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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 November 12, 2000 there were 15,875,892 shares of the
Registrant's common stock outstanding.
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PERVASIVE SOFTWARE INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements........................................................................................... 3
Condensed Consolidated Balance Sheets at September 30, 2000 and June 30, 2000.................................. 3
Condensed Consolidated Statements of Operations for the three months ended September 30, 2000 and 1999......... 4
Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2000 and 1999......... 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..................................................... 13
PART II. OTHER INFORMATION.............................................................................................. 24
Item 1. Legal Proceedings.............................................................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders............................................................ 24
Item 6. Exhibits and Reports on Form 8-K............................................................................... 24
SIGNATURES.............................................................................................................. 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Pervasive Software Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
---------------- ----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,087 $ 12,822
Marketable securities 10,322 13,322
Trade accounts receivable, net 5,579 6,350
Prepaid expenses and other current assets 3,390 4,475
------------- -------------
Total current assets 33,378 36,969
Property and equipment, net 6,530 7,244
Purchased technology and excess of cost over fair value
of net assets acquired, net 936 961
Other assets 2,131 2,074
------------- -------------
Total assets $ 42,975 $ 47,248
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 1,185 $ 1,382
Accrued payroll and payroll related costs 1,240 1,793
Other accrued expenses 3,333 3,658
Deferred revenues 1,535 1,531
Liabilities of discontinued operations 5,125 6,240
------------- -------------
Total current liabilities 12,418 14,604
Stockholders' equity :
Common stock 59,954 59,950
Retained deficit (29,397) (27,306)
------------- -------------
Total stockholders' equity 30,557 32,644
------------- -------------
Total liabilities and stockholders' equity $ 42,975 $ 47,248
============= =============
</TABLE>
See accompanying notes.
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Pervasive Software Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Revenues $ 10,020 $ 16,237
Costs and expenses:
Cost of revenues and technical support 2,464 2,067
Sales and marketing 5,035 4,476
Research and development 2,976 3,177
General and administrative 1,488 1,112
------------- -------------
Total costs and expenses 11,963 10,832
------------- -------------
Operating income (loss) from continuing operations (1,943) 5,405
Interest and other income, net 351 468
Income tax provision (200) (1,769)
------------- -------------
Income (loss) from continuing operations (1,792) 4,104
------------- -------------
Discontinued Operations:
Loss from operations - (3,480)
Income tax benefit - 923
------------- -------------
Loss from discontinued operations - (2,557)
------------- -------------
Net income (loss) $ (1,792) $ 1,547
============= =============
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.11) $ 0.26
Loss from discontinued operations - (0.16)
------------- ------------
Net income (loss) $ (0.11) $ 0.10
============= ============
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.11) $ 0.23
Loss from discontinued operations - (0.14)
------------- ------------
Net income (loss) $ (0.11) $ 0.09
============= ============
</TABLE>
See accompanying notes.
4
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Pervasive Software Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Cash from continuing operations
Income (loss) from continuing operations $ (1,792) $ 4,104
Adjustments to reconcile net income (loss) to net cash provided (used) by continuing
operations:
Depreciation and amortization 794 713
Non cash compensation expense pursuant to employee stock purchase plan 78 182
Other non cash items 47 (204)
Change in current assets and liabilities:
(Increase) decrease in trade accounts receivable 971 (432)
(Increase) decrease in prepaid expenses and other current assets 779 (793)
Decrease in accounts payable and accrued liabilities (1,153) (876)
Increase (decrease) in deferred revenue 4 (378)
Decrease in income taxes payable - (1,601)
---------------- ---------------
Net cash provided (used) by continuing operations (272) 715
Cash from discontinued operations
Loss from discontinued operations - (2,557)
Depreciation and amortization - 364
Income tax benefit - 923
Net change in assets and liabilities of discontinued operations 106 (138)
Decrease in liabilities of discontinued operations (1,012) -
---------------- ---------------
Net cash used in discontinued operations (906) (1,408)
Cash from investing activities
Purchase of property and equipment (205) (1,168)
Sales and purchases of marketable securities, net 3,000 (703)
Increase in other assets (57) (28)
---------------- ---------------
Net cash provided by (used in) investing activities 2,738 (1,899)
Cash from financing activities
Proceeds from issuance of stock, net of issuance costs 4 453
---------------- ---------------
Net cash provided by financing activities 4 453
Effect of exchange rate on cash and cash equivalents (299) (9)
---------------- ---------------
Increase (decrease) in cash and cash equivalents 1,265 (2,148)
Cash and cash equivalents at beginning of period 12,822 18,126
---------------- ---------------
Cash and cash equivalents at end of period $ 14,087 $ 15,978
================ ===============
</TABLE>
See accompanying notes.
5
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PERVASIVE SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
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, 2000, which
are contained in the Company's Annual Report filed on Form 10-K on September 28,
2000 (File No. 333-71955). The results of operations for the three month periods
ended September 30, 2000 and 1999 are not necessarily indicative of results that
may be expected for any other interim period or for the full fiscal year.
2. Earnings (Loss) 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
September 30,
-------------------------
2000 1999
---------- ---------
<S> <C> <C>
Numerator:
Income (loss) from continuing operations ............................. $ (1,792) $ 4,104
========== =========
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares .............................................. 15,777 15,544
Effect of dilutive securities:
Employee stock options ............................................... * 2,463
---------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions ............. 15,777 18,007
========== =========
Basic earnings (loss) per share from continuing operations .................. $ (0.11) $ 0.26
========== =========
Diluted earnings (loss) per share from continuing operations ................ $ (0.11) $ 0.23
========== =========
</TABLE>
* Not applicable in loss periods due to antidilutive effect.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Comprehensive Income (Loss)
The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
September 30,
2000 1999
----------- -----------
<S> <C> <C>
Net income (loss)............................................. $ (1,792) $ 1,547
Foreign currency translation adjustments...................... (300) 471
----------- -----------
Comprehensive income (loss)................................... $ (2,092) $ 2,018
=========== ===========
</TABLE>
4. EveryWare Development Inc.
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. In June 2000, the Company adopted a formal plan to sell the Tango product
line acquired in the EveryWare acquisition. Accordingly, the Tango product line
is accounted for as a discontinued operation in the accompanying consolidated
financial statements.
5. Contingencies
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 class action suit filed
in January 2000. The class action complaint alleged 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. On October 19, 2000, the U.S. District Court entered its order
dismissing plaintiffs' claims against the Company and the other defendants. The
case was dismissed with prejudice and the Plaintiffs no longer have the right to
file an amended complaint.
6. Subsequent Event
In October 2000, our Board of Directors approved the adoption of a
shareholder rights plan whereby one Preferred Share Purchase Right will be
distributed for each outstanding share of our Common Stock. The rights are
designed to assure that all of our stockholders receive fair and equal treatment
in the event of any proposed takeover and to guard against partial tender
offers, open market accumulations and other tactics designed to gain control
without paying all stockholders a fair price. The rights are not being
distributed in response to any specific effort to acquire us.
The rights become exercisable if a person or group hereafter acquires 15%
or more of our Common Stock or announces a tender offer for 15% or more of our
Common Stock. Such events, or if we are acquired in a merger or other business
combination transaction after a person acquires 15% or more of our Common Stock,
would entitle the right holder to purchase, at an exercise price of $18.00, a
number of shares of Common Stock having a market value at that time of twice the
right's exercise price. Rights held by the acquiring person would become void.
The Board of Directors can choose to redeem the rights at one cent per right at
any time before an acquiring person hereafter acquires 15% or more of the
outstanding Common Stock.
The rights were distributed on November 6, 2000 to stockholders of record
on October 6, 2000. The rights will expire in ten years. The rights distribution
is not taxable to stockholders.
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 with 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, 2000 (File No. 333-71955) and other reports
filed from time to time with the Securities and Exchange Commission.
Overview
Pervasive Software Inc. is a leading worldwide provider of data management
solutions and services which dramatically simplify the development, deployment
and management of business applications for Small and Medium Enterprises
("SME"). Our low cost of ownership database product, Pervasive.SQL, is widely
installed with over 4.0 million server seats licensed to date. With
Pervasive.SQL, software developers ("ISVs") create sophisticated yet low
maintenance applications that reach beyond the desktop to easily share
information from workstations to the Web. Our software is designed for
integration by ISVs into Web or client/server applications sold to SMEs, which
typically have environments with little to no IT infrastructure. Our
comprehensive approach to selling, marketing and supporting our offerings is
designed to drive simplicity into and mask the complexity of data management
solutions, specifically addressing the needs of ISVs who build and VARs who sell
and implement software applications to SMEs.
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. Our OEM licensing program
offers independent software vendors volume discounts and specialized technical
support, training and consulting in exchange for embedding our products in
software 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 or Web 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 collectability 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.
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
data management-related development, marketing and technical support resources
behind our
8
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current Pervasive.SQL products. Accordingly, revenue from the license of
Pervasive.SQL accounts for substantially all of our data management-related
revenues in fiscal 2000 and 2001. Our future operating results will depend upon
continued market acceptance of Pervasive.SQL. Pervasive.SQL may not achieve
continued market acceptance. 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.
In July 2000, we announced a restructuring to focus on the core data
management product business, including the discontinuation of our Tango product
line. The operating results of the Tango product line did not achieve expected
results and thus we have ceased marketing the Tango product. We are presently
continuing to support our current Tango customers while attempting to sell the
Tango product line. Tango has been recorded as a discontinued operation in the
accompanying financial statements; therefore, the following discussion and
analysis refer only to continuing operations.
In addition, as part of the July 2000 restructuring, we reduced our
workforce by approximately 100 employees, or approximately 28% of our worldwide
workforce. The majority of the reductions occurred in our Toronto office and our
Austin headquarters. The workforce reduction was primarily related to the
discontinuance of the Tango product line; however, we also reduced a portion of
our Pervasive.SQL related workforce, mostly in our Pervasive.SQL development
organization. The cost of the Pervasive.SQL workforce reduction is approximately
$400,000 and is included as an operating cost in the quarter ending September
30, 2000.
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
September 30,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues 100% 100%
Costs and expenses:
Cost of revenues and technical support 24 13
Sales and marketing 50 28
Research and development 30 19
General and administrative 15 7
------------ ------------
Total costs and expenses 119 67
------------ ------------
Operating income (loss) from continuing operations (19) 33
Interest and other income, net 3 3
Income tax provision (2) (11)
------------ ------------
Income (loss) from continuing operations (18) 25
------------ ------------
Discontinued Operations:
Loss from operations - (21)
Income tax benefit - 6
------------ ------------
Loss from discontinued operations - (15)
------------ ------------
Net income (loss) (18)% 10%
============ ============
</TABLE>
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Revenues
Our revenues related to continuing operations decreased 38% to $10.0
million in the three months ended September 30, 2000, as compared to $16.2
million reported for the comparable period in the prior fiscal year. We
attributed this revenue decrease to a lower sales pipeline, management changes
in our Japanese subsidiary and weakening of the Euro during the first quarter of
fiscal 2001, and also what we believe to be a general softening in the packaged
client/server applications market, contributing to decreased orders for our
Pervasive.SQL products embedded in these applications. Our revenues from
continuing operations for the three months ended September 30, 2000 increased
from the $9.8 million reported for the three months ended June 30, 2000,
primarily due to increased focus on our core database business subsequent to the
discontinuation of the Tango product line. We believe that each of the above
factors affecting revenue between the first quarter of fiscal 2000 and fiscal
2001 could continue to negatively affect license revenues for Pervasive.SQL in
the future.
Licenses of our software operating on Windows NT or other Microsoft
operating systems increased to approximately 70% of our revenues in the three
months ended September 30, 2000 from approximately 60% in the comparable period
in the prior fiscal year. Licenses of our software operating on NetWare
represented approximately 25% of revenues in the three months ended September
30, 2000, as compared to 35% in the comparable period in the prior fiscal 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 $7.7 million and $4.1 million in the three months
ended September 30, 1999 and 2000, representing 46% and 41% of total revenues,
respectively. We attribute the decrease in international revenue during the
first quarter of fiscal 2001 as compared to the first quarter of fiscal 2000 to
differing degrees of seasonality of sales experienced in our foreign offices,
management changes in our Japanese subsidiary, as well as a weakening of the
Euro during the quarter ended September 30, 2000. Therefore, we expect that
international revenues may continue to account for a significant portion of our
revenues in the future as we maintain, modify and potentially expand our
international operations, 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, the cost to provide technical support, primarily
telephone support, which is typically provided within 30 days of purchase,
payment of license fees for third-parties technologies embedded in our products
and the costs to deliver professional services and training services to others.
Cost of revenues and technical support related to continuing operations was $2.1
million and $2.5 million in the three months ended September 30, 1999 and 2000,
representing 13% and 25% of revenues, respectively. The increase in cost of
revenues and technical support is primarily related to increased technical
support and service personnel in the U.S., Europe and Japan. Cost of revenues
and technical support increased as a percentage of revenue primarily as a result
of the decline in revenue. We anticipate that cost of revenues and technical
support will continue to increase in dollar amount and may increase as a
percentage of revenues in the future as we incur increased license fees for
third-party technologies embedded in or bundled with our products, provide
technical support for additional products and invest in personnel to deliver
professional services and training services to others.
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Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
foreign sales office expenses, marketing programs and promotional expenses, and
travel and entertainment. Sales and marketing expenses related to continuing
operations were $4.5 million and $5.0 million in the three months ended
September 30, 1999 and 2000, representing 28% and 50% of revenues, respectively.
Sales and marketing expenses increased in dollar amount primarily due to
increased costs associated with additional sales and marketing personnel. Sales
and marketing expense increased as a percentage of revenue primarily as a result
of the decline in revenue. We expect sales and marketing expenses will increase
significantly in dollar amount , but may decline as a percentage of revenues,
due to the timing and extent of product market development activities and costs
associated with new product releases, marketing promotions, brand awareness
campaigns, lead generation programs, hiring additional sales and marketing
personnel and international expansion.
Bruce Flory joined the company as Vice President, Marketing in November
2000. Prior to joining Pervasive, Mr. Flory served as Vice President, Marketing
for ObjectSpace, Inc., a global provider of software solutions and professional
services that enable the creation and utilization of business-to-business web
services. Prior to ObjectSpace Inc., Mr. Flory served as Vice President,
Marketing for Sterling Software.
Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
related to continuing operations were $3.1 million and $3.0 million in the three
months ended September 30, 1999 and 2000, representing 19% and 30% of revenues,
respectively. Research and development expenses decreased slightly in dollar
amount primarily due to the reduction in force in July 2000. We anticipate that
research and development expenses will decrease slightly in dollar amount and as
a percent of revenue in the near term.
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 related to continuing operations were $1.1 million and $1.5 million in
the three months ended September 30, 1999 and 2000, representing 7% and 15% 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.
General and administrative expenses increased as a percentage of revenue
primarily because of the decline in revenue. We believe that our general and
administrative expenses will be consistent in dollar amount ,but may decline as
a percent of revenue in the near term.
Provision for Income Taxes. Provision for income taxes related to
continuing operations was approximately $1.8 million and $0.2 million in the
three months ended September 30, 1999 and 2000, respectively.
Although we may incur an overall loss for the 2001 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.
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:
. Recent declines in revenue related to continuing operations;
. 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.
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Accordingly, we have recorded a valuation allowance against the deferred tax
assets 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.
Loss from Discontinued Operations. Loss from discontinued operations
relates to the discontinuation of the Tango product line at the end of fiscal
2000. Total loss from discontinued operations was $2.6 million, net of income
tax benefit of $0.9 million, in the three months ended September 30, 1999. We
are currently exploring strategic alternatives for the Tango product line,
including its possible sale.
Liquidity and Capital Resources
Cash used by continuing operations was $272,000 for the three months ended
September 30, 2000 as compared with cash provided by continuing operations of
$715,000 for the comparable period in the prior fiscal year. Cash used in
continuing operations during the first quarter of fiscal 2001 resulted primarily
from a net loss from continuing operations and a decrease in accounts payable
and accrued liabilities, offset by decreases in accounts receivable, prepaid
expenses and other current assets. Cash provided by continuing operations during
the comparable period in the prior fiscal year resulted primarily from net
income from continuing operations, reduced by increases in accounts receivable,
prepaid expenses and other current assets as well as decreases in accounts
payable, accrued liabilities, deferred revenue and income taxes payable.
During the first three months of fiscal 2000, we invested $703,000, in
marketable securities, consisting of various taxable and tax advantaged
securities. During the first three months of fiscal 2001, we received net
proceeds of $3.0 million from the sale or maturity of marketable securities. In
addition, we purchased property and equipment totaling approximately $1.2
million and $0.2 million in the three months ended September 30, 1999 and 2000,
respectively. This property consisted primarily of computer hardware and
software. We expect that our capital expenditures will decrease during the
current fiscal year as compared to the prior year as a result of our
discontinued Tango product line and related workforce reduction.
On September 30, 2000, we had $21.0 million in working capital, including
$14.1 million in cash and cash equivalents and $10.3 million in marketable
securities. We have a binding commitment for a $10.0 million revolving line of
credit with a bank.
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 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 need to be
upgraded to comply with such Year 2000 requirements.
Through the first three quarters 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.
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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 Japan, Germany,
France, England, and Belgium 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 quarter ended
September 30, 2000. Quantitative and qualitative information about market risk
was addressed in Item 7A of our Form 10-K for the fiscal year ended June 30,
2000.
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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 or upgrades to our products;
. Fluctuations in the demand for and 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 or improvements to existing
products and services;
. New product releases, licensing models or pricing policies by our
competitors;
. Impact of changes to our product distribution strategy and pricing
policies;
. Lack of order backlog;
. Loss of a significant customer or distributor;
. Changes in purchasing and/or payment practices by our distributors;
. A reduction in the number of independent software vendors, or ISVs,
who embed our products;
. Changes in the mix of domestic and international sales; and
. Losses associated with discontinued operations.
Our revenues for each quarter in fiscal year 2000 decreased sequentially
from the previous quarter, due to a combination of factors, including: lower
sales pipelines, the reorganization of our domestic sales force in January 2000,
the reorganization of our European sales force in April 2000, management changes
in our worldwide sales organization, senior management changes in our Japanese
subsidiary, our past focus of resources and management attention on our
discontinued Tango product line, competitive forces and what we believe to be a
general softening in the packaged client/server applications market contributing
to decreased orders for our Pervasive.SQL products embedded in these
applications. We believe each of these factors could continue to negatively
affect sales of our Pervasive.SQL product in the future.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, change our
distribution strategy and policies, accelerate our investment in research and
development, sales or marketing efforts in response to competitive pressures or
pursue new market opportunities. Any one of these activities may further limit
our ability to adjust spending in response to revenue fluctuations.
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In July 2000, we announced a restructuring to focus on our core database
business. As part of the restructuring, we recorded in the fourth fiscal quarter
a charge of $17 million or $1.08 per share for discontinued operations related
to our Tango product line. While we currently continue to support our Tango
customers, we are exploring strategic alternatives for the Tango product line,
including its possible sale. Our operating results have fluctuated in the past
due to charges relating to the discontinued Tango operations and may continue to
fluctuate in future quarters depending upon the timing and nature of final
disposition of our Tango product line. In addition, our operating results could
be harmed in the event that additional liabilities related to the discontinued
Tango product line arise.
In addition, as part of the restructuring, we reduced our workforce by
approximately 100 employees, or approximately 28 percent of our worldwide
workforce. The majority of the reductions occurred in our Toronto office and our
Austin headquarters. The workforce reduction was primarily related to the
discontinuance of the Tango product line; however, we also reduced a portion of
our Pervasive.SQL related workforce. The cost of the Pervasive.SQL workforce
reduction is approximately $400,000 and is included as an operating cost in the
quarter ending September 30, 2000.
We derive a portion of our revenues from relatively larger orders. The
sales cycles for these transactions tend to be longer than the sales cycles on
smaller orders. This longer sales cycle for large orders makes it difficult to
predict the quarter in which these sales will occur. Accordingly, our operating
results may fluctuate from quarter to quarter based on the existence and timing
of larger orders. A reduction in large orders during any quarter could
materially impact our revenues.
We Must Successfully Manage Our Recent Reduction in Workforce
In July 2000, we reduced our workforce by approximately 100 employees or
approximately 28 percent of our worldwide workforce. The workforce reduction was
primarily related to the discontinuance of the Tango product line; however, we
also reduced a portion of our Pervasive.SQL related workforce, primarily in our
development organization. Any failure to manage the impact of the Pervasive.SQL
workforce reduction on our Pervasive.SQL product development schedules, to
retain our remaining Pervasive.SQL employees and to recruit new employees in the
future could have a material adverse effect on our business, operating results
and financial condition.
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.
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Our Success Depends on Our Management of Growth and Change Within Our Business
We have generally expanded our operations since inception, resulting in
new and increased responsibilities for management and placing a strain upon our
financial and other resources. Since our inception, we have experienced periods
of revenue growth, a general increase in the number of our employees, a general
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 379
employees at September 30, 1999, as compared to 240 at September 30, 1998. In
July 2000, we announced the discontinuance of our Tango operations and a
reduction in our workforce of approximately 100 employees. As of September 30,
2000 we had a total of 240 employees. In order to manage any future growth
effectively, we may be required to implement and improve our operational
systems, procedures and controls on a timely basis. If we experience future
growth and 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 substantially all of our revenues from the license of our
Pervasive.SQL products. In particular, we are becoming increasingly dependent on
market acceptance of our Pervasive.SQL 2000 product introduced in June 1999, as
revenues from our older database products, Btrieve and Pervasive.SQL 7, have
declined and are expected to continue to decline in subsequent quarters. 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, the
product development and deployment cycles of developers and resellers who embed
or bundle our products into packaged software applications and what we believe
is a softening in the market for client/server applications of the type built on
Pervasive.SQL 2000. Market acceptance of Pervasive.SQL 2000 and future upgrades
also may be influenced by factors in our control such as product quality and
relative demand for feature and functionality upgrades. Although we recognized
increased revenue from Pervasive.SQL 2000 in both the three months ended
September 30, 1999 and the three months ended December 31, 1999, one-time
upgrades from earlier versions of our products, our favorable upgrade pricing,
or other factors may have contributed to such increased revenues and such
increases may not continue in future quarters. In fact, revenue from
Pervasive.SQL 2000 declined in the three months ended March 31, 2000 relative to
the three months ended December 31, 1999, but then grew in the three months
ended June 30, 2000 relative to the three months ended March 31, 2000 and were
consistent in the three months ended September 30, 2000 relative to the three
months ended June 30, 2000.
Our Efforts to Develop Brand Awareness of Our Products May Not be Successful
We believe that developing and maintaining awareness of the "Pervasive"
brand name is critical to achieving widespread acceptance of our products. Brand
recognition is important given competition in the market for data management
products. 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" 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 the Pervasive name
and variations of this name for competing goods and services. Competitors or
others that use marks that are similar to our brand name 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 brand or
incur significant related expenses, our business, operating results and
financial condition could be materially adversely affected.
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 management 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.
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A Small Number of Distributors and Sales Related to Accounting Software
Applications Account For a Significant Percentage of Our Revenues
The loss of a major distributor, changes in a distributor's payment
practices, changes in the financial stability 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 pricing or 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 quarter ended September 30, 2000, three distributors combined
accounted for an aggregate of approximately 18% of our revenues, as compared to
the quarter ended September 30, 1999, where three distributors accounted for an
aggregate of approximately 26% of our revenues. Additionally, we estimate that
approximately 20% of our revenues in the quarter ended September 30, 2000 were
from sales related to accounting software applications. We expect that we will
continue to be dependent upon a limited number of distributors and sales related
to accounting software applications for a significant portion of our revenues in
future periods. Moreover, we expect that such distributors and sales related to
accounting software applications 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 we 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
. Business model or licensing model changes of our channel partners or
their competitors.
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 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.
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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 new industry standards 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 and Web computing environments and the performance demanded by
customers for data management 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.
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Our Software May Contain Errors or Defects
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. From time to time,
we discover software errors or defects 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. Product defects can put us at a
competitive disadvantage and can be costly and time consuming to correct.
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
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 the data
management products market will substantially increase competitive pressures. We
believe that Microsoft will continue to incorporate 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, IBM and
Progress. 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 providing database
products based on existing, new or open source technologies.
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,
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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 changes in licensing models or announcements of competing
products by competitors such as Microsoft, Oracle, Informix, Sybase, IBM,
Progress or others could result in the cancellation of customer orders in
anticipation of the introduction of such new licensing models or 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, or consolidations of, 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
product line has achieved market acceptance for use in Web-based applications.
In addition, we cannot be certain that our existing client/server developers
will migrate to Web-based applications and continue to use our products or that
other developers of Web-based applications would select our data management
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 quarter ended
September 30, 2000, we derived 41% 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;
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. Foreign currency exchange rate fluctuations and the associated effects
on product demand and timing of payment;
. 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 recently reorganized our sales and marketing organization in Europe to
centralize functions and better match our organizational structure to the type
of customer. However, these adjustments could negatively impact our revenue as
our sales representatives and sales managers become integrated into their new
assignments. Accordingly, our revenues may not increase, and could decline
sequentially, in future periods.
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 our international operations will continue to place
financial and administrative demands on us and our management, including
operational complexity associated with international facilities, administrative
burdens associated with managing relationships with foreign partners and
treasury functions to manage foreign currency risks and collections.
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 efforts to attract and retain highly skilled
employees could be harmed by our July 2000 workforce reduction related to the
discontinuance of our Tango product line of approximately 100 employees, or
approximately 28% of our worldwide workforce. 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.
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We Have Anti-Takeover Provisions
Our Restated Certificate of Incorporation and Bylaws contain certain
provisions that may have the effect of discouraging, delaying or preventing a
change in control 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 our 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.
Further, in October 2000, our Board of Directors approved the adoption of
a shareholder rights plan whereby one preferred share purchase right will be
distributed for each outstanding share of our common stock. The rights are
designed to assure that all of our stockholders receive fair and equal treatment
in the event of any proposed takeover and to guard against partial tender
offers, open market accumulations and other tactics designed to gain control
without paying all stockholders a fair price. The rights are not being
distributed in response to any specific effort to acquire us.
The rights become exercisable if a person or group hereafter acquires 15%
or more of our common stock or announces a tender offer for 15% or more of our
common stock. Such events, or if we are acquired in a merger or other business
combination transaction after a person acquires 15% or more of our common stock,
would entitle the right holder to purchase, at an exercise price of $18.00, a
number of shares of common stock having a market value at that time of twice the
right's exercise price. Rights held by the acquiring person would become void.
The Board of Directors can choose to redeem the rights at one cent per right at
any time before an acquiring person hereafter acquires 15% or more of the
outstanding common stock. The Rights Plan may have the effect of discouraging,
delaying or preventing a change in control 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.
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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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Complaints were filed in November and December 1999 in the U.S.
District Court for the Western District of Texas against us and certain of
our officers and directors. The cases were consolidated in a class action
suit filed in January 2000. The class action complaint alleged that we and
certain 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 our common stock during the class period of July 15,
1999 to October 21, 1999. We, along with the other defendants, filed
motions to dismiss the suit on February 7, 2000. On October 19, 2000, the
U.S. District Court entered its order dismissing plaintiffs' claims
against us and the other defendants. The case was dismissed with
prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of the stockholders was held on
November 9, 2000.
The following nominees were elected as directors, each to hold
office until their three-year term expires or until their successors have
been duly elected and qualified, by the vote set forth below:
NOMINEE FOR WITHHELD
-------------------- -------------------- --------------------
Ron R. Harris 13,789,995 370,328
David A. Boucher 13,789,995 370,328
The proposal to approve an amendment to the Company's 1997 Stock
Incentive Plan to increase the number of shares available for issuance
thereunder was approved by the vote set forth below:
FOR AGAINST ABSTAIN
-------------------- -------------------- --------------------
6,260,240 528,864 32,221
The proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending June 30, 2001
was approved by the vote set forth below:
FOR AGAINST ABSTAIN
-------------------- -------------------- --------------------
14,137,258 13,745 9,320
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
4.4*** Rights Agreement dated October 20, 2000 between the
Company and Computershare Trust Company, Inc. as Rights
Agent
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
10.10** 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-
230431).
*** Incorporated by reference to the Company's Registration
Statement on Form 8-A filed on October 24, 2000 (File No. 000-
23043)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the
quarter ended September 30, 2000.
24
<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: November 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)
25
<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
4.4*** Rights Agreement, dated October 20, 2000, between
the Company and Computershare Trust Company, Inc.,
as Rights Agent
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
10.10** 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.
000-230431).
*** Incorporated by reference to the Company's Registration
Statement on Form 8-A filed on October 24, 2000 (File No. 000-
23043).
26
