<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-23043
PERVASIVE SOFTWARE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2693793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8834 CAPITAL OF TEXAS HIGHWAY, SUITE 300
AUSTIN, TEXAS 78759
(Address of principal executive offices)
-----------------------------------------
(512) 794-1719
(Registrant's telephone number, including area code)
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
(1) Yes X No
---------- ----------
(2) Yes X No
---------- ----------
As of May 15, 1998 there were 13,367,051 shares of the Registrant's common
stock outstanding.
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PERVASIVE SOFTWARE INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements............................................. 3
Condensed Consolidated Balance Sheets at March 31, 1998 and
June 30, 1997.................................................... 3
Condensed Consolidated Statements of Operations for the three
and nine months ended March 31, 1998 and 1997.................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 1998 and 1997............................. 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 8
PART II. OTHER INFORMATION................................................26
Item 6. Exhibits and Reports on Form 8-K.................................26
SIGNATURES................................................................27
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Pervasive Software Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
----------------- -----------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 5,726 $ 4,058
Marketable securities 14,596 -
Trade accounts receivable, net 4,813 2,803
Prepaid expenses and other current assets 1,503 817
----------------- -----------------
Total current assets 26,638 7,678
Property and equipment, net 3,435 2,664
Other assets 505 103
----------------- -----------------
Total assets $ 30,578 $ 10,445
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable $ 1,611 $ 1,052
Accrued payroll and payroll related costs 1,185 517
Other accrued expenses 2,470 2,273
Deferred revenues 1,617 1,267
Income taxes payable 307 301
Deferred royalty payable--Novell 327 708
----------------- -----------------
Total current liabilities 7,517 6,118
Minority interest in subsidiary 360 695
Redeemable convertible preferred stock - 4,026
Stockholders' equity (deficit):
Convertible preferred stock - 3,915
Common stock 25,858 205
Retained deficit (3,157) (4,514)
----------------- -----------------
Total stockholders' equity (deficit) 22,701 (394)
----------------- -----------------
Total liabilities and stockholders' equity (deficit) $ 30,578 $ 10,445
================= =================
</TABLE>
See accompanying notes.
3
<PAGE>
Pervasive Software Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------------- --------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 9,744 $ 6,418 $ 25,885 $ 17,184
Costs and expenses:
Cost of revenues and technical support 1,277 861 3,671 2,339
Sales and marketing 4,243 2,651 10,875 7,037
Research and development 2,511 1,691 7,054 4,015
General and administrative 795 672 2,216 2,096
----------------- ----------------- ----------------- -----------------
Total costs and expenses 8,826 5,875 23,816 15,487
----------------- ----------------- ----------------- -----------------
Operating income 918 543 2,069 1,697
Interest and other income, net 190 16 389 58
----------------- ----------------- ----------------- -----------------
Income before income taxes and minority interest 1,108 559 2,458 1,755
Provision for income taxes (277) (143) (681) (451)
Minority interest in earnings of subsidiary,
net of tax (17) (44) (58) (84)
----------------- ----------------- ----------------- -----------------
Net income $ 814 $ 372 $ 1,719 $ 1,220
================= ================= ================= =================
Basic earnings per share $ 0.06 $ 0.36 $ 0.18 $ 1.78
================= ================= ================= =================
Diluted earnings per share $ 0.05 $ 0.03 $ 0.11 $ 0.09
================= ================= ================= =================
</TABLE>
See accompanying notes.
4
<PAGE>
Pervasive Software Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
------------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income $ 1,719 $ 1,220
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,012 500
Other non cash items 335 309
Change in current assets and liabilities:
Increase in trade accounts receivable (2,348) (575)
Increase in prepaid expenses and other current assets (618) (21)
Increase in accounts payable and accrued liabilities 1,436 1,861
Increase (decrease) in deferred revenue 350 (260)
Increase in income taxes payable 35 85
------------------ -----------------
Net cash provided by operating activities 1,921 3,119
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,769) (1,276)
Purchase of marketable securities (14,596) -
Purchase of Smithware, Inc., net of cash acquired (333) -
Purchase of minority interest (266) -
Increase in other assets (29) -
------------------ -----------------
Net cash used in investing activities (16,993) (1,276)
CASH FROM FINANCING ACTIVITIES
Payment of royalty to Novell (403) (265)
Proceeds from issuance of stock, net of issuance costs 17,552 152
------------------ -----------------
Net cash provided by (used in) financing activities 17,149 (113)
Effect of exchange rate on cash and cash equivalents (409) (174)
------------------ -----------------
Increase in cash and cash equivalents 1,668 1,556
Cash and cash equivalents at beginning of period 4,058 2,739
------------------ -----------------
Cash and cash equivalents at end of period $ 5,726 $ 4,295
================== =================
</TABLE>
See accompanying notes.
5
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. GENERAL AND BASIS OF FINANCIAL STATEMENTS
The unaudited interim condensed consolidated financial statements include
the accounts of Pervasive Software Inc. and its majority-owned subsidiaries
(collectively, the "Company" or "Pervasive"). All material intercompany
accounts and transactions have been eliminated in consolidation.
The financial statements included herein reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly state the Company's financial position,
results of operations and cash flows for the periods presented.
These financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto for the year ended June 30,
1997, which are contained in the Company's Registration Statement on Form S-1
(File No. 333-32199). The results of operations for the three month and nine
month periods ended March 31, 1998 and 1997 are not necessarily indicative of
results that may be expected for any other interim period or for the full fiscal
year.
2. INITIAL PUBLIC OFFERING
On September 25, 1997 the Company completed an initial public offering in
which the Company sold 2,000,000 shares of common stock for net proceeds to the
Company of $17.5 million, after deducting expenses of the offering. In
addition, stockholders of the Company sold 2,000,000 shares in the offering plus
500,000 shares upon subsequent exercise of an option granted to the underwriters
for over-allotments. The shares sold by the Company and selling stockholders
represented approximately 35% of the outstanding shares of the Company.
3. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND UNAUDITED STOCKHOLDER'S EQUITY
Upon closing of the initial public offering, each outstanding share of the
Company's Series A, B and C Convertible Preferred Stock and Redeemable
Convertible Preferred Stock was automatically converted into one share of common
stock of the Company resulting in the issuance of 9,713,132 shares of common
stock.
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS,
(CONTINUED)
4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement 128
replaced "primary" and "fully diluted" earnings per share with "basic" and
"diluted" earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. In February of 1998, the SEC issued Staff Accounting Bulletin 98
("SAB 98"), which, among other things, addresses earnings per share computations
in an initial public offering. All weighted average share and earnings per
share amounts for all periods have been presented, and where necessary, restated
to conform to the Statement 128 and SAB 98 requirements.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- --------------------------------
1998 1997 1998 1997
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 814 $ 372 $ 1,719 $ 1,220
======== ========= ========== ==========
Denominator:
Denominator for basic earnings per
share - weighted average shares 13,242 1,022 9,535 686
Effect of dilutive securities:
Convertible preferred shares - 9,713 3,062 9,713
Employee stock options 1,977 2,361 1,966 2,662
-------- --------- ---------- ----------
Potentially diluted common shares 1,977 12,074 5,028 12,375
-------- --------- ---------- ----------
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 15,219 13,096 14,563 13,061
======== ========= ========== ==========
Basic earnings per share $ 0.06 $ 0.36 $ 0.18 $ 1.78
======== ========= ========== ==========
Diluted earnings per share $ 0.05 $ 0.03 $ 0.11 $ 0.09
======== ========= ========== ==========
</TABLE>
5. ACQUISITIONS
On February 10, 1998, the Company acquired an additional 15% ownership
interest in its majority owned subsidiary, Pervasive Software Co., Ltd.
(formerly known as Btrieve Technologies Japan, Ltd.), by acquiring stock held by
minority shareholders for approximately $270,000 in cash. The acquisition was
accounted for under the purchase method. After the acquisition, the Company
holds 80.5% of the outstanding stock of Pervasive Software Co., Ltd.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS,
(Continued)
On February 13, 1998, the Company acquired the assets of Smithware, Inc.
("Smithware") a developer of database development and reporting components for
Pervasive products. The Company acquired the assets of Smithware for
approximately $330,000 in cash and common stock of the Company, plus up to an
additional $80,000 of cash and 47,502 shares of stock payable upon achievement
of certain milestones in the future. The acquisition has been accounted for
under the purchase method. Accordingly, the Company recorded goodwill related to
the acquisition of approximately $400,000 in the accompanying condensed
consolidated balance sheet as of March 31, 1998. The goodwill recorded in the
acquisition is being amortized over a ten year period and will be increased by
any consideration paid upon achievement of certain milestones in the future.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997 and March 1998, the AICPA issued Statement of Position
("SOP") 97-2, Software Revenue Recognition and SOP 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2, respectively, which change the
requirements for revenue recognition effective for transactions that the Company
will enter into beginning July 1, 1998. The Company has not yet assessed what
the impact of the SOPs will be on its fiscal 1999 financial statements.
8
<PAGE>
PERVASIVE SOFTWARE INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The statements contained in this filing which are not purely historical
statements are forward looking statements within the meaning of Section 21E of
the Securities and Exchange Act of 1934, including statements regarding the
Company's expectations, beliefs, hopes, intentions or strategies regarding the
future. Forward looking statements include statements regarding projected
product demand, particularly with respect to recent product releases,
anticipated or expected financial trends such as fluctuations in revenues, costs
and expenses, strategies with respect to international expansion, projected
hiring needs, market opportunities and competition. All forward looking
statements included in this document are based upon information available to the
Company as of the date hereof, and the Company assumes no obligation to update
any such forward looking statements. Actual results could differ materially
from the Company's current expectations. Factors and risks that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors that May Affect Future Results," and the factors and risks
discussed in the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission and effective as of September 25, 1997 (File
No. 333-32199) and other reports filed from time to time with the Securities and
Exchange Commission.
OVERVIEW
Pervasive is a leading provider of embedded database software designed to
enable the cost-effective development, deployment and support of low-
maintenance, packaged client/server applications. The Company markets and sells
its products through indirect channels by targeting both independent software
vendors ("ISVs") who build packaged client/server applications and value added
resellers ("VARs") who recommend and sell applications to end users.
The Company derives its revenues primarily from shrink wrap licenses
through ISVs, VARs and distributors and from OEM license agreements with ISVs.
Additionally, the Company generates revenues from user count upgrades as well as
from upgrades to client/server environments from single workstation or peer-to-
peer environments. Shrink wrap license fees depend on both the user count of
the license and whether the license is for the Company's client- or server-based
products. The Company's OEM licensing program offers ISVs volume discounts and
specialized technical support, training and consulting in exchange for embedding
the Company's products in packaged applications and paying to the Company a
royalty based on sales of the applications.
Revenues are generally recognized from the license of software upon the
later of shipment or when all significant vendor obligations have been
satisfied. Revenues related to agreements involving nonrefundable fixed minimum
license fees are generally recognized upon delivery of the product master or
first copy if no significant vendor obligations remain. Per copy royalties in
excess of a fixed minimum amount are recognized as revenues when such amounts
9
<PAGE>
are reported to the Company. The Company operates with virtually no order
backlog because its software products are shipped shortly after orders are
received, which makes product revenues in any quarter substantially dependent on
orders booked and shipped throughout that quarter. The Company enters into
agreements with certain distributors that provide for certain stock rotation and
price protection rights. These rights allow the distributor to return products
in a non-cash exchange for other products or for credits against future
purchases. The Company reserves for the cost of estimated sales returns, stock
rotation and price protection rights, as well as for uncollectable accounts
based on experience.
On February 9, 1998, the Company announced the introduction of
Pervasive.SQL(TM), an enhanced database software product that enables packaged
client/server applications to simultaneously access a single database engine
with both high volume transactional processing and industry-standard SQL
capabilities. Pervasive.SQL delivers increased performance, simplified
installation and maintenance, low cost of ownership and compatibility with
existing Btrieve(R) and Scalable SQL(TM) - based applications. The Company
began shipping Pervasive.SQL in February of 1998.
Prior to the release of Pervasive.SQL, the Company derived substantially
all of its revenues from the license of its Btrieve and Scalable SQL products.
The Company expects that its future operating results will become increasingly
dependent upon market acceptance of its recently announced Pervasive.SQL product
and anticipates that revenues from the license of Btrieve and Scalable SQL will
decrease accordingly. The pace and timing of market acceptance of Pervasive.SQL
is largely dependent upon factors such as the product development cycles of ISVs
and VARs who embed the Company's products into third party packaged software
applications. As a result, the Company expects to continue to derive the
majority of its revenues from the license of Btrieve and Scalable SQL in the
near term and there can be no assurance as to whether or when Pervasive.SQL will
achieve market acceptance. A low demand for, or low or delayed market
acceptance of the Company's Pervasive.SQL product as a result of competition,
technological change or other factors, would have a material adverse effect on
the Company's business, operating results and financial condition. Although the
Company recognized revenue in the third quarter of 1998 related to initial sales
of Pervasive.SQL, such sales may have been attributable to one-time upgrades
from earlier versions of the Company's products, favorable upgrade pricing by
the Company or other factors. As Pervasive.SQL has only recently been released,
there can be no assurance that future sales will continue at initial rates. See
"Risk Factors that May Affect Future Results."
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in the Company's consolidated statements
of operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues .................................................... 100% 100% 100% 100%
Costs and expenses:
Cost of revenues and technical support ................... 13 13 14 14
Sales and marketing ...................................... 44 42 42 41
Research and development ................................. 26 26 27 23
General and administrative ............................... 8 11 9 12
----------- ----------- ----------- -----------
Total costs and expenses .................................... 91 92 92 90
----------- ----------- ----------- -----------
Operating income ............................................ 9 8 8 10
Interest and other income, net ........................... 2 - 2 -
----------- ----------- ----------- -----------
Income before income taxes and minority interest ............ 11 8 10 10
Provision for income taxes ............................... (3) (2) (3) (3)
Minority interest in earnings of subsidiary .............. - - - -
----------- ----------- ----------- -----------
Net income .................................................. 8% 6% 7% 7%
=========== =========== =========== ===========
</TABLE>
Revenues
The Company's revenues increased to $9.7 million in the three months ended
March 31, 1998, an increase of 52% over the $6.4 million reported for the
comparable period in the prior fiscal year. Revenues in the nine months ended
March 31, 1998 were $25.9 million, representing a 51% increase over the $17.2
million reported for the comparable period in the prior fiscal year. The
increase in the Company's revenues was attributable primarily to increased
market acceptance of the Company's products, principally licenses of the
Company's software operating on Windows NT, introduction of Pervasive.SQL and
expansion of its world-wide sales organization. Although the Company's revenues
have increased in recent periods, there can be no assurance that revenues will
grow in future periods, that they will grow at past rates or that the Company
will remain profitable on a quarterly or annual basis in the future.
Licenses of the Company's software operating on Windows NT or other Microsoft
operating systems increased to approximately 45% of the Company's revenues in
the three months ended March 31, 1998 from approximately 37% in the comparable
period in the prior year. These same licenses increased to approximately 44% of
the Company's revenues in the nine months ended March 31, 1998 from 34% in
the comparable period in the prior year. Licenses of the Company's software
operating on NetWare represented approximately 47% and 57% of the
11
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Company's revenues in the three months ended March 31, 1998 and 1997,
respectively. In the nine months ended March 31, 1998, NetWare licenses
represented 50% of the Company's revenues compared to 59% in the comparable
period in the prior year. The Company believes that the increase in the
percentage of revenues attributable to licenses of the Company's products
operating on Windows NT and other Microsoft operating systems is due both to
increased market acceptance of the Company's products operating on Microsoft
platforms and to the increased market penetration of Microsoft platforms
relative to other operating systems. The Company expects that the percentages of
its revenues attributable to licenses of its software operating on particular
platforms will continue to change from time to time and there can be no
assurance that the Company's revenues attributable to licenses of its software
operating on Windows NT, or any other operating system platform, will grow in
the future, or at all.
International revenues, consisting of all revenues from customers located
outside of North America, were $3.7 million and $2.2 million in the three months
ended March 31, 1998 and 1997, representing 38% and 34% of total revenues,
respectively. International revenues were $10.2 million and $5.8 million in the
nine months ended March 31, 1998 and 1997, representing 39% and 34% of total
revenues, respectively. The increase in dollar amount was primarily
attributable to expansion of the Company's international sales organization,
particularly in Europe. The Company believes that revenues from international
markets represent a significant opportunity and expects that international
revenues may account for an increasing portion of its revenues in the future as
the Company expands internationally, primarily in Europe and Japan, but also in
other areas of the world. See "Risk Factors That May Affect Future Results
Risks Associated with International Sales and Operations."
Costs and Expenses
Cost of Revenues and Technical Support. Cost of revenues and technical
support consists primarily of the cost to manufacture and fulfill orders for the
Company's shrink wrap software products and the cost to provide technical
support, primarily telephone support, which is typically provided within 30 days
of purchase. Cost of revenues and technical support was $1.3 million and
$861,000 in the three months ended March 31, 1998 and 1997, representing 13% of
revenues in both periods. Cost of revenues and technical support was $3.7
million and $2.3 million in the nine months ended March 31, 1998 and 1997
representing 14% of revenues in both periods. The increase in cost of revenues
and technical support was attributable to increased sales volume and increased
technical support personnel in the U.S. and in Europe. The Company anticipates
that cost of revenues and technical support will continue to increase in dollar
amount as the Company incurs higher support costs with the expansion of
international operations and that such costs could vary as a percentage of
revenues relative to comparable periods in prior years.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
foreign sales office expenses, travel and entertainment and promotional
expenses. Sales and marketing expenses were $4.2 million and $2.7 million in
the three months ended March 31, 1998 and 1997, representing 44% and 42% of
revenues, respectively. Sales and marketing expenses were $10.9
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million and $7.0 million in the nine months ended March 31, 1998 and 1997,
representing 42% and 41% of revenues, respectively. The increase in dollar
amounts was primarily attributable to increased costs associated with hiring
additional sales and marketing personnel, initial promotion of Pervasive.SQL and
increased infrastructure costs associated with foreign sales office expansion.
The Company expects that sales and marketing expenses will continue to increase
in dollar amount as the Company continues to promote Pervasive.SQL, continues to
hire additional sales and marketing personnel, increase lead generation
activities and expand its international operations. Sales and marketing expenses
are likely to continue to fluctuate as a percentage of revenues due to the
timing of costs associated with new product releases and international
expansion.
Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
were $2.5 million and $1.7 million in the three months ended March 31, 1998 and
1997, representing 26% of revenues in both periods. Research and development
expenses were $7.1 million and $4.0 million in the nine months ended March 31,
1998 and 1997, representing 27% and 23% of revenues, respectively. The
increases, both in dollar amount and as a percentage of revenues are primarily
due to the increased hiring of, and contracting with, additional research and
development personnel. The Company anticipates that it will continue to devote
substantial resources to research and development and that such expenses will
continue to increase in dollar amount.
Software development costs that were eligible for capitalization in
accordance with Statement of Financial Accounting Standards No. 86 were
insignificant during these periods, and, accordingly, the Company charged all
software development costs to research and development expenses.
In March 1998, the Company announced a joint development initiative with
Oracle Corporation to enable application developers to create and deploy a
single application for both small businesses and large corporations without
substantial code changes. Research and development expenses related to the joint
development initiative with Oracle were not material for the three months ended
March 31, 1998, although there can be no assurance that such expenses will not
be material in the future.
The Company and Timothy Abels are currently planning Mr. Abels' transition
out of the role of Chief Technology Officer. Mr. Abels has served as the
Company's Chief Technology Officer since March 1997.
General and Administrative. General and administrative expenses consist
primarily of the personnel and other costs of the Company's finance, human
resources, information systems and administrative departments. General and
administrative expenses were $795,000 and $672,000 in the three months ended
March 31, 1998 and 1997, representing 8% and 11% of revenues, respectively.
General and administrative expenses were $2.2 million and $2.1 million in the
nine months ended March 31, 1998 and 1997, representing 9% and 12% of revenues,
respectively. General and administrative expenses decreased as a percentage of
revenue primarily because of significant revenue growth that outpaced general
and administrative expenditures. The Company believes that its general and
administrative expenses will increase in dollar amount through the end of fiscal
1998 and in fiscal 1999 as the Company's administrative staff expands to support
its
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growing world-wide operations and as a result of an increase in expense
associated with being a public company.
Provision for Income Taxes. The Company's income tax provisions for interim
periods are based on estimated annual effective income tax rates. The Company
reduced its estimated effective tax rate for the current fiscal year from 30% to
28%, resulting in an effective tax rate for the three month period ended March
31, 1998 of 25%. The reduction in the estimated effective tax rate for fiscal
1998 was attributable to changes in the Company's mix of foreign and domestic
income resulting in an increase in the expected benefit from release of the
Company's valuation allowance recorded against its deferred tax assets.
The estimated effective tax rates for the three month period ended March
31, 1998 and 1997, were 25% and 26%, respectfully. The reduction in the
effective tax rate in the three month period ended March 31, 1998 resulted from
the reduction in the estimated annual effective tax rate for the year from 30%
to 28%. The estimated effective tax rates for the nine month periods ended March
31, 1998 and 1997 were 28% and 26%, respectively. The increase in the Company's
effective tax rate for fiscal year 1998 is primarily due to increased foreign
taxes associated with the Company's increased operations overseas. The Company
expects its effective tax rate will increase in the future once the Company's
deferred tax asset is fully realized.
LIQUIDITY AND CAPITAL RESOURCES
On September 25, 1997 the Company completed an initial public offering in
which the Company sold 2,000,000 shares of common stock for net proceeds to the
Company of $17.5 million, after deducting expenses of the offering.
Cash provided by operations was $1.9 million for the nine months ended
March 31, 1998 as compared with $3.1 million for the comparable period in the
prior fiscal year. The decrease in cash generated by operations resulted
primarily from increases in accounts receivable consistent with the increased
sales volume during the nine months ended March 31, 1998.
During the first nine months of fiscal 1998, the Company invested $14.6
million in marketable securities, consisting of various taxable and tax
advantaged securities. In addition, the Company purchased property and
equipment totaling approximately $1.8 million and $1.3 million in the nine
months ended March 31, 1998 and 1997, respectively, primarily computer hardware
and software for the Company's growing employee base. The Company expects that
its capital expenditures will increase as the Company's employee base grows.
The Company expects to move its headquarters from its current facility of
approximately 46,000 square feet to a new facility of approximately 70,000
square feet in the second quarter of fiscal 1999. The new facility will provide
additional space and expansion options to accommodate future growth at rental
rates per square foot consistent with the current facility. The Company expects
an increase in capital expenditures and rent expense in fiscal 1999 as a result
of the move.
On February 10, 1998, the Company acquired an additional 15% ownership
interest in its majority owned subsidiary, Pervasive Software Co., Ltd.
(formerly known as Btrieve
14
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Technologies Japan, Ltd.), by acquiring stock held by minority shareholders for
approximately $270,000 in cash. After the acquisition the Company holds 80.5% of
the outstanding stock of Pervasive Software Co., Ltd.
On February 13, 1998, the Company acquired the assets of Smithware, Inc.
("Smithware") a developer of database development and reporting components for
Pervasive products. The Company acquired the assets of Smithware for
approximately $330,000 in cash and stock, plus up to an additional $80,000 of
cash and 47,502 shares of stock payable upon achievement of certain milestones
in the future.
At March 31, 1998, the Company had $19.1 million in working capital
including $5.7 million in cash and cash equivalents and $14.6 million in
marketable securities.
15
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Report on Form 10-Q, the following
risk factors should be considered in evaluating the Company and its business.
LIMITED OPERATING HISTORY; MARGINAL PROFITABILITY; FUTURE OPERATING RESULTS
UNCERTAIN
The Company was founded in January 1994. Accordingly, the Company's
prospects must be considered in light of the risks and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. To address these risks, the
Company must, among other things, respond to competitive developments, continue
to attract, retain and motivate qualified personnel and continue to improve its
products. Although the Company has been profitable for the eight most recent
fiscal quarters, this profitability has been marginal historically and, except
for the quarters ended September 30, 1994 and December 31, 1994, the Company
incurred net losses in each quarter from inception through the quarter ended
March 31, 1996. As of March 31, 1998, the Company had an accumulated deficit
of approximately $3.2 million. The Company's historical operating losses and
marginal profitability have been due in part to the commitment of significant
resources to the Company's technical support, research and development and sales
and marketing organizations. The Company expects to continue to devote
substantial resources to these areas and as a result will need to recognize
significant quarterly revenues to maintain profitability. In particular, the
Company intends to hire a significant number of sales and research and
development personnel through the end of fiscal 1998 and beyond, which the
Company believes is required if the Company is to achieve significant revenue
growth in the future. Although the Company's revenues have increased in recent
periods, there can be no assurance that the Company's revenues will grow in
future periods, that they will grow at past rates or that the Company will
remain profitable on a quarterly or annual basis in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON NEW PRODUCT RELEASE; PRODUCT CONCENTRATION
Prior to the release of Pervasive.SQL, the Company derived substantially
all of its revenues from the license of its Btrieve and Scalable SQL products.
The Company expects that its future operating results will become increasingly
dependent upon market acceptance of its recently released Pervasive.SQL product
and anticipates that revenues from the license of Btrieve and Scalable SQL will
decrease accordingly. The pace and timing of market acceptance of Pervasive.SQL
is largely dependent upon factors such as the product development cycles of ISVs
and VARs who embed the Company's products into third party packaged software
applications. As a result, the Company expects to continue to derive the
majority of its revenues from the license of Btrieve and Scalable SQL in the
near term and there can be no assurance as to whether or when Pervasive.SQL will
achieve market acceptance. A low demand for, or low or delayed market
acceptance of the Company's Pervasive.SQL product as a result of competition,
technological change or other factors, would have a material adverse effect on
the Company's business, operating results and financial condition. Although the
Company recognized revenue in the third quarter of 1998 related to initial sales
of Pervasive.SQL, such sales may have been
16
<PAGE>
attributable to one-time upgrades from earlier versions of the Company's
products, favorable upgrade pricing by the Company or other factors. As
Pervasive.SQL has only recently been released, there can be no assurance that
future sales will continue at initial rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Overview."
OPERATING RESULTS SUBJECT TO SIGNIFICANT FLUCTUATIONS; SEASONALITY
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly in the
future due to a variety of factors, such as demand for the Company's products,
the size and timing of significant orders and their fulfillment, the number,
timing and significance of product enhancements and new product announcements by
the Company and its competitors, changes in pricing policies by the Company
or its competitors, customer order deferrals in anticipation of enhancements or
new products offered by the Company or its competitors, the ability of the
Company to develop, introduce and market new and enhanced versions of its
products on a timely basis, changes in the Company's level of operating
expenses, budgeting cycles of its customers, product life cycles, software
defects and other product quality problems, the Company's ability to attract and
retain qualified personnel, changes in the Company's sales incentive plans,
changes in the mix of domestic and international revenues, the level of
international expansion, foreign currency exchange rate fluctuations,
performance of indirect channel partners, changes in the mix of indirect
channels through which the Company's products are offered, the impact of
acquisitions of competitors and indirect channel partners, the Company's ability
to control costs and general domestic and international economic and political
conditions. The Company operates with virtually no order backlog because its
software products are shipped shortly after orders are received, which makes
product revenues in any quarter substantially dependent on orders booked and
shipped throughout that quarter. As a result, if orders in the first month or
two of a quarter fall short of expectations, it is unlikely that the Company
will be able to meet its revenue targets for that quarter. In addition, the
Company is substantially reliant upon indirect sales channels over which the
Company has little or no control. Moreover, the Company's expense levels are
based to a significant extent on the Company's expectations of future revenues
and therefore are relatively fixed in the short term. If revenue levels are
below expectations, operating results are likely to be adversely and
disproportionately affected because only a small portion of the Company's
expenses vary with its revenues.
The Company's business has experienced and is expected to continue to
experience seasonal customer buying patterns. In recent years, the Company has
had relatively stronger demand for its products during the quarters ending
December 31 and June 30 and demand has been relatively weaker in the quarters
ending March 31 and September 30. The Company believes that this pattern may
continue. To the extent international operations constitute a greater
percentage of the Company's revenues in future periods, the Company anticipates
the effect of seasonal buying patterns on the Company's business could be more
pronounced in subsequent periods as a result of reduced sales activity in Europe
and Japan during the summer months.
17
<PAGE>
Based upon all of the factors described above, the Company believes that
its quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its operating
results are not necessarily meaningful and that, in any event, such comparisons
should not be relied upon as indications of future performance. The Company has
limited ability to forecast future revenues, and it is likely that in some
future quarter the Company's operating results will be below the expectations of
public securities analysts and investors. In the event that operating results
are below expectations, or in the event that adverse conditions prevail or are
perceived to prevail generally or with respect to the Company's business, the
price of the Company's Common Stock would likely be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON INDIRECT SALES CHANNEL; DISTRIBUTOR CONCENTRATION
The Company derives substantially all of its revenues from its indirect
sales channel, consisting of ISVs, VARs, system integrators, consultants and
distributors. The Company has invested, and intends to continue to invest,
significant resources to develop this channel, which could adversely affect the
Company's operating margins. There can be no assurance that the Company will be
able to attract additional indirect channel partners that will be able to market
and support the Company's products. In addition, many of the Company's indirect
channel partners offer competing product lines. Therefore, there can be no
assurance that any of the Company's current indirect channel partners will
continue to represent or recommend the Company's products. Further, the
inability to recruit new indirect channel partners, or the loss of, or a
significant reduction in revenues from, any particular indirect channel partner
could materially adversely affect the Company's business, operating results and
financial condition.
Some of the Company's ISVs, VARs and end users place their orders through
distributors. A relatively small number of distributors have accounted for a
significant percentage of the Company's revenues. In the nine months ended
March 31, 1998 and 1997, two distributors accounted for a combined 22% and 28%
of revenues, respectively. The Company expects that it will continue to be
dependent upon a limited number of distributors for a significant portion of its
revenues in future periods and such distributors are expected to vary from
period to period. The loss of a major distributor or any reduction in orders by
such distributor, including reductions due to market or competitive conditions,
combined with the inability to replace the distributor on a timely basis could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company's operating results may in the future be
subject to substantial period-to-period fluctuations as a consequence of such
distributor concentration.
18
<PAGE>
SIGNIFICANT COMPETITION
The market for the Company's products is intensely competitive and subject
to rapid change. The Company primarily encounters competition from large,
public companies, including Microsoft Corporation ("Microsoft"), Oracle
Corporation ("Oracle"), Informix Corporation ("Informix"), Sybase, Inc.
("Sybase") and International Business Machines Corporation ("IBM"). Each of
these companies offers database products competitive with the Company's
products. In particular, Sybase offers a small memory footprint database
software product, SQL Anywhere, which directly competes with the Company's
Pervasive.SQL, Btrieve and Scalable SQL products. In addition, because there
are relatively low barriers to entry in the software market, the Company may
encounter additional competition from other established and emerging companies.
Most of the Company's competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources than the Company,
significantly greater name recognition and a large installed base of customers.
As a result, the Company's competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of competitive
products, than can the Company. There is also a substantial risk that
announcements of competing products by large competitors could result in the
cancellation of customer orders in anticipation of the introduction of such new
products. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address customer needs and which
may limit the Company's ability to sell its products through particular
distribution partners. Accordingly, new competitors or alliances among current
and new competitors may emerge and rapidly gain significant market share. The
Company also expects that competition will increase as a result of software
industry consolidation. Increased competition is likely to result in price
reductions, fewer customer orders, reduced margins and loss of market share, any
of which could materially adversely affect the Company. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that the competitive pressures faced by the Company
will not materially adversely affect its business, operating results and
financial condition.
RELIANCE ON INSTALLED BASE
In connection with the acquisition of certain software and related
technology from Novell in April 1994, the Company entered into a license
agreement permitting, among other things, the then-current version of Btrieve to
be reproduced and distributed on a royalty-free basis as part of or together
with current and future versions of any Novell products, including Novell's
NetWare operating system ("NetWare"). The Company derives significant revenues
from upgrade sales into the NetWare installed base and sales of the Company's
software operating on NetWare represented approximately 50% of the Company's
revenues in the nine months ended March 31, 1998. As a result, sales of the
Company's products have been and will continue to be influenced by the market
acceptance of NetWare. NetWare faces substantial competition from other
operating systems, including Microsoft's Windows NT, which the Company believes
has a large and growing share of the worldwide market for client/server
operating systems. If sales of
19
<PAGE>
NetWare decrease, Novell discontinues NetWare or discontinues bundling Btrieve
with NetWare or if ISVs, VARs or their end users migrate to competing
client/server operating system platforms, and the Company is not able to
substantially increase sales of its products that run on competing client/server
operating systems, the Company's business, operating results and financial
condition would be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON CONTINUED GROWTH OF THE MARKET FOR CLIENT/SERVER APPLICATIONS AND
EMBEDDED DATABASES
Although demand for client/server applications and embedded databases has
grown in recent years, this market is still emerging and there can be no
assurance that it will continue to grow or that, even if the market does grow,
organizations will continue to adopt the Company's products. The Company has
spent, and intends to continue to spend, considerable resources educating
potential customers about the Company's embedded database products and the
packaged client/server applications market generally. However, there can be no
assurance that such expenditures will enable the Company's products to achieve
any additional degree of market acceptance. The rate at which organizations
have adopted the Company's products has varied significantly by market and by
product within each market, and the Company expects to continue to experience
such variations with respect to its target markets and products in the future.
There can be no assurance that the market for the Company's products will
continue to develop or that the Company's existing, newly introduced or future
products will be widely accepted. Additionally, there can be no assurance that
the market for client/server and other applications in which the Company's
products are embedded will continue to grow. If the markets for the Company's
products or the applications in which they are embedded fail to develop, or
develop more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition would be materially
adversely affected.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. The Company's future success will depend upon its ability to
continue to enhance its current products and to develop and introduce new
products on a timely basis that keep pace with technological developments and
satisfy increasingly sophisticated customer requirements. As a result of the
complexities inherent in client/server computing environments and the
performance demanded by customers for embedded databases, new products and
product enhancements can require long development and testing periods. As a
result, significant delays in the general availability of such new releases or
significant problems in the installation or implementation of such new releases
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company has experienced delays in the past
in the release of new products and new product enhancements. There can be no
assurance that the Company will be successful in developing and marketing, on
20
<PAGE>
a timely and cost effective basis, new products or new product enhancements that
respond to technological change, evolving industry standards or customer
requirements, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction or marketing of these
products or that the Company's new products and product enhancements will
achieve market acceptance.
RISK OF SOFTWARE DEFECTS
Software products as complex as those offered by the Company may contain
errors or defects, particularly when first introduced or when new versions or
enhancements are released. The Company has in the past discovered software
errors in certain of its new products after their introduction. There can be no
assurance that, despite testing by the Company, defects and errors will not be
found in current versions, new versions or enhancements of its products after
commencement of commercial shipments, resulting in loss of revenues or delay in
market acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance.
Although the latest versions of Btrieve, Scalable SQL and Pervasive.SQL are
designed to be Year 2000 compliant, an earlier release of Scalable SQL was not
Year 2000 compliant. There can be no assurance that the Company's software
products that are designed to be Year 2000 compliant contain all necessary date
code changes. In addition, third party packaged client/server applications in
which the Company's products are embedded, or for which the Company's products
are separately licensed may not be Year 2000 compliant which may have an adverse
impact on demand for the Company's products. As a result, the Company may incur
increased expenses in migration issues for such customers.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by the Company. Potential customers may also choose to defer purchasing
Year 2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues
21
<PAGE>
could cause a significant number of companies, including current Company
customers, to reevaluate their current software needs, and as a result switch to
other systems or suppliers. Any of the foregoing could result in a material
adverse effect on the Company's business, operating results and financial
condition.
The Company has performed an initial evaluation if its internal information
systems, including hardware and software purchased from third parties, for Year
2000 compliance. Although this initial evaluation did not reveal material
operational issues or costs associated with preparing its internal systems for
the year 2000, there can be no assurances that the Company will not experience
serious unanticipated negative consequences and/or material costs caused by
undetected errors or defects in the technology used in its internal systems.
PRODUCT LIABILITY
Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective as a result of existing or future laws or unfavorable
judicial decisions. The Company has not experienced any material product
liability claims to date; however, the sale and support of the Company's
products may entail the risks of such claims, which may be substantial in light
of the use of the Company's products in business-critical applications. A
successful product liability claim brought against the Company could have a
material adverse effect on the Company's business, operating results and
financial condition.
MANAGEMENT OF CHANGING BUSINESS
The Company has recently experienced a period of significant revenue growth
and an expansion in the number of its employees, the scope of its operating and
financial systems and geographic area of its operations. In particular, the
Company had a total of 209 employees at March 31, 1998, as compared to 145 at
March 31, 1997. This growth has resulted in new and increased responsibilities
for management and has placed a strain upon the Company's financial and other
resources. The Company expects that planned expansion of international
operations will lead to increased financial and administrative demands, such as
increased operational complexity associated with expanded facilities,
administrative burdens associated with managing an increasing number of
relationships with foreign partners and expanded treasury functions to manage
foreign currency risks. The Company's future operating results will also depend
on its ability to expand its sales and marketing organizations, further develop
its sales channels to penetrate different and broader markets and expand its
support organization to accommodate growth in the Company's installed base. In
addition, the Company expects to move its headquarters to new facilities in
Austin, Texas in the second quarter of fiscal 1999. This move is expected to be
a disruptive, time consuming and expensive process. The failure of the Company
to manage its expansion effectively could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
22
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
The Company anticipates that for the foreseeable future a significant
portion of its revenues will be derived from sources outside North America and
the Company intends to continue expanding its sales and support operations
internationally. In order to successfully expand international sales, the
Company must establish additional foreign operations, expand its international
sales channel management and support organizations, hire additional personnel,
customize its products for local markets, recruit additional international
resellers and increase the productivity of existing international resellers. To
the extent that the Company is unable to do so in a timely and cost-effective
manner, the Company's sales growth internationally, if any, will be limited, and
the Company's business, operating results and financial condition could be
materially adversely affected. Even if the Company is able to successfully
expand its international operations there can be no assurance that the Company
will be able to maintain or increase international market demand for its
products.
The Company's international operations are generally subject to a number of
risks, including costs of customizing products for foreign countries,
protectionist laws and business practices favoring local competition, dependence
on local vendors, compliance with multiple, conflicting and changing government
laws and regulations, longer sales cycles, greater difficulty or delay in
accounts receivable collection, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, foreign currency
exchange rate fluctuations and the associated effects on product demand,
multiple and conflicting tax laws and regulations and political and economic
instability. To date, a majority of the Company's revenues and costs have been
denominated in U.S. dollars. However, the Company believes that in the future,
an increasing portion of the Company's revenues and costs will be denominated in
foreign currencies. Although the Company may from time to time undertake
foreign exchange hedging transactions to reduce its foreign currency transaction
exposure, the Company does not currently attempt to eliminate all foreign
currency transaction exposure. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the efforts of
Ron R. Harris, the Company's President and Chief Executive Officer, and other
key management, sales and marketing, technical support and research and
development personnel, none of whom are bound by an employment contract. The
loss of key management or technical personnel could adversely affect the
Company. The Company believes that its future success will depend in large part
upon its continuing ability to attract and retain highly skilled managerial,
sales and marketing, technical support and research and development personnel.
Like other software companies, the Company faces intense competition for such
personnel, and the Company has at times experienced and continues to experience
difficulty in recruiting qualified personnel. There can be no assurance that the
Company will be successful in attracting, assimilating and retaining additional
qualified personnel in the future. The loss of the services of one or more of
the Company's key individuals, or the failure to attract and retain additional
qualified personnel,
23
<PAGE>
could have a material adverse effect on the Company's business, operating
results and financial condition.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT; USE OF
LICENSED TECHNOLOGY
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company licenses its database software
products primarily under "shrink wrap" licenses (i.e., licenses included as part
of the product packaging). Shrink wrap licenses are not negotiated with
or signed by individual licensees, and purport to take effect upon the opening
of the product package. However, the Company believes that such measures afford
only limited protection. There can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology or design
around the copyrights and trade secrets owned by the Company. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and although the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. Embedded software products,
like those offered by the Company, can be especially susceptible to software
piracy. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the U.S.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers increasingly will be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all.
In the event of a successful claim of product infringement against the Company
and failure or inability of the Company to either license the infringed or
similar technology or develop alternative technology on a timely basis, the
Company's business, operating results and financial condition could be
materially adversely affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in its products to perform key functions. There can
be no assurance that these third-party software licenses will continue to be
available to the Company on commercially reasonable terms. The loss of or
inability to maintain any such software licenses could result in shipment delays
or reductions until equivalent software could be developed, identified, licensed
and integrated which could materially adversely affect the Company's business,
operating results and financial condition.
24
<PAGE>
VOLATILITY OF STOCK PRICE
The market price of the Common Stock is highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's revenues and operating results, announcements of technological
innovations, new or enhanced products by the Company or its competitors,
developments with respect to copyrights or proprietary rights, conditions and
trends in the software and other technology industries, adoption of new
accounting standards affecting the software industry, changes in financial
estimates by securities analysts, general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the securities of technology companies. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against the company. There can
be no assurance that such litigation will not occur in the future with respect
to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
CONTROL OF COMPANY BY OFFICERS AND DIRECTORS
As of May 15, 1998 the executive officers, directors and their affiliates
in the aggregate beneficially owned approximately 65% of the Common Stock. As a
result, acting together these stockholders will be able to exercise effective
control over all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
The Company's Restated Certificate of Incorporation and Bylaws contain
certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable, including provisions:
authorizing the issuance of "blank check" preferred stock; establishing advance
notice requirements for stockholder nominations for elections to the Board of
Directors or for proposing matters that can be acted upon at stockholders'
meetings; eliminating the ability of stockholders to act by written consent;
requiring super-majority voting to approve certain amendments to the Restated
Certificate of Incorporation; limiting the persons who may call special meetings
of stockholders; and providing for a Board of Directors with staggered,
three-year terms. In addition, certain provisions of Delaware law and the
Company's 1997 Stock Incentive Plan (the "1997 Plan") may also have the effect
of discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals.
25
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits under Item 601 of Regulation S-K
3.1* Restated Certificate of Incorporation
3.2* Bylaws of the Company
4.1* Reference is made to Exhibits 3.1, 3.2 and 4.3
4.2* Specimen Common Stock certificate
4.3* Investors' Rights Agreement dated April 19, 1995, between the
Company and the investors named therein
10.1* Form of Indemnification Agreement
10.2* 1997 Stock Incentive Plan
10.3* Employee Stock Purchase Plan
10.4* First Amended and Restated 1994 Incentive Plan
10.5* Amendment and Restatement of Credit Agreement dated March 31,
1997 between the Company and Texas Commerce Bank National
Association
10.6* Lease Agreement dated October 5, 1994 between the Company and
Colina West Limited
10.7* First Amendment to Lease Agreement dated September 8, 1995
between the Company and Colina West Limited
10.8* Sublease Agreement dated December 10, 1996 between the Company
and Reynolds, Loeffler & Dowling, P.C.
10.9* Joint Venture Agreement dated March 26, 1995 between the
Company and Novell Japan, Ltd., AG Tech Corporation and Empower
Ltd.
27.1 Financial Data Schedule
*Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-32199).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended March 31,
1998.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1998 PERVASIVE SOFTWARE INC.
(Registrant)
By: /s/ JAMES R. OFFERDAHL
--------------------------------
James R. Offerdahl
Vice President of Finance and
Administration and Chief Financial
Officer (Duly Authorized Officer
and Principal Financial Officer)
27
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1* Restated Certificate of Incorporation
3.2* Bylaws of the Company
4.1* Reference is made to Exhibits 3.1, 3.2 and 4.3
4.2* Specimen Common Stock certificate
4.3* Investors' Rights Agreement dated April 19, 1995, between the
Company and the investors named therein
10.1* Form of Indemnification Agreement
10.2* 1997 Stock Incentive Plan
10.3* Employee Stock Purchase Plan
10.4* First Amended and Restated 1994 Incentive Plan
10.5* Amendment and Restatement of Credit Agreement dated March 31,
1997 between the Company and Texas Commerce Bank National
Association
10.6* Lease Agreement dated October 5, 1994 between the Company and
Colina West Limited
10.7* First Amendment to Lease Agreement dated September 8, 1995
between the Company and Colina West Limited
10.8* Sublease Agreement dated December 10, 1996 between the Company
and Reynolds, Loeffler & Dowling, P.C.
10.9* Joint Venture Agreement dated March 26, 1995 between the
Company and Novell Japan, Ltd., AG Tech Corporation and
Empower Ltd.
27.1 Financial Data Schedule
*Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-32199).
28
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0
0
<COMMON> 25,858
<OTHER-SE> (3,157)
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<CGS> 1,277
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<INCOME-TAX> 277
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<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
