<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000
REGISTRATION NO. 333-30850
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EMBARCADERO TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 511210 68-0310015
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
EMBARCADERO TECHNOLOGIES, INC.
425 MARKET STREET, SUITE 425
SAN FRANCISCO, CA 94105
(415) 834-3131
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
STEPHEN R. WONG
CHAIRMAN
EMBARCADERO TECHNOLOGIES, INC.
425 MARKET STREET, SUITE 425
SAN FRANCISCO, CA 94105
(415) 834-3131
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
STEPHEN C. FERRUOLO KENNETH J. BARONSKY
HELLER EHRMAN WHITE & MCAULIFFE LLP MILBANK, TWEED, HADLEY & MCCLOY LLP
4250 EXECUTIVE SQUARE 601 SOUTH FIGUEROA STREET
7TH FLOOR 30TH FLOOR
LA JOLLA, CALIFORNIA 92037 LOS ANGELES, CALIFORNIA 90017-5741
TELEPHONE: (858) 450-8400 TELEPHONE: (213) 892-4000
FACSIMILE: (858) 450-8499 FACSIMILE: (213) 629-5063
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED(1) PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C>
Common Stock, $0.001 par value..... 4,600,000 $55,200,000 $15,180.00
</TABLE>
(1) Includes 600,000 shares which the underwriters have the option to cover
over-allotments, if any.
(2) Estimated only for the purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
(3) Amount previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION -- APRIL 14, 2000
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 2000
[LOGO]
4,000,000 SHARES OF COMMON STOCK
- ----------------------------------------------------------------------
<TABLE>
<S> <C>
EMBARCADERO TECHNOLOGIES, INC.: THE OFFERING:
- -We provide software products that - We are offering 4,000,000 shares of
enable organizations to build and our common stock.
manage e-business applications and - The underwriters have an option to
their underlying databases. purchase up to 600,000 additional
- - Embarcadero Technologies, Inc. shares from Embarcadero to cover
425 Market Street, Suite 425 over-allotments.
San Francisco, California 94105 - This is the initial public offering
(415) 834-3131 of our common stock. No public market
currently exists for our shares. We
PROPOSED SYMBOL AND MARKET: anticipate that the initial public
- - EMBT/Nasdaq National Market offering price will be between
$11.00 and $13.00 per share.
- We plan to use the net proceeds from
this offering for working capital
and other general corporate
purposes.
- Closing: , 2000.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
<S> <C> <C>
Per Share Total
- ---------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees:
Proceeds to Embarcadero:
- ---------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
DLJDIRECT INC.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[Inside Front Cover Graphics]
Header: Embarcadero Technologies Logo--do more now--Embarcadero
software enables organizations to build and manage
e-business software applications and their underlying
databases.
Description: Three panels of graphics depict the application and database
support provided by Embarcadero products, as follows.
[Multiple Database Vendor Support Graphic]
Header: Databases from Multiple Vendors--Our software supports the
design, development and administration of databases from
multiple vendors.
Description: Graphical illustration of four sets of linked databases,
intended to to show capability of our product to support
databases from multiple vendors.
[Critical Business Applications Graphic]
Header: Critical Business Applications--Our software enables
organizations to build and manage e-business applications.
Description: Graphical illustration of computer screen from our product,
DBArtisan, intended to show ability of our products to build
and manage e-business software applicationsand their
underlying databases through a graphical interface.
[Scalable User Environment Graphic]
Header: Scalable User Environment--Our solution can be implemented
to support the databases and applications of a single
department or an entire enterprise.
Description: Graphical illustration of variable-sized computers, intended
to show ability of our products to support user environments
of various sizes.
</TABLE>
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or any sale of the common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................ 4
Risk Factors...................... 8
Special Note Regarding Forward-
Looking Statements.............. 14
Use of Proceeds................... 14
Dividend Policy................... 15
Corporate Information............. 15
Capitalization.................... 16
Dilution.......................... 17
Selected Financial Data........... 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 19
</TABLE>
<TABLE>
Business.......................... 27
<CAPTION>
Page
<S> <C>
Management........................ 39
Related Party Transactions........ 47
Principal Stockholders............ 48
Description of Capital Stock...... 49
Shares Eligible for Future Sale... 51
Underwriting...................... 53
Legal Matters..................... 56
Experts........................... 56
Change in Accountants............. 56
Additional Information............ 57
Index to Financial Statements..... F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING EMBARCADERO AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING IN OUR FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE
IN THIS PROSPECTUS.
EMBARCADERO TECHNOLOGIES, INC.
We provide software products that enable organizations to build and manage
e-business applications and their underlying databases. Our suite of products
allows customers to manage the database life cycle, which is the process of
creating, deploying and enhancing databases in response to evolving business and
software application requirements.
In today's highly competitive markets, a growing number of organizations are
using the Internet to conduct business electronically. This e-business model has
led to the proliferation of new Internet-based, or e-business, software
applications. Businesses are becoming increasingly reliant on these e-business
applications to run critical parts of their operations and to collect important
customer and market information. Organizations must ensure that these
applications are up-and-running with optimal performance. A poorly designed or
poorly performing application can have a significant operational and financial
impact on e-business organizations.
Software applications for e-business are designed to provide reliable
storage and flexible access to critical business information. Databases, which
are a proven technology for storing and accessing information, provide the
essential infrastructure for e-business applications. For example, many
business-to-business applications are supported by databases from vendors such
as Oracle, IBM, Microsoft and Sybase. These databases can provide storage and
access to information on customers, prices, product specifications and
transactions.
The proliferation of software applications from Internet and e-business
initiatives has increased the demands on databases as organizations face
numerous business and technology challenges, including storing massive amounts
of customer data, handling increasing numbers of users and utilizing information
from disparate systems. To help address these challenges, organizations need an
integrated solution that allows them to manage the database life cycle.
Our suite of products provides an integrated solution to manage the design,
development and administration phases of the database life cycle and enables
organizations to build and manage e-business applications. Our primary products
include:
- ER/STUDIO, which addresses the design phase, enables organizations to
capture business requirements and translate them into database
applications;
- RAPID SQL, which addresses the development phase, enables organizations to
streamline the process of developing complex database code; and
- DBARTISAN, which addresses the administration phase, enables organizations
to ensure the availability, performance, security and recoverability of
databases.
We believe our suite of products enables organizations to:
- DEVELOP AND SUPPORT E-BUSINESS APPLICATIONS. Our products are designed to
work individually and together to provide rapid development and continuous
availability of critical applications as enterprises deploy and extend
their information technology infrastructure for e-business initiatives.
- INCREASE UTILIZATION OF EXISTING DATABASE TECHNOLOGY. Most companies'
infrastructure consists of an assortment of databases from various
software vendors. We can bundle our products to offer an integrated
database life cycle solution for a particular database, such as Oracle, or
to support a
4
<PAGE>
multi-vendor database environment, such as Oracle, Microsoft SQL Server
and IBM DB2 UDB databases running simultaneously. We believe this provides
the only integrated solution for designing, developing and administering
databases from these different vendors.
- LEVERAGE CONSTRAINED INFORMATION TECHNOLOGY RESOURCES. We design our
products to be easy to use so that experienced database professionals can
do more in less time and less experienced professionals can become
proficient sooner.
- FACILITATE RAPID ADOPTION. Customers can download our products from our
website for evaluation or purchase, install them within minutes and
typically become productive within one hour. As a result, we believe our
customers can realize a faster return on investment than with traditional
solutions, which often involve a lengthy and expensive deployment process.
Our objective is to be the leading provider of software solutions that
enable organizations to build and manage e-business applications and their
underlying databases. The key elements of our strategy include exploiting the
growing development of e-business applications, extending our product
leadership, leveraging our installed customer base and expanding our direct
sales and marketing efforts and international distribution.
We sell our software through a direct telesales organization in North
America and indirectly through our distribution partners worldwide, including an
affiliated distributor in Europe, Embarcadero Europe, Ltd. During 1999, we
issued over 12,600 new user licenses and received maintenance renewals for over
8,800 users. We have thousands of customers across a range of industries,
including technology, telecommunications and financial services.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered................... 4,000,000 shares
Common stock to be outstanding after
the offering......................... 25,520,489 shares
Use of proceeds........................ We plan to use the net proceeds from this offering for
general corporate purposes, including working capital,
expanding our sales and marketing efforts, research and
development, capital expenditures and possible acquisitions
and investments.
Proposed Nasdaq National Market
symbol............................... EMBT
</TABLE>
Unless otherwise indicated, all information in this prospectus:
- assumes no exercise of the underwriters' option to purchase an
over-allotment of up to 600,000 additional shares; and
- gives effect to a two-for-one split of our common stock effected in
February 2000.
The number of shares of our common stock to be outstanding after this offering
includes:
- 21,266,596 shares of our common stock outstanding as of March 27, 2000;
and
- 253,893 shares to be issued upon the conversion of all shares of our
Series A preferred stock upon the closing of this offering.
The number of shares of our common stock to be outstanding after this offering
excludes:
- 4,128,268 shares issuable upon exercise of options outstanding as of
March 27, 2000; and
- 2,905,136 shares available for future issuance under our stock plans as of
March 27, 2000.
6
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table should be read in conjunction with our financial
statements and related notes appearing elsewhere in this prospectus. The pro
forma information in the table below gives effect to the tax effect of our
conversion from an S corporation to a C corporation for income tax purposes as
if the conversion had taken place on January 1, 1999. The weighted average
number of common shares used in the pro forma net loss per share calculation
includes the number of shares which, based on the initial public offering
estimated price, are equivalent to the excess of 1999 distributions to
stockholders over 1999 net income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License................................................. $ 3,434 $ 6,510 $13,406
Maintenance............................................. 1,152 2,609 5,446
------- ------- -------
Total revenues........................................ 4,586 9,119 18,852
Gross profit.............................................. 4,254 8,547 17,771
Income from operations.................................... 251 2,013 2,280
Net income................................................ 301 2,028 2,186
Pro forma net loss........................................ (410)
Pro forma net loss per share, basic and diluted........... $ (0.02)
=======
Shares used in pro forma net income per share calculation,
basic and diluted....................................... 20,363
</TABLE>
The pro forma column of the table below gives effect to:
- the sale of 253,893 shares of our Series A preferred stock in
February 2000 for an aggregate purchase price of approximately $1.8
million;
- our conversion from an S corporation to C corporation; and
- the repayment in February 2000 of notes payable to stockholders.
The pro forma as adjusted column of the table below gives effect to:
- the sale in this offering of 4,000,000 shares of common stock at an
assumed initial public offering price of $12.00 per share, less
underwriting discounts and estimated offering expenses payable by
Embarcadero.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $1,804 $2,632 $46,002
Working capital........................................... (256) 1,298 44,668
Total assets.............................................. 6,648 7,720 51,090
Notes payable to stockholders............................. 1,000 -- --
Total stockholders' equity................................ 748 2,302 45,672
</TABLE>
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
BEFORE BUYING SHARES IN THIS OFFERING. THESE RISKS AND UNCERTAINTIES ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE ARE
UNAWARE OF OR CURRENTLY DEEM IMMATERIAL MAY ALSO BECOME IMPORTANT FACTORS THAT
MAY HARM OUR BUSINESS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE
TO ANY OF THESE RISKS AND UNCERTAINTIES, AND YOU MAY LOSE PART OR ALL OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, AND, AS A
RESULT, OUR STOCK PRICE MAY FLUCTUATE OR DECLINE.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including seasonal variations in orders for
our products and the factors discussed below under the following captions:
- "We expect to incur significant increases in our operating expenses in the
foreseeable future, which may affect our profitablility;"
- "Acquisitions of companies or technologies may result in disruptions to
our business;"
- "We may lose market share and be required to reduce prices as a result of
competition from existing competitors, independent software vendors and
manufacturers of compatible software;" and
- "If we are not able to enhance our products to adapt to rapid
technological change, our revenues and income may decline."
Fluctuations in operating results are likely to cause corresponding volatility
in our stock price, particularly if our operating results vary significantly
from analysts' expectations.
IF SALES OF DBARTISAN FALL, OUR REVENUES AND INCOME MAY DECLINE.
A large portion of our revenues currently comes from sales of our DBArtisan
product. In 1997, 1998 and 1999, DBArtisan accounted for approximately 66.5%,
56.3% and 48.3%, respectively, of our license revenues in North America. We
expect that sales of DBArtisan will continue to represent a substantial portion
of our license revenues for the foreseeable future. In addition, most of our
customers initiate a relationship with Embarcadero by purchasing DBArtisan and
it is a major source of customer loyalty and goodwill. If sales of DBArtisan
fall significantly, our revenues and income may decline.
IF THE MEMBERS OF OUR MANAGEMENT TEAM ARE UNABLE TO WORK TOGETHER EFFECTIVELY,
OUR ABILITY TO MANAGE AND EXPAND OUR BUSINESS WILL SUFFER.
The members of our management team have not previously worked together, and
we cannot be sure that they will be able to work together effectively as we
expand our operations. Our management team has changed significantly in the past
six months. Ellen Taylor joined us in October 1999 as our President and also
succeeded Stephen Wong, our Chairman, as our Chief Executive Officer. Raj
Sabhlok joined us in January 2000 as Senior Vice President of Finance and
Corporate Development. Walter Scott joined us in January 2000 as Vice President
of Sales. Susan Fleck joined us as our Vice President of Customer Care in
February 2000. We intend to hire other executive officers in the near future. If
these employees cannot work together effectively, our ability to manage and
expand our business will suffer.
8
<PAGE>
IF WE CANNOT EXPAND OUR OPERATIONS, OUR RATE OF GROWTH AND INCOME MAY DECLINE.
We have recently experienced a period of significant expansion in our
operations. This growth may strain our management, administrative, operational
and financial infrastructure. To support our expanding operations, we have
increased the number of our full-time employees from 33 as of December 31, 1997
to 57 as of December 31, 1998 to 105 as of December 31, 1999; we expect to hire
additional employees in all areas to manage our expanding operations. Our
ability to manage growth requires that we continue to improve our operational,
financial and management controls and procedures. If we are unable to manage
this growth effectively, our rate of growth and our income may decline.
WE EXPECT TO INCUR SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES IN THE
FORESEEABLE FUTURE, WHICH MAY AFFECT OUR PROFITABILITY.
We intend to substantially increase our operating expenses for the
foreseeable future as we increase our sales and marketing, research and
development activities and customer support operations. In connection with these
expanded operations, we will need to significantly increase our revenues in
order to maintain profitability. However, these increased expenses will be
incurred before we realize increased revenues, if any, related to this spending.
If we do not significantly increase revenues from these efforts, our
profitability may decline.
THE PLANNED EXPANSION OF OUR INTERNATIONAL OPERATIONS EXPOSES US TO RISKS.
One aspect of our growth strategy is to expand our international operations.
As a result, we could face a number of risks from our international operations,
including:
- staffing and managing foreign operations;
- increased financial accounting and reporting complexities;
- potentially adverse tax consequences;
- the loss of revenues resulting from currency fluctuations;
- compliance with a wide variety of complex foreign laws and treaties;
- reduced protection for intellectual property rights in some countries; and
- licenses, tariffs and other trade barriers.
The expansion of our international operations may require significant
management attention and financial resources and may place burdens on our
management, administrative, operational and financial infrastructure. Our
possible investments in establishing facilities in other countries may not
produce desired levels of revenue or profitability.
OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED AND INFRINGEMENT CLAIMS OR
INDEPENDENT DEVELOPMENT OF COMPETING TECHNOLOGIES COULD HARM OUR COMPETITIVE
POSITION.
We rely on copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to establish and protect our proprietary
rights. We also enter into confidentiality agreements with employees and
consultants and attempt to restrict access to proprietary information on a
need-to-know basis. Despite such precautions, unauthorized third parties may be
able to copy aspects of our products or obtain and use information that we
consider as proprietary.
We license our software products primarily under shrink-wrap licenses
included as part of product packaging. Shrink-wrap licenses are not negotiated
with or signed by individual licensees and purport to take effect upon the
opening of the product package or downloading of the product from the Internet.
9
<PAGE>
These measures afford only limited protection. Policing unauthorized use of our
products is difficult and we are unable to determine the extent to which piracy
of our software exists. In addition, the laws of some foreign countries do not
protect our proprietary rights as well as United States laws.
We may have to enter into litigation to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others with respect to our rights. Litigation is generally very expensive and
can divert the attention of management from daily operations. Accordingly, any
intellectual property litigation could disrupt our operations and materially
adversely affect our operating results.
We are not aware of any case in which we are infringing the proprietary
rights of others. However, third parties may bring infringement claims against
us. Any such claim is likely to be time consuming and costly to defend, could
cause product delays and could force us to enter into unfavorable royalty or
license agreements with third parties. A successful infringement claim against
us could require us to enter into a license or royalty agreement with the
claimant or develop alternative technology. However, we may not be able to
negotiate favorable license or royalty agreements, if any, in connection with
such claims and we may fail to develop alternative technology on a timely basis.
Accordingly, a successful product infringement claim against us could materially
adversely affect our business and operating results.
OUR BUSINESS WILL SUFFER IF OUR SOFTWARE CONTAINS UNDETECTED ERRORS.
Errors may be found in current versions, new versions or enhancements of our
products after we make commercial shipments. We could face possible claims and
higher development costs if our software contains undetected errors or if we
otherwise fail to meet our customers' expectations. These risks may result in:
- loss of revenues, market share or customers;
- reputational harm;
- diversion of resources;
- increased service and warranty costs;
- legal actions by customers against us; and
- increased insurance costs.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS.
We plan to make strategic acquisitions of companies, products or
technologies as necessary in order to implement our business strategy. If we are
unable to fully integrate acquired businesses, products or technologies with our
existing operations, we may not receive the intended benefits of such
acquisitions. In addition, acquisitions may subject us to unanticipated
liabilities or risks. Any acquisition may temporarily disrupt our operations and
divert management's attention from day-to-day operations.
We may incur debt or issue equity securities to finance future acquisitions.
The issuance of equity securities for any acquisition could be substantially
dilutive to our stockholders. In addition, our profitability may suffer due to
acquisition-related expenses or amortization costs for acquired goodwill and
other intangible assets.
10
<PAGE>
RISKS RELATED TO OUR INDUSTRY
IF WE ARE NOT ABLE TO ENHANCE OUR PRODUCTS TO ADAPT TO RAPID TECHNOLOGICAL
CHANGE, OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.
The market for our products is characterized by rapid technological change,
frequent product introductions and enhancements, uncertain product life cycles
and changes in customer demands and industry standards. Our success depends on
our ability to continue to enhance our current products and to introduce new
products that keep pace with technological developments and satisfy increasingly
complicated customer requirements. However, due to the nature of computing
environments and the performance demanded by customers for database management
software, new products and product enhancements could require longer development
and testing periods than anticipated.
The introduction of new technologies and the emergence of new industry
standards may render our existing products obsolete and unmarketable. Delays in
the general availability of new releases or problems in the installation or
implementation of new releases could materially adversely affect our business
and operating results. 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, or in achieving market acceptance for our products and product
enhancements.
IF WE ARE NOT ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR BUSINESS WILL
NOT BE ABLE TO GROW.
Our success depends on the continued service of our executive officers and
other key administrative, sales and marketing and support personnel, many of
whom, including our President and Chief Executive Officer, Senior Vice President
of Finance and Corporate Development, Vice President of Sales, and Vice
President of Customer Care have recently joined our company. We intend to hire a
significant number of additional sales, marketing, administrative and research
and development personnel over the next several months. Our business will not be
able to grow if we cannot attract and retain qualified personnel. Competition
for qualified employees is intense and we may not be able to attract, assimilate
or retain highly qualified personnel in the future. There has in the past been
and there may in the future be a shortage of personnel that possess the
technical background necessary to sell, support and develop our products
effectively. Some of our current employees and those that we seek to hire may be
subject to non-competition or non-solicitation covenants that could further
limit our ability to attract or retain qualified personnel.
WE MAY LOSE MARKET SHARE AND BE REQUIRED TO REDUCE PRICES AS A RESULT OF
COMPETITION FROM OUR EXISTING COMPETITORS, INDEPENDENT SOFTWARE VENDORS AND
MANUFACTURERS OF COMPATIBLE SOFTWARE.
The market for our products is highly competitive, dynamic and subject to
rapidly changing technology. We compete primarily against other providers of
database management utilities, which include Computer Associates, Quest Software
and other independent software vendors.
Our products also compete with products offered by the manufacturers of the
database software with which they are compatible, including Oracle, Microsoft
and IBM. Some of these competing products are provided at no charge to their
customers. We expect that companies such as Oracle, Microsoft and IBM will
continue to develop and incorporate into their products applications which
compete with our products and may take advantage of their substantial technical,
financial, marketing and distribution resources in those efforts. We may not be
able to compete effectively with such products, which would materially adversely
affect our business and operating results.
We presently compete on numerous factors, including product functionality
and heterogeneity, reliability, ease-of-use, performance, scalability, time to
market, customer support and total cost of
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ownership. We believe that we currently compete favorably overall. However, the
market for our products is dynamic and we may not compete successfully in the
future with respect to these factors.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing and other resources, and greater name
recognition than we do. They also may be able to respond more quickly than we
can to changes in technology or customer requirements. Competition could
seriously impede our ability to sell additional products on acceptable terms.
Our competitors may:
- develop and market new technologies that render our products obsolete,
unmarketable or otherwise less competitive;
- make strategic acquisitions or establish cooperative relationships among
themselves or with other companies, thereby enhancing the functionality of
their products or increasing their operating margins; or
- establish or strengthen cooperative relationships with channel or
strategic partners which limit our ability to sell or to co-market
products through these channels.
Competitive pressures could reduce our market share or require us to reduce our
prices, either of which would materially adversely affect our business and
operating results.
RISKS RELATED TO THIS OFFERING
OUR OFFICERS AND DIRECTORS WILL BE ABLE TO EXERT SIGNIFICANT CONTROL ON THE
COMPANY AFTER THIS OFFERING, WHICH WILL ALLOW THEM TO MAKE DECISIONS WITH WHICH
OUTSIDE STOCKHOLDERS MAY NOT AGREE.
Executive officers, directors and their respective affiliates will own, in
the aggregate, approximately 82.5% of our common stock outstanding following
this offering. These stockholders, if acting together, will be able to decide
all matters which require stockholder approval, including the election of
directors and the approval of mergers or other business combination
transactions.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, AND THE TRADING PRICE OF
THE COMMON STOCK MAY BE CONSIDERABLY LOWER THAN THE OFFERING PRICE.
Prior to this offering, there was no public market for our common stock. An
active public market for our common stock may not develop or be sustained after
this offering. The market price of our common stock may fall below the initial
public offering price. Moreover, the initial public offering price has been
determined based on negotiations between us and the representatives of the
underwriters, based on factors that may not be indicative of future market
performance or the price at which our stock trades after the completion of this
offering.
WE EXPECT THE PRICE OF OUR COMMON STOCK TO BE VOLATILE, MAKING IT DIFFICULT FOR
OUR STOCKHOLDERS TO PREDICT THE RETURN ON THEIR INVESTMENT.
The market price of our common stock may fluctuate significantly in response
to a number of factors, some of which are beyond our control, including:
- quarterly variations in our operating results;
- changes in financial estimates by securities analysts;
- changes in market valuation of software and Internet companies;
- announcements we make related to significant contracts, acquisitions or
product introductions or enhancements;
- additions or departures of key personnel;
- future sales of common stock; and
- stock market price and volume fluctuations, which are particularly
volatile among securities of software and Internet companies.
12
<PAGE>
A LARGE NUMBER OF SHARES OF OUR COMMON STOCK WILL BE ELIGIBLE FOR SALE SHORTLY
AFTER THE OFFERING, WHICH COULD RESULT IN A DECLINE IN OUR STOCK PRICE.
Sales in the market of a substantial number of shares of our common stock
after the offering could adversely affect the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. On completion of this offering, we will have 25,520,489
shares of common stock outstanding, or 26,120,489 shares if the underwriters'
option to purchase additional shares is exercised in full. The 4,000,000 shares
sold in this offering, which will be 4,600,000 shares if the underwriters'
option to purchase additional shares is exercised in full, will be freely
tradable without restriction or further registration under the federal
securities laws unless purchased by our "affiliates" as that term is defined in
Rule 144 of the Securities Act. The remaining 21,520,489 shares of common stock
outstanding on completion of this offering will be "restricted securities" as
that term is defined in Rule 144.
Substantially all of the holders of our common stock and stock options are
subject to agreements that limit their ability to sell common stock. These
holders cannot sell or otherwise dispose of any shares of common stock for a
period of at least 180 days after the date of this prospectus without the prior
written approval of Donaldson, Lufkin & Jenrette. However, if the average price
of our shares appreciates by a specified amount following the date of this
prospectus, those holders who are not officers, directors or affiliates of
Embarcadero may be eligible to sell up to 25% of their shares either 90 days
after the date of this prospectus or on the second business day following the
release of our next quarterly financial statements, whichever day comes first.
Under these agreements, such holders may also be eligible to sell an additional
25% of their shares 135 days after the date of this prospectus if the average
price of our shares continues to equal or exceed the targeted amount. When these
agreements expire, all of the shares of common stock and the shares underlying
the options will become eligible for sale, in most cases only pursuant to the
volume, manner of sale and notice requirements of Rule 144. See "Shares Eligible
for Future Sale" and "Underwriting."
WE HAVE SUBSTANTIAL DISCRETION AS TO HOW TO USE THE PROCEEDS FROM THIS OFFERING,
SO WE MAY SPEND THE PROCEEDS IN WAYS WITH WHICH OUR STOCKHOLDERS MAY NOT AGREE.
Our management has broad discretion as to how to spend the proceeds from
this offering and may spend the proceeds in ways with which our stockholders may
not agree. We cannot predict that investments of the proceeds will yield a
favorable or any return. See "Use of Proceeds."
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION, WHICH MAY RESULT IN A DECLINE
IN OUR STOCK PRICE.
The initial public offering price of the common stock is substantially
higher than the pro forma net tangible book value per share of the outstanding
common stock. As a result, you will incur immediate and substantial dilution of
$10.20 per share based upon an assumed initial public offering price of $12.00
per share. In the event we issue additional shares of common stock in the
future, you may experience further dilution. Furthermore, we have issued options
to purchase common stock at prices significantly below the initial public
offering price. To the extent such options are exercised, you will experience
further dilution.
PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER
ATTEMPTS THAT MIGHT BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our Certificate of Incorporation and Bylaws as well as
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. We are subject to the
provisions of Delaware law which restrict business combinations with interested
stockholders, which may have the effect of inhibiting a non-negotiated merger or
other business combinations. See "Description of Capital Stock."
13
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. All forward-looking statements contained in this prospectus are
subject to numerous risks and uncertainties. Actual events or results may differ
materially. In evaluating these statements you should specifically consider
various factors, including the risks outlined under "Risk Factors." These
factors may cause our actual results to differ materially from any
forward-looking statement. 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.
USE OF PROCEEDS
We expect to receive net proceeds of approximately $43.4 million from the
sale of 4,000,000 shares of our common stock in this offering, at an assumed
initial public offering price of $12.00 per share after deducting underwriting
discounts and commissions and estimated expenses payable by us. We will receive
approximately $6.7 million from the sale of an additional 600,000 shares if the
underwriters' over-allotment option is exercised in full.
We plan to use the net proceeds of this offering for working capital,
general corporate purposes and other operating expenses including:
- expanding our sales and marketing;
- capital expenditures; and
- research and development.
We do not have specific uses planned for the net proceeds of this offering.
We believe that we need to retain flexibility with respect to the use of the net
proceeds of this offering to respond to factors affecting our business. The
amounts and timing of these expenditures will vary depending on a number of
factors, including competitive and technological developments, success of our
marketing efforts and the rate of growth of our business. Because of these
uncertainties, we cannot tell you with any reasonable certainty how we plan to
allocate the net proceeds.
We will retain broad discretion in the allocation of net proceeds of this
offering.
A portion of the net proceeds may be used to acquire or make investments in
complementary businesses, technologies, product lines or products. We have no
current plans, agreements or commitments with respect to any such acquisitions
or investments.
Pending the uses described above, we will invest the net proceeds in
short-term, interest bearing, investment-grade securities, certificates of
deposit or direct or guaranteed U.S. government obligations, such as Treasury
bills.
14
<PAGE>
DIVIDEND POLICY
In February 2000, we converted from an S corporation to a C corporation for
income tax purposes, effective as of January 1, 2000. As an S corporation, we
paid distributions to our S corporation stockholders in amounts generally
consistent with their allocated share of taxable income. We do not intend to
declare or pay any cash dividends on our common stock in the foreseeable future.
We currently intend to retain all available funds for use in the operation and
expansion of our business. Any future determination to pay dividends will be at
the discretion of our board of directors and will depend on our results in
operations, financial condition, contractual and legal restrictions and other
factors the board deems relevant.
CORPORATE INFORMATION
We were incorporated in the State of California as Client Worx, Inc. on
July 22, 1993 and changed our name to Embarcadero Technologies, Inc. on
October 29, 1993. We reincorporated in Delaware on February 15, 2000. Our
principal executive offices are located at 425 Market Street, Suite 425,
San Francisco, California 94105 and our telephone number is (415) 834-3131. Our
web site address is "www.embarcadero.com". "DBArtisan," "Rapid SQL" and
"ER/Studio" are our registered trademarks. "Embarcadero Technologies" is our
trademark. This prospectus also contains trademarks of other companies. Unless
otherwise indicated, all information in this prospectus assumes the
effectiveness of our amended and restated certificate of incorporation in the
State of Delaware upon the completion of this offering.
15
<PAGE>
CAPITALIZATION
The following table sets forth our cash position, current notes payable to
stockholders and total capitalization as of December 31, 1999.
The pro forma column of the table gives effect to:
- the sale of 253,893 shares of our Series A preferred stock in
February 2000 for an aggregate purchase price of approximately $1.8
million;
- our conversion from an S corporation to a C corporation;
- the repayment in February 2000 of notes payable to stockholders; and
- the authorization of 5,000,000 shares of preferred stock with a par value
of $0.001 and an increase in authorized common stock to 60,000,000 shares
with a par value of $0.001 per share upon our reincorporation in Delaware
on February 15, 2000.
The pro forma as adjusted column of the table gives effect to:
- the sale in this offering of 4,000,000 shares of common stock at an
assumed initial price of $12.00 per share, less underwriting discounts and
estimated offering expenses payable by Embarcadero; and
- the conversion of all outstanding shares of our Series A preferred stock
into shares of common stock upon the closing of this offering.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 1,804 $ 2,632 $ 46,002
======= ======= ========
Notes payable to stockholders............................... $ 1,000 $ -- $ --
======= ======= ========
Stockholders' equity:
Preferred stock, $0.001 par value, no shares authorized or
outstanding, actual; 5,000,000 shares authorized and
253,893 shares outstanding, pro forma; 5,000,000 shares
authorized and no shares outstanding, pro forma as
adjusted................................................ $ -- $ -- $ --
Common stock, no par value, 40,000,000 shares authorized,
21,175,564 shares issued and outstanding, actual; $0.001
par value, 60,000,000 shares authorized and 21,175,564
shares outstanding, pro forma; $0.001 par value,
60,000,000 shares authorized and 25,429,457 shares
outstanding, pro forma as adjusted...................... -- 21 25
Additional paid-in capital................................ 14,663 13,549 56,915
Deferred stock-based compensation......................... (10,049) (10,049) (10,049)
Accumulated deficit....................................... (3,866) (1,219) (1,219)
------- ------- --------
Total stockholders' equity.............................. 748 2,302 45,672
------- ------- --------
Total capitalization.................................. $ 1,748 $ 2,302 $ 45,672
======= ======= ========
</TABLE>
This table does not include:
- 4,128,268 shares issuable upon exercise of options outstanding on
March 27, 2000;
- 91,032 shares issued upon exercise of options since December 31, 1999; and
- 2,905,136 shares reserved for future insurance under our stock plans as of
March 27, 2000.
16
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of
December 31, 1999 was $2.3 million, or approximately $0.11 per share. Pro forma
net tangible book value per share represents the total pro forma stockholders'
equity less pro forma intangible assets divided by the number of shares of
common stock outstanding, giving effect to the issuance and conversion of all
outstanding shares of our preferred stock.
After giving effect to our sale of 4,000,000 shares of common stock offered
by this prospectus at an assumed initial public offering price of $12.00 per
share and after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma net tangible book
value would have been $45.7 million, or approximately $1.80 per share. This
represents an immediate increase in pro forma net tangible book value of $1.69
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $10.20 per share to new investors of common stock in this
offering. The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of December
31, 1999................................................ $ 0.11
Increase per share attributable to new investors in this
offering................................................ 1.69
------
Pro forma net tangible book value per share after this
offering.................................................. 1.80
------
Dilution to new investors................................... $10.20
======
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1999, the differences between the number of shares purchased from us, including
the Series A preferred stock which were purchased in February 2000, the total
consideration paid and the average price per share paid by existing stockholders
and by the new investors purchasing shares of common stock in this offering,
before deducting underwriting discounts and commissions and estimated offering
expenses payable by us, at an assumed initial public offering price of $12.00
per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 21,429,457 84.3% $ 2,048,000 4.1% $ 0.10
New investors.............................. 4,000,000 15.7 48,000,000 95.9 12.00
---------- ----- ----------- -----
Total.................................... 25,429,457 100.0% $50,048,000 100.0%
========== ===== =========== =====
</TABLE>
To the extent that any shares are issued upon exercise of options that were
outstanding at December 31, 1999 or that additional options are granted after
that date, or reserved for future issuance under our stock plans, there will be
further dilution to new investors. See "Capitalization."
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 are derived from our financial statements included elsewhere in
this prospectus. The statement of operations data for the years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 are derived from our financial statements for the years then
ended.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License (including sales to affiliate of $1,473 in
1999)................................................. $1,881 $2,650 $ 3,434 $ 6,510 $13,406
Maintenance............................................. 79 338 1,152 2,609 5,446
------ ------ ------- ------- -------
Total revenues........................................ 1,960 2,988 4,586 9,119 18,852
Cost of revenues:
License................................................. 60 197 200 321 460
Maintenance (exclusive of non-cash compensation expense
of $26 in 1999)....................................... 42 116 132 251 621
------ ------ ------- ------- -------
Total cost of revenues................................ 102 313 332 572 1,081
------ ------ ------- ------- -------
Gross profit.............................................. 1,858 2,675 4,254 8,547 17,771
Operating expenses:
Research and development (exclusive of non-cash
compensation expense of $18, $63 and $550 in 1997,
1998 and 1999, respectively).......................... 514 1,152 1,874 2,732 4,265
Sales and marketing (exclusive of non-cash compensation
expense of $16, $27 and $277 in 1997, 1998 and 1999,
respectively)......................................... 733 1,007 1,515 2,707 5,388
General and administrative (exclusive of non-cash
compensation expense of $9 and $3,408 in 1998 and
1999, respectively)................................... 109 237 580 996 1,577
Amortization of deferred stock-based compensation....... -- -- 34 99 4,261
------ ------ ------- ------- -------
Total operating expenses.............................. 1,356 2,396 4,003 6,534 15,491
------ ------ ------- ------- -------
Income from operations.................................... 502 279 251 2,013 2,280
Interest income........................................... 42 -- 52 52 88
------ ------ ------- ------- -------
Income before income taxes................................ 544 279 303 2,065 2,368
Provision for income taxes................................ (7) (5) (2) (45) (82)
------ ------ ------- ------- -------
Income before share in affiliated company profit (loss)... 537 274 301 2,020 2,286
Share in profit (loss) of affiliated company.............. -- -- -- 8 (100)
------ ------ ------- ------- -------
Net income................................................ $ 537 $ 274 $ 301 $ 2,028 $ 2,186
====== ====== ======= ======= =======
NET INCOME PER SHARE:
Basic................................................... $ 0.03 $ 0.02 $ 0.02 $ 0.12 $ 0.11
====== ====== ======= ======= =======
Diluted................................................. $ 0.03 $ 0.01 $ 0.01 $ 0.10 $ 0.10
====== ====== ======= ======= =======
SHARES USED IN PER SHARE CALCULATION:
Basic................................................... 16,800 16,800 16,800 16,810 20,070
Diluted................................................. 17,080 20,727 21,078 21,230 21,877
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 327 $ 215 $ -- $ 13 $ 1,804
Working capital........................................... 537 699 1,192 (578) (256)
Total assets.............................................. 754 921 1,590 2,706 6,648
Notes payable to stockholders............................. -- -- -- -- 1,000
Total stockholders' equity (deficit)...................... 604 479 351 (216) 748
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS
AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND
ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES
AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We provide software products that enable organizations to build and manage
e-business applications and their underlying databases.
We were incorporated in California as Client Worx, Inc. in July 1993 and
changed our name to Embarcadero Technologies, Inc. in October 1993. We
reincorporated in Delaware in February 2000. At our inception, we focused on
developing and marketing software for use with Sybase and Microsoft SQL Server
databases. In December 1993, we introduced Rapid SQL for Sybase and Microsoft
SQL Server database development. In July 1994, we introduced DBArtisan for the
administration of Sybase and Microsoft SQL Server databases. In March 1996, we
released ER/Studio, our database design solution, which was our first product to
offer support for IBM DB2 Universal Database, Informix and Oracle, as well as
Sybase and Microsoft SQL Server. The success of ER/Studio's multi-vendor support
led us to add support for other major databases to our other products. We added
Oracle support to DBArtisan in April 1997 and to Rapid SQL in January 1998. We
added support for IBM DB2 Universal Database to both products in mid-1998. Also
in 1998, we began to enhance our products with add-ons and companion products.
In October 1998, we offered our first standalone companion product, ER/Studio
Viewer, which complemented the ER/Studio product. In April 1999, we introduced
DBArtisan Schema Manager as a standalone companion product and changed the
product name to DBArtisan Change Manager in January 2000. In January 2000, we
introduced PL/SQL Debugger and SQL Profiler add-ons to extend the functionality
of Rapid SQL and DBArtisan.
We derive all of our revenues from the sale of software licenses and related
annual maintenance fees. Our total revenues have increased over each of the past
five years from $2.0 million in 1995 to $18.9 million in 1999. License revenues
are derived from our direct product sales to customers and sales through our
distributors. Pricing of our software licenses varies by product and increases
in proportion to the number of users for whom licenses are purchased.
Maintenance revenues are derived from the sales of annual maintenance contracts
related to the sale of our products, which include technical support and product
upgrades. The pricing of maintenance contracts also varies by product and
increases in proportion to the number of users for whom contracts are purchased.
Annual maintenance contracts may be purchased separately by customers at their
discretion.
We generally recognize software license revenues upon shipment, provided
that a signed contract exists, the fee is fixed and determinable and collection
of the resulting receivable is probable. Revenues from software licenses sold
through distributors are recognized under the same criteria because our
distributors only purchase products to fulfill specific customer orders and do
not hold any inventory of our products. We recognize maintenance revenues,
including amounts allocated from product revenues for ongoing customer support
and product updates, ratably over the period of the maintenance contract, which
is typically one year. Payments for maintenance fees are generally made in
advance and are non-refundable.
We market our software and related maintenance services directly through our
telesales organization in the United States and Canada, and indirectly through
our distribution partners worldwide, including Global Business Solutions, Global
Connections and Multisystems, S.A. Indirect
19
<PAGE>
sales accounted for approximately $3.3 million of our revenues in 1999.
International revenues from licenses and maintenance sold to customers outside
of North America were $224,000 in 1998 and $2.1 million in 1999, representing
2.5% and 10.9% of total revenues in those years. We intend to expand our
international sales activities in an effort to increase revenues from foreign
sales. To date, our primary international distributor has been our affiliate,
Embarcadero Europe Ltd., which has distribution rights in Europe, the Middle
East and Africa. We have recently entered into an agreement with JGC Information
Systems Co., Ltd., a distributor covering Japan.
All of our revenues are denominated in U.S. dollars, except those from
Embarcadero Europe, the revenues of which are denominated in pounds sterling.
Our business with Embarcadero Europe exposes us to currency fluctuations and
currency transaction losses or gains, which are outside of our control.
Historically, fluctuations in foreign currency exchange rates have not had a
material effect on our business. We have not conducted any hedging transaction
to reduce our risk to currency fluctuations, though we may do so as our revenues
from Embarcadero Europe increase.
As the deemed estimated fair market value of our stock exceeded the exercise
price of options granted in 1997, 1998 and 1999, we recognized deferred
compensation which is amortized over the vesting period of the options. In 1999,
we have recognized a deferred compensation expense of $14.2 million in
connection with the issuance of options to various employees, which is being
amortized over a four-year period from the date the options were issued. Future
non-cash amortization based on options granted through December 31, 1999 is
expected to be $5.8 million, $2.8 million, $1.2 million and $255,000 in the
years 2000, 2001, 2002 and 2003, respectively. Subsequent to December 31, 1999
we issued approximately 2,042,000 options at exercise prices ranging from $1.25
to $12.00. As a result of the issuance of such options, we will record deferred
stock compensation of approximately $11.5 million in the first quarter of 2000.
The compensation associated with the issuance of such options will be amortized
over the four-year vesting period of the options.
In February 2000, we converted from an S corporation to a C corporation for
income tax purposes, effective as of January 1, 2000. As an S corporation, we
paid distributions to our S corporation stockholders in amounts generally
consistent with their allocated share of taxable income.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License................................................... 74.9% 71.4% 71.1%
Maintenance............................................... 25.1 28.6 28.9
------- ------- -------
Total revenues.......................................... 100.0 100.0 100.0
Cost of revenues:
License................................................... 4.4 3.5 2.4
Maintenance............................................... 2.9 2.8 3.3
------- ------- -------
Total cost of revenues.................................. 7.2 6.3 5.7
------- ------- -------
Gross profit................................................ 92.8 93.7 94.3
Operating expenses:
Research and development.................................. 40.9 30.0 22.6
Sales and marketing....................................... 33.0 29.7 28.6
General and administrative................................ 12.6 10.9 8.4
Amortization of deferred stock-based compensation......... 0.7 1.1 22.6
------- ------- -------
Total operating expenses................................ 87.3 71.7 82.2
------- ------- -------
Income from operations...................................... 5.5 22.1 12.1
Interest income............................................. 1.1 0.6 0.5
------- ------- -------
Income before income taxes.................................. 6.6 22.7 12.6
Provision for income taxes.................................. (0.0) (0.5) (0.4)
------- ------- -------
Income before share in affiliated company profit (loss)..... 6.6 22.2 12.2
Share in profit (loss) of affiliated company................ -- 0.1 (0.6)
------- ------- -------
Net income.................................................. 6.6% 22.2% 11.6%
======= ======= =======
</TABLE>
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
REVENUES
TOTAL REVENUES. Total revenues were $4.6 million, $9.1 million and
$18.9 million in 1997, 1998 and 1999, representing increases of 98.8% from 1997
to 1998 and 106.7% from 1998 to 1999.
LICENSE. License revenues were $3.4 million, $6.5 million and $13.4 million
in 1997, 1998 and 1999, representing increases of 89.6% from 1997 to 1998 and
105.9% from 1998 to 1999. The increase in license revenues from 1997 to 1998 and
from 1998 to 1999 was due to greater market acceptance of our products. These
increases were enhanced by the introduction of new versions of our ER/Studio and
Rapid SQL products during 1998 and new versions of our ER/Studio and DBArtisan
products in 1999.
MAINTENANCE. Maintenance revenues were $1.2 million, $2.6 million and $5.4
million in 1997, 1998 and 1999, representing increases of 126.5% from 1997 to
1998 and 108.7% from 1998 to 1999. The increase in maintenance revenues from
1997 to 1998 and from 1998 to 1999 was due to an increase in the number of
maintenance licenses sold.
21
<PAGE>
COST OF REVENUES
LICENSE. Cost of license consists primarily of product media and packaging,
shipping fees, royalties and duplication services. Cost of license was $200,000,
$321,000 and $460,000 in 1997, 1998 and 1999, representing increases of
$121,000, or 60.5%, from 1997 to 1998 and $139,000, or 43.3%, from 1998 to 1999.
The increase in cost of license was due to an increase in licenses sold and to a
lesser extent an increase in royalties paid. Royalties increased $30,000 from
1997 to 1998 and $106,000 from 1998 to 1999. Cost of license represented 5.8%,
4.9% and 3.4% of license revenues in the respective periods. The cost of license
as a percentage of license revenues may vary in the future depending on the mix
of internally developed versus externally licensed products and product
components. The licensing of third-party products or product components could
result in royalty payments and a corresponding increase in cost of license as a
percentage of license revenues.
MAINTENANCE. Cost of maintenance consists of salaries and related costs for
customer support personnel. Cost of maintenance was $132,000, $251,000 and
$621,000 in 1997, 1998 and 1999, representing increases of $119,000, or 90.2%,
from 1997 to 1998 and $370,000 or 147.4%, from 1998 to 1999. The increases in
cost of maintenance was due to an increase in the number of customer support
personnel hired to service our customer base. The total number of employees in
technical support increased from two to fourteen from 1997 to 1999. Cost of
maintenance represented 11.5%, 9.6% and 11.4% of maintenance revenues in the
respective periods. We expect the cost of maintenance to increase in future
periods as we hire more support personnel.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel and related expenses, including payroll, employee
benefits, and equipment and software required to develop, test and enhance
products. Research and development expenses were $1.9 million, $2.7 million and
$4.3 million in 1997, 1998 and 1999, representing increases of $858,000, or
45.8%, from 1997 to 1998 and $1.5 million, or 56.1%, from 1998 to 1999. The
increase in research and development expenses was due to an increase in the
number of employees hired as software and product developers and also due to an
increase in hiring outside contractors to support product development efforts.
Compensation and related expenses, including outside recruiter fees, for
research and development increased $332,000 from 1997 to 1998 and $1,463,000
from 1998 to 1999. Outside contractor fees increased $490,000 from 1997 to 1998
and decreased $186,000 from 1998 to 1999. Research and development expenses
represented 40.9%, 30.0% and 22.6% of total revenues in 1997, 1998 and 1999. We
expect research and development expenses to increase in future periods as
additional development personnel are hired and as we expand our product
development activities.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions earned by sales personnel, recruiting costs, trade show,
travel and other marketing communication costs, such as advertising and
promotion. Sales and marketing expenses were $1.5 million, $2.7 million and $5.4
million in 1997, 1998 and 1999, representing increases of $1.2 million, or
78.7%, from 1997 to 1998 and $2.7 million, or 99.0%, from 1998 to 1999. The
increase in sales and marketing expenses from 1997 to 1998 was primarily due to
increases of $806,000 in salaries and related expenses and $436,000 in marketing
and advertising expenses. The increase in sales and marketing expenses from 1998
to 1999 was primarily due to increases of $1,156,000 in salaries and related
expenses, and $1,140,000 in marketing and advertising expenses. Sales and
marketing expenses represented 33.0%, 29.7% and 28.6% of total revenues in the
respective periods. We plan to invest substantial resources to expand our
selling efforts and to execute marketing programs that build the awareness and
brand equity of our products. As a result, we expect sales and marketing
expenses to increase in future periods.
22
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related expenses and costs related to our
infrastructure expansion. General and administrative expenses were $580,000,
$996,000 and $1.6 million in 1997, 1998 and 1999, representing increases of
$416,000, or 71.7%, from 1997 to 1998 and $581,000, or 58.3%, from 1998 to 1999.
The increase in general and administrative expenses from 1997 to 1998 was due to
costs associated with the expansion of our infrastructure. The increase in
general and administrative expenses from 1998 to 1999 was due primarily to an
increase in salaries and related expenses of $390,000 and increased rents
associated with facilities expansion of $189,000. General and administrative
expenses represented 12.6%, 10.9% and 8.4% of total revenue in the respective
periods. We expect total general and administrative expenses to increase as we
expand our administrative staff and facilities to support larger operations.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. As the deemed fair market
value of our stock exceeded the exercise price of options granted in 1997, 1998
and 1999, we recognized deferred compensation, which we are amortizing over the
vesting periods of the options. The total amount of deferred compensation
recorded from formation through December 31, 1999 is $14,443,000. Future
non-cash amortization based on options granted through December 31, 1999 is
expected to be $5.8 million, $2.8 million, $1.2 million and $255,000 in the
years 2000, 2001, 2002, and 2003. The amortization expense was $34,000, $99,000
and $4,261,000 in 1997, 1998 and 1999.
INTEREST INCOME. Interest income was $52,000, $52,000 and $88,000 in 1997,
1998 and 1999, representing no change from 1997 to 1998 and an increase of
$36,000 from 1998 to 1999. The increase in interest income from 1998 to 1999
resulted from an increase in our average cash balances.
PROVISION FOR INCOME TAXES. Provision for income taxes was $2,000, $45,000
and $82,000 in 1997, 1998 and 1999 representing increases of $43,000 from 1997
to 1998 and $37,000 from 1998 to 1999. The effective income tax rate was 0.7%,
2.2% and 3.5% in 1997, 1998 and 1999. In February 2000, we converted to a C
corporation for income tax purposes, effective January 1, 2000. Accordingly, we
are now subject to regular federal and state income taxes.
SHARE IN PROFIT (LOSS) OF AFFILIATED COMPANY. In September, 1998, we
acquired a 44% interest in Embarcadero Europe Ltd., which became our affiliated
distributor in the United Kingdom and Europe. Our share in profit (loss) of
Embarcadero Europe was $8,000 in 1998 and ($100,000) in 1999. The 1998 share in
profits was immaterial due to the short period of time the entity operated in
that year. In 1999, the affiliate implemented a multi-year business plan, which
emphasized expanding markets and sales growth and which resulted in operational
overhead and costs exceeding revenues.
23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth the unaudited statements of operations data
for the eight quarters in the period ended December 31, 1999, as well as such
data expressed as a percentage of total revenues for the periods indicated. This
data has been derived from our unaudited financial statements that have been
prepared on the same basis as the audited financial statements included in this
prospectus, and, in the opinion of our management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the information when read in conjunction with the financial statements and the
notes thereto included in this prospectus. Our quarterly operating results have
varied substantially in the past and may vary substantially in the future. You
should not draw any conclusions about our future results for any period from the
results of operations for any particular quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
License..................... $1,522 $1,649 $1,611 $1,728 $1,406 $3,163 $4,103 $4,734
Maintenance................. 471 592 687 859 1,032 1,219 1,583 1,612
------ ------ ------ ------ ------ ------ ------ ------
Total revenues............ 1,993 2,241 2,298 2,587 2,438 4,382 5,686 6,346
Cost of revenues:
License..................... 70 84 64 103 89 102 162 107
Maintenance(1).............. 47 55 63 86 108 129 197 187
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues.... 117 139 127 189 197 231 359 294
------ ------ ------ ------ ------ ------ ------ ------
Gross profit.................. 1,876 2,102 2,171 2,398 2,241 4,151 5,327 6,052
Operating expenses:
Research and
development(1)............ 610 709 658 755 667 936 946 1,716
Sales and marketing(1)...... 453 767 673 814 1,035 1,207 1,445 1,701
General and
administrative(1)......... 209 198 195 394 238 277 386 676
Amortization of deferred
stock-based
compensation.............. 27 21 21 30 29 464 1,345 2,423
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses................ 1,299 1,695 1,547 1,993 1,969 2,884 4,122 6,516
------ ------ ------ ------ ------ ------ ------ ------
Income from operations........ 577 407 624 405 272 1,267 1,205 (464)
Interest income............... 10 16 12 14 16 16 20 36
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.... 587 423 636 419 288 1,283 1,225 (428)
Provision for income taxes.... (12) (8) (11) (14) (24) (24) (31) (3)
------ ------ ------ ------ ------ ------ ------ ------
Income before share in
affiliated company profit
(loss)...................... 575 415 625 405 264 1,259 1,194 (431)
Share in profit (loss) of
affiliated company.......... -- -- -- 8 (21) (23) (23) (33)
------ ------ ------ ------ ------ ------ ------ ------
Net income.................... $ 575 $ 415 $ 625 $ 413 $ 243 $1,236 $1,171 $ (464)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ------------------------------
(1) Amounts exclude amortization of deferred stock-based compensation, which is
reported above as a separate operating expense, for the quarters ended:
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Cost of maintenance....... $ -- $ -- $ -- $ -- $ 2 $ 2 $ 2 $ 20
Research and
development............. 17 13 15 18 17 65 256 212
Sales and marketing....... 8 5 4 10 9 7 6 255
General and
administrative.......... 2 3 2 2 1 390 1,081 1,936
------ ------ ------ ------ ------ ------ ------ ------
$ 27 $ 21 $ 21 $ 30 $ 29 $ 464 $1,345 $2,423
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
24
<PAGE>
As a percentage of total revenue:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License..................... 76.4% 73.6% 70.1% 66.8% 57.7% 72.2% 72.2% 74.6%
Maintenance................. 23.6 26.4 29.9 33.2 42.3 27.8 27.8 25.4
------ ------ ------ ------ ------ ------ ------ ------
Total revenues............ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
License..................... 3.5 3.7 2.8 4.0 3.7 2.3 2.8 1.7
Maintenance................. 2.4 2.5 2.7 3.3 4.4 3.0 3.5 2.9
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues.... 5.9 6.2 5.5 7.3 8.1 5.3 6.3 4.6
------ ------ ------ ------ ------ ------ ------ ------
Gross profit.................. 94.1 93.8 94.5 92.7 91.9 94.7 93.7 95.4
Operating expenses:
Research and development.... 30.6 31.6 28.6 29.2 27.4 21.4 16.6 27.0
Sales and marketing......... 22.7 34.2 29.3 31.5 42.4 27.5 25.4 26.8
General and
administrative............ 10.5 8.8 8.5 15.2 9.8 6.3 6.8 10.7
Amortization of deferred
stock-based
compensation.............. 1.4 0.9 0.9 1.2 1.2 10.6 23.7 38.2
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses 65.1 75.6 67.3 77.0 80.8 65.8 72.5 102.7
------ ------ ------ ------ ------ ------ ------ ------
Income from operations........ 29.0 18.2 27.2 15.7 11.1 28.9 21.2 (7.3)
Interest income............... 0.5 0.7 0.5 0.6 0.7 0.4 0.3 0.6
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.... 29.5 18.9 27.7 16.2 11.8 29.3 21.5 (6.7)
Provision for income taxes.... (0.6) (0.4) (0.5) (0.5) (1.0) (0.5) (0.5) (0.1)
------ ------ ------ ------ ------ ------ ------ ------
Income before affiliated
company profit (loss)....... 28.9 18.5 27.2 15.7 10.8 28.7 21.0 (6.8)
Share in profit (loss) of
affiliated company.......... -- -- -- 0.3 (0.9) (0.5) (0.4) (0.5)
------ ------ ------ ------ ------ ------ ------ ------
Net income.................... 28.9% 18.5% 27.2% 16.0% 9.9% 28.2% 20.6% (7.3)%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Our total revenues have generally increased in each period presented. The
increase in license revenues in the quarter ended June 30, 1999 was primarily
due to increased sales of new versions of two of our products, which were
released in March 1999. The increase in maintenance revenues was primarily due
to the recognition of maintenance revenues attributable to our growing installed
customer base. Total operating expenses have increased as we have grown our
infrastructure to support our expanding operations, including expanding our
sales force and increasing our research and development and general and
administrative headcount and related expenses.
We have experienced seasonal patterns in the past and we expect to
experience seasonal patterns in future periods. Specifically, we would expect to
experience stronger demand for our products during the quarter ending
December 31 and weaker demand in the quarter ending March 31 due to the fact
that the budget cycles of our December 31 fiscal year-end customers generally
result in their spending more in the last quarter and less in the first quarter
of the year.
RECENT DEVELOPMENTS
In February 2000, we: (i) sold 253,893 shares of our Series A preferred
stock for an aggregate purchase price of approximately $1.8 million;
(ii) converted from an S corporation to a C corporation for income tax purposes
effective January 1, 2000; and (iii) reincorporated from California to Delaware.
We expect to incur a non-cash charge against earnings attributable to common
stockholders of approximately $1.2 million in the first quarter of 2000 as a
result of the beneficial conversion feature of the Series A preferred stock.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have funded our business to date from cash generated by our operations.
As of December 31, 1999, we had cash of $1.8 million.
Cash provided by operating activities was $192,000, $3.2 million and
$7.2 million in 1997, 1998 and 1999. The increases in 1998 and 1999 were
primarily due to increases in net income, amortization of deferred stock-based
compensation, deferred revenue resulting from additional maintenance contracts
and accrued expenses, offset by increases in accounts receivable resulting from
increased sales.
Cash used in investing activities was $176,000, $305,000 and $882,000 in
1997, 1998 and 1999. Cash used in investing activities was primarily for
purchases of property and equipment in each period. Capital expenditures totaled
$176,000, $297,000 and $882,000 in 1997, 1998 and 1999.
Cash used in financing activities was $231,000, $2.9 million and
$4.5 million in 1997, 1998 and 1999 and is due primarily to distributions to
stockholders as a result of our status as an S corporation for income tax
purposes.
We have a $2,000,000 revolving credit facility with a bank that bears
interest at the prime rate and expires on May 31, 2001. At April 14, 2000, no
balance was outstanding under this facility. The facility is secured by accounts
receivable and other assets. Our credit facility requires us to maintain various
quarterly financial covenants, including convenants related to our tangible net
worth, working capital and total liabilities. We were in compliance with all of
the financial convenants under the facility at April 14, 2000.
We believe that our existing cash balances and cash equivalents and cash
from operations will be sufficient to finance our operations through at least
the next 12 months. If additional financing is needed, there can be no assurance
that such financing will be available to us on commercially reasonable terms, or
at all.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits (rather than four) to define the applicable year. We believe that all
of our material systems are substantially year 2000 compliant. To our knowledge,
we have not experienced any significant problems as a result of year 2000
issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities and will be adopted
in the year 2001. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. We do not expect the adoption of this standard to have a material impact
on our results of operations, financial positions or cash flows.
In December 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-9, modification of SOP 97-2, "Software Revenue
Recognition with Respect to Certain Transactions." SOP 98-9 will be effective
for transactions that are entered into in fiscal years beginning after
March 15, 1999. Retroactive application is prohibited. We do not expect the
adoption of this standard to have a material impact on our results of
operations, financial positions or cash flows.
FOREIGN EXCHANGE RISK
As sales to Embarcadero Europe increase, we will be exposed to greater
volatility in fluctuations of the pound sterling. In the event we exercise our
option to acquire Embarcadero Europe, we will be exposed to volatility in
fluctuations of other currencies as well. To date, we have not used hedging
contracts to hedge our foreign-currency fluctuation risks. We will assess the
need to utilize financial instruments to hedge currency exposures on an ongoing
basis. We also do not use derivative financial instruments for speculative
trading purposes.
26
<PAGE>
BUSINESS
OVERVIEW
We provide software products that enable organizations to build and manage
e-business applications and their underlying databases. Our suite of products
allows customers to manage the database life cycle, which is the process of
creating, deploying and enhancing databases in response to evolving business and
software application requirements. By simplifying the management of the database
life cycle, our products allow organizations to rapidly develop and ensure the
availability of critical e-business applications. During 1999, we issued more
than 12,600 new user licenses and received more than 8,800 maintenance renewals.
We have thousands of customers across a range of industries, including
technology, telecommunications and financial services.
INDUSTRY BACKGROUND
In today's highly competitive markets, a growing number of organizations are
using the Internet to conduct business electronically. This e-business model has
led to the proliferation of new Internet-based, or e-business, software
applications. Businesses are becoming increasingly reliant on these e-business
applications to run critical parts of their operations and to collect important
customer and market information. These applications will continue to gain in
strategic importance as organizations seek to access and store an increasing
volume of information while providing access to that information to a greater
number of users.
While the Internet has fundamentally changed how organizations gather,
manage and distribute information, it has also presented a new set of business
and technology challenges. Given limited IT resources and intense time-to-market
pressures, organizations must ensure that the right software applications are
designed and built on time and within budget. Organizations must ensure that
these applications are up-and-running with optimal performance. Downtime--either
scheduled or unplanned--must be kept to an absolute minimum. The Internet allows
customers to quickly evaluate and switch to competing products or services,
thereby increasing the need for successful application performance. A poorly
designed or poorly performing application can have a significant operational and
financial impact, such as poor customer service, a reduction in brand equity or
significant lost revenue.
Software applications for e-business are designed to provide reliable
storage and flexible access to critical business information. Databases, which
are a proven technology for storing and accessing information, provide the
essential infrastructure of e-business applications. Dramatic improvements in
the cost and performance of computer hardware and networking technologies are
accelerating the proliferation of databases supporting e-business strategies.
The proliferation of software applications from Internet and e-business
initiatives has increased the demands on databases as organizations face
numerous business and technology challenges, including storing massive amounts
of customer data, handling increasing numbers of users and utilizing information
from disparate systems.
Historically, organizations have relied on a combination of highly trained
professionals and an assortment of software tools to manage their databases. As
e-business applications have proliferated, so have the demands placed on IT
professionals who must ensure the availability and performance of the underlying
databases. Many organizations struggle to keep pace with the simultaneous
pressures to build more applications, support more users and manage more data
within increasingly complex computing environments. At the same time, these
organizations are finding it increasingly difficult to staff database management
positions due to the limited supply of qualified IT professionals. As a result,
experienced database administrators and developers are being asked to do more in
less time and less experienced IT personnel are being asked to become more
proficient at a faster rate. This strain on IT professionals is compounded by
the growing complexity of IT systems and the need to be proficient with
different types of databases.
27
<PAGE>
Traditional software solutions for managing databases do not adequately
address the challenges of today's e-business environment. Many of these
solutions are designed for expert database administrators and developers and are
therefore too complex for less experienced IT personnel. This complexity often
prevents users of these solutions from becoming proficient without extensive
training. Also, these traditional solutions do not lend themselves to rapid
deployment, often requiring a lengthy installation process and extensive
configuration. These solutions can end up costing more than the database
software they are designed to manage. In many cases, traditional database
management solutions operate only on a single type of database, such as Oracle.
Since businesses often use databases from several different vendors to support
their e-business applications, IT professionals are forced to use a variety of
database-specific products to manage this heterogeneous environment. These
problems with traditional software solutions typically increase the time between
conception and implementation, making it difficult for organizations to rapidly
develop applications to meet changing e-business objectives.
Most traditional solutions also fail to adequately address the database life
cycle. Databases must first be designed and created, then frequently redesigned
and enhanced to support changing applications. This database life cycle includes
three phases: design, development and administration. The design phase focuses
on translating business requirements into technical specifications. The
development phase translates these technical specifications into software
applications. The administration phase involves concurrently managing these
software applications while ensuring their availability, performance, security
and recoverability. As business needs change, the process starts over again with
the need for new or enhanced applications. Most traditional solutions require
users to employ different software products with unique user interfaces and
capabilities to address each phase of the database life cycle.
As a result, we believe that there is a significant opportunity for a
database management solution that meets the demands of the e-business
environment. This solution should provide the following benefits:
- accelerate time-to-market by allowing users to produce effective work
results sooner;
- enhance the reliability and availability required of e-business
applications;
- alleviate the strain on IT resources, especially database professionals;
- provide a suite of solutions to manage the database life cycle; and
- manage an increasingly diversified and distributed database
infrastructure.
28
<PAGE>
THE EMBARCADERO SOLUTION
We provide software products that enable organizations to build and manage
e-business applications and their underlying databases. Our suite of software
solutions is designed to:
DEVELOP AND SUPPORT E-BUSINESS APPLICATIONS. Our solution allows customers
to rapidly develop applications that meet the rigorous requirements of today's
e-business environment. Our suite of products enables customers to manage the
phases of the database life cycle from a common user interface, which reduces
the training required to learn and use our products. As a result, we believe
that users can more efficiently create, maintain and enhance e-business
applications with our integrated suite of products. Our design products allow
customers to reduce the time between conception and implementation of their
e-business applications. Our development products allow companies to create and
test complex application code from an easy-to-use graphical user interface. Our
administration products ensure the performance, security, availability and
recoverability of e-business applications across a diverse mix of underlying
databases.
INCREASE UTILIZATION OF EXISTING TECHNOLOGY. Our products enable
organizations to more effectively utilize their existing database
infrastructure. Most large organizations employ a mix of databases to support
different business applications. We believe our suite of products, with its
multi-vendor support, provides the only integrated solution for designing,
developing and administering a variety of databases.
LEVERAGE CONSTRAINED IT RESOURCES. Our products enable organizations to
enhance the productivity of IT professionals in managing the database life
cycle. Our products increase the productivity of both experienced database
administrators and less experienced IT professionals through the intuitive user
interface used across our entire product line. This reduces the amount of
training needed to begin using our software and simplifies the complexity of
database programming. Our products also allow organizations to replace numerous,
costly point or database-specific solutions with an integrated solution which
addresses each phase of the database life cycle.
FACILITATE RAPID ADOPTION. From our inception, we have strived to make it
easy for our customers to discover, try, purchase and use our products. We
design our products to leverage the Internet by promoting downloaded trial
versions, enabling the purchase of our products, providing upgrades and offering
maintenance directly from our web site. We also design our products to install
within minutes with minimal configuration and to require limited on-going
maintenance. Customers can rapidly implement and utilize our products in
designing, developing and managing the databases that support their critical
applications. We believe these factors give our products a competitive advantage
relative to most traditional solutions.
GROWTH STRATEGY
Our objective is to become the leading provider of software solutions that
enable organizations to build and manage e-business applications and their
underlying databases. The key elements of our strategy are to:
EXPLOIT THE GROWING DEVELOPMENT OF E-BUSINESS APPLICATIONS. We plan to
continue to design our products for, and market our products to, organizations
implementing e-business applications. We believe that the growth and strategic
importance of the Internet is significantly increasing the development of new
software applications to conduct e-business. We believe that many of our
existing customers have increased their purchases of our products to support
their e-business applications. We also believe new Internet-based companies are
purchasing our products to quickly and reliably introduce new e-business
applications. During 1999, many Internet-based companies became our customers,
including CarsDirect.com, E*TRADE, eStamp, GoTo.com, InterVU, NetZero and
Yahoo!. We intend to increase our sales to both existing and new customers who
are developing and deploying e-business applications.
29
<PAGE>
EXTEND PRODUCT LEADERSHIP. We believe that our suite of products provides
the leading software solution to manage the database life cycle. Our products
share a core technology architecture, which we believe provides significant
advantages over competing products. This architecture reduces the cost of
product development, accelerates the time-to-market for new products and enables
us to maintain a common interface across the entire product suite. Our current
products already feature a number of important technologies for facilitating the
sharing and publication of applications and information over the Internet,
including Java, HTML and XML. We plan to build upon our database and Internet
technologies to enhance and expand our product offerings for e-business
initiatives and incorporate new technologies as they are introduced to the
market. We may seek to enhance our product leadership through the licensing or
acquisition of complementary technologies or businesses.
LEVERAGE OUR INSTALLED CUSTOMER BASE. We believe that our installed
customer base represents a significant revenue opportunity. During 1999, we
issued over 12,600 new user licenses and received maintenance renewals for over
8,800 users. Most of our customers initially purchase only one or two of our
products for a limited number of users in specific business locations. We
believe that we can sell more deeply into our installed customer base by selling
additional licenses of purchased products, by cross-selling other products and
by expanding departmental deployments into enterprise-wide implementations.
EXPAND OUR DIRECT SALES AND MARKETING EFFORTS. We plan to increase sales by
expanding our telesales efforts and building a field sales organization. Our
direct telesales force reduces the need for remote sales offices and customer
site visits by effectively using the telephone and Internet for product
demonstrations and product sales. We believe this direct telesales approach
allows us to respond more rapidly to customer needs while maintaining an
efficient, low-cost sales model. To complement our telesales efforts, we are
building a focused field sales organization to further penetrate and better
manage major accounts in the United States. In particular, we believe that a
field sales organization will facilitate enterprise-wide implementations of our
products by new and existing customers. We also plan to direct marketing efforts
at IT management, focusing on the value that our products can create for
organizations when developing, deploying and maintaining critical e-business
applications.
EXPAND OUR INTERNATIONAL DISTRIBUTION. We plan to expand our international
distribution capabilities. Although our products are sold worldwide, revenues
outside of North America represented only 10.9% of total revenues in 1999 and
were generated primarily by our affiliated distributor, Embarcadero Europe Ltd.
We believe there is a significant opportunity to expand sales of our software
products internationally. We have recently entered into an agreement with a
distributor covering Japan. We intend to increase our international distribution
by expanding direct selling efforts through Embarcadero Europe, initiating
distribution in Japan and developing stronger relationships with other
international distributors.
30
<PAGE>
PRODUCTS
Our suite of products enables organizations to design, develop and
administer databases which support e-business applications. Our products are
designed to work individually and together to provide rapid development and
optimal performance of applications that are critical as enterprises deploy and
extend their information technology infrastructure. We can bundle our products
to offer an integrated database life cycle solution for a particular database,
such as Oracle, or to support a multi-vendor database environment, such as
Oracle, Microsoft SQL Server and IBM DB2 UDB databases running simultaneously.
Our products and their functionality are summarized below:
<TABLE>
DATABASE LIFE
CYCLE PHASE
PRODUCT DESCRIPTION
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Design ER/Studio Captures business requirements and translates them into
database applications from a graphical user interface
Development Rapid SQL Streamlines the process of developing complex database
code in a graphical environment
Administration DBArtisan Ensures the availability, performance, security and
recoverability of applications through the management of
a mix of database types from a single graphical console
DB Artisan Change Provides software configuration management for databases
Manager by storing accurate records of database changes over
time
</TABLE>
Our products run on personal computers using Windows operating systems and
manage databases that run in Unix, Windows NT and Linux environments. Our
products support each of the most widely-used database platforms, including
Oracle, Microsoft SQL Server, IBM DB2 Universal Database and Sybase.
DATABASE DESIGN
ER/STUDIO. ER/Studio addresses the design phase of the database life cycle.
Designing a software application begins with a detailed understanding of both
the business requirements addressed by the application and their technical
ramifications. By carefully creating a blueprint of business requirements for an
application, organizations are more likely to successfully build and rapidly
deploy reliable applications.
ER/Studio automates the process of capturing business requirements for an
application and its underlying database. With its intuitive graphical user
interface, ER/Studio allows users to design databases using pictures or objects
and reduces the need for users to know and write software code. ER/Studio
automatically converts these objects into database code, which users can easily
review and edit with simple mouse commands. In addition to designing new
applications, customers can use ER/Studio to maintain, enhance and integrate
existing applications. They can use ER/Studio's capabilities to reverse-engineer
existing applications into easily understood diagrams. Once captured in a design
format, users can easily annotate the intended functions of an application's
elements.
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DATABASE DEVELOPMENT
RAPID SQL. Rapid SQL addresses the development phase of the database life
cycle. A large portion of the software technology underlying an application is
database code that implements business requirements. For example, database code
required for e-commerce sites includes routines that check for the availability
of inventory or that validate a purchaser's credit card number. Problems in
writing complex database code can lead to substantial delays or even failure of
the development project.
Rapid SQL offers a rich graphical environment that streamlines the process
of developing complex database code. Rapid SQL allows users to write database
code more efficiently by using templates that reduce the need for manual coding.
It also streamlines the testing process by automatically identifying programming
errors. With Rapid SQL, customers can improve their productivity, cut
development times and reduce programming errors.
DEBUGGER. Debugger is an add-on product to both DBArtisan and Rapid SQL
that extends their functionality to help troubleshoot database-programming
errors. Developers often find it difficult to locate the source of programming
errors, especially with large and complex database code. Generally, the hardest
part of fixing an error is finding its underlying cause. Debugger is designed to
simplify the process of troubleshooting errors by leading users through the
execution of code in order to identify the source of errors quickly.
DATABASE ADMINISTRATION
DBARTISAN. DBArtisan addresses the administration phase of the database
life cycle. After launching e-business applications, organizations rely on IT
professionals to maintain the performance, availability, security and
recoverability of the underlying databases. Database administration requires the
constant attention of IT staff. Typical management tasks include backing up the
information stored in a database, analyzing database integrity, controlling
access to customer accounts and information, upgrading to new versions of
databases, testing proposed changes to a database before implementing them and
monitoring the availability of servers. Many of these projects can take hours,
even days, to complete using traditional solutions.
DBArtisan is designed to simplify database administration and facilitate
day-to-day database management. Its easy-to-use graphical console permits the
simultaneous administration of several databases and automates many tedious
administrative tasks. For example, using DBArtisan, IT professionals can copy
code from one database to another without manually entering any code, review
graphs that indicate how much space is available in various databases and
rapidly identify the source of a problem with an application. These capabilities
can increase users' productivity and reduce human error, which can lead to
increased application availability and performance.
DBARTISAN CHANGE MANAGER. DBArtisan Change Manager is a companion product
to DBArtisan that is designed to extend its basic functionality to provide
software configuration management for databases. DBArtisan Change Manager
automates the tedious and error-prone process of capturing and managing complete
definitions of databases, known as database schemas. It allows users to capture
and archive objects comprising a database application and promotes the
recoverability of databases by storing accurate records of database changes over
time. For example, an Internet-based financial services company used DBArtisan
Change Manager to safely move database code changes from development to test to
production and shorten system downtime for database changes. As a result, the
customer experienced fewer planned and unplanned outages of its web site.
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CUSTOMERS
We have thousands of customers representing a wide, cross-industry spectrum
of industrial corporations, service companies, financial institutions,
government agencies and technology companies. During 1999, we issued over 12,600
new user licenses and received maintenance renewals for over 8,800 users
worldwide.
A representative sample of companies that have purchased at least $75,000 in
software licenses and maintenance since January 1, 1997 includes:
TECHNOLOGY
- - America Online
- - Hewlett-Packard
- - Intel
- - IBM
- - Micron Technology
- - UUNet
TELECOMMUNICATIONS
- - AT&T
- - Bell Mobility
- - BellSouth
- - Excel Communications
- - MCI WorldCom
- - U.S. West
- - Williams Communications
ENERGY
- - Bonneville Power
- - PG&E
- - Sonat Energy Services
- - TransCanada Pipelines
FINANCIAL SERVICES
- - Aetna
- - Banc One
- - Bank of America
- - Bear Stearns
- - CNA Financial
- - Donaldson, Lufkin & Jenrette
- - Dun & Bradstreet
- - Fidelity
- - FleetBoston Financial
- - GE Capital
- - Jackson National Life Insurance
- - John Hancock
- - MBNA
- - Merrill Lynch
- - Morgan Stanley Dean Witter
- - Northwestern Mutual
- - Providian Financial
- - Prudential
- - Reuters
- - State Street Global Advisors
- - Strong Capital Management
SERVICES
- - Andersen Consulting
- - Computer Sciences Corporation
- - EDS
- - Frank Russell Company
- - Greyhound Lines
- - Nielsen Media Research
OTHER
- - 3M
- - Anheuser-Busch
- - Blue Cross and Blue Shield
- - Kaiser Foundation Health Plan
- - NBC
- - Owens-Illinois
- - Sandia National Laboratories
- - Sony
- - State of Washington
- - Walt Disney
CASE STUDIES
The following case studies have been chosen to illustrate how some
well-known companies are using our products to address different phases of the
database life cycle.
NORTHROP GRUMMAN
Northrop Grumman is a leading defense electronics, system integration and
information technology company that provides an array of world-class
technologies and core competencies to military and commercial markets.
BUSINESS CHALLENGE. Northrop Grumman Integrated Systems and Aerostructures
Sector utilizes large database applications to support the manufacturing of
airplanes. For example, Northrop Grumman's TRACAT management system tracks
problems that arise during the production of an aircraft and their resolution.
The critical nature of applications such as the TRACAT system makes it crucial
that the database development team at Northrop Grumman Integrated Systems and
Aerostructures Sector build and maintain databases that can support vast amounts
of data and users while maintaining data integrity.
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SOLUTION. Northrop Grumman Integrated Systems and Aerostructures Sector
selected ER/Studio as its solution for the design and maintenance of databases
that run critical applications. Utilizing ER/ Studio, Northrop Grumman
Integrated Systems and Aerostructures Sector's database developers have been
able to create and maintain very large and scalable databases. ER/Studio's
ability to generate a visual picture of the multiple and complex relationships
among Northrop Grumman ISA's databases allows its database administrators to
easily build applications and extend their functionality. Northrop Grumman
Integrated Systems and Aerostructures Sector's database administrators have also
found that ER/Studio can help in other difficult, error-prone database
management tasks, such as the comparing, synchronizing and moving of a database,
which is known as a database migration. According to Northrop Grumman Integrated
Systems and Aerostructures Sector's IT staff, ER/Studio allowed one programmer
to accomplish a difficult database migration in four days, a task which might
have taken multiple developers weeks otherwise to complete.
CYBERGOLD
CyberGold is an online incentives marketing company with an Internet
community estimated by CyberGold to have approximately 4.5 million members.
BUSINESS CHALLENGE. To attract and retain members, CyberGold constantly
introduces new promotions, content and features to its web sites. The
implementation of these enhancements can require complex database programming,
which CyberGold needs to accomplish as quickly as possible with minimal errors.
These programming changes are critical to CyberGold because most actions a
consumer takes in interacting with CyberGold's web site, including signing up,
logging in, earning incentive rewards and purchasing an item, involve database
access and updates.
SOLUTION. To support the demands of its constantly changing web site,
CyberGold selected Rapid SQL for the development of its web sites' underlying
databases. CyberGold believes that Rapid SQL simplifies the development process
because it provides an easy-to-use development environment capable of
automatically generating code necessary to accomplish complex programming tasks
with optimal results. According to CyberGold's IT staff, Rapid SQL has led to
increased productivity, shorter development cycles and improved software
quality. With Rapid SQL, CyberGold IT professionals can more quickly write
complex database programming instructions that deliver valuable information and
reports to management, enabling them to make more timely business decisions.
MCI WORLDCOM
MCI WorldCom is a global leader in communications services with operations
in more than 65 countries.
BUSINESS CHALLENGE. The growth of MCI WorldCom's business largely depends
on the success of its sales force. A key tool for its sales organization is its
Forecast Information Revenue Sales Tool application, which generates, tracks and
reports on sales activities. The application must be available continuously
because any downtime could result in poor customer service and erroneous
customer information provided to decision makers. MCI WorldCom must ensure that
the application and the underlying databases are designed effectively, developed
rapidly and managed to provide optimal availability and performance.
SOLUTION. MCI WorldCom chose our suite of database design, development and
administrative products to manage the life cycle of the database underlying one
of its most critical applications. According to MCI WorldCom's IT staff, the
easy-to-use integrated product suite of ER/Studio, Rapid SQL and DBArtisan lets
them move from design to production in a fraction of the time that it took prior
to adopting our solution. Additionally, the improved ability to identify
performance bottlenecks and database errors using our products ensures that the
application will be continuously available to the sales force, once it is in
production. Also, by having its designers, developers and database
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administrators standardize on a solution with a consistent user interface, MCI
WorldCom has experienced enhanced communication, collaboration and productivity
associated with its development projects.
SALES AND MARKETING
NORTH AMERICAN SALES. We sell our software in the U.S. and Canada primarily
through our direct telesales force, which has allowed us to build a broad
customer base efficiently. By leveraging the effective use of the telephone and
the Internet for product evaluations and sales, our direct telesales approach
allows us to respond more rapidly to customer needs while maintaining an
efficient, low-cost sales model. We intend to continue to build our telesales
organization. In addition, we plan to complement our direct telesales effort
with a focused field sales organization that will target major accounts. The
field sales organization is intended to help us further penetrate and better
manage large customer accounts and to drive larger sales transactions and
enterprise-wide implementation of our products. Currently, sales cycles range
between 2-3 months for departmental sales and up to 12 months for large-scale
implementations.
INTERNATIONAL SALES. We sell our software internationally primarily through
distributors and plan to expand our global distribution capabilities.
International sales represented 10.9% of our total revenues in 1999 and were
generated primarily by our affiliated distributor, Embarcadero Europe Ltd.,
which manages the sales, marketing, distribution and support of our products in
Europe, the Middle East and Africa. In other overseas markets, we intend to sell
our products through independent distributors, which will generally have
non-exclusive distribution rights for their respective territories. We have
entered into a three-year agreement with a Japanese distributor with exclusive
rights to sell our products to end users in Japan. Our international
distributors perform sales, marketing and technical support functions for their
local customers.
MARKETING. Our marketing efforts focus on generating sales leads and
building brand awareness about our products. Our marketing efforts include
advertising in trade journals, promoting a strong web presence, maintaining an
active public relations program, attending user group conferences, participating
in major database trade shows and forging strategic alliances with other
technology companies. We plan to increase our marketing efforts directed at IT
management to facilitate wider deployments of our products. In addition, we may
enter into strategic marketing relationships with other companies whose business
goals complement our own.
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CUSTOMER SERVICE AND SUPPORT
CUSTOMER SERVICE. Our customer service department handles customer
inquiries about product licensing. Customer service representatives activate
customer licenses and are responsible for managing maintenance renewals. We team
customer service representatives with salespeople in order to provide a
coordinated approach to customer sales and service requirements.
TECHNICAL SUPPORT. Customers receive technical support for the first
60 days after licensing a product. In addition, customers may extend the period
of technical support by purchasing maintenance contracts. We offer optional
annual service contracts to customers that entitle them to receive all product
upgrades and technical support. Our standard maintenance contract covers a
12-month period, is payable in advance and is renewable at the customer's
option.
Technical support is provided for North American customers through our
offices in San Francisco, California. We currently offer technical support from
6 a.m. to 6 p.m., Pacific Time, Monday through Friday. In the future, we plan to
offer premium service plans providing for around-the-clock service for an
additional fee. We deliver technical support by email, fax or telephone.
Depending on the product involved and the nature of the inquiry, a technical
support dispatcher assigns and routes cases to the appropriate technical support
engineer. As sales of our products grow, we plan to hire more support personnel.
Internationally, our distributors are generally responsible for providing
customer service and technical support.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused primarily on enhancing our
core technology and existing products, and developing additional applications
that enable organizations to manage the database life cycle. Members of our
research and development group have extensive experience in databases, database
management software, enterprise applications and Internet technologies. We
organize our research and development staff into discrete engineering teams
responsible for specific products in each phase of the database life cycle. Our
core engineering team is responsible for enhancing our current database
administration products and exploring new product technologies for the
administration phase of the database life cycle. Separate engineering teams
focus on our database design and database development product lines. We
supplement our internal software development efforts by using outside
contractors when we believe they can perform discrete programming tasks more
effectively. In addition, we are establishing relationships with contractors
that may undertake product development efforts in exchange for fees and/or
royalties.
Our software development approach consists of a well-defined methodology
that provides guidelines for planning, controlling and implementing projects. We
employ a daily-build process that increases the collaboration, communication and
accountability of all software development team members individually and
collectively. Because we build on a core architecture, our products are tightly
integrated, which helps to reduce the number of application development errors.
Our engineering teams work closely with our quality assurance organization in an
effort to ensure quality product releases. As each product development program
approaches release, the software undergoes rigorous, iterative testing, bug
fixing, code stabilization and documentation.
Our future success depends largely on our ability to continue enhancing
existing products and to develop new ones that reinforce our competitive
position and our value proposition to customers. We have made and will continue
to make substantial financial and organizational investments in research and
development. Extensive product development input is obtained through customer
feedback, by monitoring evolving user requirements and by evaluating competing
products. We have instituted a
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product marketing function that is responsible for translating customer
requirements and market opportunities into product development initiatives that
our engineering teams can execute.
PROPRIETARY RIGHTS
We rely on copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to establish and protect our proprietary
rights. We also enter into confidentiality agreements with employees and
consultants and attempt to restrict access to proprietary information on a
need-to-know basis. Despite such precautions, unauthorized third parties may be
able to copy aspects of our products or obtain and use information that we
consider as proprietary.
We license our software products primarily under shrink-wrap licenses
included as part of product packaging. Shrink-wrap licenses are not negotiated
with or signed by individual licensees and purport to take effect upon the
opening of the product package or downloading of the product from the Internet.
These measures afford only limited protection. Policing unauthorized use of our
products is difficult and we are unable to determine the extent to which piracy
of our software exists. In addition, the laws of some foreign countries do not
protect our proprietary rights as well as United States laws.
We may have to enter into litigation to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others with respect to our rights. Litigation is generally very expensive and
can divert the attention of management from daily operations. Accordingly,
intellectual property litigation could materially adversely affect our business
and operating results.
We are not aware of any case in which we are infringing the proprietary
rights of others. However, third parties may bring infringement claims against
us. Any such claim is likely to be time consuming and costly to defend, could
cause product delays and could force us to enter into unfavorable royalty or
license agreements with third parties. A successful infringement claim against
us could require us to enter into a license or royalty agreement with the
claimant or develop alternative technology. However, we may not be able to
negotiate favorable license or royalty agreements, if any, in connection with
such claims and we may fail to develop alternative technology on a timely basis.
Accordingly, a successful product infringement claim against us could materially
adversely affect our business and operating results.
COMPETITION
The market for our products is highly competitive, dynamic and subject to
rapidly changing technology. We compete primarily against other providers of
database management utilities, which include Computer Associates, Quest Software
and other independent software vendors.
Our products also compete with products offered by the manufacturers of the
database services with which they are compatible, including Oracle, Microsoft
and IBM. Some of these competing products are provided at no charge to their
customers. We expect that companies such as Oracle, Microsoft and IBM will
continue to develop and incorporate into their products applications which
compete with our products and may take advantage of their substantial financial,
technical, marketing and distribution resources in those efforts.
We presently compete on numerous factors, including product functionality
and heterogeneity, reliability, ease-of-use, performance, scalability,
time-to-market, customer support and total cost of ownership. We believe that we
currently compete favorably overall. However, the market for our products is
dynamic and we may not compete successfully in the future with respect to one or
more of these factors.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing and other resources and greater name
recognition than we do. They also may be able to respond more quickly than we
can to changes in technology or customer requirements. Competition
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could seriously impede our ability to sell additional products on acceptable
terms. Our competitors may:
- develop and market new technologies that render our products obsolete,
unmarketable or otherwise less competitive;
- make strategic acquisitions or establish cooperative relationships among
themselves or with other companies, thereby enhancing the functionality of
their products or increasing their operating margins; or
- establish or strengthen cooperative relationships with channel or
strategic partners which limit our ability to sell or to co-market
products through these channels.
EMPLOYEES
As of December 31, 1999, we had 105 employees, 43 of whom were engaged in
research and development, 36 in sales and marketing, 14 in customer service and
support and 12 in finance and administration. Our future performance depends
largely on our continuing ability to attract, train and retain highly qualified
technical, sales, service, marketing and managerial personnel. None of our
employees is represented by a collective bargaining agreement. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
FACILITIES
Our principal offices currently occupy approximately 14,500 square feet in
San Francisco, California pursuant to leases that expire in June 2004. In
addition, we maintain a research and development facility of approximately 4,600
square feet in Pacific Grove, California pursuant to leases that expire in
August 2002 and December 2003.
We believe that our facilities are adequate for the next six to nine months
and that, if required, we can lease suitable additional space on commercially
acceptable terms to accommodate expansion.
LEGAL PROCEEDINGS
We are not currently a party to any material pending legal proceedings.
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MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth information regarding our officers and
directors as of March 27, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ---------- --------
<S> <C> <C>
EXECUTIVE OFFICERS
Stephen R. Wong........................ 40 Chairman
Ellen W. Taylor........................ 62 President, Chief Executive Officer and
Director
Raj P. Sabhlok......................... 36 Senior Vice President of Finance and
Corporate Development
Walter F. Scott III.................... 32 Vice President of Sales
Coleen J. Weeks........................ 39 Vice President of Marketing
OTHER OFFICERS
Susan A. Fleck......................... 56 Vice President of Customer Care
Nigel C. Myers......................... 32 Vice President of Product Development
Jeffrey Newman......................... 45 Vice President of Product Development
DIRECTORS
Frank J. Polestra(1)(2)................ 74 Director
Dennis J. Wong(2)...................... 42 Director
Michael J. Roberts(1).................. 42 Director
</TABLE>
- ------------------------
(1) Member of the audit committee
(2) Member of the compensation committee
EXECUTIVE OFFICERS
STEPHEN WONG is a co-founder of Embarcadero and has served as our
Chairman since July 1993. From July 1993 until October 1999, Mr. Wong also
served as our Chief Executive Officer. From May 1985 to May 1990, Mr. Wong
served as an associate, and subsequently as a partner, of Montgomery Medical
Ventures, a venture capital firm, where he specialized in technology
transfer and early stage investments. Mr. Wong holds his A.B. from Harvard
College and an M.B.A. from the Harvard Business School. Mr. Wong and Dennis
Wong, a member of our board of directors, are brothers.
ELLEN TAYLOR has served as our President and Chief Executive Officer
since October 1999. From December 1998 until October 1999, she served as
Vice President for Worldwide Marketing at Weather Services
International, Inc., a division of Litton Industries. From June 1998 until
September 1998, she served as Senior Vice President of PC DOCS, a document
and knowledge management company. From May 1996 until December 1997, Ms.
Taylor served as Chief Operating Officer of Wright Strategies, Inc, a
personal digital assistant software company. From May 1991 until
October 1995, Ms. Taylor served as Vice President and General Manager of the
Norton Utilities Product Group of Symantec Corp., a software company.
Ms. Taylor holds a B.A. degree from San Diego State University.
RAJ SABHLOK has served as our Senior Vice President of Finance and
Corporate Development since January 2000. From March 1995 until
December 1999, he served as the Director of Business Development of BMC
Software, Inc., a software company. From February 1988 until February 1995,
Mr. Sabhlok held a number of technical, marketing and sales management
positions with
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The Santa Cruz Operation, Inc., a UNIX software development company.
Mr. Sabhlok holds a B.A. degree in Mathematics from the University of
California, Santa Cruz.
WALTER SCOTT III has served as our Vice President of Sales since
January 2000. From April 1994 to January 2000, he worked in several
executive sales positions including Senior Program Director of Americas
Marketing, Sales Manager of Growth Accounts and Senior Sales Representative
at BMC Software, Inc. Mr. Scott holds a B.A. degree in Marketing and an
M.B.A. degree from the University of Maine.
COLEEN WEEKS is a co-founder of Embarcadero and has served as our Vice
President of Marketing since August 1999. From January 1995 through
July 1999, Ms. Weeks served as our Vice President of Sales and Marketing and
from July 1993 through December 1994 as our Director of Marketing.
Previously, she was Director of Marketing for QCR Associates, a
pharmaceutical marketing research firm, from November 1988 until July 1993.
Ms. Weeks holds a B.A. degree from Georgia State University.
OTHER OFFICERS
SUSAN FLECK has served as our Vice President of Customer Care since
February 2000. From September 1997 until January 2000, Ms. Fleck served as
Vice President of Engineering Services responsible for quality assurance,
quality engineering, customer support, documentation, training and release
management for New Era of Networks, Inc., a software company. From
April 1991 to September 1996, she served as Director of Quality Assurance at
Attachmate Corporation, an enterprise information access and management
software and services company. Ms. Fleck holds a B.S. degree in Computer
Science from Kean College.
NIGEL MYERS is a co-founder of Embarcadero has served as our Vice
President of Product Development overseeing our San Francisco product
development group since July 1993. Mr. Myers holds a B.S. degree from Pace
University.
JEFFREY NEWMAN has served as our Vice President of Product Development
overseeing our Pacific Grove product development group since August 1999.
From November 1988 to July 1999, Mr. Newman served as co-founder and
President of NewCon Software Inc., a software consulting firm. From 1982 to
October 1988, he served as a senior software engineer with Digital
Research Inc., an operating systems software company.
DIRECTORS
FRANK POLESTRA has served as a director since November 1999. He has been
the Managing Director of Ascent Venture Partners since March 1999. From 1980
to February 1999, Mr. Polestra served as President of Pioneer Capital Corp.,
a venture capital firm. Mr. Polestra holds Ph.D. and M.S. degrees in
physical chemistry from Yale University and a Doctor of Chemistry degree
from the University of Naples, Italy.
DENNIS WONG has served as a director since July 1993. He is currently
the Managing Director of SPI Holdings, a real estate investment company
which he formed in September 1995. He is also the President of Prism Capital
Corp., an investment company which he formed in 1989. Mr. Wong holds an A.B.
degree from Harvard College and an M.B.A. degree from the Harvard Business
School. Mr. Wong is a trustee of the San Francisco Museum of Modern Art.
Mr. Wong and Stephen Wong, our Chairman, are brothers.
MICHAEL ROBERTS has served as a director since March 2000. He has been
Senior Lecturer and Executive Director of Entrepreneurial Studies at Harvard
Business School since June 1997. From 1995 through May 1997, Mr. Roberts
served as an independent consultant to new ventures primarily in the health
care services, wireless communications, automobile services and restaurant
industries. Mr. Roberts received his A.B. degree from Harvard College, and
an M.B.A. and Ph.D. degrees from Harvard Business School.
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STRATEGIC ADVISOR
ARTHUR ROCK has served as a strategic advisor to us since February 2000. Mr.
Rock has been Principal of Arthur Rock & Co., a venture capital firm, since
1969. He was a director of Intel Corporation from its founding in 1968 until
1999 and held positions of Chairman of the Executive Committee and lead Director
of the Board of Directors. Mr. Rock has been a director of AirTouch
Communications, Inc. and a trustee of the California Institute of Technology and
serves as a director of Echelon Corporation. Mr. Rock received a B.S. degree in
Political Science and Finance from Syracuse University and an M.B.A. degree from
Harvard University.
CLASSIFIED BOARD OF DIRECTORS
Our bylaws provide that all directors will be part of a classified board of
directors, consisting of three classes of directors, each serving staggered
three-year terms. As a result, only a portion of our directors will be elected
each year. We will elect directors to initial staggered terms prior to the
closing of this offering. See "Description of Capital Stock--Effect of Certain
Provisions of Our Certificate of Incorporation, Bylaws and the Delaware
Anti-Takeover Statute."
BOARD COMMITTEES
We have established an audit committee and a compensation committee. Frank
Polestra and Michael Roberts are currently members of the audit committee. We
intend to appoint another member to our Board and to the audit committee within
three months of the closing of this offering. The audit committee makes
recommendations to the board of directors regarding the selection of independent
auditors, reviews the scope of audit and other services by our independent
auditors, reviews the accounting principles and auditing practices and
procedures to be used for our financial statements and reviews the results of
those audits.
Frank Polestra and Dennis Wong are members of the compensation committee.
The compensation committee makes recommendations to the board of directors
regarding our stock and compensation plans, approves compensation of certain
officers and grants stock options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dennis Wong, a member of the compensation committee, is the brother of
Stephen Wong, the former Chief Executive Officer and the current Chairman of
Embarcadero. During 1999, Stephen Wong received $60,000 in salary and $90,000 in
bonus compensation.
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their service on the board or any
board committee, but they are entitled to reimbursement for all reasonable
out-of-pocket expenses incurred in connection with their attendance at board and
board committee meetings. From time to time, directors who are not employees of
Embarcadero have received grants of options to purchase shares of our common
stock. Following this offering, directors will receive automatic option grants
under our 2000 Nonemployee Directors Option Plan. See "Stock Plans--2000
Nonemployee Directors Option Plan."
INDEMNIFICATION
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for: (1) breach of their duty of loyalty to the corporation or its
stockholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) unlawful payments of
dividends or unlawful stock repurchases or redemption's, or (4) any transaction
from which the director derived an improper personal benefit. This limitation of
liability does not apply to liabilities arising under the federal or state
securities laws and does not affect the availability of equitable remedies such
as injunctive relief or rescission.
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Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers, and may indemnify our other employees and agents, to
the fullest extent permitted by law. We believe that indemnification under our
certificate of incorporation and bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the bylaws permit such indemnification.
We intend to enter into agreements to indemnify our directors and officers,
in addition to the indemnification provided for in our bylaws. These agreements,
among other things, will indemnify our directors and officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in the right of Embarcadero arising out of services as one of our directors
or officers or such person's services to any of our subsidiaries or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
There is no pending litigation or proceeding involving a director or officer
of Embarcadero in which indemnification is required or permitted, and we are not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation for
the fiscal year ended December 31, 1999 paid by us to each person who served as
Chief Executive Officer and to our other executive officers who received salary
and bonus compensation in 1999 of more than $100,000. These persons are
collectively referred to as the "Named Executive Officers." The compensation
table excludes other compensation in the form of perquisites and other personal
benefits that constitutes the lesser of $50,000 or 10% of the total salary and
bonus earned by each of the Named Executive Officers in 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
- --------------------------- --------- -------- ------------
<S> <C> <C> <C>
Ellen W. Taylor (1)........................................ 44,141 -- 880,000(4)
President and Chief Executive Officer
Stephen R. Wong (2)........................................ 60,000 90,000 1,200,000(5)
Chief Executive Officer
Stuart E. Browning (3)..................................... 60,000 75,000 --
Vice President
Nigel C. Myers............................................. 60,000 75,000 --
Vice President of Development
Coleen J. Weeks............................................ 120,000 85,498 --
Vice President of Marketing
</TABLE>
- ------------------------
(1) Ms. Taylor became our President and Chief Executive Officer on October 18,
1999. Her current annual salary is $220,000.
(2) Mr. Wong served as our Chief Executive Officer from July 1993 through
October 1999 and currently serves as our Chairman.
(3) Mr. Browning served as a Vice President of the company until February 1,
2000.
(4) Three options granted on October 18, 1999 comprise this aggregate amount.
One option covers 440,000 shares and has an exercise price of $0.25 per
share. The second option covers 220,000
42
<PAGE>
shares and has an exercise price of $2.50 per share. The third option covers
220,000 shares and has an exercise price of $5.00 per share. Each of the
options expires on October 18, 2006.
(5) This option was granted on May 31, 1999 and has an exercise price per share
is $0.25. The option expires on May 31, 2006.
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted during the fiscal year ended December 31, 1999 to each of the Named
Executive Officers. All options were granted under Embarcadero's 1993 Stock
Option Plan. Unless stated otherwise, options granted under that plan normally
vest over a four-year period in sixteen equal quarterly installments.
The percentage of options granted is based on an aggregate of 2,599,400
options we granted during the fiscal year ended December 31, 1999 to our
employees, including the Named Executive Officers.
The potential realizable value amounts in the last two columns of the
following chart are calculated by assuming a base price of $12.00 per share and
represent hypothetical gains that could be achieved for the respective options
if exercised and sold at the end of the option term. The assumed 5% and 10%
annual rates of stock price appreciation from the date of grant to the end of
the option term are provided in accordance with rules of the SEC and do not
represent our estimate or projection of the future common stock price. Actual
gains, if any, on stock option exercises are dependent on the future performance
of the common stock, overall market conditions and the option holder's continued
employment through the vesting period. This table does not take into account any
actual appreciation in the price of the common stock from the date of grant to
the present.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
------------------------------------------------- OF STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES IN PRICE/$ EXPIRATION ---------------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5%($) 10%($)
- ---- ---------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ellen W. Taylor........... 440,000 16.9 $ 0.25 10/18/06 6,965,705 9,143,842
220,000 8.5 2.50 10/18/06 2,987,853 4,126,921
220,000 8.5 5.00 10/18/06 2,437,833 3,576,921
Stephen R. Wong........... 1,200,000 46.2 0.25 5/31/06 18,997,377 25,210,478
Stuart E. Browning........ -- -- -- -- -- --
Nigel C. Myers............ -- -- -- -- -- --
Coleen J. Weeks........... -- -- -- -- -- --
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information regarding exercised stock options
during the fiscal year ended December 31, 1999 and unexercised options held as
of December 31, 1999 by each of the Named Executive Officers. All options were
granted under Embarcadero's 1993 Stock Option Plan.
43
<PAGE>
There was no public trading market for our common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of the initial
public offering price of $12.00 per share, less the applicable exercise price
per share, multiplied by the number of shares underlying such options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL THE-MONEY OPTIONS AT
SHARES YEAR-END(#) FISCAL YEAR-END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ellen W. Taylor......... -- -- -- 880,000 -- 9,910,000
Stephen R. Wong......... 800,000 9,520,000 150,000 1,050,000 1,762,500 12,337,500
Stuart E. Browning...... 800,000 9,520,000 -- -- -- --
Nigel C. Myers.......... 800,000 9,520,000 -- -- -- --
Coleen J. Weeks......... -- -- -- -- -- --
</TABLE>
- ------------------------
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
Our 1993 Stock Option Plan provides that, upon a change in control of
Embarcadero, each outstanding option will generally become fully vested unless
the surviving corporation assumes the option or replaces it with a comparable
option.
We have entered into a letter agreement with Ms. Taylor, our President and
Chief Executive Officer, dated September 27, 1999. Under the letter agreement,
Ms. Taylor receives an annual base salary of $220,000 and is eligible for an
annual bonus of up to $130,000. Ms. Taylor also received an option to purchase
440,000 shares of common stock with an exercise price of $0.25 per share, an
option to purchase 220,000 shares of common stock at an exercise price of $2.50
per share and an option to purchase 220,000 shares of common stock at an
exercise price of $5.00 per share. In the event of a change of control within
six months of the commencement of Ms. Taylor's employment, or if the company
enters into an agreement that could result in a change of control within such
six-month period and the change of control occurs within nine months of the
commencement of her employment, Ms. Taylor's options will become exercisable
with respect to 50% of the underlying shares of common stock. In addition,
Ms. Taylor's options will become exercisable with respect to 25% of the
underlying shares of common stock if Ms. Taylor's employment with Embarcadero is
terminated without cause on or before October 19, 2000 or, if her employment
with Embarcadero is terminated without cause after October 19, 2000, her options
will continue to vest for six months following her termination. Ms. Taylor is
also entitled to twelve months' severance pay and benefits following her
termination without cause.
We have entered into a letter agreement with Mr. Sabhlok, our Senior Vice
President of Finance and Corporate Development, dated January 24, 2000. Under
the letter agreement, Mr. Sabhlok receives an annual base salary of $200,000 and
is eligible for an annual bonus up to $75,000. Mr. Sabhlok also received an
option to purchase 500,000 shares of common stock at an exercise price of $1.50
per share and an option to purchase 100,000 shares of common stock at an
exercise price of $5.00 per share. In the event of a change of control within
six months of the commencement of Mr. Sabhlok's employment, or if the company
enters into an agreement that could result in a change of control within such
six-month period and the change of control occurs within nine months of the
commencement of his employment, Mr. Sabhlok's option will become exercisable
with respect to the greater (1) of the number of underlying shares of common
stock that will enable him to realize $5 million of value or (2) 150,000 shares.
In addition, Mr. Sabhlok's options will become exercisable with respect to 25%
of the underlying shares of common stock if Mr. Sabhlok's employment with
Embarcadero is terminated without cause on or before January 24, 2001 or, if his
employment with Embarcadero is terminated without cause after January 24, 2001,
his options will continue to vest for six months following his termination.
Mr. Sabhlok is also entitled to six months' severance pay and benefits following
his
44
<PAGE>
termination without cause. We have also agreed to reimburse Mr. Sabhlok for up
to 70% of any losses that he suffers in the event that he is unable to realize
gains on stock options from his former employer.
We have entered into a letter agreement with Mr. Scott, our Vice President
of Sales, dated December 31, 1999. Under the letter agreement, Mr. Scott
receives an annual base salary of $200,000 and is eligible for an annual bonus
of up to $300,000. Mr. Scott also received an option to purchase 500,000 shares
of common stock at an exercise price of $1.50 per share and an option to
purchase 100,000 shares of common stock at an exercise price of $5.00 per share.
In the event of a change of control within six months of the commencement of
Mr. Scott's employment, or if the company enters into an agreement that could
result in a change of control within such six-month period and the change of
control occurs within nine months of the commencement of his employment,
Mr. Scott's option will become exercisable with respect to the greater of (1)
the number of underlying shares of common stock that will enable him to realize
$6 million of value or (2) 150,000 shares. In addition, Mr. Scott's options will
become exercisable with respect to 25% of the underlying shares of common stock
if Mr. Scott's employment with Embarcadero is terminated without cause on or
before January 2, 2001 or, if his employment with Embarcadero is terminated
without cause after January 2, 2001, his options will continue to vest for six
months following his termination. Mr. Scott is also entitled to six months'
severance pay and benefits following his termination without cause. We have also
agreed to reimburse Mr. Scott for up to 70% of the losses that he suffers in the
event that he is unable to realize gains on stock options from his former
employer.
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN. Our board of directors adopted our 1993 Stock Option Plan on
November 1, 1993. The plan was amended and restated in February 2000. This plan
provides for the grant of incentive stock options to our employees and
nonstatutory stock options to our employees, directors and consultants. As of
March 27, 2000, 11,300,000 shares of common stock were reserved for issuance
under this plan. Of these shares, 4,466,596 were issued upon exercise of stock
options, 4,128,268 shares were subject to outstanding options and 2,705,136
shares were available for future grant.
Our board of directors or a committee appointed by the board administers the
stock option plan and determines who is granted options and the terms of options
granted, including the exercise price, the number of shares subject to
individual option awards and the vesting period of options.
The exercise price for incentive stock options granted under the plan may
not be less than 100% of the fair market value of our common stock on the option
grant date. The exercise price of nonstatutory options must generally be not
less than 85% of the fair market value of our common stock on the option grant
date.
Options generally expire seven years after they are granted, except that
they generally expire earlier if the optionee's service terminates earlier. The
plan provides that no participant may receive options covering more than 600,000
shares in any one-year period.
An option under plan will generally become fully vested upon a change of
control, unless the surviving corporation assumes the option or provides an
economically equivalent substitute for the option. A change in control includes:
- an acquisition of 50% or more of our outstanding stock by any person or
entity;
- a sale of all or substantially all of our assets;
- a merger of Embarcadero after which our own stockholders own 50% or less
of the company or any successor company; or
- any other transaction which our board of directors determines, in its
discretion, would materially alter the structure, ownership or control of
the company.
45
<PAGE>
Except as otherwise determined by the board or committee administering the
plan, a participant may not transfer rights granted under our stock option plan
other than by will, the laws of descent and distribution or as otherwise
provided under the plan.
Our board of directors may amend the plan at any time, subject to any
required stockholder approval. The plan will terminate in November 2003 unless
terminated earlier by the board of directors.
2000 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN. We adopted the 2000 Nonemployee
Directors Stock Option Plan in February 2000 and have reserved a total of
200,000 shares of common stock for issuance thereunder. Of these shares, 25,000
were subject to outstanding options as of March 27, 2000. Under the plan, each
nonemployee director receives an automatic grant of a nonstatutory stock option
to purchase 25,000 shares of common stock on the date on which such person first
becomes a director. At the first board of directors meeting immediately
following each annual stockholders meeting beginning with the 2001 annual
stockholders meeting, Embarcadero will automatically grant each nonemployee
director a nonstatutory option to purchase 5,000 shares of common stock. The
exercise price of options under the plan will be equal to the fair market value
of the common stock on the date of grant. The maximum term of the options
granted under the plan is ten years. The options become exercisable over three
years in equal quarterly installments. The plan will terminate in
February 2010, unless terminated earlier in accordance with the provisions of
the plan.
401(K) PLAN. In October 1999 our board of directors adopted a Retirement Savings
and Investment Plan covering our full-time employees located in the United
States. This plan is intended to qualify under Section 401(k) of the Internal
Revenue Code of 1986, as amended, so that contributions to this plan by
employees, and the investment earnings thereon, are not taxable to employees
until withdrawn. Pursuant to the plan, employees may elect to reduce their
current compensation from a minimum of one percent of their annual compensation
up to the statutory prescribed annual limit ($10,500 in 2000) and to have the
amount of the reduction contributed to the plan. We do not currently make
additional matching contributions on behalf of plan participants.
46
<PAGE>
RELATED PARTY TRANSACTIONS
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION ARRANGEMENTS
We have entered into letter agreements with Ellen Taylor, our President and
Chief Executive Officer, Raj Sabhlok, our Senior Vice President of Finance and
Corporate Development, and Walter Scott, our Vice President of Sales, which
describes the terms and conditions of their employment with Embarcadero. See
"Management--Employment and Change of Control Arrangements."
OPTION GRANTS
We have granted options to our directors and executive officers, and we
intend to grant additional options to our directors and executive officers in
the future. See "Management--Option Grants in Last Fiscal Year" and
"Management--Director Compensation."
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with our directors and
executive officers. Such agreements may require us, among other things, to
indemnify our officers and directors, other than for liabilities arising from
willful misconduct of a culpable nature, and to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified. See "Management--Indemnification."
LOANS TO OFFICERS AND DIRECTORS
On March 1, 1999, we loaned $40,000 to each of Stephen R. Wong, our
Chairman, Dennis J. Wong, a director, Stuart E. Browning, our former Vice
President, and Nigel C. Myers, our Vice President of Product Development, and
$55,000 to Jeffrey Newman, our Vice President of Product Development. Each of
the loans was extended to finance the exercise of stock options.
Messrs. S. Wong, D. Wong, Browning and Myers exercised options to purchase
800,000 shares of our common stock with their loans, and Mr. Newman exercised
options to purchase 1,100,000 shares of common stock with his loan. In
connection with the loans, we received promissory notes in the amount of the
loans, each bearing interest at the prevailing prime rate. Principal and
interest were due no later than March 1, 2001. All of the notes were repaid in
full in December 1999.
OTHER RELATED PARTY TRANSACTIONS
Stuart Browning, a former Vice President of the company, resigned his
position with Embarcadero effective February 1, 2000. In February 2000, we
entered into an agreement with Mr. Browning which provides for him to receive
severance payments in the aggregate amount of $120,000 and continued medical
benefits for up to twelve months.
In August 1999, we entered into a three-year office lease for our Pacific
Grove facility with NewCon Software, a corporation controlled by Jeffrey Newman,
who serves as our Vice President of Product Development. Our monthly payments
under the lease are $10,000.
We believe that the transactions above were made on terms no less favorable
to us than could have been obtained from unaffiliated parties. All future
transactions, including loans between us and our officers, directors, principal
stockholders and their affiliates, will be approved by a majority of the board
of directors, including a majority of the independent and disinterested
directors, and will continue to be made on terms no less favorable to us than
could have been obtained from unaffiliated parties.
In September, 1998, we acquired a 44% interest in Embarcadero Europe Ltd.,
which became our affiliated distributor. In connection with our acquisition of
an equity interest in Embarcadero Europe, we also entered into a distribution
agreement pursuant to which we granted Embarcadero Europe rights to distribute
our products in Europe, the Middle East and Africa. We have an option until
October 2001 to acquire the remaining 56% of Embarcadero Europe's capital stock
at a price equal to two times Embarcadero Europe's gross revenues for the twelve
months prior to the month in which we exercise the option. If we had exercised
the option on March 31, 2000, the acquisition would have cost approximately
$3.0 million.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of March 27, 2000 and as adjusted to reflect the sale of the shares offered
by this prospectus for:
- each person who is known by us to beneficially own more than 5% of our
common stock;
- each of our directors;
- each of the Named Executive Officers; and
- all of our directors and executive officers as a group.
Percentage of ownership is based on 21,520,489 shares of common stock
outstanding as of March 27, 2000, giving effect to the conversion of our
preferred stock into common stock upon the closing of this offering, and
25,520,489 shares outstanding after this offering, assuming no exercise of the
underwriters' over-allotment options.
Beneficial ownership is calculated based on requirements of the Securities
and Exchange Commission. All shares of the common stock subject to options
currently exercisable or exercisable within 60 days after March 27, 2000 are
deemed to be outstanding for the purpose of computing the percentage of
ownership of the person holding such options, but are not deemed to be
outstanding for computing the percentage of ownership of any other person.
Unless otherwise indicated below, each stockholder named in the table has
sole or shared voting and investment power with respect to all shares
beneficially owned, subject to applicable community property laws.
Unless otherwise indicated in the table, the address of each individual
listed in the table is Embarcadero Technologies, Inc., 425 Market Street, Suite
425, San Francisco, California 94105.
<TABLE>
<CAPTION>
PERCENTAGE OF
OPTIONS SHARES
INCLUDED IN -------------------
NUMBER OF SHARES BENEFICIAL BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNERSHIP OFFERING OFFERING
- ------------------------ ------------------ ----------- -------- --------
<S> <C> <C> <C> <C>
Stephen R. Wong.................................. 4,998,000 225,500 24.0% 20.2%
Stuart E. Browning............................... 4,800,000 -- 22.3 18.8
Nigel C. Myers................................... 4,800,000 -- 22.3 18.8
Dennis J. Wong (1)............................... 4,783,000 -- 22.2 18.7
Jeffrey Newman................................... 1,100,000 -- 5.1 4.3
Coleen J. Weeks.................................. 800,000 -- 3.7 3.1
Ellen W. Taylor.................................. 110,000 110,000 * *
Frank J. Polestra................................ -- -- -- --
Michael J. Roberts............................... -- -- -- --
All directors and executive officers as a group
(10 persons) (2)............................... 16,591,000 335,500 77.4% 65.6%
</TABLE>
- ------------------------
* Less than 1% of Embarcadero's outstanding common stock.
(1) Includes 150,000 shares held of record by the Ethan Wong Investment Trust
and 150,000 shares held of record by the Audrey Wong Investment Trust.
Dennis Wong is a trustee for each trust.
(2) Does not include shares held by Stuart Browning, a former Vice President of
the company who resigned effective February 1, 2000.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the closing of this offering, our authorized capital stock will consist
of 60,000,000 shares of common stock and 5,000,000 shares of preferred stock.
The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our amended and
restated certificate of incorporation to be effective after the closing of this
offering, our bylaws and the provisions of applicable Delaware law.
COMMON STOCK
As of March 27, 2000, there were 21,266,596 shares of common stock
outstanding held of record by approximately 37 stockholders. There will be
25,520,489 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options,
after giving effect to the sale of common stock in the offering and the
conversion of our outstanding preferred stock.
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders.
Subject to preferences to which holders of preferred stock issued after the
sale of the common stock offered hereby may be entitled, holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available therefor.
In the event of our liquidation, dissolution or winding up, holders of common
stock will be entitled to share in our assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock.
Holders of common stock have no preemptive or conversion rights or other
subscription rights, and there are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
the shares of common stock offered by us in this offering, when issued and paid
for, will be, fully paid and nonassessable. The rights, preferences and
privileges of the holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock, which we may designate in the future.
PREFERRED STOCK
Upon the closing of this offering, each share of our outstanding Series A
preferred stock will automatically convert into one share of common stock. After
the closing, the board of directors will be authorized, subject to any
limitations prescribed by law, without stockholder approval, from time to time
to issue up to an aggregate of 5,000,000 shares of preferred stock, $0.001 par
value per share, in one or more series, each of such series to have such rights
and preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
board of directors. The rights of the holders of common stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that may be issued in the future. Issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of our outstanding voting stock. We have no present plans to
issue any shares of preferred stock.
EFFECT OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND THE
DELAWARE ANTI-TAKEOVER STATUTE
CERTIFICATE OF INCORPORATION AND BYLAWS. Provisions of our amended and restated
certificate of incorporation and bylaws may have the effect of making it more
difficult for a third party to acquire, or
49
<PAGE>
of discouraging a third party from attempting to acquire, control of us. Such
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. These provisions allow us to issue
preferred stock without any vote or further action by the stockholders, require
advance notification of stockholder proposals and nominations of candidates for
election as directors, eliminate the ability of our stockholders to act by
written consent and do not provide for cumulative voting in the election of
directors. Our bylaws provide for the division of the board of directors into
three classes, with each class serving three-year terms. In addition, our bylaws
provide that special meetings of the stockholders may be called only by the
board of directors and that the authorized number of directors may be changed
only by resolution of the board of directors. These provisions may make it more
difficult for stockholders to take corporate actions and could have the effect
of delaying or preventing a change in control of Embarcadero.
DELAWARE ANTI-TAKEOVER STATUTE. We are subject to Section 203 of the Delaware
General Corporation Law. This law prohibits a Delaware corporation from engaging
in any "business combination" with any "interested stockholder," unless any of
the following conditions are met. The law will not apply if:
- prior to the date of the transaction, the board of directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to the date of the transaction, the business combination
is approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of our
assets involving the interested stockholder;
- subject to exceptions, any transaction that results in the issuance or
transfer by us of any of our stock to the interested stockholder; and
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as an entity or
person beneficially owning 15% or more of our outstanding voting stock and any
entity or person affiliated with or controlling or controlled by such entity or
person.
REGISTRATION RIGHTS
After this offering, the holders of 253,893 shares of common stock issuable
upon the conversion of our Series A preferred stock upon the closing of this
offering will be entitled to registration rights in the event we register any
shares of our common stock under the Securities Act. If we plan to register any
shares of our common stock, we have to notify those stockholders and they may be
entitled to include all or part of their shares in the registration. However,
these registration rights are subject to conditions and limitations, including
the right of underwriters to limit the number of shares included in a
registration.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, (assuming no exercise of the underwriters'
over-allotment option) we will have outstanding an aggregate of
25,520,489 shares of common stock outstanding, assuming no exercise of
outstanding options. Of the total outstanding shares, the 4,000,000 shares sold
in this offering will be freely tradable without restriction or further
registration under the Securities Act, except that any shares held by our
affiliates, as that term is defined under the Securities Act, may generally only
be sold in compliance with the limitations of Rule 144 as described below.
SALES OF RESTRICTED SHARES
The remaining 21,520,489 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. All of these shares will be
subject to "lock-up" agreements providing that the stockholder will not offer,
sell or otherwise dispose of any of the shares of common stock owned by them for
a period of 180 days after the date of this offering. However, holders of such
restricted shares who have not been officers, directors or affiliates of
Embarcadero on or since the date of this prospectus may offer, sell or otherwise
dispose of 25% of their shares on the earlier of 90 days after the date of this
offering or on the second trading day after the first public release of
Embarcadero's quarterly results if the last recorded sale price on the Nasdaq
National Market for 20 of the 30 trading days ending on such date is at least
twice the price per share in the initial public offering. These stockholders may
also offer, sell or otherwise dispose of an additional 25% of their shares
135 days after the date of this offering if the price per share of common stock
has achieved the same target level. However, Donaldson, Lufkin & Jenrette, may
in its sole discretion, at any time without notice, release all or any portion
of the shares subject to lock-up agreements. Upon expiration of the lock-up
agreements, 15,010 shares will become eligible for sale pursuant to
Rule 144(k), 16,800,000 shares will become eligible for sale under Rule 144 and
4,466,596 shares will become eligible for sale under Rule 701.
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
(LISTED BY DATE UPON WHICH SHARES BECOME SALEABLE)
<TABLE>
<CAPTION>
NUMBER OF
DATE SHARES COMMENTS
- ---- ---------- -----------------------------------
<S> <C> <C>
At the effective date........................... -- All shares restricted under lock-up
provision
90 days after the effective date or
second trading day following first public
release of quarterly earnings (1)............. 41,649 Shares saleable under Rule 701
135 days after the effective date (1)........... 41,649 Shares saleable under Rule 701
180 days after the effective date
(expiration of lock-up)....................... 21,183,298 Shares saleable under Rule 144,
144(k) and 701
February 17, 2001............................... 253,893 Shares saleable under Rule 144
</TABLE>
- ------------------------
(1) The number of shares listed may be offered, sold or traded provided that the
last recorded sale price per share for 20 of the 30 trading days ending on
such date is at least twice the initial public offering price per share.
51
<PAGE>
After the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register all of the shares of
common stock issued or reserved for future issuance under our stock option
plans. Based upon the number of shares subject to outstanding options as of
March 27, 2000 and currently reserved for issuance under both of these plans,
this registration statement would cover approximately 6,833,404 shares. Shares
registered under the registration statement will generally be available for sale
in the open market immediately after the 180-day lock-up agreements expire.
RULE 144
In general, under Rule 144 as currently in effect, a person including an
affiliate, who has beneficially owned shares of our common stock for at least
one year would be entitled to sell in "broker's transactions" or to market
makers, within any three-month period, a number of shares that does not exceed
the greater of:
- 1% of the number of shares of common stock then outstanding (which will
equal approximately 255,000 shares immediately after this offering); or
- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to the availability of current public
information about Embarcadero.
RULE 144(k)
Under Rule 144(k), a person who is deemed to have not been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares without having to comply with the manner of sale, public
information, volume limitation or notice filing provisions of Rule 144.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period and notice filing requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of Rule 144. However,
holders of shares that would otherwise be saleable under Rule 701 are subject to
the contractual restrictions described above which restrict the sale or
disposition of such shares for 180 days following the effective date.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 2000, the underwriters named below, who are represented by Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), U.S. Bancorp Piper
Jaffray Inc., Wit SoundView Corporation and DLJDIRECT Inc. (the
"representatives"), have severally agreed to purchase from the Company the
respective number of shares of common stock set forth opposite their names
below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
U.S. Bancorp Piper Jaffray Inc..............................
Wit SoundView Corporation...................................
DLJDIRECT Inc...............................................
---------
Subtotal................................................ 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of legal matters and to
various other conditions. The underwriters are obligated to purchase and accept
delivery of all the shares of common stock offered hereby (other than those
shares covered by the over-allotment option described below) if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers (including the
underwriters) at such price less a concession not in excess of $
per share. The underwriters may allow, and such dealers may re-allow, to other
dealers a concession not in excess of $ per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives at any time without notice. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
An electronic prospectus will be available on the web sites maintained by
DLJDIRECT Inc., an affiliate of DLJ, and Wit Capital Corporation, an affiliate
of Wit SoundView Corporation. The information on these web sites relating to the
offering is not part of this prospectus and has not been approved or endorsed by
Embarcadero or the underwriters, and should not be relied on by prospective
investors.
Embarcadero has granted to the underwriters an option, exercisable within
30 days after the date of this prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 600,000 additional shares of common
stock at the initial public offering price less underwriting discounts and
commissions. The underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with the offering. To the extent
that the underwriters exercise such option, each underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such underwriter's percentage underwriting
commitment in the offering as indicated in the preceding table.
53
<PAGE>
The following table sets forth the items of compensation to be included as
underwriting compensation under the rules of the National Association of
Securities Dealers, Inc.:
<TABLE>
<CAPTION>
TOTAL
PER SHARE
WITHOUT OVER- WITH OVER- WITHOUT OVER- WITH OVER-
ALLOTMENT ALLOTMENT ALLOTMENT ALLOTMENT
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................. $ $ $ $
Additional deemed compensation paid by us
Total.................................... $ $ $ $
======== ======== ======== ========
</TABLE>
We will pay to the underwriters discounts and commissions in an amount equal
to the public offering price per share of common stock less the amount the
underwriters pay to us per share of common stock.
Employees of DLJ invested in the private placement of our Series A preferred
stock in February 2000, purchasing an aggregate of 41,669 shares of Series A
preferred stock on the same terms and conditions as the other investors in the
private placement, including price per share. Series A preferred stock is
convertible into common stock on a 1-for-1 basis. Pursuant to the rules of the
National Association of Securities Dealers, Inc. the 41,669 share of Series A
preferred stock purchased by employees of DLJ are presumed to be underwriting
compensation. The additional deemed compensation included in the chart above was
computed in accordance with the rules of the National Association of Securities
Dealers, Inc. The 41,669 shares of common stock issuable upon conversion of the
Series A preferred stock purchased by employees of DLJ are restricted as to
sale, transfer, assignment, pledge or hypothecation for a period of one year
following the effective date of this prospectus.
Embarcadero has agreed to indemnify the underwriters against various
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect thereof.
Each of Embarcadero, its executive officers and directors and its
stockholders have agreed, subject to exceptions, not to (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock
or (ii) enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common stock
(regardless of whether any of the transactions described in clause (i) or
(ii) is to be settled by the delivery of common stock, or such other securities,
in cash or otherwise) for a period of 180 days after the date of this prospectus
without the prior written consent of DLJ. However, 25% of the shares of common
stock subject to the restrictions described above (other than shares owned by
directors, officers or affiliates) will be released from these restrictions if
the reported last sale price of the common stock on the Nasdaq National Market
is at least twice the initial public offering price for 20 of the 30 consecutive
trading days ending on the last trading day of the 90-day period after the date
of this prospectus. These shares will be released on the later to occur of the
90-day period after the date of this prospectus and the second trading day after
the first public release of our quarterly results. An additional 25% of the
shares subject to the restrictions described above will be released from these
restrictions if the reported last sale price of the common stock on the Nasdaq
National Market is at least twice the initial public offering price for 20 of
the 30 consecutive trading days ending on the last trading day of the 135-day
period after the date of this prospectus.
54
<PAGE>
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered hereby will be determined by negotiation among Embarcadero and the
representatives. The factors to be considered in determining the initial public
offering price include:
- the history of and the prospects for the industry in which Embarcadero
competes;
- the past and present operations of Embarcadero;
- the historical results of operations of Embarcadero;
- the prospects for future earnings of Embarcadero;
- the recent market prices of securities of generally comparable companies;
and
- the general condition of the securities markets at the time of the
offering.
The underwriters have reserved up to an aggregate of 400,000 shares of the
common stock to be sold in this offering for sale to some of our employees and
associates of our employees and directors, and to other individuals or companies
who have commercial arrangements or personal relationships with us. Up to
200,000 of these shares will be reserved for our employees, directors and
vendors and will be administered by DLJ. Through this directed share program, we
intend to ensure that our employees, directors and vendors have the opportunity
to purchase our common stock at the same price that we are offering our shares
to the general public. Prospective participants in this program will not receive
any investment materials other than a copy of this prospectus, and will be
permitted to participate in this offering at the initial public offering price
presented on the cover page of this prospectus. No commitment to purchase shares
by any participant in this program will be accepted until after the registration
statement of which this prospectus is a part is effective and an initial public
offering price has been established. The number of shares available for sale to
the general public will be reduced by the number of shares sold through this
program. Any shares reserved for the directed share program which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby.
Up to 200,000 shares will be reserved for the benefit of selected customers
and users of our products pursuant to a directed share program being
administered by Wit SoundView Corporation's affiliate, Wit Capital Corporation.
We cannot assure you that any of the reserved shares subject to this program
will be so purchased. The number of shares of common stock available for sale to
the general public in this offering will be reduced by the number of reserved
shares sold pursuant to this program. Any reserved shares not purchased through
this program will be offered to Wit Capital Corporation customers on the same
basis as the other shares in this offering pursuant to Wit Capital's ordinary
rules and procedures. Purchases of the reserved shares pursuant to the directed
share program administered by Wit Capital Corporation may only be made through
an account at Wit Capital in accordance with Wit Capital's procedures for
opening an account and transacting in securities. In addition, Wit SoundView
Corporation is an underwriter of additional shares in the offering.
Other than in the United States, no action has been taken by Embarcadero or
the underwriters that would permit a public offering of the shares of common
stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of common stock offered hereby may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the offering of the common stock and the distribution of this
prospectus. This prospectus does not constitute an offer
55
<PAGE>
to sell or a solicitation of an offer to buy any shares of common stock offered
hereby in any jurisdiction in which such an offer or a solicitation is unlawful.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. The underwriters may bid for and purchase shares of common stock
in the open market to cover such syndicate short position or to stabilize the
price of the common stock. In addition, the underwriting syndicate may reclaim
selling concessions from syndicate members, if the syndicate repurchases
previously distributed common stock in syndicate covering transactions, in
stabilization transactions or otherwise. These activities may stabilize or
maintain the market price of the common stock above independent market levels.
The underwriters are not required to engage in these activities, and may end any
of these activities at any time.
In the past, DLJ has provided, and may in the future provide, financial
advisory services to Embarcadero.
Because employees of DLJ beneficially own more than 10% of the Company's
outstanding preferred stock prior to this offering, which beneficially owned
preferred stock will automatically convert into common stock representing
approximately 0.2% of the outstanding common stock upon consummation of this
offering, this offering is being conducted in accordance with Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc. Rule 2720
requires that a "qualified independent underwriter" within the meaning of
Rule 2720 participate in the preparation of the registration statement and
prospectus for the offering and conduct due diligence as part of such
preparation. In addition, if a bona fide independent market does not exist for
the offered securities, the public offering price can be no higher than that
recommended by the qualified independent underwriter. U.S. Bancorp Piper Jaffray
Inc. has accepted the responsibility of acting as the "qualified independent
underwriter" with respect to this offering and, accordingly, the initial
offering price specified on the cover page of this prospectus does not exceed
that recommended by U.S. Bancorp Piper Jaffray Inc. in its capacity as such.
LEGAL MATTERS
The validity of the common stock being offered by Embarcadero will be passed
upon for Embarcadero by Heller Ehrman White & McAuliffe LLP, San Diego,
California which has acted as our counsel in connection with this offering.
Stephen C. Ferruolo, a member of Heller Ehrman White & McAuliffe LLP, is
Secretary of Embarcadero. Certain matters will be passed upon for the
underwriters by Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, California.
EXPERTS
Our financial statements at December 31, 1998 and 1999 for each of the three
years in the period ended December 31, 1999 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
CHANGE IN ACCOUNTANTS
In December 1999, our board of directors dismissed Odenburg, Ullakko,
Muranishi and Co. as our independent accountants and subsequently appointed
PricewaterhouseCoopers LLP as our independent accountants. There were no
disagreements with the former accountants during the years ended December 31,
1997 and 1998 or during any subsequent interim period preceding their
replacement on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the former accountants' satisfaction, would have caused them to
make reference to the subject matter of the disagreement in connection with
their reports. The former independent accountants issued an unqualified report
on the financial statements as of and for the years ended December 31, 1997 and
1998. We did not consult with PricewaterhouseCoopers LLP on any accounting or
financial reporting matters in the periods prior to their appointment.
56
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including
exhibits and schedules) under the Securities Act, with respect to the shares to
be sold in this offering. This prospectus does not contain all of the
information set forth in the registration statement. For further information
with respect to us and the common stock offered in this prospectus, reference is
made to the registration statement, including the exhibits thereto, and the
financial statements and notes filed as a part thereof. With respect to each
such document filed with the SEC as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matter
involved.
We will be filing quarterly and annual reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at the
public reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from the SEC's web site at "www.sec.gov".
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
EMBARCADERO TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Changes in Stockholders' Equity (Deficit)..... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Embarcadero Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Embarcadero
Technologies, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, CA
February 17, 2000
F-2
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------- DECEMBER 31,
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 13 $ 1,804 $ 1,804
Trade accounts receivable, net of allowance for doubtful
accounts of $114 in 1998 and $153 in 1999............... 1,674 2,834 2,834
Related party accounts receivable......................... 176 696 696
Prepaid and other current assets.......................... 481 310 310
Deferred tax assets....................................... -- -- 244
------ ------- -------
Total current assets.................................... 2,344 5,644 5,888
Property and equipment, net................................. 342 958 958
Investment in affiliated company............................ 16 -- --
Other assets................................................ 4 46 46
------ ------- -------
Total assets................................................ $2,706 $ 6,648 $ 6,892
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 216 $ 806 $ 806
Deferred revenue.......................................... 2,706 4,094 4,094
Notes payable to stockholders............................. -- 1,000 1,000
Deferred tax liabilities.................................. -- -- 518
------ ------- -------
Total current liabilities............................... 2,922 5,900 6,418
Commitments (Note 6)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock: no par value; 40,000,000 shares authorized;
16,838,344 and 21,175,564 shares issued and outstanding
at December 31, 1998 and 1999........................... -- -- --
Additional paid-in capital................................ 232 14,663 10,523
Deferred stock-based compensation......................... (96) (10,049) (10,049)
Accumulated deficit....................................... (352) (3,866) --
------ ------- -------
Total stockholders' equity (deficit).................... (216) 748 474
------ ------- -------
Total liabilities and stockholders' equity (deficit)........ $2,706 $ 6,648 $ 6,892
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
License (including sales to affiliate of $1,473 in
1999)................................................... $ 3,434 $ 6,510 $ 13,406
Maintenance............................................... 1,152 2,609 5,446
---------- ---------- ----------
Total revenues........................................ 4,586 9,119 18,852
COST OF REVENUES:
License................................................... 200 321 460
Maintenance (exclusive of non-cash compensation expense of
$26 in 1999)............................................ 132 251 621
---------- ---------- ----------
Total cost of revenues................................ 332 572 1,081
---------- ---------- ----------
Gross profit................................................ 4,254 8,547 17,771
OPERATING EXPENSES:
Research and development (exclusive of non-cash
compensation expense of $18, $63 and $550 in 1997, 1998
and 1999, respectively)................................. 1,874 2,732 4,265
Sales and marketing (exclusive of non-cash compensation
expense of $16, $27 and $277 in 1997, 1998 and 1999,
respectively)........................................... 1,515 2,707 5,388
General and administrative (exclusive of non-cash
compensation expense of $0, $9 and $3,408 in 1997, 1998
and 1999, respectively)................................. 580 996 1,577
Amortization of deferred stock-based compensation......... 34 99 4,261
---------- ---------- ----------
Total operating expenses.............................. 4,003 6,534 15,491
---------- ---------- ----------
Income from operations...................................... 251 2,013 2,280
Interest income............................................. 52 52 88
---------- ---------- ----------
Income before income taxes.................................. 303 2,065 2,368
Provision for income taxes.................................. (2) (45) (82)
---------- ---------- ----------
Income before share in affiliated company profit (loss)..... 301 2,020 2,286
Share in profit (loss) of affiliated company................ -- 8 (100)
---------- ---------- ----------
Net income.................................................. $ 301 $ 2,028 $ 2,186
========== ========== ==========
NET INCOME PER SHARE:
Basic..................................................... $ 0.02 $ 0.12 $ 0.11
========== ========== ==========
Diluted................................................... $ 0.01 $ 0.10 $ 0.10
========== ========== ==========
SHARES USED IN PER SHARE CALCULATION:
Basic..................................................... 16,800 16,810 20,070
========== ========== ==========
Diluted................................................... 21,078 21,230 21,877
========== ========== ==========
PRO FORMA DATA (UNAUDITED) (NOTES 2 AND 5):
Income before income taxes, as reported................... $ 2,368
Pro forma income tax provision............................ (2,678)
Share in loss of affiliated company....................... (100)
----------
Pro forma net loss........................................ $ (410)
==========
Pro forma net loss per share, basic and diluted............. $ (0.02)
==========
Shares used in pro forma net loss per share, basic and
diluted................................................... 20,363
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES RETAINED TOTAL
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE EARNINGS STOCKHOLDERS'
-------------------- PAID-IN STOCK-BASED FROM (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT) (DEFICIT)
-------- --------- ---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997....... 16,800 $ -- $ 1 $ -- $ -- $ 477 $ 478
Deferred compensation related
to stock options granted..... -- -- 61 (61) -- -- --
Amortization of deferred stock-
based compensation........... -- -- -- 34 -- -- 34
Distributions to
stockholders................. -- -- -- -- -- (463) (463)
Net income..................... -- -- -- -- -- 301 301
------ --------- ------- -------- ----- ------- -------
BALANCE AT DECEMBER 31, 1997..... 16,800 -- 62 (27) -- 315 350
Exercise of common stock
options...................... 38 -- 2 -- -- -- 2
Deferred compensation related
to stock options granted..... -- -- 168 (168) -- -- --
Amortization of deferred stock-
based compensation........... -- -- -- 99 -- -- 99
Distributions to
stockholders................. -- -- -- -- -- (2,695) (2,695)
Net income..................... -- -- -- -- -- 2,028 2,028
------ --------- ------- -------- ----- ------- -------
BALANCE AT DECEMBER 31, 1998..... 16,838 -- 232 (96) -- (352) (216)
Exercise of common stock
options...................... 4,337 -- 217 -- (216) -- 1
Payment on notes receivable
from
stockholders for purchase of
common stock................. -- -- -- -- 216 -- 216
Deferred compensation related
to stock options granted..... -- -- 14,214 (14,214) -- -- --
Amortization of deferred stock-
based compensation........... -- -- -- 4,261 -- -- 4,261
Distributions to
stockholders................. -- -- -- -- -- (5,700) (5,700)
Net income..................... -- -- -- -- -- 2,186 2,186
------ --------- ------- -------- ----- ------- -------
BALANCE AT DECEMBER 31, 1999..... 21,175 $ -- $14,663 $(10,049) $ -- $(3,866) $ 748
====== ========= ======= ======== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 301 $ 2,028 $ 2,186
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 128 178 252
Provision for doubtful accounts....................... 50 39 50
Amortization of deferred stock-based compensation..... 34 99 4,261
Share in loss (profit) of affiliated company.......... -- (8) 100
Loss on disposal of property and equipment............ 4 12 14
Changes in assets and liabilities:
Trade accounts receivable........................... (761) (502) (1,210)
Related party accounts receivable................... -- (176) (520)
Prepaid and other current assets.................... (130) (342) 170
Accounts payable and accrued liabilities............ 133 58 506
Deferred revenue.................................... 431 1,857 1,389
Other long-term assets.............................. 2 -- (42)
------- ------- -------
Net cash provided by operating activities....... 192 3,243 7,156
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (176) (297) (882)
Investment in affiliated company.......................... -- (8) --
------- ------- -------
Net cash used in investing activities........... (176) (305) (882)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft............................................ 232 (232) --
Distributions to stockholders............................. (463) (2,695) (4,700)
Proceeds from exercise of stock options................... -- 2 1
Payments on notes receivable from stockholders............ -- -- 216
------- ------- -------
Net cash used in financing activities........... (231) (2,925) (4,483)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (215) 13 1,791
Cash and cash equivalents at beginning of year.............. 215 -- 13
------- ------- -------
Cash and cash equivalents at end of year.................... $ -- $ 13 $ 1,804
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes................................ $ 3 $ -- $ 56
======= ======= =======
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred stock-based compensation......................... $ 61 $ 168 $14,214
======= ======= =======
Notes payable (distribution) to stockholders.............. $ -- $ -- $ 1,000
======= ======= =======
Exercise of common stock options for notes receivable..... $ -- $ -- $ 216
======= ======= =======
</TABLE>
The accompanying notes are in integral part of these financial statements.
F-6
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
Embarcadero Technologies, Inc. (the "Company") was incorporated in
California on July 23, 1993 and reincorporated in Delaware on February 15, 2000.
The Company provides software products that enable organizations to build and
manage e-business applications and their underlying databases.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. These estimates include levels of allowances for accounts receivable,
valuation of deferred tax assets and value of the Company's capital stock.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, trade accounts receivable, accounts payable
and accrued liabilities and notes payable to stockholders approximate fair value
due to their short maturities.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash and cash equivalents with high credit quality
financial institutions. The Company has not experienced any losses on its
deposits of cash and cash equivalents. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company records an allowance for doubtful
accounts receivable for credit losses at the end of each period based on
analysis of individual aged accounts receivable balances. As a result of this
analysis, the Company believes that its allowance for doubtful accounts is
adequate at December 31, 1998 and 1999.
The activity in the allowance for the doubtful accounts may be summarized as
follows (in thousdands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Allowance balance at January 1........................... $35 $ 84 $114
Amounts charged to expense............................... 50 39 50
Amounts written off...................................... (1) (9) (11)
--- ---- ----
Allowance balance at December 31......................... $84 $114 $153
=== ==== ====
</TABLE>
There was no single customer that accounted for more than 10% of the total
revenues in all periods presented.
F-7
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to five years. Leasehold improvements are amortized on a
straight line basis over the lesser of their estimated useful life or the lease
term. Gains and losses from the disposal of property and equipment are taken
into income in the year of disposition. Repairs and maintenance costs are
expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows applicable to such assets.
REVENUE RECOGNITION
Total revenues consist of revenues earned under software license agreements
and maintenance agreements. The Company adopted the provisions of Statement of
Position 97-2, or SOP 97-2, effective January 1, 1998. SOP 97-2 supersedes
Statement of Position 91-1, "Software Revenue Recognition" and delineates the
accounting for software product and maintenance revenues. Under SOP 97-2,
revenues from software license agreements are recognized upon shipment, provided
that a signed contract exists, the fee is fixed and determinable and collection
of the resulting receivable is probable.
Revenues from software licenses sold through distributors are recognized
under the same SOP 97-2 criteria because distributors only purchase products to
fulfill specific customer orders and do not hold any inventory of the Company's
products.
For contracts with multiple obligations (e.g., deliverable and undeliverable
products and maintenance), revenues are allocated to each component of the
contract based on objective evidence of its fair value, which is specific to the
Company. The Company recognizes revenues allocated when the criteria for product
revenue set forth above are met. The Company recognizes revenues from
maintenance fees, including amounts allocated from product revenues for ongoing
customer support and product updates ratably over the period of the maintenance
contract. Payments for maintenance fees are generally made in advance and are
non-refundable.
Prior to the adoption of SOP 97-2, effective January 1, 1998, the Company
recognized revenues from the sale of products upon shipment if remaining
obligations were insignificant and collection of the resulting accounts
receivable was probable. Provisions for the estimated obligations were accrued
upon shipment. Revenues from software maintenance contracts, including amounts
unbundled from product sales, were deferred and recognized ratably over the
period of the contract.
COST OF REVENUES
Cost of license revenues includes costs associated with the delivery of
software products and royalties for third party embedded software. Cost of
maintenance revenues include salaries and related expenses for the service
organization.
F-8
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
STOCK-BASED COMPENSATION
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for employee stock options under Accounting Principles Board
Opinion ("APB") No. 25 and follows the disclosure-only provisions of SFAS 123.
Under APB No. 25, compensation expense is based on the difference, if any, on
the date of the grant, between the estimated fair value of the Company's shares
and the exercise price of options to purchase that stock.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs are included in research and development and are
expensed as incurred. Under Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" some software development costs are capitalized after
technological feasibility is established. The capitalized cost is then amortized
on a straight-line basis over the estimated product life, or on the ratio of
current revenues to total projected product revenues, whichever is greater. To
date, the period between technological feasibility, which generally has been
defined as the establishment of a working model, typically occurs when the beta
testing commences, and the general availability of such software has been short
and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company did not have any
significant components that are required to be reported in comprehensive income
other than its net income.
INCOME TAXES
The Company elected to be taxed under the S corporation provisions of the
Internal Revenue Code. Historically, the stockholders of the Company were
allocated their pro rata share of the Company's income in their individual
returns. Due to its S corporation status, the Company was only subject to
California corporate state income taxes. In February 2000, the Company converted
from an S corporation to a C corporation, effective as of January 1, 2000,
accordingly, the Company will now be subject to regular federal and state income
taxes.
PRO FORMA BALANCE SHEET INFORMATION (UNAUDITED)
The pro forma balance sheet gives effect to the termination of the Company's
S corporation tax status as if such termination had occured on December 31,
1999.
Upon termination of its S corporation status, the Company was required to
recognize deferred income taxes for cumulative temporary differences between
income for financial and tax reporting purposes. Had the Company been a
C corporation at December 31, 1999, the cumulative deferred
F-9
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
income tax liability, net, calculated in accordance with SFAS No. 109,
"Accounting for Income Taxes," would have approximated $274,000 (see also Note
5).
Upon termination of S corporation status, the accumulated deficit is
required to be reclassified to additional paid in capital; the pro forma balance
sheet reflects such reclassification.
HISTORICAL NET INCOME PER SHARE
The Company computes historical net income per share in accordance with SFAS
No. 128, Earnings per Share. Basic earnings per share is computed by dividing
net income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities by including stock options in the weighted
average number of common shares outstanding for a period, if dilutive.
A reconciliation of the numerator and denominator used in the calculation of
historical basic and diluted net income per share follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Historical net income per share, basic and diluted:
Numerator for net income, basic and diluted............. $ 301 $ 2,028 $ 2,186
------- ------- -------
Denominator for basic earnings per share:
Weighted average vested common shares outstanding... 16,800 16,810 20,070
------- ------- -------
Net income per share basic.............................. $ 0.02 $ 0.12 $ 0.11
======= ======= =======
Denominator for diluted earnings per share:
Weighted average vested common shares outstanding... 16,800 16,810 20,070
Effect of dilutive securities-
Common stock options............................ 4,278 4,420 1,302
------- ------- -------
Weighted average common and common equivalent
shares............................................ 21,078 21,230 21,877
------- ------- -------
Net income per share diluted............................ $ 0.01 $ 0.10 $ 0.10
======= ======= =======
Anti dilutive securities not included in net income per
share calculation-common stock options.................. -- -- 109
======= ======= =======
</TABLE>
PRO FORMA NET LOSS AND NET LOSS PER SHARE (UNAUDITED)
The pro forma net loss gives effect to the tax provision that would have
been required by the termination of the Company's S corporation tax status had
such termination occurred on January 1, 1999.
The Company computes pro forma net income per share in accordance with SFAS
No. 128, Earnings Per Share, as if the Company had converted from an
S corporation to a C corporation in 1999. In accordance with SEC administrative
policies, the weighted average number of common shares outstanding used in the
pro forma per share calculation also includes the number of common shares
F-10
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
which, based on the initial public offering estimated price, are equivalent to
the excess of 1999 distributions to stockholders over 1999 net income.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities and will be adopted
in the year 2001. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. The Company does not expect the adoption of this standard to have a
material impact on its results of operations, financial positions or cash flows.
In December 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-9, modification of SOP 97-2, "Software Revenue
Recognition with Respect to Certain Transactions." SOP 98-9 will be effective
for transactions that are entered into in fiscal years beginning after
March 15, 1999. Retroactive application is prohibited. The Company does not
expect the adoption of this standard to have a material impact on its results of
operations, financial position or cash flows.
NOTE 3--BALANCE SHEET ACCOUNTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Computer equipment and software........................... $ 582 $ 976
Furniture and fixtures.................................... 35 205
Leasehold improvements.................................... 7 159
----- -----
624 1,340
Less: Accumulated depreciation and amortization........... (282) (382)
----- -----
$ 342 $ 958
===== =====
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Payroll and related expenses.............................. $ 51 $ 305
Sales tax payable......................................... 36 132
Accrued state income tax.................................. 45 82
Other..................................................... 84 287
----- -----
$ 216 $ 806
===== =====
</TABLE>
NOTE 4--RELATED PARTY TRANSACTIONS
In September 1998 the Company invested $8,000 in a foreign entity,
Embarcadero Europe Limited ("EEL"), resulting in an approximate 44% ownership
interest in EEL. The investment is accounted for under the equity method. The
Company has an option to acquire the remaining 56% ownership interest in EEL. At
December 31, 1999, if the Company exercised its option, the cost would be
approximately $3 million. The option expires in October 2001. In 1998 and 1999,
the Company had
F-11
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS (CONTINUED)
software product and maintenance revenue from EEL totaling $18,000 and
$1,870,000 and reimbursed EEL for marketing and administrative expenses of
$156,000 and $714,000.
The Company leases office space controlled by an individual who became a
stockholder and employee of the Company in 1999. Total payments for rent were
$51,000 during the year ended December 31, 1999.
NOTE 5--PRO FORMA INCOME TAXES (UNAUDITED)
The pro forma provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
CURRENT:
U.S. federal.............................................. $2,123
State and local........................................... 560
------
Total current income taxes.............................. 2,683
------
DEFERRED:
U.S. federal.............................................. (37)
Other..................................................... 32
------
Total deferred income taxes............................. (5)
------
Net income taxes............................................ $2,678
======
</TABLE>
The reconciliation between the effective pro forma income tax rate and the
U.S. federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
-------------
<S> <C>
U.S. federal taxes at statutory rate........................ $ 900
Permanent difference--non-deductible expenses............... 1,384
State taxes, net of federal tax benefit..................... 394
------
Pro forma tax provision................................... $2,678
======
</TABLE>
F-12
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
Pro forma deferred tax assets and liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1999
-----------------
<S> <C>
DEFERRED TAX ASSETS:
Accruals and allowances................................... $ 244
-----
Total deferred tax assets............................... 244
-----
DEFERRED TAX LIABILITIES:
Depreciation.............................................. $ (45)
Cash to accrual basis..................................... (473)
-----
Total deferred tax liabilities.......................... (518)
-----
Net deferred tax liability.................................. $(274)
=====
</TABLE>
NOTE 6--COMMITMENTS
ROYALTY OBLIGATIONS
In December 1998, the Company entered into an agreement to license and
integrate certain third party software into the Company's products, under which
the Company is obligated to pay royalties on proceeds from sales of such
products. The initial term of the agreement is two years. The agreement is
automatically extended for additional one-year terms thereafter, unless either
party gives at least two months' advance notice of termination. In 1999, the
Company paid royalty fees of $101,000 under this agreement.
REIMBURSEMENT OF EXPENSES
In connection with the Company's investment in EEL (see Note 4), the Company
was obligated to reimburse EEL for marketing and distribution expenses of
$43,000 a month. Effective September 1999, the Company agreed to amend the
agreement to reimburse expenses at the higher of a rate of 25% of EEL's gross
revenues or a monthly amount of $43,000.
LEASES
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through 2004. Rent expense for the year
ended December 31, 1997, 1998 and 1999 was $86,000, $118,000 and $308,000. The
terms of the facility lease provide for rental payments on a graduated scale.
The Company recognizes rent expense on a straight-line basis over the lease
period, and has accrued for rent expense incurred but not paid.
F-13
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases,
including lease commitments entered into subsequent to December 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
- ------------ ---------
<S> <C>
2000........................................................ $ 621
2001........................................................ 618
2002........................................................ 613
2003........................................................ 469
2004........................................................ 170
------
Total minimum lease payments............................ $2,491
======
</TABLE>
F-14
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS
In November 1993, the Company adopted the 1993 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. At December 31, 1999, the Company
had reserved 12,000,000 shares of Common Stock for issuance under the Plan. In
February 2000, the Company amended and restated the Plan to reserve 11,300,000
shares of Common Stock for issuance.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 100% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that the
exercise price of an ISO and NSO granted to a 10% stockholder shall not be less
than 110% of the estimated fair value of the shares on the date of grant.
Options are exercisable at such times and under such conditions as determined by
the Board of Directors.
Activity under the Plan is set forth as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
NUMBER OF OPTIONS AVERAGE
OF SHARES ISSUED AND EXERCISE AGGREGATE
AVAILABLE OUTSTANDING PRICE PRICE
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Balances, January 1, 1997........................ 7,500,000 4,500,000 $0.05 $ 225,000
Options granted.................................. (84,400) 84,400 0.05 4,220
Options cancelled................................ 40,000 (40,000) 0.05 (2,000)
---------- ---------- ----------
Balances, December 31, 1997...................... 7,455,600 4,544,400 0.05 227,220
Options granted.................................. (176,600) 176,600 0.05 8,830
Options exercised................................ -- (38,344) 0.05 (1,917)
Options cancelled................................ 96,056 (96,056) 0.05 (4,803)
---------- ---------- ----------
Balances, December 31, 1998...................... 7,375,056 4,586,600 0.05 229,330
Options granted.................................. (2,599,400) 2,599,400 0.85 2,209,490
Options exercised................................ -- (4,337,220) 0.05 (216,861)
Options cancelled................................ 169,980 (169,980) 0.23 (39,095)
---------- ---------- ----------
Balances, December 31, 1999...................... 4,945,636 2,678,800 0.81 $2,182,864
========== ========== ==========
</TABLE>
For financial reporting purposes, the Company has determined that the
estimated value of common stock determined in anticipation of the Company's
initial public offering (see Note 10) was in excess of the exercise price, which
was deemed to be the fair market value as of the dates of grant. In connection
with the grants of such options, the Company recognized deferred compensation of
approximately $61,000 in 1997, $168,000 in 1998 and $14,214,000 in 1999.
Deferred stock-based compensation will be amortized over the vesting periods
utilizing the multiple option method; approximately $34,000 was expensed in the
year ended December 31, 1997, $99,000 in 1998 and $4,261,000 in 1999. Future
amortization based on options granted through December 31, 1999 is
F-15
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS (CONTINUED)
expected to be $5,830,000, $2,762,000, $1,202,000 and $255,000 in the years
2000, 2001, 2002 and 2003, respectively.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT DECEMBER 31, 1999 OPTIONS EXERCISABLE AT
------------------------------------------- DECEMBER 31, 1999
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ----------------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.05.................. 344,400 8.04 $0.05 328,190 $0.05
0.25.................. 1,774,400 9.52 0.25 800,904 0.25
0.50.................. 120,000 9.82 0.50 69,278 0.50
2.50-5.00............. 440,000 9.80 3.75 22,308 3.75
--------- ---- ----- --------- -----
2,678,800 9.39 0.81 1,220,680 0.27
========= =========
</TABLE>
FAIR VALUE DISCLOSURES
The Company has adopted the disclosure-only provisions of Statement of
Financing Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost for the Company's stock-based compensation
plan been determined based on the fair value at the grant dates for the awards
under a method prescribed by SFAS No. 123, the Company's net income would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income:
As reported........................................ $ 301 $2,028 $2,186
Pro forma.......................................... 300 2,027 2,088
Basic net income per share:
As reported........................................ 0.02 0.12 0.11
Pro forma.......................................... 0.02 0.12 0.10
Diluted net income per share:
As reported........................................ 0.01 0.10 0.10
Pro forma.......................................... 0.01 0.10 0.10
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Risk-free interest rate.......................... 6.13% 5.42% 5.00%
Expected life.................................... 3 years 3 years 3.5 years
Expected dividends............................... $ -- $ -- $ --
</TABLE>
The weighted average per share fair value of common stock options granted
during 1997, 1998 and 1999 was $0.94, $1.85 and $6.75.
F-16
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) defined contribution plan covering all
employees. Under the plan, employees are permitted to contribute a portion of
gross compensation not to exceed standard limitations provided by the Internal
Revenue Service. The Company has not made any contributions under this plan
since inception.
NOTE 9--SEGMENT REPORTING
The Company operates in one industry segment. The Company's geographic sales
data based on customer destination is defined by region: North America, United
Kingdom (U.K.) and Other. Sales in the U.K. are transacted by the Company's
affiliated distributor, Embarcadero Europe Ltd. The affiliated distributor as
well as other distributors handle regions outside the U.K. and North America.
Revenue by geographic region was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
North America............................................... $4,330 $8,895 $16,800
U.K......................................................... 160 160 1,975
Other....................................................... 96 64 77
------ ------ -------
$4,586 $9,119 $18,852
====== ====== =======
</TABLE>
NOTE 10--SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
In January 2000, the Company's Board of Directors authorized the Company to
file a registration statement with the Securities and Exchange Commission for
the purpose of an initial public offering of the Company's common stock.
REINCORPORATION
In February 2000, the Company reincorporated in Delaware. At the time of its
reincorporation, the Company increased the number of its authorized common stock
to 60,000,000 shares, authorized 5,000,000 shares of preferred stock and
effected a two-for-one stock split of its outstanding common stock. All share
and per share information included in these financial statements have been
retroactively adjusted to reflect the stock split.
NONEMPLOYEE DIRECTORS STOCK OPTION PLAN
In February 2000, the Company's Board of Directors and stockholders adopted
the 2000 Nonemployee Directors Stock Option Plan under which nonemployee
directors will automatically be granted options to purchase shares of common
stock on their election and on each annual stockholders' meeting, beginning with
the annual stockholders meeting in 2001.
F-17
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--SUBSEQUENT EVENTS (CONTINUED)
A total of 200,000 shares of common stock have been authorized for issuance
under the 2000 Nonemployee Directors Stock Option Plan.
1993 STOCK OPTION PLAN
In February 2000, the Company's Board of Directors and stockholders approved
the amendment and restatement of the 1993 Stock Option Plan. A total of
11,300,000 shares of common stock have been authorized for issuance under the
1993 Stock Option Plan as amended.
SERIES A CONVERTIBLE PREFERRED STOCK
In February 2000, the Company sold 253,893 shares of Series A convertible
preferred stock for proceeds of approximately $1,828,030. The holders of
Series A convertible preferred stock have certain rights and preferences
including voting rights, dividends, liquidation and conversion. Shares of
Series A convertible preferred stock automatically convert into common shares
upon the closing of the initial public offering of the Company's common stock.
The conversion ratio of the series A convertible preferred stock as of
February 15, 2000 is 1:1. The Company will incur a non-cash charge (beneficial
conversion feature) against earnings attributable to common stockholders of
approximately $1.2 million in the quarter ending March 31, 2000.
F-18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[Inside Back Cover Graphics]
Header: Embarcadero Technologies Logo--do more now--Database
Design--Database Development--Database Administration.
Description: Graphical illustration representing the three phases of the
database lifecycle, intended to show the capability of our
products to manage databases from the design phase through
the development phase and the administration phase.
</TABLE>
<PAGE>
- ---------------------------------------------------------
- ---------------------------------------------------------
, 2000
[LOGO]
4,000,000 SHARES OF COMMON STOCK
----------------------
P R O S P E C T U S
----------------------
DONALDSON, LUFKIN & JENRETTE
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
DLJDIRECT INC.
- ---------------------------------------------------------
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy these securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Embarcadero
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of common stock may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses to be paid by Embarcadero, other
than the underwriting discounts and commissions payable by Embarcadero in
connection with the sale of the common stock being registered. All amounts shown
are estimates except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
Registration fee............................................ $ 15,180
NASD filing fee............................................. 6,250
Nasdaq National Market...................................... 95,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 350,000
Director and officer liability insurance.................... 250,000
Transfer agent and registrar fees........................... 25,000
Miscellaneous expenses...................................... 73,570
Total....................................................... $1,270,000
==========
</TABLE>
ITEM 14 INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. Our Certificate of Incorporation and Bylaws
provide that we will indemnify our directors, officers, and that we may
indemnify our employees and agents, to the full extent permitted by Delaware
General Corporation Law, including in circumstances in which indemnification is
otherwise discretionary under Delaware law. In addition, we intend to enter into
separate indemnification agreements with our directors and officers which would
require us, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from willful misconduct of a culpable nature). The indemnification
provisions in our Certificate of Incorporation and Bylaws and the
indemnification agreement to be entered into between us and our directors and
officers may be sufficiently broad to permit indemnification of our officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act. We also intend to maintain director and officer
liability insurance, if available on reasonable terms, to insure our directors
and officers against the cost of defense, settlement or payment of a judgment
under certain circumstances. In addition, the underwriting agreement filed as
Exhibit 1.1 to this Registration Statement provides for indemnification by the
underwriters of the Company and our officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES.
In the past three years we have sold and issued the following securities:
1. In February 2000, we issued 253,893 shares of Series A preferred stock to
a total of nine investors for an aggregate purchase price of $1,828,030. The
issuance of these securities was exempt from registration under the Securities
Act pursuant to Rule 506 under Regulation D. Based on representations made to us
by the investors, the investors were all accredited investors within the meaning
of Rule 501 of Regulation D under the Securities Act and were able to bear the
financial risk
II-1
<PAGE>
of their investment. The investors represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
securities. We did not make any offer to sell the securities by means of any
general solicitation or general advertising within the meaning of Rule 502 of
Regulation D of the Securities Act.
2. During the past three years, we have issued an aggregate of 4,488,900
options to purchase shares of common stock to our employees and directors and
4,466,596 shares of common stock have been issued pursuant to the exercise of
options. The sales of the above securities were deemed to be exempt from
registration pursuant to either Section 4(2) of the Securities Act or Rule 701
promulgated under the Securities Act. The recipients of securities in each of
these transactions represented their intention to acquire the securities for
investment only and not with view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationship with us, to information about us.
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation, as
currently in effect+
3.2 Form of Amended and Restated Certificate of Incorporation,
to be effective upon closing+
3.3 Bylaws, as currently in effect+
3.4 Form of Amended and Restated Bylaws, to be effective upon
closing+
4.1 Specimen Common Stock Certificate
5.1 Opinion of Heller Ehrman White & McAuliffe LLP+
10.1 Amended and Restated 1993 Stock Option Plan+
10.2 2000 Nonemployee Directors Stock Option Plan+
10.3 Form of Indemnification Agreement+
10.4 Office Lease between Metropolitan Life Insurance Company and
Embarcadero Technologies, Inc. dated April 23, 1999, as
amended+
10.5 Lease Agreement between NewCon Software, Inc. and
Embarcadero Technologies, Inc., dated as of August 1,
1999+
10.6 Lease between Wallace J. Getz and Embarcadero Technologies,
Inc., dated as of December 6, 1999+
10.7 Employment Offer Letter to Ellen Taylor dated September 23,
1999
10.8 Employment Offer Letter to Raj P. Sabhlok dated January 24,
2000+
10.9 Employment Offer Letter to Walter F. Scott III dated
December 31, 1999+
10.10 Separation Agreement and General Release with Stuart
Browning dated February 1, 2000+
10.11 Series A Preferred Stock Purchase Agreement dated
February 17, 2000+
10.12 Bank Loan Agreement between Embarcadero Technologies, Inc.
and Union Bank of California, dated as of March 27, 2000
16.1 Letter re: change in certifying accountant+
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP, independent auditors
23.2 Consent of Heller Ehrman White & McAuliffe LLP (included in
Exhibit 5.1)+
24.1 Power of Attorney+
27.1 Financial Data Schedule+
</TABLE>
- ------------------------
+ Previously filed
(B) FINANCIAL STATEMENT SCHEDULE.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17 UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the Offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in San Francisco,
California, on the 13th day of April, 2000.
<TABLE>
<S> <C> <C>
EMBARCADERO TECHNOLOGIES, INC.
By: /s/ ELLEN W. TAYLOR
-----------------------------------------
Ellen W. Taylor
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act, this Amendment No. 3 to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ELLEN W. TAYLOR President and Chief Executive
------------------------------------ Officer (Principal Executive April 13, 2000
Ellen W. Taylor Officer)
/s/ RAJ P. SABHLOK
------------------------------------ Senior Vice President and Chief April 13, 2000
Raj P. Sabhlok Financial Officer
STEPHEN R. WONG*
------------------------------------ Chairman of the Board April 13, 2000
Stephen R. Wong
FRANK J. POLESTRA*
------------------------------------ Director April 13, 2000
Frank J. Polestra
DENNIS J. WONG*
------------------------------------ Director April 13, 2000
Dennis J. Wong
MICHAEL J. ROBERTS*
------------------------------------ Director April 13, 2000
Michael J. Roberts
/s/ RAJ P. SABHLOK
------------------------------------ April 13, 2000
Raj P. Sabhlok
*(Attorney in Fact)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation, as
currently in effect+
3.2 Form of Amended and Restated Certificate of Incorporation,
to be effective upon closing+
3.3 Bylaws, as currently in effect+
3.4 Form of Amended and Restated Bylaws, to be effective upon
closing+
4.1 Specimen Common Stock Certificate
5.1 Opinion of Heller Ehrman White & McAuliffe LLP+
10.1 Amended and Restated 1993 Stock Option Plan+
10.2 2000 Nonemployee Directors Stock Option Plan+
10.3 Form of Indemnification Agreement+
10.4 Office Lease between Metropolitan Life Insurance Company and
Embarcadero Technologies, Inc. dated April 23, 1999, as
amended+
10.5 Lease Agreement between NewCon Software, Inc. and
Embarcadero Technologies, Inc., dated as of August 1,
1999+
10.6 Lease between Wallace J. Getz and Embarcadero Technologies,
Inc., dated as of December 6, 1999+
10.7 Employment Offer Letter to Ellen Taylor dated September 23,
1999
10.8 Employment Offer Letter to Raj P. Sabhlok dated January 24,
2000+
10.9 Employment Offer Letter to Walter F. Scott III dated
December 31, 1999+
10.10 Separation Agreement and General Release with Stuart
Browning dated February 1, 2000+
10.11 Series A Preferred Stock Purchase Agreement dated
February 17, 2000+
10.12 Bank Loan Agreement between Embarcadero Technologies, Inc.
and Union Bank of California, dated as of March 27, 2000
16.1 Letter re: change in certifying accountant+
23.1 Consent of PricewaterhouseCoopers LLP, independent auditors
23.2 Consent of Heller Ehrman White & McAuliffe LLP (included in
Exhibit 5.1)+
24.1 Power of Attorney+
27.1 Financial Data Schedule+
</TABLE>
- ------------------------
+ Previously filed
<PAGE>
4,000,000 Shares
EMBARCADERO TECHNOLOGIES, INC.
Common Stock
UNDERWRITING AGREEMENT
__________, 2000
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY INC.
WIT SOUNDVIEW CORPORATION.
DLJDIRECT, INC.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Embarcadero Technologies, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell 4,000,000 shares of its common stock, par value
$.001 per share (the "FIRM SHARES") to the several underwriters named in
Schedule I hereto (the "UNDERWRITERS"). The Company also proposes to issue
and sell to the several Underwriters not more than an additional 600,000
shares of its common stock, par value $.001 per share (the "ADDITIONAL
SHARES") if requested by the Underwriters as provided in Section 2 hereof.
The Firm Shares and the Additional Shares are hereinafter referred to
collectively as the "SHARES". The shares of common stock of the Company to be
outstanding after giving effect to the sales contemplated hereby are
hereinafter referred to as the "COMMON STOCK".
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of
1933, as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended
at the time it became
<PAGE>
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A
under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement
pursuant to Rule 462(b) under the Act registering additional shares of Common
Stock (a "RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise
specified, any reference herein to the term "REGISTRATION STATEMENT" shall be
deemed to include such Rule 462(b) Registration Statement.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE AND LOCK-UP AGREEMENTS . On
the basis of the representations and warranties contained in this Agreement,
and subject to its terms and conditions, the Company agrees to issue and
sell, and each Underwriter agrees, severally and not jointly, to purchase
from the Company at a price per Share of $______ (the "PURCHASE PRICE") the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to
issue and sell the Additional Shares and the Underwriters shall have the
right to purchase, severally and not jointly, up to 600,000 Additional Shares
from the Company at the Purchase Price. Additional Shares may be purchased
solely for the purpose of covering over-allotments made in connection with
the offering of the Firm Shares. The Underwriters may exercise their right
to purchase Additional Shares in whole or in part from time to time by giving
written notice thereof to the Company within 30 days after the date of this
Agreement. You shall give any such notice on behalf of the Underwriters and
such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof, which date shall be a business day (i) no earlier than two business
days after such notice has been given (and, in any event, no earlier than the
Closing Date (as hereinafter defined)) and (ii) no later than ten business
days after such notice has been given. If any Additional Shares are to be
purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Company the number of Additional Shares (subject to such adjustments
to eliminate fractional shares as you may determine) which bears the same
proportion to the total number of Additional Shares to be purchased from the
Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Wit
SoundView Corporation ("WIT SOUNDVIEW") have each agreed to reserve up to
200,000 Shares to be purchased by it under this Agreement for sale to (i) in
the case of DLJ, the Company's directors, officers, employees and business
associates and other parties related to the Company and (ii) in the case of
Wit SoundView, the Company's customers (collectively, "PARTICIPANTS"), as set
forth in the Prospectus under the heading "UNDERWRITERS" (the "DIRECTED SHARE
PROGRAM"). The 400,000 Shares to be sold by DLJ and Wit SoundView pursuant to
the Directed Share Program are referred to hereinafter as the "DIRECTED
SHARES". Any Directed Shares not orally confirmed for purchase by any
Participant by the end of the business day on which this Agreement is
executed will be offered to the public by the Underwriters as set forth in
the Prospectus.
The Company hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant
2
<PAGE>
to purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other
arrangement that transfers all or a portion of the economic consequences
associated with the ownership of any Common Stock (regardless of whether any
of the transactions described in clause (i) or (ii) is to be settled by the
delivery of Common Stock, or such other securities, in cash or otherwise),
except to the Underwriters pursuant to this Agreement, for a period of 180
days after the date of the Prospectus without the prior written consent of
DLJ. Notwithstanding the foregoing, during such period (i) the Company may
grant stock options pursuant to the Company's Amended and Restated 1993 Stock
Option Plan and 2000 Nonemployee Directors Stock Option Plan and (ii) the
Company may issue shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof, in
each case so long as none of those shares may be transferred during the
period of 180 days after the date of the Prospectus. The Company also agrees
not to file any registration statement with respect to any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock for a period of 180 days after the date of the Prospectus
without the prior written consent of DLJ. The Company shall, prior to or
concurrently with the execution of this Agreement, (i) deliver an agreement
in the form of Annex II hereto executed by (A) each of the directors and
officers of the Company and (B) each stockholder and optionholder listed on
Annex I hereto and (ii) enter stop transfer instructions with its transfer
agent and registrar against the transfer of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
beneficially owned by any such persons.
SECTION 3. TERMS OF PUBLIC OFFERING. The Company is advised by you
that the Underwriters propose (i) to make a public offering of their
respective portions of the Shares as soon after the execution and delivery of
this Agreement as in your judgment is advisable and (ii) initially to offer
the Shares upon the terms set forth in the Prospectus. The price at which
the Shares will be sold to the public shall not be higher than the maximum
price recommended by U.S. Bancorp Piper Jaffray, Inc., which has agreed to
act as a "qualified independent underwriter" (within the meaning of Section
(b)(15) of Rule 2720 of the National Association of Securities Dealers, Inc.)
with respect to the offering and sale of the Shares.
SECTION 4. DELIVERY AND PAYMENT. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations
and registered in such names as DLJ shall request no later than two business
days prior to the Closing Date or the applicable Option Closing Date (as
defined below), as the case may be. The Company shall deliver the Shares,
with any transfer taxes thereon duly paid by the respective Sellers, to DLJ
through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the
Company of the Purchase Price therefore by wire transfer of Federal or other
funds immediately available in New York City. The certificates representing
the Shares shall be made available for inspection not later than 9:30 A.M.,
New York City time, on the business day prior to the Closing Date or the
applicable Option Closing Date, as the case may be, at the office of DTC or
its designated custodian (the "DESIGNATED OFFICE"). The time and date of
delivery and payment for the Firm Shares shall be 9:00 A.M., New York City
time, on ________, 2000 or such other time on the same or such other date as
DLJ and the Company shall agree in writing. The time and date of delivery
for the Firm Shares are hereinafter referred
3
<PAGE>
to as the "CLOSING DATE". The time and date of delivery and payment for any
Additional Shares to be purchased by the Underwriters shall be 9:00 A.M., New
York City time, on the date specified in the applicable exercise notice given
by you pursuant to Section 2 or such other time on the same or such other
date as DLJ and the Company shall agree in writing. The time and date of
delivery for any Additional Shares are hereinafter referred to as an "OPTION
CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Heller Ehrman White & McAuliffe LLP, 333
Bush Street, San Francisco, California 94104 and the Shares shall be
delivered at the Designated Office, all on the Closing Date or such Option
Closing Date, as the case may be.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes, (iii)
when any amendment to the Registration Statement becomes effective, (iv) if
the Company is required to file a Rule 462(b) Registration Statement after
the effectiveness of this Agreement, when the Rule 462(b) Registration
Statement has become effective and (v) of the happening of any event during
the period referred to in Section 5(d) below which makes any statement of a
material fact made in the Registration Statement or the Prospectus untrue or
which requires any additions to or changes in the Registration Statement or
the Prospectus in order to make the statements therein not misleading. If at
any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will use its best
efforts to obtain the withdrawal or lifting of such order at the earliest
possible time.
(b) To furnish to you five signed copies of the Registration Statement
as first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of
each amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the
Act; during the period specified in Section 5(d) below, not to file any
further amendment to the Registration Statement and not to make any amendment
or supplement to the Prospectus of which you shall not previously have been
advised or to which you shall reasonably object after being so advised; and,
during such period, to prepare and file with the Commission, promptly upon
your reasonable request, any amendment to the Registration Statement or
amendment or supplement to the Prospectus which may be necessary or advisable
in connection with the distribution of the Shares by you, and to use its best
efforts to cause any such amendment to the Registration Statement to become
promptly effective.
4
<PAGE>
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or
a dealer, to furnish in New York City to each Underwriter and any dealer as
many copies of the Prospectus (and of any amendment or supplement to the
Prospectus) as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with applicable
law, forthwith to prepare and file with the Commission an appropriate
amendment or supplement to the Prospectus so that the statements in the
Prospectus, as so amended or supplemented, will not in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters
and by dealers under the state securities or Blue Sky laws of such
jurisdictions as you may request, to continue such registration or
qualification in effect so long as required for distribution of the Shares
and to file such consents to service of process or other documents as may be
necessary in order to effect such registration or qualification; PROVIDED,
HOWEVER, that the Company shall not be required in connection therewith to
qualify as a foreign corporation in any jurisdiction in which it is not now
so qualified or to take any action that would subject it to general consent
to service of process or taxation other than as to matters and transactions
relating to the Prospectus, the Registration Statement, any preliminary
prospectus or the offering or sale of the Shares, in any jurisdiction in
which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending
June 30, 2001 that shall satisfy the provisions of Section 11(a) of the Act,
and to advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished
to or filed with the Commission or any national securities exchange on which
any class of securities of the Company is listed and such other publicly
available information concerning the Company as you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel
and the Company's accountants in connection with the
5
<PAGE>
registration and delivery of the Shares under the Act and all other fees and
expenses in connection with the preparation, printing, filing and
distribution of the Registration Statement (including financial statements
and exhibits), any preliminary prospectus, the Prospectus and all amendments
and supplements to any of the foregoing, including the mailing and delivering
of copies thereof to the Underwriters and dealers in the quantities specified
herein, (ii) all costs and expenses related to the transfer and delivery of
the Shares to the Underwriters, including any transfer or other taxes payable
thereon, (iii) all costs of printing or producing this Agreement and any
other agreements or documents in connection with the offering, purchase, sale
or delivery of the Shares, (iv) all expenses in connection with the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing
or producing any Preliminary and Supplemental Blue Sky Memoranda in
connection therewith (including the filing fees and fees and disbursements of
counsel for the Underwriters in connection with such registration or
qualification and memoranda relating thereto), (v) the filing fees and
disbursements of counsel for the Underwriters in connection with the review
and clearance of the offering of the Shares by the National Association of
Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to
the Common Stock and all costs and expenses incident to the listing of the
Shares on the Nasdaq National Market, (vii) the cost of printing certificates
representing the Shares, (viii) the costs and charges of any transfer agent,
registrar and/or depositary, (ix) the costs and expenses of the Company
relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including,
without limitation, expenses associated with the production of road show
slides and graphics, fees and expenses of any consultants engaged in
connection with the road show, presentations with the prior approval of the
Company, travel and lodging expenses of the representatives and officers of
the Company and any such consultants, and the cost of any aircraft chartered
(with the approval of the Company) in connection with the road show, (x) all
fees and disbursements of counsel incurred by the Underwriters in connection
with the Directed Share Program and stamp duties, similar taxes or duties or
other taxes, if any, incurred by the Underwriters in connection with the
Directed Share Program, and (xi) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision
is not otherwise made in this Section; PROVIDED, HOWEVER, that except for the
Company's specific payment obligation under this Section 5(i), the
Underwriters agree to pay all of their own costs and expenses, including
without limitation the fees and expenses of their counsel, incurred in
connection with the transactions contemplated by this Agreement .
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the
Nasdaq National Market for a period of three years after the date of this
Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior
to the Closing Date or any Option Closing Date, as the case may be, and to
satisfy all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the
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Commission registering the Shares not so covered in compliance with Rule
462(b) by 10:00 P.M., New York City time, on the date of this Agreement and
to pay to the Commission the filing fee for such Rule 462(b) Registration
Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the
Act.
(m) To place stop transfer orders on any Directed Shares that have been
sold to Participants subject to the three month restriction on sale,
transfer, assignment, pledge or hypothecation imposed by NASD Regulation,
Inc. under its Interpretative Material 2110-1 on free-riding and withholding
to the extent necessary to ensure compliance with the three-month
restrictions.
(n) To comply with all applicable securities and other laws, rules and
regulations in each jurisdiction in which the Directed Shares are offered in
connection with the Directed Share Program.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement
filed after the effectiveness of this Agreement will become effective no
later than 10:00 P.M., New York City time, on the date of this Agreement; and
no stop order suspending the effectiveness of the Registration Statement is
in effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended,
if applicable, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, (ii) the Registration Statement
(other than any Rule 462(b) Registration Statement to be filed by the Company
after the effectiveness of this Agreement) and the Prospectus comply and, as
amended or supplemented, if applicable, will comply in all material respects
with the Act, (iii) if the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such Rule
462(b) Registration Statement and any amendments thereto, when they become
effective (A) will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (B) will comply in all
material respects with the Act and (iv) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act,
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complied when so filed in all material respects with the Act, and did not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in this
paragraph do not apply to statements or omissions in any preliminary
prospectus based upon information relating to any Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use
therein.
(d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware and has
the corporate power and authority to carry on its business as described in
the Prospectus and to own, lease and operate its properties, and is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where
the failure to be so qualified would not have a material adverse effect on
the business, prospects, financial condition or results of operations of the
Company.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued
by the Company relating to or entitling any person to purchase or otherwise
to acquire any shares of the capital stock of the Company, except as
otherwise disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights; all the outstanding
shares of capital stock of the Company and options and other rights to
acquire capital stock of the Company have been issued in compliance with the
registration and qualification provisions of all applicable securities laws
(or applicable exemptions therefrom); and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid
and non-assessable, and the issuance of such Shares will not be subject to
any preemptive or similar rights.
(g) To the Company's knowledge, all of the outstanding shares of
capital stock of Embarcadero Europe Ltd. owned by the Company have been duly
authorized and validly issued and are fully paid and non-assessable, and are
owned by the Company free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) The Company is not in violation of its certificate of incorporation
or by-laws or in default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company, to
which the Company is a party or by which the Company or any of its property
is bound.
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(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with,
any court or governmental body or agency (except such as may be required
under the securities or Blue Sky laws of the various states), (ii) conflict
with or constitute a breach of any of the terms or provisions of, or a
default under, the certificate of incorporation or by-laws of the Company or
any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company, to which the Company is a party
or by which the Company or any of its property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction
over the Company or any of its property or (iv) result in the suspension,
termination or revocation of any Authorization (as defined below) of the
Company or any other impairment of the rights of the Company under any
Authorization.
(k) There are no legal or governmental proceedings pending or, to
the Company's knowledge, threatened to which the Company is or could be a
party or to which any of its property is or could be subject that are
required to be described in the Registration Statement or the Prospectus and
are not so described; nor are there any statutes, regulations, contracts or
other documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement that are not so described or filed as required.
(l) The Company has not violated any foreign, federal, state or
local law or regulation relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any
provisions of the Foreign Corrupt Practices Act, or the rules and regulations
promulgated thereunder, except for such violations which, singly or in the
aggregate, would not have a material adverse effect on the business,
prospects, financial condition or results of operation of the Company.
(m) The Company has such permits, licenses, consents, exemptions,
franchises, authorizations and other approvals (each, an "AUTHORIZATION") of,
and has made all filings with and notices to, all governmental or regulatory
authorities and self-regulatory organizations and all courts and other
tribunals, including, without limitation, under any applicable Environmental
Laws, as are necessary to own, lease, license and operate its respective
properties and to conduct its business, except where the failure to have any
such Authorization or to make any such filing or notice would not, singly or
in the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company. Each such
Authorization is valid and in full force and effect and the Company is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation,
the receipt of any notice from any authority or governing body) which allows
or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after
notice or lapse of time or both, would result in any other impairment of the
rights of the holder of any such Authorization; and such Authorizations
contain no restrictions that are burdensome to the Company; except where such
failure to be valid and in full force and effect or to be in compliance, the
occurrence of any such event or the
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presence of any such restriction would not, singly or in the aggregate, have
a material adverse effect on the business, prospects, financial condition or
results of operations of the Company.
(n) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance with
Environmental Laws or any Authorization, any related constraints on operating
activities and any potential liabilities to third parties) which would,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company.
(o) This Agreement has been duly authorized, executed and
delivered by the Company.
(p) Pricewaterhouse Coopers LLP are independent public
accountants with respect to the Company as required by the Act.
(q) The financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
together with related schedules and notes, present fairly the financial
position, results of operations and changes in financial position of the
Company on the basis stated therein at the respective dates or for the
respective periods to which they apply; such statements and related schedules
and notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared on
a basis consistent with such financial statements and the books and records
of the Company. Embarcadero Europe Ltd. would not constitute a "significant
subsidiary" of the Company, as such term is defined in Rule 405 of the rules
and regulations of the Commission under the Securities Act, if it were a
subsidiary of the Company.
(r) The PRO FORMA financial statements of the Company and the
related notes thereto set forth in the Registration Statement and the
Prospectus (and any supplement or amendment thereto) have been prepared on a
basis consistent with the historical financial statements of the Company,
give effect to the assumptions used in the preparation thereof on a
reasonable basis and in good faith and present fairly the historical and
proposed transactions contemplated by the Registration Statement and the
Prospectus. Such PRO FORMA financial statements have been prepared in
accordance with the applicable requirements of Rule 11-02 of Regulation S-X
promulgated by the Commission. The other PRO FORMA financial and statistical
information and data set forth in the Registration Statement and the
Prospectus (and any supplement or amendment thereto) are, in all material
respects, accurately presented and prepared on a basis consistent with the
PRO FORMA financial statements.
(s) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit
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preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(t) All material tax returns required to be filed by the Company
and each of its subsidiaries in any jurisdiction have been filed, other than
those filings being contested in good faith, and all material taxes,
including withholding taxes, penalties and interest, assessments, fees and
other charges due pursuant to such returns or pursuant to any assessment
received by the Company or any of its subsidiaries have been paid, other than
those being contested in good faith and for which adequate reserves have been
provided.
(u) Effective as of July 22, 1993, the Company validly elected S
Corporation Status (as defined in Section 1361 of the Internal Revenue Code
of 1986, as amended) for federal and certain state income tax purposes and
validly continued to qualify as an S corporation in each such jurisdiction
since such date until the termination of the Company's S corporation status
effective January 1, 2000.
(v) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(w) Except as set forth in the Registration Statement, there are
no contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(x) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required by
the Act to be described in the Registration Statement or the Prospectus which
is not so described.
(y) The Company owns or possesses, or can acquire on reasonable
terms, all patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary
or confidential information, systems or procedures), trademarks, service
marks and trade names ("INTELLECTUAL PROPERTY") currently employed by it in
connection with the business now operated by it except where the failure to
own or possess or otherwise be able to acquire such intellectual property
would not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operation of the
Company; and the Company has not received any notice of infringement of or
conflict with asserted rights of others with respect to any of such
intellectual property which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse effect
on the business, prospects, financial condition or results of operations of
the Company.
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(z) Since the respective dates as of which information is given
in the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement),
(i) there has not occurred any material adverse change or any development
involving a prospective material adverse change in the condition, financial
or otherwise, or the earnings, business, management or operations of the
Company and its subsidiaries, taken as a whole, (ii) there has not been any
material adverse change or any development involving a prospective material
adverse change in the capital stock or in the long-term debt of the Company
or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries has incurred any material liability or obligation, direct or
contingent.
(aa) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(bb) The Registration Statement, the Prospectus and any
preliminary prospectus comply, and any amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or
supplemented, if applicable, are distributed in connection with the Directed
Share Program.
(cc) No consent, approval, authorization or order of, or
qualification with, any governmental body or agency, other than those
obtained, is required in connection with the offering of the Directed Shares
in any jurisdiction where the Directed Shares are being offered.
(dd) The Company has not offered, or caused DLJ to offer, Shares
to any person pursuant to the Directed Share Program with the specific intent
to unlawfully influence (1) a customer or supplier of the Company to alter
the customer's or supplier's level or type of business with the Company, or
(2) a trade journalist or publication to write or publish favorable
information about the Company or its products.
(ee) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
SECTION 7. INDEMNIFICATION. (a) The Company agrees to indemnify and
hold harmless each Underwriter, its directors, its officers and each person,
if any, who controls any Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), from and against any and all losses, claims, damages,
liabilities and judgments (including, without limitation, any legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) caused by any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), the Prospectus (or any amendment or supplement
thereto) or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based
upon information relating to any Underwriter furnished in writing to the
Company by such Underwriter through
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you expressly for use therein; PROVIDED, HOWEVER, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not
inure to the benefit of any Underwriter who failed to deliver a Prospectus,
as then amended or supplemented, (so long as the Prospectus and any
amendments or supplements thereto was provided by the Company to the several
Underwriters in the requisite quantity and on a timely basis to permit proper
delivery on or prior to the Closing Date) to the person asserting any losses,
claims, damages, liabilities or judgments caused by any untrue statement or
alleged untrue statement of a material fact contained in such preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such material misstatement or omission
or alleged material misstatement or omission was cured in the Prospectus, as
so amended or supplemented, and such Prospectus was required by law to be
delivered at or prior to the written confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, to the same extent as the foregoing indemnity from the Company to such
Underwriter but only with reference to information relating to such
Underwriter furnished in writing to the Company by such Underwriter through
you expressly for use in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus.
(c) In case any action (including any governmental proceeding or
investigation) shall be commenced involving any person in respect of which
indemnity may be sought pursuant to Section 7(a) or 7(b) (the "INDEMNIFIED
PARTY"), the indemnified party shall promptly notify the person against whom
such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party shall assume the defense of such action, including the
employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except
that in the case of any action in respect of which indemnity may be sought
pursuant to both Sections 7(a) and 7(b), the Underwriter shall not be
required to assume the defense of such action pursuant to this Section 7(c),
but may employ separate counsel and participate in the defense thereof, but
the fees and expenses of such counsel, except as provided below, shall be at
the expense of such Underwriter). Any indemnified party shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of the indemnified party unless (i) the employment of such counsel
shall have been specifically authorized in writing by the indemnifying party,
(ii) the indemnifying party shall have failed to assume the defense of such
action or employ counsel reasonably satisfactory to the indemnified party or
(iii) the named parties to any such action (including any impleaded parties)
include both the indemnified party and the indemnifying party, and the
indemnified party shall have been advised by such counsel that there may be
one or more legal defenses available to it which are different from or
additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such
action on behalf of the indemnified party). In any such case, the
indemnifying party shall not, in connection with any one action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the fees
and expenses of more than one separate firm
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of attorneys (in addition to any local counsel) for all indemnified parties
and all such fees and expenses shall be reimbursed as they are incurred.
Such firm shall be designated in writing by DLJ, in the case of parties
indemnified pursuant to Section 7(a), and by the Company, in the case of
parties indemnified pursuant to Section 7(b). The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and
all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii)
effected without its written consent if the settlement is entered into more
than twenty business days after the indemnifying party shall have received a
request from the indemnified party for reimbursement for the fees and
expenses of counsel (in any case where such fees and expenses are at the
expense of the indemnifying party) and, prior to the date of such settlement,
the indemnifying party shall have failed to comply with such reimbursement
request. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement or compromise of, or consent to
the entry of judgment with respect to, any pending or threatened action in
respect of which the indemnified party is or could have been a party and
indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
on claims that are or could have been the subject matter of such action and
(ii) does not include a statement as to or an admission of fault, culpability
or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this
Section 7 is unavailable to an indemnified party or insufficient in respect
of any losses, claims, damages, liabilities or judgments referred to therein,
then each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 7(d)(i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
7(d)(i) above but also the relative fault of the Company on the one hand and
the Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Underwriters on the other hand shall be deemed to be in the same proportion
as the total net proceeds from the offering (after deducting underwriting
discounts and commissions, but before deducting expenses) received by the
Company, and the total underwriting discounts and commissions received by the
Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault of the Company on the one hand and the Underwriters on the
other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by
pro rata allocation (even if the
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Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations
set forth above, any legal or other expenses incurred by such indemnified
party in connection with investigating or defending any matter, including any
action, that could have given rise to such losses, claims, damages,
liabilities or judgments. Notwithstanding the provisions of this Section 7,
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 7(d) are
several in proportion to the respective number of Shares purchased by each of
the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available
to any indemnified party at law or in equity.
SECTION 8. DIRECTED SHARE PROGRAM INDEMNIFICATION. (a) The Company
agrees to indemnify and hold harmless DLJ and Wit SoundView and its affiliate
Wit Capital Corporation ("Wit Capital") and each person, if any, who controls
either DLJ or Wit SoundView or Wit Capital within the meaning of Section 15
of the Act or Section 20 of the Exchange Act (collectively, the "DIRECTED
SHARE PROGRAM ENTITIES"), from and against any and all losses, claims,
damages, liabilities and judgments (including, without limitation, any legal
or other expenses incurred in connection with investigating or defending any
matter, including any action that could give rise to any such losses, claims,
damages, liabilities or judgments (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material
prepared by or with the consent of the Company for distribution to
Participants in connection with the Directed Share Program or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
(ii) caused by the failure of any Participant to pay for and accept delivery
of Directed Shares that the Participant agreed to purchase; or (iii) related
to, arising out of, or in connection with the Directed Share Program.
(b) In case any action (including any governmental proceeding or
investigation) shall be instituted involving any Directed Share Program
Entity in respect of which indemnity may be sought pursuant to Section 8(a),
the Directed Share Program Entity seeking indemnity shall promptly notify the
Company in writing and the Company, upon request of the Directed Share
Program Entity, shall assume the defense of such action, including the
employment of counsel reasonably satisfactory to the Directed Share Program
Entity to represent the Directed Share Program Entity and any others the
Company may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such action as incurred. In any such
action, any Directed Share Program Entity shall have the right to retain its
own counsel, but the fees and
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expenses of such counsel shall be at the expense of such Directed Share
Program Entity unless (i) the Company shall have agreed to the retention of
such counsel, (ii) the Company shall have failed to assume the defense of
such action or employ counsel reasonably satisfactory to the Directed Share
Program Entities or (iii) the named parties to any such action (including any
impleaded parties) include both the Company and any Directed Share Program
Entity and such Directed Share Program Entity shall have been advised by such
counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the Company (in which
case the Company shall not have the right to assume the defense of such
action on behalf of the Directed Share Program Entities).
In any such case, the Company shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Directed Share Program Entities
and all such fees and expenses shall be reimbursed as they are incurred.
Such firm shall be designated in writing by DLJ. The Company shall indemnify
and hold harmless the Directed Share Program Entities from and against any
and all losses, claims, damages, liabilities and judgments by reason of any
settlement of any proceeding or action (i) effected with its written consent
or (ii) effected without its written consent if the settlement is entered
into more than twenty business days after the Company shall have received a
request from the Directed Share Program Entities for reimbursement for the
fees and expenses of counsel (in any case where such fees and expenses are at
the expense of the Company) and, prior to the date of such settlement, the
Company shall have failed to comply with such reimbursement request. The
Company shall not, without the prior written consent of the Directed Share
Program Entities, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened proceeding or
action in respect of which any Directed Share Program Entity is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by any Directed Share Program Entity, unless such settlement,
compromise or judgment (i) includes an unconditional release of all the
Directed Share Program Entities from all liability on claims that are or
could have been the subject matter of such proceeding or action and (ii) does
not include a statement as to or an admission of fault, culpability or a
failure to act, by or on behalf of any Directed Share Program Entity.
(c) To the extent the indemnification provided for in this
Section 8 is unavailable to any Directed Share Program Entity or insufficient
in respect of any losses, claims, damages, liabilities or judgments referred
to therein, then the Company, in lieu of indemnifying such Directed Share
Program Entity, shall contribute to the amount paid or payable by such
Directed Share Program Entity as a result of such losses, claims, damages,
liabilities and judgments (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Directed Share Program Entities on the other hand from the offering of the
Directed Shares or (ii) if the allocation provided by clause 8(c)(i) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause 8(c)(i) above
but also the relative fault of the Company on the one hand and the Directed
Share Program Entities on the other hand, as well as any other relevant
equitable considerations. The relative benefits received by the Company on
the one hand and the Directed Share Program Entities on the other hand shall
be deemed to be in the same proportion as the
16
<PAGE>
total net proceeds from the offering of the Directed Shares (after deducting
underwriting discounts and commissions, but before deducting expenses)
received by the Company, and the total underwriting discounts and commissions
received by the Directed Share Program Entities from the offering of the
Directed Shares, bear to the total price to the public of the Directed
Shares, in each case as set forth in the table on the cover page of the
Prospectus. If the loss, claim, damage, liability or judgment is caused by
an untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact, the relative fault of the Company
on the one hand and the Directed Share Program Entities on the other hand
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Directed Share Program Entities and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Directed Share Program Entities agree that it would
not be just and equitable if contribution pursuant to this Section 8(c) were
determined by pro rata allocation (even if the Directed Share Program
Entities were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The aggregate amount
paid or payable by the Directed Share Program Entities as a result of the
losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
Directed Share Program Entity in connection with investigating or defending
any matter, including any proceeding or action, that could have given rise to
such losses, claims, damages, liabilities or judgments. Notwithstanding the
provisions of this Section 8, the Directed Share Program Entities shall not
be required to contribute, in the aggregate, any amount in excess of the
amount by which the total price at which the Directed Shares sold by such
Directed Share Program Entity exceeds the amount of any damages which the
Directed Share Program Entities have otherwise been required to pay pursuant
to this Section 8. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
(d) The indemnity and contribution provisions contained in this
Section 8 shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Directed Share Program Entity or the Company, its officers or
directors or any person controlling the Company and (iii) acceptance of and
payment for any of the Directed Shares.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to
any Directed Share Program Entity at law or in equity.
SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares under this
Agreement are subject to the satisfaction of each of the following conditions:
17
<PAGE>
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on the Closing Date
with the same force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York
City time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate
dated the Closing Date, signed by Stephen Wong and Raj Sabhlok, in their
capacities as the Chairman and Senior Vice President of Finance and Corporate
Development of the Company, confirming the matters set forth in Sections
6(z), 9(a) and 9(b) and that the Company has complied with all of the
agreements and satisfied all of the conditions herein contained and required
to be complied with or satisfied by the Company on or prior to the Closing
Date.
(d) Since the respective dates as of which information is given
in the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement),
(i) there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company, (ii) there shall not have
been any change or any development involving a prospective change in the
capital stock or in the long-term debt of the Company and (iii) the Company
shall not have incurred any liability or obligation, direct or contingent,
the effect of which, in any such case described in clause 9(d)(i), 9(d)(ii)
or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing
Date, of Heller Ehrman White & McAuliffe LLP counsel for the Company, to the
effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of Delaware and has the
corporate power and authority to carry on its business as described in
the Prospectus and to own, lease and operate its properties;
(ii) the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would not
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company;
18
<PAGE>
(iii) all the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid,
non-assessable and not subject to any preemptive or similar rights;
(iv) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
rights;
(v) this Agreement has been duly authorized, executed and delivered
by the Company;
(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(vii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are pending before or contemplated by the
Commission;
(viii) the statements under the captions "Management -
Indemnification", "Management - Employment and Change of Control
Arrangements", "Management - Employee Benefit Plans", "Description of
Capital Stock", and "Shares Eligible for Future Sale" and Items 14 and 15
of Part II of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;
(ix) the Company is not in violation of its certificate of
incorporation or by-laws and, to the best of such counsel's knowledge
after due inquiry, the Company is not in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture,
loan agreement, mortgage, lease or other agreement or instrument filed as
an exhibit to the Registration Statement;
(x) the execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby (other than the
performance of the Company's indemnification obligations hereunder, with
respect to which no opinion need be given) will not (A) require any
consent, approval, authorization or other order of, or qualification with,
any court or governmental body or agency (except such as may be required
under the securities or Blue Sky laws of the various states), (B) conflict
with or constitute a breach of any of the terms or provisions of, or a
default under, the certificate of incorporation or by-laws of the Company
or any indenture, loan agreement, mortgage, lease or other agreement or
instrument filed as an exhibit to the Registration Statement, (C) violate
or conflict with any applicable law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency having
jurisdiction over the Company or any of its property or (D) to such
counsel's knowledge, result in the
19
<PAGE>
suspension, termination or revocation of any Authorization of the Company or
any of its subsidiaries;
(xi) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company is a party or to
which any of its property is subject that are required to be described in
the Registration Statement or the Prospectus and are not so described, or
of any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that are not so
described or filed as required;
(xii) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended;
(xiii) to such counsel's knowledge and except as described in the
Registration Statement, there are no contracts, agreements or
understandings between the Company and any person granting such person the
right to require the Company to file a registration statement under the
Act with respect to any securities of the Company or to require the
Company to include such securities with the Shares registered pursuant to
the Registration Statement; and
(xiv) in addition, such opinion shall include statements to the
effect that (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form with the Act, (B) such counsel has no reason
to believe that at the time the Registration Statement became effective or
on the date of this Agreement, the Registration Statement and the
prospectus included therein (except for the financial statements and other
financial data as to which such counsel need not express any belief)
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if applicable
(except for the financial statements and other financial data, as
aforesaid) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
The opinion of Heller Ehrman White & McAuliffe LLP described in Section
9(e) above shall be rendered to you at the request of the Company and shall
so state therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Milbank, Tweed, Hadley & McCloy LLP, counsel for the
Underwriters, as to the matters referred to in Sections 9(e)(iv), 9(e)(v),
9(e)(viii) (but only with respect to the statements under the caption
"Description of Capital Stock" and "Underwriting") and 9(e)(xvii).
In giving such opinions with respect to the matters covered by Section
9(e)(xvi), Heller Ehrman White & McAuliffe LLP and Milbank, Tweed, Hadley &
McCloy LLP may state that
20
<PAGE>
their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments
or supplements thereto and review and discussion of the contents thereof, but
are without independent check or verification except as specified.
(g) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be,
in form and substance satisfactory to you, from PricewaterhouseCoopers LLP,
independent public accountants, containing the information and statements of
the type ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you (i) the agreements
specified in Section 2 hereof which agreements shall be in full force and
effect on the Closing Date and (ii) a letter from the Company's transfer
agent and registrar acknowledging the stop transfer restrictions described in
Section 2 hereof.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date
to perform or comply with any of the agreements herein contained and required
to be performed or complied with by the Company on or prior to the Closing
Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to
the good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such
Additional Shares.
SECTION 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon the execution and delivery of this Agreement by
the parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment,
is material and adverse and, in your judgment, makes it impracticable to
market the Shares on the terms and in the manner contemplated in the
Prospectus, (ii) the suspension or material limitation of trading in
securities or other instruments on the New York Stock Exchange, the American
Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange, the Chicago Board of Trade or the Nasdaq National Market or
limitation on prices for securities or other instruments on any such exchange
or the Nasdaq National Market, (iii) the suspension of trading of any
securities of the Company on any exchange or in the over-the-counter market,
(iv) the enactment, publication, decree or other promulgation of any federal
or state statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely
affects, or will materially and adversely affect, the business, prospects,
21
<PAGE>
financial condition or results of operations of the Company, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in
your opinion has a material adverse effect on the financial markets in the
United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not
more than one-tenth of the total number of Firm Shares or Additional Shares,
as the case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion
which the number of Firm Shares set forth opposite its name in Schedule I
bears to the total number of Firm Shares which all the non-defaulting
Underwriters have agreed to purchase, or in such other proportion as you may
specify, to purchase the Firm Shares or Additional Shares, as the case may
be, which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; PROVIDED that in no event shall the number
of Firm Shares or Additional Shares, as the case may be, which any
Underwriter has agreed to purchase pursuant to Section 2 hereof be increased
pursuant to this Section 10 by an amount in excess of one-ninth of such
number of Firm Shares or Additional Shares, as the case may be, without the
written consent of such Underwriter. If on the Closing Date any Underwriter
or Underwriters shall fail or refuse to purchase Firm Shares and the
aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares to be purchased
by all Underwriters and arrangements satisfactory to you and the Company for
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter and the Company. In any such case which does not
result in termination of this Agreement, either you or the Company shall have
the right to postpone the Closing Date, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. If, on an Option Closing Date, any Underwriter or Underwriters
shall fail or refuse to purchase Additional Shares and the aggregate number
of Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased on
such date, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase such Additional Shares or
(ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase on such
date in the absence of such default. Any action taken under this paragraph
shall not relieve any defaulting Underwriter from liability in respect of any
default of any such Underwriter under this Agreement.
SECTION 11. MISCELLANEOUS. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to
Embarcadero Technologies, Inc., 425 Market Street, Suite 425, San Francisco,
California 94105, Attention: Stephen Wong and (ii) if to any Underwriter or
to you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277
Park Avenue, New York, New York 10172, Attention: Syndicate Department, or
in any case to such other address as the person to be notified may have
requested in writing.
22
<PAGE>
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters
set forth in or made pursuant to this Agreement shall remain operative and in
full force and effect, and will survive delivery of and payment for the
Shares, regardless of (i) any investigation, or statement as to the results
thereof, made by or on behalf of any Underwriter, the officers or directors
of any Underwriter, any person controlling any Underwriter, the Company, the
officers or directors of the Company or any person controlling the Company,
(ii) acceptance of the Shares and payment for them hereunder and (iii)
termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Company agrees to reimburse the
several Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination
of this Agreement, the Company shall be liable for all expenses which it has
agreed to pay pursuant to Section 5(i) hereof. The Company also agrees to
reimburse the several Underwriters, their directors and officers and any
persons controlling any of the Underwriters for any and all fees and expenses
(including, without limitation, the fees disbursements of counsel) incurred
by them in connection with enforcing their rights hereunder (including,
without limitation, pursuant to Section 7 hereof).
The statements set forth under the caption "Underwriting" in the
Prospectus, except for the statements regarding the actions of the Company in
the fourteenth paragraph thereunder, constitute the written information
furnished by or on behalf of the underwriters referred to in Sections 6(b),
6(c), 7(a) and 7(b) hereof.
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters,
the Underwriters' directors and officers, any controlling persons referred to
herein, the Company's directors and the Company's officers who sign the
Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include a purchaser of any of the Shares
from any of the several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
23
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
EMBARCADERO TECHNOLOGIES, INC.
By:
---------------------------------
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY INC.
WIT SOUNDVIEW CORPORATION
DLJDIRECT, INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
----------------------------------------
24
<PAGE>
SCHEDULE I
----------
Underwriters Number of Firm Shares
to be Purchased
Donaldson, Lufkin & Jenrette Securities
Corporation
U.S. Bancorp Piper Jaffray Inc.
Wit SoundView Corporation
DLJDIRECT, Inc.
Total 4,000,000
<PAGE>
Annex I
[Insert names of stockholders of the Company who will be required
to sign lock-ups]
<PAGE>
Annex II
[Form of Lock-up Agreement]
<PAGE>
<TABLE>
<S><C>
=============================================================================================================
COMMON SHARES COMMON SHARES
[LOGO] EMBARCADERO
TECHNOLOGIES-Registered Trademark-
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE CUSIP 290787 10 0
IN RIDGEFIELD PARK, NJ AND NEW YORK, NY SEE REVERSE FOR CERTAIN DEFINITIONS
- -------------------------------------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
- -------------------------------------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF
- ----------------------------------------EMBARCADERO TECHNOLOGIES, INC.---------------------------------------
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED
ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS
COUNTERSIGNED AND REGISTERED BY THE TRANSFER AGENT AND REGISTRAR. IN WITNESS WHEREOF, THE CORPORATION HAS
CAUSED THIS CERTIFICATE TO BE EXECUTED AND ATTESTED TO BY THE MANUAL OR FACSIMILE SIGNATURES OF ITS DULY
AUTHORIZED OFFICERS, UNDER A FACSIMILE OF ITS CORPORATE SEAL TO BE AFFIXED HERETO.
DATED:
[SEAL]
/s/ Raj P. Sabhlok /s/ Ellen Taylor /s/ Stephen R. Wong
SR. VICE PRESIDENT, FINANCE
AND CORPORATE DEVELOPMENT PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD
- -------------------------------------------------------------------------------------------------------------
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
EMBARCADERO TECHNOLOGIES, INC.
Upon request the Corporation will furnish any holder of shares of Common Stock of the Corporation,
without charge, with a full statement of the powers, designations, preferences, and relative, participating,
optional or other special rights of any class or series of capital stock of the Corporation, and the
qualifications, limitations or restrictions of such preferences and/or rights.
The following abbreviations, when used in the inscription on the face of this certificate, shall be
construed as though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ..........Custodian............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act............................
in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
_____________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
_____________________________________________________________________________________________________________
_____________________________________________________________________________________________________________
_____________________________________________________________________________________________________________
_______________________________________________________________________________________________________SHARES
OF COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT
____________________________________________________________________________________________________ ATTORNEY
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN
THE PREMISES.
DATED________________________________________
IN PRESENCE OF
X________________________________________________ X________________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
NOTICE: WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By______________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO SEC RULE 17Ad-15.
[STAMP]
</TABLE>
<PAGE>
Exhibit 10.7
[Printed on Embarcadero Technologies, Inc. Letterhead]
September 27, 1999
Ms. Ellen Taylor
875 Dale Street
Andover, MA 01845
Dear Ellen:
I am pleased to make this offer to you to join Embarcadero
Technologies (the "Company") as its President and Chief Executive Officer. If
you accept this offer, we are assuming that you will commence employment not
later than October 18, 1999.
The terms of your employment are as follows:
1. SALARY. Your base salary will be $18,333.33 per month (equivalent to
$220,000 per year).
2. BONUS. You will be eligible to receive a semi-annual bonus of up to
$65,000, or a total of $130,000 per annum, based upon objective performance
standards that are measurable on a semi-annual basis, which are to be set for
you and Embarcadero Technologies and to be mutually agreed between you and
the Board of Directors.
3. STOCK OPTIONS. You will be granted seven-year standard-form options
to purchase (a) 220,000 shares of Common Stock at an exercise price of $0.50
per share, (b) 110,000 shares of Common Stock at an exercise price of $5.00
per share and (c) 110,000 shares of Common Stock at an exercise price of
$10.00 per share. Your options shall vest at a rate of 6.25% per quarter on
each three-month anniversary from your start date. Your options shall cease
vesting upon termination of your employment, except as set forth in paragraph
7 below. In the event of a "change in control," your options shall become
fully vested, except that if either (i) the change of control occurs within
six months of the commencement of your employment or (ii) within such
six-month period the Company enters into an agreement that would result in a
change of control and such change of control occurs within nine months of the
commencement of your employment, 50% of your options shall become vested.
For purposes of the preceding paragraph, a change in control means
the occurrence of either of the following:
(a) any "person" (as used in Section 13(d) of the
Securities Exchange Act of 1934 and the rules
promulgated thereunder) becomes the "beneficial
owner" (as defined in Rule 13d-3) of securities
<PAGE>
Ms. Ellen Taylor
September 27, 1999
Page 2
representing a majority of the voting power of the
then outstanding securities of Embarcadero
Technologies; or
(b) a sale of assets involving all or substantially all
of the assets of Embarcadero Technologies, or a
merger or consolidation of Embarcadero Technologies
in which the holders of securities of Embarcadero
Technologies immediately prior to such event hold in
the aggregate less than a majority of the securities
of Embarcadero Technologies immediately after such
event.
4. RELOCATION ASSISTANCE. Embarcadero Technologies will reimburse you
for the reasonable and customary out-of-pocket expenses associated with (i)
the sale of your existing residence and purchase of a new residence in the
Bay Area (within twelve months of your relocation) including real estate
commissions on the sale of your existing residence and reasonable and
customary closing expenses paid by you; (ii) the relocation of your family
and household goods to the Bay Area, including travel and temporary housing
expenses in the Bay Area for a period not to exceed three months; and (iii)
two additional round trips between Massachusetts and the Bay Area for you and
your family to prepare for your move. The reimbursement of expenses listed in
(i), (ii) and (iii) above shall not exceed $73,000.
5. OTHER BENEFITS. In addition to the benefits specifically described in
this letter, you will be entitled to reimbursement for parking and
Embarcadero Technologies' standard executive benefits.
6. PROPRIETARY INFORMATION. You will be required to sign Embarcadero
Technologies' standard employee confidential information and inventions
agreement (a copy of which has been provided to you).
7. SEVERANCE. Your employment will be at will, which means that either
you or Embarcadero Technologies may terminate your employment at any time
with or without "cause" (as defined below). However, in the event you are
terminated without cause by the Company, you will be entitled to severance
pay in an amount equal to 12 months' base salary (which will be payable in
semi-monthly installments) and the Company will also continue to pay your
medical and dental benefits in accordance with the benefits you were
receiving at the time of your termination for six months. These payments will
terminate when you commence other full-time employment. In addition, if your
are terminated without cause by the Company during the first year of your
employment, 25% of your options shall become vested; or, if you are
terminated without cause after the first year of your employment, you shall
receive credit for an additional
<PAGE>
Ms. Ellen Taylor
September 27, 1999
Page 3
six-months of vesting beyond what you will have vested through your tenure
with the Company.
In the event that you voluntarily leave the Company or you are
terminated by the Company with cause, no severance pay will be due to you.
"Cause" shall mean (a) fraud or illegal acts; (b) material violation with
consequential damages to the Company of Company agreements, including the
Company's confidential information and inventions agreement; (c) material
failure to perform your job function to a reasonable standard after notice of
such failure has been given to you by the Board and you have had a 15
business-day period to cure such failure or (d) any other reason deemed cause
under applicable California law.
8. ARBITRATION. In the event of any dispute arising out of or relating
to your employment relationship or its termination (including without
limitation claims for breach of contract, wrongful termination, or age, race,
sex, disability or other discrimination) that it is not resolved by good
faith negotiations between the parties, you and Embarcadero Technologies
agree fully, finally and exclusively to arbitrate the dispute in binding
arbitration under the Employment Dispute Resolution Rules of the American
Arbitration Association in San Francisco County, California, rather than
litigate the dispute in court; provided that this arbitration provision shall
not apply to any dispute relating to or arising out of the alleged misuse or
misappropriation of Embarcadero Technologies' trade secrets or proprietary
information. In the event of arbitration, the arbitrator shall be allowed to
assess costs.
9. TERM OF OFFER. This offer will remain in effect until 5:00 p.m.
(Pacific Standard Time) on Tuesday, September 28, 1999.
I am enthusiastic about your joining Embarcadero Technologies and
look forward to working with you.
Very truly yours,
/s/ Stephen Wong
Stephen Wong
Chairman and Chief Executive Officer
ACCEPTED AND APPROVED:
Date: September 27, 1999
<PAGE>
Ms. Ellen Taylor
September 27, 1999
Page 4
/s/ Ellen Taylor
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Ellen Taylor
<PAGE>
Exhibit 10.12
BUSINESS LOAN AGREEMENT
This Business Loan Agreement (this "Agreement") is entered into as of the
date set forth below between Union Bank of California, N.A. ("Bank") and the
undersigned ("Borrower") with respect to each and every extension of credit
(whether one or more, collectively referred to as the "Loan") from Bank to
Borrower. In consideration of the Loan, Bank and Borrower agree to the
following terms and conditions:
1. THE LOAN.
1.1 THE NOTE. The Loan is evidenced by one or more promissory notes or
other evidences of indebtedness, including each amendment,
extension, renewal or replacement thereof, which are incorporated
herein by this reference (whether one or more, collectively referred
to as the "Note").
1.2 REVOLVING LOAN CLEAN-UP PERIOD. For any portion of the Loan which is
a revolving loan, at least N/A consecutive days during each 12 month
period the principal amount outstanding under such revolving loan
must be zero.
1.3 FEE. Borrower shall pay to Bank a fee of $5,000.00.
1.4. COLLATERAL. The payment and performance of all obligations of
Borrower under the Loan Documents are and shall be during the term
of the Loan secured by a perfected security interest in such real or
personal property collateral as is required by Bank and each
security interest shall rank in first priority unless otherwise
specified in writing by Bank.
2. CONDITIONS TO AVAILABILITY OF THE LOAN. Before Bank is obligated to
disburse all or any portion of the Loan. Bank must have received (a) the
Note and every other document required by Bank in connection with the
Loan, each of which must be in form and substance satisfactory to Bank
(together with this Agreement, referred to as the "Loan Documents"), (b)
confirmation of the perfection of its security interest in any collateral
for the Loan, and (c) payment of any fee required in connection with the
Loan.
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants (and each
request for a disbursement of the proceeds of the Loan shall be deemed a
representation and warranty made on the date of such request) that:
3.1 Borrower is an individual or Borrower is duly organized and existing
under the laws of the state of its organization and is duly qualified
to conduct business in each jurisdiction in which its business is
conducted;
*When "N/A" appears in a blank in this Agreement, it means the Subsection in
which it appears is deemed deleted from this Agreement. If only a portion of
a Subsection is to be deleted, it is crossed out.
<PAGE>
3.2 The execution, delivery and performance of the Loan Documents
executed by Borrower are within Borrower's power, have been duly
authorized, are legal, valid and binding obligations of Borrower, and
are not in conflict with the terms of any charter, bylaw, or other
organization papers of Borrower or with any law, indenture, agreement
or undertaking to which Borrower is a party or by which Borrower is
bound or affected;
3.3 All financial statements and other financial information submitted by
Borrower to Bank are true and correct in all material respects, and
there has been no material adverse change in Borrower's financial
condition since the date of the latest of such financial statements;
3.4 Borrower is properly licensed and in good standing in each state in
which Borrower is doing business, and Borrower has complied with all
laws and regulations affecting Borrower, including without
limitation, each applicable fictitious business name statute;
3.5 There is no event which is, or with notice or lapse of time or both
would be, an Event of Default (as defined in Article 5);
3.6 Borrower is not engaged in the business of extending credit for the
purpose of, and no part of the Loan will be used, directly or
indirectly, for purchasing or carrying margin stock within the
meaning of Federal Reserve Board Reg. U; and
3.7 Borrower is not aware of any fact, occurrence or circumstance which
Borrower has not disclosed to Bank in writing which has, or could
reasonably be expected to have, a material adverse effect on
Borrower's ability to repay the Loan or perform its obligations under
the Loan Documents.
4. COVENANTS. Borrower agrees, so long as the Loan or any commitment to make
any advance under the Loan is outstanding and until full and final payment
of all sums outstanding under any Loan Document, that Borrower will:
4.1 Maintain:
(a) Working Capital of at least $1,000,000.00. to be measured
quarterly (As used herein, "Working Capital" means the excess of
current assets over current liabilities);
(b) A ratio of current assets to current liabilities of at least
N/A:1.00;
(c) Tangible Net Worth of at least $1,000,000.00, and subsequent to
Borrower's IPO, $10,000,000.00, to increase by 50% of Borrowers
net profits, measured quarterly. As used herein, "Tangible Net
Worth" means net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses,
trademarks, trade names, goodwill and other similar intangible
assets, organizational expenses, and monies due from affiliates
(including officers, shareholders and directors));
(d) Subsequent to Borrower's IPO, a ratio of total liabilities to
Tangible Net Worth of not greater than 1:00:1.00. Subject to
Borrower's IPO (As used herein "Tangible Net Worth" means net
worth increased by indebtedness of Borrower subordinated to Bank
and decreased by patents, licenses, trademarks, trade names,
goodwill and other similar intangible assets, organizational
expenses, and monies due from affiliates (including officers,
shareholders and directors));
All accounting terms used in this Agreement shall have the definitions given
them by generally accepted accounting principles, unless otherwise defined
herein.
<PAGE>
4.8. Maintain adequate books, accounts and records and prepare all
financial statements required hereunder in accordance with
generally accepted accounting principles, and in compliance with
the regulations of any governmental regulatory body having
jurisdiction over Borrower or Borrower's business and permit
employees or agents of Bank at any reasonable time to inspect
Borrower's assets and properties, and to examine or audit
Borrower's books, accounts and records and make copies and
memoranda thereof.
4.9. At all times comply with, or cause to be complied with, all laws,
statutes, rules, regulations, orders and directions of any
governmental authority having jurisdiction over Borrower or
Borrower's business, and all material agreements to which Borrower
is a party.
4.10. Except as provided in this Agreement, or in the ordinary course of
its business as currently conducted, not make any loans or
advances, become a guarantor or surety, pledge its credit or
properties in any manner, or extend credit.
4.11. Not purchase the debt or equity of another person or entity except
for savings accounts and certificates of deposit of Bank, direct
U.S. Government obligations and commercial paper issued by
corporations with top ratings of Moody's or Standard & Poor's,
provided that all such permitted investments shall mature within
one year of purchase.
4.12. Not create, assume or suffer to exist any mortgage, encumbrance,
security interest, pledge or lien ("Lien") on Borrower's real or
personal property, whether now owned or hereafter acquired, or upon
the income or profits thereof except the following: (a) Liens in
favor of Bank, (b) Liens for taxes or other items not delinquent or
contested in good faith and (c) other Liens which do not exceed in
the aggregate $500,000 at any one time.
4.13. Not sell or discount any account receivable or evidence of
indebtedness, except to Bank; not borrow any money or become
contingently liable for money borrowed, except pursuant to
agreements made with Bank.
4.14. Neither liquidate, nor dissolve, nor convey, sell or lease all or the
greater part of its assets or business.
4.15. Not engage in any business activities or operations substantially
different from or unrelated to Borrower's present business
activities and operations.
4.16. Not, in any single fiscal year of Borrower, expend or incur
obligations of more than $1,000,000 for the acquisition of fixed or
capital assets.
4.17. Not, in any single fiscal year of Borrower, enter into any lease of
real or personal property which would cause Borrower's aggregate
annual obligations under all such real and personal property leases
to exceed $1,000,000.
4.18. Borrower will promptly, upon demand by Bank, take such further
action and execute all such additional documents and instruments in
connection with this Agreement as Bank in its reasonable discretion
deems necessary, and promptly supply Bank with such other
information concerning its affairs as Bank may request from time to
time.
5. EVENTS OF DEFAULT. The occurrence of any of the following events ("Events
of Default") shall terminate any obligation on the part of Bank to make or
continue the Loan and automatically, unless otherwise provided under the
Loan Documents, shall make all sums of interest and principal and any
other amounts owing under the Loan immediately due and payable, without
notice of default, presentment or demand for payment, protest or notice of
nonpayment or dishonor, or any other notices or demands:
<PAGE>
5.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the other Loan
Documents:
5.2 Any default shall occur under the note or any of the other Loan
Documents;
5.3 Borrower shall default in the due performance or observance of any
covenant or condition of the Loan Documents;
5.4 Any guaranty or subordination agreement required hereunder shall be
breached or become ineffective, or any guarantor or subordinating
creditor shall die or disavow or attempt to revoke or terminate such
guaranty or subordination agreement; or
5.5 There shall be a change in ownership or control of 10% or more of
the issued and outstanding stock of Borrower or any guarantor, or (if
the Borrower is a partnership) there shall be a change in ownership
or control of any general partner's interest.
6. MISCELLANEOUS PROVISIONS.
6.1 The rights, powers and remedies given to Bank hereunder shall be
cumulative and not alternative and shall be in addition to all
rights, powers and remedies given to Bank by law against Borrower
or any other person, including but not limited to Bank's rights of
setoff and banker's lien.
6.2 Any forbearance or failure or delay by Bank in exercising any
right, power or remedy hereunder shall not be deemed a waiver
thereof and any single or partial exercise of any right, power or
remedy shall not preclude the further exercise thereof. No waiver
shall be effective unless it is in writing and signed by an
officer of Bank.
6.3 The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assigns of
Borrower, and any assignment by Borrower without Bank's consent
shall be null and void.
6.4 This Agreement and all other agreements and instruments required by
Bank in connection herewith shall be governed by and construed
according to the laws of the State of California.
6.5 Should any one or more provisions of this Agreement be determined
to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
6.6 Except for documents and instruments specifically referenced
herein, this Agreement constitutes the entire agreement between
Bank and Borrower regarding the Loan and all prior communications,
verbal or written, between Borrower and Bank shall be of no further
effect or evidentiary value.
6.7 The section and subsection headings herein are for convenience of
reference only and shall not limit or otherwise affect the meaning
hereof.
6.8 This Agreement may be amended only in writing signed by all parties
hereto.
6.9 Borrower and Bank may execute one or more counterparts to this
Agreement, each of which shall be deemed an original, but taken
together shall be one and the same instrument.
6.10 Any notices or other communications provided for or allowed
hereunder shall be effective only when given by one of the
following methods and addressed to the respective party at its
address given with the signatures at the end of this Agreement and
shall be considered to have been validly given: (a) upon delivery,
if delivered personally; (b) upon receipt, if mailed, first class
postage prepaid, with the United States Postal
<PAGE>
Service; (c) on the next business day if sent by overnight courier
service of recognized standing; and (d) upon telephoned
confirmation of receipt, if telecopied.
7. ADDITIONAL PROVISIONS
The following additional provisions, if any, are hereby made a part of
this Agreement:
7.1 Liquidity as measured by Borrower's total cash and marketable
securities of $2,000,000.00.
7.2 Provide the ongoing and Continuing Guarantees of any and all
subsidiaries of Borrower to Bank, in form and substance
satisfactory to Bank.
THIS AGREEMENT is executed on behalf of the parties as of 3/27, 2000.
UNION BANK OF CALIFORNIA, N.A. EMBARCADERO TECHNOLOGIES, INC.
("Bank") ("Borrower")
By: /s/ Landis Dibble V.P. By: /s/ Stephen Wong
---------------------------- ---------------------------
Title: Vice President Title: CEO
Printed Name: Landis Dibble Printed Name: Stephen Wong
Address where notices to Bank are to Address where notices to Bank are to
be sent: be sent:
Union Bank of California, N.A. Embarcadero Technologies, Inc.
350 California Street. 10th floor 425 Market Street. Suite 425
San Francisco, CA 94104 San Francisco, CA 94105
Attn: Landis Dibble Attn: Stephen Wong
Phone: (415)705-7148 Phone: (415)834-3131
Fax: (415)705-7111 Fax: (415)393-0161
<PAGE>
UNION
BANK OF
CALIFORNIA
COMMERCIAL PROMISSORY NOTE
WONG/IR/12344
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Borrower Name EMBARACEDERO TECHNOLOGIES, INC.
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Borrower Address Office Loan Number
70064 2595990594 0001-00-0-001
425 MARKET STREET, SUITE 425 ----------------------------------------------
San Francisco, CA 94105 Maturity Date Amount
MAY 31, 2001 $2,000,000.00
- -------------------------------------------------------------------------------
Date MARCH 27, 2000 $2,000,000.00
FOR VALUE RECEIVED, on MAY 31, 2001 the undersigned ("Debtor") promises to
pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated
below, the principal sum of TWO MILLION AND NO/100 Dollars ($2,000,000.00),
or so much thereof as is disbursed, together with interest on the balance of
such principal sum from time to time outstanding, at a per annum rate equal
to the Reference Rate, such per annum rate to change as and when the
Reference Rate shall change.
As used herein, the term "Reference Rate" shall mean the rate announced by
Bank from time to time as its corporate headquarters as its "Reference Rate."
The Reference Rate is an index rate determined by Bank from time to time as
a means of pricing certain extensions of credit and is neither directly tied
to any external rate of interest or index nor necessarily the lowest rate of
interest charged by Bank at any given time. All computations of interest
under this note shall be made on the basis of a year of 365 days, for actual
days elapsed.
1. INTEREST PAYMENTS. Debtor shall pay interest on the LAST day of each
MONTH commencing APRIL 30, 2000. Should interest not be so paid, it shall
become a part of the principal and thereafter bear interest as herein
provided.
At any time prior to the maturity of this note, the maker(s) may borrow,
repay and reborrow hereon so long as the total outstanding at any one time
does not exceed the principal amount of this note.
Debtor shall pay all amounts due under this note in lawful money of the
United States at Bank's SAN FRANCISCO COMMERCIAL BANKING Office, or such
other office as may be designated by Bank, from time to time.
2. LATE PAYMENTS. If any installment payment required by the terms of this
note shall remain unpaid ten days after due, at the option of Bank, Debtor
shall pay a fee of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option
of Bank, and, to the extent permitted by law, interest shall be payable on
the outstanding principal under this note at a per annum rate equal to five
percent (5%) in excess of the interest rate specified in the initial
paragraph of this note, calculated from the date of default until all amounts
payable under this note are paid in full.
4. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following: (a) the failure of Debtor to make
any payment required under this note when due; (b) any breach,
misrepresentation or other default by Debtor, any guarantor, co-maker,
endorser, or any person or entity other than Debtor providing security for
this note (hereinafter individually and collectively referred to as the
"Obligor") under any security agreement, guaranty or other agreement between
Bank and any Obligor; (c) the insolvency of any Obligor or the failure of
any Obligor generally to pay such Obligor's debts as such debts become due;
(d) the commencement as to any Obligor of any voluntary or involuntary
proceeding under any laws relating to bankruptcy, insolvency, reorganization,
arrangement, debt adjustment or debtor relief; (e) the assignment by any
Obligor for the benefit of such Obligor's creditors; (f) the appointment, or
commencement of any proceedings for the appointment, of a receiver, trustee,
custodian or similar official for all or substantially all of any Obligor's
property; (g) the commencement of any proceeding for the dissolution or
liquidation of any Obligor; (h) the termination of existence or death of any
Obligor; (i) the revocation of any guaranty or subordination agreement given
in connection with this note; (j) the failure of any Obligor to comply with
any order, judgment, injunction, decree, writ or demand of any court or other
public authority; (k) the filing or recording against any Obligor, or the
property of any Obligor, of any notice of levy, notice to withhold, or other
legal process for taxes other than property taxes; (l) the default by any
Obligor personally liable for amounts owed hereunder on any obligation
concerning the borrowing of money; (m) the issuance against any Obligor, or
the property of any Obligor, of any writ of attachment, execution, or other
judicial lien; or (n) the deterioration of the financial condition of any
Obligor which results in Bank deeming itself, in good faith, insecure.
Upon the occurrence of any such default, Bank, in its discretion, may cease to
advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of
default under d, e, f, or g, all principal and interest shall automatically
become immediately due and payable.
5. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note
are not paid when due, Debtor promises to pay all costs and expenses,
including reasonable attorneys' fees, incurred by Bank in the collection or
enforcement of this note. Debtor and any endorsers of this note, for the
maximum period of time and the full extent permitted by law, (a) waive
diligence, presentment, demand, notice of nonpayment, protest, notice of
protest, and notice of every kind; (b) waive the right to assert the defense
of any statute of limitations to any debt or obligation hereunder; and (c)
consent to renewals and extensions of time for the payment of any amounts due
under this note. If this note is signed by more than one party, the term
"Debtor" includes each of the undersigned and any successors in interest
thereof; all of whose liability shall be joint and several. Any married
person who signs this note agrees that recourse may be had against the
separate property of that person for any obligations hereunder. The receipt
of any check or other item of payment by Bank, at its option, shall not be
considered a payment on account until such check or other item of payment is
honored when presented for payment at the draw bank. Bank may delay the
credit of such payment based upon Bank's schedule of funds availability, and
interest under this note shall accrue until the funds are deemed collected.
In any action brought under or arising out of this note. Debtor and any
endorser of this note, including their successors and assigns, hereby
consents to the jurisdiction of any competent court within the State of
California, as provided in any alternative dispute resolution agreement
executed between Debtor and Bank, and consents to service of process by any
means authorized by California law. The term "Bank" includes, without
limitation, any holder of this note. This note shall be construed in
accordance with and governed by the laws of the State of California. This
note hereby incorporates any alternative dispute resolution agreement
previously, concurrently or hereafter executed between Debtor and Bank.
EMBARCADERO TECHNOLOGIES, INC.
By: /s/ Stephen R. Wong Chairman, 4/4/2000
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<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 3 to Registration
Statement on Form S-1 of our report dated February 17, 2000 relating to the
financial statements of Embarcadero Technologies, Inc., which appear in such
Registration Statement. We also consent to the references to us under the
headings "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 12, 2000
