1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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)
-----------
(512) 231-6000
(Registrant's telephone number, including area code)
-----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
(1) Yes X No
------- -------
(2) Yes X No
------- -------
As of May 14, 2001 there were 15,927,041 shares of the Registrant's common
stock outstanding.
================================================================================
2
PERVASIVE SOFTWARE INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements.............................................................. 3
Condensed Consolidated Balance Sheets at March 31, 2001 and June
30, 2000.......................................................................... 3
Condensed Consolidated Statements of Operations for the three and
nine months ended March 31, 2001 and 2000......................................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 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............................................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................ 13
PART II. OTHER INFORMATION................................................................. 24
Item 1. Legal Proceedings................................................................. 24
Item 5. Other Information................................................................. 24
Item 6. Exhibits and Reports on Form 8-K.................................................. 24
SIGNATURES................................................................................. 25
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pervasive Software Inc.
Condensed Consolidated Balance Sheets
(in thousands)
MARCH 31, JUNE 30,
2001 2000
----------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 20,108 $ 12,822
Marketable securities 5,350 13,322
Trade accounts receivable, net 5,547 6,350
Prepaid expenses and other current assets 1,969 4,475
-------- --------
Total current assets 32,974 36,969
Property and equipment, net 5,604 7,244
Purchased technology and excess of cost over fair value
of net assets acquired, net 870 961
Other assets 2,209 2,074
-------- --------
Total assets $ 41,657 $ 47,248
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 984 $ 1,382
Accrued payroll and payroll related costs 1,357 1,793
Other accrued expenses 4,870 3,658
Deferred revenues 1,645 1,531
Liabilities of discontinued operations 3,314 6,240
-------- --------
Total current liabilities 12,170 14,604
Stockholders' equity :
Common stock 60,086 59,950
Retained earnings (deficit) (30,599) (27,306)
-------- --------
Total stockholders' equity 29,487 32,644
-------- --------
Total liabilities and stockholders' equity $ 41,657 $ 47,248
======== ========
See accompanying notes.
3
4
Pervasive Software Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues $ 10,712 $ 11,254 $ 31,331 $ 42,229
Costs and expenses:
Cost of revenues and technical support 2,278 2,230 7,345 6,873
Sales and marketing 4,509 5,063 14,558 14,769
Research and development 2,472 3,572 8,117 10,356
General and administrative 1,409 1,524 4,400 4,271
-------- -------- -------- --------
Total costs and expenses 10,668 12,389 34,420 36,269
-------- -------- -------- --------
Operating income (loss) from continuing operations 44 (1,135) (3,089) 5,960
Interest and other income, net 292 406 968 1,327
Income tax benefit (provision) (100) 219 (401) (2,186)
Minority interest in (earnings) loss of subsidiary, net of
tax -- -- -- (19)
-------- -------- -------- --------
Income (loss) from continuing operations 236 (510) (2,522) 5,082
Discontinued operations:
Loss from operations -- (4,668) -- (12,337)
Income tax benefit (provision) -- (668) -- 1,806
-------- -------- -------- --------
Loss from discontinued operations -- (5,336) -- (10,531)
-------- -------- -------- --------
Net income (loss) $ 236 $ (5,846) $ (2,522) $ (5,449)
======== ======== ======== ========
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.01 $ (0.03) $ (0.16) $ 0.33
Loss from discontinued operations -- (0.34) -- (0.67)
-------- -------- -------- --------
Net income (loss) $ 0.01 $ (0.37) $ (0.16) $ (0.35)
======== ======== ======== ========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.01 $ (0.03) $ (0.16) $ 0.29
Loss from discontinued operations -- (0.34) -- (0.59)
-------- -------- -------- --------
Net income (loss) $ 0.01 $ (0.37) $ (0.16) $ (0.31)
======== ======== ======== ========
See accompanying notes.
4
5
Pervasive Software Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
NINE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- --------
CASH FROM CONTINUING OPERATIONS
Income (loss) from continuing operations $ (2,522) $ 5,082
Adjustments to reconcile income (loss) to net cash provided by continuing operations:
Depreciation and amortization 2,233 2,276
Non cash compensation expense pursuant to employee stock purchase plan 147 643
Other non cash items 47 (204)
Change in current assets and liabilities:
Decrease in trade accounts receivable 410 832
(Increase) decrease in prepaid expenses and other current assets 2,090 (3,001)
Decrease in accounts payable and accrued liabilities (883) (492)
Increase (decrease) in deferred revenue 125 (279)
Increase (decrease) in income taxes refundable/payable, net 1,187 (3,531)
-------- --------
Net cash provided by continuing operations 2,834 1,326
CASH FROM DISCONTINUED OPERATIONS
Loss from discontinued operations -- (10,531)
Depreciation and amortization -- 1,131
Income tax benefit -- 1,806
Net change in assets and liabilities of discontinued operations 447 (265)
Decrease in liabilities of discontinued operations (2,927) --
-------- --------
Net cash used in discontinued operations (2,480) (7,859)
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment (710) (3,588)
Sales of marketable securities, net 7,972 2,443
Purchase of business, net of cash acquired -- (1,105)
Increase in other assets (228) (123)
-------- --------
Net cash provided by (used in) investing activities 7,034 (2,373)
CASH FROM FINANCING ACTIVITIES
Proceeds from issuance of stock, net of issuance costs 135 1,164
-------- --------
Net cash provided by financing activities 135 1,164
-------- --------
Effect of exchange rate on cash and cash equivalents (237) (58)
-------- --------
Increase (decrease) in cash and cash equivalents 7,286 (7,800)
Cash and cash equivalents at beginning of period 12,822 18,126
-------- --------
Cash and cash equivalents at end of period $ 20,108 $ 10,326
======== ========
See accompanying notes.
5
6
PERVASIVE SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
1. GENERAL AND BASIS OF FINANCIAL STATEMENTS
The unaudited interim condensed consolidated financial statements include
the accounts of Pervasive Software Inc. and its majority-owned subsidiaries
(collectively, the "Company" or "Pervasive"). All material intercompany accounts
and transactions have been eliminated in consolidation.
The financial statements included herein reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly state the Company's financial position,
results of operations and cash flows for the periods presented. These financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended June 30, 2000, which
are contained in the Company's Annual Report filed on Form 10-K on September 28,
2000 (File No. 000-23043). The results of operations for the three and nine
month periods ended March 31, 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 FROM CONTINUING OPERATIONS
The following table sets forth the computation of basic and diluted
earnings (loss) per share from continuing operations (in thousands, except per
share data):
Three months ended Nine months ended
March 31, March 31,
------------------------ -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator:
Net income (loss) from continuing operations ...................... $ 236 $ (510) $ (2,522) $ 5,082
========== ========== ========== ==========
Denominator:
Denominator for basic earnings (loss) per share - weighted average .... 15,843 15,688 15,843 15,620
shares
Effect of dilutive securities:
Employee stock options ............................................ 1,332 -- -- 2,191
---------- ---------- ---------- ----------
Potentially dilutive common shares ................................ 1,332 -- -- 2,191
---------- ---------- ---------- ----------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and assumed conversions .......... 17,175 15,688 15,843 17,811
========== ========== ========== ==========
Basic earnings (loss) per share ........................................ $ 0.01 $ (0.03) $ (0.16) $ 0.33
========== ========== ========== ==========
Diluted earnings (loss) per share ...................................... $ 0.01 $ (0.03) $ (0.16) $ 0.29
========== ========== ========== ==========
6
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. COMPREHENSIVE INCOME
The components of comprehensive income (loss) are as follows:
Three months ended Nine months ended
March 31, March 31,
------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
Net income (loss) ............................ $ 236 $(5,846) $(2,522) $(5,449)
Foreign currency translation adjustments...... (429) (265) (770) 222
------- ------- ------- -------
Comprehensive loss ........................... $ (193) $(6,111) $(3,292) $(5,227)
======= ======= ======= =======
4. EVERYWARE DEVELOPMENT INC.
On November 12, 1998, Pervasive acquired for cash approximately 93% of
the outstanding common shares of EveryWare Development Inc. ("EveryWare"), a Web
development tool and Web-application server provider based in Toronto, Canada.
Pervasive acquired the remaining outstanding shares of EveryWare in December
1998. In June 2000, the Company adopted a formal plan to discontinue the Tango
product line acquired in the EveryWare acquisition. Accordingly, the Tango
product line is accounted for as a discontinued operation in the accompanying
consolidated financial statements.
5. CONTINGENCIES
Complaints were filed in November and December 1999 in the U.S. District
Court for the Western District of Texas against the Company and certain of its
officers and directors. The cases were consolidated in a class action suit filed
in January 2000. The class action complaint alleged that the Company and certain
of its officers and directors violated federal securities laws, including Rule
10b-5 under the Securities Exchange Act of 1934, by making false statements and
failing to disclose material information to artificially inflate the price of
the Company's common stock during the Class Period of July 15, 1999 to October
21, 1999. The Company and other defendants filed motions to dismiss the suit on
February 7, 2000. On October 19, 2000, the U.S. District Court entered its order
dismissing plaintiffs' claims against the Company and the other defendants. The
case was dismissed with prejudice and the Plaintiffs no longer have the right to
file an amended complaint.
6. SHAREHOLDER RIGHTS PLAN
In October 2000, the Board of Directors approved the adoption of a
shareholder rights plan whereby one Preferred Share Purchase Right was
distributed for each outstanding share of the Company's Common Stock.
The rights become exercisable if, following adoption of the plan, a
person or group acquires 15% or more of the Company's Common Stock or announces
a tender offer for 15% or more of the Company's Common Stock. Such events, or if
the Company is acquired in a merger or other business combination transaction
after a person acquires 15% or more of the Company's 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 acquires 15% or more of the outstanding Common Stock.
The rights were distributed on November 6, 2000 to stockholders of record
on October 6, 2000. The rights will expire in ten years.
7
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, 2000 (File No. 333-71955) and other reports
filed from time to time with the Securities and Exchange Commission.
OVERVIEW
Pervasive Software Inc. is a leading worldwide provider of data management
solutions and services which dramatically simplify the development, deployment
and management of business applications for Small and Medium Enterprises
("SME"). Our low cost of ownership database product, Pervasive.SQL, is widely
installed with over 4 million server seats licensed to date. With Pervasive.SQL,
independent software vendors ("ISVs") create sophisticated yet low maintenance
applications that reach beyond the desktop to easily share information from
workstations to the Web. Our software is designed for integration by ISVs into
Web or client/server applications sold to SMEs, which typically have
environments with little to no IT infrastructure. Our comprehensive approach to
selling, marketing and supporting our offerings is designed to drive simplicity
into and mask the complexity of data management solutions, specifically
addressing the needs of ISVs who build and VARs who sell and implement software
applications to SMEs.
We derive our revenues primarily from shrink-wrap licenses through
independent software vendors, value-added resellers and distributors and through
OEM license agreements with independent software vendors. Shrink-wrap license
fees are variable and based generally on user count. Our OEM licensing program
offers independent software vendors volume discounts and specialized technical
support, training and consulting in exchange for embedding our products in
software applications and paying us a royalty based on sales of their
applications. Additionally, we generate revenues from version upgrades, user
count upgrades, and from upgrades to client/server or Web environments from
single user workstation or workgroup environments.
We generally recognize revenues from software licenses when persuasive
evidence of an arrangement exists, the software has been delivered, the fee is
fixed or determinable and collectability is probable. We generally recognize
revenues related to agreements involving nonrefundable fixed minimum license
fees when we deliver the product master or first copy if no significant vendor
obligations remain. We recognize per copy royalties in excess of a fixed minimum
amount as revenues when such amounts are reported to us. We operate with
virtually no order backlog because our software products are shipped shortly
after orders are received. This makes product revenues in any quarter
substantially dependent on orders booked and shipped throughout that quarter. We
enter into agreements with certain distributors that provide for certain stock
rotation and price protection rights. These rights allow the distributor to
return products in a non-cash exchange for other products or for credits against
future purchases. We reserve for estimated sales returns, stock rotation and
price protection rights, as well as for uncollectable accounts based on
experience.
Historically, we have derived substantially all of our revenues from our
Pervasive.SQL and Btrieve data management products. On June 30, 1999, we
discontinued general availability of our Btrieve products to consolidate our
data management-related development, marketing and technical support resources
behind our current Pervasive.SQL products. Accordingly, revenue from the license
of Pervasive.SQL accounts for substantially all of our data management-related
revenues in fiscal 2000 and 2001. In addition, we released Pervasive.SQL 2000i
in late
8
9
March 2001 and announced a related price increase effective April 2001. Our
future operating results will depend upon continued market acceptance of
Pervasive.SQL, which it may not achieve. Any decrease in demand or market
acceptance for our Pervasive.SQL product would have a damaging effect on our
business, operating results and financial condition.
In July 2000, we announced a restructuring to focus on the core data
management product business, including the discontinuation of our Tango product
line. The operating results of the Tango product line did not achieve expected
results and thus we have ceased marketing the Tango product. While we are
presently continuing to support our current Tango customers, we have announced
the discontinuance of such support effective June 30, 2001, and we are exploring
strategic alternatives for the Tango product line, including its possible sale.
Tango has been recorded as a discontinued operation in the accompanying
financial statements; therefore, the following discussion and analysis refer
only to continuing operations.
In addition, as part of the July 2000 restructuring, we reduced our
workforce by approximately 100 employees, or approximately 28% of our worldwide
workforce. The majority of the reductions occurred in our Toronto office and our
Austin headquarters. The workforce reduction was primarily related to the
discontinuance of the Tango product line; however, we also reduced a portion of
our Pervasive.SQL related workforce, mostly in our Pervasive.SQL development
organization.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in our consolidated statements of
operations.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
Revenues .............................................. 100% 100% 100% 100%
Costs and expenses:
Cost of revenues and technical support .......... 21 20 23 16
Sales and marketing ............................. 43 45 47 35
Research and development ........................ 23 32 26 25
General and administrative ...................... 13 13 14 10
------ ------ ------ ------
Total costs and expenses .............................. 100 110 110 86
------ ------ ------ ------
Operating income (loss) from continuing operations .... -- (10) (10) 14
Interest and other income, net .................. 3 3 3 3
Income tax benefit (provision) .................. (1) 2 (1) (5)
------ ------ ------ ------
Income (loss) from continuing operations .............. 2 (5) (8) 12
------ ------ ------ ------
Discontinued operations:
Loss from operations ............................ -- (41) -- (29)
Income tax benefit (provision) .................. -- (6) -- 4
------ ------ ------ ------
Loss from discontinued operations ..................... -- (47) -- (25)
------ ------ ------ ------
Net income (loss) ..................................... 2% (52)% (8)% (13)%
====== ====== ====== ======
Revenues
Our revenues from continuing operations were $10.7 million in the three
months ended March 31, 2001, a decrease of 5% from the $11.3 million reported
for the comparable period in the prior fiscal year. Our revenues from continuing
operations for the nine month period ended March 31, 2001 decreased 26% to $31.3
million as compared to $42.2 million for the comparable period in the prior
fiscal year. We attributed these revenue decreases to competitive pressures 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
9
10
believe that each of the above factors affecting revenue could continue to
negatively affect license revenues for Pervasive.SQL in the future, offset
somewhat by the recent release of our Pervasive.SQL 2000i product and related
price increase. Our revenues from continuing operations for the three months
ended March 31, 2001 of $10.7 million, were an increase from the $10.0 million
and $10.6 million for the three months ended September 30, 2000 and December 31,
2000 respectively, primarily due to increased focus on our core database
business subsequent to the discontinuation of the Tango product line.
Licenses of our software operating on Windows NT or other Microsoft
operating systems continue to represent approximately 70% 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, or at all.
International revenues, consisting of all revenues from customers located
outside of North America, were $5.0 million and $5.7 million in the three months
ended March 31, 2000 and 2001, representing 47% and 51% of total revenues,
respectively. International revenues were $20.8 million and $14.3 million in the
nine months ended March 31, 2000 and 2001, representing 49% and 46% of total
revenues, respectively. We attribute the decrease in international revenue
during the first nine months of fiscal 2001 as compared to the first nine months
of fiscal 2000 to 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 related to continuing operations was $2.2
million and $2.3 million in the three months ended March 31, 2000 and 2001,
representing 20% and 21% of revenues, respectively. Cost of revenues and
technical support related to continuing operations was $6.9 million and $7.3
million for the nine month period ended March 31, 2000 and 2001, representing
16% and 23% of revenues, respectively. The increase in cost of revenues and
technical support is primarily related to increased technical support and
consulting personnel in the U.S., Europe and Japan. Cost of revenues and
technical support increased as a percentage of revenue primarily as a result of
the decrease in revenue. We anticipate that cost of revenues and technical
support will decrease in dollar amount in the future as we continue to reduce
costs associated with hiring and retaining technical support and training
personnel, partially offset by increased license fees for third-party
technologies embedded in or bundled with our products and increased investment
in personnel to deliver professional services to others.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
foreign sales office expenses, marketing programs and promotional expenses, and
travel and entertainment. Sales and marketing expenses related to continuing
operations were $5.1 million and $4.5 million in the three months ended March
31, 2000 and 2001, representing 45% and 43% of revenues, respectively. Sales and
marketing expenses related to continuing operations were $14.8 million and $14.6
million for the nine months ended March 31, 2000 and 2001, representing 35% and
47% of revenues, respectively. Sales and marketing expenses decreased slightly
in dollar amount for the nine month period ended March 31, 2001 primarily due to
a reduction of costs associated with sales and marketing personnel. Sales and
marketing expense increased as a percentage of revenue primarily as a result of
the decrease in revenue. We expect sales and marketing expenses will decrease in
dollar amount in the near term as we continue to reduce costs associated with
hiring and retaining sales and marketing personnel and related travel and field
office expenses, partially offset by the timing and extent of product market
development activities and costs associated with new product releases, marketing
promotions, brand awareness campaigns and lead generation programs.
10
11
Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
related to continuing operations were $3.6 million and $2.5 million in the three
months ended March 31, 2000 and 2001, representing 32% and 23% of revenues,
respectively. Research and development expenses related to continuing operations
were $10.4 million and $8.1 million for the nine months ended March 31, 2000 and
2001, representing 25% and 26% of revenues, respectively. Research and
development expenses decreased in dollar amount primarily due to the reduction
in force in July 2000. Research and development expense increased as a
percentage of revenue on a year to date basis primarily as a result of the
decrease in revenue. We anticipate that research and development expenses will
decrease in dollar amount in the near term as we continue to reduce costs
associated with hiring and retaining research and development personnel and
reduce investment in outsourced development projects.
Software development costs that were eligible for capitalization in
accordance with Statement of Financial Accounting Standards No. 86 were
insignificant during these periods. Accordingly, we charged all software
development costs to research and development expenses.
General and Administrative. General and administrative expenses consist
primarily of the personnel and other costs of our finance, human resources,
information systems and administrative departments. General and administrative
expenses related to continuing operations were $1.5 million and $1.4 million in
the three months ended March 31, 2000 and 2001, representing 13% and 13% of
revenues, respectively. General and administrative expenses related to
continuing operations were $4.3 million and $4.4 million for the nine months
ended March 31, 2000 and 2001, representing 10% and 14% of revenues,
respectively. We attribute the increase in dollar amount for the nine months
primarily to the increased staffing and associated expenses necessary to manage
and support our operations, both domestically and internationally. General and
administrative expenses increased as a percentage of revenue primarily because
of the decrease in revenue. We believe that our general and administrative
expenses will decrease in dollar amount in the near term as we continue to
reduce costs associated with hiring and retaining general and administrative
personnel.
Provision for Income Taxes. Income taxes related to continuing operations
was a benefit of approximately $0.2 million and a provision of approximately
$0.1 million in the three months ended March 31, 2000 and 2001, respectively.
Provision for income taxes related to continuing operations was approximately
$2.2 million and $0.4 million for the nine months ended March 31, 2000 and 2001,
respectively.
Although we may incur an overall loss for the 2001 year, we will continue
to record a provision for income taxes on profits reported by our foreign
operations. In addition, anticipated operating losses reported by our domestic
operations may require us to reserve certain deferred tax assets that have
limited carryforward periods.
We believe that, based on a number of factors, it is more likely than not
that a substantial amount of our deferred tax assets may not be realized. These
factors include:
o Recent trends in revenue related to continuing operations;
o The potential impact of anticipated deductions due to exercise of
employee stock options on deferred tax assets with limited carryforward
periods; and
o The intensely competitive market in which we operate and which is
subject to rapid change.
Accordingly, we have recorded a valuation allowance against the deferred
tax assets to the extent domestic deferred tax assets exceed the potential
benefit from carryback or carryover of deferred items to offset taxable income
in the current year, prior years or the next succeeding year.
11
12
Loss from Discontinued Operations. Loss from discontinued operations
relates to the discontinuation of the Tango product line at the end of fiscal
2000. Total loss from discontinued operations was $5.3 million, including income
tax provision of $0.7 million, in the three months ended March 31, 2000. Total
loss from discontinued operations was $10.5 million, net of income tax benefit
of $1.8 million, in the nine months ended March 31, 2000. While we are presently
continuing to support our current Tango customers, we have announced the
discontinuance of such support effective June 30, 2001, and we are exploring
strategic alternatives for the Tango product line, including its possible sale.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations was $1.3 million and $2.8 million
for the nine months ended March 31, 2000 and 2001, respectively. Cash provided
by continuing operations for the nine months ended March 31, 2001 resulted
primarily from decreases in prepaid expenses and other current assets and
receipt of a Federal income tax refund, offset by a net loss from continuing
operations and a decrease in accounts payable and accrued liabilities. Cash
provided by continuing operations during the comparable period in the prior
fiscal year resulted primarily from net income from continuing operations and a
decrease in accounts receivable, reduced by increases in prepaid expenses and
other current assets as well as decreases in accounts payable, accrued
liabilities, deferred revenue and income taxes payable.
During the first nine months of fiscal 2000 and fiscal 2001, we received
net proceeds of $2.4 million and $8.0 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 $3.6 million and $0.7 million in the nine months ended March 31,
2000 and 2001, respectively. This property consisted primarily of computer
hardware and software.
On March 31, 2001, we had $20.8 million in working capital, including
$20.1 million in cash and cash equivalents and $5.4 million in marketable
securities. We have a $10.0 million revolving line of credit which expires on
February 28, 2002.
In December 2000, we announced a share-repurchase program. According to
the program, we can purchase shares of our common stock up to a total value of
$5.0 million on the open market or in privately negotiated transactions in
accordance with applicable securities and other laws. The program expires July
21, 2001 and any purchases under the program may be commenced or suspended at
any time without prior notice.
12
13
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 three or nine
months ended March 31, 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, 2000.
13
14
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. Any of the following risks could harm our business, financial
condition or results of operations. In such case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
OUR FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER
Our operating results have varied significantly from quarter to quarter in
the past and will continue to vary significantly from quarter to quarter in the
future due to a variety of factors. Many of these factors are outside of our
control. These factors include:
o Fluctuations in demand for our products or upgrades to our products;
o Fluctuations in the demand for and deployment of client/server
applications in which our Pervasive.SQL products are designed to be
embedded;
o Fluctuations in demand for our products due to the potential
deteriorating economic conditions on our customer base;
o Seasonality and the timing of product sales and shipments;
o Unexpected delays in introducing new or improvements to existing
products and services;
o New product releases, licensing models or pricing policies by our
competitors;
o Acquisitions or mergers involving our competitors or customers;
o Impact of changes to our product distribution strategy and pricing
policies;
o Lack of order backlog;
o Loss of a significant customer or distributor;
o Changes in purchasing and/or payment practices by our distributors;
o A reduction in the number of independent software vendors, or ISVs, who
embed our products;
o Changes in the mix of domestic and international sales;
o Impact of changes to our geographic investment levels and business
models; and
o Losses associated with discontinued operations.
Our revenues for each quarter in fiscal year 2000 decreased sequentially
from the previous quarter, due to a combination of factors, including: lower
sales pipelines, the reorganization of our domestic sales force in January 2000,
the reorganization of our European sales force in April 2000, management changes
in our worldwide sales organization, senior management changes in our Japanese
subsidiary, our past focus of resources and management attention on our
discontinued Tango product line, competitive forces and what we believe to be a
general softening in the packaged client/server applications market contributing
to decreased orders for our Pervasive.SQL products embedded in these
applications. Although our revenues have grown sequentially in each of the first
three quarters of fiscal 2001, 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, change our distribution strategy and policies, accelerate our investment
in research and development, sales or marketing efforts
14
15
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
a charge of $17 million or $1.08 per share for discontinued operations related
to our Tango product line. While we continue to support our current Tango
customers, we have announced the discontinuance of such support effective June
30, 2001, and we are exploring strategic alternatives for the Tango product
line, including its possible sale. Our operating results have fluctuated in the
past due to charges relating to the discontinued Tango operations and may
continue to fluctuate in future quarters depending upon the timing and nature of
final disposition of our Tango product line. In addition, our operating results
could be harmed in the event that additional liabilities related to the
discontinued Tango product line arise.
In addition, 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 larger orders. The
sales cycles for these transactions tend to be longer than the sales cycles on
smaller orders. This longer sales cycle for large orders makes it difficult to
predict the quarter in which these sales will occur. Accordingly, our operating
results may fluctuate from quarter to quarter based on the existence and timing
of larger orders. A reduction in large orders during any quarter could
materially impact our revenues.
WE MUST SUCCESSFULLY MANAGE OUR REDUCTION IN WORKFORCE
In July 2000, we reduced our workforce by approximately 100 employees or
approximately 28 percent of our worldwide workforce. The workforce reduction was
primarily related to the discontinuance of the Tango product line; however, we
also reduced a portion of our Pervasive.SQL related workforce, primarily in our
development organization. Any failure to manage the impact of the Pervasive.SQL
workforce reduction on our Pervasive.SQL product development schedules, to
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, to the extent international operations may
constitute a greater percentage of our revenues in future periods, we anticipate
that demand for our products in Europe and Japan will decline in the summer
months because of reduced corporate buying patterns during the vacation season.
WE CURRENTLY OPERATE WITHOUT A BACKLOG
We generally operate with virtually no order backlog because our software
products are shipped and revenue is recognized shortly after orders are
received. This lack of backlog makes product revenues in any quarter
substantially dependent on orders booked and shipped throughout that quarter. As
a result, if orders in the first month or two of a quarter fall short of
expectations, it is likely we will not meet our revenue targets for that
quarter. As a result, our quarterly operating results would be materially and
adversely affected.
OUR 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
15
16
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 that use marks that are similar to our brand name may
cause confusion among actual and potential customers, which could prevent us
from achieving significant brand recognition. If we fail to promote and maintain
our brand or incur significant related expenses, our business, operating results
and financial condition could be materially adversely affected.
WE MAY FACE PROBLEMS IN CONNECTION WITH FUTURE ACQUISITIONS OR JOINT VENTURES
In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement,
modify or expand our business. Our negotiations of potential acquisitions or
joint ventures and our integration of acquired businesses, products or
technologies could divert management time and resources. Any future acquisitions
could require us to issue dilutive equity securities, 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.
A SMALL NUMBER OF DISTRIBUTORS AND SALES RELATED TO ACCOUNTING SOFTWARE
APPLICATIONS ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR REVENUES
The loss of a major distributor, changes in a distributor's payment
practices, changes in the financial stability of a major distributor or any
reduction in orders by such distributor, including reductions due to market or
competitive conditions, combined with the inability to replace the distributor
on a timely basis, or any modifications to our pricing or distribution channel
strategy could materially adversely affect our business, operating results and
financial condition. Many of our independent software vendors, value-added
resellers and end users place their orders through distributors. A relatively
small number of distributors have accounted for a significant percentage of our
revenues. In the nine months ended March 31, 2001, three distributors combined
accounted for an aggregate of approximately 16% of our revenues, as compared to
the nine months ended March 31, 2000, where three distributors accounted for an
aggregate of approximately 21% of our revenues. Additionally, we estimate that
approximately 20% of our revenues in the nine months ended March 31, 2001 were
from sales related to accounting software applications. We expect that we will
continue to be dependent upon a limited number of distributors and sales related
to accounting software applications for a significant portion of our revenues in
future periods. Moreover, we expect that such distributors and sales related to
accounting software applications will vary from period to period. Our
distributors have not agreed to any minimum order requirements. Although we
forecast demand and plan accordingly, if a distributor purchases excess product,
we may be obligated to accept the return of some products.
WE DEPEND ON OUR INDIRECT SALES CHANNEL
Our failure to continue to grow our indirect sales channel or the loss of
a significant number of members of our indirect channel partners would have a
material adverse effect on our business, financial condition and operating
results. We do not have a substantial direct sales force and we derive
substantially all of our revenues from indirect
16
17
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:
o 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;
o Pressures placed on the sales channel to sell competing products;
o Our failure to adequately support the sales channel;
o Competing product lines offered by certain of our indirect channel
partners; and
o Business model or licensing model changes of our channel partners or
their competitors.
We cannot be certain that we will be able to continue to attract
additional indirect channel partners or retain our current partners. In
addition, we cannot be certain that our competitors will not attempt to recruit
certain of our current or future partners. For example, in December 2000,
Microsoft Corporation (a competitor) acquired Great Plains Software (an ISV that
embeds our product into certain of their 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.
WE MAY NOT BE ABLE TO DEVELOP STRATEGIC RELATIONSHIPS
Our current collaborative relationships may not prove to be beneficial to
us, and they may not be sustained. We may not be able to enter into successful
new strategic relationships in the future, which could have a material adverse
effect on our business, operating results and financial condition. From time to
time, we have collaborated with other companies in areas such as product
development, marketing, distribution and implementation. Maintaining these and
other relationships is a meaningful part of our business strategy. However, many
of our current and potential strategic partners are either actual or potential
competitors with us. In addition, many of our current relationships are informal
or, if written, terminable with little or no notice.
WE DEPEND ON THIRD-PARTY TECHNOLOGY IN OUR PRODUCTS
We rely upon certain software that we license from third parties,
including software that is integrated with our internally developed software and
used in our products to perform key functions. These third-party software
licenses may not continue to be available to us on commercially reasonable
terms. The loss of, or inability to maintain or obtain any of these software
licenses, could result in shipment delays or reductions until we develop,
identify, license and integrate equivalent software. Any delay in product
development or shipment could damage our business, operating results and
financial condition.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success depends to a significant degree upon our ability to protect
our software and other proprietary technology. We rely primarily on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our proprietary rights.
However, these measures afford us only limited protection. In addition, we rely
in part on "shrink wrap" and "click wrap" licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of certain
jurisdictions. Unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary. Although we
believe software piracy may be a problem, we are unable to determine the extent
to which piracy of our software products occurs. In addition, portions of our
source code are developed in foreign countries with laws that do not protect our
proprietary rights to the same extent as the laws of the United States.
Although we are not aware that any of our products infringe upon the
proprietary rights of third parties, we may be subjected to claims of
intellectual property infringement by third parties as the number of products
and
17
18
competitors in our industry segment continues to grow and the functionality of
products in different industry segments increasingly overlaps. Any infringement
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or the loss or deferral of sales or
require us to enter into royalty or licensing agreements. If we are required to
enter into royalty or licensing agreements, they may not be on terms acceptable
to us. Unfavorable royalty and licensing agreements could seriously damage our
business, operating results and financial condition.
WE MUST ADAPT TO RAPID TECHNOLOGICAL CHANGE
Our future success will depend upon our ability to continue to enhance our
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and new industry standards and
satisfy increasingly sophisticated customer requirements. Rapid technological
change, frequent new product introductions and enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards
characterize the market for our products. The introduction of products embodying
new technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. As a result of the complexities inherent in
client/server and Web computing environments and the performance demanded by
customers for data management products, new products and product enhancements
can require long development and testing periods. As a result, significant
delays in the general availability of such new releases or significant problems
in the installation or implementation of such new releases could have a material
adverse effect on our business, operating results and financial condition. We
have experienced delays in the past in the release of new products and new
product enhancements. We may not be successful in:
o 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;
o Avoiding difficulties that could delay or prevent the successful
development, introduction or marketing of these products; or
o 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 or defects, sometimes called "bugs," particularly when first
introduced or when new versions or enhancements are released. From time to time,
we discover software errors or defects in certain of our new products after
their introduction. Despite our testing, current versions, new versions or
enhancements of our products may still have defects and errors after
commencement of commercial shipments. Product defects can put us at a
competitive disadvantage and can be costly and time consuming to correct.
WE MAY BECOME SUBJECT TO PRODUCT OR PROFESSIONAL SERVICES LIABILITY CLAIMS
A product or professional services liability claim, whether or not
successful, could damage our reputation and our business, operating results and
financial condition. Our license and service agreements with our customers
typically contain provisions designed to limit our exposure to potential product
or service liability claims. However, these contract provisions may not preclude
all potential claims. Product or professional services liability claims could
require us to spend significant time and money in litigation or to pay
significant damages.
WE COMPETE WITH MICROSOFT WHILE SIMULTANEOUSLY SUPPORTING MICROSOFT TECHNOLOGIES
We currently compete with Microsoft in the market for data management
products while simultaneously maintaining a working relationship with Microsoft.
Microsoft has a longer operating history, a larger installed base of customers
and substantially greater financial, distribution, marketing and technical
resources than the Company.
18
19
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 will likely have, and any similar
transactions may have, an adverse effect on our ability to compete effectively.
We believe that we must maintain a working relationship with Microsoft to
achieve success. Many of our customers use Microsoft-based operating platforms.
Thus it is critical to our success that our products be closely integrated with
Microsoft technologies. Notwithstanding our historical and current support of
Microsoft platforms, Microsoft may in the future promote technologies and
standards more directly competitive with or not compatible with our technology.
WE FACE SIGNIFICANT COMPETITION FROM OTHER COMPANIES
We encounter competition for our database products primarily from large,
public companies, including Microsoft, Oracle, Informix, Sybase, IBM and
Progress. In particular, Sybase's small memory footprint database software
product, Adaptive Server Anywhere, and Microsoft's product, SQL Server, directly
compete with our products. In addition, because there are relatively low
barriers to entry in the software market, we may encounter additional
competition from other established and emerging companies providing database
products based on existing, new or open source technologies.
Application service providers ("ASP") are beginning to enter our market
and could cause a change in revenue models from licensing of client/server and
Web-based applications to renting applications. Our competitors may be more
successful than we are in adopting these revenue models and capturing related
market share.
Most of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers. In addition,
some competitors have demonstrated a willingness to, or may willingly in the
future, incur substantial losses as a result of deeply discounted product
offerings or aggressive marketing campaigns. As a result, our competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of competitive products, than we can. There is also a
substantial risk that changes in licensing models or announcements of competing
products by competitors such as Microsoft, Oracle, Informix, Sybase, IBM,
Progress or others could result in the cancellation of customer orders in
anticipation of the introduction of such new licensing models or products. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs and which may limit our
ability to sell our products through particular distribution partners.
Accordingly, new competitors or alliances among, or consolidations of, current
and new competitors may emerge and rapidly gain significant market share in our
current or anticipated markets. We also expect that competition will increase as
a result of software industry consolidation. Increased competition is likely to
result in price reductions, fewer customer orders, reduced margins and loss of
market share, any of which could materially adversely affect our business. We
cannot be certain that we will be able to compete successfully against current
and future competitors or that the competitive pressures that we face will not
materially adversely affect our business, operating results and financial
condition.
WE ARE SUSCEPTIBLE TO A SHIFT IN THE MARKET FOR CLIENT/SERVER APPLICATIONS
TOWARD WEB-BASED APPLICATIONS
We have derived substantially all of our historical revenues from the use
of our products in client/server applications. We expect to rely on continued
market demand for client/server applications indefinitely. Although the
19
20
market for client/server applications has grown in recent years, we believe that
the rate of growth has slowed in recent quarters, that this trend will continue
or accelerate in future quarters, and that other application platforms are
emerging. In particular, we believe market demand is shifting from client/server
applications to Web-based applications. This shift is occurring before our
product line has achieved market acceptance for use in Web-based applications.
In addition, we cannot be certain that our existing client/server developers
will migrate to Web-based applications and continue to use our products or that
other developers of Web-based applications would select our data management
products. Further, this shift may result in a change in revenue models from
licensing of client/server and Web-based applications to renting of applications
from application service providers. A decrease in client/server application
sales coupled with an inability to derive revenues from the Web-based
application market could have a material adverse effect on our business,
operating results and financial condition.
WE 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 nine months
ended March 31, 2001, we derived 46% of our revenues outside North America. Our
international operations are generally subject to a number of risks. These risks
include:
o Costs of translating and localizing products for foreign languages;
o Foreign laws and business practices favoring local competition;
o Dependence on local channel partners;
o Compliance with multiple, conflicting and changing government laws and
regulations;
o Longer sales cycles;
o Greater difficulty or delay in collecting payments from customers;
o Difficulties in staffing and managing foreign operations;
o Foreign currency exchange rate fluctuations and the associated effects
on product demand and timing of payment;
o Increased tax rates in certain foreign countries;
o Difficulties with financial reporting in foreign countries;
o Quality control of certain development activities; and
o 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 that our international operations will continue to place
financial and administrative demands on us and our management, including
operational complexity associated with international facilities, administrative
burdens associated with managing relationships with foreign partners and
treasury functions to manage foreign currency risks and collections.
20
21
FLUCTUATIONS IN THE RELATIVE VALUE OF FOREIGN CURRENCIES CAN AFFECT OUR BUSINESS
To date, the majority of our transactions have been denominated in U.S.
dollars. The majority of our international operating expenses, substantially all
of our sales in Japan and certain other international sales have been
denominated in currencies other than the U.S. dollar. Therefore, our operating
results may be adversely affected by changes in the value of the U.S. dollar. To
the extent our international operations expand 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 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 that are essential to our
product development, marketing, service and support teams may limit the rate at
which we can generate revenue and develop new products or product enhancements.
This could have a material adverse effect on our business, operating results and
financial condition.
WE HAVE ANTI-TAKEOVER PROVISIONS
Our Restated Certificate of Incorporation and Bylaws contain certain
provisions that may have the effect of discouraging, delaying or preventing a
change in control or unsolicited acquisition proposals that a stockholder might
consider favorable, including provisions: authorizing the issuance of "blank
check" preferred stock; establishing advance notice requirements for stockholder
nominations for elections to the Board of Directors or for proposing matters
that can be acted upon at stockholders' meetings; eliminating the ability of
stockholders to act by written consent; requiring super-majority voting to
approve certain amendments to the Restated Certificate of Incorporation;
limiting the persons who may call special meetings of stockholders; and
providing for a Board of Directors with staggered, three-year terms. In
addition, certain provisions of Delaware law and 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 will be
distributed for each outstanding share of our common stock. The rights are
designed to assure that all of our stockholders receive fair and equal treatment
in the event of any proposed takeover and to guard against partial tender
offers, open market accumulations and other tactics designed to gain control
without paying all stockholders a fair price. The rights are not being
distributed in response to any specific effort to acquire us.
The rights become exercisable if a person or group hereafter acquires
15% or more of our common stock or announces a tender offer for 15% or more of
our common stock. Such events, or if we are acquired in a merger or other
business combination transaction after a person acquires 15% or more of our
common stock, would entitle the right holder to purchase, at an exercise price
of $18.00, a number of shares of common stock having a market value at that time
of twice the right's exercise price. Rights held by the acquiring person would
become void. The Board of Directors can choose to redeem the rights at one cent
per right at any time before an acquiring person hereafter acquires 15% or more
of the outstanding common stock. The Rights Plan may have the effect of
discouraging, delaying or preventing a change in control or unsolicited
acquisition proposals.
21
22
THE PRICE OF OUR STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO FLUCTUATE
SUBSTANTIALLY
Our common stock is traded on the Nasdaq National Market. The market
price of our common stock has been volatile and could fluctuate substantially
based on a variety of factors outside of our control, in addition to our
financial performance. Furthermore, stock prices for many companies, including
our own, fluctuate widely for reasons that may be unrelated to operating
results.
22
23
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
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Complaints were filed in November and December 1999 in the
U.S. District Court for the Western District of Texas against us and
certain of our officers and directors. The cases were consolidated in a
class action suit filed in January 2000. The class action complaint
alleged that we and certain officers and directors violated federal
securities laws, including Rule 10b-5 under the Securities Exchange Act
of 1934, by making false statements and failing to disclose material
information to artificially inflate the price of our common stock
during the class period of July 15, 1999 to October 21, 1999. We, along
with the other defendants, filed motions to dismiss the suit on
February 7, 2000. On October 19, 2000, the U.S. District Court entered
its order dismissing plaintiffs' claims against us and the other
defendants. The case was dismissed with prejudice.
ITEM 5. OTHER INFORMATION
In May 2001, Robert Arn left the Company. Mr. Arn had served
as Chief Technical Officer since January 2001 and had also served as
Vice President, Advanced Technology from November 1998 to December
2000. In March 2001, Joe Aragona resigned his position as a member of
our Board of Directors. Mr. Aragona, a general partner of Austin
Ventures, a venture capital firm, had served as a director since June
1995.
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
*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
(i) Report on Form 8-K filed on January 26, 2001
containing the Company's news release dated January
18, 2001 announcing that the Board of Directors
approved a six-month extension of the
share-repurchase program.
24
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: May 15, 2001 PERVASIVE SOFTWARE INC.
(Registrant)
By: /s/ James R. Offerdahl
------------------------------------------
James R. Offerdahl
Chief Operating Officer and Chief
Financial Officer (Duly Authorized
Officer and Principal Financial Officer)
25
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).