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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-23043
PERVASIVE SOFTWARE INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2693793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12365 Riata Trace Parkway, Bldg. II
Austin, Texas 78727
(Address of principal executive offices)
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(512) 231-6000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
(1) Yes X No
----- -----
(2) Yes X No
----- -----
As of May 12, 2000 there were 15,798,386 shares of the Registrant's common
stock outstanding.
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PERVASIVE SOFTWARE INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements.............................................. 3
Condensed Consolidated Balance Sheets at March 31,
2000 and June 30, 1999............................................ 3
Condensed Consolidated Statements of Operations for
the three and nine months ended March 31, 2000 and 1999........... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended March 31, 2000 and 1999......................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 15
Part II. Other Information................................................. 27
Item 1. Legal Proceedings................................................. 27
Item 6. Exhibits and Reports on Form 8-K.................................. 27
SIGNATURES................................................................. 28
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Pervasive Software Inc.
Condensed Consolidated Balance Sheets
(in thousands)
March 31, June 30,
2000 1999
--------------- ---------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 10,326 $ 18,126
Marketable securities 19,334 21,777
Trade accounts receivable, net 8,548 9,352
Prepaid expenses and other current assets 5,815 3,979
--------------- ---------------
Total current assets 44,023 53,234
Property and equipment, net 8,574 7,509
Purchased technology and excess of cost over fair value
of net assets acquired, net 10,598 11,135
Other assets 2,376 995
--------------- ---------------
Total assets $65,571 $72,873
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 1,515 $ 2,517
Accrued payroll and payroll related costs 1,981 1,403
Other accrued expenses 4,384 4,144
Deferred revenues 1,556 2,252
Income taxes payable 219 2,457
--------------- ---------------
Total current liabilities 9,655 12,773
Deferred tax liability 565 565
--------------- ---------------
Total liabilities 10,220 13,338
Minority interest in subsidiary - 449
Stockholders' equity:
Common stock 59,361 57,869
Retained earnings (4,010) 1,217
--------------- ---------------
Total stockholders' equity 55,351 59,086
--------------- ---------------
Total liabilities and stockholders' equity $ 65,571 $ 72,873
=============== ===============
See accompanying notes.
3
Pervasive Software Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues $ 12,580 $ 16,015 $ 45,479 $ 41,878
Costs and expenses:
Cost of revenues and technical support 3,023 2,270 8,798 6,076
Sales and marketing 8,131 6,110 23,196 16,624
Research and development 5,413 4,172 14,670 10,653
General and administrative 1,540 1,267 4,344 3,485
Amortization of excess of cost over fair value of net
assets acquired 276 275 848 430
Charge for purchased research and development - - - 1,800
------------- ------------- ------------- -------------
Total costs and expenses 18,383 14,094 51,856 39,068
------------- ------------- ------------- -------------
Operating income (loss) (5,803) 1,921 (6,377) 2,810
Interest and other income, net 406 85 1,327 425
------------- ------------- ------------- -------------
Income (loss) before income taxes and minority interest (5,397) 2,006 (5,050) 3,235
Income tax provision (449) (622) (380) (1,554)
Minority interest in earnings of subsidiary, net of tax - (16) (19) (19)
------------- ------------- ------------- -------------
Net income (loss) $ (5,846) $ 1,368 $ (5,449) $ 1,662
============= ============= ============= =============
Basic earnings (loss) per share $ (0.37) $ 0.10 $ (0.35) $ 0.12
============= ============= ============= =============
Diluted earnings (loss) per share $ (0.37) $ 0.09 $ (0.35) $ 0.11
============= ============= ============= =============
See accompanying notes.
4
Pervasive Software Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine months ended
March 31,
--------------------------------------
2000 1999
--------------- ----------------
Cash from operating activities
Net income (loss) $ (5,449) $ 1,662
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,407 2,125
Non cash compensation expense pursuant to employee stock purchase plan 643 571
Charge for purchased research and development - 1,800
Other non cash items (204) 406
Change in current assets and liabilities:
Decrease (increase) in trade accounts receivable 1,042 (3,026)
Increase in prepaid expenses, other current assets and other assets (3,310) (881)
Increase (decrease) in accounts payable and accrued liabilities (571) 1,170
Increase (decrease) in deferred revenue (366) 775
Decrease in income taxes payable (1,725) (315)
--------------- ----------------
Net cash provided (used) by operating activities (6,533) 4,287
Cash from investing activities
Purchase of property and equipment (3,588) (4,584)
Sale of marketable securities, net 2,443 743
Purchase of businesses, net of cash acquired (1,105) (11,702)
Decrease (increase) in other assets (123) 28
--------------- ----------------
Net cash used in investing activities (2,373) (15,515)
Cash from financing activities
Payment of royalty to Novell - (158)
Proceeds from issuance of stock, net of issuance costs 1,164 24,726
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Net cash provided by financing activities 1,164 24,568
Effect of exchange rate on cash and cash equivalents (58) (283)
--------------- ----------------
Increase (decrease) in cash and cash equivalents (7,800) 13,057
Cash and cash equivalents at beginning of period 18,126 15,587
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Cash and cash equivalents at end of period $ 10,326 $ 28,644
=============== ================
See accompanying notes.
5
PERVASIVE SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
1. General and Basis of Financial Statements
The unaudited interim condensed consolidated financial statements include
the accounts of Pervasive Software Inc. and its majority-owned subsidiaries
(collectively, the "Company" or "Pervasive"). All material intercompany accounts
and transactions have been eliminated in consolidation.
The financial statements included herein reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly state the Company's financial position,
results of operations and cash flows for the periods presented. These financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended June 30, 1999, which
are contained in the Company's Annual Report filed on Form 10-K on September 28,
1999 (File No. 000-23043). The results of operations for the three and nine
month periods ended March 31, 2000 and 1999 are not necessarily indicative of
results that may be expected for any other interim period or for the full fiscal
year.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):
Three months ended Nine months ended
March 31, March 31,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Numerator:
Net income (loss)............................................................ $ (5,846) $ 1,368 $ (5,449) $ 1,662
========= ========= ========= =========
Denominator:
Denominator for basic earnings (loss) per share - weighted average shares..... 15,688 13,664 15,620 13,490
Effect of dilutive securities:
Employee stock options....................................................... * 2,262 * 1,975
--------- --------- --------- ---------
Potentially dilutive common shares........................................... * 2,262 * 1,975
--------- --------- --------- ---------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and assumed conversions..................... 15,688 15,926 15,620 15,465
========= ========= ========= =========
Basic earnings (loss) per share................................................ $ (0.37) $ 0.10 $ (0.35) $ 0.12
========= ========= ========= =========
Diluted earnings (loss) per share.............................................. $ (0.37) $ 0.09 $ (0.35) $ 0.11
========= ========= ========= =========
*Not applicable in loss periods due to antidilutive effect.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Comprehensive Income
The components of comprehensive income (loss) are as follows:
Three months ended Nine months ended
March 31, March 31,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income (loss)............................................. $ (5,846) $ 1,368 $ (5,449) $ 1,662
Foreign currency translation adjustments...................... (265) (511) 222 (67)
---------- ---------- ---------- ----------
Comprehensive income (loss)................................... $ (6,111) $ 857 $ (5,227) $ 1,595
========== ========== ========== ==========
4. Contingencies
Class action complaints were filed in November and December 1999 in the
U.S. District Court for the Western District of Texas against the Company and
certain of its officers and directors. The cases were consolidated in a single
amended consolidated complaint filed in January 2000. The amended consolidated
complaint alleges that the Company and certain of its officers and directors
violated federal securities laws, including Rule 10b-5 under the Securities
Exchange Act of 1934, by making false statements and failing to disclose
material information to artificially inflate the price of the Company's common
stock during the Class Period of July 15, 1999 to October 21, 1999. The Company
and other defendants filed motions to dismiss the suit on February 7, 2000. No
ruling has been made on the motion to dismiss the suit. While the proceedings
are at a very early stage, the Company believes the suit is without merit and
intends to defend itself vigorously.
5. Business Combinations
On October 29, 1999, the Company acquired an additional 19.5% ownership
interest in Pervasive Software Japan by purchasing stock held by a minority
shareholder for $750,000 in cash. The acquisition was accounted for under the
purchase method and, accordingly the excess of purchase price over the fair
market value of net assets acquired of $160,000 was recorded as goodwill and
will be amortized over a ten-year period. After the acquisition, the Company
holds 100% of the outstanding stock of Pervasive Japan.
On November 12, 1998, Pervasive acquired for cash approximately 93% of the
outstanding common shares of EveryWare Development Inc. ("EveryWare"), a Web
development tool and Web-application server provider based in Toronto, Canada.
Pervasive acquired the remaining outstanding shares of EveryWare in December
1998. The total value of the acquisition, including assumption of outstanding
options and transaction costs, was approximately $11.8 million. The acquisition
has been accounted for under the purchase method and, accordingly, the operating
results of EveryWare have been included in the consolidated financial statements
since the date of acquisition. The net assets acquired were recorded at their
estimated fair values at the effective date of the acquisition. Valuation of
the intangible assets acquired were determined by an independent third-party
appraisal company and consisted of purchased research and development, software
technology, and excess of fair value of net assets acquired. The amount related
to purchased research and development, as determined by the independent third
party appraisal company, was $1.8 million and was charged against income in the
quarter ended December 31, 1998 because the underlying research and development
projects had not yet reached technological feasibility and had no alternative
future uses. The excess of costs over fair value of net assets acquired of
approximately $9.8 million is being amortized over a ten-year period.
7
PERVASIVE SOFTWARE INC.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The statements contained in this Report on Form 10-Q that are not purely
historical statements are forward looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding the Company's expectations, beliefs, hopes, intentions or strategies
regarding the future. These forward looking statements involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward looking statements. We are under no duty to update any forward
looking statements after the date of this filing on Form 10-Q to conform these
statements to actual results. See "Risk Factors that May Affect Future
Results," and the factors and risks discussed in the Company's Annual Report on
Form 10-K filed on September 28, 1999 (File No. 000-23043) and other reports
filed from time to time with the Securities and Exchange Commission.
Overview
Pervasive Software Inc. is a leading provider of application development
and deployment software that dramatically simplifies the development, deployment
and maintenance of Web-based and client/server applications. Our comprehensive,
integrated suite of software products includes Web application development and
deployment products and high performance zero administration databases.
Combined, these products offer a unique solution that simplifies the
development, deployment and maintenance of Web-based and client/server
applications and lowers the cost of ownership of Web-based and client/server
distributed computing environments. Our business model leverages a channel of
software developers, application service providers, Web and systems integrators,
and value-added resellers around the world.
We derive our revenues primarily from shrink-wrap licenses through
independent software vendors, value-added resellers and distributors and through
OEM license agreements with independent software vendors. Shrink-wrap license
fees are variable and based generally on user count and platform, or in the case
of our Tango Web application server product, the customer's volume requirements
and the number of application servers. Our OEM licensing program offers
independent software vendors volume discounts and specialized technical support,
training and consulting in exchange for integrating our products in packaged
applications and paying us a royalty based on sales of the applications.
Additionally, we generate revenues from version upgrades, user count upgrades,
and from upgrades to client/server environments from single-user workstation or
workgroup environments.
We generally recognize revenues from software licenses when persuasive
evidence of an arrangement exists, the software has been delivered, the fee is
fixed or determinable and collectibility is probable. We generally recognize
revenues related to agreements involving nonrefundable fixed minimum license
fees when we deliver the product master or first copy if no significant vendor
obligations remain. We recognize per copy royalties in excess of a fixed minimum
amount as revenues when such amounts are reported to us. We generally operate
with virtually no order backlog because our software products are shipped
shortly after orders are received. This makes product revenues in any quarter
substantially dependent on orders booked and shipped throughout that quarter. We
enter into agreements with certain distributors that provide for certain stock
rotation and price protection rights. These rights allow the distributor to
return products in a non-cash exchange for other products or for credits against
future purchases. We reserve for estimated sales returns, stock rotation and
price protection rights, as well as for uncollectable accounts based on
experience.
Historically, we derived substantially all of our revenues from our
Pervasive.SQL and Btrieve data management products. On June 30, 1999, we
discontinued general availability of our Btrieve products to consolidate our
development, marketing and technical support resources behind our current Tango
and Pervasive.SQL products. Accordingly, Btrieve license revenue has declined
substantially over time and we expect that our revenue from the license of Tango
and Pervasive.SQL will account for substantially all of our revenues for
8
the foreseeable future. Our operating results depend upon market acceptance of
Pervasive.SQL, our ability to develop and market enhanced versions of our
Pervasive.SQL and Tango products, and the expenses associated with these
efforts. Demand declined for our Pervasive.SQL product in the quarter ended
December 31, 1999 compared to the quarter ended September 30, 1999, and declined
further in the quarter ended March 31, 2000. A continuing decrease in demand or
market acceptance for our Pervasive.SQL product, and the failure of Tango to
achieve market acceptance, would have a damaging effect on our business,
operating results and financial condition.
In October 1999, we announced a major initiative to significantly increase
sales and marketing and development expenses to capitalize on the market for e-
business and mobile computing applications. Lower than anticipated revenues and
increased expense levels related to these initiatives contributed to an
operating loss in the three months ended March 31, 2000. We anticipate that we
may continue to incur operating losses in future periods as a result of these
factors. We cannot be certain that these initiatives or future initiatives will
successfully generate license revenue from our Tango and Pervasive.SQL products.
In December 1998, we granted Novell, Inc., a non-exclusive, perpetual,
irrevocable license to reproduce and distribute a 90-day trial, unlimited user
count version of Pervasive.SQL for distribution in combination with other
products distributed by Novell. After the 90-day trial period, users may
purchase a permanent Pervasive.SQL license directly from us. Users who elect
not to purchase a permanent Pervasive.SQL license retain rights to a free two-
user version of Pervasive.SQL. Novell previously distributed Pervasive.SQL
through a service release and began general distribution in January 2000. We
will not receive any royalties directly from Novell related to the license
agreement. We do believe, however, that we may receive fees in the future by
licensing multi-user upgrades to end users of some of the Pervasive.SQL licenses
distributed by Novell.
9
Results of Operations
The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in our consolidated statements of
operations.
Three months ended Nine months ended
March 31, March 31,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ------------ ------------ ------------
Revenues .................................................... 100% 100% 100% 100%
Costs and expenses:
Cost of revenues and technical support .................. 24 14 19 15
Sales and marketing ..................................... 65 38 51 40
Research and development ................................ 43 26 32 25
General and administrative .............................. 12 8 10 8
Amortization of excess of cost over fair value
of net assets acquired ............................... 2 2 2 1
Charge for purchased research and development .......... - - - 4
----------- ------------ ------------ ------------
Total costs and expenses .................................... 146 88 114 93
----------- ------------ ------------ ------------
Operating income (loss) ..................................... (46) 12 (14) 7
Interest and other income ............................... 3 1 3 1
----------- ------------ ------------ ------------
Income (loss) before income taxes and minority interest ..... (43) 13 (11) 8
Income tax benefit (provision) .......................... (3) (4) (1) (4)
Minority interest in earnings of subsidiary ............. - - - -
----------- ------------ ------------ ------------
Net income (loss) ........................................... (46%) 9% (12%) 4%
=========== ============ ============ ============
Supplemental disclosures:
Operating income (loss), excluding certain charges*........... (44%) 14% (12%) 12%
=========== ============ ============ ============
Net income (loss), excluding certain charges*................. (44%) 10% (10%) 9%
=========== ============ ============ ============
* Amounts for the nine month period ended March 31, 1999 exclude a charge for
purchased research and development of $1.8 million. In addition, amounts
exclude amortization of excess of cost over fair value of net assets acquired
of $275,000, and $276,000 for the three month periods ended March 31, 1999
and 2000, respectively, and $430,000 and $848,000 for the nine month periods
ended March 31, 1999 and 2000, respectively.
Revenues
Our revenues were $12.6 million for the three months ended March 31, 2000,
a decrease of 21% from the $16.0 million reported for the comparable period in
the prior fiscal year. Our revenues for the nine months ended March 31, 2000
were $45.5 million, representing a 9% increase from the $41.9 million reported
for the comparable period in the prior fiscal year. We attributed the revenue
increase for the nine months ended March 31, 2000 to increased licenses of
Pervasive.SQL operating on Windows NT, revenue related to our recently
introduced Tango 2000 product and expansion of our worldwide sales organization.
Our decrease in revenues for the three months ended March 31, 2000 relative
to the comparable period in the prior year and relative to the $16.2 million
reported for the three months ended December 31, 1999, was primarily due to
lower sales pipeline entering the quarter, the recent reorganization of our
domestic sales force and what we believe to be a general softening in the
packaged client/server applications market contributing to decreased orders for
our Pervasive.SQL products embedded in these applications. We believe each of
these factors could continue to negatively affect license revenues for both our
Pervasive.SQL and our Tango products in future quarters. In January 2000, we
reorganized our domestic sales organization resulting in centrally managed
telesales and OEM sales operations. These telesales and OEM sales activities
were previously managed by district managers in the field. We are currently
implementing similar changes to our sales organization in Europe. These
adjustments are designed to result in a simpler and more
10
easily managed organization that is better matched to the type of customer.
However, these adjustments could negatively impact our revenue for the near term
as our sales representatives and sales managers become integrated into their new
assignments. Accordingly, our quarterly revenues may not increase, and could
decline sequentially, in the three months ending June 30, 2000.
Licenses of our software operating on Windows NT or other Microsoft
operating systems increased to approximately 68% of our revenues for the three
month period ended March 31, 2000 from approximately 57% in the comparable
period in the prior fiscal year. These same licenses represented approximately
62% of our revenues in the nine months ended March 31, 2000 compared with
approximately 54% in the comparable period in 1999. Licenses of our software
operating on NetWare represented approximately 24% of revenues in the three
months ended March 31, 2000, as compared to 33% in the comparable period in the
prior fiscal year. In the nine months ended March 31, 2000, NetWare licenses
represented 32% of our revenues compared to 38% in the comparable period in the
prior year. We believe that the increase in the percentage of revenues
attributable to licenses of our products operating on Windows NT and other
Microsoft operating systems is due to two factors: (1) the increased market
acceptance of our products operating on Microsoft platforms and (2) the
increased market penetration of Microsoft platforms relative to other operating
systems. During the three months ended December 31, 1999, we released new
versions of Pervasive.SQL 2000 operating on Solaris and Linux platforms.
Revenues to date for these new releases were not significant. We expect that the
percentages of our revenues attributable to licenses of our software operating
on particular platforms will continue to change from time to time. We cannot be
certain that our revenues attributable to licenses of our software operating on
Windows NT, or any other operating system platform, will grow in the future.
International revenues, consisting of all revenues from customers located
outside of North America, decreased from $7.0 million to $6.3 million in the
three months ended March 31, 1999 and 2000, representing 44% and 50% of total
revenues, respectively. International revenues increased from $17.2 million to
$22.1 million for the nine months ended March 31, 1999 and 2000, representing
41% and 49% of total revenues, respectively. We attribute the decrease in
dollar amount of international revenues in the three months ended March 31, 2000
primarily to what we believe to be a general softening in the international
packaged client/server applications market contributing to decreased orders for
our Pervasive.SQL products embedded in these applications. Similarly,
international revenues increased as a percentage of revenues in the three months
ended March 31, 2000 primarily due to the decrease in our domestic revenue
during the period. We attribute the increase in international revenues in the
nine months ended March 31, 2000 primarily to expansion of our international
sales organization, principally in Europe and Japan. We expect that
international revenues will continue to account for a significant portion of our
revenues in the future.
Costs and Expenses
Cost of Revenues and Technical Support. Cost of revenues and technical
support consists primarily of the cost to manufacture and fulfill orders for our
shrink wrap software products, the cost to provide technical support, primarily
telephone support, which is typically provided within 30 days of purchase, the
cost of license fees for third-party technologies embedded in our products and
the costs to deliver professional services and training services to customers.
Cost of revenues and technical support was $2.3 million and $3.0 million in the
three months ended March 31, 1999 and 2000, representing 14% and 24% of
revenues, respectively. Cost of revenues and technical support was $6.1 million
and $8.8 million in the nine months ended March 31, 1999 and 2000, representing
15% and 19% of revenues, respectively. Cost of revenues and technical support
increased due to increased technical support and service personnel in the U.S.,
Europe and Japan and increased license fees for third-party technologies
embedded or bundled with our products. We anticipate that cost of revenues and
technical support will fluctuate in dollar amount and as a percentage of
revenues in the future based on increased license fees for third-party
technologies embedded in or bundled with our products and our investment in
personnel to deliver professional services and training services to others.
In March 2000, Dick Tusia was named Vice President, Customer Engineering.
Prior to joining Pervasive, Mr. Tusia was the director of worldwide technical
services at Trilogy Software in Austin, Texas. He has held support and services
management positions with Cadence Design Systems, Tivoli Systems, and Digital
Equipment.
11
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, sales
office expenses, marketing programs and promotional expenses, and travel and
entertainment. Sales and marketing expenses were $6.1 million and $8.1 million
in the three months ended March 31, 1999 and 2000, representing 38% and 65% of
revenues, respectively. Sales and marketing expenses were $16.6 million and
$23.2 million in the nine months ended March 31, 1999 and 2000, representing 40%
and 51% of revenues, respectively. In October 1999, we announced a major
initiative to significantly increase sales and marketing and development
expenses to capitalize on the market for e-business and mobile computing
applications. The sales and marketing initiatives include significant
incremental spending on programs and activities intended to attract and recruit
Web application developers and Web integrators who design and deploy e-business
applications and to increase brand awareness. Sales and marketing expenses
increased in dollar amount primarily because of costs related to these
initiatives, hiring additional sales and marketing personnel, increased
infrastructure costs associated with sales office expansion and increased as a
percentage of revenues primarily due to lower than anticipated revenues. We
expect that sales and marketing expenses will fluctuate in dollar amount and as
a percentage of revenues in the future based on the timing of product market
development activities and costs associated with new product releases, marketing
promotions, brand awareness campaigns, lead generation programs, and investment
in sales and marketing personnel.
David Dunnigan was appointed Senior Vice President, World Wide Marketing
and Sales in March 2000. Mr. Dunnigan previously served as Vice President, World
Wide Sales since November 1999. Prior to joining Pervasive Mr. Dunnigan served
as Vice President, Sales and Marketing for Novient, Inc., a world wide provider
of professional services automation software for the consulting and systems
integration industry. Prior to Novient, Inc., Mr. Dunnigan served as General
Manager-Front Office VAR Division for Aurum Software, a Baan Company.
Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses were
$4.2 million and $5.4 million in the three months ended March 31, 1999 and 2000,
representing 26% and 43% of revenues, respectively. Research and development
expenses were $10.7 million and $14.7 million in the nine months ended March 31,
1999 and 2000, representing 25% and 32% of revenues, respectively. Research and
development expenses increased in dollar amount primarily due to the increased
hiring of and/or contracting with additional research and development personnel
consistent with our initiative announced in October 1999. We anticipate that
research and development expenses will continue to fluctuate in dollar amount
and as a percentage of revenues in the future in connection with our development
of new products and enhancements to existing products.
Software development costs that were eligible for capitalization in
accordance with Statement of Financial Accounting Standards No. 86 were
insignificant during these periods. Accordingly, we charged all software
development costs to research and development expenses.
General and Administrative. General and administrative expenses consist
primarily of the personnel and other costs of our finance, human resources,
information systems and administrative departments. General and administrative
expenses were $1.3 million and $1.5 million in the three months ended March 31,
1999 and 2000, representing 8% and 12% of revenues, respectively. General and
administrative expenses were $3.5 million and $4.3 million in the nine months
ended March 31, 1999 and 2000, representing 8% and 10% of revenues,
respectively. We attribute the increase in dollar amount primarily to the
increased staffing and associated expenses necessary to manage and support our
increased scale of operations, both domestically and internationally. General
and administrative expenses increased as a percentage of revenue primarily
because of lower than anticipated revenue growth. We believe that our general
and administrative expenses will fluctuate in dollar amounts and as a percentage
of revenue in future periods based on the timing of investments in our
administrative staff to support our worldwide operations.
12
Amortization of Excess of Cost Over Fair Value of Net Assets Acquired. We
acquired 93% of the capital stock of EveryWare Development Inc. in November
1998, and acquired the remaining outstanding shares in December 1998, for total
consideration of $11.8 million, including cash paid to the EveryWare
shareholders, transaction costs and the value of employee stock options assumed.
We accounted for the acquisition using the purchase method of accounting. We
hired an independent third-party appraisal company to determine the valuation of
the intangible assets acquired. The valuation allocated the purchase price as
follows: $1.8 million attributed to purchased research and development; $1.2
million attributed to current technology; and $200,000 attributed to the
assembled workforce. We charged to operations $1.8 million in purchased research
and development in the quarter ended December 31, 1998, because the underlying
research and development projects had not yet reached technological feasibility
and had no alternative future uses. The remaining excess cost over the fair
market value of the net assets acquired is being amortized over a ten year
period. During the three month periods ended March 31, 1999 and 2000, the
Company recorded $275,000 and $276,000, respectively, related to amortization of
intangible assets related to the EveryWare and Smithware acquisitions.
Provision for Income Taxes. We recorded provisions for taxes of
approximately $622,000 and $449,000 in the three months ended March 31, 1999 and
2000, respectively. In October 1999, we announced a major initiative to
significantly increase sales and marketing and development expenses to
capitalize on the market for e-business and mobile computing applications. As a
result of these increased expense levels and lower than expected revenues, we
anticipate that we will report an operating loss for fiscal 2000. Accordingly,
the tax provision for the nine months ended March 31, 2000 reflects the
anticipated effective tax rate for the year. Although we anticipate that we will
incur an overall loss for the year, we will continue to record a provision for
income taxes on profits reported by our foreign operations.
We believe that, based on a number of factors, it is more likely than not
that a substantial amount of our deferred tax assets may not be realized. These
factors include:
. Recent decline in demand for our database products;
. Anticipated operating losses in future periods due to increased
marketing and development costs;
. Limited history of operating profits of our Canadian subsidiary;
. Recent increase in expense levels to support our growth;
. The potential impact of anticipated deductions due to exercise of
employee stock options on deferred tax assets with limited carryforward
periods; and
. The intensely competitive market in which we operate and which is
subject to rapid change.
Accordingly, we have recorded a valuation allowance against the deferred
tax assets related to the Canadian subsidiary and a valuation allowance to the
extent domestic deferred tax assets exceed the potential benefit from carryback
or carryover of deferred items to offset taxable income in the current year or
prior years.
Liquidity and Capital Resources
Cash used by operations was $6.5 million for the nine months ended March
31, 2000 as compared with cash provided by operations of $4.3 million for the
comparable period in the prior fiscal year. The decrease in cash generated by
operations resulted primarily from increases in prepaid expenses, decreases in
accounts payable, accrued liabilities and deferred revenue, the timing of income
tax payments and the decrease in net income during the period when compared to
the net income for the comparable period in the prior year, exclusive of the
non-cash charge for purchased research and development.
13
During the first nine months of fiscal 1999 and 2000, we had net sales of
marketable securities of $743,000 and $2.4 million, respectively, consisting of
various taxable and tax advantaged securities. In addition, we purchased
property and equipment totaling approximately $4.6 million and $3.6 million in
the nine months ended March 31, 1999 and 2000, respectively. This property
consisted primarily of computer hardware and software for our employee base. In
addition, for the nine months ended March 31, 1999, we purchased furniture,
fixtures and leasehold improvements of approximately $1.3 million related to our
new facility.
On October 29, 1999, we acquired an additional 19.5% ownership interest in
Pervasive Software Japan by purchasing stock held by a minority shareholder for
$750,000 in cash. The acquisition was accounted for under the purchase method
and, accordingly the excess of purchase price over the fair market value of net
assets acquired of $160,000 was recorded as goodwill and will be amortized over
a ten year period. After the acquisition, we hold 100% of the outstanding stock
of Pervasive Software Japan.
We have entered into licensing agreements with three vendors related to
technology included, or to be included, with our internally developed products
which require fixed minimum license payments totaling $2.2 million for the year
ended June 30, 2000 and $700,000 for each of the years ended June 30, 2001 and
2002. For the nine months ended March 31, 2000 we made payments relating to
licensing agreements totaling $2.2 million. License payments are capitalized and
amortized over the estimated useful life of the licensed technology (two to
five years), or on a per unit basis based on the terms of the license agreement.
These license agreements provide for use of the technologies on a perpetual
basis or for fixed periods of time.
On March 31, 2000, we had $34.4 million in working capital, including $10.3
million in cash and cash equivalents and $19.3 million in marketable securities.
We have a $10 million revolving line of credit with a bank, but have at no time
borrowed under such line. Our line of credit contains certain financial
covenants and restrictions as to various matters including our ability to pay
cash dividends and effect mergers or acquisitions without the bank's prior
approval. We are currently in compliance with such financial covenants and
restrictions. We have granted a first priority security interest in
substantially all of our tangible assets as security for our obligations under
our credit lines.
Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB No. 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. We are currently studying the
implications of SAB No. 101, but it is not likely to have a material impact on
the financial statements of the Company.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, which further clarifies APB
Opinion No. 25, Accounting for Stock Issued to Employees. Management believes
that this interpretation will not have a material impact on the Company's
financial position or results of operations.
Year 2000 Update
The "Year 2000" issue results from an industry-wide practice of
representing years with only two digits instead of four. Beginning in the year
2000, date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates (2000 or 1900). As a
result, computer systems and/or software used by many companies needed to be
upgraded to comply with such Year 2000 requirements.
Through the first four months of the calendar year 2000, we have not
experienced any significant problems associated with the Year 2000 issue.
Although it appears that the Year 2000 issue will not have a significant adverse
affect on Pervasive, we continue to offer Year 2000 related support to our
customers and monitor the Year 2000 compliance of our internal systems world
wide. Undetected errors in our products or internal systems that may
14
be discovered in the future could have a material adverse affect on our
business, operating results or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. Dollars. However, we do
have foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. Currently, we have operations in Canada, Japan,
Germany, France, Ireland, England, Belgium, and Hong Kong and conduct
transactions in the local currency of each location. We monitor our foreign
currency exposure and, from time to time will attempt to reduce our exposure
through hedging. The impact of fluctuations in the relative value of other
currencies was not material for the three or nine months ended March 31, 2000.
Quantitative and qualitative information about market risk was addressed in Item
7A of our Form 10-K for the fiscal year ended June 30, 1999.
15
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. Any of the following risks could harm our business, financial
condition or results of operations. In such case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
Our Financial Results May Vary Significantly from Quarter to Quarter
Our operating results have varied significantly from quarter to quarter in
the past and will continue to vary significantly from quarter to quarter in the
future due to a variety of factors. Many of these factors are outside of our
control. These factors include:
. Fluctuations in demand for our products;
. Fluctuations in the deployment of client/server applications in which our
Pervasive.SQL products are designed to be embedded;
. Seasonality and the timing of product sales and shipments;
. Unexpected delays in introducing new or improvements to existing products
and services;
. New product releases or pricing policies by our competitors;
. Impact of changes to our product distribution strategy and pricing
policies;
. Lack of order backlog;
. Loss of a significant customer or distributor;
. Changes in purchasing practices by our distributors;
. A reduction in the number of independent software vendors, or ISVs, who
embed our products;
. Increased expenses related to our recently announced sales and marketing
and product development initiatives; and
. Changes in the mix of domestic and international sales.
In recent quarters, we have derived a portion of our revenues from relatively
larger orders. The sales cycles for these transactions tend to be longer than
the sales cycles on smaller orders. This longer sales cycle for large orders
makes it difficult to predict the quarter in which these sales will occur.
Accordingly, our operating results may fluctuate from quarter to quarter based
on the existence and timing of larger orders. A reduction in large orders
during any quarter could materially impact our revenues.
In October 1999, we announced a major initiative to significantly increase
sales and marketing and development expenses to capitalize on the market for e-
business and mobile computing applications. We anticipate that we may incur
operating losses as a result of the increased expenses related to these
initiatives. We cannot be certain that these initiatives or future initiatives
will successfully generate license revenue from our Tango and Pervasive.SQL
products.
In addition, our revenues for the three months ended March 31, 2000 decreased
from our revenues for the three months ended December 31, 1999, primarily due to
lower sales pipeline entering the quarter, the recent
16
reorganization of our domestic sales force and what we believe to be a general
softening in the packaged client/server applications market contributing to
decreased orders for our Pervasive.SQL products embedded in these applications.
We believe each of these factors could continue to negatively affect sales of
both our Pervasive.SQL and our Tango products in the future, particularly in
upcoming quarters. In addition, we reorganized our domestic sales organization
in January 2000, resulting in centrally managed domestic telesales and domestic
OEM sales operations. These telesales and OEM sales activities were previously
managed by district managers in the field. A similar reorganization is currently
being deployed in Europe. These adjustments could negatively impact our revenue
for the near term as our sales representatives and sales managers become
accustomed to their new assignments. Accordingly, we anticipate that our
quarterly revenues may not increase, and could decline sequentially, in the
quarter ended June 30, 2000.
Significant portions of our expenses are not variable in the short term and
cannot be quickly reduced to respond to decreases in revenues. Therefore, if our
revenues are below our expectations, our operating results are likely to be
adversely and disproportionately affected. In addition, we may change our
prices, distribution strategy and policy and have already announced plans to
accelerate our investment in research and development, as well as sales and
marketing to pursue new market opportunities. Any one of these activities may
further limit our ability to adjust spending in response to revenue
fluctuations.
In addition, we may experience fluctuations based on our past and future
acquisitions of businesses and product lines. For example, we incurred a loss in
the quarter ended December 31, 1998 as a result of a charge for purchased
research and development associated with our acquisition of EveryWare
Development Inc.
Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results
Our business has, on occasion, experienced seasonal customer buying patterns.
In recent years, we have generally experienced relatively weaker demand in the
quarters ending March 31 and September 30. We believe that this pattern may
continue. In addition, to the extent international operations constitute a
greater percentage of our revenues in future periods, we anticipate that demand
for our products in Europe and Japan will decline in the summer months because
of reduced corporate buying patterns during the vacation season.
We Currently Operate Without a Backlog
We generally operate with virtually no order backlog because our software
products are shipped and revenue is recognized shortly after orders are
received. This lack of backlog makes product revenues in any quarter
substantially dependent on orders booked and shipped throughout that quarter. As
a result, if orders in the first month or two of a quarter fall short of
expectations, it is likely we will not meet our revenue targets for that
quarter. As a result, our quarterly operating results would be materially and
adversely affected.
Our Success Depends on Our Management of Significant Growth and Change Within
Our Business
We have expanded our operations rapidly since inception, resulting in new and
increased responsibilities for management and placing a strain upon our
financial and other resources. During this period, we have experienced revenue
growth, an increase in the number of our employees, an expansion in the scope of
our operating and financial systems and an expansion in the geographic area of
our operations. In particular, we had a total of 391 employees at March 31,
2000, as compared to 323 at March 31, 1999. In order to manage growth
effectively, we must implement and improve our operational systems, procedures
and controls on a timely basis. If we fail to implement and improve these
systems, our business, operating results and financial condition will be
materially adversely affected.
Our Performance Depends on Market Acceptance of Pervasive.SQL
We derive a significant portion of our revenues from the license of our
Pervasive.SQL products. In particular, we are becoming increasingly dependent on
market acceptance of our recently introduced Pervasive.SQL 2000
17
product, as revenues from our older database products, Btrieve and Pervasive.SQL
7, decline in future quarters. Revenue from Pervasive.SQL 2000 declined in the
three months ended March 31, 2000 relative to the three months ended December
31, 1999 and this trend may continue in future quarters. Market acceptance of
Pervasive.SQL 2000 may be influenced heavily by factors outside of our control
such as new product offerings or promotions by competitors, the product
development and deployment cycles of developers and resellers who embed or
bundle our products into packaged software applications and what we believe is a
softening in the market for client/server applications of the type built on
Pervasive.SQL 2000. Although we recognized increased revenue from Pervasive.SQL
2000 in both the three months ended September 30, 1999 and the three months
ended December 31, 1999, one-time upgrades from earlier versions of our
products, our favorable upgrade pricing, or other factors may have contributed
to such increased revenues and such increases may not continue in future
quarters.
Our Performance Depends on Our Ability to Successfully Market and Support Tango
We acquired the technology for our Tango products in November 1998 and we
began to market the Tango Application Server and Tango Development Studio both
as stand-alone products and integrated with Pervasive.SQL during the third
quarter of fiscal 1999. To date, we have not derived significant revenues from
the Tango products. Our performance depends on our ability to generate demand
for, gain market acceptance of and effectively support our Tango products in the
near future. As a result, we expect to devote significant resources to our sales
and marketing efforts relating to Tango. Because of our limited experience
marketing the Tango products, we cannot be certain that we will achieve market
acceptance for or generate significant revenue from the Tango products. Our
ability to rapidly gain market acceptance and to effectively support our Tango
products is subject to a number of factors, including:
. The success of our efforts to centrally manage our domestic telesales
and OEM sales activities;
. Our ability to further integrate Pervasive.SQL with the Tango products
and coordinate our sales and marketing efforts relating to these
products;
. Our ability to recruit and train new and existing developers, value-
added resellers, systems integrators, Web integrators and consultants;
. The success of promotions involving our Tango development environment
and our ability to ultimately receive Tango Application Server revenue
from past and future promotions;
. Our ability to develop and market product enhancements that will lead to
broader adoption of Tango by Web developers;
. The time lag between adoption and deployment of the Tango product line;
. Our ability to successfully market Tango products to our installed base
of customers, independent software vendors and value-added resellers;
. The extent of competitive pricing pressure from companies in our markets
that are willing to accept losses in an attempt to gain market share;
and
. Continued growth in the market for Web-based development products.
We Have Significant Product Concentration
Historically, we have derived substantially all of our revenues from our
Pervasive.SQL and Btrieve data management products. On June 30, 1999, we
discontinued general availability of our Btrieve products to consolidate our
development, marketing and technical support resources behind our current
Pervasive.SQL
18
products. Accordingly, our data management-related revenue from licenses of
Pervasive.SQL may continue to account for substantially all of our revenues for
the foreseeable future. We experienced a slight decline in demand for the most
recent release of our data management product, Pervasive.SQL 2000, and a
significant decline in demand for older versions of our database products,
resulting in an overall decline in revenue for the three months ended March 31,
2000 relative to the three months ended December 31, 1999. Our future operating
results will depend upon continued market acceptance of Pervasive.SQL. A
continued decrease in demand or a decline in market acceptance for our
Pervasive.SQL product would have a damaging effect on our business, operating
results and financial condition.
Our Efforts to Develop Brand Awareness of Our Products May Not be Successful
We believe that developing and maintaining awareness of the "Pervasive" and
"Tango" brand names is critical to achieving widespread acceptance of our
products. The importance of brand recognition will increase as competition
increases in the market for Web-based development and deployment products. A key
element of our business strategy is to commit significant resources to promote
our brands. We have not obtained a United States registration for all of these
names, and we are aware of other companies that use the word "Pervasive" or
"Tango" either in their marks alone or in combination with other words. We
expect that it may be difficult or impossible to prevent third-party usage of
these names and variations of these names for competing goods and services.
Competitors or others that use marks that are similar to our brand names may
cause confusion among actual and potential customers, which could prevent us
from achieving significant brand recognition. Additionally, we may be unable to
sell our products under the "Tango" brand name in certain foreign countries
where third parties have already registered a trademark for this brand name. If
we fail to promote and maintain our brands or incur significant related
expenses, our business, operating results and financial condition could be
materially adversely affected.
We May Face Problems in Connection With Future Acquisitions or Joint Ventures
In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. Our negotiations of potential acquisitions or joint
ventures and our integration of acquired businesses, products or technologies
could divert time and resources. Any future acquisitions could require us to
issue dilutive equity securities, incur debt or contingent liabilities, amortize
goodwill and other intangibles, or write-off purchased research and development
and other acquisition-related expenses. If we are unable to fully integrate
acquired businesses, products or technologies with our existing operations, we
may not receive the intended benefits of acquisitions.
A Small Number of Distributors Account For a Significant Percentage of Our
Revenues
The loss of a major distributor or any reduction in orders by such
distributor, including reductions due to market or competitive conditions,
combined with the inability to replace the distributor on a timely basis, or any
modifications to our pricing or distribution channel strategy could materially
adversely affect our business, operating results and financial condition. Many
of our independent software vendors, value-added resellers and end users place
their orders through distributors. A relatively small number of distributors
have accounted for a significant percentage of our revenues. In the nine months
ended March 31, 2000, three distributors accounted for approximately 21% of
revenues, and in the nine months ended March 31, 1999, two distributors combined
accounted for approximately 19% of revenues. We expect that we will continue to
be dependent upon a limited number of distributors for a significant portion of
our revenues in future quarters. Moreover, we expect that such distributors will
vary from period to period. Our distributors have not agreed to any minimum
order requirements. Although we forecast demand and plan accordingly, if a
distributor purchases excess product, we may be obligated to accept the return
of some products.
We Depend on Our Indirect Sales Channel
Our failure to continue to grow our indirect sales channel or the loss of a
significant number of members of our indirect channel partners would have a
material adverse effect on our business, financial condition and operating
19
results. We do not have a substantial direct sales force and derive
substantially all of our revenues from indirect sales through a channel
consisting of independent software vendors, value-added resellers, system
integrators, consultants and distributors. Our sales channel could be adversely
affected by a number of factors including:
. The emergence of a new platform resulting in the failure of independent
software vendors to develop and the failure of value-added resellers to
sell our products based on our supported platforms;
. Pressures placed on the sales channel to sell competing products;
. Our failure to adequately support the sales channel;
. Competing product lines offered by certain of our indirect channel
partners; and
. Our failure to properly manage the transition of our sales force following
our recent decision to centralize certain domestic sales functions and
close certain domestic field sales offices.
We cannot be certain that we will be able to continue to attract additional
indirect channel partners or retain our current partners. In addition, we cannot
be certain that our competitors will not attempt to recruit certain of our
current or future partners.
We May Not Be Able to Develop Strategic Relationships
Our current collaborative relationships may not prove to be beneficial to us,
and they may not be sustained. We may not be able to enter into successful new
strategic relationships in the future, which could have a material adverse
effect on our business, operating results and financial condition. From time to
time, we have collaborated with other companies in areas such as product
development, marketing, distribution and implementation. Maintaining these and
other relationships is a meaningful part of our business strategy. However, many
of our current and potential strategic partners are either actual or potential
competitors with us. In addition, many of our current relationships are informal
or, if written, terminable with little or no notice.
We Depend on Third-Party Technology in Our Products
We rely upon certain software that we license from third parties, including
software that is integrated with our internally developed software and used in
our products to perform key functions. These third-party software licenses may
not continue to be available to us on commercially reasonable terms. The loss
of, or inability to maintain or obtain any of these software licenses, could
result in shipment delays or reductions until we develop, identify, license and
integrate equivalent software. Any delay in product development or shipment
could damage our business, operating results and financial condition.
We May be Unable to Protect Our Intellectual Property and Proprietary Rights
Our success depends to a significant degree upon our ability to protect our
software and other proprietary technology. We rely primarily on a combination of
copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect our proprietary rights. However, these
measures afford us only limited protection. In addition, we rely in part on
"shrink wrap" and "click wrap" licenses that are not signed by the end user and,
therefore, may be unenforceable under the laws of certain jurisdictions.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Although we believe software
piracy may be a problem, we are unable to determine the extent to which piracy
of our software products occurs. In addition, portions of our source code are
developed in foreign countries with laws that do not protect our proprietary
rights to the same extent as the laws of the United States.
Although we are not aware that any of our products infringe upon the
proprietary rights of third parties, we may be subjected to claims of
intellectual property infringement by third parties as the number of products
and
20
competitors in our industry segment continues to grow and the functionality
of products in different industry segments increasingly overlaps. Any
infringement claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or the loss or deferral of
sales or require us to enter into royalty or licensing agreements. If we are
required to enter into royalty or licensing agreements, they may not be on terms
acceptable to us. Unfavorable royalty and licensing agreements could seriously
damage our business, operating results and financial condition.
We Must Adapt to Rapid Technological Change
Our future success will depend upon our ability to continue to enhance our
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and satisfy increasingly
sophisticated customer requirements. Rapid technological change, frequent new
product introductions and enhancements, uncertain product life cycles, changes
in customer demands and evolving industry standards characterize the market for
our products. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. As a result of the complexities inherent in client/server
computing environments and the performance demanded by customers for databases
and Web-based products, new products and product enhancements can require long
development and testing periods. As a result, significant delays in the general
availability of such new releases or significant problems in the installation or
implementation of such new releases could have a material adverse effect on our
business, operating results and financial condition. We have experienced delays
in the past in the release of new products and new product enhancements. We may
not be successful in:
. Developing and marketing, on a timely and cost-effective basis, new
products or new product enhancements that respond to technological change,
evolving industry standards or customer requirements;
. Avoiding difficulties that could delay or prevent the successful
development, introduction or marketing of these products; or
. Achieving market acceptance for our new products and product enhancements.
Our Software May Contain Undetected Errors or Defects
Errors or defects in our products may result in loss of revenues or delay in
market acceptance, and could materially adversely affect our business, operating
results and financial condition. Software products such as ours may contain
errors or defects, sometimes called "bugs," particularly when first introduced
or when new versions or enhancements are released. From time to time, we
discover software errors or defects in certain of our new products after their
introduction. Despite our testing, current versions, new versions or
enhancements of our products may still have defects and errors after
commencement of commercial shipments. Product defects can put us at a
competitive disadvantage and can be costly and time consuming to correct.
We May Become Subject to Product or Professional Services Liability Claims
A product or professional services liability claim, whether or not
successful, could damage our reputation and our business, operating results and
financial condition. Our license and service agreements with our customers
typically contain provisions designed to limit our exposure to potential product
or service liability claims. However, these contract provisions may not preclude
all potential claims. Product or professional services liability claims could
require us to spend significant time and money in litigation or to pay
significant damages.
We Compete with Microsoft while Simultaneously Supporting Microsoft Technologies
We currently compete with Microsoft in the market for data management and Web
development and deployment products while simultaneously maintaining a working
relationship with Microsoft. Microsoft has a
21
longer operating history, a larger installed base of customers and substantially
greater financial, distribution, marketing and technical resources than the
Company. As a result, we may not be able to compete effectively with Microsoft
now or in the future, and our business, operating results and financial
condition may be materially adversely affected.
We expect that Microsoft's commitment to and presence in both the database
and Web development and deployment products markets will substantially increase
competitive pressures. We believe that Microsoft will continue to incorporate
Web application server or SQL Server database technology into its operating
system software and certain of its server software offerings, possibly at no
additional cost to its users. We believe that Microsoft will also continue to
enhance its SQL Server database technology.
We believe that we must maintain a working relationship with Microsoft to
achieve success. Many of our customers use Microsoft-based operating platforms.
Thus it is critical to our success that our products be closely integrated with
Microsoft technologies. Notwithstanding our historical and current support of
Microsoft platforms, Microsoft may in the future promote technologies and
standards more directly competitive with or not compatible with our technology.
We Face Significant Competition From Other Companies
We encounter competition for our database products primarily from large,
public companies, including Microsoft, Oracle, Informix, Sybase, IBM and
Progress. In particular, Sybase's small memory footprint database software
product, Adaptive Server Anywhere, and Microsoft's product, SQL Server, directly
compete with our products. In addition, because there are relatively low
barriers to entry in the software market, we may encounter additional
competition from other established and emerging companies.
The Web development and deployment market is an emerging, intensely
competitive environment, subject to rapidly changing products and new market
participants. The market is also undergoing significant consolidation, which
could result in the creation of a relatively few dominant players. In the last
two years, Netscape acquired Kiva Software, Sun Microsystems acquired
NetDynamics and BEA Systems acquired WebLogic. Oracle, Microsoft and IBM have
each entered the Web development and deployment market with internally developed
solutions. The primary competitor for our Tango development environment and
application server is Allaire's Cold Fusion product. Additional competitors
include Silverstream, Bluestone and HAHT Software. Another set of competitors
could arise as traditional online transaction processing and database vendors
expand their application server solutions to include Web-based application
development software. We believe that, given the projected size of the market
and strong trend towards distributed computing, it is likely that additional
competitors may enter the market. This could lead to intense pricing pressure,
particularly on front-end development tools and perhaps the application server,
and result in higher research and development costs to compete on a feature-for-
feature basis.
Application service providers ("ASP") are beginning to enter our market and
could cause a change in revenue models from licensing of client/server and Web-
based applications to renting applications. Our competitors may be more
successful than we are in adopting these revenue models and capturing related
market share.
Most of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers. In addition,
some competitors have demonstrated a willingness to, or may willingly in the
future, incur substantial losses as a result of deeply discounted product
offerings or aggressive marketing campaigns. As a result, our competitors may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of competitive products, than we can. There is also a
substantial risk that announcements of competing products by large competitors
such as Microsoft, Oracle or IBM could result in the cancellation of customer
orders in anticipation of the introduction of such new products. In addition,
current and potential competitors have established or may establish cooperative
relationships among
22
themselves or with third parties to increase the ability of their products to
address customer needs and which may limit our ability to sell our products
through particular distribution partners. Accordingly, new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share in our current or anticipated markets. We also expect
that competition will increase as a result of software industry consolidation.
Increased competition is likely to result in price reductions, fewer customer
orders, reduced margins and loss of market share, any of which could materially
adversely affect our business. We cannot be certain that we will be able to
compete successfully against current and future competitors or that the
competitive pressures that we face will not materially adversely affect our
business, operating results and financial condition.
We Are Susceptible to a Shift in the Market for Client/Server Applications
Toward Web-Based Applications
We have derived substantially all of our historical revenues from the use of
our products in client/server applications. We expect to rely on continued
market demand for client/server applications indefinitely. Although the market
for client/server applications has grown in recent years, we believe that the
rate of growth has slowed in recent quarters, that this trend will continue or
accelerate in future quarters, and that other application platforms are
emerging. In particular, we believe market demand is shifting from client/server
applications to Web-based applications. This shift is occurring before our Web-
based product line has achieved market acceptance. In addition, we cannot be
certain that developers of Web-based applications would select our Web-based
products. Further, this shift may result in a change in revenue models from
licensing of client/server and Web-based applications to renting of applications
from application service providers. A decrease in client/server application
sales coupled with an inability to derive revenues from the Web-based
application market could have a material adverse effect on our business,
operating results and financial condition.
We Increasingly Depend on the Growth of International Sales and Operations
We anticipate that for the foreseeable future we will derive a significant
portion of our revenues from sources outside North America. In the nine months
ended March 31, 2000, we derived 49% of our revenues outside North America. Our
international operations are generally subject to a number of risks. These risks
include:
. Costs of translating and localizing products for foreign languages;
. Foreign laws and business practices favoring local competition;
. Dependence on local channel partners;
. Compliance with multiple, conflicting and changing government laws and
regulations;
. Longer sales cycles;
. Greater difficulty or delay in collecting payments from customers;
. Difficulties in staffing and managing foreign operations;
. Foreign currency exchange rate fluctuations and the associated effects on
product demand;
. Increased tax rates in certain foreign countries;
. Difficulties with financial reporting in foreign countries;
. Quality control of certain development activities; and
. Political and economic instability.
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We are currently reorganizing our sales and marketing organization in Europe
to centralize functions and better match our organizational structure to the
type of customer. However, these adjustments could negatively impact our
revenue for the near term as our sales representatives and sales managers become
integrated into their new assignments. Accordingly, our quarterly revenues may
not increase, and could decline sequentially, in the three months ending June
30, 2000.
We may continue expanding our sales and support operations internationally.
Despite our efforts, we may not be able to expand our sales and support
operations internationally in a timely and cost-effective manner. Such an
outcome would limit or eliminate any sales growth internationally, which in turn
would materially adversely affect our business, operating results and financial
condition. Even if we successfully expand our international operations, we may
be unable to maintain or increase international market demand for our products.
We expect that our international operations will continue to place financial
and administrative demands on us and our management, including operational
complexity associated with international facilities, administrative burdens
associated with managing relationships with foreign partners and treasury
functions to manage foreign currency risks and collections.
Fluctuations in the Relative Value of Foreign Currencies Can Affect Our Business
To date, the majority of our transactions have been denominated in U.S.
dollars. The majority of our international operating expenses, substantially all
of our sales in Japan and certain other international sales have been
denominated in currencies other than the U.S. dollar. Therefore, our operating
results may be adversely affected by changes in the value of the U.S. dollar. To
the extent our international operations expand, our exposure to exchange rate
fluctuations will increase. We have entered into limited hedging transactions to
mitigate our exposure to currency fluctuations. Despite these hedging
transactions, exchange rate fluctuations have caused, and will continue to
cause, currency transaction gains and losses. Although these transactions have
not resulted in material gains and losses to date, similar transactions could
have a damaging effect on our business, results of operations or financial
condition in future periods.
We Must Continue to Hire and Retain Skilled Personnel in a Tight Labor Market
Qualified personnel are in great demand and short supply throughout the
software industry. Our success depends in large part on our ability to attract,
motivate and retain highly skilled employees on a timely basis, particularly
executive management, sales and marketing personnel, software engineers and
other senior personnel. Our failure to attract and retain the highly trained
technical personnel that are essential to our product development, marketing,
service and support teams may limit the rate at which we can generate revenue
and develop new products or product enhancements. This could have a material
adverse effect on our business, operating results and financial condition.
We Have Anti-Takeover Provisions
The Company's Restated Certificate of Incorporation and Bylaws contain
certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable, including provisions:
authorizing the issuance of "blank check" preferred stock; establishing advance
notice requirements for stockholder nominations for elections to the Board of
Directors or for proposing matters that can be acted upon at stockholders'
meetings; eliminating the ability of stockholders to act by written consent;
requiring super-majority voting to approve certain amendments to the Restated
Certificate of Incorporation; limiting the persons who may call special meetings
of stockholders; and providing for a Board of Directors with staggered, three-
year terms. In addition, certain provisions of Delaware law and the Company's
1997 Stock Incentive Plan (the "1997 Plan") may also have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals.
24
The Price of Our Stock Has Been Volatile and Could Continue to Fluctuate
Substantially
Our common stock is traded on the Nasdaq National Market. The market price of
our common stock has been volatile and could fluctuate substantially based on a
variety of factors outside of our control, in addition to our financial
performance. Furthermore, stock prices for many companies, including our own,
fluctuate widely for reasons that may be unrelated to operating results.
25
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Report on Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Risk
Factors," and elsewhere in this Report constitute forward looking statements
within the meaning of Section 21E of the Securities and Exchange Act of 1934.
Forward looking statements include statements regarding the Company's
expectations, beliefs, hopes, intentions or strategies regarding the future.
These statements involve known and unknown risks, uncertainties, and other
factors that may cause our or our industry's actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward looking statements. Such factors include, among other things, those
listed under "Risk Factors" and elsewhere in this Report on Form 10-Q.
In some cases, you can identify forward looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward looking
statements after the date of this Report to conform such statements to actual
results.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Class action complaints were filed in November and December 1999 in
the U.S. District Court for the Western District of Texas against the
Company and certain of its officers and directors. The cases were
consolidated in a single amended consolidated complaint filed in January
2000. The amended consolidated complaint alleges that the Company and
certain of its officers and directors violated federal securities laws,
including Rule 10b-5 under the Securities Exchange Act of 1934, by making
false statements and failing to disclose material information to
artificially inflate the price of the Company's common stock during the
Class Period of July 15, 1999 to October 21, 1999. The Company and other
defendants filed motions to dismiss the suit on February 7, 2000. No
ruling has been made on the motion to dismiss the suit. While the
proceedings are at a very early stage, the Company believes the suit is
without merit and intends to defend itself vigorously.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits under Item 601 of Regulation S-K
3.1* Restated Certificate of Incorporation
3.2* Bylaws of the Company
4.1* Reference is made to Exhibits 3.1, 3.2 and 4.3
4.2* Specimen Common Stock certificate
4.3* Investors' Rights Agreement dated April 19, 1995, between the
Company and the investors named therein
10.1* Form of Indemnification Agreement
10.2* 1997 Stock Incentive Plan
10.3* Employee Stock Purchase Plan
10.4* First Amended and Restated 1994 Incentive Plan
10.5* Amendment and Restatement of Credit Agreement dated March 31,
1997 between the Company and Texas Commerce Bank National
Association
10.8* Sublease Agreement dated December 10, 1996 between the
Company and Reynolds, Loeffler & Dowling, P.C.
10.9* Joint Venture Agreement dated March 26, 1995 between the
Company and Novell Japan, Ltd., AG Tech Corporation and
Empower Ltd.
10.10** Lease agreement dated April 2, 1998 between the Company and
CarrAmerica Realty, L.P. T/A Riata Corporate Park
27.1 Financial Data Schedule
*Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-32199).
** Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (File No. 000-23043).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended March 31,
2000.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000 PERVASIVE SOFTWARE INC.
(Registrant)
By: /s/ James R. Offerdahl
---------------------------------------
James R. Offerdahl
Chief Operating
Officer and Chief Financial
Officer (Duly Authorized Officer and
Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1* Restated Certificate of Incorporation
3.2* Bylaws of the Company
4.1* Reference is made to Exhibits 3.1, 3.2 and 4.3
4.2* Specimen Common Stock certificate
4.3* Investors' Rights Agreement dated April 19, 1995, between the
Company and the investors named therein
10.1* Form of Indemnification Agreement
10.2* 1997 Stock Incentive Plan
10.3* Employee Stock Purchase Plan
10.4* First Amended and Restated 1994 Incentive Plan
10.5* Amendment and Restatement of Credit Agreement dated March 31,
1997 between the Company and Texas Commerce Bank National
Association
10.8* Sublease Agreement dated December 10, 1996 between the
Company and Reynolds, Loeffler & Dowling, P.C.
10.9* Joint Venture Agreement dated March 26, 1995 between the
Company and Novell Japan, Ltd., AG Tech Corporation and
Empower Ltd.
10.10** Lease agreement dated April 2, 1998 between the Company and
CarrAmerica Realty, L.P. T/A Riata Corporate Park
27.1 Financial Data Schedule
*Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-32199).
** Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (File No. 000-23043).
29