<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-23043
PERVASIVE SOFTWARE INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2693793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12365 Riata Trace Parkway, Bldg. II
Austin, Texas 78727
(Address of principal executive offices)
--------------------------
(512) 231-6000
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days
(1) Yes x No
----- -----
(2) Yes x No
----- -----
As of February 14, 2000 there were 15,695,439 shares of the Registrant's
common stock outstanding.
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PERVASIVE SOFTWARE INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements............................................... 3
Condensed Consolidated Balance Sheets at December 31,
1999 and June 30, 1999............................................. 3
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 1999 and 1998.............. 4
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 1999 and 1998........................ 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 14
Part II. Other Information.................................................. 26
Item 1. Legal Proceedings.................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders................ 26
Item 6. Exhibits and Reports on Form 8-K................................... 26
Signatures.................................................................. 27
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Pervasive Software Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,510 $ 18,126
Marketable securities 20,900 21,777
Trade accounts receivable, net 10,300 9,352
Prepaid expenses and other current assets 4,749 3,979
------------ ------------
Total current assets 50,459 53,234
Property and equipment, net 8,326 7,509
Purchased technology and excess of cost over fair value
of net assets acquired, net 10,731 11,135
Other assets 2,254 995
------------ ------------
Total assets $71,770 $72,873
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 2,508 $ 2,517
Accrued payroll and payroll related costs 1,846 1,403
Other accrued expenses 3,603 4,144
Deferred revenues 1,621 2,252
Income taxes payable 592 2,457
------------ ------------
Total current liabilities 10,170 12,773
Deferred tax liability 565 565
------------ ------------
Total liabilities 10,735 13,338
Minority interest in subsidiary - 449
Stockholders' equity:
Common stock 58,942 57,869
Retained earnings 2,093 1,217
------------ ------------
Total stockholders' equity 61,035 59,086
------------ ------------
Total liabilities and stockholders' equity $ 71,770 $ 72,873
============ ============
</TABLE>
See accompanying notes.
3
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Pervasive Software Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 16,197 $ 14,087 $ 32,899 $ 25,863
Costs and expenses:
Cost of revenues and technical support 3,197 2,186 5,775 3,806
Sales and marketing 8,594 5,535 15,065 10,514
Research and development 4,953 3,521 9,257 6,481
General and administrative 1,666 1,193 2,804 2,218
Amortization of excess of cost over fair value of net 286 139 572 155
assets acquired
Charge for purchased research and development - 1,800 - 1,800
---------- ---------- ---------- ----------
Total costs and expenses 18,696 14,374 33,473 24,974
---------- ---------- ---------- ----------
Operating income (loss) (2,499) (287) (574) 889
Interest and other income, net 430 122 921 340
---------- ---------- ---------- ----------
Income (loss) before income taxes and minority interest (2,069) (165) 347 1,229
Income tax benefit (provision) 915 (506) 69 (932)
Minority interest in (earnings) loss of subsidiary, 4 (17) (19) (3)
net of tax
---------- ---------- ---------- ----------
Net income (loss) $ (1,150) $ (688) $ 397 $ 294
========== ========== ========== ==========
Basic earnings (loss) per share $ (0.07) $ (0.05) $ 0.03 $ 0.02
========== ========== ========== ==========
Diluted earnings (loss) per share $ (0.07) $ (0.05) $ 0.02 $ 0.02
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
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Pervasive Software Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
---------------------------------
1999 1998
--------- ----------
<S> <C> <C>
Cash from operating activities
Net income $ 397 $ 294
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,219 1,177
Non cash compensation expense pursuant to employee stock purchase plan 328 339
Charge for purchased research and development - 1,800
Other non cash items (204) 331
Change in current assets and liabilities:
Increase in trade accounts receivable (669) (1,145)
Increase in prepaid expenses, other current assets and other assets (1,666) (448)
Increase (decrease) in accounts payable and accrued liabilities (98) 44
Increase (decrease) in deferred revenue (309) 764
Decrease in income taxes payable (1,754) (669)
--------- ----------
Net cash provided (used) by operating activities (1,756) 2,487
Cash from investing activities
Purchase of property and equipment (2,442) (3,127)
Sale (purchase) of marketable securities, net 877 (1,647)
Purchase of businesses, net of cash acquired (938) (11,449)
Increase in other assets (123) 26
--------- ----------
Net cash used in investing activities (2,626) (16,197)
Cash from financing activities
Payment of royalty to Novell - (158)
Proceeds from issuance of stock, net of issuance costs 616 130
--------- ----------
Net cash provided (used) by financing activities 616 (28)
Effect of exchange rate on cash and cash equivalents 150 13
--------- ----------
Decrease in cash and cash equivalents (3,616) (13,725)
Cash and cash equivalents at beginning of period 18,126 15,587
--------- ----------
Cash and cash equivalents at end of period $ 14,510 $ 1,862
========= ==========
</TABLE>
See accompanying notes.
5
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PERVASIVE SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. General and Basis of Financial Statements
The unaudited interim condensed consolidated financial statements include
the accounts of Pervasive Software Inc. and its majority-owned subsidiaries
(collectively, the "Company" or "Pervasive"). All material intercompany accounts
and transactions have been eliminated in consolidation.
The financial statements included herein reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly state the Company's financial position,
results of operations and cash flows for the periods presented. These financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended June 30, 1999, which
are contained in the Company's Annual Report filed on Form 10-K on September 28,
1999 (File No. 000-23043). The results of operations for the three and six month
periods ended December 31, 1999 and 1998 are not necessarily indicative of
results that may be expected for any other interim period or for the full fiscal
year.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------------- ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)............................................................. $(1,150) $ (688) $ 397 $ 294
------- ------- ------- -------
Denominator:
Denominator for basic earnings (loss) per share - weighted average shares...... 15,628 13,431 15,586 13,404
Effect of dilutive securities:
Employee stock options........................................................ *- *- 2,343 1,851
------- ------- ------- -------
Potentially dilutive common shares............................................ *- *- 2,343 1,851
------- ------- ------- -------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and assumed conversions........................ 15,628 13,431 17,929 15,255
======= ======= ======= =======
Basic earnings (loss) per share................................................. $ (0.07) $ (0.05) $ 0.03 $ 0.02
======= ======= ======= =======
Diluted earnings (loss) per share............................................... $ (0.07) $ (0.05) $ 0.02 $ 0.02
======= ======= ======= =======
* Not applicable in loss periods due to antidilutive effect.
</TABLE>
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Comprehensive Income
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss).............................................. $(1,150) $ (688) $ 397 $ 294
Foreign currency translation adjustments....................... 16 259 479 444
------- ------- ------- -------
Comprehensive income (loss).................................... $(1,134) $ (429) $ 876 $ 738
======= ======= ======= =======
</TABLE>
4. Contingencies
Class action complaints were filed in November and December 1999 in the
U.S. District Court for the Western District of Texas against the Company and
certain of its officers and directors. The cases were consolidated in a single
amended consolidated complaint filed in January 2000. The amended consolidated
complaint alleges that the Company and certain of its officers and directors
violated federal securities laws, including Rule 10b-5 under the Securities
Exchange Act of 1934, by making false statements and failing to disclose
material information to artificially inflate the price of the Company's common
stock during the Class Period of July 15, 1999 to October 21, 1999. The Company
and other defendants filed motions to dismiss the suit on February 7, 2000.
While the proceedings are at a very early stage, the Company believes the suit
is without merit and intends to defend itself vigorously.
5. Business Combinations
On October 29, 1999, the Company acquired an additional 19.5% ownership
interest in Pervasive Software Japan by purchasing stock held by a minority
shareholder for $750,000 in cash. The acquisition was accounted for under the
purchase method and, accordingly the excess of purchase price over the fair
market value of net assets acquired of $160,000 was recorded as goodwill and
will be amortized over a ten-year period. After the acquisition, the Company
holds 100% of the outstanding stock of Pervasive Japan.
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. The acquisition
has been accounted for under the purchase method and, accordingly, the operating
results of EveryWare have been included in the consolidated financial statements
since the date of acquisition. The net assets acquired were recorded at their
estimated fair values at the effective date of the acquisition. 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 of
approximately $9.8 million is being amortized over a ten-year period.
7
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PERVASIVE SOFTWARE INC.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The statements contained in this Report on Form 10-Q that are not purely
historical statements are forward looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding the Company's expectations, beliefs, hopes, intentions or strategies
regarding the future. These forward looking statements involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward looking statements. We are under no duty to update any forward
looking statements after the date of this filing on Form 10-Q to conform these
statements to actual results. See "Risk Factors that May Affect Future
Results," and the factors and risks discussed in the Company's Annual Report on
Form 10-K filed on September 28, 1999 (File No. 000-23043) and other reports
filed from time to time with the Securities and Exchange Commission.
Overview
Pervasive Software Inc. is a leading provider of application development
and deployment software that dramatically simplifies the development, deployment
and maintenance of Web-based and client/server applications. Our comprehensive,
integrated suite of software products includes Web application development and
deployment products and high performance zero administration databases.
Combined, these products offer a unique solution that simplifies the
development, deployment and maintenance of Web-based and client/server
applications and lowers the cost of ownership of Web-based and client/server
distributed computing environments. Our business model leverages a channel of
software developers, application service providers, Web and systems integrators,
and value-added resellers around the world.
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 our Tango
Web application server product, the customer's volume requirements and the
number of application servers. Our OEM licensing program offers independent
software vendors volume discounts and specialized technical support, training
and consulting in exchange for integrating our products in packaged applications
and paying us a royalty based on sales of the applications. Additionally, we
generate revenues from version upgrades, user count upgrades, and 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 generally 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.
Historically, we have derived substantially all of our revenues from our
Pervasive.SQL and Btrieve data management products. On June 30, 1999, we
discontinued general availability of our Btrieve products to consolidate our
development, marketing and technical support resources behind our current Tango
and Pervasive.SQL products. Accordingly, we expect that our revenue from the
license of Tango and Pervasive.SQL will account for substantially all of our
revenues for the foreseeable future as revenue from the license of Btrieve
8
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will decline substantially over time. Our operating results depend upon market
acceptance of Pervasive.SQL, our ability to develop and market our Tango
products, and the expenses associated with these efforts. In the three months
ended December 31, 1999, we experienced a decline in demand for our
Pervasive.SQL products when compared to the three months ended September 30,
1999. A continuing decrease in demand or market acceptance for our Pervasive.SQL
product, and the failure of Tango to achieve market acceptance, would have a
damaging effect on our business, operating results and financial condition.
In October 1999, we announced a major initiative to significantly increase
sales and marketing and development expenses to capitalize on the anticipated
growth in the market for e-business and mobile computing applications. The sales
and marketing initiatives include significant incremental spending on programs
and activities intended to attract and recruit Web application developers and
Web integrators who design and deploy e-business applications and to increase
brand awareness. The increased development expenses are intended to accelerate
delivery of new features to our Tango 2000 and Pervasive.SQL 2000 products to
support deployment of e-business applications across popular client and server
environments, including the market for mobile and wireless handheld devices. We
incurred an operating loss in the three months ended December 31, 1999 as a
result of lower than anticipated revenues and increased expense levels related
to these initiatives and we anticipate that we may continue to incur operating
losses in future periods as a result of the increased expenses related to these
initiatives. We cannot be certain that these initiatives or future initiatives
will successfully generate license revenue from our Tango and Pervasive.SQL
products.
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 in combination with other products distributed by
Novell. Novell previously distributed the two-user version of Pervasive.SQL
through a service release and began general distribution in January 2000. We
will not receive any royalties directly from Novell related to the agreement. We
do believe, however, that we may receive fees in the future by licensing multi-
user upgrades to end users of some of the two-user versions distributed by
Novell.
9
<PAGE>
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
operations.
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues .......................................................... 100% 100% 100% 100%
Costs and expenses:
Cost of revenues and technical support ........................ 20 16 18 15
Sales and marketing ........................................... 53 39 46 41
Research and development ...................................... 31 25 27 25
General and administrative .................................... 10 8 9 8
Amortization of excess of cost over fair value
of net assets acquired ........................................ 2 1 2 1
Charge for purchased research and development ................ - 13 - 7
------ ------ ------ ------
Total costs and expenses .......................................... 116 102 102 97
------ ------ ------ ------
Operating income (loss) ........................................... (16) (2) (2) 3
Interest and other income ..................................... 3 1 3 1
------ ------ ------ ------
Income (loss) before income taxes and minority interest ........... (13) (1) 1 4
Income tax benefit (provision) ................................ 6 (4) - (3)
Minority interest in earnings of subsidiary ................... - - - -
------ ------ ------ ------
Net income (loss) ................................................. (7)% (5)% 1% 1%
====== ====== ====== ======
Supplemental disclosures:
Operating income (loss), excluding certain charges*................. (14)% 12% - 11%
====== ====== ====== ======
Net income (loss), excluding certain charges*....................... (5)% 9% 3% 9%
====== ====== ====== ======
</TABLE>
* Amounts for the three and six month periods ended December 31, 1998 exclude a
charge for purchased research and development of $1.8 million. In addition,
amounts exclude amortization of excess of cost over fair value of net assets
acquired of $139,000, and $286,000 for the three month periods ended December
31, 1998 and 1999, respectively and $155,000 and $572,000 for the six month
periods ended December 31, 1998 and 1999, respectively.
Revenues
Our revenues increased to $16.2 million for the three months ended December
31, 1999, an increase of 15% over the $14.1 million reported for the comparable
period in the prior fiscal year. Our revenues for the six months ended December
31, 1999 were $32.9 million, representing a 27% increase from the $25.9 million
reported for the comparable period in the prior fiscal year. We attributed this
revenue increase to increased licenses of Pervasive.SQL operating on Windows NT,
revenue related to our recently introduced Tango 2000 product and expansion of
our worldwide sales organization.
Our revenues for the three months ended December 31, 1999 decreased from
the $16.7 million reported for the three months ended September 30, 1999,
primarily due to recent transition of our sales force leadership, slower than
expected market growth for packaged client/server applications contributing to
decreased projected orders for our Pervasive.SQL products embedded in these
applications, and, we believe, customers ordering less software due to Year 2000
priorities. We believe these factors could continue to negatively affect license
revenues for both our Pervasive.SQL and our Tango products in the future,
particularly in upcoming quarters. In addition, we initiated adjustments to our
domestic sales organization in January 2000, resulting in centrally managed
domestic telesales and domestic OEM sales operations. These telesales and OEM
sales activities were previously managed by district managers in the field. The
adjustments are designed to result in a simpler and more easily managed
organization that is better matched to the type of customer. However, these
adjustments could negatively impact our revenue for the near term as our sales
representatives and sales managers become accustomed to their new assignments.
Accordingly, we anticipate that our quarterly revenues may not grow, and could
decline sequentially, in the three months ended March 31, 2000.
Licenses of our software operating on Windows NT or other Microsoft
operating systems increased to approximately 60% of our revenues in both the
three and six month periods ended December 31, 1999 from approximately 50% in
the comparable periods in the prior fiscal year. Licenses of our software
operating on NetWare represented approximately 34% of revenues in the three
months ended December 31, 1999, as compared
10
<PAGE>
to 37% in the comparable period in the prior fiscal year. In the six months
ended December 31, 1999, NetWare licenses represented 35% of our revenues
compared to 40% 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. During the three months ended
December 31, 1999, we released new versions of Pervasive.SQL 2000 operating on
Solaris and Linux platforms. Revenues to date for these new releases were not
significant. 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, increased from $5.9 million to $8.2 million in the
three months ended December 31, 1998 and 1999, representing 42% and 51% of total
revenues, respectively. International revenues increased from $10.2 million to
$15.8 million for the six months ended December 31, 1998 and 1999, representing
39% and 48% of total revenues, respectively. We attribute the increase
primarily to expansion of our international sales organization, principally in
Europe and Japan. We expect that international revenues will continue to
account for a significant portion of our revenues in the future.
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, the cost to provide technical support, primarily
telephone support, which is typically provided within 30 days of purchase,
payment of license fees for third-party technologies embedded in our products
and the costs to deliver professional services and training services to
customers. Cost of revenues and technical support was $2.2 million and $3.2
million in the three months ended December 31, 1998 and 1999, representing 16%
and 20% of revenues, respectively. Cost of revenues and technical support was
$3.8 million and $5.8 million in the six months ended December 31, 1998 and
1999, representing 15% and 18% of revenues, respectively. Cost of revenues and
technical support increased due to increased sales volume and increased
technical support and service personnel in the U.S., Europe and Japan and
increased license fees for third-party technologies embedded or bundled with our
products. We anticipate that cost of revenues and technical support will
fluctuate in dollar amount and as a percentage of revenues in the future based
on the timing of our expansion of our international operations, increased
license fees for third-party technologies embedded in or bundled with our
products, and investment in personnel to deliver professional services and
training services to others.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, sales
office expenses, marketing programs and promotional expenses, and travel and
entertainment. Sales and marketing expenses were $5.5 million and $8.6 million
in the three months ended December 31, 1998 and 1999, representing 39% and 53%
of revenues, respectively. Sales and marketing expenses were $10.5 million and
$15.1 million in the six months ended December 31, 1998 and 1999, representing
41% and 46% of revenues, respectively. In October 1999, we announced a major
initiative to significantly increase sales and marketing and development
expenses to capitalize on the anticipated growth in the market for e-business
and mobile computing applications. The sales and marketing initiatives include
significant incremental spending on programs and activities intended to attract
and recruit Web application developers and Web integrators who design and deploy
e-business applications and to increase brand awareness. Sales and marketing
expenses increased in dollar amount and as a percentage of revenues primarily
because of costs related to these initiatives, hiring additional sales and
marketing personnel, increased infrastructure costs associated with sales office
expansion and lower than anticipated revenue growth. We expect that sales and
marketing expenses will continue to increase in dollar amount as a result of
increased Tango and other product market development activities and costs
associated with new product releases, marketing promotions, brand awareness
campaigns, lead generation programs, and hiring additional sales and marketing
personnel.
Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses were
$3.5 million and $5.0 million in the three months ended December
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31, 1998 and 1999, representing 25% and 31% of revenues, respectively. Research
and development expenses were $6.5 million and $9.3 million in the six months
ended December 31, 1998 and 1999, representing 25% and 27% of revenues,
respectively. Research and development expenses increased in dollar amount
primarily due to the increased hiring of and/or contracting with additional
research and development personnel. In October 1999, we announced plans to
increase research and development expenditures. The increased expenditures are
intended to accelerate the delivery of new features to our Tango 2000 and
Pervasive.SQL 2000 products to support deployment of e-business applications
across several popular client and server environments including the market for
mobile and wireless handheld devices. We anticipate that research and
development expenses will continue increase in dollar amount in the future as a
result of these expenditures.
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.
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 $1.2 million and $1.7 million in the three months ended December
31, 1998 and 1999, representing 8% and 10% of revenues, respectively. General
and administrative expenses were $2.2 million and $2.8 million in the six months
ended December 31, 1998 and 1999, representing 8% and 9% of revenues,
respectively. We attribute the increase in dollar amount primarily to the
increased staffing and associated expenses necessary to manage and support our
increased scale of operations, both domestically and internationally and
increased legal costs related to our defense of shareholder class action
litigation against the Company. General and administrative expenses increased as
a percentage of revenue primarily because of lower than anticipated revenue
growth and increased legal costs. We believe that our general and administrative
expenses will continue to increase in dollar amounts in the future relative to
comparable periods in the prior year as our administrative staff expands to
support our worldwide operations.
Amortization of Excess of Cost Over Fair Value of Net Assets Acquired. 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. The remaining excess cost over the fair
market value of the net assets acquired is being amortized over a ten year
period. During the three month periods ended December 31, 1998 and 1999, the
Company recorded $139,000 and $286,000, respectively, related to amortization of
intangible assets related to the EveryWare and Smithware acquisitions.
Provision for Income Taxes. We recorded a provision for taxes of
approximately $506,000 and a benefit of approximately $915,000 in the three
months ended December 31, 1998 and 1999, respectively. In October 1999, we
announced a major initiative to significantly increase sales and marketing and
development expenses to capitalize on the anticipated growth in the market for
e-business and mobile computing applications. As a result of these increased
expense levels, we anticipate that we will report an operating loss for fiscal
2000. Accordingly, the tax provision for the six months ended December 31, 1999
reflects the anticipated effective tax rate for the year resulting in a tax
benefit in the current quarter.
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:
. Limited history of operating profits of our Canadian subsidiary;
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. Anticipated operating losses in future periods due to increased
marketing and development costs;
. Recent increase in expense levels to support our growth;
. 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 against the deferred
tax assets related to the Canadian subsidiary and a valuation allowance to the
extent domestic deferred tax assets exceed the potential benefit from carryback
or carryover of deferred items to offset taxable income in the current year,
prior years or the next succeeding year.
Although we may incur an overall loss for the year, we will continue to
record a provision for income taxes on profits reported by our foreign
operations. In addition, anticipated operating losses reported by our domestic
operations may require us to reserve certain deferred tax assets that have
limited carryforward periods.
Liquidity and Capital Resources
Cash used by operations was $1.8 million for the six months ended December
31, 1999 as compared with cash provided by operations of $2.5 million for the
comparable period in the prior fiscal year. The decrease in cash generated by
operations resulted primarily from increases in prepaid expenses, decreases in
deferred revenue, the timing of income tax payments and the decrease in net
income during the period when compared to the net income for the comparable
period in the prior year, exclusive of the non-cash charge for purchased
research and development.
During the first six months of fiscal 1999 and 2000, we had net purchases
of $1.6 million and net sales of $877,000, respectively, of marketable
securities, consisting of various taxable and tax advantaged securities. In
addition, we purchased property and equipment totaling approximately $3.1
million and $2.4 million in the six months ended December 31, 1998 and 1999,
respectively. This property consisted primarily of computer hardware and
software for our growing employee base. In addition, for the six months ended
December 31, 1998, we purchased furniture, fixtures and leasehold improvements
of approximately $1.3 million related to our new facility. We expect that our
capital expenditures will increase as our employee base grows.
On October 29, 1999, we acquired an additional 19.5% ownership interest in
Pervasive Software Japan by purchasing stock held by a minority shareholder for
$750,000 in cash. The acquisition was accounted for under the purchase method
and, accordingly the excess of purchase price over the fair market value of net
assets acquired of $160,000 was recorded as goodwill and will be amortized over
a ten year period. After the acquisition, we hold 100% of the outstanding stock
of Pervasive Software Japan.
We have entered into licensing agreements with three vendors related to
technology included, or to be included, with our internally developed products
which require fixed minimum license payments totaling $2.2 million for the year
ended June 30, 2000 and $700,000 for each of the years ended June 30, 2001 and
2002. For the six months ended December 31, 1999 we made payments relating to
licensing agreements totaling $1.5 million. License payments are capitalized as
prepaid expenses and amortized over the estimated useful life of the licensed
technology (two to five years), or on a per unit basis based on the terms of
the license agreement. These license agreements provide for use of the
technologies on a perpetual basis or for fixed periods of time.
On December 31, 1999, we had $40.3 million in working capital, including
$14.5 million in cash and cash equivalents and $20.9 million in marketable
securities. We have a $10 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
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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.
Recently Issued Accounting Standards
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 adopted
SOP 98-9 in fiscal year 2000. The effect of such adoption was not significant.
In June 1998, the FASB issued Statement 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, which defers for one year the effective date of Statement 133. Statement
133 is now effective for all fiscal quarters of all fiscal years beginning after
our fiscal year 2001. We do not anticipate that the adoption of Statement 133
will have a significant effect on our results of operations or financial
position because of our minimal use of derivatives.
Year 2000 Update
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, computer systems and/or software used by many companies needed to be
upgraded to comply with such Year 2000 requirements.
Through the first month of the calendar year 2000, we have not experienced
any significant problems associated with the Year 2000 issue. Although it
appears that the Year 2000 issue will not have a significant adverse affect on
Pervasive, we continue to offer Year 2000 related support to our customers and
monitor the Year 2000 compliance of our internal systems world wide. Undetected
errors in our products or internal systems that may be discovered in the future
could have a material adverse affect on our business, operating results or
financial condition.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. Dollars. However, we do
have foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. Currently, we have operations in Canada, Japan,
Germany, France, Ireland, England, Belgium, and Hong Kong and conduct
transactions in the local currency of each location. We monitor our foreign
currency exposure and, from time to time will attempt to reduce our exposure
through hedging. The impact of fluctuations in the relative value of other
currencies was not material for the three or six months ended December 31, 1999.
Quantitative and qualitative information about market risk was addressed in Item
7A of our Form 10-K for the fiscal year ended June 30, 1999.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
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. Any of the following risks could harm our business, financial
condition or results of operations. In such case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
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:
. Fluctuations in demand for our products in current markets and the
emerging e-business application and mobile computing markets;
. Fluctations in the deployment of client/server applications in which
our Pervasive.SQL products are designed to be embedded;
. Seasonality and the timing of product sales and shipments;
. 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 customer or distributor;
. A reduction in the number of independent software vendors, or ISVs, who
embed our products;
. Increased expenses related to our recently announced sales and
marketing and product development initiatives; and
. Changes in the mix of domestic and international sales.
In recent quarters, we have derived a portion of our revenues from
relatively larger orders. The sales cycles for these transactions tend to be
longer than the sales cycle on smaller orders. Also, some of these transactions
have closed in the last few days of the quarter. Accordingly, our operating
results may fluctuate from quarter to quarter based on the existence and timing
of larger orders. In addition, we had fewer large order opportunities in the
negotiation process at the end of December 1999 than we had at the end of
September 1999. Fewer large order opportunities could negatively impact our
revenue in the March 2000 quarter relative to our revenue for the quarter ended
December 1999.
In October 1999, we announced a major initiative to significantly increase
sales and marketing and development expenses to capitalize on the anticipated
growth in the market for e-business and mobile computing applications. The sales
and marketing initiatives include significant incremental spending on programs
and activities intended to attract and recruit Web application developers and
Web integrators who design and deploy e-business applications and to increase
brand awareness. The increased development expenses are intended to accelerate
delivery of new features to our Tango 2000 and Pervasive.SQL 2000 products to
support deployment of e-business applications across popular client and server
environments, including the emerging market for mobile and wireless handheld
devices. We anticipate that we may incur operating losses as a result of the
increased expenses related to these initiatives. We cannot be certain that these
initiatives or future initiatives will successfully generate license revenue
from our Tango and Pervasive.SQL products.
In addition, our revenues for the three months ended December 31, 1999
decreased from our revenues for the three months ended September 30, 1999,
primarily due to recent transition of our sales force leadership, slower than
expected market growth for packaged client/server applications contributing to
decreased projected orders of our Pervasive.SQL products embedded in these
applications, and, we believe, customers ordering less software due to Year 2000
priorities. We believe these factors could continue to negatively affect sales
of both our Pervasive.SQL and our Tango products in the future, particularly in
upcoming quarters. In addition, we initiated adjustments to our domestic sales
organization in January 2000, resulting in centrally managed domestic telesales
and domestic OEM sales operations. These telesales and OEM sales activities were
previously managed by district managers in the field. These adjustments could
negatively impact our revenue for the near term as our sales representatives and
sales managers become accustomed to their new assignments. Accordingly, we
anticipate that our quarterly revenues may not grow, and could decline
sequentially, in the three months ended March 31, 2000.
Significant portions 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 are likely to be
adversely and disproportionately affected. In addition, we may change our prices
and have already announced plans to accelerate our investment in research and
development, as well as sales and marketing to pursue new
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market opportunities. Any one of these activities may further limit our ability
to adjust spending in response to revenue fluctuations.
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.
Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results
Our business has, on occasion, experienced seasonal customer buying
patterns. In recent years, we have generally experienced 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 in the summer
months because of reduced corporate buying patterns during the vacation season.
We Currently Operate Without a Backlog
We generally 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 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 386 employees at December 31,
1999, as compared to 305 at December 31, 1998. 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 Market Acceptance of Pervasive.SQL
We derive a significant portion of our revenues from the license of our
Pervasive.SQL products. In particular, we are becoming increasingly dependent on
market acceptance of our recently introduced Pervasive.SQL 2000 product, as
revenues from our older database products, Btrieve and Pervasive.SQL, decline in
future quarters. We cannot be certain that future sales of Pervasive.SQL 2000
will continue at current rates. Continued market acceptance of Pervasive.SQL
2000 may be influenced heavily by factors outside of our control such as new
product offerings or promotions by competitors and the product development and
deployment cycles of developers and resellers who embed or bundle our products
into packaged software applications. Although we recognized increased revenue
from Pervasive.SQL 2000 in the first and second quarters of fiscal 2000, 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
began to market the Tango Application Server and Tango Development Studio both
as stand-alone products and integrated with Pervasive.SQL during the third
quarter of fiscal 1999. 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
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our Tango products in the near future. As a result, we expect to devote
significant resources to our sales and marketing efforts relating to Tango.
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:
. The success of our efforts to centrally manage our domestic telesales
and OEM sales activities;
. Our ability to further integrate Pervasive.SQL with the Tango products;
. Our ability to recruit and train new and existing developers, value-
added resellers, systems integrators, Web integrators and consultants;
. The success of promotions involving our Tango development environment
and our ability to ultimately receive Tango Application Server revenue
from past and future promotions;
. 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.
We Have Significant Product Concentration
Historically, we have derived substantially all of our revenues from our
Pervasive.SQL and Btrieve data management products. On June 30, 1999, we
discontinued general availability of our Btrieve products to consolidate our
development, marketing and technical support resources behind our current
Pervasive.SQL products. Accordingly, our data management-related revenue from
licenses of Pervasive.SQL may continue to account for substantially all of our
revenues for the foreseeable future. Although revenue from the license of our
most recent release of our data management product, Pervasive.SQL 2000,
increased in the three months ended December 31, 1999, we experienced a decline
in demand for older versions of our database products, resulting in an overall
decline in revenue for the three months ended December 31, 1999 when compared to
the three months ended September 30, 1999. 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 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 "Pervasive" and
"Tango" brand names is critical to achieving widespread acceptance of our
products. The importance of brand recognition will increase as competition
increases in the market for Web-based development and deployment products. A key
element of our business strategy is to commit significant resources to promote
our brands. We have not obtained a United States registration for all of these
names, and we are aware of other companies that use the word "Pervasive" or
"Tango" either in their marks alone or in combination with other words. We
expect that it may be difficult or impossible to prevent third-party usage of
these names and variations of these names 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.
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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.
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, or any
modifications to our distribution channel strategy 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, 1999, three distributors accounted for approximately 21% of
revenues, and in the six months ended December 31, 1998, two distributors
combined accounted for approximately 24% of revenues. 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.
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;
. Competing product lines offered by certain of our indirect channel
partners; and
. Our failure to properly manage the transition of our sales force
following our recent decision to centralize certain domestic sales
functions and close certain domestic field sales offices.
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 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. We may not be able to enter into successful
new strategic relationships in the future, which could have a material
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adverse effect on our business, operating results and financial condition. From
time to time, we have collaborated with other companies 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 our current 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.
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 occurs. 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.
Although we are not aware that any of our products infringe upon the
proprietary rights of third parties, we may be subjected to claims of
intellectual property infringement by third parties 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. 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 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:
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. 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
Although to date we are not aware of any significant issues, 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 may not 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 Pervasive.SQL and Btrieve are designed to be Year
2000 compliant. An earlier release of the predecessor to Pervasive.SQL, Scalable
SQL v3.0, 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.
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We May Become Subject to Product or Professional Services Liability Claims
A product or professional services liability claim, whether or not
successful, could damage our reputation and our business, operating results and
financial condition. Our license and service agreements with our customers
typically contain provisions designed to limit our exposure to potential product
or service liability claims. However, these contract provisions may not preclude
all potential claims. Product or professional services 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 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.
Recently, a Federal District ruled that Microsoft wielded monopoly power in
personal computer operating systems. There is substantial uncertainty regarding
the impact of this ruling on the software industry including the short-term and
long-term demand for software designed for Microsoft's application products,
including SQL Server, and the Windows operating system.
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's small memory footprint database software product, Adaptive
Server Anywhere and Microsoft's product, SQL Server, directly compete 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
two years, Netscape acquired Kiva Software, Sun Microsystems acquired
NetDynamics and BEA Systems acquired WebLogic. Oracle, Microsoft and IBM have
each 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, Bluestone and HAHT Software.
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
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front-end development tools, and result in higher research and development costs
to compete on a feature-for-feature basis.
Application service providers ("ASP") are beginning to enter our market and
could cause a change in revenue models from licensing of client/server and
Web-based applications to renting applications. Our competitors may be more
successful than we are in adopting these revenue models and capturing related
market share.
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. In addition,
some competitors have demonstrated a willingness to, or may willingly in the
future, incur substantial losses as a result of deeply discounted product
offerings or aggressive marketing campaigns. 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, Oracle or IBM 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.
We Are Susceptible to a Shift in the Market for Client/Server Applications
Toward Web-Based Applications
We have derived substantially all of our historical 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 grown in recent years, we believe that the
rate of growth has slowed in recent quarters, that this trend will continue or
accelerate in future quarters, and that other application platforms are
emerging. In particular, we believe market demand is shifting from client/server
applications to Web-based applications. This shift is occurring before our Web-
based product line has achieved market acceptance. In addition, we cannot be
certain that developers of Web-based applications would select our Web-based
products. Further, this shift may result in a change in revenue models from
licensing of client/server and Web-based applications to renting of applications
from application service providers. 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 the six months
ended December 31, 1999, we derived 48% of our revenues outside North America.
Our international operations are generally subject to a number of risks. These
risks include:
. Costs of translating and localizing 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;
22
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. 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 may 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 operating expenses, substantially all
of our sales in Japan and certain other international sales have 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. To
the extent our international operations expand, our exposure to exchange rate
fluctuations will increase. 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 Have Substantial Influence Over Stockholder
Voting
As of February 14, 2000, the executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 31% of
our outstanding common stock. 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.
23
<PAGE>
We Have Anti-Takeover Provisions
The Company's Restated Certificate of Incorporation and Bylaws contain
certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable, including provisions:
authorizing the issuance of "blank check" preferred stock; establishing advance
notice requirements for stockholder nominations for elections to the Board of
Directors or for proposing matters that can be acted upon at stockholders'
meetings; eliminating the ability of stockholders to act by written consent;
requiring super-majority voting to approve certain amendments to the Restated
Certificate of Incorporation; limiting the persons who may call special meetings
of stockholders; and providing for a Board of Directors with staggered, three-
year terms. In addition, certain provisions of Delaware law and the Company's
1997 Stock Incentive Plan (the "1997 Plan") may also have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals.
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.
24
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Report on Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Risk
Factors," and elsewhere in this Report constitute forward looking statements
within the meaning of Section 21E of the Securities and Exchange Act of 1934.
Forward looking statements include statements regarding the Company's
expectations, beliefs, hopes, intentions or strategies regarding the future.
These statements involve known and unknown risks, uncertainties, and other
factors that may cause our or our industry's actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward looking statements. Such factors include, among other things, those
listed under "Risk Factors" and elsewhere in this Report on Form 10-Q.
In some cases, you can identify forward looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms or other comparable terminology.
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 and completeness of such
statements. We are under no duty to update any of the forward looking
statements after the date of this Report to conform such statements to actual
results.
25
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Class action complaints were filed in November and December 1999 in
the U.S. District Court for the Western District of Texas against the
Company and certain of its officers and directors. The cases were
consolidated in a single amended consolidated complaint filed in January
2000. The amended consolidated complaint alleges that the Company and
certain of its officers and directors violated federal securities laws,
including Rule 10b-5 under the Securities Exchange Act of 1934, by making
false statements and failing to disclose material information to
artificially inflate the price of the Company's common stock during the
Class Period of July 15, 1999 to October 21, 1999. The Company and other
defendants filed motions to dismiss the suit on February 7, 2000. While
the proceedings are at a very early stage, the Company believes the suit is
without merit and intends to defend itself vigorously.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Pervasive Software Inc. was held
on November 3, 1999 in Austin, Texas. Of the total 15,612,385 shares
outstanding as of the record date, 11,240,340 shares (72.0%) were present
or represented by proxy at the meeting. The table below presents the voting
results of election of the Company's Board of Directors:
Votes For Votes Withheld
-------------- ------------------
Shelby H. Carter, Jr. 10,685,120 555,220
Nancy R. Woodward 10,685,235 555,105
The stockholders approved an amendment to the Company's Employee
Stock Purchase Plan including an increase to the number of shares issuable
thereunder by 250,000 shares, and an increase in the number of shares a
participant may purchase from 250 to 500 shares per purchase period. The
proposal received 10,645,524 affirmative votes, 589,396 negative votes, and
5,420 abstentions.
The stockholders ratified and approved the appointment of Ernst &
Young LLP as the independent public accountants of the Company for the
fiscal year ending June 30, 2000. The proposal received 10,685,078
affirmative votes, 554,582 negative votes, and 680 abstentions.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits under Item 601 of Regulation S-K
3.1* Restated Certificate of Incorporation
3.2* Bylaws of the Company
4.1* Reference is made to Exhibits 3.1, 3.2 and 4.3
4.2* Specimen Common Stock certificate
4.3* Investors' Rights Agreement dated April 19, 1995, between
the Company and the investors named therein
10.1* Form of Indemnification Agreement
10.2* 1997 Stock Incentive Plan
10.3* Employee Stock Purchase Plan
10.4* First Amended and Restated 1994 Incentive Plan
10.5* Amendment and Restatement of Credit Agreement dated March
31, 1997 between the Company and Texas Commerce Bank
National Association
10.8* Sublease Agreement dated December 10, 1996 between the
Company and Reynolds, Loeffler & Dowling, P.C.
10.9* Joint Venture Agreement dated March 26, 1995 between the
Company and Novell Japan, Ltd., AG Tech Corporation and
Empower Ltd.
10.10** Lease agreement dated April 2, 1998 between the Company
and CarrAmerica Realty, L.P. T/A Riata Corporate Park
27.1 Financial Data Schedule
*Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-32199).
**Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (File No. 000-23043).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
December 31, 1999.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 2000 PERVASIVE SOFTWARE INC.
(Registrant)
By: /s/ James R. Offerdahl
------------------------------
James R. Offerdahl
Chief Operating Officer and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
27
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1* Restated Certificate of Incorporation
3.2* Bylaws of the Company
4.1* Reference is made to Exhibits 3.1, 3.2 and 4.3
4.2* Specimen Common Stock certificate
4.3* Investors' Rights Agreement dated April 19, 1995, between the
Company and the investors named therein
10.1* Form of Indemnification Agreement
10.2* 1997 Stock Incentive Plan
10.3* Employee Stock Purchase Plan
10.4* First Amended and Restated 1994 Incentive Plan
10.5* Amendment and Restatement of Credit Agreement dated March 31,
1997 between the Company and Texas Commerce Bank National
Association
10.8* Sublease Agreement dated December 10, 1996 between the Company
and Reynolds, Loeffler & Dowling, P.C.
10.9* Joint Venture Agreement dated March 26, 1995 between the
Company and Novell Japan, Ltd., AG Tech Corporation and
Empower Ltd.
10.10** Lease agreement dated April 2, 1998 between the Company and
CarrAmerica Realty, L.P. T/A Riata Corporate Park
27.1 Financial Data Schedule
*Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-32199).
**Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (File No. 000-23043).
28
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