<PAGE>
Filed pursuant to Rule 424(b)(1)
SEC File No. 333-71955
[LOGO OF PERVASIVE SOFTWARE APPEARS HERE]
2,630,000 Shares
Common Stock
We are offering 1,500,000 shares of our common stock and the selling
stockholders are selling an additional 1,130,000 shares. Our common stock is
traded on the Nasdaq National Market under the symbol "PVSW." The last
reported sale price of our common stock on the Nasdaq National Market on March
18, 1999, was $17.25 per share.
---------------------
This investment involves risks.
See "Risk Factors" commencing on page 6.
---------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public offering price.................................... $17.25 $45,367,500
Underwriting discounts and commissions................... $ 1.03 $ 2,722,050
Proceeds to Pervasive.................................... $16.22 $24,322,500
Proceeds to the selling stockholders..................... $16.22 $18,322,950
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Pervasive has granted the underwriters a 30-day option to purchase up to an
additional 394,500 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on March 24, 1999.
---------------------
BancBoston Robertson Stephens
Hambrecht & Quist
U.S. Bancorp Piper Jaffray Inc.
FAC / Equities
The date of this prospectus is March 18, 1999
<PAGE>
[Inside Front Cover]
[Graphic]
Web development as easy as one, two...
Web application development with Tango
[Graphic of screen shots of the Tango Development Studio]
Conventional development process
[Graphic of screen shots of a conventional web-development application]
Tango brings drag-and-drop simplicity to the Web application development
process. The Tango Development Studio provides a sophisticated visual editing
environment for creating Web-based applications quickly and efficiently. For
deploying the applications, the multi-threaded Tango Application Server works
in conjunction with an HTTP (Web) server and interacts with a database server
to return dynamic content to a Web browser.
Other Web development tools require combining CGI scripting code with HTML,
determining how to connect the database to the application server, setting a
complex set of individual parameters related to security and configuration, and
more.
Tango dramatically simplifies this process, giving Web developers a
comprehensive suite of software for creating and deploying high-volume, high-
performance Web-based applications quickly, easily and cost-effectively.
[Graphic of Pervasive Software logo]
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 15
Price Range of Common Stock.............................................. 16
Dividend Policy.......................................................... 16
Use of Proceeds.......................................................... 17
Capitalization........................................................... 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 30
Management............................................................... 44
Certain Transactions..................................................... 52
Principal and Selling Stockholders....................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 58
Legal Matters............................................................ 60
Experts.................................................................. 60
Additional Information................................................... 60
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------------
Our logo and certain titles and logos of our products mentioned in this
prospectus are either (1) our trademarks or (2) trademarks that have been
licensed to us. Each trademark, trade name or service mark of any other company
appearing in this prospectus belongs to its holder.
3
<PAGE>
SUMMARY
Because this is only a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the consolidated financial statements and notes, before
deciding to invest in shares of our common stock. Unless we indicate otherwise,
all information in this prospectus assumes the underwriters will not exercise
their over-allotment option.
Pervasive Software Inc.
Pervasive Software Inc. is a leading provider of information management
solutions that dramatically simplify the development, deployment and
maintenance of Web-based and client/server applications. Our Pervasive.SQL data
management products enable software developers to create sophisticated
distributed applications that require minimal ongoing maintenance without
having to master the technical aspects of traditional enterprise databases. Our
Tango Web solutions enable the rapid development and deployment of robust and
scalable Web-based applications with "point-and-click" simplicity. Together,
these products offer a unique solution that masks the complexity of developing,
deploying and maintaining Web-based applications and lowers the cost of
ownership of Web-based distributed computing environments. Enhancing our
solution is our value-added indirect sales channel of over 10,000 independent
software developers and value-added resellers who target the large market of
organizations that have limited information technology resources.
Pervasive was founded in 1994 with the simple but powerful mission of
dramatically simplifying distributed computing by developing "zero
administration" database and information management products that reduce the
need for scarce and expensive IT professionals. Today, Web-based applications
are proliferating as organizations conduct electronic commerce, dynamically
link partners, suppliers and vendors and generate other online business
opportunities. Despite the many benefits of the Web as a distributed computing
environment, the increasing sophistication of Web-based applications and their
interactions with underlying databases present many of the same complexities as
client/server computing, as well as additional challenges relating to security,
user access and data integrity. These complexities, along with the competitive
need to develop, deploy and modify applications in "Internet time," has created
even more pressure on already strained IT professionals. As a result of these
factors, organizations need Web-based solutions with zero administration
features similar to those deployed in client/server systems.
To take advantage of the opportunities presented by the Web's emergence as a
distributed computing platform, we acquired EveryWare Development Inc. with its
Tango product line in November 1998. By combining the Tango Application Server
with the zero administration functionality of our Pervasive.SQL database, our
integrated solution:
. Minimizes the cost of ownership throughout the lifecycle of an
application;
. Reduces the time to develop and deploy Web-based and
client/server applications;
. Simplifies application development to appeal to a broad range
of software developers; and
. Offers a single vendor solution that seamlessly integrates the
Web application server with the underlying database.
We believe that the emergence of the Internet and the proliferation of hand-
held computing and other embedded and smart devices will drive dramatic
increases in the need for Web application servers integrated with underlying
zero administration databases. We intend to enhance and extend our technologies
and leverage our value-added channel to capitalize on these market
opportunities.
Our Address
Our principal executive offices are located at 12365 Riata Trace Parkway,
Building II, Austin, Texas 78727. Our telephone number is (512) 231-6000.
4
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The Offering
The following information is based on 13,473,099 shares outstanding at
December 31, 1998. This number excludes 3,148,683 shares of common stock
issuable upon the exercise of stock options outstanding at December 31, 1998 at
a weighted average exercise price of $4.61 per share. It also excludes 793,546
shares reserved for issuance under our stock option plans and employee stock
purchase plan.
<TABLE>
<S> <C>
Common stock offered by 1,500,000 shares
Pervasive..............
Common stock offered by 1,130,000 shares
the selling stockhold-
ers....................
Common stock to be out- 14,973,099 shares
standing after the of-
fering.................
Use of proceeds......... For covering expenses related to the offering and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market
symbol................. PVSW
</TABLE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The following tables summarize the financial data for our business. The
consolidated balance sheet data has been adjusted for the sale of 1,500,000
shares of our common stock in this offering and the application of the net
proceeds. See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
Period from Six Months Ended
January 12, 1994 Fiscal Years Ended June 30, December 31,
(inception) to -------------------------------- -----------------
June 30, 1994 1995 1996 1997 1998 1997 1998
---------------- ------ ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 933 $8,601 $13,476 $24,481 $36,700 $ 16,141 $ 25,863
Charge for purchased
research and
development........... -- -- -- -- -- -- 1,800
Operating income
(loss)................ (2,208) (655) (3,109) 2,255 3,344 1,151 889
Net income (loss)....... $(2,203) $ (609) $(3,205) $ 1,590 $ 2,722 $ 905 $ 294
Diluted earnings (loss)
per share............. $(1,102) $ (305) $(1,603) $ 0.12 $ 0.18 $ 0.06 $ 0.02
Shares used in computing
diluted earnings per
share................. 2 2 2 13,080 14,741 14,313 15,255
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------
Actual As Adjusted
Balance Sheet Data: ------- -----------
<S> <C> <C>
Cash and cash equivalents................................... $ 1,862 $25,660
Working capital............................................. 7,686 31,484
Total assets................................................ 37,150 60,948
Total stockholders' equity.................................. 25,425 49,223
</TABLE>
5
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of our common stock could decline,
and you may lose all or part of your investment. Please see the "Special Note
Regarding Forward-Looking Statements" elsewhere in this prospectus.
We Expect Our Financial Results May Vary Significantly from Quarter to Quarter
Our operating results have varied significantly from quarter to quarter in
the past and will continue to vary significantly from quarter to quarter in the
future due to a variety of factors. Many of these factors are outside of our
control. These factors include:
. Demand for our products;
. Seasonality and the timing of product sales;
. Unexpected delays in introducing new products and services;
. New product releases or pricing policies by our competitors;
. Lack of order backlog;
. Loss of a significant distributor;
. Increased expenses, whether related to sales and marketing, product
development oradministration; and
. The mix of domestic and international sales.
In addition, we may experience fluctuations based on our past and future
acquisitions of businesses and product lines. For example, we incurred a loss
in the quarter ended December 31, 1998 as a result of a charge for purchased
research and development associated with our acquisition of EveryWare
Development Inc.
We will continue to determine our investment and expense levels based on our
expected future revenues, which may not grow at historical rates in future
periods, if at all. A significant portion of our expenses are not variable in
the short term and cannot be quickly reduced to respond to decreases in
revenues. Therefore, if our revenues are below our expectations, our operating
results and net income are likely to be adversely and disproportionately
affected. In addition, we may reduce our prices or accelerate our investment in
research and development efforts in response to competitive pressures or to
pursue new market opportunities. Any one of these activities may further limit
our ability to adjust spending in response to revenue fluctuations.
Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results
Our business has experienced, and is expected to continue to experience,
seasonal customer buying patterns. In recent years, we have had relatively
stronger demand for our products during the quarters ending December 31 and
June 30, and relatively weaker demand in the quarters ending March 31 and
September 30. We believe that this pattern may continue. In addition, to the
extent international operations constitute a greater percentage of our revenues
in future periods, we anticipate that demand for our products in Europe and
Japan will decline because of reduced corporate buying patterns during the
vacation season in the summer months.
We Currently Operate Without a Backlog
We currently operate with virtually no order backlog because our software
products are shipped and revenue is recognized shortly after orders are
received. This lack of backlog makes product revenues in any quarter
substantially dependent on orders booked and shipped throughout that quarter.
As a result, if orders in
6
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the first month or two of a quarter fall short of expectations, it is likely we
will not meet our revenue targets for that quarter. As a result, our quarterly
operating results would be materially and adversely affected.
Our Success Depends on Our Management of Significant Growth and Change Within
Our Business
We have expanded our operations rapidly since inception, resulting in new and
increased responsibilities for management and placing a strain upon our
financial and other resources. During this period, we have experienced revenue
growth, an increase in the number of our employees, an expansion in the scope
of our operating and financial systems and an expansion in the geographic area
of our operations. In particular, we had a total of 305 employees at December
31, 1998, as compared to 189 at December 31, 1997. In order to manage growth
effectively, we must implement and improve our operational systems, procedures
and controls on a timely basis. If we fail to implement and improve these
systems, our business, operating results and financial condition will be
materially adversely affected.
Our Performance Depends on Our Successful Transition To and Market Acceptance
of Pervasive.SQL
Prior to the release of our Pervasive.SQL products, we derived substantially
all of our revenues from the license of our Btrieve products. Although we
expect to continue to derive a significant portion of our revenues from Btrieve
licenses in the near term, our future operating results will become
increasingly dependent on market acceptance of Pervasive.SQL. We cannot be
certain that future sales of Pervasive.SQL will continue at initial rates. The
pace and timing of market acceptance of Pervasive.SQL has depended largely on
factors such as the product development cycles of developers and resellers who
embed our products into packaged software applications. We cannot be certain
whether or when Pervasive.SQL will become integrated into our customers'
development, marketing and support infrastructure to the same extent as
Btrieve. Although we recognized increased revenue from Pervasive.SQL in the
first and second quarters of fiscal 1999, one-time upgrades from earlier
versions of our products, our favorable upgrade pricing, or other factors may
have contributed to such sales.
Our Future Success Will Depend on Our Ability to Successfully Market and
Support Tango
We acquired the technology for our Tango products in November 1998 and we
recently began to market the Tango Application Server and Tango Development
Studio both as stand-alone products and integrated with Pervasive.SQL. To date,
we have not derived significant revenues from the Tango products. Our
performance depends on our ability to generate demand for, gain market
acceptance of and effectively support our Tango products in the near future.
Because of our limited experience marketing the Tango products, we cannot be
certain that we will achieve market acceptance for or generate significant
revenue from the Tango products. Our ability to rapidly gain market acceptance
and to effectively support our Tango products is subject to a number of
factors, including:
. Our ability to successfully integrate Pervasive.SQL with the
Tango products;
. Our ability to recruit and train new and existing value-added resellers;
. The success of our seeding promotion involving free downloads
of our Tango development environment and our ability to
ultimately receive Tango Application Server revenue from this
promotion;
. The time lag between adoption and deployment of the Tango
product line;
. Our ability to successfully market Tango products to our
installed base of customers, independent software vendors and
value-added resellers;
. The extent of competitive pricing pressure from companies in
our markets that are willing to accept losses in an attempt
to gain market share; and
. Continued growth in the market for Web-based development
products.
7
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We Must Successfully Integrate Our Recent Acquisition of EveryWare Development
Inc.
Our failure to successfully address the risks associated with our acquisition
of EveryWare Development Inc. of Toronto, Canada could have a material adverse
affect on our business, operating results and financial condition. We acquired
EveryWare in November 1998. The success of this acquisition will depend on our
ability to:
. Successfully integrate and manage EveryWare's operations,
which are based in Canada;
. Retain EveryWare's software developers; and
. Implement our business strategy.
We Have Significant Product Concentration
We currently derive substantially all of our revenues from our Pervasive.SQL
and Btrieve data management products. Data management-related revenue will
continue to account for substantially all of our revenues for the foreseeable
future. As a result, our future operating results will depend upon continued
market acceptance of Pervasive.SQL and our ability to develop and market our
Tango products. Pervasive.SQL may not achieve continued market acceptance, and
Tango may not achieve market acceptance at all. Any decrease in demand or
market acceptance for our Pervasive.SQL and Btrieve product would have a
damaging effect on our business, operating results and financial condition.
Our Efforts to Develop Brand Awareness of Our Products May Not be Successful
We believe that developing and maintaining awareness of the "Tango" and
"Pervasive" brand names is critical to achieving widespread acceptance of our
products. The importance of brand recognition will increase as competition in
the market for Web-based development and deployment products increases. A key
element of our business strategy is to commit significant resources to promote
our brands. We have not obtained a United States registration of the trademark
for these names, and we are aware of other companies that use these marks, in
particular "Tango," in their marks alone or in combination with other words. We
expect that it may be difficult or impossible to prevent third-party uses for
competing goods and services. Competitors or others that use marks that are
similar to our brand names may cause confusion among actual and potential
customers, which could prevent us from achieving significant brand recognition.
If we fail to promote and maintain our brands or incur significant related
expenses, our business, operating results and financial condition could be
materially adversely affected.
A Small Number of Distributors Account For a Significant Percentage of Our
Revenues
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
materially adversely affect our business, operating results and financial
condition. Many of our independent software vendors, value-added resellers and
end users place their orders through distributors. A relatively small number of
distributors have accounted for a significant percentage of our revenues. In
the six months ended December 31, 1998, two distributors accounted for a
combined 24% of revenues, and two distributors accounted for a combined 22% of
revenues for the comparable period in the 1997 fiscal year. We expect that we
will continue to be dependent upon a limited number of distributors for a
significant portion of our revenues in future periods. Moreover, we expect that
such distributors will vary from period to period. Our distributors have not
agreed to any minimum order requirements. Although we forecast demand and plan
accordingly, if a distributor purchases excess product, we may be obligated to
accept the return of some products.
8
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We Depend on Our Indirect Sales Channel
Our failure to continue to grow our indirect sales channel or the loss of a
significant number of members of our indirect channel partners would have a
material adverse effect on our business, financial condition and operating
results. We do not have a substantial direct sales force and derive
substantially all of our revenues from indirect sales through a channel
consisting of independent software vendors, value-added resellers, system
integrators, consultants and distributors. Our sales channel could be adversely
affected by a number of factors including:
. The emergence of a new platform resulting in the failure of
independent software vendors to develop and the failure of
value-added resellers to sell our products based on our
supported platforms;
. Pressures placed on the sales channel to sell competing products;
. Our failure to adequately support the sales channel; and
. Competing product lines offered by certain of our indirect channel
partners.
We cannot be certain that we will be able to continue to attract additional
indirect channel partners or retain our current partners. In addition, we
cannot be certain that our competitors will not attempt to recruit certain of
our current or future partners.
We May Face Problems in Connection With Future Acquisitions or Joint Ventures
In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement
or expand our business. Our negotiations of potential acquisitions or joint
ventures and our integration of acquired businesses, products or technologies
could divert time and resources. Any future acquisitions could require us to
issue dilutive equity securities, incur debt or contingent liabilities,
amortize goodwill and other intangibles, or write-off purchased research and
development and other acquisition-related expenses. If we are unable to fully
integrate acquired businesses, products or technologies with our existing
operations, we may not receive the intended benefits of acquisitions.
We May Not Be Able to Develop Strategic Relationships
Our current collaborative relationships may not prove to be beneficial to us,
and they may not be sustained. Further we may not be able to enter into
successful new strategic relationships in the future, which could have a
material adverse effect on our business, operating results and financial
condition. From time to time, we have collaborated with other companies,
including Oracle, Novell and Macromedia, in areas such as product development,
marketing, distribution and implementation. Maintaining these and other
relationships is a meaningful part of our business strategy. However, many of
our current and potential strategic partners are either actual or potential
competitors with us. In addition, many of these relationships are informal or,
if written, terminable with little or no notice.
We Depend on Third-Party Technology in Our Products
We rely upon certain software that we license from third parties, including
software that is integrated with our internally developed software and used in
our products to perform key functions. These third-party software licenses may
not continue to be available to us on commercially reasonable terms. The loss
of, or inability to maintain or obtain any of these software licenses, could
result in shipment delays or reductions until we develop, identify, license and
integrate equivalent software. Any delay in product development or shipment
could damage our business, operating results and financial condition.
9
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We May be Unable to Protect Our Intellectual Property and Proprietary Rights
Our success depends to a significant degree upon our ability to protect our
software and other proprietary technology. We rely primarily on a combination
of copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect our proprietary rights. However, these
measures afford us only limited protection. In addition, we rely in part on
"shrink wrap" and "click wrap" licenses that are not signed by the end user
and, therefore, may be unenforceable under the laws of certain jurisdictions.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Although we believe software
piracy may be a problem, we are unable to determine the extent to which piracy
of our software products exists. In addition, portions of our source code are
developed in foreign countries with laws that do not protect our proprietary
rights to the same extent as the laws of the United States.
We may increasingly be subject to claims of intellectual property
infringement as the number of products and competitors in our industry segment
continues to grow and the functionality of products in different industry
segments increasingly overlaps. Although we are not aware that any of our
products infringe upon the proprietary rights of third parties, third parties
may claim infringement by us with respect to current or future products. Any
infringement claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or the loss or deferral of
sales or require us to enter into royalty or licensing agreements. If we are
required to enter into royalty or licensing agreements, they may not be on
terms acceptable to us. Unfavorable royalty and licensing agreements could
seriously damage our business, operating results and financial condition.
We Must Adapt to Rapid Technological Change
Our future success will depend upon our ability to continue to enhance our
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. Rapid technological change, frequent new
product introductions and enhancements, uncertain product life cycles, changes
in customer demands and evolving industry standards characterize the market for
our products. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. As a result of the complexities inherent in client/server
computing environments and the performance demanded by customers for embedded
databases and Web-based products, 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 our business, operating results and financial condition. We
have experienced delays in the past in the release of new products and new
product enhancements. We may not be successful in:
. Developing and marketing, on a timely and cost-effective
basis, new products or new product enhancements that respond
to technological change, evolving industry standards or
customer requirements;
. Avoiding difficulties that could delay or prevent the
successful development, introduction or marketing of these
products; or
. Achieving market acceptance for our new products and product
enhancements.
We May be Affected by Unexpected Year 2000 Problems
We are subject to potential "Year 2000" problems affecting our products, our
internal systems and the systems of our vendors and distributors, any of which
could have a material adverse effect on our business, operating results and
financial condition. Many existing computer systems and software products do
not
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properly recognize dates after December 31, 1999. This "Year 2000" problem
could result in miscalculations, data corruption, system failures or
disruptions of operations.
The latest versions of Btrieve and Pervasive.SQL are designed to be Year 2000
compliant. An earlier release of the predecessor to Pervasive.SQL, Scalable
SQL, and certain other discontinued products were not designed to be Year 2000
compliant; however, the product documentation described how to utilize the
products in a manner that would support four digit date entries. We cannot be
certain that our software products that are designed to be Year 2000 compliant
contain all necessary date code changes. In addition, third party applications
in which our products are embedded, or for which our products are separately
licensed, may not comply with Year 2000 requirements, which may have an adverse
impact on demand for our products. As a result, we may incur increased expenses
and lose customers to competing products.
Tango, when installed alone, does not involve data storage. Thus, the ability
of a Web-based application built with Tango to comply with Year 2000
requirements is largely dependent on whether the database underlying the
application is Year 2000 compliant. Therefore, we cannot ensure that Web-based
applications developed using our products will comply with Year 2000
requirements. For example, if Tango, when installed alone, is connected to a
database that is not Year 2000 compliant, the information received by a Tango
application may be incorrect.
Changing purchasing patterns of customers impacted by Year 2000 issues may
result in reduced funds available for our products.
In addition, there can be no assurance that Year 2000 errors or defects will
not be discovered in our internal software systems and, if such errors or
defects are discovered, there can be no assurance that the costs of making such
systems Year 2000 compliant will not be material.
Year 2000 errors or defects in the internal systems maintained by our vendors
or distributors could require us to incur significant unanticipated expenses to
remedy any problems or replace affected vendors and could reduce our revenue
from our distribution channel.
Our Software May Contain Undetected Errors
Errors or defects in our products may result in loss of revenues or delay in
market acceptance, and could materially adversely affect our business,
operating results and financial condition. Software products such as ours may
contain errors or defects, sometimes called "bugs," particularly when first
introduced or when new versions or enhancements are released. In the past, we
have discovered software errors in certain of our new products after their
introduction. Despite our testing, current versions, new versions or
enhancements of our products may still have defects and errors after
commencement of commercial shipments.
We May Become Subject to Product Liability Claims
A product liability claim, whether or not successful, could damage our
reputation and our business, operating results and financial condition. Our
license agreements with our customers typically contain provisions designed to
limit our exposure to potential product liability claims. However, these
contract provisions may not preclude all potential claims. Product liability
claims could require us to spend significant time and money in litigation or to
pay significant damages.
We Compete with Microsoft while Simultaneously Supporting Microsoft
Technologies
We currently compete with Microsoft in the market for data management and Web
development and deployment products while simultaneously maintaining a working
relationship with Microsoft. Microsoft has a longer operating history, a larger
installed base of customers and substantially greater financial, distribution,
marketing and technical resources than the Company. As a result, we may not be
able to compete effectively
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with Microsoft now or in the future, and our business, operating results and
financial condition may be materially adversely affected.
We expect that Microsoft's commitment to and presence in both the database
and Web development and deployment products markets will substantially increase
competitive pressures. We believe that Microsoft will continue to incorporate
Web application server or SQL Server database technology into its operating
system software and certain of its server software offerings, possibly at no
additional cost to its users. We believe that Microsoft will also continue to
enhance its SQL Server database technology.
We believe that we must maintain a working relationship with Microsoft to
achieve success. Many of our customers use Microsoft-based operating platforms.
Thus it is critical to our success that our products be closely integrated with
Microsoft technologies. Notwithstanding our historical and current support of
Microsoft platforms, Microsoft may in the future promote technologies and
standards more directly competitive with or not compatible with our technology.
We Face Significant Competition From Other Companies
We encounter competition for our database products primarily from large,
public companies, including Microsoft, Oracle, Informix, Sybase and IBM. In
particular, Sybase offers a small memory footprint database software product,
Adaptive Server Anywhere, which directly competes with our products. In
addition, because there are relatively low barriers to entry in the software
market, we may encounter additional competition from other established and
emerging companies.
The Web development and deployment market is an emerging, intensely
competitive environment, subject to rapidly changing products and new market
participants. The market is also undergoing tremendous consolidation, which
could result in the creation of a relatively few dominant players. In the last
year, Netscape acquired Kiva Software, Sun Microsystems acquired NetDynamics
and BEA Systems acquired WebLogic. Both Oracle and IBM entered the Web
development and deployment market with internally developed solutions. The
primary competitor for Tango is Allaire's Cold Fusion product. Additional
competitors include Silverstream, HAHT Software, Bluestone and Microsoft.
Another set of competitors could arise as traditional online transaction
processing and database vendors expand their application server solutions to
include Web-based application development software. We believe that, given the
projected size of the market and strong trend towards distributed computing, it
is likely that additional competitors may enter the market. This could lead to
intense pricing pressure, particularly on front-end development tools, and
result in higher research and development costs to compete on a feature-for-
feature basis.
Most of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers. As a result,
our 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
we can. There is also a substantial risk that announcements of competing
products by large competitors such as Microsoft or Oracle 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 our ability to sell our products through particular distribution
partners. Accordingly, new competitors or alliances among current and new
competitors may emerge and rapidly gain significant market share in our current
or anticipated markets. We also expect 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 our business. We
cannot be certain that we will be able to compete successfully against current
and future competitors or that the competitive pressures that we face will not
materially adversely affect our business, operating results and financial
condition.
12
<PAGE>
We Are Susceptible to a Shift in the Market for Client/Server Applications
Toward Web-Based Applications
We derive substantially all of our revenues from the use of our products in
client/server applications. We expect to rely on continued market demand for
client/server applications indefinitely. Although the market for client/server
applications has been growing in recent years, other application platforms are
emerging. In particular, we may see market demand shift from client/server
applications to Web-based applications. This shift may occur before our Web-
based product line achieves market acceptance. In addition, we cannot be
certain that should such a platform shift occur, developers of Web-based
applications would select our Web-based products. A decrease in client/server
application sales coupled with an inability to derive revenues from the Web-
based application market could have a material adverse effect on our business,
operating results and financial condition.
We Increasingly Depend on the Growth of International Sales and Operations
We anticipate that for the foreseeable future we will derive a significant
portion of our revenues from sources outside North America. In fiscal 1998, we
derived 39% of our revenues outside North America. Our international operations
are generally subject to a number of risks. These risks include:
. Costs of translating products for foreign languages;
. Foreign laws and business practices favoring local
competition;
. Dependence on local channel partners;
. Compliance with multiple, conflicting and changing government
laws and regulations;
. Longer sales cycles;
. Greater difficulty or delay in collecting payments from
customers;
. Difficulties in staffing and managing foreign operations;
. Foreign currency exchange rate fluctuations and the
associated effects on product demand;
. Increased tax rates in certain foreign countries;
. Difficulties with financial reporting in foreign countries;
. Quality control of certain development activities; and
. Political and economic instability.
We intend to continue expanding our sales and support operations
internationally. Despite our efforts, we may not be able to expand our sales
and support operations internationally in a timely and cost-effective manner.
Such an outcome would limit or eliminate any sales growth internationally,
which in turn would materially adversely affect our business, operating results
and financial condition. Even if we successfully expand our international
operations, we may be unable to maintain or increase international market
demand for our products.
We expect that planned expansion of international operations will lead to
increased financial and administrative demands on us and our management,
including 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.
Fluctuations in the Relative Value of Foreign Currencies Can Affect Our
Business
To date, the majority of our transactions have been denominated in U.S.
dollars. The majority of our international operation expenses, substantially
all of our sales in Japan and certain other international sales have
13
<PAGE>
been denominated in currencies other than the U.S. dollar. Therefore, our
operating results may be adversely affected by changes in the value of the U.S.
dollar. As our international operations expand, our exposure to exchange rate
fluctuations will increase as we use an increasing number of foreign
currencies. We have entered into limited hedging transactions to mitigate our
exposure to currency fluctuations. Despite these hedging transactions, exchange
rate fluctuations have caused, and will continue to cause, currency transaction
gains and losses. Although these transactions have not resulted in material
gains and losses to date, similar transactions could have a damaging effect on
our business, results of operations or financial condition in future periods.
We Must Continue to Hire and Retain Skilled Personnel in a Tight Labor Market
Qualified personnel are in great demand and short supply throughout the
software industry. Our success depends in large part on our ability to attract,
motivate and retain highly skilled employees on a timely basis, particularly
executive management, sales and marketing personnel, software engineers and
other senior personnel. Our failure to attract and retain the highly trained
technical personnel that are essential to our product development, marketing,
service and support teams may limit the rate at which we can generate revenue
and develop new products or product enhancements. This could have a material
adverse effect on our business, operating results and financial condition.
Our Executive Officers and Directors' Substantial Influence Over Stockholder
Voting
We anticipate that the executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately 40% of our
outstanding common stock following the completion of this offering. These
stockholders may be able to exercise substantial influence over matters
requiring approval by our stockholders, such as the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying or preventing a change in control of our
Company.
We Have Anti-Takeover Provisions
Provisions of our Certificate of Incorporation, our Bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. See "Description of Capital Stock" for
a more complete discussion of these matters.
Future Sales of Our Common Stock Could Cause the Price of Our Shares to Decline
Upon completion of this offering, we will have 14,973,099 shares of common
stock outstanding. Substantially all of these shares will be transferable
either without restriction or registration under the Securities Act of 1933, as
amended, or pursuant to the volume and other limitations of Rule 144
promulgated under the Securities Act. Following this offering, resales of a
substantial number of shares of common stock into the public market could cause
the price of our common stock to decline.
Approximately 4,396,133 shares of common stock are subject to lock-up
agreements between the holders of those shares and the representatives of the
underwriters, pursuant to which the holders have agreed not to offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of common
stock until 90 days after the date of this prospectus, subject to limited
exceptions. Following the expiration of this period, substantially all of the
shares subject to the lock-up agreements will become available for immediate
resale in the public market subject to the volume and other limitations of Rule
144.
14
<PAGE>
The Price of Our Stock Has Been Volatile and Could Continue to Fluctuate
Substantially
Our common stock is traded on the Nasdaq National Market. The market price of
our common stock has been volatile and could fluctuate substantially based on a
variety of factors outside of our control, in addition to our financial
performance. Furthermore, stock prices for many companies, including our own,
fluctuate widely for reasons that may be unrelated to operating results.
---------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements that involve risks and uncertainties. These statements relate to
future events or our future financial performance. In some cases, investors can
identify forward-looking statements by terms such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of such terms and other comparable
terms. These statements are only predictions. Our actual results could differ
from those anticipated in these forward-looking statements. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity,
performance, or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy or completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"PVSW." Public trading of the common stock commenced on September 26, 1997.
Prior to that, there was no public market for the common stock. The following
table sets forth, for the periods indicated, the high and low sale price per
share of the common stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1998: High Low
-------------------------------- ------- -------
<S> <C> <C>
First Quarter (from September 26, 1997).................... $11 5/8 $11
Second Quarter............................................. 11 1/2 7
Third Quarter.............................................. 14 5/8 6 3/4
Fourth Quarter............................................. 14 1/2 10 3/8
<CAPTION>
Fiscal Year Ended June 30, 1999:
--------------------------------
<S> <C> <C>
First Quarter.............................................. $13 1/4 $ 7
Second Quarter............................................. 20 1/2 7
Third Quarter (through March 18, 1999)..................... 22 1/4 15 1/2
</TABLE>
As of December 31, 1998, there were approximately 131 holders of record of
our common stock. On March 18, 1999, the last sale price reported on the Nasdaq
National Market for our common stock was $17.25 per share.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not expect to do so in the foreseeable future. We anticipate that we will
retain all future earnings, if any, generated from operations to develop and
expand our business. Any future determination with respect to the payment of
dividends will be at the discretion of the Board of Directors and will depend
upon, among other things, our operating results, financial condition and
capital requirements, the terms of then-existing indebtedness, general business
conditions and such other factors as the Board of Directors deems relevant. In
addition, the terms of our credit facility prohibits the payment of cash
dividends without the lender's consent.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to us from our sale of common stock in this offering are
estimated to be $23.8 million ($30.2 million if the underwriters' over-
allotment option is exercised in full), after deducting underwriting discounts
and commissions and estimated offering expenses payable by us. We will not
receive any of the proceeds from the sale of shares of common stock by the
selling stockholders.
We intend to use the proceeds of the offering for working capital and general
corporate purposes. Although we may use a portion of the net proceeds for
possible acquisition of businesses that are complementary to our business,
there are no current plans in this regard. Pending such uses, we plan to invest
the net proceeds in short-term, interest-bearing, investment grade securities.
CAPITALIZATION
The following table sets forth our actual capitalization as of December 31,
1998 and our capitalization as adjusted to reflect sale of the shares of common
stock offered by this prospectus and the application of the net proceeds. The
outstanding share information excludes 3,148,683 shares subject to outstanding
options as of December 31, 1998 at a weighted exercise price of approximately
$4.61 per share, and also excludes 793,546 shares reserved for issuance under
our stock plans. See "Use of Proceeds."
<TABLE>
<CAPTION>
December 31,
1998
-----------------
As
Actual Adjusted
------- --------
(in thousands)
<S> <C> <C>
Long-term debt, net of current portion....................... $ -- $ --
Stockholders' equity:
Common stock: $0.001 par value, 75,000,000 shares
authorized, 13,473,099 shares issued and outstanding,
actual; 75,000,000 shares authorized, 14,973,099 shares
issued and outstanding, as adjusted........................ 27,111 50,909
Preferred stock: $0.001 par value, 5,000,000 shares
authorized, none issued and outstanding, actual and as
adjusted................................................... -- --
Retained deficit............................................ (1,686) (1,686)
------- -------
Total stockholders' equity................................. 25,425 49,223
------- -------
Total capitalization..................................... $25,425 $49,223
======= =======
</TABLE>
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, we provide summary historical consolidated financial data
of Pervasive Software Inc. We have prepared this information using our audited
consolidated financial statements for the period from January 12, 1994
(inception) through June 30, 1994, for the four fiscal years ended June 30,
1998 and the unaudited consolidated financial statements for the six-month
periods ended December 31, 1997 and 1998. Investors should read this summary
historical financial data along with the historical financial statements and
related notes for the three fiscal years ended June 30, 1998 and the six-month
periods ended December 31, 1997 and 1998, as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in this
prospectus. The data for the six months ended December 31, 1998 includes
results of EveryWare Development Inc. since November 12, 1998, charges relating
to the acquisition of EveryWare for purchased research and development of $1.8
million, and amortization of the fair value of net assets acquired and
purchased technology of $139,000. Investors should read the pro forma condensed
statements of operations and related notes for the six months ended December
31, 1998, and for the year ended June 30, 1998, included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Period from
January 12,
1994 Six Months Ended
(Inception) Fiscal Year Ended June 30, December 31,
to June 30, ---------------------------------- ------------------
1994 1995 1996 1997 1998 1997 1998
----------- ------- ------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues................ $ 933 $ 8,601 $13,476 $24,481 $36,700 $ 16,141 $ 25,863
Costs and expenses:
Cost of revenues and
technical support..... 424 1,997 2,605 3,310 5,292 2,394 3,806
Sales and marketing.... 216 3,864 6,998 10,034 15,438 6,632 10,514
Research and
development........... 2,303 2,399 4,477 5,996 9,556 4,543 6,481
General and
administrative........ 198 996 2,505 2,886 3,041 1,421 2,218
Amortization of excess
of cost over fair
value
of net assets
acquired.............. -- -- -- -- 29 -- 155
Charge for purchased
research and
development........... -- -- -- -- -- -- 1,800
------- ------- ------- ------- ------- -------- --------
Total costs and
expenses............... 3,141 9,256 16,585 22,226 33,356 14,990 24,974
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................. (2,208) (655) (3,109) 2,255 3,344 1,151 889
Interest and other
income................ 5 86 99 55 573 199 340
Provision for income
taxes................. -- (129) (170) (593) (1,101) (404) (932)
Minority interest in
(earnings) loss of
subsidiary............ -- 89 (25) (127) (94) (41) (3)
------- ------- ------- ------- ------- -------- --------
Net income (loss)....... $(2,203) $ (609) $(3,205) $ 1,590 $ 2,722 $ 905 $ 294
======= ======= ======= ======= ======= ======== ========
Basic earnings (loss)
per share.............. $(1,102) $ (305) ($1,603) $ 1.90 $ 0.26 $ 0.12 $ 0.02
======= ======= ======= ======= ======= ======== ========
Diluted earnings per
share.................. -- -- -- $ 0.12 $ 0.18 $ 0.06 $ 0.02
======= ======= ======= ======= ======= ======== ========
Shares used in computing
basic earnings per
share.................. 2 2 2 835 10,468 7,681 13,404
======= ======= ======= ======= ======= ======== ========
Shares used in computing
diluted earnings per
share.................. -- -- -- 13,080 14,741 14,313 15,255
======= ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------------- ------------
1994 1995 1996 1997 1998 1998
----- ------ ------ ------- ------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents.. $ 831 $5,096 $2,739 $ 4,058 $15,587 $ 1,862
Marketable securities...... -- -- -- -- 4,943 6,590
Working capital............ 1,281 5,740 1,768 1,560 19,815 7,686
Total assets............... 2,937 8,480 7,471 10,445 32,643 37,150
Long-term liabilities, net
of current portion........ 958 1,006 621 -- -- --
Redeemable convertible
preferred stock........... -- 4,026 4,026 4,026 -- --
Total stockholders' equity
(deficit)................. 1,562 1,061 (2,083) (394) 23,979 25,425
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in the
forward-looking statements. Please see the "Special Note Regarding Forward-
Looking Statements" elsewhere in this prospectus.
Overview
Pervasive Software Inc. is a leading provider of information management
solutions that dramatically simplify the development, deployment and
maintenance of Web-based and client/server applications. Our comprehensive,
integrated suite of software products includes zero administration databases,
Web application servers, Web development and deployment solutions and data
management and reporting tools. Together, these products offer a unique
solution that masks the complexity of developing, deploying and maintaining
Web-based applications and lower the cost of ownership of Web-based distributed
computing environments. Our business model leverages a value-added distribution
channel of software developers, value-added resellers and system integrators
around the world.
On November 12, 1998, we acquired 93% of the outstanding stock of EveryWare
Development Inc., and acquired the remaining outstanding shares in December
1998, for total consideration of $11.8 million, including cash paid to the
EveryWare shareholders, transaction costs and the value of employee stock
options assumed. The transaction was recorded using the purchase accounting
method. The following table presents the allocation of the purchase price (in
thousands):
<TABLE>
<S> <C>
Software technology............................................... $ 1,200
Purchased research and development................................ 1,800
Excess of cost over fair value of net assets acquired............. 9,761
Deferred tax adjustment related to intangible assets acquired..... (600)
Net fair value of tangible assets acquired and liabilities assumed
................................................................. (377)
-------
$11,784
=======
</TABLE>
We derive our revenues primarily from shrink-wrap licenses through
independent software vendors, value-added resellers and distributors and
through OEM license agreements with independent software vendors. Shrink-wrap
license fees are variable and based generally on user count, or in the case of
Tango, number of applications served. Our OEM licensing program offers
independent software vendors volume discounts and specialized technical
support, training and consulting in exchange for embedding our products in
packaged applications and paying us a royalty based on sales of the
applications. Additionally, we generate revenues from user count upgrades as
well as from upgrades to client/server environments from single user
workstation or workgroup environments.
We generally recognize revenues from software licenses when persuasive
evidence of an arrangement exists, the software has been delivered, the fee is
fixed or determinable and collectibility is probable. We generally recognize
revenues related to agreements involving nonrefundable fixed minimum license
fees when we deliver the product master or first copy if no significant vendor
obligations remain. We recognize per copy royalties in excess of a fixed
minimum amount as revenues when such amounts are reported to us. We operate
with virtually no order backlog because our software products are shipped
shortly after orders are received. This makes product revenues in any quarter
substantially dependent on orders booked and shipped throughout that quarter.
We enter 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. We reserve for estimated sales returns, stock
rotation and price protection rights, as well as for uncollectable accounts
based on experience.
19
<PAGE>
We derive substantially all of our revenues from the license of our
Pervasive.SQL and Btrieve products, and to date we have not derived significant
revenues from our Tango products. Although we expect to continue to derive a
significant portion of our revenues from Btrieve licenses in the near term, we
expect that our future operating results will become increasingly dependent
upon market acceptance of Pervasive.SQL released in February 1998, and
anticipate that revenues from the license of Btrieve will decrease accordingly.
Pervasive.SQL market acceptance is largely dependent upon factors such as the
product development cycles of independent software vendors and value-added
resellers who embed our products into packaged software applications. In
February 1999, we launched a marketing program in which we are offering the
Tango development environment for free for a limited time. This program is
intended to encourage developers to build applications on the Tango platform as
a "seeding" strategy for Tango Application Server licenses. We cannot be
certain that we will successfully generate license revenue from our Tango
products through this marketing program or otherwise.
In December 1998, we granted Novell, Inc., a non-exclusive, perpetual,
irrevocable license to reproduce and distribute a two-user version of
Pervasive.SQL for distribution only in combination with other products
distributed by Novell. We do not receive any royalties directly from Novell
related to the agreement. We do believe, however, that we will receive fees in
the future by licensing multi-user upgrades for some of the two-user versions
distributed by Novell. Novell has not yet begun to distribute our two-user
version, but we believe Novell will do so in 1999.
Results of Operations
The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in our consolidated statements of
operation. The results of EveryWare subsequent to November 12, 1998 are
included in, but are not significant to, our consolidated statement of
operations for the six months ended December 31, 1998, except for the effect of
purchase accounting adjustments for purchased research and development and
amortization of cost in excess of net assets acquired.
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended June 30, December 31,
------------------------- ---------------
1996 1997 1998 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues......................... 100% 100% 100% 100% 100%
Costs and expenses:
Cost of revenues and technical
support........................ 19 14 14 15 15
Sales and marketing............. 52 41 42 41 41
Research and development........ 33 24 26 28 25
General and administrative...... 19 12 9 9 8
Amortization of excess of cost
over fair value
of net assets acquired......... -- -- -- -- 1
Charge for purchased research
and development................ -- -- -- -- 7
------ ------ ------ ------ ------
Total costs and expenses......... 123 91 91 93 97
------ ------ ------ ------ ------
Operating income (loss).......... (23) 9 9 7 3
Interest and other income....... 1 -- 1 1 1
------ ------ ------ ------ ------
Income (loss) before income taxes
and minority interest........... (22) 9 10 8 4
Provision for income taxes...... (2) (2) (3) (2) (3)
Minority interest in earnings of
subsidiary..................... -- (1) -- -- --
------ ------ ------ ------ ------
Net income (loss)................ (24)% 6% 7% 6% 1%
====== ====== ====== ====== ======
</TABLE>
20
<PAGE>
Revenues
We generated revenues of $13.5 million, $24.5 million and $36.7 million for
the fiscal years ended June 30, 1996, 1997 and 1998, respectively, an increase
of 81% from fiscal 1996 to 1997, and 50% from fiscal 1997 to 1998. Our revenues
were $16.1 million and $25.9 million for the six months ended December 31, 1997
and 1998, respectively, a 60% increase from this period in 1997 to 1998. We
attributed this revenue increase in each period to increased market acceptance
of our products operating on Windows NT, introduction of Pervasive.SQL and
expansion of our worldwide sales organization. In addition, the revenue
increase from 1996 to 1997 also was attributable to market acceptance of price
increases in June 1996 for most of our products. Although our revenues have
increased in recent periods, we cannot be certain that revenues will grow in
future periods, that they will grow at past rates or that we will remain
profitable on a quarterly or annual basis in the future.
Licenses of our software operating on Windows NT or other Microsoft operating
systems increased to approximately 45% of our revenues in fiscal 1998 from
approximately 36% in the prior year. These same licenses represented 50% of our
revenues in the six months ended December 31, 1998 compared to 43% in the
comparable period in 1997. Licenses of our software operating on NetWare
represented approximately 48% of revenues in fiscal 1998, as compared to 58% in
the prior year. In the six months ended December 31, 1998, NetWare licenses
represented 40% of our revenues compared to 52% in the comparable period in the
prior year. We believe that the increase in the percentage of revenues
attributable to licenses of our products operating on Windows NT and other
Microsoft operating systems is due to two factors: (1) the increased market
acceptance of our products operating on Microsoft platforms and (2) the
increased market penetration of Microsoft platforms relative to other operating
systems. We expect that the percentages of our revenues attributable to
licenses of our software operating on particular platforms will continue to
change from time to time. We cannot be certain that our revenues attributable
to licenses of our 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 $5.7 million, $8.3 million and $14.2 million in
fiscal 1996, 1997 and 1998, representing 43%, 34% and 39% of total revenues,
respectively. We recognized international revenues of $6.5 million and $10.2
million for the six months ended December 31, 1997 and 1998, representing 40%
and 39% of total revenues, respectively. We attribute the increase in dollar
amount in each period primarily to expansion of our international sales
organization, particularly in Europe and Japan. International revenues
decreased as a percentage of revenues from fiscal 1996 to 1997 primarily due to
the increasing contribution to revenues from our domestic OEM licensing program
and, to a lesser extent, from the June 1996 price increase. We believe that
revenues from international markets represent a significant opportunity.
Therefore, we expect that international revenues may account for an increasing
portion of our revenues in the future as we expand internationally, primarily
in Europe and Japan, but also in other areas of the world.
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
our 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 $2.6 million, $3.3 million
and $5.3 million in fiscal 1996, 1997 and 1998, representing 19%, 14% and 14%
of revenues, respectively. Cost of revenues and technical support was $2.4
million and $3.8 million for the six months ended December 31, 1997 and 1998,
representing 15% of revenues in both periods. Cost of revenues and technical
support increased in each period due to increased sales volume and increased
technical support personnel in the U.S., Europe and, for the six months ended
December 31, 1998, in Japan. We anticipate that cost of revenues and technical
support will continue to increase in dollar amount as we expand our
international operations, particularly in Japan, and provide technical support
for additional products. Cost of revenues and technical support may vary as a
percentage of revenues in the future.
21
<PAGE>
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, marketing programs and
promotional expenses. Sales and marketing expenses were $7.0 million, $10.0
million and $15.4 million in fiscal 1996, 1997 and 1998, representing 52%, 41%
and 42% of revenues, respectively. Sales and marketing expenses were $6.6
million and $10.5 million for the six months ended December 31, 1997 and 1998,
representing 41% of revenues in both periods. We primarily attributed the
increase in dollar amounts from fiscal 1996 to 1997 to increased costs
associated with hiring additional sales and marketing personnel and, to a
lesser extent, increased infrastructure costs associated with foreign sales
office expansion. This increase was partially offset by a reduction of
approximately $1.2 million in marketing costs associated with our shift away
from advertising toward more direct mail oriented lead generation activities.
Sales and marketing expenses decreased as a percentage of revenues in fiscal
1997 primarily because of significant revenue growth that outpaced sales and
marketing expenditures. Sales and marketing expenses increased in dollar
amounts from fiscal 1997 to 1998 and from the six months ended December 31,
1997 to the six months ended December 31, 1998 primarily due to increased costs
associated with hiring additional sales and marketing personnel, the promotion
of Pervasive.SQL and increased infrastructure costs associated with foreign
sales office expansion. We expect that sales and marketing expenses will
continue to increase in dollar amount as we continue to promote Pervasive.SQL
and Tango, hire additional sales and marketing personnel and expand our
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, marketing promotions and international expansion.
Research and Development. Research and development expenses consist primarily
of personnel and related costs. Research and development expenses were $4.5
million, $6.0 million and $9.6 million in fiscal 1996, 1997 and 1998,
representing 33%, 24% and 26% of revenues, respectively. Research and
development expenses were $4.5 million and $6.5 million for the six months
ended December 31, 1997 and 1998, respectively, representing 28% and 25% of
revenues, respectively. Research and development expenses increased in dollar
amount each period primarily due to the increased hiring of, and contracting
with, additional research and development personnel. Research and development
expenses decreased as a percentage of revenues in fiscal 1997 and for the six
months ended December 31, 1998 compared to the comparable period in the prior
year primarily because of significant revenue growth that outpaced research and
development expenditures. We anticipate that we 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. Accordingly, we charged all software
development costs to research and development expenses.
In March 1998, we 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. The joint development effort should also allow
existing packaged application providers to migrate their solutions to Pervasive
and Oracle databases. We have performed, and will perform, all of the
development effort required to create the technology and will own the
technology in its final form. Oracle has allowed us access to certain of their
proprietary information to enable us to design and develop the resulting
application programming interface. We have no financial arrangement with Oracle
related to the initiative. Research and development expenses related to the
joint development initiative with Oracle were not material for the year ended
June 30, 1998, or for the six months ended December 31, 1998, and we do not
expect these expenses to be material in the future.
General and Administrative. General and administrative expenses consist
primarily of the personnel and other costs of our finance, human resources,
information systems and administrative departments. General and administrative
expenses were $2.5 million, $2.9 million and $3.1 million in fiscal 1996, 1997
and 1998, representing 19%, 12% and 9% of revenues, respectively. General and
administrative expenses were $1.4 million and $2.2 million for the six months
ended December 31, 1997 and 1998, respectively, representing 9%
22
<PAGE>
of revenues in both periods. We attribute the increase in dollar amount in each
period primarily to the increased staffing and associated expenses necessary to
manage and support our increased scale of operations, both domestically and
internationally. General and administrative expenses decreased as a percentage
of revenue in fiscal 1997 and 1998 primarily because of significant revenue
growth that outpaced general and administrative expenditures. We believe that
our general and administrative expenses will increase in dollar amount in the
future as our administrative staff expands to support our growing worldwide
operations.
Charge for Purchased Research and Development. We acquired 93% of the capital
stock of EveryWare Development Inc. in November 1998, and acquired the
remaining outstanding shares in December 1998, for total consideration of $11.8
million, including cash paid to the EveryWare shareholders, transaction costs
and the value of employee stock options assumed. We accounted for the
acquisition using the purchase method of accounting. We hired an independent
third-party appraisal company to determine the valuation of the intangible
assets acquired. The valuation allocated the purchase price as follows: $1.8
million attributed to purchased research and development; $1.2 million
attributed to current technology; and $200,000 attributed to the assembled
workforce. We charged to operations $1.8 million in purchased research and
development in the quarter ended December 31, 1998, because the underlying
research and development projects had not yet reached technological feasibility
and had no alternative future uses.
We are using the purchased research and development to complete new products
that will become part of our product lines in fiscal 1999 and fiscal 2000. We
believe these new products will include new technology which furthers the
extensibility, ease-of-use, productivity and performance of our Web application
server and Web development and deployment solutions, as well as new integrated
tools and utilities for administration and analysis. We expect that
substantially all the purchased research and development will reach
technological feasibility, but there can be no assurance that the commercial
viability of these products will actually be achieved. If commercial viability
is not achieved, we would look to other alternatives to provide these
solutions. We do not believe that a delay in providing such alternative
solutions would have a significant adverse effect on our results of operations.
At the time of the acquisition, we estimated the time to be incurred to
transform the purchased research and development into commercially viable
products as approximately 79 man months or approximately $400,000.
The nature of the efforts required to complete development of the purchased
research and development into commercially viable products principally relates
to the completion of all designing, prototyping, verification and testing
activities necessary to establish that the products can be produced to meet
design specifications, including functions, features, and technical performance
requirements.
An independent third-party appraiser determined the value assigned to
purchased research and development. This third-party appraiser projected cash
flows related to future products expected to be derived once technological
feasibility is achieved, including costs to complete the development of
technology and the future revenues and costs which are expected to result from
commercialization of the products. Cash flows recognized the contribution of
core technology and other supporting assets and were discounted back to their
present value at a rate of 25% for one project and 30% for another project. The
resulting net cash flows from such projects are based on our estimates of
revenues, cost of revenues and technical support, research and development
expenses, selling, general and administrative expenses and income taxes
resulting from such projects. Our estimates were based on expected trends in
technology and the nature and expected timing of completion of purchased
research and development. Nothing has come to our attention that would lead us
to believe substantial changes need to be made to the underlying assumptions.
Provision for Income Taxes. Provision for income taxes was approximately
$170,000, $593,000 and $1.1 million in fiscal 1996, 1997 and 1998,
respectively. Provision for income taxes was approximately $404,000 and
$932,000 for the six months ended December 31, 1997 and 1998, respectively. Our
effective tax rates were 26% and 28% for fiscal 1997 and 1998, respectively and
30% and 31% for the six months ended December 31, 1997 and 1998, respectively,
before considering the impact of the non-deductible charge for purchased
research
23
<PAGE>
and development. Tax expense in fiscal 1996, and an insignificant portion of
the tax expense in fiscal 1997 and 1998, represents withholding taxes paid or
accrued to be paid to foreign countries on royalties we earned. Our effective
tax rate for fiscal year 1998 and for the six months ended December 31, 1998
increased primarily due to foreign taxes associated with our increased
operations overseas.
We believe that, based on a number of factors, it is more likely than not
that a substantial amount of our deferred tax assets may not be realized. These
factors include:
. A limited history of profitability;
. Recent increases in expense levels to support our growth;
. The lack of carryback capacity to realize the deferred tax assets;
. The potential impact of anticipated deductions due to exercise of
employee stock options on deferred tax assets with limited
carryforward periods; and
. The intensely competitive market in which we operate and which is
subject to rapid change.
Accordingly, we have recorded a valuation allowance to the extent deferred
tax assets exceed the potential benefit from carryback of deferred items to
offset current or prior year taxable income. We expect our effective tax rate
will increase in the future once our deferred tax asset is fully realized. See
Note 4 of Notes to Consolidated Financial Statements.
24
<PAGE>
Quarterly Results from Operations
The following table sets forth selected unaudited quarterly information for
our last eight fiscal quarters. We believe that this information has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this prospectus and believe that all necessary
adjustments (consisting only of normal recurring adjustments) have been
included in the amounts stated below and present fairly the results of such
periods when read in conjunction with the audited consolidated financial
statements and notes thereto. The data for the quarter ended December 31, 1998
includes results of EveryWare Development Inc. since November 12, 1998, charges
relating to the acquisition of EveryWare's for purchased research and
development of $1.8 million, and amortization of the fair value of net assets
acquired and purchased technology of $139,000.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
1997 1997 1997 1997 1998 1998 1998 1998
------- ------- -------- ------- ------- ------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $6,418 $7,297 $7,671 $8,470 $9,744 $10,815 $11,776 $14,087
Costs and expenses:
Cost of revenues and
technical support..... 861 971 1,164 1,230 1,277 1,621 1,620 2,186
Sales and marketing.... 2,651 2,997 3,112 3,520 4,243 4,563 4,979 5,535
Research and
development........... 1,691 1,981 2,251 2,292 2,511 2,502 2,960 3,521
General and
administrative........ 672 790 630 791 782 838 1,025 1,193
Amortization of excess
of cost over fair
value of net assets
acquired.............. -- -- -- -- 13 16 16 139
Charge for purchased
research and
development........... -- -- -- -- -- -- -- 1,800
------ ------ ------ ------ ------ ------- ------- -------
Total costs and ex-
penses................. 5,875 6,739 7,157 7,833 8,826 9,540 10,600 14,374
------ ------ ------ ------ ------ ------- ------- -------
Operating income
(loss)................. 543 558 514 637 918 1,275 1,176 (287)
Interest and other in-
come (expense), net.... 16 (3) (19) 218 190 184 218 122
Provision for income
taxes.................. (143) (142) (146) (258) (277) (420) (426) (506)
Minority interest in
(earnings) loss of
subsidiary............. (44) (43) (19) (22) (17) (36) 14 (17)
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)....... $ 372 $ 370 $ 330 $ 575 $ 814 $ 1,003 $ 982 $ (688)
====== ====== ====== ====== ====== ======= ======= =======
Basic earnings per
share.................. $ 0.36 $ 0.29 $ 0.16 $ 0.04 $ 0.06 $ 0.08 $ 0.07 $ (0.05)
Diluted earnings per
share.................. $ 0.03 $ 0.03 $ 0.02 $ 0.04 $ 0.05 $ 0.07 $ 0.06 $ (0.05)
As a Percentage of Reve-
nues:
Revenues................ 100% 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Cost of revenues and
technical support..... 13 13 15 15 13 15 14 16
Sales and marketing.... 42 41 41 42 44 42 42 39
Research and
development........... 26 27 29 27 26 23 25 25
General and
administrative........ 11 11 8 9 8 8 9 8
Amortization of excess
of cost over fair
value of net assets
acquired.............. -- -- -- -- -- -- -- 1
Charge for purchased
research and
development........... -- -- -- -- -- -- -- 13
------ ------ ------ ------ ------ ------- ------- -------
Total costs and ex-
penses................. 92 92 93 93 91 88 90 102
------ ------ ------ ------ ------ ------- ------- -------
Operating income
(loss)................. 8 8 7 7 9 12 10 (2)
Interest and other in-
come (expense), net.... -- -- -- 3 2 1 2 1
Provision for income
taxes.................. (2) (2) (2) (3) (3) (4) (4) (4)
Minority interest in
(earnings) loss of
subsidiary............. -- (1) (1) -- -- -- -- --
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)....... 6% 5% 4% 7% 8% 9% 8% (5)%
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
25
<PAGE>
Our operating results have varied significantly from quarter to quarter in
the past and will continue to vary significantly from quarter to quarter in the
future due to a variety of factors. For example, we incurred a loss in the
quarter ended December 31, 1998 as a result of write-offs associated with our
acquisition of EveryWare Development Inc.
Liquidity and Capital Resources
In fiscal 1996, cash used in operations was $1.5 million. Cash provided by
operations was $3.7 million and $3.0 million for fiscal 1997 and 1998,
respectively. Cash provided by operations was $0.6 million and $2.5 million for
the six months ended December 31, 1997 and 1998, respectively. The decrease in
cash generated by operations from fiscal 1997 to 1998 resulted primarily from
increases in accounts receivable consistent with the increased sales volume
during fiscal 1998. The increase in cash generated by operations from the six
months ended December 31, 1997 to the six months ended December 31, 1998
resulted primarily from increased earnings, excluding a non-cash charge for
purchased research and development and amortization of acquisition related
intangibles.
During fiscal 1998, we invested $4.9 million in marketable securities,
consisting of various taxable and tax advantaged securities. In addition, we
purchased property and equipment totaling approximately $840,000, $2.2 million
and $2.4 million in fiscal 1996, 1997 and 1998, respectively. This property
consisted primarily of computer hardware and software for our growing employee
base. We purchased property and equipment totaling approximately $1.2 million
for the six months ended December 31, 1997 and $3.1 million for the six months
ended December 31, 1998 including approximately $1.3 million for furniture and
fixtures and improvements related to our new facility. We expect that our
capital expenditures will increase as our employee base grows.
In November 1998, we acquired 93% of the outstanding stock of EveryWare
Development Inc., and acquired the remaining outstanding shares in December
1998. We financed the acquisition by using available funds of approximately $11
million during the quarter ended December 31, 1998 and, therefore,
substantially reduced our liquidity position.
In February 1998, we acquired Smithware, Inc. a developer of database
development and reporting components for Pervasive products. We acquired
Smithware for approximately $390,000 consisting of $170,000 in cash, 23,752
shares of our common stock valued at $160,000 and acquisition costs of $60,000,
plus up to an additional $80,000 of cash and 47,502 shares of stock payable
upon achievement of certain milestones in the future. In conjunction with the
acquisition, we repaid Smithware's outstanding debts of approximately $110,000.
In the six months ended December 31, 1998, we paid $80,000 in cash and issued
19,000 shares of our common stock valued at $155,000 to the former Smithware
shareholders upon achieving the first of two milestones specified in the
acquisition agreement.
In February 1998, we purchased an additional 15% ownership interest in our
majority owned subsidiary, Pervasive Software Co., Ltd. (formerly known as
Btrieve Technologies Japan, Ltd.), by acquiring stock held by minority
shareholders for approximately $266,000 in cash. Following this purchase, we
hold 80.5% of the outstanding stock of Pervasive Software Co., Ltd.
In September 1997, we completed an initial public offering in which we sold
2,000,000 shares of common stock for net proceeds of $17.4 million, after
deducting the underwriter's discount and expenses of the offering.
On December 31, 1998, we had $7.7 million in working capital including $1.9
million in cash and cash equivalents and $6.6 million in marketable securities.
We have a $10.0 million revolving line of credit with a bank, but have at no
time borrowed under such line. Our line of credit contains certain financial
covenants and restrictions as to various matters including our ability to pay
cash dividends and effect mergers or acquisitions without the bank's prior
approval. We are currently in compliance with such financial covenants and
restrictions. We have granted a first priority security interest in
substantially all of our tangible assets as security for our obligations under
our credit lines.
26
<PAGE>
We believe that the net proceeds from the offering, existing cash and cash
equivalents and cash generated from operating activities will be adequate to
meet our cash needs for at least the next 12 months. Thereafter, we may require
additional funds to support our working capital requirements or for other
purposes and we may seek to raise additional funds through public or private
equity financing or from other sources. There can be no assurance that
additional financing will be available at all or that if available, such
financing will be obtainable on terms favorable to Pervasive or that any
additional financing would not be dilutive.
Recently Issued Accounting Standards
In October 1997, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 97-2, Software Revenue Recognition, which
changes the requirements for revenue recognition. In March 1998, the AICPA
issued SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2,
"Software Revenue Recognition." We adopted SOP 97-2 and SOP 98-4 in fiscal
1999. The effect of such adoption was not significant.
In December 1998, the AICPA issued Statement of Position 98-9, Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions. SOP 98-9 amends SOP 98-4 to extend the deferral of the
application of certain passages of SOP 97-2 provided by SOP 98-4 through fiscal
years beginning on or before March 15, 1999. All other provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning March 15,
1999. We believe that the adoption of SOP 98-9 will not have a material effect
on our results of operations or financial position.
In June 1997, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, or Statement 130. This statement establishes standards for reporting
and display of comprehensive income. We adopted Statement 130 in fiscal 1999.
In June 1997, the FASB also issued Statement 131, Disclosures about Segments
of an Enterprise and Related Information. Statement 131 establishes the
standards for the manner in which public enterprises are required to report
financial and descriptive information about their operating segments. We are
required to adopt Statement 131 for the year ended June 30, 1999. We believe
that the adoption of Statement 131 will not affect our results of operations or
financial position, and will not significantly affect the disclosure of segment
information in the future.
In February 1998, the FASB issued Statement 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. The Statement supersedes the
disclosure requirements in Statements No. 87, Employers' Accounting for
Pensions, No. 88, Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. Statement 132
revises the required disclosures about pensions and other postretirement
benefits. We believe that the adoption of Statement 132 will have no affect on
our results of operations, financial position or disclosures in the future.
In June 1998, the FASB issued Statement 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in fiscal
2000. Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of Statement 133 will have a significant effect on
the Company's results of operations or the financial position of the Company.
Year 2000 Compliance
The "Year 2000" issue results from an industry-wide practice of representing
years with only two digits instead of four. Beginning in the year 2000, date
code fields will need to accept four digit entries to distinguish twenty-first
century dates from twentieth century dates (2000 or 1900). As a result, in less
than one year, 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.
27
<PAGE>
Our Year 2000 readiness plan for our current versions of Pervasive.SQL 7,
Btrieve v6.15, ODBC Interface v2 and Tango v3.5 includes the following:
. Assessment--Take an inventory of products to be tested, survey
third-party programs utilized, generate compliance plan, and
define what compliance will mean;
. Implementation--Devise upgrades to correct any Year 2000 issues;
. Validation--Test and debug current versions of products; and
. Contingency Planning--Plan to implement in the event that we do
not achieve Year 2000 compliance by January 1, 2000.
We have completed all phases of our plan, except for contingency planning,
with respect to the current versions of all of our products. Based on our
review, each of the current versions of our products was found to have no known
Year 2000 limitations, when configured and used in accordance with the related
documentation, and provided that the underlying operating system of the host
machine and any other software used with or in the host machine are also Year
2000 compliant. An earlier release of Scalable SQL and certain other
discontinued products were not designed to be Year 2000 compliant. However, the
product documentation for these earlier products did describe how to utilize
the products in a manner which would support four digit entries. Earlier
versions of our products have not been tested for Year 2000 compliance as these
earlier versions of our products are no longer supported by us. We recommend
upgrading to the current version of our products if customers have any
concerns.
We have defined "Year 2000 Compliant" as the ability to:
. Correctly handle date information needed for the transition from
December 31, 1999 to January 1, 2000;
. Function according to the product documentation provided for this
date change, without changes in operation resulting from the
approaching new century, assuming correct configuration;
. Where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined, and
predetermined manner;
. If the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways that
are unambiguous as to century; and
. Recognize Year 2000 as a leap year.
We do not currently have any information concerning the Year 2000 compliance
status of our customers or third-party vendors who embed or resell our
products. Third-party applications that utilize our products may still be
written in a manner that does not take advantage of the Year 2000 capabilities
of our products. If our current or future customers fail to achieve Year 2000
compliance or if they divert technology expenditures away from software
products such as those offered by us to address Year 2000 issues, our business,
operating results, or financial condition could be materially adversely
affected.
We have not specifically tested software licensed from third parties that is
marketed through our channel, but we have received warranties and
representations from our vendors that the licensed software is Year 2000
Compliant. Despite testing by us and by our current and potential customers,
and assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000
date functions. Unknown errors or defects in our products could result in loss
of revenues or delay in market acceptance, which could have a material adverse
effect on our business, operating results and financial condition. Some
commentators have predicted significant litigation regarding Year 2000
compliance issues. Because of the nature of such litigation, it is uncertain
whether or to what extent we may be affected by it.
Our internal systems include both our information technology and non-IT
systems (such as our security system, building equipment, and embedded
microcontrollers). We have initiated an informal Year 2000 compliance project
to assess our material internal IT systems and our non-IT systems. The project
encompasses two major areas of our internal IT structure: the technical
services area, including all hardware, operating
28
<PAGE>
system, and standard application issues; and the applications area, including
all corporate database, accounting and custom applications. To the extent that
we are not able to test the technology provided by third-party vendors, we are
seeking assurances from such vendors that their systems are Year 2000
Compliant. Although we are not currently aware of any material operational
issues or costs associated with preparing our internal IT and non-IT systems
for the Year 2000, we may experience material unanticipated problems and costs
caused by undetected errors or defects in the technology used in such systems.
We plan to formalize our internal IT and non-IT Year 2000 readiness plan
beginning March 1999. We anticipate that a majority of the existing Year 2000
issues will be eliminated by this time, and we believe that this time frame
will provide adequate time to resolve any remaining material issues.
Nonetheless, undetected errors or defects in the technology used in our
internal IT and non-IT systems could have a material adverse affect on our
business, operating results, or financial condition.
We have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past, nor do we have specific
dollars budgeted for the project as the costs are not considered to be
material. We have not yet fully developed a comprehensive contingency plan to
address situations that may result if we are unable to achieve Year 2000
compliance of our critical operations. The cost of developing and implementing
such a plan may itself be material.
Finally, we are also subject to external forces that might generally affect
industry and commerce, such as utility or transportation company Year 2000
compliance failures and related service interruptions. The costs associated
with any such external forces could be material.
29
<PAGE>
BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those indicated in
the forward-looking statements. Please see the "Special Note Regarding Forward-
Looking Statements" elsewhere in this prospectus.
Company Background
Pervasive was founded in 1994 with the simple but powerful mission to be the
leading provider of database and information management solutions that
dramatically simplify the development, deployment and maintenance of robust
distributed computing applications. From our original Btrieve product, through
several successor generations and now to Pervasive.SQL, we have devoted
significant resources to the development of "zero administration" database and
information management products that mask the complexity of client/server and
other distributed computing environments. Our database technology spares
software developers the time and expense of having to become experts in many
technical aspects of distributed computing, such as data management, security
management and network configuration. In addition, our databases are designed
to require minimal ongoing maintenance, virtually eliminating the need for
scarce and expensive database administrators and other IT professionals. As a
result, developers who embed Pervasive databases into their applications can
focus their resources on creating robust applications. Enhancing our solution
is our unique value-added channel of over 10,000 independent software
developers and value-added resellers who target the large market of
organizations that have limited IT resources.
Today, the dramatic growth in the use of the Internet as a new distributed
computing platform is driving fundamental changes in business practices around
the world. Web-based applications are proliferating as organizations conduct
electronic commerce, dynamically link partners, suppliers and vendors and
generate other online business opportunities. The evolution of Web-based
development, from simple, static Web pages to dynamic, data-driven Web-based
applications, has given rise to the Web application server, which has emerged
as the platform for enabling Web users to interact with underlying database
systems.
Despite the many benefits of the Web as a distributed computing environment,
the increasing sophistication of Web-based applications and their interactions
with underlying databases present many of the same complexities as
client/server computing, as well as additional challenges relating to security,
user access and data integrity. These complexities, along with the competitive
need to develop, deploy and modify applications in "Internet time," has created
even more pressure on already strained IT professionals. As a result of these
factors, organizations need Web-based solutions with zero administration
features similar to those deployed in complex client/server environments.
A robust, high performance Web application server is only one piece of a
comprehensive solution to this problem. A complete solution for enabling
dynamic, data-driven Web-based applications must seamlessly integrate the Web
application server with a powerful and scalable underlying database that has
zero administration features. The need for such zero administration solutions
will continue to grow as the cost of bandwidth and computing power decreases.
We believe these market forces will give rise to the proliferation of the next
generation of distributed environments, such as mobile computing, smart cards,
and Web appliances, creating a dramatic increase in new applications and users.
To take advantage of these opportunities and capitalize on our skills and
expertise in simplifying distributed computing, we purchased EveryWare
Development Inc. and its Tango line of Web development and deployment solutions
in November 1998. We believe the combination of our Tango Application Server
with the zero administration functionality of our Pervasive.SQL database offers
a unique, comprehensive solution that masks the complexity of developing,
deploying and maintaining Web-based applications, lowers the cost of ownership
of Web-based distributed computing environments and is extensible to new
platforms and markets.
30
<PAGE>
The Pervasive Solution
Pervasive Software is a leading provider of information management solutions
that dramatically simplify the development, deployment and maintenance of Web-
based and client/server applications. Our comprehensive, integrated suite of
software products includes high-performance, zero administration databases, Web
application server, Web development and deployment solutions and data
management and reporting tools. Our products:
. Minimize the cost of ownership throughout the lifecycle of an
application by reducing reliance on scarce and expensive database
administrators and other IT professionals;
. Reduce the time to develop and deploy Web-based and client/server
applications;
. Simplify application development to appeal to a broader range of
software developers, including Web application developers,
webmasters, desktop publishers and end users; and
. Offer a single vendor solution that provides seamless integration
of the Web application server with the underlying database.
Our Pervasive.SQL and Btrieve database products, which combine the high
performance associated with enterprise-class databases with our zero
administration features, are uniquely suited for embedding in Web-based and
client/server applications. Today, over 10,000 independent software vendors and
value-added resellers have developed or deployed applications that use our
databases.
Our Tango products simplify the development and deployment of Web-based
applications and allow a broad range of Web developers to:
. Create dynamic, complex Web-based applications, such as e-commerce,
customer support and document management applications, with "point
and click" simplicity;
. Integrate Web-based applications seamlessly with Pervasive.SQL or
other databases that are compliant with open database connectivity
standards;
. Deploy highly scalable Web-based applications capable of handling
high traffic volumes; and
. Leverage our worldwide marketing, training and support
organizations.
Many organizations with limited IT resources rely on our value-added channel
to help them develop, deploy and maintain business critical applications. Our
products and our marketing approach are specifically tailored to meet the needs
of our channel partners and their customers. In particular, we have designed
sales, marketing, training and licensing programs to encourage independent
software vendors to develop new Web-based applications with Tango and
Pervasive.SQL. We believe that our sharp focus on independent software vendors
and value-added resellers provides us with multiple sales opportunities, a
cost-effective, value-added source of service and technical support and a
large, loyal and well-educated channel that develops applications using our
products.
The Pervasive Strategy
Pervasive's goal is to be the leading worldwide provider of software for
easily managing information and dramatically lowering the cost of ownership of
applications across all distributed computing environments. Key elements of our
strategy to attain this goal include:
Pursuing Our Vision of "Zero Administration" Applications. We will continue
to invest considerable research and development resources to further our vision
of zero administration applications that simplify and lower the cost of
ownership of complex distributed computing environments. We are extending our
zero administration technologies to make applications built on our solutions
self-tuning, self-diagnosing, and automatically configured and automatically
updated. We also plan to provide pre-packaged templates and
31
<PAGE>
objects to make applications easier to develop and deploy by a broader range of
professional and non-professional developers.
Leveraging Our Technology Leadership into New Markets. We have excelled in
developing small memory footprint and zero administration technologies for
bringing client/server computing to a broad market of customers. Recently, we
have expanded our product offering with the Tango suite of solutions that
simplify the development, deployment and maintenance of Web-based applications.
We believe that the proliferation of hand-held computing and other embedded and
smart devices will dramatically increase the number of new software
applications used by an even broader market of customers. To exploit these new
market opportunities, we intend to:
. Deploy our small memory footprint technologies on additional
platforms, such as mobile computing, smart cards and Web
appliances;
. Deliver the leading Web application development and deployment
solution by further integrating Tango with our database
technologies; and
. Extend Tango's leadership in enabling rapid deployment of Web-
based applications.
Broadening Our Brand Recognition. To gain market share in a variety of new
markets, we intend to broaden recognition of our Pervasive and Tango brands
beyond our traditional channels. In early 1999, we are launching a variety of
marketing campaigns targeted at a broad range of developers and support
professionals. Part of this effort is an aggressive promotion involving free
downloads of our Tango development environment and various promotions around
developing applications with Tango. This program is intended to encourage
developers to build applications on the Tango platform as a "seeding" strategy
for Tango Application Server licenses.
Leveraging and Expanding Our Worldwide Value-Added Channels. We believe that
our investments in training and educating our channel partners, our long-term
relationships with independent software vendors and value-added resellers and
our success in encouraging them to deploy applications using Pervasive products
have given us a competitive advantage in the marketplace. Our channel approach
is designed to further integrate our products into Web-based and client/server
applications and to stimulate sales of the applications themselves. We believe
that we can continue to leverage these loyal and well-educated channel partners
and add additional channel partners with respect to our new Web development and
deployment products and with future extensions to our product offerings. In
addition, we will continue to identify and, where possible, secure additional
complementary third-party software products for sale through our channel.
Expanding Our Strategic Partnerships. We intend to build upon the
relationships we have formed with current strategic partners, while expanding
our alliances to include new partners with complementary products, technologies
or business models. Our partnerships provide us with many benefits, including:
. Increased market recognition and visibility;
. Access to new customers and sales channels; and
. Valuable improvements to our product line.
In particular, we intend to enhance our relationship with Oracle Corporation
to enable the development of applications that can scale and inter-operate
between our respective solutions. We also intend to strengthen and extend our
existing relationships with Novell and Macromedia, in addition to building
complementary marketing and technology relationships with other industry
partners.
Expanding Our Global Presence. Since 1997, we have expanded our global
distribution capabilities by adding sales offices in Toronto and Hong Kong,
additional sales personnel in Frankfurt, Paris, Brussels and Tokyo, and new
technical support centers in Dublin and Tokyo. Our international offices
provide additional support for and increase the productivity of our channel
partners in these markets. We intend to continue to increase our international
sales and marketing activities to capitalize on opportunities to increase our
product sales in international markets.
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<PAGE>
Products
Pervasive offers a wide range of information management solutions for
client/server and Web-based applications that enable independent software
vendors and value-added resellers to combine the sophistication of distributed
computing with the low cost of ownership and convenience of zero administration
applications. The resulting applications enable organizations in multiple
industries to automate a wide range of business critical functions. The
following tables describe our high performance, zero administration databases,
Web application server, Web development and deployment solutions and data
management and reporting tools:
<TABLE>
<CAPTION>
Product Name Description Platforms
- --------------------------------------------------------------------------------------------
DATABASE PRODUCTS
- --------------------------------------------------------------------------------------------
<C> <S> <C>
Pervasive.SQL High performance transactional and relational Windows NT/98/95/3.1
database Windows CE (beta)
engine targeted at high volume transaction NetWare
applications and optimized for reporting, ad hoc OS/2
query and decision support systems. DOS
- --------------------------------------------------------------------------------------------
Pervasive.SQL Single user version of Pervasive.SQL that allows Windows NT/98/95
Workstation migration from single user to client/server with
little or no code changes.
- --------------------------------------------------------------------------------------------
Pervasive.SQL Developer kit for Pervasive.SQL that provides Windows NT/98/95
Software tight integration with leading development
Developer Kit tools.
- --------------------------------------------------------------------------------------------
Pervasive.SQL Server that provides for the Internet enabling Windows NT
I*net Data Server of existing Pervasive.SQL and Btrieve
applications with little or no code changes.
- --------------------------------------------------------------------------------------------
Btrieve Record-oriented database software targeted at Windows NT/95/3.1
high volume transaction applications. NetWare
OS/2
DOS
- --------------------------------------------------------------------------------------------
Btrieve Multi-user configuration of Btrieve for Windows NT/98/95/3.1
Workgroup environments without a dedicated network server. NetWare
DOS
- --------------------------------------------------------------------------------------------
WEB-BASED PRODUCTS
- --------------------------------------------------------------------------------------------
Tango Web-based application server that enables the Windows NT/98/95
Application Server deployment of high performance Web-based Sun Solaris
application across multiple platforms. AIX
MacOS
- --------------------------------------------------------------------------------------------
Tango Integrated environment to create dynamic Web- Windows NT/98/95
Development Studio based applications, which includes the Tango MacOS
Editor for development and Tango Personal Server FileMaker Pro
for testing and validation.
- --------------------------------------------------------------------------------------------
DATA MANAGEMENT AND REPORTING PRODUCTS
- --------------------------------------------------------------------------------------------
Seagate Software Industry standard report writer that allows end Windows NT/98/95
Crystal Reports users to generate sophisticated reports on their
Pervasive.SQL or Btrieve databases.
- --------------------------------------------------------------------------------------------
Data Junction Easy to use data translation and migration Windows NT/98/95
utility that allows data from other data sources
to be transferred into a Pervasive.SQL database.
</TABLE>
33
<PAGE>
Database Products
Our line of database and information management software offers the high
performance associated with enterprise databases combined with the simplicity
of our zero administration technology. These products enable our independent
software vendor and value-added reseller customers to more profitably develop,
deploy and maintain Web-based and client/server applications that provide
robust functionality and low overall cost of ownership in environments with
minimal IT infrastructures. Pervasive's database and information management
software simplifies development by enabling developers to write applications
that are capable of running on multiple platforms and that can scale with
little or no modification from single user workstation to client/server and
Internet environments. Business critical applications built on our embedded
databases enable organizations to implement client/server systems and automate
critical business functions without the costs and complexities typically
associated with enterprise-class client/server applications and databases.
In addition to our database server products, we offer the Pervasive.SQL
Software Developer Kit, which includes tools, documentation and licenses to
enable programmers to quickly and easily develop, test and deploy applications
that embed our databases. The Pervasive SQL Software Developer Kit, released in
September 1998, is designed to attract new independent software vendors to the
Pervasive.SQL development community. It provides tight integration with leading
development tools such as Microsoft's Visual Basic and Visual C++, Symantec's
Visual Cafe, and Inprise's Delphi to substantially reduce application
development time.
Web-Based Products
In November 1998, we expanded our product offerings to include solutions for
Web-based application development and deployment through the acquisition of
EveryWare Development Inc. and their Tango suite of products. Together, the
Tango Application Server and the Tango Development Studio form a comprehensive
Web development and deployment environment for the creation of robust, business
critical Web-based applications. Our Tango products and associated services
provide professional Web developers with the ability to create and deploy high-
volume, high-performing Web sites and Web-based applications quickly, easily
and cost-effectively. The ability to accept customer or corporate requests to
make changes "on the fly" is critically important as competitive pressures do
not allow companies to withstand the long development cycles that plague
client/server environments. In addition, we believe Tango provides the lowest
total cost of ownership for creating and maintaining Web-based applications on
the market.
The Tango Application Server enables developers to deploy Web-based
applications on Windows NT/98/95, Macintosh, Solaris or AIX and enables
applications running on Web browsers and other client devices to access dynamic
content in underlying databases. The Tango Development Studio provides an
efficient visual programming environment for prototyping and developing Web-
based applications. The Tango Development Studio features include a visual
"drag-and-drop" editor for easy development, industry-standard scripting
language, and integration with a wide range of back-end corporate information
systems, such as databases, mainframes, and even other servers, for easy,
efficient data management. Our Tango products have been integrated with the
zero administration functionality of our Pervasive.SQL database. We intend to
incorporate Web personalization technology into the next release of Tango.
Data Management and Reporting Products
In February 1998, we began marketing certain complementary third-party
products through our value-added channel. Among these products is Crystal
Reports, an industry standard report writer from Seagate Software that allows
end users to generate sophisticated reports on their Pervasive.SQL or Btrieve
databases. We also offer powerful data conversion tools from Data Junction
Corporation, which enable software developers to migrate applications quickly
and easily to run on the Pervasive.SQL database engine.
34
<PAGE>
Product Characteristics
The following tables describe the principal characteristics and benefits of
our Pervasive.SQL and Tango product offerings.
Pervasive.SQL
<TABLE>
<CAPTION>
Product Characteristics Description Benefits
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Embedded Designed to be "hidden" Allows broad deployment of
inside complex distributed
an application, permitting applications into
development of a tightly environments with minimal or
integrated application. no IT infrastructure.
- --------------------------------------------------------------------------------------------
Small Memory Footprint Internal memory requirements Maximizes resources available
are 1.3 MB. to the application and
enables operation on a wide
range of hardware.
- --------------------------------------------------------------------------------------------
Zero Administration Features Automates administrative Requires low level of IT
functions, such as disk space support making sophisticated
allocation, memory and index systems and applications
management, which eliminates cost-effective.
the need for ongoing
maintenance.
- --------------------------------------------------------------------------------------------
Reliability Based on industry-proven Provides high degree of data
technology. integrity and stability to
business applications.
- --------------------------------------------------------------------------------------------
Configurability Permits simultaneous access Enables the storage and
to local and distributed processing of databases to be
data. distributed throughout the
network.
- --------------------------------------------------------------------------------------------
Application Scalability Applications can run in any Offers cost savings for
configuration from single developers and end users
user workstation environments because a single application
to multiple user can be deployed in multiple
client/server and Internet configurations without
environments. modification.
- --------------------------------------------------------------------------------------------
Open Database Connectivity Incorporates the industry Allows ODBC-compliant
("ODBC") standard interface, which applications to access data
enables any application to stored in any Pervasive.SQL
communicate with any or Btrieve database.
database.
- --------------------------------------------------------------------------------------------
Common MicroKernel Allows transactional and Allows developers to choose
Database Engine relational applications to the appropriate data access
share common databases method: transactional access
simultaneously. for high volume and
relational access for
reporting, queries and
decision support.
</TABLE>
35
<PAGE>
Tango
<TABLE>
<CAPTION>
Product Characteristics Description Benefits
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Rapid Development Standards-based environment Allows broad development and
using non-proprietary deployment of complex Web-
languages and offering an based applications into
extensive library of pre- environments with minimal or
built meta-tags and business no IT resources.
application files for common
functions.
- -------------------------------------------------------------------------------------------
Turnkey Solution A fully integrated Provides all of the tools
environment that includes necessary to effectively
complete development tools, a develop, test and deploy
powerful application server, simple to complex Web-based
and robust reporting tools. solutions.
- -------------------------------------------------------------------------------------------
Zero Administration Features Uses a visual language to Requires low level of IT
represent the underlying support making complex Web-
logic of the application, based applications easily
separating out the business, adaptable to meet ever-
presentation and database changing business demands.
logic.
- -------------------------------------------------------------------------------------------
Multi-Platform Runs across multiple Leverages existing company
platforms while supporting standards and
industry standards such as infrastructures, decreasing
ODBC, Java, HTML, XML, SQL, training time and increasing
CGI, JavaScript, JavaBeans productivity, while allowing
and Com Objects. the user to use the best tool
for the job.
- -------------------------------------------------------------------------------------------
Portability Development can be done on Allows development and
Windows NT/98/95 or the deployment to be done on the
Macintosh and be deployed on most optimal platform that
any supported platform meets the business and
(Windows NT, AIX, Sun Solaris resource requirements.
and MacOS).
- -------------------------------------------------------------------------------------------
Extensibility Works with any Web server Leverages current technology
that supports CGI. investments as well as
Dynamically generates all developer expertise, while
HTML for the user. Java, supporting the integration of
JavaScript, VRML, QuickTime new technologies as business
and other multimedia tools and technical requirements
can all be integrated easily dictate.
into Tango applications.
- -------------------------------------------------------------------------------------------
Reliability Based on industry-proven Provides high degree of data
technology. integrity and stability to
business applications.
</TABLE>
36
<PAGE>
Customers
We license our database and Web development and deployment products to
independent software developers, value-added resellers and, to a lesser extent,
directly to end user customers. Our products have been deployed globally in a
wide variety of markets. We believe that the following lists are representative
of our customers and the markets into which our products are deployed:
Database Products
Accounting
AGRIS Corporation
Computer Associates
DBA Software
Dexter & Cheney Inc.
DITEC Informationstechnologie GmbH & Co. KG
Exact International Development B.V.
Great Plains Software, Inc.
Macola Software, Incorporated
Matrix International BV
Logo Yazilim
Platinum Software Corporation
Real World
Scala ECE Overseas Ltd.
Solomon Software
Systems Union Group, Ltd.
Document Imaging
Cardiff Software, Inc.
Document Solutions
J&B Software
MACESS Corporation
Finance
Associated Software Consultants, Inc.
basoft Neue Bankensoftware AG
Fair Isaac and Company
SD Sociaal
Healthcare Administration
ComCotec Inc.
HBOC
IMPAC Medical Systems, Inc.
Marquette Medical
Per Se'
Practice Works
Manufacturing
Bergen Computer
Expandable Software, Inc.
Kewill
Other
CAM Data Systems, Inc.
Cheyenne Software
Delphi Information Systems
Dimasys
La Societe de Programmation de COBA inc.
Magic Software Enterprises, Ltd.
Maximizer Technologies Inc.
Optimal Robotics
Rapattoni Corporation
Smith, Abbott and Company, Inc.
Synchronics, Inc.
Web-Based Products
Alcatel Network Systems, Inc. colleges.com
Apple Computer Harvard University
Bank of Montreal Hewlett-Packard
Baxter Healthcare Corporation NASA
Boeing Information Services National Institutes of Health
Chase Manhattan Bank theglobe.com
37
<PAGE>
Sales and Marketing
Pervasive's sales and marketing organization focuses on value-added channels
by targeting independent software vendors, including professional and non-
professional developers, that build Web-based and client/server applications
and the value-added resellers that sell and implement the applications to end
users with minimal IT resources. In addition, with the expansion of our product
suite to the Internet platform we are launching a variety of marketing and
promotional campaigns designed to broaden recognition of our Pervasive and
Tango brands. Our marketing group has primary responsibility for product
direction and has developed a number of programs utilized by the sales
organization to support the independent software vendor and value-added
reseller channels, such as the OEM program for independent software vendors and
other partner programs for value-added resellers and independent software
vendors. These programs are worldwide in scope and capture leads from a variety
of additional marketing programs including direct response marketing and
advertising, joint marketing and public relations.
Our OEM program focuses on recruiting independent software vendors to embed
Pervasive's database, Internet development/deployment and information
management products on an OEM basis. The OEM program is designed to generate
mutually beneficial strategic relationships between Pervasive and our
independent software vendors and ongoing royalties for Pervasive through
licensing contracts, which are typically for three-year terms. This program
offers our OEM partners volume discounts, specialized technical support,
training and consulting, which enable delivery of tightly integrated solutions
to end users.
Our other sales and marketing programs recruit many value-added resellers and
independent software vendors to develop applications that are designed to be
deployed with shrink-wrap versions of Pervasive's database, information
management and Web-based products. These programs further develop, support and
train value-added resellers and independent software vendors to facilitate the
deployment of packaged applications. The sales group works with these
customer's and, when volumes become sufficient, recruits these independent
software vendors into the OEM program.
Our sales and marketing organization utilizes seeding strategies designed to
stimulate high-volume deployment of Web-based and client/server products. Our
database products seeding strategy enables our customers to develop client-
based applications and to deploy them broadly with minimal incremental cost. We
then work with our channel partners through a combination of promotional and
lead referral programs to upgrade these applications to client/server
environments. As a result, we generate upgrade revenues while enabling
independent software vendors and value-added resellers to sell higher margin
server products to end users upgrading from single user workstation, or peer-
to-peer networks to client/server environments and customers ready to deploy
Tango developed applications into a three-tier Web application server
environment. In February 1998, we are launching an aggressive seeding promotion
involving downloads of our Tango development environment and various promotions
around developing applications for Tango.
The international sales group utilizes more than 60 distribution partners
covering more than 80 countries worldwide. The distribution partners implement
sales and marketing programs for a particular region, typically using our
business alliance, distributor or master distributor programs. In addition to
managing these distributor relationships, the international sales group
recruits and supports independent software vendors and value-added resellers
with the same programs as the domestic sales groups. Pervasive currently has
international sales offices in Toronto, Frankfurt, Paris, Brussels, London,
Hong Kong and Tokyo.
Customer Service and Technical Support
We offer multiple levels of worldwide customer services, including technical
support, training, product maintenance and consulting services. First level, or
front line, support responds to most customer inquiries that are routine in
scope via telephone and email. Second level, or back line, support responds to
escalated technical issues and supports our large partners. Self-help support
is also available via our Web site, which includes a searchable knowledge base,
answers to frequently asked questions and technical white papers.
38
<PAGE>
In order to provide a higher quality of customer support, we formed a
specialized customer engineering group in June 1997. This group combines
traditional technical support with an engineering development team to provide
maintenance for all products, develop customer-driven enhancements to our
products, issue regularly scheduled service packs and handle escalations of
highly technical customer issues. The customer engineering group also offers
worldwide fee-based training and consulting services to our channel and OEM
partners.
Customer service is provided at no charge for the first 30 days after initial
purchase and at any time via email or our Web site. After 30 days, we offer
contract and fee-based premium support programs. Worldwide customer support is
provided through our corporate offices in Austin, Texas and through support and
development centers in Dublin, Toronto and Tokyo.
Research and Development
We have made substantial investments in research and development through both
internal development and technology acquisition. As of December 31, 1998, we
had 102 employees in research and development, and our research and development
expenditures for fiscal 1996, 1997 and 1998 were $4.5 million, $6.0 million and
$9.6 million, respectively. We will continue to invest considerable research
and development resources to further our vision of zero administration
applications that simplify and lower the cost of ownership of high performance
distributed computing.
We have devoted the majority of our research and development activity to
developing feature extensions to our Pervasive.SQL product line. Our
development efforts consists primarily of adding new competitive product
features, expanding the number of computer and network operating systems on
which the products can be installed and maintaining the ability to run in
multiple operating system environments. Development activities continue to
focus on two major product lines, our Pervasive.SQL database products and
Tango. We continue to focus on enhancing Pervasive.SQL as database software
characterized by a small memory footprint, high-performance and zero
administration requirements, and extend these technologies to support mobile
computing, smart cards and Web appliances. For Tango, our efforts center on
improving the rapid development capabilities of the Tango Development Studio,
increasing extensibility by augmenting support for industry-standard interfaces
and extending multi-platform support and maintenance features for the Tango
Application Server.
In March 1998, we 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. The joint development effort should also allow
existing packaged application providers to migrate their solutions between
Pervasive and Oracle databases.
We are also investing in synchronization technology for integration into a
future release of Pervasive.SQL. Once this integration is complete, future
versions of Pervasive.SQL will be designed to enable developers of mobile and
occasionally connected applications to deliver solutions featuring simple
implementation and low administration requirements.
Technology
Pervasive.SQL and Btrieve
Pervasive.SQL and Btrieve utilize our MicroKernel Database Architecture
Engine, or MKDE, architecture. A primary feature of the MKDE architecture is
that it enables applications to have simultaneous transactional and relational
access to data. Pervasive.SQL provides a number of advantages over other
database management systems including:
.Support for larger storage needs (up to 64 gigabytes per table);
.Smart components for simplified installation and configuration;
39
<PAGE>
.Expanded programming language interfaces;
.A file management utility to expedite data import, export and recovery
tasks;
.Enhanced automatic tuning designed to increase performance;
.Simultaneous transactional and relational access to the same data; and
.Built-in recovery capabilities.
Applications based on Pervasive database engines can scale from single user
workstation to client/server environments without relinking or changing code.
Network environments can be customized to minimize network traffic and to
balance resource loading by distributing database files and data processing
throughout multi-platform computer networks.
The configuration options for our database products include the following:
. Single-User Workstation. The single-user workstation configuration
provides mobile and stand-alone operation. All access modules and
MKDE components reside locally, and data files are stored on the
workstation's disk drive. This configuration is used when the
workstation is not connected to a network or when data files do not
need to be shared.
. Workgroup. The Btrieve workgroup configuration enables shared access
to data files by a small team of users. The workgroup technology is
suited for environments that support peer-to-peer networking but do
not have a dedicated database management server.
. Client/Server. In a client/server configuration, database requests
made by an application are typically processed on a server. A small
requester module on the workstation routes requests from the
application to a server database engine. Since all data processing
and data files reside on the server, this configuration minimizes
both network traffic and the use of workstation resources.
Tango
Tango is a Web application server development and deployment environment for
generating dynamic Web-based applications and accessing databases. Tango
consists of two main components: the Tango Development Studio, which is a
sophisticated editing environment that features a complete graphical user
interface for developing Web application files, and the Tango Application
Server, which is an application server that executes application files created
with the Tango Development Studio.
The Tango Application Server, a multi-threaded engine, works in conjunction
with an HTTP (Web) server to return HTML to a Web browser. Web pages viewed in
a Web browser can contain forms or links that point to Tango application files
created with the Tango Development Studio. When the user submits a form or
clicks a link, the Web server receives the request and passes it to Tango CGI
or one of the plug-ins that, in turn, sends it to the Tango Application Server.
The Tango Application Server then executes the application file, which could
involve performing multiple actions and interactions with a database server. A
series of action results are merged by the Tango Application Server to create
an HTML page. When execution is complete, the HTML results are returned through
the CGI or plug-in to the Web server, and then to the user browser.
The Tango Development Studio provides a point-and-click, drag-and-drop
interface in which application files are created for use specifically in the
Tango Application Server. The Development Studio works by querying the database
schema and noting the tables and columns of the database. Columns can be
dragged into specific actions within the application, thus defining the way in
which the database is accessed. No knowledge of SQL or database specifics is
required. Actions can include file access, mail, and general external actions
(e.g., launching applications, accessing Java components, triggering events).
Tango application files are built using a series of custom meta tags that
describe control flow, data, and actions for dynamically generating HTML pages.
40
<PAGE>
Plug-ins supported by the Tango Application Server include NSAPI, an
application programming interface used in conjunction with Netscape Web servers
such as FastTrack or Enterprise server, and ISAPI, an application programming
interface that is the plug-in interface supported by Microsoft's Internet
Information Server. Plug-in access to the Tango Application Server is more
efficient than CGI access as the plug-in runs as part of the Web server process
and does not require starting up a separate process. Databases supported
include Pervasive.SQL, Oracle, Microsoft Access, Microsoft SQL Server, and ODBC
data sources.
Competition
We encounter competition for our database products primarily from large,
public companies, including Microsoft, Oracle, Informix, Sybase and IBM. In
particular, Sybase offers a small memory footprint database software product,
Adaptive Server Anywhere, which directly competes with our products. Microsoft
has devoted resources to making its SQL Server product increasingly applicable
to the market for our products and has a number of Web application development
products. We believe that Microsoft will continue to incorporate SQL Server and
Web application server technology into its operating system software and
certain of its server software offerings, possibly at no additional cost to its
users. Microsoft's activities could materially adversely effect sales of our
products on the Windows NT platform. In addition, because there are relatively
low barriers to entry in the software market, we may encounter additional
competition from other established and emerging companies.
The Web development and deployment market is an emerging, intensely
competitive environment, subject to rapidly changing products and new market
participants. The market is also undergoing tremendous consolidation, which
could result in the creation of a relatively few dominant players. In the last
year, Netscape acquired Kiva Software, Sun Microsystems acquired NetDynamics
and BEA Systems acquired WebLogic. Both Oracle and IBM entered the Web
development and deployment market with internally developed solutions. The
primary competitor for Tango is Allaire's Cold Fusion product. Additional
competitors include Silverstream, HAHT Software, Bluestone and Microsoft.
Another set of competitors could arise as traditional online transaction
processing and database vendors expand their application server solutions to
include Web-based application development software. We believe that, given the
projected size of the market and strong trend towards distributed computing, it
is likely that additional competitors may enter the market. This could lead to
intense pricing pressure, particularly on front-end development tools, and
result in higher research and development costs to compete on a feature-for-
feature basis.
Most of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers. As a result,
our 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
we can. There is also a substantial risk that announcements of competing
products by large competitors such as Microsoft or Oracle 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 our ability to sell our products through particular distribution
partners. Accordingly, new competitors or alliances among current and new
competitors may emerge and rapidly gain significant market share in our current
or anticipated markets. We also expect 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 our business. We
cannot be certain that we will be able to compete successfully against current
and future competitors or that the competitive pressures that we face will not
materially adversely affect our business, operating results and financial
condition.
41
<PAGE>
Proprietary Rights
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely primarily on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our proprietary rights. We
also believe that factors such as the technological and creative skills of our
personnel, new research and developments, frequent product enhancements, name
recognition and reliable product maintenance are essential to establishing and
maintaining a technology leadership position. We seek to protect our software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. We cannot be certain that others
will not develop technologies that are similar or superior to our technology or
design around the copyrights and trade secrets owned by us. We license our
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. We believe, however, that these
measures afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a
persistent problem. Embedded software products, like those offered by us, can
be especially susceptible to software piracy. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the laws
of the U.S. Any such resulting litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our
business, operating results and financial condition. We cannot be certain that
our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology. Any failure by
us to meaningfully protect our property could have a material adverse effect on
our business, operating results and financial condition.
We are not aware that we are infringing any proprietary rights of third
parties. There can be no assurance, however, that third parties will not claim
infringement by us of their intellectual property rights. We expect that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in our 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 us to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to us, if at all. In the event of a successful claim of
product infringement against us, should we fail or be unable to either license
the infringed or similar technology or develop alternative technology on a
timely basis, our business, operating results and financial condition could be
materially adversely affected.
We rely upon certain software that we license from third parties, including
software that is integrated with our internally developed software and is used
in our products to perform key functions. There can be no assurance that these
third-party software licenses will continue to be available to us 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 our business, operating results and
financial condition.
42
<PAGE>
Employees
As of December 31, 1998, we employed 305 full-time employees, including 104
in sales and marketing, 102 in research and development, 53 in technical
support and 46 in general and administrative. We believe that our future
success will depend in large part upon our continuing ability to attract and
retain highly skilled managerial, sales, marketing, customer support and
research and development personnel. Like other software companies, we face
intense competition for such personnel, and we have at times experienced and
continue to experience difficulty in recruiting qualified personnel. There can
be no assurance that we will be successful in attracting, assimilating and
retaining other qualified personnel in the future. We are not subject to any
collective bargaining agreement and we believe that our relationships with our
employees are good.
Facilities
In October 1998 we moved our headquarters to a new facility in Austin, Texas
of approximately 70,000 square feet. The new facility provides additional space
and expansion options at rental rates per square foot consistent with our
previous facility. This new facility is leased through September 2008. We
currently lease other domestic offices in California, Illinois and Tennessee,
as well as international offices in Toronto, Frankfurt, Paris, Brussels,
Dublin, London, Hong Kong and Tokyo. We continue to be obligated under two
leases for our prior headquarters facility in Austin, Texas. We have leased all
space in our prior facility to two subtenants. The first lease and
corresponding sublease expires in August 2000, and the second lease and
corresponding sublease expires in December 2000.
43
<PAGE>
MANAGEMENT
Executive Officers and Directors
Set forth below is a list of our executive officers and directors as of
December 31, 1998:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- --------------------------------------------------------------
<S> <C> <C>
Ron R. Harris........... 45 President, Chief Executive Officer and Director
James R. Offerdahl...... 42 Chief Operating Officer, Chief Financial Officer and Secretary
Ramon D. Acosta,
Ph.D. ................. 39 Vice President, Development
Scott J. Bleakley....... 42 Vice President, Marketing
John E. Farr............ 38 Vice President, Finance
Casey G. A. Leaman...... 52 Vice President, Worldwide Sales
Marcus D. Marshall...... 45 Vice President, Customer Engineering
Joseph C. Aragona(1).... 42 Director
David A. Boucher(2)..... 47 Director
David R. Bradford....... 48 Director
Shelby H. Carter(1)(2).. 67 Director
Nancy R. Woodward(1).... 42 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Ron R. Harris has served as our President and Chief Executive Officer since
our inception and as a director since June 1995. Prior to joining us, Mr.
Harris served as a Vice President of Citrix Systems, Inc., a developer of thin-
client/server software, from October 1990 to May 1993. Mr. Harris received his
B.S. in Computer Science from Vanderbilt University and an M.B.A. from the
University of Texas at Austin.
James R. Offerdahl has served as our Chief Operating Officer, Chief Financial
Officer and Secretary since September 1998. In addition, Mr. Offerdahl served
as Chief Financial Officer, Vice President, Finance and Administration and
Secretary from October 1996 to September 1998. From May 1993 to September 1996,
Mr. Offerdahl served as Chief Financial Officer and Vice President of
Administration of Tivoli Systems Inc., a provider of enterprise systems
management solutions, acquired by IBM in March 1996. From April 1991 to May
1993, Mr. Offerdahl served as Vice President of Finance and Administration of
InterFlo Medical, a medical device company that was acquired by Baxter
Healthcare Corporation in April 1992. Mr. Offerdahl received a B.S. in
Accounting from Illinois State University and an M.B.A. from the University of
Texas at Austin.
Ramon D. Acosta, Ph.D. has served as our Vice President, Development since
December 1998. Previously, Mr. Acosta served as Director of Desktop and Server
Products from June 1997 to November 1998, and as Engineering Project Manager
from October 1995 to May 1997. Prior to joining us in 1995, Mr. Acosta held
research, development and management positions with Scientific and Engineering
Software, a system simulation company, International Software Systems
Incorporated, a software development company and integrated systems solution
provider, and Microelectronics and Computer Technology Corporation, a high
technology consortium and small company incubator. Mr. Acosta received a B.S.
in Computer and Systems Engineering from Renssalaer Polytechnic Institute and
an M.S. and Ph.D. in Electrical Engineering from Cornell University.
Scott J. Bleakley has served as our Vice President, Marketing since December
1998 and served as Vice President, Corporate Development from April 1998 to
that time. Prior to joining us, Mr. Bleakley served as Vice President of
Business Development of Tivoli Systems, Inc. Prior to Tivoli, Mr. Bleakley
served in a number of positions at IBM over a 6 year period where he most
recently served as the Sales Operations Executive for the RS/6000 product line
in the U.S. and Canada. Mr. Bleakley received a B.A. in Economics from Ohio
Wesleyan University and an M.B.A. from Miami University.
44
<PAGE>
John E. Farr has served as our Vice President, Finance since October 1998.
Previously, Mr. Farr served as Director of Finance from April 1997 to October
1998 and as Controller from November 1994 to April 1997. Prior to joining
Pervasive, Mr. Farr served as Senior Audit Manager for KPMG LLP, an
international accounting firm. Mr. Farr received a B.B.A. in Accounting from
Southwestern University.
Casey G. A. Leaman has served as our Vice President, Worldwide Sales since
January 1998. Previously, Mr. Leaman served as Vice President, International
Sales from February 1997 to January 1998. Prior to joining us, Mr. Leaman
served as Vice President of International Sales of CenterLine Software, Inc., a
developer of compilers and software testing tools, from October 1995 to October
1996. Prior to that time, Mr. Leaman served as a director of Kanishka Systems
PTE Ltd. (Singapore), a developer of document management software, from March
1994 to May 1995 and as President and Chief Operating Officer from January 1995
to May 1995. From August 1992 to January 1994, Mr. Leaman served as Regional
Managing Director-Asia for a division of ASK Computer Systems Inc., a software
developer. Mr. Leaman received a B.S. in Agricultural Business Management from
Penn State University and an M.S. in Agricultural Economics from Purdue
University.
Marcus D. Marshall has served as our Vice President, Customer Engineering
since May 1997. He served as our Vice President, Development from November 1995
to May 1997 and as Vice President, Engineering and Technical Support from June
1995 to November 1995. Prior to joining us, Mr. Marshall served as Director of
Engineering (U.S.) of Computer Resources International, a developer of software
engineering environments, from February 1994 to June 1995. From November 1991
to February 1994, Mr. Marshall served as Vice President of Development of
International Software Systems, Inc., a developer of software engineering
environments and software productivity enhancement tools. Mr. Marshall received
a B.S. and an M.S. in Electrical Engineering from Rice University.
Joseph C. Aragona has served as one of our directors since June 1995. Since
June 1982, Mr. Aragona has served as a General Partner of Austin Ventures, a
venture capital firm. He also serves as a director for various private
companies. Mr. Aragona received a B.A. from Harvard College and an M.B.A. from
the Harvard University Graduate School of Business.
David A. Boucher has served as one of our directors since October 1995. Mr.
Boucher has served as a General Partner of Applied Technology, a venture
capital firm, since January 1993. From January 1981 to August 1992, Mr. Boucher
served as President and Chief Executive Officer of Interleaf, Inc., an
electronic publishing software developer. Mr. Boucher also serves as director
of Wang Laboratories, Inc., a network integration services company, Interleaf,
Inc. and various private companies.
David R. Bradford has served as one of our directors since October 1995. Mr.
Bradford has served as Senior Vice President, General Counsel of Novell, Inc.,
a networking software company, since 1985. Mr. Bradford also serves as a
director of a private company. Mr. Bradford received a B.A. in Political
Science and a J.D. from Brigham Young University and an M.B.A. from Pepperdine
University.
Shelby H. Carter, Jr. has served as one of our directors since August 1996.
Since January 1986, Mr. Carter has served as a distinguished adjunct professor
at the University of Texas Graduate School of Business and College of Business
Administration. Mr. Carter has founded several successful high technology
companies and currently serves as a director of several private companies. Mr.
Carter received a B.B.A. from the University of Texas at Austin.
Nancy R. Woodward is one of our founders and has served as a director and
Chairman of the Board since our inception. Ms. Woodward received a B.S. in
Computer Science from the University of Michigan.
Board Composition
We currently have authorized seven directors. The terms of office of the
board of directors are divided into three classes: Class I, whose term will
expire at the annual meeting of stockholders to be held in 2001; Class II,
45
<PAGE>
whose term will expire at the annual meeting of stockholders to be held in
1999; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2000. The Class I directors are Joseph C. Aragona
and David Bradford, the Class II directors are David A. Boucher and Nancy R.
Woodward, and the Class III directors are Ron R. Harris and Shelby H. Carter,
Jr. At each annual meeting of stockholders after the initial classification,
the successors to directors whose term will then expire will be elected to
serve from the time of election and qualification until the third annual
meeting following election. This classification of the board of directors may
have the effect of delaying or preventing changes in our control or management.
Each officer is elected by and serves at the discretion of the board of
directors. Each of our officers and directors, other than nonemployee
directors, devotes substantially full time to our affairs. Our nonemployee
directors devote such time to our affairs as is necessary to discharge their
duties. There are no family relationships among any of our directors, officers
or key employees.
Committees of the Board. The audit committee reviews, acts on and reports to
the board of directors with respect to various auditing and accounting matters,
including:
. The selection of our independent accountants;
. The scope of our annual audits;
. Fees to be paid to the independent accountants;
. The performance of our independent accountants; and
. Our accounting practices.
The compensation committee establishes salaries, incentives and other forms
of compensation for our officers and our other employees and administers our
incentive compensation and benefit plans.
Director Compensation. Certain non-employee directors receive $1,000 per
meeting attended, plus a retainer of $8,000 annually for serving on the board
of directors. Directors are not compensated for attending committee meetings.
All directors are reimbursed for reasonable expenses incurred by them in
attending board and committee meetings. Certain non-employee board members are
eligible for option grants pursuant to the provisions of the Automatic Option
Grant Program under our 1997 Stock Incentive Plan. Under the Automatic Option
Grant Program, each individual who first joins the board as an eligible non-
employee director on or after the effective date of the 1997 Stock Incentive
Plan will receive at that time, an automatic option grant for 20,000 shares of
common stock. In addition, at each annual stockholders meeting, beginning with
the first annual meeting after June 30, 1998, each eligible non-employee
director, whether or not he or she is standing for re-election at that
particular meeting, will be granted a stock option to purchase 5,000 shares of
common stock. A non-employee director is not eligible for automatic option
grants if such individual is a preferred stockholder, owns 5% or more of our
voting power, or represents entities that own preferred stock or 5% or more of
our voting power. The optionee will vest in each automatic option grant in a
series of four annual installments over the optionee's period of board service,
beginning one year from the grant date. Each option will have an exercise price
equal to the fair market value of the common stock on the automatic grant date
and a maximum term of ten years, subject to earlier termination following the
optionee's cessation of board service. Vesting of the automatic option shares
will automatically accelerate and the options become fully exercisable upon (1)
a change in our control by merger or consolidation, sale of all or
substantially all of our assets or tender offer for 50% or more of our
outstanding voting stock or (2) the death or disability of the optionee while
serving as a board member. Mr. Carter was granted options to purchase 10,000
shares of common stock on August 21, 1996 at an exercise price of $0.13 per
share and 10,000 shares of common stock on March 19, 1997 at an exercise price
of $2.00 per share. Mr. Bradford was granted options to purchase 10,000 shares
of common stock on October 4, 1995 at an exercise price of $0.13 per share.
Pursuant to the Automatic Option Grant Program, each of Mr. Boucher, Mr.
Bradford and Mr. Carter were granted options to purchase 5,000 shares of common
stock on the date of the last annual stockholder meeting.
46
<PAGE>
Directors who are also our employees are eligible to participate in our Bonus
Plan, to receive options and be issued shares of common stock directly under
the 1997 Stock Incentive Plan, and are also eligible to participate, subject to
certain limitations, in our Employee Stock Purchase Plan, subject to certain
limitations.
Compensation Committee Interlocks and Insider Participation
The compensation committee of our board was formed in March 1997, and the
members of the compensation committee are Joseph C. Aragona, Shelby H. Carter,
Jr. and Nancy R. Woodward. Other than Nancy R. Woodward, who has served as our
Secretary and is currently chairman of the board, none of these individuals was
at any time during fiscal 1998, or at any other time, an officer or employee of
Pervasive. No member of our compensation committee serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board or compensation committee.
Executive Compensation
The following Summary Compensation Table sets forth the compensation earned
for the two fiscal years ended June 30, 1998 by our chief executive officer and
the four other most highly compensated officers whose salary and bonus for the
1998 fiscal year were in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
----------------- ------------
Awards
------------
Securities All Other
Fiscal Underlying Compensa-
Name and Principal Position Year Salary(1) Bonus Options(#) tion(2)
- --------------------------- ------ --------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Ron R. Harris.............. 1998 $165,851 $ 0 -- $ 690
President, Chief Executive 1997 150,587 50,000 -- 510
Officer and Director
James R. Offerdahl(3)...... 1998 153,000 0 50,000 486
Chief Operating Officer, 1997 105,000 15,000 200,000 352
Chief Financial Officer
and Secretary
Robert J. Adams, Jr.(4).... 1998 154,299 18,189 -- 11,967
Former Vice President, 1997 142,654 24,200 50,000 308
Worldwide Marketing
Casey G.A. Leaman(5)....... 1998 124,500 102,165(6) 50,000 21,116
Vice President, Worldwide 1997 41,654 25,333(6) 100,000 25,342
Sales
Marcus D. Marshall......... 1998 133,481 0 20,000 739
Vice President, Customer 1997 115,390 10,000 20,000 603
Engineering
Theodule J. Doucet, Jr..... 1998 114,166 96,539(6) -- 196
Former Vice President, 1997 104,112 56,281(6) 40,000 314
Strategic Sales
</TABLE>
- --------
(1) Salary includes amounts deferred under Pervasive's 401(k) Plan.
(2) All Other Compensation consists of life insurance premiums, except that Mr.
Adams' compensation includes $11,637 in 1998 for relocation expenses and
Mr. Leaman's compensation includes $25,000 for relocation expenses in 1997
and $20,000 in 1998.
(3) Mr. Offerdahl commenced employment with Pervasive on October 1, 1996.
(4) In January 1999, Scott J. Bleakley succeeded Mr. Adams as Vice President,
Marketing.
(5) Mr. Leaman commenced employment with Pervasive on February 10, 1997.
(6) Represents sales commissions.
47
<PAGE>
The following table contains information concerning the stock option grants
made in the fiscal year ended June 30, 1998 to the named executive officers. No
stock appreciation rights were granted to these individuals during such year.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Terms(4)
----------------------------------------------- ----------------------
Number of
Securities % of Total
Underlying Options Granted Exercise
Options to Employees in Price per Expiration
Name Granted(1) 1998(2) Share(3) Date 5%($) 10%($)
- ------------------------ ---------- --------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ron R. Harris........... 0 -- -- -- -- --
James R. Offerdahl...... 50,000 7% $8.37 10/28/07 263,192 666,981
Robert J. Adams, Jr..... 0 -- -- -- -- --
Casey G.A. Leaman....... 50,000 7 7.50 12/16/07 235,835 597,653
Marcus D. Marshall...... 20,000 3 8.37 10/28/07 105,277 266,792
Theodule J. Doucet,
Jr..................... 0 -- -- -- -- --
</TABLE>
- --------
(1) The options listed in the table become exercisable in four equal annual
installments. Upon a merger or other change in control, the option shall
become exercisable and the option shares shall become vested as if the
optionee had been employed for an additional 12 months. In addition, the
option shares shall vest in full if outstanding options are not assumed by
the acquiring entity. Should options be assumed but the optionee's
employment be involuntarily terminated within 12 months of such a change in
control, then the option shares shall vest in full. Each option has a
maximum term of ten years, subject to earlier termination in the event of
the optionee's cessation of employment with Pervasive.
(2) Based on an aggregate of 726,400 options granted in fiscal 1998.
(3) The exercise price may be paid in cash or through a cashless exercise
procedure.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
Pervasive's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the option
grants made to the executive officers.
48
<PAGE>
The following table sets forth information concerning the shares acquired and
the value realized upon the exercise of stock options during fiscal 1998 and
the fiscal year-end number and value of unexercised options with respect to the
named executive officers. No stock appreciation rights were exercised by these
individuals in fiscal 1998 or were outstanding at the end of that year.
Aggregate Option Exercises in Last Fiscal Year
And Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options in-the-Money Options
Shares at June 30, 1998(#)(2) at June 30, 1998(3)
Acquired on Value ------------------------- -------------------------
Name Exercise(#) Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ron R. Harris........... 0 -- 1,335,816 -- $13,725,510 --
James R. Offerdahl...... 0 -- -- 50,000 -- $100,250
Robert J. Adams, Jr..... 0 -- 50,000 -- 338,750 --
Casey G.A. Leaman....... 100,000(4) $500,000 -- 50,000 -- 143,750
Marcus D. Marshall...... 0 -- 10,000 20,000 67,750 40,100
Theodule J. Doucet,
Jr..................... 17,500(4) 189,800 50,000 -- 407,301 --
</TABLE>
- --------
(1) Market price at exercise less exercise price.
(2) The options granted before July 1, 1997 are immediately exercisable for all
the option shares, but any shares purchased thereunder will be subject to
repurchase by Pervasive at the original exercise price paid per share upon
the optionee's cessation of service to Pervasive prior to vesting in such
shares. As of June 30, 1998, the repurchase right had lapsed as to
1,038,475 unexercised option shares for Mr. Harris, none for Mr. Offerdahl,
12,500 option shares for Mr. Adams, none for Mr. Leaman, 2,500 option
shares for Mr. Marshall, and 7,500 option shares for Mr. Doucet.
(3) Based on the fair market value of Pervasive's common stock at fiscal year
end (June 30, 1998) ($10.375 per share), as reported on the Nasdaq National
Market.
(4) The acquired shares include options for vested and unvested shares. As of
June 30, 1998 Pervasive's repurchase right had lapsed with respect to
shares acquired during the fiscal year as follows: Mr. Doucet (no shares)
and Mr. Leaman (25,000 shares).
Bonus Plan
We have adopted a bonus program pursuant to which all full-time, non-
commissioned employees are eligible for annual cash bonuses based upon a
combination of Pervasive's achieving specified objectives and the employee
meeting specified individual performance objectives.
1997 Stock Incentive Plan
Pervasive's 1997 Stock Incentive Plan was adopted by our board on May 22,
1997 and was approved by our stockholders as the successor to the 1994
Incentive Plan. We have reserved 5,614,605 shares of common stock for issuance
under the 1997 Stock Incentive Plan as of December 31, 1998. As of July 1, 1999
and 2000, the number of shares reserved for issuance under the 1997 Stock
Incentive Plan will be increased automatically by 5% of the total number of
shares of common stock then outstanding or, if less, by 1,000,000 shares. As of
December 31, 1998, 1,714,223 shares had been issued under the 1997 Stock
Incentive Plan, options for 3,418,683 shares were outstanding (including
options incorporated from the 1994 Stock Incentive Plan) and 793,546 shares
remained available for future grant. No participant in the 1997 Stock Incentive
Plan may acquire shares of common stock under the 1997 Stock Incentive Plan in
excess of 500,000 shares each calendar year over the term of the plan. Except
as otherwise noted below, the outstanding options under the 1994 Stock
Incentive Plan contain substantially the same terms as options granted under
the 1997 Stock Incentive Plan.
49
<PAGE>
Under the 1997 Stock Incentive Plan, the eligible individuals are: employees,
non-employee members of the board of directors and consultants. The types of
awards that may be made under the 1997 Stock Incentive Plan are options to
purchase shares of common stock, stock appreciation rights, and restricted
shares. Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for such favorable
tax treatment. Non-employee members of our board are also eligible for
automatic option grants under the 1997 Stock Incentive Plan. With limited
restrictions, if shares awarded under the 1997 Stock Incentive Plan or the 1994
Stock Incentive Plan are forfeited, then those shares will again become
available for new awards under the 1997 Stock Incentive Plan.
The compensation committee of our board of directors administers the 1997
Stock Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of the 1997 Stock
Incentive Plan, including the discretion to determine which eligible
individuals are to receive any award, and to determine the type, number,
vesting requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1997 Stock
Incentive Plan may not be less than 100% of the fair market value of the common
stock on the option grant date. The exercise price for non-qualified options
granted under the 1997 Stock Incentive Plan may not be less than 85% of the
fair market value of the common stock on the option grant date. The exercise
price may be paid in cash or in outstanding shares of common stock. The
exercise price may also be paid by using a cashless exercise method or
promissory note. The purchase price for newly issued restricted shares awarded
under the 1997 Stock Incentive Plan may be paid in cash, by promissory note or
by the rendering of past or future services.
The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.
In the event we are acquired by merger, consolidation or asset sale, each
option or stock award outstanding at the time under the 1997 Stock Incentive
Plan will become vested or exercisable in 12 additional months' worth of stock.
In addition, each award will become fully exercisable or fully vested if the
option or award is not assumed by the surviving corporation or its parent.
Should the acquiring corporation or its parent assume an outstanding option and
the optionee be involuntarily terminated within twelve (12) months following
the date of the acquisition, the assumed options will fully vest. In addition,
the committee has the discretion to accelerate the vesting of options in its
discretion.
Under the automatic grant program, each individual will receive at the time
he or she first joins the board as a non-employee director an automatic option
to purchase 20,000 shares of common stock. In addition, at each annual
stockholders meeting, beginning in 1998, each non-employee director, whether or
not he or she is standing for re-election at that particular meeting, will be
granted a stock option to purchase 5,000 shares of common stock. The optionee
will vest in each automatic option grant in a series of four annual
installments over the optionee's period of board service, beginning one year
from the grant date. Each option will have an exercise price equal to the fair
market value of the common stock on the automatic grant date and a maximum term
of ten years, subject to earlier termination following the optionee's cessation
of board service. Vesting of the automatic option shares will automatically
accelerate and the options become fully exercisable upon (A) an acquisition of
us by merger, consolidation or asset sale or (B) the death or disability of the
optionee while serving as a board member.
The board may amend the 1997 Stock Incentive Plan at any time. If the board
amends the plan, stockholder approval of the amendment will be sought only if
required by an applicable law. The 1997 Stock Incentive Plan will terminate on
June 30, 2007, unless the board decides to terminate the plan sooner.
50
<PAGE>
Employee Stock Purchase Plan
Pervasive's Employee Stock Purchase Plan was adopted by our board on May 22,
1997 and was approved by our stockholders. We have reserved 1,000,000 shares of
common stock for issuance under the Employee Stock Purchase Plan. The Employee
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code. Two overlapping offering periods each with a duration of 24
months commence every May 1 and November 1 each calendar year.
Purchases of common stock will occur on April 30 and October 31 each calendar
year during an offering period. The Employee Stock Purchase Plan will be
administered by the compensation committee of our board. Each of our employees
is eligible to participate if he or she is employed by us for at least 20 hours
per week and for more than five months per year.
The Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 10% of an employee's cash
compensation, nor more than 250 shares per participant on any purchase date.
The price of each share of common stock purchased under the Employee Stock
Purchase Plan will be 85% of the lower of (A) the fair market value per share
of common stock on the date immediately before the first date of the applicable
offering period or (B) the fair market value per share of common stock on the
purchase date. In the case of the first offering period, the price per share
under the plan was 85% of the price offered to the public in the initial public
offering. Employees may end their participation in the Employee Stock Purchase
Plan at any time. Participation ends automatically upon termination of
employment with us.
Each outstanding purchase right will be exercised immediately prior to a
merger or consolidation with the payroll deductions accumulated to date by
participating employees. The board may amend or terminate the Employee Stock
Purchase Plan immediately after the close of any purchase date. If the Board
increases the number of shares of common stock reserved for issuance under the
Employee Stock Purchase Plan, it must seek the approval of our stockholders.
The Purchase Plan will in all events terminate in July 2007.
Employment Contracts and Change in Control Arrangements
The compensation committee of the board of directors has the authority under
our 1997 Stock Incentive Plan to provide for accelerated vesting of the shares
of common stock subject to outstanding options held by any employee or director
in connection with certain changes in control of Pervasive or the subsequent
termination of the officer's employment following the change in control event.
None of the individuals listed in the summary compensation table above have
employment agreements with Pervasive, and their employment may be terminated at
any time. In connection with Mr. Doucet's termination of employment, Pervasive
entered into an agreement dated January 23, 1998, pursuant to which he agreed
to make himself available up to 40 hours per week and Pervasive agreed to
continue his salary and certain benefits and to continue vesting his option
shares through June 30, 1998 and thereafter, through September 5, 1998, he
agreed to make himself available for up to 20 hours per week at a reduced
salary. Pursuant to the agreement, Mr. Doucet agreed to release any potential
claims against Pervasive.
51
<PAGE>
CERTAIN TRANSACTIONS
Transactions with Directors and Officers
In August 1996, we granted options to purchase 10,000 shares of our common
stock at an exercise price of $0.13 per share to Shelby H. Carter, Jr., one of
our directors. In March 1997, we granted Mr. Carter options to purchase 10,000
shares of our common stock at an exercise of $2.00 per share.
In October 1998, we granted Novell a non-exclusive, perpetual, irrevocable
license to reproduce and distribute a two-user version of Pervasive.SQL for
distribution only in combination with other products distributed by Novell.
David Bradford, one of our directors, serves as General Counsel to Novell.
We believe that all of the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans (if any), between Pervasive
and our officers, directors and principal stockholders and their affiliates
will be approved by a majority of the board of directors, including a majority
of the independent and disinterested outside directors of the board of
directors, and will be on terms no less favorable to us than could be obtained
from unaffiliated third parties.
Indemnification
Our Certificate of Incorporation limits the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by Delaware General Corporation Law.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors and officers to the
fullest extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. We have also
entered into indemnification agreements with our officers and directors
containing certain provisions that may require us, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of January 31, 1999, certain information
with respect to shares beneficially owned by (1) each person who is known by us
to be the beneficial owner of more than five percent of our outstanding shares
of common stock; (2) the Chief Executive Officer and the four other most highly
compensated executive officers with base salaries in excess of $100,000; (3)
each of our directors; and (4) all current directors and executive officers as
a group. This table is based upon information supplied by officers, directors
and principal stockholders and a Schedule 13G filed with the SEC. Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this rule, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
(for example, upon exercise of an option or warrant) within sixty (60) days of
the date as of which the information is provided; in computing the percentage
ownership of any person, the amount of shares is deemed to include the amount
of shares beneficially owned by such person (and only such person) by reason of
such acquisition rights. As a result, the percentage of outstanding shares of
any person as shown in the following table does not necessarily reflect the
person's actual voting power at any particular date. The percentage of
beneficial ownership for the following table is based on 13,495,459 shares of
common stock outstanding as of January 31, 1999, and 14,995,459 shares of
common stock outstanding after the completion of this offering. The number of
shares of common stock outstanding after this offering includes 1,500,000
shares of common stock being offered by Pervasive in this offering. Unless
otherwise indicated, the address for each listed stockholder is: c/o Pervasive
Software Inc., 12365 Riata Trace Parkway, Bldg. II, Austin, Texas 78727. To our
knowledge, except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to the shares of common stock
indicated.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Owned
Prior to Offering After Offering
----------------- Number of -----------------
Name and Address of Beneficial Shares
Owner(1) Number Percent Offered Number Percent
- ------------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Funds affiliated with Austin
Ventures(1)..................... 750,057 5.6% 250,000 500,057 3.3%
114 West Seventh Street
1300 Norwood Tower
Austin, TX 78701
Paul J. Schupf Associates(2)..... 1,283,400 9.5 -- 1,283,400 8.6
P.O. Box 179
Hamilton, NY 13346
Ron R. Harris(3)................. 1,455,816 10.8 -- 1,455,816 9.7
Robert J. Adams, Jr.(4).......... 100,750 * -- 100,750 *
Casey G.A. Leaman(5)............. 110,750 * 5,000 105,750 *
Marcus D. Marshall(6)............ 70,750 * 10,000 60,750 *
James R. Offerdahl(7)............ 205,213 1.5 10,000 195,213 1.3
Nancy R. and Douglas W.
Woodward(8)..................... 4,134,186 30.6 855,000 3,279,186 21.9
Joseph C. Aragona(1)............. 810,784 6.0 250,000 560,784 3.7
David A. Boucher(9).............. 160,000 1.2 -- 160,000 1.1
David R. Bradford(10)............ 10,000 * -- 10,000 *
Shelby H. Carter, Jr.(11)........ 20,000 * -- 20,000 *
All directors and executive
officers as a group
(14 persons)(12)................ 7,156,949 48.1% 1,130,000 6,026,949 40.2%
</TABLE>
- --------
*Represents beneficial ownership of less than 1% of the outstanding shares of
common stock.
(1) Includes 242,103 shares held by Austin Ventures IV-A, L.P. and 507,954
shares held by Austin Ventures IV-B, L.P. Mr. Aragona's shares also include
6,808 shares held by Mr. Aragona and 53,919 shares held by Aragona Ltd. Mr.
Aragona, a director of Pervasive, is a General Partner of AV Partners IV,
L.P., which is
53
<PAGE>
the general partner of Austin Ventures IV-A, L.P. and Austin Ventures IV-B,
L.P. Mr. Aragona disclaims beneficial ownership of the shares held by
Austin Ventures IV-A, L.P., Austin Ventures IV-B, L.P. and Aragona Ltd.,
except to the extent of his pecuniary interest therein arising from his
general partnership interest in AV Partners IV, L.P. and his interest in
Aragona Ltd.
(2) Based on a Schedule 13G dated August 19, 1998, Paul J. Schupf Associates
has reported that it may be deemed to be the beneficial owner of 1,283,400
shares of common stock of Pervasive.
(3) Includes options immediately exercisable for 1,335,816 shares of common
stock.
(4) Includes options immediately exercisable for 25,000 shares of common
stock. Also includes 62,500 shares of common stock that are subject to
Pervasive's repurchase right which lapses in increments over time.
(5) Includes 75,000 shares of common stock that are subject to Pervasive's
repurchase right which lapses in increments over time.
(6) Includes options immediately exercisable for 10,000 shares of common
stock. Also includes 17,500 shares of common stock that are subject to
Pervasive's repurchase right which lapses in increments over time.
(7) Includes 100,000 shares of common stock that are subject to Pervasive's
repurchase right which lapses in increments over time.
(8) Includes 235,160 shares held by Northern Trust Bank of Texas N.A. as
trustee of Nancy R. Woodward Grantor Retained Annuity Trust and 235,160
shares held by Northern Trust Bank of Texas N.A. as trustee of Douglas W.
Woodward Grantor Retained Annuity Trust. Each of the trusts will sell
52,500 shares in the offering.
(9) Includes 160,000 shares held by Technologies for Information and
Entertainment, L.P.
(10) Includes options immediately exercisable for 10,000 shares of common
stock.
(11) Includes options immediately exercisable for 10,000 shares of common
stock.
(12) Includes options immediately exercisable for 1,390,816 shares of common
stock.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 75,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
preferred stock, $0.001 par value.
Common Stock
As of December 31, 1998, there were 13,473,099 shares of common stock
outstanding that were held of record by approximately 131 stockholders. This
number does not include stockholders whose shares are held by a brokerage house
or clearing agency, but does include each brokerage house or clearing agency as
one record holder. There will be 14,973,099 shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment option and assuming
no exercise after December 31, 1998, of outstanding options) after giving
effect to the sale of the shares of common stock to the public offered hereby
and the conversion of our preferred stock into common stock at a one-to-one
ratio.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available therefor.
In the event of our liquidation, dissolution, or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common
stock to be issued upon completion of this offering will be fully paid and
nonassessable. See "Dividend Policy."
Preferred Stock
The board of directors has the authority to issue the preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in our
control without further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. At present, we have no plans to issue any of the preferred
stock.
Anti-Takeover Effects of Provisions of the Our Certificate of Incorporation and
Bylaws and Delaware Law
Certificate of Incorporation and Bylaws
Our Certificate of Incorporation provides that the board of directors will be
divided into three classes of directors, with each class serving a staggered
three-year term. The classification system of electing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us and may maintain the incumbency of the board of directors,
as the classification of the board of directors generally increases the
difficulty of replacing a majority of the directors. The Certificate of
Incorporation also provides that all stockholder actions must be effected at a
duly called meeting and not by a consent in writing. Further, provisions of the
bylaws and the Certificate of Incorporation provide that the stockholders may
amend the bylaws or certain provisions of the Certificate of Incorporation only
with the affirmative vote of 75% of our capital stock. These provisions of the
Certificate of Incorporation and bylaws could discourage potential
55
<PAGE>
acquisition proposals and could delay or prevent a change in our control. These
provisions are intended to enhance the likelihood of continuity and stability
in the composition of the board of directors and in the policies formulated by
the board of directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of us. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for our shares and, as a consequence, they
also may inhibit fluctuations in the market price of our shares that could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in our management.
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, or
DGCL Section 203, which regulates corporate acquisitions. DGCL Section 203
prevents certain Delaware corporations, including those whose securities are
listed for trading on the Nasdaq National Market, from engaging under certain
circumstances in a "business combination" with any "interested stockholder" for
three years following the date that such stockholder became an interested
stockholder. For purposes of DGCL Section 203, a "business combination"
includes, among other things, a merger or consolidation involving Pervasive and
the interested stockholder and the sale of more than ten percent (10%) of
Pervasive's assets. In general, DGCL Section 203 defines an "interested
stockholder" as any entity or person beneficially owning fifteen percent (15%)
or more of the outstanding voting stock of Pervasive and any entity or person
affiliated with or controlling or controlled by such entity or person. A
Delaware corporation may "opt out" of DGCL Section 203 with an express
provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of the corporation's
outstanding voting shares. We have not "opted out" of the provisions of DGCL
Section 203.
Registration Rights
After this offering, the holders of approximately 4,059,243 shares of common
stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. Under the terms of the agreement between
us and the holders of such registrable securities, if we propose to register
any of our securities under the Securities Act, either for our own account or
for the account of other security holders exercising registration rights, such
holders are entitled to notice of such registration and are entitled to include
shares of such common stock therein. Additionally, such holders are also
entitled to certain demand registration rights pursuant to which they may
require us to file a registration statement under the Securities Act at our
expense with respect to their shares of common stock, and we are required to
use our best efforts to effect such registration. All of these registration
rights are subject to certain conditions and limitations, among them the right
of the underwriters of an offering to limit the number of shares included in
such registration and our right not to effect a requested registration within
six months following an offering of our securities, including the offering made
hereby.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is American Securities
Transfer and Trust, Inc., and its telephone number is (303) 234-5300.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have approximately 14,973,099
shares of common stock outstanding. Of this amount, the 2,630,000 shares
offered hereby will be available for immediate sale in the public market as of
the date of this prospectus. Approximately 4,396,133 additional shares will be
available for sale in the public market following the expiration of 90-day
lock-up agreements with the representatives of the underwriters or us, subject
in some cases to compliance with the volume and other limitations of Rule 144.
<TABLE>
<CAPTION>
Days after Date of Approximate Shares
this Prospectus Eligible for Future Sale Comment
------------------ ------------------------ -------
<S> <C> <C>
Upon Effectiveness...... 10,576,966 Freely tradeable shares sold in offering and shares saleable under
Rule 144(k) that are not subject to 90-day lock-up
90 days................. 4,396,133 Lock-up released; shares saleable under Rule 144 or 144(k)
Thereafter.............. None Restricted securities held for one year or less
</TABLE>
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
is entitled to sell within any three-month period commencing 90 days after the
date of this prospectus a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of common stock (approximately 149,731
shares immediately after the offering) or (ii) the average weekly trading
volume during the four calendar weeks preceding such sale, subject to the
filing of a Form 144 with respect to such sale. A person (or persons whose
shares are aggregated) who is not deemed to have been our affiliate at any time
during the 90 days immediately preceding the sale who has beneficially owned
his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Any future sale of
substantial amounts of the common stock in the open market may adversely affect
the market price of the common stock offered hereby.
Pervasive, our directors, executive officers, and certain of our other
stockholders have agreed pursuant to the Underwriting Agreement and other
agreements that they will not sell any common stock without the prior consent
of BancBoston Robertson Stephens Inc. for a period of 90 days from the date of
this prospectus, except that we may, without such consent, grant options and
sell shares pursuant to our stock plans.
In addition, after this offering, the holders of approximately 4,059,243
shares of common stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by our affiliates) immediately upon the effectiveness of such
registration.
57
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht and Quist LLC, U.S. Bancorp Piper
Jaffray Inc. and First Albany Corporation have severally agreed with us and the
selling stockholders, subject to the terms and conditions of the underwriting
agreement, to purchase the number of shares of common stock set forth opposite
their respective names below. The underwriters are committed to purchase and
pay for all shares if any are purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc. ................................ 1,262,400
Hambrecht and Quist LLC............................................ 631,200
U.S. Bancorp Piper Jaffray Inc..................................... 499,700
First Albany Corporation........................................... 236,700
---------
Total............................................................ 2,630,000
=========
</TABLE>
The underwriters' representatives have advised us that the underwriters
propose to offer the shares of common stock to the public at the public
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less a concession of not in excess of $0.62 per share, of
which $0.10 may be reallowed to other dealers. After the public offering, the
public offering price, concession, and reallowance to dealers may be reduced by
the underwriters' representatives. No such reduction shall change the amount of
proceeds to be received by us as set forth on the cover page of this
prospectus.
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to 394,500 additional
shares of common stock at the same price per share as will be paid for the
2,630,000 shares that the underwriters have agreed to purchase. To the extent
that the underwriters exercise such option, each of the underwriters will have
a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of common stock to be purchased by
it shown in the above table represents as a percentage of the 2,630,000 shares
offered hereby. If purchased, such additional shares will be sold by the
underwriters on the same terms as those on which the 2,630,000 shares are being
sold.
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act of 1933 and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Pervasive, our directors, officers and certain of our other stockholders have
each agreed that, without the prior written consent of BancBoston Robertson
Stephens Inc. on behalf of the underwriters, during the period ending 90 days
after the date of this prospectus, we will not, directly or indirectly;
. Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock
(whether such shares or any such securities are then owned by such
person or are thereafter acquired directly from us); or
. Enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
58
<PAGE>
The restrictions described in the previous paragraph do not apply to
. the sale to the underwriters of the shares of common stock under the
underwriting agreement;
. the issuance by Pervasive of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on
the date of this prospectus which is described in the prospectus;
. transactions by any person other than Pervasive relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock; or
. issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of the prospectus and consistent with past practices.
The underwriters have informed us that they do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
Stabilization Disclosure
The underwriters' representatives have advised us that, pursuant to
Regulation M under the Securities Act of 1933, certain persons participating in
the offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids which may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or the purchase
of the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the underwriters' representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the underwriters'
representatives in a syndicate covering transaction and has therefore not been
effectively placed by such underwriter or syndicate member. The underwriters'
representatives have advised us that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Regulation M/Passive Market Disclosure
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
common stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
59
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Austin, Texas.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Brobeck, Phleger & Harrison LLP, Austin, Texas.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and financial statement schedule at June 30, 1997 and
1998, and for each of the three years in the period ended June 30, 1998, as set
forth in their report. We have included our financial statements and financial
statement schedule in the Prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
KPMG LLP, independent auditors, have audited the consolidated financial
statements of EveryWare Development Inc., consisting of consolidated balance
sheets as of June 30, 1998, June 30, 1997 and December 31, 1996 and the related
consolidated statements of loss and deficit and changes in financial position
for the year ended June 30, 1998, the six months ended June 30, 1997 and the
year ended December 31, 1996, as set forth in their report, which is included
in this Prospectus. The consolidated financial statements of EveryWare
Development Inc. are included in this Prospectus in reliance on their report,
given on their authority as experts in accounting and auditing. The report of
KPMG LLP covering the June 30, 1998 consolidated financial statements of
EveryWare notes that, under U.S. reporting standards, their report would
contain an additional explanatory paragraph that states that EveryWare's
recurring losses from operations raise substantial doubt about EveryWare's
ability to continue as a going concern. The consolidated financial statements
of EveryWare do not include any adjustments that might result from the outcome
of that uncertainty.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock. This prospectus does not
contain all of the information contained in the registration statement, and the
exhibits and schedules to the registration statement. For further information
with respect to Pervasive and our common stock, we refer you to the
registration statement, and the exhibits and schedules filed as part of the
registration statement. Statements made in this prospectus concerning the
contents of any contract or any other document are not necessarily complete. If
a contract or document has been filed as an exhibit to the registration
statement, we refer you to the copy of the contract or document that has been
filed. Each statement in this prospectus relating to a contract or document
filed as an exhibit is qualified by the filed exhibits. The registration
statement and the exhibits and schedules to the registration statement may be
inspected without charge at the SEC's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the SEC after payment
fees prescribed by the SEC. The SEC maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC at http://www.sec.gov. We are subject to
the informational requirements of the Exchange Act and, in accordance
therewith, file reports, proxy statements and other information with the SEC
and provide our stockholders with annual reports containing audited
consolidated financial statements. Reports, proxy statements and other
information filed by us can be inspected and copied at the public reference
facilities maintained by the SEC in Washington, D.C. and at the SEC's regional
offices in New York, New York and Chicago, Illinois. The SEC also makes
electronic filings publicly available on its Web site within 24 hours of
acceptance. Our common stock is quoted on the Nasdaq National Market. Reports,
proxy and information statements and other information concerning Pervasive may
be inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
60
<PAGE>
PERVASIVE SOFTWARE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Pervasive Software Inc.
Annual Financial Statements
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets at June 30, 1997 and 1998................... F-3
Consolidated Statements of Operations for the three years ended June 30,
1998................................................................... F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the three years ended June
30, 1998............................................................... F-5
Consolidated Statements of Cash Flows for the three years ended June 30,
1998................................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Interim Financial Statements
Condensed Consolidated Balance Sheet at December 31, 1998 (Unaudited)... F-19
Condensed Consolidated Statements of Operations for the six months ended
December 31, 1997 and 1998 (Unaudited)................................. F-20
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 1997 and 1998 (Unaudited)................................. F-21
Notes to Condensed Consolidated Financial Statements (Unaudited)........ F-22
Pro Forma Condensed Financial Statements
Unaudited Pro Forma Condensed Statements of Operations for the year
ended June 30, 1998 and the six months ended December 31, 1998......... F-25
Notes to Unaudited Pro Forma Condensed Financial Statements............. F-28
EveryWare Development Inc. (An Acquired Business of Pervasive Software
Inc.)
Annual Financial Statements
Report of Independent Auditors.......................................... F-29
Consolidated Balance Sheets at June 30, 1997 and 1998 and December 31,
1996................................................................... F-30
Consolidated Statements of Loss and Deficit for the year ended June 30,
1998, the six months ended June 30, 1997 and the year ended December
31, 1996............................................................... F-31
Consolidated Statements of Changes in Financial Position for the year
ended June 30, 1998, the six months ended June 30, 1997 and the year
ended December 31, 1996................................................ F-32
Notes to Consolidated Financial Statements.............................. F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Pervasive Software Inc.
We have audited the accompanying consolidated balance sheets of Pervasive
Software Inc. and Subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of operations, changes in redeemable convertible
preferred stock and stockholders' equity (deficit) and cash flows for each of
the three years in the period ended June 30, 1998. Our audits also included
the financial statement schedule listed in the Index at Item 16(b). These
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pervasive
Software Inc. and Subsidiaries at June 30, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended June 30, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Austin, Texas
July 17, 1998
F-2
<PAGE>
PERVASIVE SOFTWARE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------
1997 1998
------- -------
(in thousands,
except share
data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including interest bearing
investments of $3,075 in 1997 and $15,130 in 1998......... $ 4,058 $15,587
Marketable securities...................................... -- 4,943
Trade accounts receivable, net of allowance for doubtful
accounts of $100 in 1997 and $300 in 1998................. 2,803 5,304
Inventory.................................................. 105 350
Deferred income taxes...................................... 157 546
Prepaid expenses and other current assets.................. 555 1,370
------- -------
Total current assets......................................... 7,678 28,100
Property and equipment, net.................................. 2,664 3,667
Other assets................................................. 103 876
------- -------
Total assets................................................. $10,445 $32,643
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable..................................... $ 1,052 $ 1,382
Accrued payroll and payroll related costs.................. 517 966
Other accrued expenses..................................... 2,273 2,710
Deferred revenue........................................... 1,267 1,929
Income taxes payable....................................... 301 1,140
Deferred royalty payable -- Novell......................... 708 158
------- -------
Total current liabilities.................................... 6,118 8,285
Minority interest in subsidiary.............................. 695 379
Redeemable convertible preferred stock....................... 4,026 --
Stockholders' equity (deficit):
Preferred stock............................................ 3,915 --
Common stock, $0.001 par value; Authorized--75,000,000
shares; issued and outstanding--1,391,611 shares in 1997
and 13,347,724 shares in 1998............................. 205 26,270
Accumulated deficit........................................ (4,514) (2,291)
------- -------
Total stockholders' equity (deficit)......................... (394) 23,979
------- -------
Total liabilities and stockholders' equity................... $10,445 $32,643
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
PERVASIVE SOFTWARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1996 1997 1998
------- ------- -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Revenues............................................ $13,476 $24,481 $36,700
Costs and expenses:
Cost of revenues and technical support............ 2,605 3,310 5,292
Sales and marketing............................... 6,998 10,034 15,438
Research and development.......................... 4,477 5,996 9,556
General and administrative........................ 2,505 2,886 3,070
------- ------- -------
Total costs and expenses............................ 16,585 22,226 33,356
------- ------- -------
Operating income (loss)............................. (3,109) 2,255 3,344
Interest and other income......................... 99 55 573
------- ------- -------
Income (loss) before income taxes and minority
interest........................................... (3,010) 2,310 3,917
Provision for income taxes........................ (170) (593) (1,101)
Minority interest in earnings of subsidiary, net
of income taxes.................................. (25) (127) (94)
------- ------- -------
Net income (loss)................................... $(3,205) $ 1,590 $ 2,722
======= ======= =======
Basic earnings (loss) per share..................... $(1,602) $ 1.90 $ 0.26
======= ======= =======
Diluted earnings (loss) per share................... $(1,602) $ 0.12 $ 0.18
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
PERVASIVE SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
--------------------------------------------
Redeemable Total
Convertible Stockholders'
Preferred Preferred Common Accumulated Equity
Stock Stock Stock Deficit (Deficit)
----------- --------- ------- ----------- -------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balances at June 30,
1995................... $4,026 $3,915 $ -- $(2,854) $ 1,061
Foreign currency
translation
adjustment........... -- -- -- 61 61
Net loss.............. -- -- -- (3,205) (3,205)
------ ------ ------- ------- -------
Balances at June 30,
1996................... 4,026 3,915 -- (5,998) (2,083)
Issuance of 1,389,611
shares of common
stock pursuant to the
exercise of stock
options.............. -- -- 205 -- 205
Foreign currency
translation
adjustment........... -- -- -- (106) (106)
Net income............ -- -- -- 1,590 1,590
------ ------ ------- ------- -------
Balances at June 30,
1997................... 4,026 3,915 205 (4,514) (394)
Conversion of
9,713,132 shares of
preferred stock...... (4,026) (3,915) 7,941 -- 4,026
Issuance of 2,000,000
shares of common
stock, net of
issuance costs of
$1,168............... -- -- 17,432 -- 17,432
Issuance of 23,752
shares of common
stock in purchase of
a business........... -- -- 162 -- 162
Acquisition of 74,012
treasury shares,
cumulative treasury
shares of 74,012 and
cost of $10 at June
30, 1998............. -- -- (10) -- (10)
Issuance of 249,699
shares of common
stock pursuant to the
exercise of stock
options.............. -- -- 170 -- 170
Issuance of 43,542
shares of common
stock pursuant to the
employee stock
purchase plan........ -- -- 370 -- 370
Foreign currency
translation
adjustment,
cumulative amount of
$(586) at June 30,
1998................. -- -- -- (499) (499)
Net income............ -- -- -- 2,722 2,722
------ ------ ------- ------- -------
Balances at June 30,
1998................... $ -- $ -- $26,270 $(2,291) $23,979
====== ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
PERVASIVE SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
1996 1997 1998
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Cash from operating activities
Net income (loss)................................ $(3,205) $ 1,590 $ 2,722
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................. 575 749 1,442
Non cash compensation expense pursuant to
employee stock purchase plan.................. -- -- 469
Deferred income tax benefit.................... -- (157) (782)
Other non cash items........................... 132 6 110
Change in current assets and liabilities:
Increase in current assets................... (1,663) (16) (3,602)
Increase in accounts payable and accrued
liabilities................................. 878 2,085 2,017
Increase (decrease) in deferred revenue...... 1,738 (525) 662
------- ------- --------
Net cash provided by (used in) operating
activities........................................ (1,545) 3,732 3,038
Cash from investing activities
Purchase of property and equipment............... (843) (2,161) (2,421)
Purchase of marketable securities................ -- -- (23,393)
Proceeds from sale of marketable securities...... -- -- 18,450
Purchase of business, net of cash acquired....... -- -- (333)
Purchase of minority interest.................... -- -- (266)
Increase in other assets......................... -- -- (60)
------- ------- --------
Net cash used in investing activities.............. (843) (2,161) (8,023)
Cash from financing activities
Proceeds from issuance of stock, net of issuance
costs........................................... -- -- 17,432
Purchase of treasury stock....................... -- -- (10)
Payment of royalty to Novell..................... -- (370) (570)
Proceeds from exercise of stock options.......... -- 205 170
------- ------- --------
Net cash provided by (used in) financing
activities........................................ -- (165) 17,022
Effect of exchange rate changes on cash and cash
equivalents....................................... 31 (87) (508)
------- ------- --------
Increase (decrease) in cash and cash equivalents... (2,357) 1,319 11,529
Cash and cash equivalents at beginning of year..... 5,096 2,739 4,058
------- ------- --------
Cash and cash equivalents at end of year........... $ 2,739 $ 4,058 $ 15,587
======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
1. The Company
Pervasive Software Inc. (the Company), is a leading provider of ultra light
embedded database software designed to enable the cost-effective development,
deployment and support of low-maintenance packaged client/server applications.
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
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 $17.4 million, after deducting the underwriters' discount and
other costs of the offering.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company licenses its software through OEM license agreements with
independent software vendors (ISVs) and through shrink-wrap software licenses,
sold through ISVs, value-added resellers (VARs) and distributors. 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 OEM license 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
related to OEM license agreements in excess of a fixed minimum amount are
recognized as revenue when such amounts are reported to the Company. The
Company generally provides telephone support to customers and end users in the
30 days immediately following the sale at no additional charge and at a
minimal cost per call. When material, the Company accrues the cost of
providing this support. Revenue from training is recognized when the related
services are performed. 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, rotation and price
protection rights as well as uncollectible accounts based on experience.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue.
Software Development Costs
Software development costs incurred by the Company in connection with its
long-term development projects are accounted for in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed (Statement 86). The Company
has not capitalized any internal costs through June 30, 1998 related to its
software development activities.
Advertising Costs
The Company expenses costs of producing advertising and sales related
collateral materials as incurred. Other production costs associated with
direct mail programs, placement costs associated with magazine or other
printed media and all direct costs associated with trade shows and other sales
related events are expensed when the related direct mail is sent, advertising
space is used or the event is held. These expenses in 1996, 1997 and 1998 were
approximately $1,900,000, $700,000 and $700,000, respectively.
Income Taxes
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (Statement 109), deferred tax
assets and liabilities are recognized for the future tax
F-7
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled.
Cash and Cash Equivalents
Cash and cash equivalents include cash, certificates of deposit, and
securities with original maturities less than ninety days when purchased.
Marketable Securities
Marketable securities have been classified as available-for-sale and such
designation is reevaluated as of each balance sheet date. While the Company's
intent is to hold debt securities to maturity, they are classified as
available-for-sale because the sale of such securities may be required prior
to maturity. Realized gains and losses are recorded on the specific
identification method. Unrealized gains and losses have been insignificant for
all periods presented.
All of the Company's marketable securities mature on or before June 30,
1999. All are stated at cost, which approximates fair market value as of June
30, 1997 and 1998, and consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------
1997 1998
------ ------
<S> <C> <C>
Marketable securities
U.S. Government agencies.................................... $ -- $3,907
Municipal bonds............................................. -- 1,036
------ ------
Total..................................................... $ -- $4,943
====== ======
</TABLE>
Inventory
Inventories, consisting primarily of finished goods, are stated at the lower
of cost (first in, first out) or market. The Company utilizes the services of
fulfillment houses to manufacture, store, and ship inventory and process
returned product. The Company does not take title to product in inventory
until the point at which the product is packaged by the fulfillment houses and
is available for shipping.
Property and Equipment
Property and equipment are stated at cost and are being depreciated over
their estimated useful lives (2 to 5 years) using the straight-line method.
Leasehold improvements are amortized over the life of the lease or the
estimated useful life, whichever is shorter.
Foreign Currency Transactions
For the Company's foreign subsidiaries, the functional currency has been
determined to be the local currency, and therefore, assets and liabilities are
translated at year end exchange rates, and income statement items are
translated at average exchange rates prevailing during the year. Such
translation adjustments are recorded in aggregate as a component of
stockholders' equity. Gains and losses from foreign currency denominated
transactions are included in other income (expense) and were not material in
1996, 1997 or 1998.
Financial instruments, principally forward pricing contracts, are used by
the Company in the management of its foreign currency exposures. Gains and
losses on foreign currency transaction hedges are recognized in
F-8
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
income when realized and offset the foreign exchange gains and losses on the
underlying transactions. The Company does not hold or issue derivative
financial instruments for trading purposes.
Fair Value of Financial Instruments
Cash equivalents, accounts receivable, accounts payable, accrued liabilities
and other liabilities are stated at cost which approximates fair value due to
the short-term maturity of these instruments.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of short-term investments, including
marketable securities, and trade receivables. The Company's short-term
investments, which are included in cash and cash equivalents and in marketable
securities for reporting purposes, are placed with high credit quality
financial institutions and issuers. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. Estimated credit losses are provided for in the financial
statements and historically have been within management's expectations.
For the year ended June 30, 1996, Distributor A accounted for $2,390,000 of
the Company's total revenues. For the year ended June 30, 1997, Distributors A
and B accounted for $2,530,000 and $4,530,000, respectively, of the Company's
total revenues. For the year ended June 30, 1998, Distributor A accounted for
$3,700,000 of the Company's total revenues. No other customers accounted for
more than 10% of the Company's revenues during the years ended June 30, 1996,
1997 or 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
The Company has adopted the provisions of Financial Accounting Standards
Statement No. 123, Accounting for Stock Based Compensation and has elected to
account for its employee stock options under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.
Net Income Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 (Statement 128),
Earnings Per Share. Statement 128 replaced "primary" and "fully diluted"
earnings per share with "basic" and "diluted" earnings per share. 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
requirements.
Recently Issued Accounting Standards
In October 1997, the AICPA issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, which changes the requirements for revenue recognition.
In March 1998, the AICPA issued SOP 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2, "Software Revenue Recognition." The Company is required
to adopt SOP 97-2 and SOP 98-4 during the year ended June 30, 1999. The
Company believes that the adoption of the SOP will not have a material effect
on its 1999 financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130). This statement establishes standards for reporting and
display of comprehensive income. The Company is required to
F-9
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
adopt Statement 130 in fiscal 1999. The Company believes that the adoption of
Statement 130 will not affect its results of operations or financial position,
but will affect the disclosure of comprehensive items in the future.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information (Statement 131). Statement 131
establishes the standards for the manner in which public enterprises are
required to report financial and descriptive information about their operating
segments. The Company is required to adopt Statement 131 in fiscal 1999. The
Company believes that the adoption of Statement 131 will not affect its
results of operations or financial position, and will not significantly affect
the disclosure of segment information in the future.
3. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1997 1998
------- -------
<S> <C> <C>
Computer equipment and purchased software.................. $ 2,881 $ 4,640
Office equipment, furniture and fixtures................... 932 1,461
Leasehold improvements..................................... 213 407
------- -------
4,026 6,508
Less accumulated depreciation and amortization............. (1,362) (2,841)
------- -------
$ 2,664 $ 3,667
======= =======
</TABLE>
4. Income Taxes
The components of income (loss) before income taxes and minority interest
consist of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Domestic income (loss)......................... $ (3,083) $ 1,384 $ 2,820
Foreign income................................. 73 926 1,097
-------- ------- -------
Income (loss) before taxes and minority
interest...................................... $ (3,010) $ 2,310 $ 3,917
======== ======= =======
Details of the income tax provision consist of the following (in thousands):
<CAPTION>
Year ended June 30,
--------------------------
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Income tax provision:
Current:
Federal.................................... $ (61) $ 185 $ 942
Foreign.................................... 160 551 850
State...................................... -- 14 91
-------- ------- -------
Total current................................ 99 750 1,883
-------- ------- -------
Deferred:
Federal.................................... 71 (157) (782)
-------- ------- -------
Total deferred............................... 71 (157) (782)
-------- ------- -------
$ 170 $ 593 $ 1,101
======== ======= =======
</TABLE>
F-10
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The foreign taxes include withholdings on royalties from foreign countries.
The Company's provision for income taxes differs from the expected provision
(benefit) amount computed by applying the statutory federal income tax rate of
34% to income (loss) before income taxes and minority interest for 1996, 1997
and 1998 as a result of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Computed at statutory rate of 34%................. $(1,023) $ 785 $ 1,332
Effect of foreign operations...................... 159 236 266
State income taxes, net of federal benefit........ -- 14 60
Tax exempt interest............................... -- -- (63)
Research tax credit............................... -- -- (40)
Future benefits not currently recognized.......... 1,023 (428) (462)
Other............................................. 11 (14) 8
------- ------- -------
$ 170 $ 593 $ 1,101
======= ======= =======
</TABLE>
The components of deferred income taxes at June 30, 1997 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Purchased technology, net................................ $ 799 $ 747
Tax credit carryforwards................................. 308 --
Accrued expenses not deductible for tax purposes......... 352 789
Revenue deferred for financial purposes.................. 296 483
Other.................................................... 100 156
------- -------
Total deferred tax assets.............................. 1,855 2,175
Valuation allowance for deferred tax assets................ (1,698) (1,236)
------- -------
Net deferred tax assets................................ $ 157 $ 939
======= =======
</TABLE>
Management believes that, based on a number of factors, it is more likely
than not that a substantial amount of the Company's deferred tax assets may not
be realized. These factors include the lack of a significant history of
profits, recent increases in expense levels to support the Company's growth,
the lack of carryback capacity to realize the deferred tax asset in full, the
potential impact of anticipated deductions due to exercise of employee stock
options on deferred tax assets with limited carryforward periods, and the fact
that the Company operates in an intensely competitive market subject to rapid
change. Accordingly, the Company has recorded a valuation allowance to the
extent deferred tax assets exceed the potential benefit from carryback of
deferred items to offset current or prior year taxable income. During the year
ended June 30, 1998, the valuation allowance was reduced by approximately
$462,000 primarily due to additional carryback potential generated in the
current year.
5. Employee Benefits
The Company's employees are offered health and dental coverage under a
partially self-funded plan in which the Company purchases specific stop-loss
insurance coverage at $30,000 per year, per employee. The Company has also
purchased an aggregate stop-loss insurance coverage to limit its maximum annual
exposure to claims funded. Based on the policy census at June 30, 1998, such
maximum annual exposure for the policy
F-11
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
year ending December 31, 1998 is approximately $490,000. The Company pays a
fixed fee per covered individual for administrative costs of the administrator
and the cost of the stop-loss insurance purchased on the Company's behalf. The
Company contributes 100% toward the cost to insure each employee and 75%
toward the cost to insure dependents for which coverage is requested by the
employee. Expenses for the partially self-funded plan including premiums and
claims funded for the years ended June 30, 1996, 1997 and 1998 were
approximately $255,000, $311,000 and $508,000, respectively.
The Company has a 401(k) retirement plan which is available to all domestic,
full-time employees. The Company's expenses related to the plan were not
significant in the years ended June 30, 1996, 1997 or 1998.
6. Common Stock and Stock Options
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors in July 1997 and approved by the
stockholders in August 1997. A total of 500,000 shares of common stock has
been reserved for issuance under the 1997 Purchase Plan. The 1997 Purchase
Plan is intended to qualify under Section 423 of the Internal Revenue Code and
has consecutive and overlapping twenty-four month offering periods that begin
every six months. The 1997 Purchase Plan commenced after the completion of the
initial public offering. Each twenty-four month offering period includes four
six-month purchase periods, during which payroll deductions are accumulated
and at the end of which, shares of common stock are purchased with a
participant's accumulated payroll deductions. The 1997 Purchase Plan permits
eligible employees to purchase common stock through payroll deductions of up
to 250 shares per purchase period, 500 shares in the initial purchase period
ended April 30, 1998. The price of common stock to be purchased under the 1997
Purchase Plan is 85% of the lower of the fair market value of the common stock
at the beginning of the offering period or at the end of the relevant purchase
period. In fiscal 1998, 43,542 shares of common stock at a price of $8.50 per
share were issued under the 1997 Purchase Plan. Shares available for purchase
under the 1997 Purchase Plan were 456,458 at June 30, 1998. The Company
recorded non-cash compensation expense totaling approximately $469,000 during
1998 related to employee withholdings under the 1997 Purchase Plan.
The Company's 1997 Stock Incentive Plan (the 1997 Plan) was adopted by the
Board of Directors on May 22, 1997, and approved by the stockholders on August
12, 1997, as the successor to the First Amended and Restated 1994 Incentive
Plan (the 1994 Plan). Outstanding options under the 1994 Plan have been
incorporated into the 1997 Plan and no further options grants will be made
under the 1994 Plan. The incorporated options will continue to be governed by
their existing terms, unless the Plan Administrator elects to extend one or
more features of the 1997 Plan to those options.
Incentive stock options may be granted to employees of the Company entitling
them to purchase shares of common stock for a maximum of ten years (five years
in the case of options granted to a person possessing more than 10% of the
combined voting power of the Company as of the date of grant). The exercise
price for incentive stock options may not be less than fair market value of
the common stock on the date of the grant (110% of fair market value in the
case of options granted to a person possessing more than 10% of the combined
voting power of the Company). Nonqualified stock options may be granted to
employees, officers, directors, independent contractors and consultants of the
Company. The exercise price for nonqualified stock options may not be less
than 85% of the fair market value of the common stock on the date of the grant
(110% of fair market value in the case of options granted to a person
possessing more than 10% of the combined voting power of the Company). The
Company may also award Restricted Stock and Stock Appreciation Rights subject
to provisions in the 1997 Plan.
The vesting period for stock options is generally a four-year period.
Options granted prior to July 1, 1997 are exercisable by the holder prior to
vesting, however, unvested shares are subject to repurchase by the Company at
the exercise price should the employee be terminated or leave the Company
prior to vesting in such options.
F-12
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of changes in common stock options during the year ended June 30,
1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Range of Exercise Exercise
Shares Prices Price
---------- ----------------- --------
<S> <C> <C> <C>
Options outstanding, June 30, 1995...... 2,255,066 $0.10- 0.13 $0.10
Granted............................... 644,510 $0.13 $0.13
Exercised............................. -- -- --
Surrendered........................... (108,600) $0.10- 0.13 $0.11
---------- ----------- -----
Options outstanding, June 30, 1996...... 2,790,976 $0.10- 0.13 $0.11
Granted............................... 1,094,018 $0.13- 4.60 $1.17
Exercised............................. (1,389,611) $0.10- 2.00 $0.15
Surrendered........................... (235,686) $0.10- 2.00 $0.15
---------- ----------- -----
Options outstanding, June 30, 1997...... 2,259,697 $0.10- 4.60 $0.59
Granted............................... 726,400 $6.00-13.88 $8.09
Exercised............................. (249,699) $0.10- 3.60 $0.72
Surrendered........................... (177,599) $0.10-10.63 $1.86
---------- ----------- -----
Options outstanding, June 30, 1998...... 2,558,799 $0.10-13.88 $1.68
========== =========== =====
</TABLE>
The following is additional information relating to options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------------------
Weighted-Average
Remaining
Range of Weighted Average Contractual Life
Exercise Price Number of Options Exercise Price of Options
-------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
$0.10 to $0.30 1,545,922 $0.11 6.93
$0.60 to $0.90 121,438 $0.74 8.52
$2.00 to $4.60 212,638 $3.22 8.86
$6.00 to $8.37 416,400 $7.51 9.28
$10.63 to $13.88 262,401 $11.94 9.74
----------------
--------- --------------- ----
$0.10 to $13.88 2,558,799 $0.11 to $11.94 7.60
=============== ========= =============== ====
</TABLE>
Of the options exercised, 480,486 shares remain unvested at June 30, 1998
and may be repurchased by the Company at the option's exercise price and
recorded as treasury stock should vesting requirements not be fulfilled. At
June 30, 1998, 3,184,012 shares of common stock were reserved for exercise of
stock options. As part of the Company's 1997 Plan, the number of shares of
common stock available for issuance automatically increases on July 1 each
calendar year beginning July 1, 1998 and ending July 1, 2000, by an amount
equal to five percent (5%) of the shares of common stock and common stock
equivalents outstanding on the trading day immediately preceding July 1, with
a maximum annual increase of 1,000,000 shares.
Pro forma compensation expense regarding net income and earnings per share
is required by Statement 123, which also requires the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to June 30, 1995, under the fair value method prescribed by
Statement 123. During fiscal 1998, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-
F-13
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pricing model and during fiscal 1997 and 1996, the fair value of each option
grant was estimated using the minimum value model, with the following weighted
average assumptions:
<TABLE>
<CAPTION>
Employee Stock
Employee Stock Options Purchase Plan
---------------------- --------------
1996 1997 1998 1998
------- ------- -------- --------------
<S> <C> <C> <C> <C>
Risk free interest rate............ 5.99% 6.49% 5.80% 5.46%
Dividend yield..................... 0.00% 0.00% 0.00% 0.00%
Volatility factor.................. -- -- 0.582 0.582
Weighted average expected life of
options (in years)................ 4 4 4 0.5
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the options' vesting periods and stock purchased
under the 1997 Employee Stock Purchase Plan is amortized over the six month
purchase period. The Company's pro forma information follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Pro forma stock based compensation expense.............. $ 2 $ 12 $ 387
Pro forma net income (loss)............................. $(3,207) $1,578 $2,335
Pro forma basic earnings per share...................... $ -- $ 1.89 $ 0.22
Pro forma diluted earnings per share.................... $ -- $ 0.12 $ 0.16
Weighted average grant date fair value.................. $ 0.03 $ 0.22 $ 4.39
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
June 30, 1995, the pro forma effect will not be fully reflected until fiscal
1999.
7. Preferred Stock
On September 25, 1997, the effective date of the Company's initial public
offering, all of the outstanding preferred stock was converted into 9,713,132
shares of common stock. In addition, the Company's Certificate of
Incorporation was amended authorizing the Board of Directors to issue
preferred stock ("new preferred stock") in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further
vote or action by the stockholders. At June 30, 1998, the Company had not
issued any new preferred stock.
F-14
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income (loss)................................. $(3,205) $ 1,590 $ 2,722
======= ======= =======
Denominator:
Denominator for basic earnings per share--weighted
average shares..................................... 2 835 10,468
Effect of dilutive securities:
Convertible preferred shares...................... -- 9,713 2,315
Employee stock options............................ -- 2,532 1,958
------- ------- -------
Potentially dilutive common shares................ -- 12,245 4,273
------- ------- -------
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversions.... 2 13,080 14,741
======= ======= =======
Basic earnings per share.............................. $(1,603) $ 1.90 $ 0.26
======= ======= =======
Diluted earnings per share............................ $(1,603) $ 0.12 $ 0.18
======= ======= =======
</TABLE>
The Company's historical capital structure prior to its initial public
offering is not indicative of its prospective structure due to the automatic
conversion of all shares of convertible preferred stock into common stock
concurrent with the closing of the Company's anticipated initial public
offering. Accordingly, historical net income (loss) per share for the year
ended June 30, 1996 is not considered meaningful and has not been presented
herein.
9. Investment in Pervasive Software Co., Ltd.
In May 1995, the Company acquired a 65.5% controlling interest in a newly
formed entity, Pervasive Software Co., Ltd. ("Pervasive Japan", formerly known
as Btrieve Technologies Japan, Ltd.). Pervasive Japan was formed for the
purpose of localization, support and marketing in Japan of the Company's ultra
light embedded database products for packaged client/server applications.
On February 10, 1998, the Company acquired an additional 15% ownership
interest in Pervasive Japan by acquiring stock held by minority shareholders
for approximately $266,000 in cash, which approximated its proportionate share
of book value. The acquisition was accounted for under the purchase method.
After the acquisition, the Company holds 80.5% of the outstanding stock of
Pervasive Japan. Pervasive Japan's net assets before elimination of
intercompany balances at June 30, 1997 and 1998 were approximately $2,000,000,
and $1,900,000 respectively. Pervasive Japan had entered into various
operating agreements with certain of its former minority shareholders in which
these certain shareholders provide localization, pre- and post-sales support,
management and marketing services. Expenses related to these agreements during
the period in which the related entity was a minority shareholder were
$590,000, $616,000 and $326,000 in 1996, 1997 and 1998, respectively. One of
the former minority shareholders is also a distributor for Pervasive Japan.
Sales to this distributor during the period in which the related entity was a
minority shareholder were approximately $2,390,000, $2,530,000 and $1,800,000
in 1996, 1997 and 1998, respectively. Receivables from this former shareholder
were $530,000 as of June 30, 1997.
F-15
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Acquisition of Smithware, Inc.
On February 13, 1998, the Company acquired Smithware, Inc. ("Smithware") a
developer of database development and reporting components for Pervasive
products. The Company acquired Smithware for approximately $390,000 consisting
of $170,000 in cash, 23,752 shares of common stock of the Company valued at
$160,000 and acquisition costs of $60,000, plus up to an additional $80,000 of
cash and 47,502 shares of stock payable upon achievement of certain milestones
in the future. In conjunction with the acquisition, the Company repaid
Smithware's outstanding debts of approximately $110,000. The acquisition has
been accounted for under the purchase method and, accordingly, the operating
results of Smithware have been included in the consolidated financial
statements from the date of the acquisition. The acquisition did not have a
material effect on operations. The excess of purchase price over the fair
value of the net assets ($390,000) was recorded as goodwill, is being
amortized over a ten year period and will be increased by any consideration
paid upon achievement of certain milestones in the future. As of June 30,
1998, accumulated amortization of goodwill was approximately $13,000.
11. Line of Credit
At June 30, 1998, the Company has a $4,000,000 revolving line of credit with
a bank, but at no time has borrowed under such line. Borrowings under the line
of credit would be collateralized by substantially all accounts receivable,
inventory and equipment and bears interest at the bank's prime lending rate or
LIBOR rate at the Company's option. The revolving line of credit will expire
on September 30, 1999.
12. Commitments and Contingencies
The Company leases its office space and is obligated for its proportionate
share of utilities and other defined operating expenses of the building.
Office rent expense for the year ended June 30, 1996, 1997 and 1998, was
approximately $451,000, $573,000 and $924,000, respectively.
The Company will 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. Future
minimum lease payments at June 30, 1998, under the operating leases for office
space, net of minimum sublease rent payments, are as follows (in thousands):
<TABLE>
<S> <C>
1999.................................................................. $1,148
2000.................................................................. 1,329
2001.................................................................. 1,299
2002.................................................................. 1,421
2003.................................................................. 1,466
------
$6,663
======
</TABLE>
The leases for office space include options to renew the leases for
additional five year periods and are partially collateralized by letters of
credit totaling $301,000 to and in favor of the landlords.
13. Foreign Currency Swap Agreement
The Company has entered into foreign currency swap contracts to minimize
foreign exchange exposure related to yen-denominated intercompany
transactions. At June 30, 1998, the Company had two offsetting foreign
currency contracts outstanding with notional amounts of approximately $224,000
and maturing in March 1999. Gains and losses on currency swaps were not
material to the consolidated financial statements as of June 30, 1996, 1997
and 1998.
F-16
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Segments of Business and Geographic Area Information
The Company is engaged in the design, development and marketing of ultra
light embedded database products for packaged client/server applications. The
Company considers its business activities to constitute a single segment of
business.
A summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenue:
Domestic........................................... $ 7,747 $16,135 $22,476
Europe (all originating from U.S.)................. 2,716 4,693 9,293
Japan.............................................. 2,425 2,863 3,877
Rest of World (all originating from U.S.).......... 588 790 1,054
------- ------- -------
Total............................................ $13,476 $24,481 $36,700
======= ======= =======
Operating income (loss)(A):
United States...................................... $(2,983) $ 361 $(1,279)
Europe (inclusive of revenue originating from
U.S.)............................................. (202) 1,131 3,765
Japan.............................................. 76 763 858
------- ------- -------
Total............................................ $(3,109) $ 2,255 $ 3,344
======= ======= =======
Identifiable assets:
United States...................................... $ 5,646 $ 6,644 $29,253
Europe............................................. 392 810 620
Japan.............................................. 1,433 2,991 2,770
------- ------- -------
Total............................................ $ 7,471 $10,445 $32,643
======= ======= =======
</TABLE>
(A) Operating income for Europe does not include any allocation of marketing,
product development, technical support and administrative costs incurred
in the United States.
15. Statements of Cash Flows
The increase in current assets reflected in the statements of cash flows is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
(Increase) in trade accounts receivable......... $(1,485) $ (259) $(2,550)
Decrease (increase) in inventory................ 123 (19) (234)
Decrease (increase) in prepaid expenses and
other.......................................... (301) 262 (818)
------- ------- -------
$(1,663) $ (16) $(3,602)
======= ======= =======
</TABLE>
F-17
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The increase in accounts payable and accrued liabilities reflected in the
statements of cash flows is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
---------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Increase (decrease) in trade accounts payable........ $ (126) $ 342 $ 289
Increase in accrued payroll and payroll related
costs............................................... 213 57 362
Increase in income taxes refundable/payable.......... 311 301 906
Increase in accrued expenses......................... 480 1,385 460
------ ------ ------
$ 878 $2,085 $2,017
====== ====== ======
Supplemental disclosures:
Interest paid during the year...................... $ -- $ -- $ --
====== ====== ======
Income taxes paid (refunded) during the year:
Domestic......................................... $ (316) $ 376 $ 426
====== ====== ======
Foreign.......................................... $ 159 $ -- $ 271
====== ====== ======
</TABLE>
F-18
<PAGE>
PERVASIVE SOFTWARE INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 1,862
Marketable securities.......................................... 6,590
Trade accounts receivable, net................................. 6,859
Prepaid expenses and other current assets...................... 3,050
-------
Total current assets............................................. 18,361
Property and equipment, net...................................... 6,648
Purchased technology and excess of cost over fair value of net
assets acquired, net............................................ 11,387
Other assets..................................................... 754
-------
Total assets..................................................... $37,150
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable......................................... $ 1,868
Accrued payroll and payroll related costs...................... 1,398
Other accrued expenses......................................... 3,904
Deferred revenues.............................................. 2,878
Income taxes payable........................................... 627
-------
Total current liabilities........................................ 10,675
Deferred tax liability........................................... 600
-------
Total liabilities................................................ 11,275
Minority interest in subsidiary.................................. 450
Stockholders' equity:
Common stock................................................... 27,111
Retained deficit............................................... (1,686)
-------
Total stockholders' equity....................................... 25,425
-------
Total liabilities and stockholders' equity....................... $37,150
=======
</TABLE>
See accompanying notes.
F-19
<PAGE>
PERVASIVE SOFTWARE INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Revenues................................................... $ 16,141 $ 25,863
Costs and expenses:
Cost of revenues and technical support................... 2,394 3,806
Sales and marketing...................................... 6,632 10,514
Research and development................................. 4,543 6,481
General and administrative............................... 1,421 2,218
Amortization of excess of cost over fair value of net
assets acquired......................................... -- 155
Charge for purchased research and development............ -- 1,800
-------- --------
Total costs and expenses................................... 14,990 24,974
-------- --------
Operating income........................................... 1,151 889
Interest and other income, net........................... 199 340
-------- --------
Income before income taxes and minority interest........... 1,350 1,229
Provision for income taxes............................... (404) (932)
Minority interest in earnings of subsidiary, net of tax.. (41) (3)
-------- --------
Net income................................................. $ 905 $ 294
======== ========
Basic earnings per share................................... $ 0.12 $ 0.02
======== ========
Diluted earnings per share................................. $ 0.06 $ 0.02
======== ========
</TABLE>
See accompanying notes.
F-20
<PAGE>
PERVASIVE SOFTWARE INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Cash from operating activities
Net income................................................ $ 905 $ 294
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 631 1,177
Non cash compensation expense pursuant to employee stock
purchase plan.......................................... 196 339
Other non cash items.................................... 127 331
Charge for purchased research and development........... -- 1,800
Change in current assets and liabilities:
Increase in trade accounts receivable................. (1,349) (1,145)
Increase in prepaid expenses and other current
assets............................................... (365) (448)
Increase in accounts payable and accrued liabilities.. 347 44
Increase in deferred revenue.......................... 48 764
Increase (decrease) in income taxes payable........... 64 (669)
------- --------
Net cash provided by operating activities................... 604 2,487
Cash from investing activities
Purchase of property and equipment........................ (1,162) (3,127)
Purchase of marketable securities......................... -- (1,647)
Purchase of businesses, net of cash acquired.............. -- (11,449)
Increase in other assets.................................. (31) 26
------- --------
Net cash used in investing activities....................... (1,193) (16,197)
Cash from financing activities
Payment of royalty to Novell.............................. (224) (158)
Proceeds from issuance of stock, net of issuance costs.... 17,545 130
------- --------
Net cash provided by (used in) financing activities......... 17,321 (28)
Effect of exchange rate on cash and cash equivalents........ (293) 13
------- --------
Increase (decrease) in cash and cash equivalents............ 16,439 (13,725)
Cash and cash equivalents at beginning of period............ 4,058 15,587
------- --------
Cash and cash equivalents at end of period.................. $20,497 $ 1,862
======= ========
</TABLE>
See accompanying notes.
F-21
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 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. The results of operations
for the six month periods ended December 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.Business Combinations
On November 12, 1998, Pervasive acquired for cash approximately 93% of the
outstanding common shares of EveryWare Development Inc. ("EveryWare"), a Web
development tool and Web application server provider based in Toronto Canada.
Pervasive acquired the remaining outstanding shares of EveryWare in December
1998. The total value of the acquisition, including assumption of outstanding
options and transaction costs, was approximately $11.8 million. In addition,
the Company made advances to EveryWare totalling $705,000 in October and
November 1998.
The acquisition has been accounted for as a purchase business combination by
the Company and, accordingly, the net assets acquired were recorded at their
estimated fair values at the effective date of the acquisition. The following
table presents the allocation of the purchase price (in thousands):
<TABLE>
<S> <C>
Software technology............................................. $ 1,200
Purchased research and development.............................. 1,800
Excess of cost over fair value of net assets acquired........... 9,761
Deferred tax adjustment related to intangible assets acquired... (600)
Net fair value of tangible assets acquired and liabilities
assumed........................................................ (377)
-------
$11,784
=======
</TABLE>
Valuation of the intangible assets acquired were determined by an
independent third party appraisal company and consisted of purchased research
and development, software technology, and excess of fair value of net assets
acquired. The amount related to purchased research and development, as
determined by the independent third party appraisal company, was $1.8 million
and was charged against income in the quarter ended December 31, 1998 because
the underlying research and development projects had not yet reached
technological feasibility and had no alternative future uses. The excess of
costs over fair value of net assets acquired is amortized over a ten year
period.
On February 13, 1998, the Company acquired Smithware, Inc. ("Smithware"), a
developer of database development and reporting components for Pervasive
products, for cash and common stock of the Company, plus up to an additional
$80,000 of cash and 47,502 shares of common stock payable upon achievement of
certain milestones in the future. In July 1998, the Company paid $80,000 in
cash and issued 19,000 shares of the Company's common stock valued at $155,000
to the former Smithware shareholders upon achieving the first two milestones
specified in the acquisition agreement. Payment of the additional purchase
price was recorded as additional goodwill and is being amortized over a ten
year period.
F-22
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3.Pro Forma Results of Operations
Pro forma results of operations for the six months ended December 31, 1997
and 1998 are presented below for illustrative purposes, as if the acquisition
of EveryWare had occurred as of the beginning of the fiscal year for each of
the periods presented.
<TABLE>
<CAPTION>
Six Months
Ended
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Revenues................................................. $19,560 $27,006
Operating income......................................... 200 471
Net loss................................................. (172) (271)
Basic loss per share..................................... $ (0.01) $ (0.02)
</TABLE>
4.Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Six Months
Ended December
31,
----------------
1997 1998
------- -------
<S> <C> <C>
Numerator:
Net income ........................................... $ 905 $ 294
======= =======
Denominator:
Denominator for basic earnings per share--weighted
average shares....................................... 7,681 13,404
Effect of dilutive securities:
Convertible preferred shares........................ 4,593 --
Employee stock options.............................. 2,039 1,851
------- -------
Potentially dilutive common shares.................. 6,632 1,851
------- -------
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversions...... 14,313 15,255
======= =======
Basic earnings per share................................ $ 0.12 $ 0.02
======= =======
Diluted earnings per share.............................. $ 0.06 $ 0.02
======= =======
5.Comprehensive Income
Effective July 1, 1998, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 130, Reporting Comprehensive Income (Statement
130). Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components. The components of comprehensive
income are as follows (in thousands):
<CAPTION>
Six months
ended
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Net income.............................................. $ 905 $ 294
Foreign currency translation adjustments................ (230) 444
------- -------
Comprehensive income.................................... $ 675 $ 738
======= =======
</TABLE>
F-23
<PAGE>
PERVASIVE SOFTWARE INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6.Recent Accounting Pronouncements
Effective July 1, 1998, the Company adopted AICPA 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. The Company believes the effect of
such adoption will not have a material effect on its financial statements in
fiscal 1999.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to
extend the deferral of the application of certain passages of SOP 97-2
provided by SOP 98-4 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning March 15, 1999. We believe that the adoption of
SOP 98-9 will not have a material effect on the Company's results of
operations or financial position.
In June 1997, FASB issued Statement of Financial Accounting Standard No.
131, Disclosures about Segments of an Enterprise and Related Information
(Statement 131), which establishes the standards for the manner in which
public enterprises are required to report financial and descriptive
information about their operating segments. In accordance with Statement 131,
the Company will provide the required disclosures for the first time in its
annual report on Form 10-K for the year ended June 30, 1999 and on Form 10-Q
for the quarter ended September 30, 1999. The Company believes that the
adoption of Statement 131 will not affect its results of operations or
financial position, and will not significantly affect the disclosure of
segment information in the future.
In February 1998, the FASB issued Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. The Statement supersedes the
disclosure requirements in Statements No. 87, Employers' Accounting for
Pensions, No. 88, Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. Statement 132
revises the required disclosures about pensions and other postretirement
benefits. We believe that the adoption of Statement 132 will have no affect on
our results of operations, financial position or disclosures in the future.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in fiscal
2000. Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of Statement 133 will have a significant effect
on the Company's results of operations or the financial position of the
Company.
F-24
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
On November 12, 1998, Pervasive Software Inc. (the "Company") acquired 93%
of the outstanding shares of EveryWare Development Inc. ("EveryWare"). The
Company acquired the remaining outstanding shares of EveryWare in December
1998 (the November and December transactions are herein referred to as the
"Acquisition"). The Acquisition was accounted for as a purchase business
combination by the Company. The pro forma condensed financial statements are
based on the historical financial statements of the Company and EveryWare.
These financial statements include the following unaudited pro forma condensed
financial statements: (i) Unaudited Pro Forma Condensed Statements of
Operations of the Company and EveryWare for the year ended June 30, 1998 which
were based on the audited financial statements of the Company and EveryWare
and the pro forma financial statements for the six months ended December 31,
1998 which were based on the unaudited financial statements of the Company and
EveryWare; and (ii) related notes thereto. The unaudited pro forma condensed
statements of operations assume the Acquisition had been consummated on
July 1, 1997.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the financial position or results of
operations that would have been reported if the Acquisition had been
consummated as presented in the accompanying unaudited pro forma condensed
financial statements, nor is it necessarily indicative of the Company's future
results of operations. The pro forma adjustments and the assumptions on which
they are based are described in the accompanying notes to the unaudited pro
forma condensed financial statements.
These unaudited pro forma condensed financial statements are based on and
should be read in conjunction with the historical consolidated financial
statements and related notes thereto of the Company and the financial
statements and notes thereto of EveryWare for the year ended June 30, 1998.
The financial information for EveryWare included in these unaudited pro
forma condensed financial statements has been derived from financial
statements prepared in accordance with Canadian GAAP in Canadian dollars.
These financial statements have been conformed to comply with U.S. GAAP and
have been translated to U.S. dollars at an average exchange rate of
Cdn$1.00=US$0.66 for the year ended June 30, 1998 and for the six months ended
December 31, 1998. Such translations should not be construed as
representations that the Canadian dollar amounts represent, or have been or
could be, converted into U.S. dollars at that or any other rate.
F-25
<PAGE>
PERVASIVE SOFTWARE INC.
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
EVERYWARE
HISTORICAL PRO FORMA
PERVASIVE (July 1, 98 to ADJUSTMENTS PRO
HISTORICAL Nov. 11, 98) (NOTE 2) FORMA
---------- -------------- ----------- -------
(in thousands of U.S. dollars, except per
share data)
<S> <C> <C> <C> <C>
Revenues...................... $25,863 $ 1,143 $ -- $27,006
Cost and expenses:
Cost of revenues and
technical support.......... 3,806 730 (185)(c) 4,396
45 (a)
Sales and marketing......... 10,514 958 -- 11,472
Research and development.... 6,481 595 -- 7,076
General and administrative.. 2,218 850 -- 3,068
Amortization of excess cost
over fair value of net
assets acquired............ 155 368 (a) 523
Charge for purchased
research and development... 1,800 -- (1,800)(b) --
------- ------- ------- -------
Total costs and expenses...... 24,974 3,133 (1,572) 26,535
------- ------- ------- -------
Operating income (loss)....... 889 (1,990) 1,572 471
Interest and other income... 340 -- (170)(d) 170
------- ------- ------- -------
Income (loss) before income
taxes and
minority interest............ 1,229 (1,990) 1,402 641
Provision for income taxes.. (932) -- 23 (e) (909)
Minority interest in
earnings of subsidiary, net
of income taxes............ (3) -- -- (3)
------- ------- ------- -------
Net income (loss)............. $ 294 $(1,990) $ 1,425 $ (271)
======= ======= ======= =======
Basic earnings per share...... $ 0.02 $ (0.02)
======= =======
Shares used in computing basic
earnings per share........... 13,404 13,404
Diluted earnings per share.... $ 0.02 $ (0.02)
======= =======
Shares used in computing
diluted earnings per share... 15,255 13,404
</TABLE>
See accompanying notes.
F-26
<PAGE>
PERVASIVE SOFTWARE INC.
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
(in thousands of U.S. dollars, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
PERVASIVE EVERYWARE ADJUSTMENTS
HISTORICAL HISTORICAL (NOTE 2) PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.......................... $36,700 $ 5,169 $ -- $41,869
Cost and expenses:
Cost of revenues and technical
support........................ 5,292 1,775 (509)(c) 6,678
120 (a)
Sales and marketing............. 15,438 3,558 -- 18,996
Research and development........ 9,556 1,950 -- 11,506
General and administrative...... 3,041 1,660 -- 4,701
Amortization of excess cost over
fair value of net assets
acquired....................... 29 -- 980 (a) 1,009
------- ------- ------ -------
Total costs and expenses.......... 33,356 8,943 591 42,890
------- ------- ------ -------
Operating income (loss)........... 3,344 (3,774) (591) (1,021)
Interest and other income....... 573 15 (460)(d) 128
------- ------- ------ -------
Income (loss) before income taxes
and minority interest............ 3,917 (3,759) (1,051) (893)
Provision for income taxes...... (1,101) -- 60 (e) (1,041)
Minority interest in earnings of
subsidiary, net of income
taxes.......................... (94) -- -- (94)
------- ------- ------ -------
Net income (loss)................. $ 2,722 $(3,759) $ (991) $(2,028)
======= ======= ====== =======
Basic earnings per share.......... $ 0.26 $ (0.19)
======= =======
Shares used in computing basic
earnings per share............... 10,468 10,468
======= =======
Diluted earnings per share........ $ 0.18 $ (0.19)
======= =======
Shares used in computing diluted
earnings per share............... 14,741 10,468
</TABLE>
See accompanying notes.
F-27
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
(in thousand of U.S. dollars)
1. GENERAL
The Acquisition has been accounted for as a purchase business combination by
the Company. The accompanying unaudited pro forma condensed financial
statements reflect an aggregate purchase price of approximately $11.8 million,
consisting of cash paid to EveryWare stockholders and optionholders, costs
directly related to the Acquisition and value of replacement options issued to
EveryWare employees.
For purposes of the accompanying unaudited pro forma condensed financial
statements, the aggregate purchase price has been allocated to the net assets
acquired, with the remainder recorded as excess cost over net assets acquired
on the basis of preliminary estimates of fair values. These preliminary
estimates of fair value were determined by the Company's management based
primarily on information furnished by management of EveryWare and an
independent valuation of acquired technologies and research and development.
The final allocation of the purchase price will be based on a complete
evaluation of the assets and liabilities of EveryWare. Accordingly, the
information presented herein may differ from the final purchase price
allocation, however, it is expected that such differences, if any, will not
materially affect the accompanying pro forma financial information.
2. UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma condensed statements of operations have
been prepared as if the Acquisition was consummated as of July 1, 1997 and
reflect the following pro forma adjustments:
(a) Reflects the new basis and amortization period of intangibles associated
with acquired intangibles. The amortization was based on the value of
intangible assets at December 31, 1998. Amounts are amortized over 10 years.
(b) To eliminate the one-time impact of the charge for purchased research
and development of $1.8 million recorded by the Company in connection with the
Acquisition.
(c) To eliminate EveryWare's historical intangibles amortization expense.
(d) To adjust interest income to reflect interest foregone as a result of
US$11.5 million cash payment for the acquisition of EveryWare and related
acquisition costs assuming an average rate of 4%.
(e) To record decrease in deferred tax liabilities associated with the
amortization of acquired intangibles.
3. ALLOCATION OF PURCHASE PRICE
The following table presents the allocation of the purchase price (in
thousands):
<TABLE>
<S> <C>
Software technology............................................... $ 1,200
Purchased research and development................................ 1,800
Excess of cost over fair value of net assets acquired............. 9,761
Deferred tax adjustment related to intangible assets acquired..... (600)
Net fair value of tangible assets acquired and
liabilities assumed.............................................. (377)
-------
$11,784
=======
</TABLE>
Valuation of the intangible assets acquired were determined by an
independent third party appraisal company and consisted of purchased research
and development, software technology, and excess cost over fair value of net
assets acquired. The amount related to purchased research and development, as
determined by the independent third party appraisal company, was $1.8 million
and was charged against income in the quarter ended December 31, 1998 because
the underlying research and development projects had not yet reached
technological feasibility and had no alternative future uses. The excess of
costs over fair value of net assets acquired is amortized over a ten year
period.
F-28
<PAGE>
AUDITORS' REPORT
To the Board of Directors of EveryWare Development Inc.
We have audited the consolidated balance sheets of EveryWare Development
Inc. as at June 30, 1998 and 1997 and December 31, 1996 and the consolidated
statements of loss and deficit and changes in financial position for the year
ended June 30, 1998, for the six months ended June 30, 1997 and for the year
ended December 31, 1996. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at June 30,
1998 and 1997 and December 31, 1996 and the results of its operations and the
changes in its financial position for the year ended June 30, 1998, for the
six months ended June 30, 1997 and for the year ended December 31, 1996 in
accordance with generally accepted accounting principles in Canada which,
except as described in note 16, conform in all material respects with
accounting principles generally accepted in the United States.
/s/ KPMG LLP
Chartered Accountants
Hamilton, Canada
September 24, 1998, except as to note 15, which is as of October 1, 1998
Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph when the financial statements are affected by
conditions and events that cast substantial doubt on the company's ability to
continue as a going concern, such as those described in note 1 to the
financial statements. Our report to the directors dated September 24, 1998, is
expressed in accordance with Canadian reporting standards which do not permit
a reference to such events and conditions in the auditors' report when these
are adequately disclosed in the financial statements.
/s/ KPMG LLP
Chartered Accountants
Hamilton, Canada
September 24, 1998
F-29
<PAGE>
EVERYWARE DEVELOPMENT INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1998 1997 1996
------------ ----------- ------------
(in Canadian dollars)
<S> <C> <C> <C>
Assets
Current assets:
Cash and short-term deposits........ $ 227,036 $ 2,196,503 $ 247,132
Accounts receivable................. 1,778,782 1,241,041 2,264,099
Inventory........................... 180,659 194,723 165,260
Investment tax credits receivable... -- 110,491 573,067
Prepaid expenses.................... 125,827 87,242 129,612
------------ ----------- -----------
2,312,304 3,830,000 3,379,170
Capital assets (note 3)............... 971,217 1,188,453 852,050
Purchased technology and product
rights (note 4)...................... 1,783,383 2,723,364 --
Deferred development costs, net (note
5)................................... -- -- 390,000
------------ ----------- -----------
$ 5,066,904 $ 7,741,817 $ 4,621,220
============ =========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities........................ $ 1,547,232 $ 2,499,920 $ 1,182,860
Deferred revenue.................... 111,698 5,625 12,924
------------ ----------- -----------
1,658,930 2,505,545 1,195,784
Shareholders' equity:
Share capital (note 6).............. 13,514,902 11,765,889 5,721,300
Deficit............................. (10,106,928) (6,529,617) (2,295,864)
------------ ----------- -----------
3,407,974 5,236,272 3,425,436
Commitments (note 9)
Basis of presentation (note 1)
------------ ----------- -----------
$ 5,066,904 $ 7,741,817 $ 4,621,220
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
EVERYWARE DEVELOPMENT INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
<TABLE>
<CAPTION>
Year Six months Year
ended ended ended
June 30, June 30, December 31,
1998 1997 1996
------------ ----------- ------------
(in Canadian dollars)
<S> <C> <C> <C>
Sales................................. $ 7,919,202 $ 2,183,319 $ 6,065,517
Cost of sales......................... 513,801 457,434 1,083,807
------------ ----------- -----------
7,405,401 1,725,885 4,981,710
Expenses:
Selling, general and
administrative..................... 7,796,958 4,146,552 5,455,744
Research and development (note 5)... 2,293,245 1,608,179 1,608,694
Depreciation of capital assets...... 625,577 207,537 278,116
Amortization of purchased
technology......................... 289,981 -- --
Interest expense.................... 1,022 10,170 --
------------ ----------- -----------
11,006,783 5,972,438 7,342,554
------------ ----------- -----------
(3,601,382) (4,246,553) (2,360,844)
Interest income....................... 24,071 12,800 61,033
------------ ----------- -----------
Loss before income taxes.............. (3,577,311) (4,233,753) (2,299,811)
Income taxes (note 10)................ -- -- --
------------ ----------- -----------
Net loss.............................. (3,577,311) (4,233,753) (2,299,811)
(Deficit) retained earnings, beginning
of period............................ (6,529,617) (2,295,864) 3,947
------------ ----------- -----------
Deficit, end of period................ $(10,106,928) $(6,529,617) $(2,295,864)
------------ ----------- -----------
Net loss per share (note 11).......... $ (0.3262) $ (0.5844) $ (0.3487)
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
EVERYWARE DEVELOPMENT INC.
Consolidated Statements of Changes in Financial Position
<TABLE>
<CAPTION>
Year Six months Year
ended ended ended
June 30, June 30, December 31,
1998 1997 1996
----------- ----------- ------------
(in Canadian dollars)
<S> <C> <C> <C>
Cash provided by (used in):
Operations:
Net loss.............................. $(3,577,311) $(4,233,753) $(2,299,811)
Items not involving cash:
Amortization of deferred development
costs.............................. -- 692,944 1,231,340
Amortization of purchased
technology......................... 289,981 -- --
Depreciation of capital assets...... 625,577 207,537 278,116
Gain on sale of subsidiaries........ (2,500) -- --
Changes in non-cash operating working
capital (note 12).................... (1,298,386) 1,832,818 (965,918)
----------- ----------- -----------
(3,962,639) (1,500,454) (1,756,273)
Financing:
Proceeds on issuance of common shares
and warrants......................... 1,749,013 6,044,589 2,872,510
Proceeds on sale of subsidiaries (note
8)................................... 652,500 -- --
----------- ----------- -----------
2,401,513 6,044,589 2,872,510
Investments:
Acquisition of InContext Systems Inc.
(note 8)............................. -- (2,074,653) --
Purchases of capital assets........... (408,341) (217,167) (749,781)
Expenditures on deferred development
(net)................................ -- (302,944) (1,231,340)
----------- ----------- -----------
(408,341) (2,594,764) (1,981,121)
----------- ----------- -----------
Increase (decrease) in cash position.... (1,969,467) 1,949,371 (864,884)
Cash position, beginning of period...... 2,196,503 247,132 1,112,016
----------- ----------- -----------
Cash position, end of period............ $ 227,036 $ 2,196,503 $ 247,132
=========== =========== ===========
</TABLE>
Cash position is defined as cash and short-term deposits.
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in Canadian dollars)
The consolidated financial statements of EveryWare Development Inc. (the
"Company") have been prepared by management of the Company in accordance with
accounting principles generally accepted in Canada which, except as described
in note 16, conform in all material respects with accounting principles
generally accepted in the United States and practices prescribed by the United
States Securities and Exchange Commission.
1. Basis of presentation:
On June 30, 1997, EveryWare Development Canada Corp. ("EDCC") amalgamated
with InContext Systems Inc. ("InContext") and continues to operate as one
company under the name EveryWare Development Inc. ("EDI", "Company"). EDCC
changed its name from Patshare Capital Inc. on April 26, 1996.
The Company designs and distributes computer software products under the
trade name EveryWare Development Corp. ("EDC").
These financial statements have been prepared on the going concern basis
which assumes that the Company will continue in operation in the foreseeable
future and be able to realize assets and satisfy liabilities in its normal
course of business.
The Company has incurred significant losses in recent years and does not
currently have a confirmed source of additional financing in place. The
Company is seeking additional financing to fund operations until positive cash
flows from operations can be generated. There can be no assurance the Company
will be successful in obtaining the necessary financing to continue
operations.
(a)Basis of consolidation:
The consolidated financial statements comprise the financial statements
of EveryWare Development Inc. and its wholly-owned subsidiary companies.
All significant intercompany balances and transactions have been
eliminated.
(b)Accounting principles:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(c)Business combination of EDCC and InContext:
On June 30, 1997, EDCC completed a Plan of Arrangement with InContext,
a public company, which was a software developer. A new company, EDI was
formed.
Under the terms of the amalgamation agreement, the shareholders of EDCC
received 0.1 common shares in EDI (8,805,144 shares in total) in exchange
for each share of EDCC tendered. The shareholders of InContext received
0.035 common shares in EDI (1,281,108 shares in total) and 0.05 warrants
(1,830,155 warrants in total), with each whole warrant entitling the
holder to acquire one EDI share for $4.00 per share at any time before
July 1, 1999, in exchange for each share of InContext tendered.
The holders of warrants of EDCC received 0.1 EDI warrants in exchange
for each EDCC warrant held. Each whole EDI warrant has identical terms
for exercise as the EDCC warrant converted and entitles the holder to
purchase one EDI common share at a purchase price of 10 multiplied by the
exercise price of the EDCC warrant, at any time during the term of the
warrant. Details of the EDI warrants issued are provided in note 6(b)(v).
F-33
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
The holders of EDCC Special Compensation Options received 0.1 EDI
Special Compensation Option in exchange for each EDCC Special
Compensation Option held. Each whole EDI Special Compensation Option
entitles the holder to acquire for no additional consideration one EDI
Compensation Option, each of which entitles the holder to acquire one EDI
common share and one EDI warrant, until March 18, 1999 at a price of
$3.00 per option.
(d)Accounting for the business combination of EDCC and InContext (see
also note 8):
The combination of EDCC and InContext to form EDI, has been accounted
for as an acquisition of InContext by EDCC. Therefore, the purchase
method has been used to account for the combination.
Application of purchase accounting results in the following:
(i) The financial statements of EDI are considered a continuation of
the financial statements of EDCC. The results of operations of
InContext are included in the financial statements of EDI from
June 30, 1997 forward.
(ii) EDCC's interest in identifiable assets acquired and liabilities
assumed from InContext was based on their fair values on the date
of acquisition.
(iii) The excess of the acquisition cost over EDCC's interest in the
identifiable assets acquired and liabilities assumed from
InContext has been reflected as purchased technology and product
rights.
(e)Business combination of EDCC and EDC:
On March 12, 1996, EDCC acquired all of the outstanding shares and
warrants to acquire common shares of EDC, a private company. Under the
terms of the agreement, the shareholders of EDC received one common share
of EDCC for each share of EDC tendered (59,278,000 shares in total) and
one warrant that entitles the holder to acquire one common share of EDCC
for $0.60 per share until March 12, 1998 for each EDC warrant tendered
(10,000,000 warrants in total).
(f)Accounting for the business combination of EDCC and EDC:
As former shareholders of EDC held a majority of the outstanding shares
of EDCC subsequent to these transactions, the business combination of the
two companies was accounted for as a reverse takeover of EDCC by EDC.
Application of reverse takeover accounting resulted in the following:
(i) As EDC was deemed to be the acquirer for accounting purposes, its
assets and liabilities were included in the consolidated financial
statements at their historical carrying values in the accounts of
EDC;
(ii) Control of the net assets of EDCC was deemed to be acquired by
EDC. For purposes of this transaction, the deemed consideration
was the $2,204,638 ascribed to the 9,116,435 common shares and
3,624,500 warrants of EDCC outstanding at March 12, 1996.
The accounting for the business combination on this basis can be
summarized as follows:
<TABLE>
<S> <C>
Deemed consideration........................................ $2,204,638
----------
Assigned value of net assets of EDCC:.......................
Current assets.............................................. $2,259,774
Current liabilities......................................... (55,136)
----------
$2,204,638
==========
</TABLE>
F-34
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
2. Significant accounting policies:
(a)Short-term investments:
Short-term deposits consist of high quality short-term (less than three
months) non-leveraged financial instruments issued by or guaranteed by
major financial institutions in Canada or in similar low risk
instruments. Since the Company intends to hold the financial instruments
to maturity, they are valued at cost plus accumulated interest.
(b)Inventory:
Inventory consists of computer CDs and manuals and is stated at the
lower of cost and net realizable value.
(c)Capital assets:
Capital assets are stated at cost. Depreciation is provided using the
following methods and over the following terms:
<TABLE>
<CAPTION>
Asset Basis Term
----- ------------- --------
<S> <C> <C>
Computer hardware................................. Straight-line 3 years
Computer software................................. Straight-line 3 years
Furniture and fixtures............................ Straight-line 10 years
Leasehold improvements............................ Straight-line 4 years
</TABLE>
(d)Purchased technology and product rights:
Purchased technology and product rights, representing the underlying
technology for the InContext products, are being amortized to income on a
straight-line basis, over 8 years. The carrying value of purchased
technology and product rights are periodically reassessed and are written
down to net recoverable value when it is determined that a permanent
impairment in ongoing value has occurred.
(e)Research and development costs:
Research costs are expensed as incurred. Development costs are expensed
in the year incurred unless management believes a development project
meets the generally accepted accounting criteria for deferral and
amortization.
(f)Revenue recognition:
The Company recognizes revenue from software licenses, net of allowance
for estimated returns and cancellations, upon the later of delivery of
the software or when all significant vendor obligations have been
satisfied.
Revenue from license agreements with original equipment manufacturers
("OEMs") for redistribution to the OEMs' end user customers is recognized
when the Company delivers the software to the OEM.
Revenue from post contract support and maintenance agreements is
recognized in proportion to the estimated costs incurred over the service
period.
Revenue from consulting and other software related services is
recognized as the services are rendered.
F-35
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
Deferred revenues represent payments received prior to the completion
of the earnings process.
(g)Investment tax credits:
Investment tax credits are recorded as a reduction of the related
expense or the cost of the asset acquired. The benefits are recognized
when the Company has complied with the terms and conditions of the
applicable tax legislation.
(h)Segmented information:
The Company operates in one industry segment being the design and
distribution of computer software products. Sales made to customers
located outside of Canada for the year ended June 30, 1998 were
approximately $5,000,000 (six months ended June 30, 1997: $1,500,000;
year ended December 31, 1996: $4,500,000).
(i)Foreign currency translation:
The Company's subsidiaries are considered to be integrated operations.
Accordingly, monetary assets and liabilities denominated in foreign
currencies are translated into Canadian dollars at the rate of exchange
prevailing at year end, while other consolidated balance sheet items are
translated at historic rates. Revenues and expenses are translated at the
rate of exchange on the transaction dates. Realized and unrealized
foreign exchange gains and losses are included in income in the year in
which they occur, except where they arise from translation of non-current
monetary items. Such gains and losses are deferred and amortized to
income on a straight-line basis over the remaining life of the underlying
monetary items.
3. Capital assets:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------
Accumulated Net book
Cost depreciation value
---------- ------------ ----------
<S> <C> <C> <C>
Computer hardware........................... $1,666,473 $ 988,376 $678,097
Computer software........................... 284,616 159,506 125,110
Furniture and fixtures...................... 198,444 57,259 141,185
Leasehold improvements...................... 62,252 35,427 26,825
---------- ---------- ----------
$2,211,785 $1,240,568 $971,217
========== ========== ==========
<CAPTION>
June 30, 1997
----------------------------------
Accumulated Net book
Cost depreciation value
---------- ------------ ----------
<S> <C> <C> <C>
Computer hardware........................... $1,416,433 $584,375 $ 832,058
Computer software........................... 253,011 97,368 155,643
Furniture and fixtures...................... 196,512 35,896 160,616
Leasehold improvements...................... 61,465 21,329 40,136
---------- ---------- ----------
$1,927,421 $738,968 $1,188,453
========== ========== ==========
</TABLE>
F-36
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------
Accumulated Net book
Cost amortization value
---------- ------------ --------
<S> <C> <C> <C>
Computer hardware............................. $1,025,700 $409,220 $616,480
Computer software............................. 148,760 79,020 69,740
Furniture and fixtures........................ 160,782 27,731 133,051
Leasehold improvements........................ 48,242 15,463 32,779
---------- -------- --------
$1,383,484 $531,434 $852,050
========== ======== ========
</TABLE>
4. Purchased technology and product rights:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Cost......................................... $2,073,364 $2,723,364 $--
Accumulated amortization..................... 289,981 -- --
---------- ---------- --------
$1,783,383 $2,723,364 $--
========== ========== ========
</TABLE>
5. Research and development costs:
<TABLE>
<CAPTION>
Year Six months Year
ended ended ended
June 30, June 30, December 31,
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Research and development costs............. $2,293,245 $1,218,179 $ 1,819,654
Investment tax credits..................... -- -- (210,960)
Software development costs deferred........ -- (302,944) (1,231,340)
Software development costs amortized....... -- 692,944 1,231,340
---------- ---------- -----------
Research and development expense........... $2,293,245 $1,608,179 $ 1,608,694
========== ========== ===========
</TABLE>
The cost and accumulated amortization of deferred development costs at June
30, 1998 are $Nil (June 30, 1997: $Nil; December 31, 1996: $1,748,486 and
$1,358,486, respectively).
The balances outstanding at June 30, 1997 have each been reduced by
$2,051,430 to reflect the elimination of fully written down balances, which
relate to product versions no longer marketed by the Company.
F-37
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
6. Share capital:
(a)As at June 30, 1998:
The authorized share capital of EDI consists of an unlimited number of
common and preferred shares. The issued share capital of EDI as at June
30, 1998 is as follows:
<TABLE>
<CAPTION>
Common
shares Warrants Amount
------ --------- -----------
<S> <C> <C>
12,237,160 3,675,567 $13,514,902
---------- --------- -----------
</TABLE>
The warrants outstanding at June 30, 1998 entitled the holder to
purchase common shares as follows:
<TABLE>
<CAPTION>
Price per Expiry
Warrants share date
-------- --------- -----------------
<S> <C> <C>
100,000 $1.65 November 19, 1998
1,268,500 $1.65 March 18, 1999
1,707,067 $1.80 July 1, 1999
600,000 $0.52 October 4, 1999
--------- ----- -----------------
3,675,567
</TABLE>
(b)Changes in share capital:
(i) January 1, 1996 to March 12, 1996:
As described in notes 1(e) and 1(f), EDC is deemed, for accounting
purposes, to have acquired EDCC effective March 12, 1996.
Changes in the share capital of EDC to March 12, 1996, the effective
date of the business combination with EDCC, were as follows:
<TABLE>
<CAPTION>
Common Special
shares Warrants warrants Amount
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Share capital of EDC, December
31, 1995...................... 47,278,000 -- 10,000,000 $2,848,790
Shares issued as finders fee... 1,000,000 -- -- --
Exercise of special warrants... 10,000,000 10,000,000 (10,000,000) --
Exercise of warrants by
underwriters.................. 1,000,000 -- -- 320,000
Additional share issue costs... -- -- -- (211,878)
---------- ---------- ----------- ----------
Share capital of EDC, March 11,
1996.......................... 59,278,000 10,000,000 -- $2,956,912
========== ========== =========== ==========
</TABLE>
As part of a 1995 private placement, underwriters were granted options
to acquire 1,000,000 common share purchase warrants entitling the holder
to purchase shares at a price of $0.32 per share. These options were
exercised in 1996. In addition, Yorkton Securities Inc. and Securities
Trading S.A. were issued a finder's fee which resulted in them acquiring
in total, 1,000,000 common shares of EDC for no cash proceeds.
(ii) As at March 12, 1996:
The ascribed share capital of EDCC as at March 12, 1996 for accounting
purposes, is computed as follows:
<TABLE>
<S> <C>
Existing share capital of EDC, March 12, 1996................. $2,956,912
Ascribed value of shares of EDCC.............................. 2,204,638
----------
Share capital of EDCC, March 12, 1996......................... $5,161,550
==========
</TABLE>
F-38
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
The number of outstanding common shares and warrants of EDCC as at
March 12, 1996, is computed as follows:
<TABLE>
<CAPTION>
Common
shares Warrants
---------- ----------
<S> <C> <C>
Existing EDCC shares and warrants March 12, 1996........ 9,116,435 3,624,500
Shares and warrants issued to effect business
combination with EDC................................... 59,278,000 10,000,000
---------- ----------
68,394,435 13,624,500
========== ==========
</TABLE>
(iii) March 12, 1996 to June 30, 1997:
Changes in the share capital of EDCC to June 30, 1997, the effective
date of the business combination with InContext, were as follows:
<TABLE>
<CAPTION>
Common Special
shares Warrants warrants Amount
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Share capital of EDCC,
March 12, 1996............... 68,394,435 13,624,500 -- $ 5,161,550
Exercise of stock options.... 435,000 -- -- 65,250
Exercise of warrants......... 157,500 (157,500) -- 94,500
Proceeds from private place-
ment........................ 2,000,000 2,000,000 -- 400,000
---------- ---------- ----------- -----------
Share capital of EDCC, Decem-
ber 31, 1996................ 70,986,935 15,467,000 -- 5,721,300
Proceeds from private place-
ment March 19, 1997......... -- -- 11,650,000 3,095,450
Proceeds from private place-
ment April 4, 1997.......... -- -- 5,200,000 1,404,600
Exercise of special war-
rants....................... 16,850,000 16,850,000 (16,850,000) --
Additional share issue
costs....................... -- -- -- (166,274)
Exercise of stock options.... 75,000 -- -- 11,250
Exercise of warrants......... 139,500 (139,500) -- 27,900
---------- ---------- ----------- -----------
Share capital of EDCC, June
30, 1997.................... 88,051,435 32,177,500 -- $10,094,226
========== ========== =========== ===========
</TABLE>
On November 19, 1996, EDCC completed a private placement for proceeds
of $400,000. Pursuant to the private placement, 2,000,000 common shares
were issued and 2,000,000 warrants were granted which entitle the holder
to purchase one common share at $0.35 per share for each warrant tendered
until November 19, 1998.
On March 19, 1997, EDCC raised gross proceeds of $3,495,000 less
transaction costs of $399,550 by way of private placement of 11,650,000
Special Warrants at a price of $0.30 per Special Warrant. Each Special
Warrant consisted of one common share and one warrant, each warrant
entitling the holder thereof to purchase one common share of EDCC until
March 19, 1999 at a price of $0.35 per share.
On April 4, 1997, a private placement of 5,200,000 Special Warrants at
$0.30 per Special Warrant raised gross proceeds of $1,560,000, less
transaction costs of $155,400. Each Special Warrant consisted of one
common share and one warrant, each warrant entitling the holder thereof
to purchase one common share and one warrant, each warrant entitling the
holder thereof to purchase one common share of EDCC until April 4, 1999
at a price of $0.35 per share.
On March 19, 1997, EDCC issued, to the underwriters of the private
placement 1,685,000 non-assignable Special Compensation Options for no
consideration. Each Special Compensation Option
F-39
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
entitles the holder thereof to acquire one EDCC common share and one EDCC
warrant until March 18, 1999 at a price of $0.30 per option. Each warrant
entitles the holder thereof to purchase one common share of EDCC until
March 19, 1999 at a price of $0.35 per share.
(iv) As at June 30, 1997
As described in note 1(c), EDI was formed on the amalgamation of EDCC
and InContext, effective June 30, 1997.
The issued share capital of EDI as at June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Common
shares Warrants Amount
---------- --------- -----------
<S> <C> <C> <C>
EDI common shares and warrants issued
to EDCC shareholders.................. 8,805,144 3,217,750 $10,094,226
EDI common shares and warrants issued
to InContext shareholders............. 1,281,108 1,830,155 1,671,663
---------- --------- -----------
10,086,252 5,047,905 $11,765,889
========== ========= ===========
</TABLE>
(v) July 1, 1997 to June 30, 1998
<TABLE>
<CAPTION>
Common
shares Warrants Amount
---------- ---------- -----------
<S> <C> <C> <C>
Share capital of EDI, June 30,
1997.............................. 10,086,252 5,047,905 $11,765,889
Exercise of warrants............... 1,154,305 (1,154,305) 1,238,031
Expiration of warrants............. -- (818,033) --
Proceeds from private placements... 996,603 600,000 523,982
Share issue costs.................. -- -- (13,000)
---------- ---------- -----------
Share capital of EDI, June 30,
1998.............................. 12,237,160 3,675,567 $13,514,902
========== ========== ===========
</TABLE>
On February 12, 1998, the Board of Directors approved the repricing of
certain warrants previously granted. The 1,332,750 series A warrants expiring
on March 12, 1998 were reduced to $1.10 per share until expiry. The 200,000
series B warrants expiring on November 19, 1998 were reduced to $1.10 per
share until March 12, 1998 and thereafter increased to $1.65 per share. The
1,685,000 series C warrants expiring on March 18, 1999 were reduced to $1.10
per share until March 12, 1998 and thereafter increased to $1.65 per share.
The 1,830,155 series D warrants expiring on July 1, 1999 were reduced to $1.10
per share until March 12, 1998 and thereafter increased to $1.80 per share.
During March 1998, 1,153,843 warrants were exercised at a price of $1.10 per
share for net proceeds of $1,237,199 after transaction costs. On June 10,
1998, 462 warrants were exercised at a price of $1.80 per share for proceeds
of $832. On March 12, 1998, 818,033 warrants expired.
On October 3, 1997, EDI completed a private placement for proceeds of
$249,600. Pursuant to the private placement, 600,000, common shares were
issued and 600,000 warrants were granted which entitled the holder to purchase
one common share at $0.52 per share for each warrant tendered until October 4,
1999. On November 12, 1997, EDI completed a private placement for proceeds of
$97,500. Pursuant to the private placement, 75,000 common shares were issued.
On May 15, 1998, EDI completed a private placement for proceeds of $176,882.
Pursuant to the private placement, 321,603 common shares were issued.
F-40
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
Warrants outstanding at June 30, 1998 entitle the holder to purchase common
shares as follows:
<TABLE>
<CAPTION>
Common Price per
shares share Expiring
------ --------- -----------------
<S> <C> <C>
100,000 $1.65 November 19, 1998
1,268,500 $1.65 March 18, 1999
1,707,067 $1.80 July 1, 1999
600,000 $0.52 October 4, 1999
---------
3,675,567
</TABLE>
7. Stock options:
EDI has a stock option plan covering all employees. A summary of option
activity is as follows:
<TABLE>
<S> <C>
Outstanding at January 1, 1996.................................... 510,000
Granted......................................................... 6,225,000
Exercised....................................................... (435,000)
Expired or cancelled............................................ (525,000)
----------
Outstanding at December 31, 1996.................................. 5,775,000
Granted......................................................... 1,302,500
Exercised....................................................... (75,000)
Expired or cancelled............................................ (595,000)
----------
Options to acquire EDCC common stock outstanding at June 30,1997.. 6,407,500
Adjustment to convert EDCC options to EDI options................. (5,766,750)
----------
640,750
Options to acquire EDI common stock converted from former options
to acquire InContext common stock................................ 106,995
----------
Options to acquire EDI common stock outstanding at June 30,1997... 747,745
Granted......................................................... 1,140,100
Expired or cancelled............................................ (957,245)
----------
Options to acquire EDI common stock outstanding at June 30,1998... 930,600
==========
</TABLE>
Under the amalgamation agreement, the options to acquire EDCC and InContext
common stocks were converted into options under the EDI stock option plan as
follows:
. each EDCC stock option outstanding shall be treated as if such options
had been issued as EDI stock options under the EDI stock option plan,
except that each holder of such former EDCC stock options, upon due
exercise of such former EDCC stock options shall be entitled to receive
0.1 EDI common shares for every EDCC common share which such holder
would have been entitled to receive otherwise upon due exercise of such
former EDCC stock options.
. each InContext stock option outstanding shall be treated as if such
options had been issued as EDI stock options under the EDI stock option
plan, except that each holder of such former InContext stock options
upon due exercise of such former InContext stock options shall be
entitled to receive 0.035 EDI common shares for every InContext common
share which such holder would have been entitled to receive otherwise
upon due exercise of such former InContext stock options.
Under the EDI stock option plan, the aggregate number of common shares
reserved for issuance is 10% of the issued common shares, of which 293,116
remain available at June 30, 1998.
F-41
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
Options outstanding at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Common Price per
shares share Expiry
------ --------- ------
<S> <C> <C>
4,550 $14.29 September 19, 1999
12,000 $ 2.50 October 10, 1999
3,500 $14.29 March 29, 2000
2,450 $44.57 July 28, 2000
30,000 $ 2.25 July 29, 2001
329,000 $ 0.375 August 12, 2002
416,000 $ 0.74 September 30, 2002
133,100 $ 0.74 March 24, 2003
-------
930,600
=======
</TABLE>
8. Divestitures/Acquisitions:
Divestitures:
During the year ended June 30, 1998, the Company sold for cash two of its
subsidiaries, InContext Corporation and Bottom Line Software resulting in a
gain on sale of $2,500.
The total selling price was approximately $752,500 less selling costs of
$100,000. The net assets sold consisted of purchased technology and product
rights of $650,000, current assets of approximately $150,000, capital
assets of approximately $20,000, accounts payable and accrued liabilities
of approximately $170,000.
For the year ended June 30, 1998 the subsidiaries reported sales of
approximately $800,000 ($120,000 six months ended June 30, 1997; $410,000
year ended December 31, 1996).
Acquisition of InContext Systems Inc.:
As described in notes 1(c) and 1(d) the business combination with
InContext has been accounted for as an acquisition of InContext by EDCC.
The total purchase price for InContext Systems Inc. and its two
subsidiaries InContext Corporation and InContext USA Corporation was
$2,171,663. The consideration comprised 1,281,108 shares in EDI with an
ascribed value of $1,921,663 at $1.50 per share plus $250,000 of
transaction costs.
The acquired business included at fair value, $97,010 of cash, $29,210 of
other current assets, $326,772 of capital assets and $1,004,693 of current
liabilities.
The difference between the total purchase price and the net fair value of
all identifiable assets and liabilities acquired was $2,723,364 and has
been reflected in the financial statements as purchased technology and
product rights.
During 1996, the Company purchased the net assets of Bottom Line Software,
which were nominal in amount, from related parties for $1. The Company
previously held a 20% ownership interest in Bottom Line Software.
F-42
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
9. Commitments:
Under various agreements, the Company has an obligation to pay royalties
based upon sales of certain computer software products. There are no minimum
royalties required under these agreements.
The Company is committed under operating leases for office space. The annual
commitments for the years ending June 30 are as follows: 1999--$450,000;
2000--$303,000 and 2001--$23,000.
10. Income taxes:
At June 30, 1998, the Company has tax loss carry-forwards available to
reduce future years' income for tax purposes. Federal and provincial losses
are approximately $8,200,000 and $9,400,000 respective, expiring between 2002
and 2005. The Company also has scientific research costs of approximately
$2,000,000 and share issue costs of approximately $1,000,000 available to
reduce future years' income for tax purposes. The benefit of the foregoing
items has not been recorded in these accounts.
11. Net loss per share:
Net loss per share has been calculated using the weighted average number of
shares deemed or actually outstanding during the year ended June 30, 1998 and
consists of 10,968,047 shares (six months ended June 30, 1997: 7,245,212
shares; year ended December 31, 1996: 6,595,778 shares).
12. Changes in non-cash operating working capital:
<TABLE>
<CAPTION>
Year Six months Year
ended ended ended
June 30, June 30, December 31,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Decrease (increase) in accounts
receivable............................. $ (537,741) $1,023,058 $(1,733,199)
Decrease (increase) in inventory........ 14,064 (6,002) (99,990)
Decrease (increase) in investment tax
credits receivable..................... 110,491 462,576 (16,772)
Decrease (increase) in prepaid
expenses............................... (38,585) 48,118 (57,029)
Decrease in receivable from related
companies.............................. -- -- 17,777
Increase (decrease) in accounts payable
and accrued liabilities................ (952,688) 312,367 954,746
Decrease (increase) in deferred
revenue................................ 106,073 (7,299) (31,451)
----------- ---------- -----------
$(1,298,386) $1,832,818 $ (965,918)
=========== ========== ===========
</TABLE>
13. Fair values of financial instruments:
The carrying values of all financial assets and liabilities approximate
their fair value due to the relatively short periods to maturity of the
instruments.
14. Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than
a date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
F-43
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
affecting the entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
15. Subsequent event:
On October 1, 1998, an offer was made to the existing shareholders of the
Company to purchase for cash all of the outstanding common shares at a price
of $1.20 per share. The offer to purchase the shares is conditional upon,
among other things, at least 66 2/3% of the outstanding common shares being
tendered.
16. Reconciliation to United States Generally Accepted Accounting Principles:
Reconciliations of net loss determined in accordance with generally accepted
accounting principles in Canada to net loss determined under accounting
principles which are generally accepted in the United States are as follows:
<TABLE>
<CAPTION>
Year Six months Year
ended ended ended
June 30, June 30, December 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Net loss for the period in accordance
with Canadian accounting principles, as
reported............................... $(3,577,311) $(4,233,753) $(2,299,811)
Development expenses (a)................ -- 390,000 --
Compensation expense related to options
granted to non-employees (b)........... (100,000) (50,000) (60,000)
Compensation expense related to options
granted to employees (c)............... (590,000) (320,000) (360,000)
Expense associated with repricing of
warrants (d)........................... (1,000,000) -- --
Impact of adjustments to purchase price
of InContext Systems Inc. (e).......... (490,207) -- --
----------- ----------- -----------
Net loss for the period in accordance
with United States accounting
principles............................. $(5,757,518) $(4,213,753) $(2,719,811)
=========== =========== ===========
Net loss per share in accordance with
United States accounting principles--
Basic and Fully Diluted................ $ (0.5249) $ (0.5816) $ (0.4124)
=========== =========== ===========
</TABLE>
Differences between Canadian and United States accounting principles are as
follows:
(a) Under Canadian accounting principles, development costs, which meet
certain criteria, are deferred and amortized. Under United States
accounting principles, such development costs would not have met the
test for capitalization and accordingly have been expensed as
incurred.
(b) During the year ended December 31, 1996, the Company issued options
to purchase 500,000 common shares for $0.48 per share to a
shareholder who was performing consulting services for the Company.
The options vest over a thirty month period. During the period ended
June 30, 1997, the Company reduced the exercise price of the option
to $0.25 per share. All other terms of the original option agreement
were unchanged. Under Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" the fair value of these
options must be recognized as an expense and as additional paid in
capital over the vesting period of the options.
The fair value of the option at the date of grant has been estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions used for original grant and repricing. In 1996 and
1997, respectively: dividend yield of zero, expected volatility of 70% ,
risk-free interest rates
F-44
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
of 4% for both years and expected lives of 30 months and 15 months for
1996 options and 1997 repriced options.
(c) At June 30, 1998, the Company has a stock-based compensation plan for
employees. The Company applies APB Opinion 25 and related
Interpretations in accounting for compensation costs for the employee
stock option plan for U.S. GAAP purposes. Accordingly, compensation
cost has been recognized under U.S. GAAP over the vesting period for
the plan where the options were issued and the strike price at the
date of being granted was less than the trading price of the
Company's shares. Where the options issued had a strike price greater
than the market value of the shares, no compensation cost has been
recognized.
(d) During 1998, the Board of Directors approved the repricing of certain
warrants granted as outlined in note 6(b). Under US GAAP, in
accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the fair value of the
repriced warrants in excess of the fair value of the warrant
immediately prior to repricing is accounted for as compensation
expense.
The fair value of the warrants has been estimated using the Black-
Scholes option pricing model with the following weighted average
assumptions used: dividend yield of zero, expected volatility of 70%,
risk-free interest rate of 4% and expected life of 11 months.
(e) On June 30, 1997, EDCC completed a Plan of Arrangement with
InContext, a public company, which was a software developer. A new
company, EDI was formed as described in note 1(c). As described in
note 8, the amalgamation of InContext and EDCC was accounted for as
an acquisition of InContext by EDCC using the purchase method of
accounting for business combinations under Canadian GAAP.
Under US GAAP, the transaction also would be accounted for using the
purchase method of accounting. However, under US GAAP, the value of the
equity securities issued is based on the trading price of Everyware's
shares for a reasonable period of time before and after the two companies
have reached an agreement on the transaction terms and conditions and the
proposed transaction are announced. Accordingly, the date for measuring
the consideration paid by Everyware to acquire InContext is deemed to be
May 16, 1997 rather than June 30, 1997 used under Canadian GAAP.
Under US GAAP, the value ascribed to the consideration paid by
Everyware to acquire InContext has been determined as follows:
<TABLE>
<S> <C>
Common shares................................................... $3,843,324
Warrants........................................................ 1,750,000
Transaction costs............................................... 500,000
----------
6,093,324
Purchase price consideration under Canadian GAAP................ 2,171,663
----------
$3,921,661
==========
</TABLE>
This difference has been allocated to goodwill and is being amortized
over 8 years.
The cumulative effect of the application of the above-noted United States
accounting principles on the balance sheet of the Company as at June 30, 1998
would be to decrease deferred development costs asset by Nil (June 30, 1997--
Nil, December 31, 1996--$390,000), increase goodwill by $3,431,454 (June 30,
1997-- $3,921,661, December 31, 1996--Nil), and increase shareholders' equity
by $3,431,454 (June 30, 1997--increase $3,921,661, December 31, 1996--decrease
$390,000).
F-45
<PAGE>
EVERYWARE DEVELOPMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in Canadian dollars)
Under US GAAP, non-cash financing and investing activities are excluded from
the Statement of Cash Flows. Accordingly, the Consolidated Statement of
Changes in Financial Position would be revised for the acquisition of
InContext on June 30, 1997 through the issuance of shares with an ascribed
value of $1,671,663. Further, expenditures on deferred development would be
reclassified from investing activities to operating activities. The impact on
the Company's Consolidated Statement of Financial Position is as follows:
<TABLE>
<CAPTION>
Year Six months Year
ended ended ended
June 30, June 30, December 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash provided by (used in):
Operations:
Under Canadian GAAP................... $(3,962,639) $(1,500,454) $(1,756,273)
Expenditures on deferred development.. -- (302,944) (1,231,340)
----------- ----------- -----------
Under US GAAP......................... $(3,962,639) $(1,803,398) $(2,987,613)
=========== =========== ===========
Financing:
Under Canadian GAAP................... $ 2,401,513 $ 6,044,589 $ 2,872,510
Non-cash proceeds on issuance of
common shares and warrants........... -- (1,671,633) --
----------- ----------- -----------
Under US GAAP......................... $ 2,401,513 $ 4,372,956 $ 2,872,510
=========== =========== ===========
Investments:
Under Canadian GAAP................... $ (408,341) $(2,594,764) $(1,981,121)
Non-cash acquisition of InContext..... -- 1,671,633 --
Expenditures on deferred development.. -- 302,944 1,231,340
----------- ----------- -----------
Under US GAAP......................... $ (408,341) $ (620,187) $ (749,781)
=========== =========== ===========
</TABLE>
F-46
<PAGE>
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