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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 September 30, 2001
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
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(2) Yes X No
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As of November 12, 2001 there were 16,853,574 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 September 30, 2001
and June 30, 2001................................................. 3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2001 and 2000.......................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2001 and 2000.......................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 13
PART II. OTHER INFORMATION................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders............... 24
Item 6. Exhibits and Reports on Form 8-K.................................. 24
SIGNATURES................................................................. 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Pervasive Software Inc.
Condensed Consolidated Balance Sheets
(in thousands)
September 30, June 30,
2001 2001
----------------- -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 23,142 $ 20,593
Marketable securities 4,892 6,510
Trade accounts receivable, net 5,404 5,356
Prepaid expenses and other current assets 1,103 1,895
----------------- -----------------
Total current assets 34,541 34,354
Property and equipment, net 4,361 4,755
Purchased technology and excess of cost over fair value
of net assets acquired, net 168 853
Other assets 648 506
----------------- -----------------
Total assets $ 39,718 $ 40,468
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 779 $ 500
Accrued payroll and payroll related costs 1,100 1,583
Other accrued expenses 5,349 5,543
Deferred revenues 1,652 1,530
Liabilities of discontinued operations 1,501 1,633
----------------- -----------------
Total current liabilities 10,381 10,789
Stockholders' equity :
Common stock 59,474 60,148
Retained deficit (30,137) (30,469)
----------------- -----------------
Total stockholders' equity 29,337 29,679
----------------- -----------------
Total liabilities and stockholders' equity $ 39,718 $ 40,468
================= =================
See accompanying notes.
3
Pervasive Software Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three months ended
September 30,
2001 2000
----------------- -----------------
Revenues $8,965 $10,020
Costs and expenses:
Cost of revenues and technical support 1,665 2,464
Sales and marketing 3,083 5,035
Research and development 1,938 2,976
General and administrative 1,351 1,488
----------------- -----------------
Total costs and expenses 8,037 11,963
----------------- -----------------
Operating income (loss) 928 (1,943)
Interest and other income, net 229 351
Income tax provision (175) (200)
----------------- -----------------
Income (loss) before effect of adoption of new accounting principle 982 (1,792)
Effect of adoption of new accounting principle (676) -
----------------- -----------------
Net income (loss) $ 306 $(1,792)
================= =================
Basic earnings (loss) per share:
Income (loss) before effect of adoption of new accounting principle $ 0.06 $ (0.11)
Effect of adoption of new accounting principle (0.04) -
----------------- -----------------
Net income (loss) $ 0.02 $ (0.11)
================= =================
Diluted earnings (loss) per share:
Income (loss) before effect of adoption of new accounting principle $ 0.06 $ (0.11)
Effect of adoption of new accounting principle (0.04) -
----------------- -----------------
Net income (loss) $ 0.02 $ (0.11)
================= =================
See accompanying notes.
4
Pervasive Software Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three months ended
September 30,
-----------------------------------------
2001 2000
----------------- -----------------
Cash from continuing operations
Income (loss) from continuing operations $ 306 $(1,792)
Adjustments to reconcile net income (loss) to net cash provided (used) by
continuing operations:
Depreciation and amortization 595 794
Other non cash items 676 47
Change in current assets and liabilities:
(Increase) decrease in trade accounts receivable (28) 971
Decrease in prepaid expenses and other current assets 1,179 779
Decrease in accounts payable and accrued liabilities (500) (1,075)
Increase in deferred revenue 122 4
----------------- -----------------
Net cash provided (used) by continuing operations 2,350 (272)
Cash from discontinued operations
Net change in assets and liabilities of discontinued operations - 106
Decrease in liabilities of discontinued operations (133) (1,012)
----------------- -----------------
Net cash used in discontinued operations (133) (906)
Cash from investing activities
Purchase of property and equipment (216) (205)
Sales and purchases of marketable securities, net 1,619 3,000
Investment in business venture (351) -
Increase in other assets (141) (57)
----------------- -----------------
Net cash provided by investing activities 911 2,738
Cash from financing activities
Proceeds from issuance of stock, net of issuance costs 9 4
Acquisition of treasury stock (684) -
----------------- -----------------
Net cash provided (used) by financing activities (675) 4
Effect of exchange rate on cash and cash equivalents 96 (299)
----------------- -----------------
Increase in cash and cash equivalents 2,549 1,265
Cash and cash equivalents at beginning of period 20,593 12,822
----------------- -----------------
Cash and cash equivalents at end of period $23,142 $14,087
================= =================
See accompanying notes.
5
PERVASIVE SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
1. General and Basis of Financial Statements
The unaudited interim condensed consolidated financial statements include the
accounts of Pervasive Software Inc. and its majority-owned subsidiaries
(collectively, the "Company" or "Pervasive"). All material intercompany
accounts and transactions have been eliminated in consolidation.
The financial statements included herein reflect all adjustments, consisting
only of normal recurring adjustments, which in the opinion of management are
necessary to fairly state the Company's financial position, results of
operations and cash flows for the periods presented. These financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the year ended June 30, 2001, which are
contained in the Company's Annual Report filed on Form 10-K on September 28,
2001 (File No. 000-23043). The results of operations for the three month periods
ended September 30, 2001 and 2000 are not necessarily indicative of results that
may be expected for any other interim period or for the full fiscal year.
2. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
Three mnths ended
September 30,
---------------------------------------
2001 2000
--------------- --------------
Numerator:
Net income (loss)................................................................... $ 306 $ (1,792)
=============== ==============
Denominator:
Denominator for basic earnings (loss) per share - weighted average shares........... 16,919 15,777
Effect of dilutive securities:
Employee stock options............................................................. 593 *
--------------- --------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions............................ 17,512 15,777
=============== ==============
Basic earnings (loss) per share....................................................... $0.02 $ (0.11)
=============== ==============
Diluted earnings (loss) per share..................................................... $0.02 $ (0.11)
=============== ==============
* Not applicable in loss periods due to antidilutive effect.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows (in thousands):
Three months ended
September 30,
--------------------------------
2001 2000
-------------- -------------
Net income (loss)......................................... $ 306 $(1,792)
Foreign currency translation adjustments.................. 27 (300)
Comprehensive income (loss)............................... $ 333 $(2,092)
============ ===========
4. Option Exchange Program
In July 2001, the Company implemented an option exchange program allowing
employees to exchange all stock options to purchase shares of the Company's
stock under the Pervasive Software Inc. 1997 Stock Incentive Plan (the Plan) for
new options under the Plan. The Company cancelled stock options, representing
approximately 770,000 shares, previously granted to those employees who
voluntarily participated in the program in exchange for new options,
representing an equal number of shares, that will be granted on or after
February 27, 2002. The exercise price of these new options will be equal to the
fair market value of the Company's common stock on the grant date. The program
has been organized to comply with FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, and is not expected to result
in any additional compensation charges or variable plan accounting.
5. Change in Accounting Principle
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (Statement) No. 141, Business Combinations,
which eliminates the pooling method of accounting for all business combinations
initiated after June 30, 2001 and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. The Company adopted this accounting standard for business
combinations initiated after June 30, 2001.
The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, effective July 1, 2001. Statement 142
discontinues the amortization of goodwill and requires future periodic testing
of goodwill for impairment. In addition, the Statement requires reassessment of
the useful lives of previously recognized intangible assets. With the adoption
of the Statement, the Company ceased amortization of goodwill as of July 1,
2001.
Upon adoption of Statement 142, the Company completed an evaluation of its
carrying value of goodwill as allowed effective July 1, 2001, resulting in an
impairment charge of approximately $676,000, which is recorded as a cumulative
change in accounting principle. The Company's implied fair value of goodwill was
$0 as a result of the Company's allocation of enterprise value, as determined by
quoted market prices, to all of the Company's assets and liabilities. The
following table presents the quarterly results of the Company on a comparable
basis as if Statement 142 had been adopted effective July 1, 2000:
Three months ended September 30,
-----------------------------------
2001 2000
-------------- ---------------
Reported net income (loss) $ 306 $(1,792)
Goodwill amortization (net of tax) - 26
Effect of adoption of new accounting principle (net of tax) 676 -
-------------- ---------------
Adjusted net income (loss) $ 982 $(1,766)
============== ===============
7
Basic earnings (loss) per share:
Reported net income (loss) $0.02 $ (0.11)
Goodwill amortization (net of tax) - 0.00
Effect of adoption of new accounting principle (net of tax) 0.04 -
-------------- ---------------
Adjusted net income (loss) $0.06 $ (0.11)
============== ===============
Diluted earnings (loss) per share:
Reported net income (loss) $0.02 $ (0.11)
Goodwill amortization (net of tax) - 0.00
Effect of adoption of new accounting principle (net of tax) 0.04 -
-------------- ---------------
Adjusted net income (loss) $0.06 $ (0.11)
============== ===============
6. Recently Issued Accounting Standards
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement 144 supercedes Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the accounting and reporting provisions relating
to the disposal of a segment of a business as required by Accounting Principles
Board No. 30. The provisions of Statement 144 will be effective for the
Company's fiscal year beginning July 1, 2002. The Company does not expect that
the adoption of Statement 144 will have a significant impact on its financial
statements.
8
PERVASIVE SOFTWARE INC.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The statements contained in this Report on Form 10-Q that are not purely
historical statements are forward looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding the Company's expectations, beliefs, hopes, intentions or strategies
regarding the future. These forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements. We are under no duty to update any forward
looking statements after the date of this filing on Form 10-Q to conform these
statements with actual results. See "Risk Factors that May Affect Future
Results," and the factors and risks discussed in the Company's Annual Report on
Form 10-K filed on September 28, 2001 (File No. 000-23043) and other reports
filed from time to time with the Securities and Exchange Commission.
Overview
Pervasive Software is a leading worldwide provider of data management
solutions and services which dramatically simplify the development, deployment
and management of business applications for Small and Mid-size Enterprises
(SME). Our high-performance, flexible database, Pervasive.SQL, is widely
installed with more than 4 million server seats licensed to date. With
Pervasive.SQL, independent software vendors (ISVs) can create sophisticated yet
low-maintenance business applications that reach far beyond the desktop to
easily share information from workstations to the Web. Our software is designed
for integration by ISVs into Web or client/server applications sold to SMEs,
which typically have environments with little to no IT infrastructure and
require self-tuning, zero administration products. As a result, end-users can
concentrate on running their businesses instead of managing the database
underlying their applications, which is particularly critical to this large
market.
We derive our revenues primarily from shrink-wrap licenses through ISVs,
VARs and distributors and through OEM license agreements with ISVs. Shrink-wrap
license fees are variable and based generally on user count. Our OEM licensing
program offers ISVs volume discounts and specialized technical support, training
and consulting in exchange for embedding our products in software applications
and paying us a royalty based on sales of their applications. Additionally, we
generate revenues from version upgrades, user count upgrades, upgrades to new or
additional platforms, and from upgrades to client/server or Web environments
from single user workstation or workgroup environments.
We generally recognize revenues from software licenses when persuasive
evidence of an arrangement exists, the software has been delivered, no
significant obligations with regard to implementation remain, the fee is fixed
or determinable, and collectibility is probable. We generally recognize revenues
related to agreements involving nonrefundable fixed minimum license fees when we
deliver the product master or first copy if no significant vendor obligations
remain. We recognize per copy royalties in excess of a fixed minimum amount as
revenues when such amounts are reported to us. We operate with virtually no
order backlog because our software products are shipped shortly after orders are
received. This makes product revenues in any quarter substantially dependent on
orders booked and shipped throughout that quarter. We enter into agreements with
certain distributors that provide for certain stock rotation and price
protection rights. These rights allow the distributor to return products in a
non-cash exchange for other products or for credits against future purchases. We
reserve for estimated sales returns, stock rotation and price protection rights,
as well as for uncollectable accounts based on experience.
Historically, we have derived substantially all of our revenues from our
Pervasive.SQL data management products. In addition, we released Pervasive.SQL
2000i in late March 2001 and announced a related price increase effective April
2001. Our future operating results will depend upon continued market acceptance
of Pervasive.SQL.
9
Any decrease in demand or market acceptance for our Pervasive.SQL product would
have a damaging effect on our business, operating results and financial
condition.
In July 2000, we reduced our workforce by approximately 100 employees, or
approximately 28% of our worldwide workforce. The majority of the reductions
occurred in our Toronto office and our Austin headquarters. The workforce
reduction was primarily related to the discontinuance of our Tango product line;
however, we also reduced a portion of our Pervasive.SQL related workforce,
mostly in our Pervasive.SQL development organization.
In June 2001, we reduced our workforce by approximately 40 employees, or
approximately 20% of our worldwide workforce, to further improve profitability
going forward and as a precautionary measure in light of the continued uncertain
economic environment. The reduction resulted in a non-recurring charge in the
fourth quarter of fiscal year 2001 of $2.5 million, including a charge for the
workforce reduction and related charges for idle leased facilities and certain
intangible assets.
In July 2001, we formed a new business venture with AG-TECH Corporation, a
company developing, selling and importing packaged software, to sell and support
our products in Japan. AG-TECH has been engaged in the sales and support of
Btrieve (predecessor to Pervasive.SQL) and Pervasive.SQL products since 1986. In
conjunction with the joint venture, AG-TECH launched a new operating division
staffed with specialists experienced in selling and supporting Pervasive.SQL to
assume responsibility for OEM sales, packaged software sales, technical support
and localization and translation of our products into Japanese. We expect the
new business venture to result in improved profitability on sales in Japan as
the arrangement allows us to significantly reduce our costs in Japan.
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
September 30,
-----------------------------
2001 2000
------------ ------------
Revenues 100% 100%
Costs and expenses:
Cost of revenues and technical support 19 24
Sales and marketing 34 50
Research and development 22 30
General and administrative 15 15
------------ ------------
Total costs and expenses 90 119
------------ ------------
Operating income (loss) 10 (19)
Interest and other income, net 3 3
Income tax provision (2) (2)
------------ ------------
Income (loss) before effect of adoption of new accounting principle 11 (18)
Effect of adoption of new accounting principle (8) -
------------ ------------
Net income (loss) 3% (18)%
============ ============
Revenues
Our revenues decreased 10% to $9.0 million in the three months ended
September 30, 2001, as compared to $10.0 million reported for the comparable
period in the prior fiscal year. We attributed this revenue decrease to
10
competitive pressures, a different discount structure in Japan following our new
business venture formed in July 2001, 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 that each of the above factors affecting revenue between the first
quarter of fiscal 2001 and fiscal 2002 could continue to negatively affect
license revenues for Pervasive.SQL in the future. Our revenues for the three
months ended September 30, 2001 decreased from the $10.8 million reported for
the three months ended June 30, 2001, primarily due to seasonality in our
European and Japanese operations in the first quarter of fiscal 2002, a
different discount structure in Japan following our new business venture formed
in July 2001, and an overall weakening of the global economy.
Licenses of our software operating on Windows NT or other Microsoft operating
systems continue to represent approximately 75% of our revenues. 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, were $4.1 million and $3.3 million in the three months
ended September 30, 2000 and 2001, representing 41% and 36% of total revenues,
respectively. We attribute the decrease in international revenue during the
first quarter of fiscal 2002 as compared to the first quarter of fiscal 2001 to
competitive pressures, a different discount structure in Japan following our new
business venture formed in July 2001, 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 expect that international revenues will continue to account for a significant
portion of our revenues in the future as we maintain and modify our
international operations.
Costs and Expenses
Cost of Revenues and Technical Support. Cost of revenues and technical
support consists primarily of the cost to manufacture and fulfill orders for our
shrink wrap software products, the cost to provide technical support, primarily
telephone support, which is typically provided within 30 days of purchase,
payment of license fees for third-parties technologies embedded in our products
and the costs to deliver professional services and training services to others.
Cost of revenues and technical support was $2.5 million and $1.7 million in the
three months ended September 30, 2000 and 2001, representing 24% and 19% of
revenues, respectively. The decrease in cost of revenues and technical support
is primarily related to a reduction in costs associated with technical support
and training personnel following our reduction in force in June 2001 and the
formation of our new business venture in Japan, as well as reduced license fees
for third-party technologies embedded in or bundled with our products. Cost of
revenues and technical support decreased as a percentage of revenue primarily as
a result of the reduction in costs. We anticipate that cost of revenues and
technical support in the near term will be consistent with the costs incurred
during the three months ended September 30, 2001, primarily as a result of the
continued effect of the reduction in costs associated with technical support and
training personnel following our reduction in force in June 2001, the formation
of our new business venture in Japan and reduced license fees for third-party
technologies.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
foreign sales office expenses, marketing programs and promotional expenses, and
travel and entertainment. Sales and marketing expenses were $5.0 million and
$3.1 million in the three months ended September 30, 2000 and 2001, representing
50% and 34% of revenues, respectively. Sales and marketing expenses decreased
in dollar amount primarily due to reduced costs associated with sales and
marketing personnel and the formation of our new business venture in Japan.
Sales and marketing expense decreased as a percentage of revenue primarily as a
result of the decrease in expenses. We expect sales and marketing expenses in
the near term will be consistent with costs incurred during the three months
ended September 30, 2001, primarily as a result of the continued effect of
reduced costs associated with sales and marketing personnel following our
reduction in force in June 2001 and the formation of our new business venture in
Japan.
11
Research and Development. Research and development expenses consist primarily
of personnel and related costs. Research and development expenses were $3.0
million and $2.0 million in the three months ended September 30, 2000 and 2001,
representing 30% and 22% of revenues, respectively. Research and development
expenses decreased in dollar amount primarily due to reduced costs associated
with research and development personnel following our reduction in force in June
2001 and the formation of our new business venture in Japan. We anticipate that
research and development expenses in the near term will be consistent with the
costs incurred in the three months ended September 30, 2001, primarily as a
result of the continued effect of the reduction in costs associated with
research and development personnel following our reduction in force in June 2001
and the formation of our new business venture in Japan.
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 $1.5 million and $1.4 million in the three months ended September
30, 2000 and 2001, representing 15% and 15% of revenues, respectively. We
attribute the decrease in dollar amount primarily to the reduction in costs
associated with general and administrative personnel and the formation of our
new business venture in Japan. We believe that our general and administrative
expenses in the near term will be consistent with costs incurred in the three
months ended September 30, 2001, primarily as a result of the continued effect
of the reduction in costs associated with general and administrative personnel
and the formation of our new business venture in Japan.
Provision for Income Taxes. Provision for income taxes was approximately $0.2
million and $0.2 million in the three months ended September 30, 2000 and 2001,
respectively.
Based on a number of factors, we believe that it is more likely than not,
that a substantial amount of our deferred tax assets may not be realized. These
factors include:
. Recent trends in revenue related to continuing operations;
. The potential impact of anticipated deductions due to exercise of employee
stock options on deferred tax assets with limited carryforward periods;
and
. The intensely competitive market in which we operate and which is subject
to rapid change.
Accordingly, we have recorded a valuation allowance equal to the net deferred
tax asset due to uncertainties regarding the realization of deferred tax assets
based on the lack of earnings history. We expect to continue to incur foreign
taxes associated with our international operations while our domestic income
taxes will remain minimal as we utilize substantial net operating losses carried
forward from previous years.
Effect of Adoption of New Accounting Principle. We adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
effective July 1, 2001. Statement 142 discontinues the amortization of goodwill
and requires future periodic testing of goodwill for impairment. In addition,
the Statement requires reassessment of the useful lives of previously recognized
intangible assets. With the adoption of the Statement, we ceased amortization
of goodwill as of July 1, 2001. The adoption will result in a decrease in
operating expense related to goodwill amortization of approximately $104,000 per
year. Additionally, we completed a goodwill impairment test as allowed by
Statement 142 during the first quarter of fiscal 2002, resulting in an
impairment charge of approximately $676,000, which is recorded as a cumulative
change in accounting principle.
12
Liquidity and Capital Resources
Cash provided by continuing operations was $2.4 million for the three months
ended September 30, 2001 as compared with cash used by continuing operations of
$0.3 million for the comparable period in the prior fiscal year. Cash provided
by continuing operations during the first quarter of fiscal 2002 resulted
primarily from net income from continuing operations, a decrease in prepaid
expenses and other current assets and non-cash charge related to the early
adoption of FASB Statement No. 142. Cash used in continuing operations during
the comparable period in the prior fiscal year resulted primarily from a net
loss from continuing operations and a decrease in accounts payable and accrued
liabilities, offset by decreases in accounts receivable, prepaid expenses and
other current assets.
During the first three months of fiscal 2002 and 2001 we received net
proceeds of $1.6 and $3.0 million, respectively, from the sale or maturity of
marketable securities, consisting of various taxable and tax advantaged
securities. In addition, we purchased property and equipment totaling
approximately $0.2 million and $0.2 million in the three months ended September
30, 2001 and 2000, respectively. This property consisted primarily of computer
hardware and software. We expect that our capital expenditures may increase
during the current fiscal year as compared to the prior year as a result of
possible capital projects to upgrade certain front and back office systems.
We have a stock repurchase plan in place whereby we may repurchase shares of
our common stock up to a total of $5.0 million through July 21, 2002. Depending
on market conditions and other factors, such purchases may be commenced or
suspended at any time without prior notice. As of September 30, 2001, we had
repurchased approximately 420,000 shares of common stock at an aggregate cost of
approximately $684,000.
On September 30, 2001, we had $24.2 million in working capital, including
$28.0 million in cash, cash equivalents and marketable securities.
Recently Issued Accounting Standards
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement 144 supercedes Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the accounting and reporting provisions relating
to the disposal of a segment of a business as required by Accounting Principles
Board No. 30. The provisions of Statement 144 will be effective for the fiscal
year beginning July 1, 2002. We do not expect that the adoption of Statement
144 will have a significant impact on our financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. Dollars. However, we do
have foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. Currently, we have operations in Japan, Germany,
France, England, and Belgium and conduct transactions in the local currency of
each location. We monitor our foreign currency exposure and, from time to time
will attempt to reduce our exposure through hedging. The impact of fluctuations
in the relative value of other currencies was not material for the quarter ended
September 30, 2001. Quantitative and qualitative information about market risk
was addressed in Item 7A of our Form 10-K for the fiscal year ended June 30,
2001.
13
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 at
times in the past and may continue to vary significantly from quarter to quarter
in the future due to a variety of factors. Many of these factors are outside of
our control. These factors include:
. Fluctuations in demand for our products or upgrades to our products;
. Fluctuations in the demand for and deployment of client/server applications
in which our Pervasive.SQL products are designed to be embedded;
. Fluctuations in demand for our products due to the potential deteriorating
economic conditions on our customer base;
. Seasonality of purchases and the timing of product sales and shipments;
. Unexpected delays in introducing new or improvements to existing products
and services;
. New product releases, licensing models or pricing policies by our
competitors;
. Acquisitions or mergers involving us, our competitors or customers;
. Impact of changes to our product distribution strategy and pricing
policies;
. Lack of order backlog;
. Loss of a significant customer or distributor;
. Changes in purchasing and/or payment practices by our distributors;
. A reduction in the number of independent software vendors, or ISVs, who
embed our products or value-added resellers, or VARs, who sell and deploy
our products;
. Changes in the mix of domestic and international sales;
. Impact of changes to our geographic investment levels and business models;
. Losses associated with discontinued operations;
. Changes in our business plan or strategy; and
. Changes in generally accepted accounting principles.
Our revenues in fiscal year 2001 decreased from the previous fiscal year due
to a combination of factors, including: lower sales pipelines, our past focus of
resources and management attention on our discontinued Tango product line,
competitive forces and what we believe to be a general softening in the packaged
client/server
14
applications market contributing to decreased orders for our Pervasive.SQL
products embedded in these applications. We believe certain of these factors
could continue to negatively affect sales of our Pervasive.SQL product in the
future. Significant portions of our expenses are not variable in the short term
and cannot be quickly reduced to respond to decreases in revenues. Therefore, if
our revenues are below our expectations, our operating results are likely to be
adversely and disproportionately affected. In addition, we may change our
prices, modify our distribution strategy and policies, accelerate our investment
in research and development, sales or marketing efforts in response to
competitive pressures or pursue new market opportunities. Any one of these
activities may further limit our ability to adjust spending in response to
revenue fluctuations.
In July 2000, we announced a restructuring to focus on our core database
business. As part of the restructuring, we recorded in the fourth fiscal quarter
of fiscal 2000, a charge of $17 million or $1.08 per share for discontinued
operations related to our Tango product line. We continued to support our Tango
customers until we completed the sale of the Tango technology in June 2001. The
sale, along with an ongoing assessment of future liabilities of the discontinued
Tango operations, resulted in a gain from discontinued operations of $1.7
million for the quarter ended June 30, 2001. Our operating results have
fluctuated in the past due to charges relating to the discontinued Tango
operations and may continue to fluctuate in future quarters depending upon the
timing and nature of final disposition of remaining liabilities of the
discontinued Tango product line.
In June 2001, we reduced our workforce by approximately 40 employees, or 20%
of our worldwide workforce, to further improve profitability going forward and
as a precautionary measure in light of the continued uncertain economic
environment. The reduction resulted in a non-recurring charge in the fourth
quarter of fiscal year 2001 of $2.5 million, including a charge for the
workforce reduction and related charges for idle leased facilities and certain
intangible assets. Our operating results have fluctuated in the past due to
these charges.
In July 2001, we formed a new business venture with AG-TECH Corporation, a
company developing, selling and importing packaged software, to sell and support
our products in Japan. AG-TECH has been engaged in the sales and support of
Btrieve (predecessor to Pervasive.SQL) and Pervasive.SQL products since 1986. In
conjunction with the joint venture, AG-TECH launched a new operating division
staffed with specialists experienced in selling and supporting Pervasive.SQL to
assume responsibility for OEM sales, packaged software sales, technical support
and localization and translation of our products into Japanese. We cannot be
certain that this venture will be successful which could result in our inability
to successfully operate in Japan. Even if we successfully implement this new
venture, we may be unable to maintain or increase Japanese market demand for our
products.
In addition, we may experience fluctuations in our operating results based on
our past and future acquisitions of businesses and product lines. For example,
we incurred losses in the quarters ended December 31, 1998 and 1999; March 31,
2000 and June 30, 2000; primarily due to losses incurred by the now discontinued
Tango product line.
We derive a portion of our revenues from relatively large 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.
Our revenue growth and profitability depend on the overall demand for our
products and services, which in turn depends on general economic and business
conditions. The nature and extent of the effect of the current economic climate
on our ability to sell our products and services is uncertain. A softening of
demand for our products and services caused by weakening of the economy may
result in decreased revenues or lower growth rates. There can be no assurance
that we will be able to effectively promote revenue growth rates in all economic
conditions.
15
We Must Successfully Manage Our Reductions in Workforce
In June 2001, we reduced our workforce by approximately 40 employees, or 20%
of our worldwide workforce, to further improve profitability going forward and
as a precautionary measure in light of the continued uncertain economic
environment. Any failure to manage the impact of the Pervasive.SQL workforce
reduction on our Pervasive.SQL product development schedules, to manage any
future workforce reductions, to retain our remaining Pervasive.SQL employees and
to recruit new employees in the future could have a material adverse effect on
our business, operating results and financial condition.
Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results
Our business has, on occasion, experienced seasonal customer buying patterns.
In recent years, we have generally experienced relatively weaker demand in the
quarters ending March 31 and September 30. We believe that this pattern may
continue. In addition, 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 Performance Depends on Market Acceptance of Pervasive.SQL
We derive substantially all of our revenues from the license of our
Pervasive.SQL products. In particular, we are becoming increasingly dependent on
market acceptance of our Pervasive.SQL 2000 product introduced in June 1999 and
related upgrades, as revenues from our older database products, Btrieve and
Pervasive.SQL 7, have declined and are expected to continue to decline in
subsequent quarters. Market acceptance of Pervasive.SQL 2000 may be influenced
heavily by factors outside of our control such as new product offerings or
promotions by competitors, mergers and acquisitions of customers and
competitors, the product development and deployment cycles of developers and
resellers who embed or bundle our products into packaged software applications
and what we believe is a softening in the market for client/server applications
of the type built on Pervasive.SQL 2000. Market acceptance of Pervasive.SQL 2000
and future upgrades also may be influenced by factors in our control such as
product quality, relative demand for feature and functionality upgrades and the
recent and any future price increases.
Our Efforts to Develop and Maintain Brand Awareness of Our Products May Not be
Successful
Brand awareness is important given competition in the market for data
management products. We are aware of other companies that use the word
"Pervasive" either in their marks alone or in combination with other words. We
expect that it may be difficult or impossible to prevent third-party usage of
the Pervasive name and variations of this name for competing goods and services.
Competitors or others who use marks similar to our brand name may cause
confusion among actual and potential customers, which could prevent us from
achieving significant brand recognition. If we fail to promote and maintain our
brand or incur significant related expenses, our business, operating results and
financial condition could be materially adversely affected.
We May Face Problems in Connection With Future Acquisitions or Joint Ventures
In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement,
modify or expand our business. Our negotiations of potential acquisitions or
16
joint ventures and our integration of acquired businesses, products or
technologies could divert management time and resources. Any future acquisitions
could require us to issue dilutive equity securities, reduce our cash and
marketable 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. In addition, market reactions to
acquisitions are difficult to predict and if we do announce any future
acquisitions, such market reactions may cause our stock price to fluctuate.
A Small Number of Distributors and Sales Related to Accounting Software
Applications Account For a Significant Percentage of Our Revenues
The loss of a major distributor, changes in a distributor's payment
practices, changes in the financial stability of a major distributor or any
reduction in orders by such distributor, including reductions due to market or
competitive conditions combined with the potential inability to replace the
distributor on a timely basis, or any modifications to our pricing or
distribution channel strategy could materially adversely affect our business,
operating results and financial condition. Many of our independent software
vendors, value-added resellers and end users place their orders through
distributors. A relatively small number of distributors have accounted for a
significant percentage of our revenues. In the quarter ended September 30, 2001,
three distributors combined accounted for an aggregate of approximately 16% of
our revenues, as compared to the quarter ended September 30, 2000, where three
distributors accounted for an aggregate of approximately 18% of our revenues.
Additionally, we estimate that approximately 20% of our revenues in the quarter
ended September 30, 2001 were from sales related to accounting software
applications. We expect we will continue to depend on a limited number of
distributors and sales related to accounting software applications for a
significant portion of our revenues in future periods. Moreover, we expect that
such distributors and sales related to accounting software applications will
vary from period to period. Our distributors have not agreed to any minimum
order requirements. Although we forecast demand and plan accordingly, if a
distributor purchases excess product, we may be obligated to accept the return
of some products.
We Depend on Our Indirect Sales Channel
Our failure to continue to grow our indirect sales channel or the loss of a
significant number of members of our indirect channel partners would have a
material adverse effect on our business, financial condition and operating
results. We do not have a substantial direct sales force, and we derive
substantially all of our revenues from indirect sales through a channel
consisting of independent software vendors, value-added resellers, system
integrators, consultants and distributors. Our sales channel could be adversely
affected by a number of factors including:
. The emergence of a new platform resulting in the failure of independent
software vendors to develop and the failure of value-added resellers to
sell our products based on our supported platforms;
. Pressures placed on the sales channel to sell competing products;
. Our failure to adequately support the sales channel;
. Competing product lines offered by certain of our indirect channel
partners; and
. Business model or licensing model changes of our channel partners or their
competitors.
We cannot be certain we will be able to continue to attract additional
indirect channel partners or retain our current partners. In addition, we cannot
be certain our competitors will not attempt to recruit certain of our current or
future partners. For example, in December 2000, Microsoft (a competitor)
acquired Great Plains Software (an ISV that embeds our product into certain of
its products and also a channel partner). This will likely have, and any similar
transactions may have, an adverse effect on our ability to attract and retain
partners.
17
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. 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 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. We
cannot be certain that others will not develop technologies that are similar or
superior to our technology or design around the copyrights and trade secrets
owned by us. Unauthorized parties may attempt to copy aspects of our products or
to obtain and use information we regard as proprietary. Although we believe
software piracy may be a problem, we are unable to determine the extent to which
piracy of our software products occurs. In addition, portions of our source code
are developed in foreign countries with laws that do not protect our proprietary
rights to the same extent as the laws of the United States.
Although we are not aware that any of our products infringe upon the
proprietary rights of third parties, we may be subjected to claims of
intellectual property infringement by third parties as the number of products
and competitors in our industry segment continues to grow and the functionality
of products in different industry segments increasingly overlaps. Any
infringement claims, with or without merit, could be time-consuming, result in
costly litigation, divert management attention and resources, cause product
shipment delays or the loss or deferral of sales or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us, if at all. In the
event of a successful claim of product infringement against us, should we fail
or be unable to either license the infringed or similar technology or develop
alternative technology on a timely basis, our business, operating results and
financial condition could be materially adversely affected.
We Must Adapt to Rapid Technological Change
Our future success will depend upon our ability to continue to enhance our
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and new industry standards and
satisfy increasingly sophisticated customer requirements. Rapid technological
change, frequent new product introductions and enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards
characterize the market for our products. The introduction of products embodying
new technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. As a result of the complexities inherent in
client/server and Web computing environments and the performance demanded by
customers for data management products, new products and product enhancements
can require long
18
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 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, sometimes called "bugs," particularly when first introduced or when new
versions or enhancements are released. From time to time, we discover software
errors in certain of our new products after their introduction. Despite our
testing, current versions, new versions or enhancements of our products may
still have errors after commencement of commercial shipments. Product errors
can put us at a competitive disadvantage and can be costly and time-consuming to
correct.
We May Become Subject to Product or Professional Services Liability Claims
A product or professional services liability claim, whether or not
successful, could damage our reputation and our business, operating results and
financial condition. Our license and service agreements with our customers
typically contain provisions designed to limit our exposure to potential product
or service liability claims. However, these contract provisions may not preclude
all potential claims. Product or professional services liability claims could
require us to spend significant time and money in litigation or to pay
significant damages.
We Compete with Microsoft while Simultaneously Supporting Microsoft Technologies
We currently compete with Microsoft in the market for data management
products while simultaneously maintaining a working relationship with Microsoft.
Microsoft has a longer operating history, a larger installed base of customers
and substantially greater financial, distribution, marketing and technical
resources than Pervasive. As a result, we may not be able to compete effectively
with Microsoft now or in the future, and our business, operating results and
financial condition may be materially adversely affected.
We expect that Microsoft's commitment to and presence in the data management
products market will substantially increase competitive pressures. We believe
that Microsoft will continue to incorporate SQL Server database technology into
its operating system software and certain of its server software offerings,
possibly at no additional cost to its users. We believe that Microsoft will also
continue to enhance its SQL Server database technology.
Further, in December 2000, Microsoft acquired Great Plains Software, a
channel partner for Pervasive. This, and any similar transactions may have an
adverse effect on our ability to compete effectively.
We believe 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,
19
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, 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
or emerging companies providing database products based on existing, new or
open-source technologies.
Application service providers ("ASP") are beginning to enter our market and
could cause a change in revenue models from licensing of client/server and Web-
based applications to renting applications. Our competitors may be more
successful than we are in adopting these revenue models and capturing related
market share.
Most of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers. In addition,
some competitors have demonstrated a willingness to, or may willingly in the
future, incur substantial losses as a result of deeply discounted product
offerings or aggressive marketing campaigns. As a result, our competitors may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of competitive products, than we can. There is also a
substantial risk that changes in licensing models or announcements of competing
products by competitors such as Microsoft, Oracle, Sybase, IBM, Progress or
others could result in the cancellation of customer orders in anticipation of
the introduction of such new licensing models or products. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs and which may limit our ability to sell
our products through particular distribution partners. Accordingly, new
competitors or alliances among, or consolidations of, current and new
competitors may emerge and rapidly gain significant market share in our current
or anticipated markets. We also expect that competition will increase as a
result of software industry consolidation. Increased competition is likely to
result in price reductions, fewer customer orders, reduced margins and loss of
market share, any of which could materially adversely affect our business. We
cannot be certain we will be able to compete successfully against current and
future competitors or that the competitive pressures 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 may be shifting from
client/server applications to Web-based applications. If so, this shift would be
occurring before our product line has achieved market acceptance for use in Web-
based applications. In addition, we cannot be certain that our existing
client/server developers will migrate to Web-based applications and continue to
use our products or that other developers of Web-based applications would select
our data management products. Further, this shift may result in a change in
revenue models from licensing of client/server and Web-based applications to
renting of applications from application service providers. A decrease in
client/server application sales coupled with an inability to derive revenues
from the Web-based application market could have a material adverse effect on
our business, operating results and financial condition.
20
We Depend on International Sales and Operations
We anticipate that for the foreseeable future we will derive a significant
portion of our revenues from sources outside North America. In the quarter ended
September 30, 2001, we derived 36% of our revenues outside North America. Our
international operations are generally subject to a number of risks. These risks
include:
. 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 and timing of payment;
. Increased tax rates in certain foreign countries;
. Difficulties with financial reporting in foreign countries;
. Quality control of certain development, translation or localization
activities; and
. Political and economic instability.
We may expand or modify our sales and support operations internationally.
Despite our efforts, we may not be able to expand or modify 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 or modify our international
operations, we may be unable to maintain or increase international market demand
for our products.
We expect our international operations will continue to place financial and
administrative demands on us, 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 and substantially
all of our sales in Japan 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. Certain of our international sales are
denominated in U.S. dollars, especially in Europe. Any strengthening of the U.S.
dollar against the currencies of countries where we sell products denominated in
U.S. dollars will increase the relative cost of our products and could
negatively impact our sales in those countries. To the extent our international
operations expand or are modified, our exposure to exchange rate fluctuations
may increase. We have, on occasion, 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
21
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
Our success depends in large part on our ability to attract, motivate and
retain highly skilled employees on a timely basis, particularly executive
management, sales and marketing personnel, software engineers and other senior
personnel. Our efforts to attract and retain highly skilled employees could be
harmed by our past or any future workforce reductions. Our failure to attract
and retain the highly trained technical personnel who 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
Our Restated Certificate of Incorporation and Bylaws contain certain
provisions that may have the effect of discouraging, delaying or preventing a
change in control or unsolicited acquisition proposals that a stockholder might
consider favorable. It includes provisions to authorize the issuance of "blank
check" preferred stock; establish 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; eliminate the ability of
stockholders to act by written consent; require super-majority voting to approve
certain amendments to the Restated Certificate of Incorporation; limit the
persons who may call special meetings of stockholders; and provide for a Board
of Directors with staggered, three-year terms. In addition, certain provisions
of Delaware law and 1997 Stock Incentive Plan (the "1997 Plan") may also have
the effect of discouraging, delaying or preventing a change in control or
unsolicited acquisition proposals.
Further, in October 2000, our Board of Directors approved the adoption of a
shareholder rights plan whereby one preferred share purchase right was
distributed for each outstanding share of our common stock. The rights are
designed to assure that all of our stockholders receive fair and equal treatment
in the event of any proposed takeover and to guard against partial tender
offers, open market accumulations and other tactics designed to gain control
without paying all stockholders a fair price. The rights were not being
distributed in response to any specific effort to acquire us.
The rights become exercisable if a person or group hereafter acquires 15% or
more of our common stock or announces a tender offer for 15% or more of our
common stock. Such events, or if we are acquired in a merger or other business
combination transaction after a person acquires 15% or more of our common stock,
would entitle the right holder to purchase, at an exercise price of $18.00, a
number of shares of common stock having a market value at that time of twice the
right's exercise price. Rights held by the acquiring person would become void.
The Board of Directors can choose to redeem the rights at one cent per right at
any time before an acquiring person hereafter acquires 15% or more of the
outstanding common stock. The Rights Plan may have the effect of discouraging,
delaying or preventing a change in control or unsolicited acquisition proposals.
The Price of Our Stock Has Been Volatile and Could Continue to Fluctuate
Substantially
Our common stock is traded in 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.
22
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.
23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting of the stockholders was held on November
1, 2001.
The following nominees were elected as directors, each to hold office
until their three-year term expires or until their successors have been duly
elected and qualified, by the vote set forth below:
NOMINEE FOR WITHHELD
- -------------------- --------------- -------------
David R. Bradford 15,572,563 73,974
James R. Offerdahl 15,567,010 79,527
The proposal to approve an amendment to the Company's 1997 Stock Incentive
Plan to increase the number of shares granted under the Automatic Option Grant
program and certain other amendments was approved by the vote set forth below:
FOR AGAINST ABSTAIN
- -------------------- --------------- -------------
6,325,883 1,772,333 37,473
The proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending June 30, 2002 was
approved by the vote set forth below:
FOR AGAINST ABSTAIN
- -------------------- --------------- -------------
15,621,390 13,063 12,025
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits under Item 601 of Regulation S-K
3.1* Restated Certificate of Incorporation
3.2* Bylaws of the Company
4.1* Reference is made to Exhibits 3.1, 3.2 and 4.3
4.2* Specimen Common Stock certificate
4.3* Investors' Rights Agreement dated April 19, 1995, between the
Company and the investors named therein
4.4*** Rights Agreement dated October 20, 2000 between the Company
and Computershare Trust Company, Inc. as Rights Agent
10.1* Form of Indemnification Agreement
10.2* 1997 Stock Incentive Plan
10.3* Employee Stock Purchase Plan
10.4* First Amended and Restated 1994 Incentive Plan
10.10** Lease agreement dated April 2, 1998 between the Company and
CarrAmerica Realty, L.P. T/A Riata Corporate Park
24
* Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 333-32199).
** Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1998 (File No.
000-230431).
*** Incorporated by reference to the Company's Registration Statement
on Form 8-A filed on October 24, 2000 (File No. 000-23043).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September
30, 2001.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2001 PERVASIVE SOFTWARE INC.
(Registrant)
By: /s/ John E. Farr
----------------------------------
John E. Farr
Chief Financial Officer (Duly Authorized
Officer and Principal Financial Officer)
26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1* Restated Certificate of Incorporation
3.2* Bylaws of the Company
4.1* Reference is made to Exhibits 3.1, 3.2 and 4.3
4.2* Specimen Common Stock certificate
4.3* Investors' Rights Agreement dated April 19, 1995, between
the Company and the investors named therein
4.4*** Rights Agreement dated October 24, 2000, between the Company
and Computershare Trust Company, Inc., as Rights Agent
10.1* Form of Indemnification Agreement
10.2* 1997 Stock Incentive Plan
10.3* Employee Stock Purchase Plan
10.4* First Amended and Restated 1994 Incentive Plan
10.10** Lease agreement dated April 2, 1998 between the Company and
CarrAmerica Realty, L.P. T/A Riata Corporate Park
* Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 333-32199).
** Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (File No.
000-230431).
*** Incorporated by reference to the Company's Registration Statement
on Form 8-A filed on October 24, 2000 (File No. 000-23043).
27