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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, 1998
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, BUILDING 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 9, 1998 there were 13,469,438 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,
1998 and June 30, 1998.......................................... 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1998 and 1997.................. 4
Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 1998 and 1997.................. 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 Risks.................................................... 14
PART II. OTHER INFORMATION............................................... 22
Item 6. Exhibits and Reports on Form 8-K................................ 22
SIGNATURES................................................................. 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pervasive Software Inc.
Condensed Consolidated Balance Sheets
(in thousands)
SEPTEMBER 30, JUNE 30,
1998 1998
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 14,706 $ 15,587
Marketable securities 5,497 4,943
Trade accounts receivable, net 6,081 5,304
Prepaid expenses and other current assets 2,663 2,266
------------ -----------
Total current assets 28,947 28,100
Property and equipment, net 4,473 3,667
Other assets 1,325 876
------------ -----------
Total assets $ 34,745 $ 32,643
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,535 $ 1,382
Accrued payroll and payroll related costs 1,515 966
Other accrued expenses 2,912 2,710
Deferred revenues 2,253 1,929
Income taxes payable 851 1,140
Deferred royalty payable - Novell - 158
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Total current liabilities 9,066 8,285
Minority interest in subsidiary 360 379
Stockholders' equity:
Common stock 26,455 26,270
Retained deficit (1,136) (2,291)
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Total stockholders' equity 25,319 23,979
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Total liabilities and stockholders' equity $ 34,745 $ 32,643
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See accompanying notes.
3
Pervasive Software Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
----------- -----------
Revenues $11,776 $ 7,671
Costs and expenses:
Cost of revenues and technical support 1,620 1,164
Sales and marketing 4,979 3,112
Research and development 2,960 2,251
General and administrative 1,041 630
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Total costs and expenses 10,600 7,157
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Operating income 1,176 514
Interest and other income (expense), net 218 (19)
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Income before income taxes and minority interest 1,394 495
Provision for income taxes (426) (146)
Minority interest in loss (earnings) of
subsidiary, net of tax 14 (19)
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Net income $ 982 $ 330
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Basic earnings per share $ 0.07 $ 0.16
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Diluted earnings per share $ 0.06 $ 0.02
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See accompanying notes.
4
Pervasive Software Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
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CASH FROM OPERATING ACTIVITIES
Net income $ 982 $ 330
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 470 293
Other non cash items 150 69
Change in current assets and liabilities:
Increase in trade accounts receivable (741) (790)
Increase in prepaid expenses and other assets (516) (251)
Increase in accounts payable and accrued liabilities 667 307
Increase (decrease) in deferred revenue 320 (373)
Decrease in income taxes payable (248) (165)
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Net cash provided by (used in) operating activities 1,084 (580)
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,087) (757)
Purchase of marketable securities (554)
Increase in other assets (78) (3)
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Net cash used in investing activities (1,719) (760)
CASH FROM FINANCING ACTIVITIES
Payment of royalty to Novell (158) (98)
Proceeds from issuance of stock, net of issuance costs 28 117
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Net cash provided by (used in) financing activities (130) 19
Effect of exchange rate on cash and cash equivalents (116) (132)
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Decrease in cash and cash equivalents (881) (1,453)
Cash and cash equivalents at beginning of period 15,587 4,058
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Cash and cash equivalents at end of period $14,706 $ 2,605
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See accompanying notes.
5
PERVASIVE SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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,
1998, which are contained in the Company's Annual Report on Form 10-K (File No.
000-23043). The results of operations for the three month periods ended
September 30, 1998 and 1997 are not necessarily indicative of results that may
be expected for any other interim period or for the full fiscal year.
2. INITIAL PUBLIC OFFERING
On September 25, 1997 the Company completed an initial public offering in
which the Company sold 2,000,000 shares of common stock for net proceeds to the
Company of $17.5 million, after deducting expenses of the offering. In
addition, stockholders of the Company sold 2,000,000 shares in the offering plus
500,000 shares upon subsequent exercise of an option granted to the underwriters
for over-allotments. The net proceeds from the offering were received on October
1, 1997.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended
September 30,
-------------------------
1998 1997
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Numerator:
Net income $ 982 $ 330
========= =========
Denominator:
Denominator for basic earnings per share -
weighted average shares 13,378 2,126
Effect of dilutive securities:
Convertible preferred shares - 9,185
Employee stock options 1,850 2,085
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Potentially dilutive common shares 1,850 11,270
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Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 15,228 13,396
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Basic earnings per share $ 0.07 $ 0.16
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Diluted earnings per share $ 0.06 $ 0.02
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6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS,
(Continued)
4. COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 130, Reporting Comprehensive Income (Statement 130).
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components. The components of comprehensive income
are as follows:
Three months ended
September 30,
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1998 1997
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Net income........................................ $ 982 $ 330
Foreign currency translation adjustments.......... 184 (78)
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Comprehensive income.............................. $1,166 $ 252
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5. RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1998, the Company adopted AICPA Statement of Position
(SOP) 97-2, Software Revenue Recognition and SOP 98-4, Deferral of the Effective
Date of a Provision of SOP 97. The Company believes the effect of such adoption
will not have a material effect on its financial statements in fiscal 1999.
In June 1997, FASB issued Statement of Financial Accounting Standard No.
131, Disclosures about Segments of an Enterprise and Related Information
(Statement 131), which establishes the standards for the manner in which public
enterprises are required to report financial and descriptive information about
their operating segments. In accordance with Statement 131, the Company will
provide the required disclosures for the first time in its annual report on Form
10-K for the year ended June 30, 1999 and on Form 10-Q for the quarter ended
September 30, 1999. The Company believes that the adoption of Statement 131
will not affect its results of operations or financial position, and will not
significantly affect the disclosure of segment information in the future.
6. ACQUISITION OF SMITHWARE, INC.
On February 13, 1998, the Company acquired Smithware, Inc. ("Smithware"), a
developer of database development and reporting components for Pervasive
products, for cash and common stock of the Company, plus up to an additional
$80,000 of cash and 47,502 shares of common stock payable upon achievement of
certain milestones in the future. In the quarter ended September 30, 1998, the
Company paid $80,000 in cash and issued 19,000 shares of the Company's common
stock valued at $155,000 to the former Smithware shareholders upon achieving the
first two milestones specified in the acquisition agreement. Payment of the
additional purchase price was recorded as additional goodwill and is being
amortized over a ten year period.
7. SUBSEQUENT EVENT
On November 12, 1998, Pervasive acquired for cash approximately 93% of the
outstanding common shares of EveryWare Development Inc. ("EveryWare"), an
Internet application development and Web-application server provider based in
Toronto Canada. Pervasive has commenced compulsory procedures to acquire the
remaining shares of EveryWare, which is expected to be completed in December
1998. The total value of the acquisition, including assumption of outstanding
options and warrants, will be approximately $10.75 million. The acquisition will
be accounted for under the purchase method of accounting.
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. 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 with the Securities and Exchange Commission on September 28,
1998 (File No. 000-23043) and other reports filed from time to time with the
Securities and Exchange Commission.
OVERVIEW
Pervasive is a worldwide provider of ultra-light, embedded database and
information management software for packaged client/server applications. The
software is designed for integration by independent software vendors ("ISVs")
into packaged applications that are deployed in environments without a dedicated
database administrator ("DBA"). The Company's Pervasive.SQL database engine,
which combines high performance transactional and industry-standard relational
data access, enables ISVs to deliver easy-to-use, reliable and cost-effective
applications to end users. As a result, end users can concentrate on running
their businesses instead of managing the database underlying their applications.
This is particularly critical in the large number of zero DBA or Z-DBA
environments typically found in small and mid-sized businesses or departments of
large organizations that lack the information technology infrastructure or
personnel required to deploy and support client/server applications.
The Company derives its revenues primarily from shrink-wrap licenses
through ISVs, value added resellers ("VARs") and distributors and from OEM
license agreements with ISVs. Additionally, the Company generates revenues from
user count upgrades as well as from upgrades to client/server environments from
single user workstation or peer-to-peer environments. Shrink-wrap license fees
depend on both the user count of the license and whether the license is for the
Company's client- or server-based products. The Company's OEM licensing program
offers ISVs volume discounts and specialized technical support, training and
consulting in exchange for embedding the Company's products in packaged
applications and paying to the Company a royalty based on sales of the
applications.
Revenues are generally recognized from the license of software when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collection is probable. Revenues related to
agreements involving nonrefundable fixed minimum license fees are generally
recognized upon delivery of the product master or first copy if no vendor
obligations remain. Per copy royalties in excess of a fixed minimum amount are
recognized as revenues when such amounts are reported to the Company. The
Company operates with virtually no order backlog because its software products
are shipped shortly after orders are received, which makes product revenues in
any quarter substantially dependent on orders booked and shipped throughout that
quarter. The Company enters 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. The Company reserves for the
cost of estimated sales returns, stock rotation and price protection rights, as
well as for uncollectable accounts based on experience.
On February 9, 1998, the Company announced the introduction of
Pervasive.SQL, an enhanced database software product that enables packaged
client/server applications to simultaneously access a single database engine
with both high volume transactional processing and industry-standard SQL
capabilities. The software is designed for integration by ISVs into packaged
client/server and Internet-based applications that are deployed in Z-DBA
environments. Pervasive.SQL delivers improved performance, simplified
installation and maintenance, low cost of ownership and compatibility with
existing Btrieve- and Scalable SQL - based applications. The Company began
shipping Pervasive.SQL in February of 1998.
8
Prior to the release of Pervasive.SQL, the Company derived substantially
all of its revenues from the license of its Btrieve and Scalable SQL products.
The Company expects that its future operating results will become increasingly
dependent upon market acceptance of its recently announced Pervasive.SQL product
and anticipates that revenues from the license of Btrieve and Scalable SQL will
decrease accordingly. The pace and timing of market acceptance of Pervasive.SQL
is largely dependent upon factors such as the product development cycles of ISVs
and VARs who embed the Company's products into third-party packaged software
applications. As a result, the Company expects to continue to derive a
significant portion of its revenues from the license of Btrieve and Scalable SQL
in the near term and there can be no assurance as to whether or when
Pervasive.SQL will achieve sustainable market acceptance. A low demand for, or
low or delayed market acceptance of the Company's Pervasive.SQL product as a
result of competition, technological change or other factors, would have a
material adverse effect on the Company's business, operating results and
financial condition. Although the Company recognized increased revenue from
Pervasive.SQL in the first quarter of fiscal 1999, such sales may have been
attributable to one-time upgrades from earlier versions of the Company's
products, favorable upgrade pricing by the Company or other factors. There can
be no assurance that future sales of Pervasive.SQL will continue at initial
rates. See "Risk Factors that May Affect Future Results."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in the Company's consolidated statements
of operations:
Three Months Ended
September 30,
----------------------
1998 1997
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Revenues............................................. 100% 100%
Costs and expenses:
Cost of revenues and technical support............ 14 15
Sales and marketing............................... 42 41
Research and development.......................... 25 29
General and administrative........................ 9 8
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Total costs and expenses............................. 90 93
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Operating income..................................... 10 7
Interest and other income (expense), net............. 2 -
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Income before income taxes and minority interest..... 12 7
Provision for income taxes........................... (4) (2)
Minority interest in loss (earnings) of subsidiary... - (1)
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Net income........................................... 8% 4%
======== =========
Revenues
The Company's revenues increased to $11.8 million in the three months ended
September 30, 1998, an increase of 54% over the $7.7 million reported for the
comparable period in the prior fiscal year. The increase in the Company's
revenues was attributable primarily to increased market acceptance of the
Company's products, principally licenses of the Company's software operating on
Windows NT, increased market acceptance of Pervasive.SQL and expansion of its
world-wide sales organization. Although the Company's revenues have increased
in recent periods, there can be no assurance that revenues will grow in future
periods, that they will grow at past rates or that the Company will remain
profitable on a quarterly or annual basis in the future.
9
Licenses of the Company's software operating on Windows NT or other
Microsoft operating systems increased to approximately 49% of the Company's
revenues in the three months ended September 30, 1998 from approximately 39% in
the comparable period in the prior year. Licenses of the Company's software
operating on NetWare represented approximately 43% and 56% of the Company's
revenues in the three months ended September 30, 1998 and 1997, respectively.
The Company believes that the increase in the percentage of revenues
attributable to licenses of the Company's products operating on Windows NT and
other Microsoft operating systems is due both to increased market acceptance of
the Company's products operating on Microsoft platforms and to the increased
market penetration of Microsoft platforms relative to other operating systems.
The Company expects that the percentages of its revenues attributable to
licenses of its software operating on particular platforms will continue to
change from time to time and there can be no assurance that the Company's
revenues attributable to licenses of its software operating on Windows NT, or
any other operating system platform, will grow in the future, or at all.
International revenues, consisting of all revenues from customers located
outside of North America, were $4.3 million and $3.2 million in the three months
ended September 30, 1998 and 1997, representing 37% and 42% of total revenues,
respectively. The increase in dollar amount was primarily attributable to
expansion of the Company's international sales organization, particularly in
Europe. The decrease in international revenues as a percentage of total
revenues was primarily due to a relatively stronger quarter domestically in the
three months ended September 30, 1998 resulting primarily from the addition of a
new domestic distributor, Ingram Micro, the world's leading wholesale
distributor of technology products. The Company believes that revenues from
international markets represent a significant opportunity and expects that
international revenues may account for an increasing portion of its revenues in
the future as the Company expands internationally, primarily in Europe and
Japan, but also in other areas of the world. See "Risk Factors That May Affect
Future Results Risks Associated with International Sales and Operations."
In February 1998, the Company began marketing certain complementary third-
party products through its channel. Those third-party products now include
Crystal Reports, an industry standard report writer from Seagate Software that
allows end users to generate sophisticated reports on their Pervasive.SQL,
Btrieve or Scalable SQL databases, and powerful data conversion tools from Data
Junction Corporation, which enable software developers to quickly and easily
transfer data from other sources into a Pervasive.SQL database. Revenue from
third party products was not significant in fiscal 1998 or in the three months
ended September 30, 1998.
In August 1998, Pervasive began shipping the Pervasive.SQL workstation
engine. The Pervasive.SQL workstation engine allows developers to write and
deploy robust, full-featured remote and occasionally-connected applications from
the desktop, and scale the applications to run in Pervasive-based client/server
environments. Compatibility between workstation and client/server environments
is accomplished without code changes, expanding the market potential for
Pervasive-based applications.
In September 1998, Pervasive announced and began shipping the new
Pervasive.SQL Software Developers Kit which is designed to speed development of
applications based on the Pervasive.SQL embedded database engine. The
Pervasive.SQL Software Developers Kit contains a collection of rapid-application
development resources including ActiveX controls, a pure Java API, support for
all major Windows development environments and the I*Net Data Server, which
provides a direct connection to Pervasive-based data over the Internet,
intranets or extranets.
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 the
Company's shrink wrap software products and the cost to provide technical
support, primarily telephone support, which is typically provided within 30 days
of purchase. Cost of revenues and technical support was $1.6 million and $1.2
million in the three months ended September 30, 1998 and 1997, representing 14%
and 15% of revenues, respectively. The increase in dollar amount of cost of
revenues and technical support was attributable to increased sales volume and
increased technical support personnel in the U.S., Europe and Japan. The
Company anticipates that cost of revenues and technical support will continue to
increase in dollar amount as the Company expands its international operations,
particularly in Japan, and provides technical support for additional products.
Such costs could vary as a percentage of revenues relative to comparable periods
in prior years.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
foreign sales office expenses, travel and entertainment and promotional
expenses. Sales and marketing expenses were $5.0 million and $3.1 million in
the three months ended September 30, 1998 and 1997, representing 42% and 41% of
revenues, respectively. The increase in dollar amount was primarily
attributable to increased costs associated with hiring additional sales and
marketing personnel and increased infrastructure costs associated with foreign
sales office expansion. The Company expects that sales and marketing expenses
will continue to increase in dollar amount as the Company continues to promote
Pervasive.SQL and its other products, hire additional sales and marketing
personnel, increase lead generation activities and expand its international
operations. Sales and marketing expenses are likely to continue to fluctuate as
a percentage of revenues due to the timing of costs associated with new product
releases and international expansion.
10
Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
were $3.0 million and $2.3 million in the three months ended September 30, 1998
and 1997, representing 25% and 29% of revenues, respectively. The increase in
dollar amount is primarily due to the increased hiring of, and contracting with,
additional research and development personnel. The decrease as a percentage of
total revenues is primarily due to significant revenue growth that outpaced
research and development expenditures. The Company anticipates that it will
continue to devote substantial resources to research and development and that
such expenses will continue to increase in dollar amount.
Software development costs that were eligible for capitalization in
accordance with Statement of Financial Accounting Standards No. 86 were
insignificant during these periods, and, accordingly, the Company 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 the Company's finance, human
resources, information systems and administrative departments. General and
administrative expenses were $1.0 million and $630,000 in the three months ended
September 30, 1998 and 1997, representing 9% and 8% of revenues, respectively.
The Company believes that its general and administrative expenses will increase
in dollar amount in the future as the Company's administrative staff expands to
support its growing world-wide operations and as a result of an increase in
expenses associated with being a public company.
Provision for Income Taxes. The Company's income tax provisions for interim
periods are based on estimated annual effective income tax rates. The projected
income tax provision for fiscal 1999 reflects the Company's anticipated mix of
foreign and domestic income and the expected benefit from release of the
Company's valuation allowance recorded against its deferred tax assets.
The estimated effective tax rate for the three month periods ended
September 30, 1998 and 1997, was 31% and 30% respectfully. The increase in the
Company's effective tax rate for fiscal year 1999 is primarily due to increased
foreign taxes associated with the Company's increased operations overseas and a
decrease in the expected benefit from partial release of the valuation allowance
recorded against the Company's deferred tax assets. The Company expects its
effective tax rate will increase in the future once the Company's deferred tax
asset is fully realized.
LIQUIDITY AND CAPITAL RESOURCES
On September 25, 1997, the Company completed an initial public offering in
which the Company sold 2,000,000 shares of common stock for net proceeds to the
Company of $17.5 million, after deducting expenses of the offering.
Cash provided by operations was $1.1 million for the three months ended
September 30, 1998 as compared with cash used by operations of $580,000 for the
comparable period in the prior fiscal year. The increase in cash generated by
operations resulted primarily from increases in net income and deferred revenue
during the three months ended September 30, 1998.
During the first three months of fiscal 1999, the Company invested $554,000
in marketable securities, consisting of various taxable and tax advantaged
securities. In addition, the Company purchased property and equipment totaling
approximately $1.1 million and $757,000 in the three months ended September 30,
1998 and 1997, respectively, primarily computer hardware and software for the
Company's growing employee base. The Company expects that its capital
expenditures will increase as the Company's employee base grows.
In October 1998, the Company moved its headquarters to a new facility of
approximately 70,000 square feet. The new facility provides additional space
and expansion options to accommodate future growth at rental rates per square
foot consistent with its prior facility.
11
On November 12, 1998, Pervasive acquired for cash approximately 93% of the
outstanding common shares of. EveryWare, an Internet application development and
Web-application server provider based in Toronto Canada. Pervasive has
commenced compulsory procedures to acquire the remaining shares of EveryWare,
which is expected to be completed in December 1998. The total value of the
acquisition, including assumption of outstanding options and warrants, will be
approximately $10.75 million. The acquisition will be accounted for under the
purchase method of accounting.
At September 30, 1998, the Company had $19.9 million in working capital
including $14.7 million in cash and cash equivalents and $5.5 million in
marketable securities. The Company anticipates a significant decrease in cash
and cash equivalents and working capital in the second quarter of fiscal 1999 as
a result of the acquisition of EveryWare and increased capital expenditures as a
result of the move of the Company's headquarters.
The Company had a $4.0 million revolving line of credit with a bank at
September 30, 1998 and in October 1998, the revolving line of credit was
increased to $10.0 million. At no time has the Company borrowed under such
line. The Company's line of credit contains certain financial covenants and
restrictions as to various matters including the Company's ability to pay cash
dividends and effect mergers or acquisitions without the bank's prior approval.
The Company is currently in compliance with such financial covenants and
restrictions. The Company has granted a first priority security interest in
substantially all of its tangible assets as security for its obligations under
its credit line.
YEAR 2000 COMPLIANCE
The "Year 2000" issue results from an industry-wide practice of
representing years with only two digits instead of four. Beginning in the year
2000, date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates (2000 or 1900). As a
result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such Year 2000 requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance.
The Company's Year 2000 readiness plan for current versions of its
products; Pervasive.SQL 7, Btrieve v6.15, Scalable SQL 4 and ODBC Interface v2
includes the following:
1. Assessment - Take an inventory of products to be tested, survey third-
party programs utilized, generate compliance plan, and define what
compliance will mean.
2. Implementation - Devise upgrades to correct any Year 2000 issues.
3. Validation - Test and debug current versions of products.
4. Contingency planning Plan to implement in the event that the Company
does not achieve Year 2000 compliance by January 1, 2000.
The Company has essentially completed all phases of its plan, except for
contingency planning, with respect to the current versions of all of its
products. As a result, each of the current versions of its products was found
to have no known Year 2000 limitations, when configured and used in accordance
with the related documentation, and provided that the underlying operating
system of the host machine and any other software used with or in the host
machine are also Year 2000 compliant. An earlier release of Scalable SQL is not
Year 2000 compliant and several other earlier versions of the Company's products
have not been tested for Year 2000 compliance. These earlier versions of the
Company's products are no longer supported by Pervasive Software. The Company
recommends upgrading to the current version of its products if customers have
any concerns.
12
Pervasive has defined "Year 2000 Compliant" as the ability to:
1. Correctly handle date information needed for the transition from
December 31, 1999 to January 1, 2000.
2. Function according to the product documentation provided for this date
change, without changes in operation resulting from the approaching new
century, assuming correct configuration.
3. Where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined, and
predetermined manner.
4. If the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways that are
unambiguous as to century.
5. Recognize Year 2000 as a leap year.
Third-party applications which utilize Pervasive products can still be
written that do not take advantage of the Year 2000 capabilities of Pervasive's
products. Pervasive does not currently have any information concerning the Year
2000 compliance status of its customers or third party vendors who imbed or
resell Pervasive's products. If Pervasive's current or future customers fail to
achieve Year 2000 compliance or if they divert technology expenditures away from
software products such as those offered by the Company to address Year 2000
issues, the Company's business, operating results, or financial condition could
be materially adversely affected.
Despite testing by Pervasive and current and potential customers, and
assurances from developers of products incorporated into Pervasive's products,
the Company's products may contain undetected errors or defects associated with
Year 2000 date functions. Unknown errors or defects in Pervasive's products
could result in loss of revenues or delay in market acceptance, which could have
a material adverse effect on the Company's business, operating results and
financial condition. Pervasive has not specifically tested software licensed
from third parties that is marketed through the Company's channel, but the
Company has received warranties and representations from its vendors that
licensed software is Year 2000 Compliant.
The Company's internal systems include both its information technology
("IT") and non-IT systems (such as its security system, building equipment, and
embedded microcontrollers). The Company has initiated an informal Year 2000
compliance project to assess its material internal IT systems and its non-IT
systems. The project encompasses two major areas of Pervasive's internal IT
structure, the technical services area, including all hardware, operating
system, and standard application issues, and the applications area, including
all corporate database, accounting and custom applications. To the extent that
the Company is not able to test the technology provided by third-party vendors,
the Company is seeking assurances from such vendors that their systems are Year
2000 Compliant. Although Pervasive is not currently aware of any material
operational issues or costs associated with preparing its internal IT and non-IT
systems for the Year 2000, the Company may experience material unanticipated
problems and costs caused by undetected errors or defects in the technology used
in its internal IT and non-IT systems. The Company plans to formalize its
internal IT and non-IT Year 2000 readiness plan beginning January 1999. The
Company anticipates that a majority of the existing Year 2000 issues will be
eliminated by this time and it believes that this time frame will provide
adequate time to resolve any remaining material issues.
The Company has funded its Year 2000 plan from operating cash flows and has
not separately accounted for these costs in the past, nor does the Company have
specific dollars budgeted for the project as the costs are not considered to be
material. Pervasive has not yet fully developed a comprehensive contingency
plan to address situations that may result if the Company is unable to achieve
Year 2000 compliance of its critical operations. The cost of developing and
implementing such a plan may itself be material.
13
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of the Company's operations are based in the U.S. and,
accordingly, the majority of its transactions are denominated in U.S. Dollars.
However, the Company does 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, the Company has
operations in Japan, Germany, France, Ireland, England, Belgium, and Hong Kong
and conducts transactions in the local currency of each location. The Company
monitors its foreign currency exposure and, from time to time will attempt to
reduce its exposure through hedging. The impact of fluctuations in the relative
value of other currencies was not material for the quarter ended September 30,
1998. Quantitative and qualitative information about market risk was addressed
in Item 7A of the Company's Form 10-K for the fiscal year ended June 30, 1998.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Investors should carefully consider the following risk factors and warnings
before making an investment decision. The risks described below are not the
only ones facing the Company. Additional risks that the Company does not yet
know of or that it currently thinks are immaterial may also impair its business
operations. If any of the following risks actually occur, the Company's
business, operating results or financial condition could be materially adversely
affected. In such case, the trading price of the Company's Common Stock could
decline. Investors should also refer to the other information set forth in this
Report on Form 10-Q, including the condensed consolidated financial statements
and the related notes.
This Report on Form 10-Q contains forward-looking statements. These
statements relate to future events or the Company's future financial
performance. In some cases, investors 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 and other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, investors should specifically
consider various factors, including the risks outlined below. These factors may
cause the Company's actual results to differ materially from any forward-looking
statement. See also the factors and risks discussed in other reports filed from
time to time with the Securities and Exchange Commission.
LIMITED OPERATING HISTORY; MARGINAL PROFITABILITY; FUTURE OPERATING RESULTS
UNCERTAIN
The Company was founded in January 1994. Accordingly, the Company's
prospects must be considered in light of the risks and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. To address these risks, the
Company must, among other things, respond to competitive developments, continue
to attract, retain and motivate qualified personnel and continue to improve its
products. Although the Company has been profitable for the ten most recent
fiscal quarters, this profitability has been marginal historically and, except
for the quarters ended September 30, 1994 and December 31, 1994, the Company
incurred net losses in each quarter from inception through the quarter ended
March 31, 1996. As of September 30, 1998, the Company had an accumulated
deficit of approximately $1.1 million. The Company's historical operating
losses and marginal profitability have been due in part to the commitment of
significant resources to the Company's technical support, research and
development and sales and marketing organizations. The Company expects to
continue to devote substantial resources to these areas and as a result will
need to recognize significant quarterly revenues to maintain profitability. In
particular, the Company intends to hire a significant number of sales and
research and development personnel through the end of fiscal 1998 and beyond,
which the Company believes is required if the Company is to achieve significant
revenue growth in the future. Although the Company's revenues have increased in
recent periods, there can be no assurance that the Company's revenues will grow
in future periods, that they will grow at past rates or that the Company will
remain profitable on a quarterly or annual basis in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
14
DEPENDENCE ON NEW PRODUCT RELEASE; PRODUCT CONCENTRATION
Prior to the release of Pervasive.SQL, the Company derived substantially
all of its revenues from the license of its Btrieve and Scalable SQL products.
The Company expects that its future operating results will become increasingly
dependent upon market acceptance of its recently released Pervasive.SQL product
and anticipates that revenues from the license of Btrieve and Scalable SQL will
decrease accordingly. The pace and timing of market acceptance of Pervasive.SQL
is largely dependent upon factors such as the product development cycles of ISVs
and VARs who embed the Company's products into third party packaged software
applications. As a result, the Company expects to continue to derive the
majority of its revenues from the license of Btrieve and Scalable SQL in the
near term and there can be no assurance as to whether or when Pervasive.SQL will
achieve market acceptance. A low demand for, or low or delayed market
acceptance of the Company's Pervasive.SQL product as a result of competition,
technological change or other factors, would have a material adverse effect on
the Company's business, operating results and financial condition. Although the
Company recognized increased revenue from Pervasive.SQL in the first quarter of
fiscal 1999, such sales may have been attributable to one-time upgrades from
earlier versions of the Company's products, favorable upgrade pricing by the
Company or other factors. There can be no assurance that future sales of
Pervasive.SQL will continue at initial rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Overview."
RISKS ASSOCIATED WITH ACQUISITION OF EVERYWARE DEVELOPMENT INC.
In November 1998, the Company acquired approximately 93% of the outstanding
common shares of EveryWare Development Inc. ("EveryWare"), a Canadian
corporation. Pervasive faces a number of risks and uncertainties associated with
this acquisition, including: the Company's ability to integrate and manage the
operations of a Canadian subsidiary; integration of Pervasive and EveryWare
products on a timely and cost-effective basis; market acceptance of EveryWare
products by the Company's installed base of customers, ISVs and VARs; and the
significant decrease in the Company's liquidity and capital resources as a
result the purchase of EveryWare stock, costs associated with the acquisition
and funding of EveryWare's operations. There can be no assurance that the
Company will be able to effectively address these and other risks associated
with the acquisition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OPERATING RESULTS SUBJECT TO SIGNIFICANT FLUCTUATIONS; SEASONALITY
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly in the
future due to a variety of factors, such as demand for the Company's products,
the size and timing of significant orders and their fulfillment, the number,
timing and significance of product enhancements and new product announcements by
the Company and its competitors, changes in pricing policies by the Company or
its competitors, customer order deferrals in anticipation of enhancements or new
products offered by the Company or its competitors, the ability of the Company
to develop, introduce and market new and enhanced versions of its products on a
timely basis, changes in the Company's level of operating expenses, budgeting
cycles of its customers, product life cycles, software defects and other product
quality problems, the Company's ability to attract and retain qualified
personnel, changes in the Company's sales incentive plans, changes in the mix of
domestic and international revenues, the level of international expansion,
foreign currency exchange rate fluctuations, performance of indirect channel
partners, changes in the mix of indirect channels through which the Company's
products are offered, the impact of acquisitions of competitors and indirect
channel partners, the Company's ability to control costs and general domestic
and international economic and political conditions. The Company operates with
virtually no order backlog because its software products are shipped shortly
after orders are received, which 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 unlikely that the Company will be able to meet its revenue
targets for that quarter. In addition, the Company is substantially reliant
upon indirect sales channels over which the Company has little or no control.
Moreover, the Company's expense levels are based to a significant extent on the
Company's expectations of future revenues and therefore are relatively fixed in
the short term. If revenue levels are below expectations, operating results are
likely to be adversely and disproportionately affected because only a small
portion of the Company's expenses vary with its revenues.
15
The Company's business has experienced and is expected to continue to
experience seasonal customer buying patterns. In recent years, the Company has
had relatively stronger demand for its products during the quarters ending
December 31 and June 30 and demand has been relatively weaker in the quarters
ending March 31 and September 30. The Company believes that this pattern may
continue. To the extent international operations constitute a greater
percentage of the Company's revenues in future periods, the Company anticipates
the effect of seasonal buying patterns on the Company's business could be more
pronounced in subsequent periods as a result of reduced sales activity in Europe
and Japan during the summer months.
Based upon all of the factors described above, the Company believes that
its quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its operating
results are not necessarily meaningful and that, in any event, such comparisons
should not be relied upon as indications of future performance. The Company has
limited ability to forecast future revenues, and it is likely that in some
future quarter the Company's operating results will be below the expectations of
public securities analysts and investors. In the event that operating results
are below expectations, or in the event that adverse conditions prevail or are
perceived to prevail generally or with respect to the Company's business, the
price of the Company's Common Stock would likely be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON INDIRECT SALES CHANNEL; DISTRIBUTOR CONCENTRATION
The Company derives substantially all of its revenues from its indirect
sales channel, consisting of ISVs, VARs, system integrators, consultants and
distributors. The Company has invested, and intends to continue to invest,
significant resources to develop this channel, which could adversely affect the
Company's operating margins. There can be no assurance that the Company will be
able to attract additional indirect channel partners that will be able to market
and support the Company's products. In addition, many of the Company's indirect
channel partners offer competing product lines. Therefore, there can be no
assurance that any of the Company's current indirect channel partners will
continue to represent or recommend the Company's products. Further, the
inability to recruit new indirect channel partners, or the loss of, or a
significant reduction in revenues from, any particular indirect channel partner
could materially adversely affect the Company's business, operating results and
financial condition.
Some of the Company's ISVs, VARs and end users place their orders through
distributors. A relatively small number of distributors have accounted for a
significant percentage of the Company's revenues. In the three months ended
September 30, 1998, three distributors accounted for a combined 28% of revenues,
and two distributors accounted for a combined 22% of revenues for the comparable
period in the prior fiscal year. The Company expects that it will continue to
be dependent upon a limited number of distributors for a significant portion of
its revenues in future periods and such distributors are expected to vary from
period to period. 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 could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company's operating results may in the future be
subject to substantial period-to-period fluctuations as a consequence of such
distributor concentration.
SIGNIFICANT COMPETITION
The market for the Company's products is intensely competitive and subject
to rapid change. The Company primarily encounters competition from large,
public companies, including Microsoft Corporation ("Microsoft"), Oracle
Corporation ("Oracle"), Informix Corporation ("Informix"), Sybase, Inc.
("Sybase") and International Business Machines Corporation ("IBM"). Each of
these companies offers database products competitive with the Company's
products. In particular, Sybase offers a small memory footprint database
software product, Adaptive Server Anywhere, which directly competes with the
Company's Pervasive.SQL, and Btrieve products. In addition, because there are
relatively low barriers to entry in the software market, the Company may
encounter additional competition from other established and emerging companies.
Most of the Company's competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources than the Company,
significantly greater name recognition and a large installed base of customers.
As a result, the
16
Company's 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
can the Company. There is also a substantial risk that announcements of
competing products by large competitors could result in the cancellation of
customer orders in anticipation of the introduction of such new products. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs and which may limit the
Company's ability to sell its products through particular distribution partners.
Accordingly, new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. The Company also expects 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 the Company. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that the
competitive pressures faced by the Company will not materially adversely affect
its business, operating results and financial condition.
RELIANCE ON INSTALLED BASE
In connection with the acquisition of certain software and related
technology from Novell in April 1994, the Company entered into a license
agreement permitting, among other things, the then-current version of Btrieve to
be reproduced and distributed on a royalty-free basis as part of or together
with current and future versions of any Novell products, including Novell's
NetWare operating system ("NetWare"). The Company derives significant revenues
from upgrade sales into the NetWare installed base and sales of the Company's
software operating on NetWare represented approximately 43% of the Company's
revenues in the three months ended September 30, 1998. As a result, sales of
the Company's products have been and will continue to be influenced by the
market acceptance of NetWare. NetWare faces substantial competition from other
operating systems, including Microsoft's Windows NT, which the Company believes
has a large and growing share of the worldwide market for client/server
operating systems. If sales of NetWare decrease, Novell discontinues NetWare or
discontinues bundling Btrieve with NetWare or if ISVs, VARs or their end users
migrate to competing client/server operating system platforms, and the Company
is not able to substantially increase sales of its products that run on
competing client/server operating systems, the Company's business, operating
results and financial condition would be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON CONTINUED GROWTH OF THE MARKET FOR CLIENT/SERVER APPLICATIONS AND
EMBEDDED DATABASES
Although demand for client/server applications and embedded databases has
grown in recent years, this market is still emerging and there can be no
assurance that it will continue to grow or that, even if the market does grow,
organizations will continue to adopt the Company's products. The Company has
spent, and intends to continue to spend, considerable resources educating
potential customers about the Company's embedded database products and the
packaged client/server applications market generally. However, there can be no
assurance that such expenditures will enable the Company's products to achieve
any additional degree of market acceptance. The rate at which organizations
have adopted the Company's products has varied significantly by market and by
product within each market, and the Company expects to continue to experience
such variations with respect to its target markets and products in the future.
There can be no assurance that the market for the Company's products will
continue to develop or that the Company's existing, newly introduced or future
products will be widely accepted. Additionally, there can be no assurance that
the market for client/server and other applications in which the Company's
products are embedded will continue to grow. If the markets for the Company's
products or the applications in which they are embedded fail to develop, or
develop more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition would be materially
adversely affected.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry
17
standards can render existing products obsolete and unmarketable. The Company's
future success will depend upon its ability to continue to enhance its 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. As a result of the complexities inherent in client/server
computing environments and the performance demanded by customers for embedded
databases, 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 the
Company's business, operating results and financial condition. The Company has
experienced delays in the past in the release of new products and new product
enhancements. There can be no assurance that the Company will 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, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these products or that the Company's new products
and product enhancements will achieve market acceptance.
RISK OF SOFTWARE DEFECTS
Software products as complex as those offered by the Company may contain
errors or defects, particularly when first introduced or when new versions or
enhancements are released. The Company has in the past discovered software
errors in certain of its new products after their introduction. There can be no
assurance that, despite testing by the Company, defects and errors will not be
found in current versions, new versions or enhancements of its products after
commencement of commercial shipments, resulting in loss of revenues or delay in
market acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance.
Although the latest versions of Btrieve, Scalable SQL and Pervasive.SQL are
designed to be Year 2000 compliant, an earlier release of Scalable SQL was not
Year 2000 compliant. There can be no assurance that the Company's software
products that are designed to be Year 2000 compliant contain all necessary date
code changes. In addition, third party packaged client/server applications in
which the Company's products are embedded, or for which the Company's products
are separately licensed may not be Year 2000 compliant which may have an adverse
impact on demand for the Company's products. As a result, the Company may incur
increased expenses and migration issues for such customers.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by the Company. Potential customers may also choose to defer purchasing
Year 2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could cause a
significant number of companies, including current Company customers, to
reevaluate their current software needs, and as a result switch to other systems
or suppliers. Any of the foregoing could result in a material adverse effect on
the Company's business, operating results and financial condition.
18
The Company has performed an initial evaluation if its internal information
systems, including hardware and software purchased from third parties, for Year
2000 compliance. Although this initial evaluation did not reveal material
operational issues or costs associated with preparing its internal systems for
the year 2000, there can be no assurances that the Company will not experience
serious unanticipated negative consequences and/or material costs caused by
undetected errors or defects in the technology used in its internal systems.
PRODUCT LIABILITY
Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective as a result of existing or future laws or unfavorable
judicial decisions. The Company has not experienced any material product
liability claims to date; however, the sale and support of the Company's
products may entail the risks of such claims, which may be substantial in light
of the use of the Company's products in business-critical applications. A
successful product liability claim brought against the Company could have a
material adverse effect on the Company's business, operating results and
financial condition.
MANAGEMENT OF CHANGING BUSINESS
The Company has recently experienced a period of significant revenue growth
and an expansion in the number of its employees, the scope of its operating and
financial systems and geographic area of its operations. In particular, the
Company had a total of 240 employees at September 30, 1998, as compared to 182
at September 30, 1997. This growth has resulted in new and increased
responsibilities for management and has placed a strain upon the Company's
financial and other resources. The Company expects that planned expansion of
international operations will lead to increased financial and administrative
demands, such as increased operational complexity associated with expanded
facilities, administrative burdens associated with managing an increasing number
of relationships with foreign partners and expanded treasury functions to manage
foreign currency risks. The Company's future operating results will also depend
on its ability to expand its sales and marketing organizations, further develop
its sales channels to penetrate different and broader markets and expand its
support organization to accommodate growth in the Company's installed base.
In October 1998, the Company moved its headquarters to a new facility of
approximately 70,000 square feet. The new facility provides additional space
and expansion options to accommodate future growth at rental rates per square
foot consistent with it prior facility. The Company expects an increase in
capital expenditures and rent expense in fiscal 1999 as a result of the move.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
The Company anticipates that for the foreseeable future a significant
portion of its revenues will be derived from sources outside North America and
the Company intends to continue expanding its sales and support operations
internationally. In order to successfully expand international sales, the
Company must establish additional foreign operations, expand its international
sales channel management and support organizations, hire additional personnel,
customize its products for local markets, recruit additional international
resellers and increase the productivity of existing international resellers. To
the extent that the Company is unable to do so in a timely and cost-effective
manner, the Company's sales growth internationally, if any, will be limited, and
the Company's business, operating results and financial condition could be
materially adversely affected. Even if the Company is able to successfully
expand its international operations there can be no assurance that the Company
will be able to maintain or increase international market demand for its
products.
The Company's international operations are generally subject to a number of
risks, including costs of customizing products for foreign countries,
protectionist laws and business practices favoring local competition, dependence
on local vendors, compliance with multiple, conflicting and changing government
laws and regulations, longer sales cycles, greater difficulty or delay in
accounts receivable collection, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, foreign currency
exchange rate fluctuations and the
19
associated effects on product demand, multiple and conflicting tax laws and
regulations and political and economic instability. To date, a majority of the
Company's revenues and costs have been denominated in U.S. dollars. However, the
Company believes that in the future, an increasing portion of the Company's
revenues and costs will be denominated in foreign currencies. Although the
Company may from time to time undertake foreign exchange hedging transactions to
reduce its foreign currency transaction exposure, the Company does not currently
attempt to eliminate all foreign currency transaction exposure. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the efforts of
Ron R. Harris, the Company's President and Chief Executive Officer, and other
key management, sales and marketing, technical support and research and
development personnel, none of whom are bound by an employment contract. The
loss of key management or technical personnel could adversely affect the
Company. The Company believes that its future success will depend in large part
upon its continuing ability to attract and retain highly skilled managerial,
sales and marketing, technical support and research and development personnel.
Like other software companies, the Company faces intense competition for such
personnel, and the Company has at times experienced and continues to experience
difficulty in recruiting qualified personnel. There can be no assurance that the
Company will be successful in attracting, assimilating and retaining additional
qualified personnel in the future. The loss of the services of one or more of
the Company's key individuals, or the failure to attract and retain additional
qualified personnel, could have a material adverse effect on the Company's
business, operating results and financial condition.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT; USE OF
LICENSED TECHNOLOGY
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company licenses its database software
products primarily under "shrink wrap" licenses (i.e., licenses included as part
of the product packaging). Shrink wrap licenses are not negotiated with or
signed by individual licensees, and purport to take effect upon the opening of
the product package. However, the Company believes that such measures afford
only limited protection. There can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology or design
around the copyrights and trade secrets owned by the Company. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and although the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. Embedded software products,
like those offered by the Company, can be especially susceptible to software
piracy. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the U.S.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers increasingly will be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all.
In the event of a successful claim of product infringement against the Company
and failure or inability of the Company to either license the infringed or
similar technology or develop alternative technology on a timely basis, the
Company's business, operating results and financial condition could be
materially adversely affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in its products to perform key functions.
20
There can be no assurance that these third-party software licenses will continue
to be available to the Company on commercially reasonable terms. The loss of or
inability to maintain any such software licenses could result in shipment delays
or reductions until equivalent software could be developed, identified, licensed
and integrated which could materially adversely affect the Company's business,
operating results and financial condition.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock is highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's revenues and operating results, announcements of technological
innovations, new or enhanced products by the Company or its competitors,
developments with respect to copyrights or proprietary rights, conditions and
trends in the software and other technology industries, adoption of new
accounting standards affecting the software industry, changes in financial
estimates by securities analysts, general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the securities of technology companies. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against the company. There can
be no assurance that such litigation will not occur in the future with respect
to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
CONTROL OF COMPANY BY OFFICERS AND DIRECTORS
As of November 9, 1998 the executive officers, directors and their
affiliates in the aggregate beneficially owned approximately 58% of the Common
Stock. As a result, acting together these stockholders will be able to exercise
effective control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
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.
21
PART II. OTHER INFORMATION
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
10.6* Lease Agreement dated October 5, 1994 between the Company and
Colina West Limited
10.7* First Amendment to Lease Agreement dated September 8, 1995
between the Company and Colina West Limited
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
10.11** Amendment and Restatement of Credit Agreement and Promissory
Note dated February 28, 1998 between the Company and Chase
Bank of Texas, National Association
10.12 First Amendment to Credit Agreement and Promissory Note dated
October 22, 1998 between the Company and Chase Bank of Texas,
National Association
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 (File No. 000-23043).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September
30, 1998.
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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 16, 1998 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)
23
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
10.6* Lease Agreement dated October 5, 1994 between the Company and
Colina West Limited
10.7* First Amendment to Lease Agreement dated September 8, 1995
between the Company and Colina West Limited
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
10.11** Amendment and Restatement of Credit Agreement and Promissory
Note dated February 28, 1998 between the Company and Chase
Bank of Texas, National Association
10.12 First Amendment to Credit Agreement and Promissory Note dated
October 22, 1998 between the Company and Chase Bank of Texas,
National Association
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 (File No. 000-23043).
24