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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 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)
8834 CAPITAL OF TEXAS HIGHWAY, SUITE 300
AUSTIN, TEXAS 78759
(Address of principal executive offices)
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(512) 794-1719
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of each class)
-----------------------------------------
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of September 21, 1998 the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $64,110,549. Shares of
Common Stock held by each officer and director have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of September 21, 1998 there were 13,403,177 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's Annual Meeting of Stockholders to be held
on November 4, 1998.
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PERVASIVE SOFTWARE INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
JUNE 30, 1998
TABLE OF CONTENTS
Page
PART I..................................................................... 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of the Security Holders..... 18
Item 4a. Executive Officers of the Registrant........................ 18
PART II.................................................................... 20
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Consolidated Financial Data........................ 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.. 29
Item 8. Consolidated Financial Statements and Supplementary Data.... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 30
PART III................................................................... 31
Item 10. Directors and Executive Officers of the Registrant.......... 31
Item 11. Executive Compensation...................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 31
Item 13. Certain Relationships and Related Transactions.............. 31
PART IV.................................................................... 32
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 32
SIGNATURES................................................................. 34
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PART I
ITEM 1. BUSINESS
The statements contained in this Report on Form 10-K and in the Annual Report
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," "Special Note Regarding Forward-Looking Statements" and the factors
and risks discussed in other reports filed from time to time with the Securities
and Exchange Commission.
OVERVIEW
Pervasive Software Inc. ("Pervasive" or the "Company") is a leading 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(TM) 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(TM) 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's
comprehensive approach to selling, marketing and supporting its products is
designed to address the specific needs of its large indirect distribution
channel of ISVs that build packaged client/server applications and value added
resellers ("VARs") that sell and implement these applications to end users in Z-
DBA environments. The Company develops, markets, sells and supports its products
worldwide through its principal office in Austin, Texas and through offices in
Frankfurt, Paris, Brussels, Dublin, London, Hong Kong and Tokyo.
INDUSTRY BACKGROUND
Organizations are recognizing the importance of collecting, analyzing and
disseminating information to obtain competitive advantage. This information is
increasingly generated by sophisticated client/server applications and managed
by underlying database software that allow for decentralized decision making and
broader access to critical business information. The benefits of client/server
systems and computing trends such as improved hardware price performance, the
proliferation of application development tools and the emergence of the Internet
have resulted in significant growth in the market for packaged client/server
applications and underlying database software. According to the 1998 WORLDWIDE
SOFTWARE REVIEW AND FORECAST from International Data Corporation, the worldwide
market for packaged application software for Windows and NetWare operating
environments was approximately $13 billion in 1997, and is projected to grow
approximately 38% annually to over $34 billion in 2000.
Client/server computing environments are inherently complex, typically
involving a variety of hardware, operating systems, networking protocols,
applications and database software. It is likely that this complexity will
increase over time as organizations exploit new technologies, such as the
Internet, intranets, mobile and hand-held computing, and embedded and smart
devices. As a result of this complexity, organizations that develop, deploy and
support applications built on enterprise-scale database software typically
require large and costly information technology departments including highly
skilled database administrators.
Many businesses, especially small and mid-sized companies and departments of
large organizations, typically do not have the information technology budgets,
infrastructure, computing expertise or database administrators required to
deploy and support client/server applications built on enterprise-scale database
software. As a result, for these zero database administrator, or Z-DBA,
environments, the total cost of ownership of client/server computing has been
prohibitive. Business Research Group estimates that in 1997 only 22% of domestic
organizations with less
1
than 1,000 employees had deployed client/server applications while more than 90%
of larger organizations had deployed such applications. According to 1990 U.S.
Census data, in the U.S. alone there were over 6 million organizations with less
than 1,000 employees, not including departments of larger organizations whose
needs often mirror those of smaller organizations.
This relatively low penetration of client/server applications in Z-DBA
environments, combined with a growing market for packaged applications, has
created an opportunity for ISVs and VARs to develop, deploy and support packaged
client/server applications that meet their customers' robust functionality needs
and also run in Z-DBA environments. Only then can ISVs and VARs provide the
benefits of client/server computing, ease of implementation and low overall cost
of ownership that Z-DBA environments require.
To provide these benefits, ISVs and VARs require ultra-light embedded database
and information management software that facilitates the development, deployment
and support of packaged client/server applications. ISVs require database
software that enables them to develop their applications with minimal
investments in networking, communications, client/server, Internet or database
expertise. ISVs also require database software with minimal, or ultra-light,
system requirements to allow for optimum performance of the application in a
variety of hardware configurations. VARs require reliable, high-performance,
zero administration database software that they can quickly and cost-effectively
deploy and support. Low-end desktop database products do not meet the needs of
this market because they typically lack the scalability and functionality
required for developing full featured client/server applications and are often
sold through retail channels that provide minimal deployment or support to their
customers. Likewise, enterprise-scale database software fails to meet the needs
of this market because it typically either requires a large and costly
information technology department with one or more database administrators or
results in prohibitively high implementation and support costs. Accordingly,
there is a need for reliable, high-performance, zero administration, embeddable
database software that enables ISVs and VARs to cost-effectively develop, deploy
and support client/server and Internet-based applications targeted at
organizations seeking robust, low cost of ownership, packaged solutions for
their Z-DBA environments.
THE PERVASIVE SOLUTION
Pervasive is a leading provider of ultra-light, embedded database and
information management software designed to enable the cost-effective
development, deployment and support of packaged client/server applications
in Z-DBA environments. The Company's database engines, Pervasive.SQL, Btrieve(R)
and Scalable SQL(TM), are well suited for integration by software developers
into business-critical applications that are reliable and scalable and can be
rapidly deployed. These products enable the Company's ISV and VAR customers to
more profitably develop, deploy and support packaged client/server applications
that provide robust functionality and low overall cost of ownership in Z-DBA
environments. The Company's comprehensive approach to selling, marketing and
supporting its products is designed to address the specific needs of ISVs that
build packaged client/server applications and the VARs that sell and implement
these applications to end users in Z-DBA environments.
The Company's database and information management software simplifies
development by enabling developers to write applications that are capable of
running on multiple platforms and that can scale with little or no modification
from single user workstation to client/server and Internet environments. The
Company's products currently operate on the Windows NT, NetWare, Windows 98,
Windows 95, Windows 3.1, OS/2 and DOS operating platforms. In addition, the
software is designed to allow developers to exercise a high degree of control
over the database engine, enabling the tight integration, or embedding, of the
database into their applications. As a result, packaged applications built on
the Company's embedded databases enable organizations to implement client/server
systems and automate critical business functions without the costs and
complexities typically associated with enterprise-class client/server
applications and databases. In addition, the architecture of the Company's
products incorporates network and communications protocols that monitor and
manage the client/server connection. Further, the small memory footprint of the
Company's software requires significantly smaller investments in memory and
computing power than enterprise-class database software and permits portability
to a wide range of PC desktop and server systems. In the second quarter of
fiscal 1999, the Company will begin shipping Pervasive.SQL I*net Data
Server(TM), which is being designed to allow for Internet-enabling of existing
Pervasive.SQL applications with little or no code changes.
2
The Company's sales and marketing organization focuses exclusively on indirect
channels by targeting ISVs that build packaged client/server and Internet-based
applications and VARs that sell and deploy the applications. The Company's
sales, marketing, training and licensing programs are designed to encourage ISVs
to embed the Company's databases into their own software products and to
stimulate the sales of the applications by VARs to end users. The Company
believes its strong relationships with ISVs and VARs provide the Company with a
competitive advantage, market visibility, and multiple sales opportunities that
offer end users additional sources of service and technical support.
STRATEGY
Pervasive's strategy is to be the leading provider of embedded, low
maintenance database and information management products for packaged
client/server and Internet-based applications worldwide. The Company has
tailored its database and information management products to meet the specific
needs of ISVs and VARs that develop solutions for Z-DBA environments. Key
elements of the Company's strategy include:
Extend Technology Leadership into New Markets. The Company intends to extend
its leadership position in embedded databases for packaged client/server
applications. As the Company's customers extend the use of client/server
applications to Internet and intranet applications, the Company intends to
further enhance the functionality of its products to exploit these
opportunities. In addition, the Company is extending the technological
advantages of its small memory footprint, highly reliable, low-maintenance
databases for use in new and emerging markets, such as applications designed for
mobile and hand-held computing, and embedded and smart devices. The Company's
business development efforts are focusing on identifying, developing and
securing opportunities and relationships in these new markets.
Continue to Leverage and Grow Worldwide Indirect Channel. The Company
believes that its past investments in training and educating its channel
partners, its long-term relationships with ISVs and VARs and its success in
encouraging them to embed the Company's products into their applications has
created a competitive advantage in the marketplace. The Company's channel
approach is designed to further the integration of its products into
client/server and Internet-based applications and to stimulate sales of the
applications themselves. The Company intends to continue to leverage its large
investment in U.S. and European channel programs by replicating these successes
in other regions of the world, by expanding these channels with the recruitment
of new ISVs and VARs and by expanding the size of its global sales organization
to manage these channels. In addition, the Company intends to identify and
secure additional third-party information management products such as data
transformation, report writing, and data-mart/data warehousing for sale through
its channel.
Leverage Installed Base. A significant element of the Company's strategy is
to leverage its large installed base. The Company has a large installed base
that embeds its software in many different types of applications, especially
accounting and financial applications which are often the first client/server
applications purchased by organizations looking for Z-DBA solutions. Once an end
user standardizes on a functional application and embedded database, additional
applications can be more easily integrated. Accordingly, the Company intends to
leverage this strong position to further penetrate additional application
markets, such as health care, manufacturing, retail and others.
In addition, the Company derives revenues from user count upgrade sales and
version upgrade sales of the Company's products including Pervasive.SQL and
Btrieve operating on Microsoft Windows NT and Novell NetWare operating systems.
The Company intends to leverage this large, worldwide installed base of Windows
NT and NetWare users by marketing and selling upgrades to the most recent
versions and to higher user count versions of the Company's products.
Continue Client-Based "Seeding" Strategy. The Company's seeding strategy
stimulates high-volume deployment of its client-based shrink wrap products. This
strategy enables ISVs to develop client-based applications and to deploy them
broadly with minimal incremental cost. The Company then works with its ISVs and
VARs through a combination of promotional and lead referral programs to upgrade
these applications to client/server environments. The Company intends to
continue its seeding strategy in order to generate upgrade revenues by
3
enabling ISVs and VARs to sell higher margin server products as end users
upgrade from single user workstation to client/server environments.
PRODUCTS
The Company offers a range of database and information management products
that enable ISVs to combine the sophistication of client/server computing with
the low cost of ownership and convenience of Z-DBA packaged software. The
resulting applications enable organizations to automate business-critical
functions in their Z-DBA environments. The following table provides an overview
of these products and the platforms on which they operate:
- --------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION PLATFORMS
========================================================================================================
Pervasive.SQL High performance database engine that provides transactional Windows NT
and relational data access, easy installation and NetWare
maintenance, improved performance over previous versions, is Windows 98
compatible with older versions of Btrieve, and provides low Windows 95
cost of ownership for Z-DBA packaged applications. Windows 3.1
OS/2
DOS
- --------------------------------------------------------------------------------------------------------
Pervasive.SQL Single user version of Pervasive.SQL that includes all the Windows NT
Workstation features found in the server and allows migration from single Windows 98
user to client/server with little or no code changes. Windows 95
- --------------------------------------------------------------------------------------------------------
Pervasive.SQL SDK Software Developer's Kit that provides tight integration with Windows NT
leading development tools such as Microsoft's Visual Basic Windows 98
and Visual C++, Symantec's Visual Cafe, and Inprise's Delphi. Windows 95
Included is the Java class library, ActiveX controls, I*net
Data Server, ODBC connectivity, Pervasive.SQL Workstation,
and the Developer Resource Center.
- --------------------------------------------------------------------------------------------------------
Pervasive.SQL Allows for the Internet enabling of existing Pervasive.SQL Windows NT
I*net Data Server applications with little or no code changes so ISVs and VARs
can extend packaged applications to mobile workers.
- --------------------------------------------------------------------------------------------------------
Seagate Software Industry standard report writer that allows end users to Windows NT
Crystal Reports generate sophisticated reports on their Pervasive.SQL, Windows 98
Btrieve or Scalable SQL databases. Windows 95
- --------------------------------------------------------------------------------------------------------
Data Junction Easy to use data translation and migration utility that Windows NT
allows data from other data sources to be transferred into a Windows 98
Pervasive.SQL database. Windows 95
- --------------------------------------------------------------------------------------------------------
Btrieve Navigational, record-oriented database software targeted at Windows NT
high volume transaction applications. NetWare
Windows 95
Windows 3.1
OS/2
DOS
- --------------------------------------------------------------------------------------------------------
Scalable SQL Relational database software optimized for reporting, ad hoc Windows NT
query and decision support systems. NetWare
- --------------------------------------------------------------------------------------------------------
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
4
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.
Pervasive.SQL employs the Company's MicroKernel Database Engine allowing
applications to operate a transactional and a relational database engine at the
same time, a primary advantage of this architecture. Pervasive.SQL combines a
high performance record-oriented, transactional interface for high volume
applications with a SQL-oriented relational interface for flexible reporting, ad
hoc query and decision support. Pervasive.SQL delivers a relational and
transactional engine with multi-platform support, low maintenance operation
and application scalability from single user workstations to client/server and
Internet configurations.
Pervasive.SQL provides a number of advantages over other ultra-light database
management systems including support for larger storage needs (up to 64
gigabytes); smart components for simplified installation and configuration;
expanded programming language interfaces; a 32-bit file management utility to
expedite data import, export and recovery tasks; enhanced automatic tuning
designed to increase performance; and built-in recovery capabilities.
Pervasive.SQL offers a high degree of programming control through its record-
oriented, transactional interface and delivers low-maintenance operation through
self-tuning algorithms for index balancing, disk space allocation and cache
management.
The Company continues to offer its Btrieve and Scalable SQL database engines
as the Company's ISVs migrate their existing applications to the current
Pervasive.SQL product. This migration is expected to take place over an
extended period of time consistent with each ISV's own product development
cycles.
In addition to its database products, the Company offers software developer
kits, which include tools, documentation and licenses to enable programmers to
develop, test and deploy applications that embed the Company's databases. The
Company's new Pervasive.SQL Software Developer's Kit ("SDK") product, released
in September 1998, is designed to attract new ISVs to the Pervasive.SQL
development community. It provides tight integration with leading development
tools such as Microsoft's Visual Basic and Visual C++, Symantec's Visual Cafe,
and Inprise's Delphi to substantially reduce application development time.
In February 1998, the Company began marketing certain complementary third-
party products through its channel. Third-party products offered by the Company
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 migrate applications to run on the Pervasive.SQL database
engine.
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The Company has designed its Pervasive.SQL, Btrieve and Scalable SQL products
with a number of common characteristics as set forth in the table below:
- -----------------------------------------------------------------------------------------------------------------------
PRODUCT CHARACTERISTICS DESCRIPTION BENEFITS
=======================================================================================================================
Embedded Designed to be "hidden" inside an Allows broad deployment of complex
application, permitting development of a distributed applications into
tightly integrated application. environments with minimal or no
information technology infrastructure.
- -----------------------------------------------------------------------------------------------------------------------
Small Memory Footprint Internal memory requirements: Maximizes resources available to the
Pervasive. SQL 1.3 MB application and enables operation on a
Btrieve 350 KB wide range of hardware.
Scalable SQL 1.0 MB
- -----------------------------------------------------------------------------------------------------------------------
Low Maintenance Administrative functions, such as disk Requires low level of information
space allocation, memory and index technology support making complex
management are automated, which eliminates applications available in Z-DBA
the need for regular maintenance. environments.
- -----------------------------------------------------------------------------------------------------------------------
Reliability Pervasive.SQL, Btrieve and Scalable SQL Provides high degree of data integrity
are based on industry-proven technology. and stability to business applications.
- -----------------------------------------------------------------------------------------------------------------------
Configurability Pervasive.SQL, Btrieve and Scalable SQL Enables the storage and processing of
can access local and distributed data databases to be distributed throughout
simultaneously. the network.
- -----------------------------------------------------------------------------------------------------------------------
Application Scalability Applications can run in any configuration Offers cost savings for developers and
from single user workstation to supporting end users because a single application
hundreds of concurrent users in can be deployed in multiple
client/server and Internet environments. configurations without modification.
- -----------------------------------------------------------------------------------------------------------------------
Open Database Connectivity Industry standard interface enabling any Allows ODBC-compliant applications to
("ODBC") application to communicate with any access data stored in any Pervasive.SQL,
database. Btrieve or Scalable SQL database.
- -----------------------------------------------------------------------------------------------------------------------
Common MicroKernel Database Transactional and relational applications Allows developers to choose the
Engine can simultaneously share common databases. appropriate data access method:
transactional access for high volume and
relational access for reporting, queries
and decision support.
- -----------------------------------------------------------------------------------------------------------------------
6
SALES AND MARKETING
Pervasive's sales and marketing organization focuses on indirect channels by
targeting the ISVs that build packaged client/server applications and the VARs
that sell and implement the applications to end users in Z-DBA environments. The
Company's marketing group has primary responsibility for product direction and
has developed a number of programs utilized by the sales organization to support
the ISV and VAR channels, such as the OEM program for large ISVs and other
partner programs for VARs and small and mid-sized ISVs. These programs are
worldwide in scope and capture leads from a variety of additional marketing
programs including direct response marketing and advertising, joint marketing
and public relations.
The Company's OEM program focuses on recruiting large ISVs to embed the
Company's database and information management products on an OEM basis. Large
OEM customers include accounting and financial application vendors, such as
Great Plains Software, Solomon Software, Macola Software, Platinum Software and
AccPac International, and healthcare application vendors, such as HBOC and
Macess. In addition, the Company has numerous OEM customers in other packaged
application markets including document imaging, banking, sales force automation
and manufacturing. The OEM program is designed to generate mutually beneficial
strategic relationships between the Company and its ISVs and ongoing royalties
for the Company through licensing contracts, which are typically for three-year
terms. This program offers the Company's OEM partners volume discounts,
specialized technical support, training and consulting, enabling delivery of
tightly integrated solutions to end users. The Company's sales groups administer
education and training programs for the VARs that work directly with the OEMs.
These programs reduce the burden on the OEMs and allow the Company to access and
influence their VAR channel.
The Company's other sales and marketing programs recruit many VARs and small
and mid-sized ISVs to develop applications that are designed to be deployed with
shrink-wrap versions of the Company's database and information management
products. These programs further develop, support and train VARs and small and
mid-sized ISVs to facilitate the deployment of packaged applications. The sales
group monitors these customer's needs and, when volumes become sufficient,
recruits these ISVs into the OEM program.
The Company's sales and marketing organization utilizes a seeding strategy for
sales of its client-based shrink wrap products to stimulate high-volume
deployment of client- and client/server-based products. This strategy enables
ISVs to develop client-based applications and to deploy them broadly with
minimal incremental cost. The Company then works with its ISVs and VARs through
a combination of promotional and lead referral programs to upgrade these
applications to client/server environments. As a result, the Company generates
upgrade revenues while enabling ISVs and VARs to sell higher margin server
products to end users upgrading from single user workstation or peer-to-peer
networks to client/server environments.
The international sales group utilizes more than 60 distribution partners
covering more than 80 countries worldwide. The distribution partners implement
sales and marketing programs for a particular region, typically using the
Company's business alliance, distributor or master distributor programs. In
addition to managing these distributor relationships, the international sales
group recruits and supports ISVs and VARs with the same programs as the domestic
sales groups. The Company currently has international sales offices in
Frankfurt, Paris, Brussels, London, Hong Kong and Tokyo.
Although the Company focuses its sales and marketing efforts on ISVs and VARs,
its shrink-wrap products are often fulfilled through large software
distributors. For the year ended June 30, 1996 aggregate purchases by
Distributor A totaled $2.4 million, representing 18% of total revenues. For the
year ended June 30, 1997, aggregate purchases by Distributors A and B totaled
$2.5 million and $4.5 million, representing 10% and 18%, respectively. For the
year ended June 30, 1998 aggregate purchases by Distributor A totaled $3.7
million, representing 10% of total revenues. No other customers accounted for
more than 10% of the Company's revenues in fiscal 1996, 1997 or 1998.
In February 1998, the Company began marketing certain complementary third-
party products through its channel. Third-party products offered by the Company
include Crystal Reports, an industry standard report writer
7
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 migrate applications to run on the
Pervasive.SQL database engine. The Company markets these third-party products on
a stand alone basis or integrated with the Company's own products.
CUSTOMER SERVICE AND SUPPORT
The Company offers two levels of customer service. First level support
responds to customer inquiries via telephone, electronic mail and fax. Second
level support responds to higher level technical needs and supports the OEM
partner accounts. To provide high quality customer support, the Company has
established a specialized customer engineering group, consisting of both support
and engineering personnel. The Company believes that combining support and
engineering expertise in one group provides customers with more rapid resolution
of software support issues. The Company's customer service and support
organization also provides training and consulting services to its channel
partners.
Customer service is provided at no charge for the first 30 days after initial
purchase and at any time via electronic mail or the Company's web site. After
the 30 days, the Company offers contract and fee-based premium support programs.
Worldwide customer support is provided through the corporate offices in Austin,
Texas and through support and development centers in Dublin, Ireland and in
Tokyo, Japan. From the Company's inception in January 1994 through June 30,
1998, revenues from customer service and support were not significant.
RESEARCH AND DEVELOPMENT
The Company has made substantial investments in research and development
through both internal development and technology acquisition. Although the
Company expects that most enhancements to existing and new products will be
developed internally, from time to time the Company will evaluate externally
developed technologies for integration into its product lines.
The Company has invested the majority of its research and development activity
on developing feature extensions to its Pervasive.SQL product line. This
development consists primarily of adding new competitive product features,
expanding the number of computer and network operating systems on which the
products can be installed and maintaining the ability to run in multiple
operating system environments. Development activities continue to focus on
developing database software characterized by a small memory footprint, high-
performance and low-maintenance requirements, to better serve the ISVs, VARs and
their end users in Z-DBA environments.
In March 1998, the Company announced a joint development initiative with
Oracle Corporation to enable application developers to create and deploy a
single application for both small businesses and large corporations without
substantial code changes. The joint development effort should also allow
existing packaged application providers to migrate their solutions to Pervasive
and Oracle databases. Research and development expenses related to the joint
development initiative with Oracle were not material for the year ended June 30,
1998, however, these expenses are expected to increase in the future.
In June 1998, the Company announced a strategic licensing agreement to
integrate Synchrologic Inc.'s synchronization technology into a future release
of Pervasive.SQL. Once this integration is complete, future versions of
Pervasive.SQL should enable developers of mobile and occasionally connected
applications to deliver solutions featuring simple implementation and low
administration requirements.
The Company's research and development expenditures for fiscal 1996, 1997 and
1998 were $4.5 million, $6.0 million and $9.6 million, respectively. The Company
expects that it will continue to commit significant resources to research and
development in the future. To date, all cost related to development of the
Company's products have been expensed as incurred.
The market for the Company's products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing customer
8
requirements. The introduction of products incorporating new technologies and
the emergence of new industry standards could render existing products obsolete
and unmarketable. The Company's future success will depend in part upon its
ability to anticipate changes, enhance its current products, develop and
introduce new products that keep pace with technological advancements and
address the increasingly sophisticated needs of its customers. See "Risk Factors
That May Affect Future Results--Rapid Technological Change and New Products."
TECHNOLOGY
Pervasive.SQL, Btrieve and Scalable SQL are based on Pervasive's MicroKernel
Database Architecture and each employs the Company's MicroKernel Database Engine
(MKDE) allowing applications to operate a transactional and a relational
database engine at the same time, a primary advantage of this architecture.
Pervasive.SQL provides a number of advantages over other database management
systems including support for larger storage needs (up to 64 gigabytes); smart
components for simplified installation and configuration; expanded programming
language interfaces; a 32-bit file management utility to expedite data import,
export and recovery tasks; enhanced automatic tuning designed to increase
performance; and built-in recovery capabilities.
Applications based on Pervasive database engines can scale from single user
workstation to client/server environments with little or no code changes or
relinking. Network environments can be customized to minimize network traffic
and to balance resource loading by distributing database files and data
processing throughout multi-platform computer networks.
The configuration options for the Company's products include the following:
Single User Workstation. The single user workstation configuration provides
mobile and stand-alone operation. All access modules and MKDE components
reside locally, and data files are stored on the workstation's disk drive.
This configuration is used when the workstation is not connected to a network
or when data files do not need to be shared.
Client/Server. In a client/server configuration, database requests made by an
application are typically processed on a server. A small requester module on
the workstation routes requests from the application to a server database
engine. Since all data processing and data files reside on the server, this
configuration minimizes both network traffic and the use of workstation
resources.
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, Oracle, Informix, Sybase and IBM. Each of these
companies offers database software 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 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, significantly greater name recognition and a
larger installed base of customers than the Company. As a result, the 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 such as Microsoft or Oracle 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 in the Company's current or
anticipated markets. 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
9
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.
EMPLOYEES
As of June 30, 1998, the Company employed 220 full-time employees, including
87 in sales and marketing, 61 in research and development, 38 in technical
support and 34 in general and administrative. The Company believes that its
future success will depend in large part upon its continuing ability to attract
and retain highly skilled managerial, sales, marketing, customer 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 other qualified personnel in the future.
The Company is not subject to any collective bargaining agreement and it
believes that its relationships with its employees are good.
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-K, including the consolidated financial statements and the
related notes.
This Report on Form 10-K and the Annual Report contain 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 "Special Note Regarding Forward-Looking Statements" and 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 nine 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
June 30, 1998, the Company had an accumulated deficit of approximately $2.3
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 1999 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
10
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."
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 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 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 revenue in the third and fourth
quarters of 1998 related to initial sales of Pervasive.SQL, 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. As
Pervasive.SQL has only recently been released, there can be no assurance that
future sales will continue at initial rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview."
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.
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 September 30 and March 31. 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
11
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 fiscal 1996, 1997 and
1998, two distributors accounted for a combined 27%, 29% and 20% of revenues,
respectively. 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, Btrieve and Scalable SQL 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 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
12
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 48% of the Company's
revenues in fiscal 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 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.
13
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 Pervasive.SQL, Btrieve, and Scalable 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 in 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
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 220 employees at June 30, 1998, as compared to 168 at
June 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 continued 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
addition, the Company will move its headquarters to new facilities in Austin,
Texas in the second quarter of fiscal 1999. This move is expected to be a
disruptive, time consuming and expensive process. The failure of the Company to
manage its expansion effectively could have a material adverse effect on the
Company's business, operating results and financial condition. 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
14
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 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
15
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. 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 June 30, 1998 the executive officers, directors and their affiliates in
the aggregate beneficially owned approximately 60% 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.
16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in the "Letter to Stockholders" in the Annual Report
and this Report on Form 10-K under "Business," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere 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 Prospectus.
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 Prospectus to conform such statements to
actual results.
17
ITEM 2. PROPERTIES
The Company expects to move its headquarters from its current facility of
approximately 46,000 square feet to a new facility of approximately 70,000
square feet in October 1998. The new facility will provide additional space and
expansion options to accommodate future growth at rental rates per square foot
consistent with the current facility. This new facility is leased through
September 2008. The Company expects to incur approximately $2 million in
capital expenditures and increased rent expense in fiscal 1999 as a result of
the move. The Company currently leases other domestic offices in California,
Illinois and Tennessee, as well as international offices in Frankfurt, Paris,
Brussels, Dublin, London, Hong Kong and Tokyo.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year ended June 30, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the biographical summaries of the executive officers of
the Company as of September 28, 1998:
The executive officers and directors of the Company, and their ages as of
September 28, 1998, are as follows:
NAME AGE POSITION
- -------------------------- --- -------------------------------------------
Ron R. Harris............. 45 President, Chief Executive Officer and
Director
James R. Offerdahl........ 42 Chief Operating Officer and Chief Financial
Officer
Robert J. Adams, Jr....... 39 Vice President, Worldwide Marketing
Scott Bleakley............ 42 Vice President, Corporate Development
Casey G. A. Leaman........ 51 Vice President, Worldwide Sales
Marcus D. Marshall........ 46 Vice President, Customer Engineering
Ron R. Harris has served as President and Chief Executive Officer for the
Company since its inception and as a director since June 1995. He has also
served as the Company's acting Vice President of Research and Development since
May 1997. Prior to joining the Company, Mr. Harris served as a Vice President
of Citrix Systems, Inc., a developer of thin-client/server software, from
October 1990 to May 1993. Mr. Harris received his B.S. in Computer Science from
Vanderbilt University and an M.B.A. from the University of Texas at Austin.
James R. Offerdahl has served as the Company's Chief Operating Officer, Chief
Financial Officer and Secretary since September 1998. In addition, Mr. Offerdahl
served as Chief Financial Officer, Vice President, Finance and Administration
and Secretary from October 1996 to September 1998. From May 1993 to September
1996, Mr. Offerdahl served as Chief Financial Officer and Vice President,
Administration of Tivoli Systems Inc., a provider of enterprise systems
management solutions, acquired by IBM in March 1996. From April 1991 to May
1993, Mr. Offerdahl served as Vice President, Finance and Administration of
InterFlo Medical, a medical device company that was acquired by Baxter
Healthcare Corporation in April 1992. Mr. Offerdahl received a B.S. in
Accounting from Illinois State University and an M.B.A. from the University of
Texas at Austin.
Robert J. Adams, Jr. has served as the Company's Vice President, Worldwide
Marketing since April 1996. In addition, Mr. Adams served as Vice President,
Marketing and Inside Sales from August 1996 to December 1997.
18
Prior to joining the Company, Mr. Adams served as President and Chief Executive
Officer of Adams & Co., Inc., a consulting company, from October 1995 to April
1996. From January 1993 to October 1995, Mr. Adams served as President and Chief
Executive Officer of Business Matters, Inc., a software development company.
From March 1984 to January 1993, Mr. Adams served in various capacities at Lotus
Development Corporation, a software development company, most recently as
Director of the Database Products Group. Mr. Adams currently serves as a
director of PC Build, Inc., a privately held hardware manufacturing company. Mr.
Adams received a B.S. in Industrial Engineering from Purdue University and an
M.B.A. from Babson College.
Scott Bleakley has served as the Company's Vice President, Corporate
Development since April 1998. Prior to joining the Company, Mr. Bleakley served
as Vice President of Business Development of Tivoli Systems, Inc. Prior to
Tivoli, Mr. Bleakley served in a number of positions at IBM over a 6 year period
where he most recently served as the Sales Operations Executive for the RS/6000
product line in the U.S. and Canada. Mr. Bleakley received a B.A. in Economics
from Ohio Wesleyan University and an M.B.A. from Miami University.
Casey G. A. Leaman has served as the Company's Vice President, Worldwide Sales
since January 1998. Previously, Mr. Leaman served as Vice President,
International Sales from February 1997 to December 1997. Prior to joining the
Company, Mr. Leaman served as Vice President, International Sales of CenterLine
Software, Inc., a developer of compilers and software testing tools, from
October 1995 to October 1996. Prior to that time, Mr. Leaman served as a
director of Kanishka Systems PTE Ltd. (Singapore), a developer of document
management software, from March 1994 to May 1995 and as President and Chief
Operating Officer from January 1995 to May 1995. From August 1992 to January
1994, Mr. Leaman served as Regional Managing Director-Asia for a division of ASK
Computer Systems Inc., a software developer. From March 1989 through June 1992,
Mr. Leaman served in various roles at Lotus Development Corporation, including
Regional General Manager-Asia & Australia. Mr. Leaman received a B.S. in
Agricultural Business Management from Penn State University and an M.S. in
Agricultural Economics from Purdue University.
Marcus D. Marshall has served as the Company's Vice President, Customer
Engineering since May 1997. He served as the Company's Vice President, Research
and Development from November 1995 to May 1997 and as Vice President,
Engineering and Technical Support from June 1995 to November 1995. Prior to
joining the Company, Mr. Marshall served as Director of Engineering (U.S.) of
Computer Resources International, a developer of software engineering
environments, from February 1994 to June 1995. From November 1991 to February
1994, Mr. Marshall served as Vice President, Development of International
Software Systems, Inc., a developer of software engineering and simulation
software. Mr. Marshall received a B.S. and an M.S. in Electrical Engineering
from Rice University.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on the Nasdaq National Market
under the symbol PVSW. The Company completed its initial public offering and
commenced trading on September 26, 1997. The following table sets forth the high
and low closing sales prices of the Company's common stock from September 26,
1997 to June 30, 1998.
Fiscal 1998 High Low
----------------------- -------------- --------------
First Quarter* $11.63 $11.00
Second Quarter $11.50 $ 7.00
Third Quarter $14.63 $ 6.75
Fourth Quarter $14.50 $10.38
*Commencing September 26, 1997
As of August 31, 1998, there were approximately 130 stockholders of record
(which number does not include the number of stockholders whose shares are held
by a brokerage house or clearing agency, but does include such brokerage house
or clearing agency as one record holder). The company believes it has in excess
of 1,800 beneficial owners of its of its common stock.
The Company has never paid a cash dividend on its common stock and does not
intend to pay cash dividends on its common stock in the foreseeable future.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with ''Management's Discussion and Analysis of Financial Condition and Results
of Operations,'' which are included elsewhere in this Form 10-K. The
consolidated statements of operations data for the fiscal years ended June 30,
1996, 1997 and 1998 and the consolidated balance sheet data at June 30, 1997 and
1998 are derived from audited consolidated financial statements included
elsewhere in this Form 10-K. The consolidated statements of operations data for
the periods ended June 30, 1994 and 1995 and the consolidated balance sheet data
at June 30, 1994, 1995 and 1996 are derived from audited consolidated financial
statements not included herein.
PERIOD FROM
JANUARY 12,
1994
(INCEPTION) YEAR ENDED JUNE 30,
TO JUNE 30 -------------------------------------------------
1994 1995 1996 1997 1998
----------- ---------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statements of Operations Data:
Revenues................................................ $ 933 $ 8,601 $ 13,476 $ 24,481 $ 36,700
Costs and expenses:
Cost of revenues and technical support................. 424 1,997 2,605 3,310 5,292
Sales and marketing.................................... 216 3,864 6,998 10,034 15,438
Research and development............................... 2,303 2,399 4,477 5,996 9,556
General and administrative............................. 198 996 2,505 2,886 3,070
----------- ---------- --------- ---------- --------
Total costs and expenses................................ 3,141 9,256 16,585 22,226 33,356
----------- ---------- --------- ---------- --------
Operating income (loss)................................. (2,208) (655) (3,109) 2,255 3,344
Interest and other income.............................. 5 86 99 55 573
Provision for income taxes............................. -- (129) (170) (593) (1,101)
Minority interest in (earnings) loss of subsidiary..... -- 89 (25) (127) (94)
----------- ---------- --------- ---------- --------
Net income (loss)....................................... $ (2,203) $ (609) $ (3,205) $ 1,590 $ 2,722
=========== ========== ========= ========== ========
Basic earnings per share................................ $ 1.90 $ 0.26
========== ========
Diluted earnings per share.............................. $ 0.12 $ 0.18
========== ========
Shares used in computing basic earnings per share....... 835 10,468
========== ========
Shares used in computing diluted earnings per share..... 13,080 14,741
========== ========
JUNE 30,
-------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- ------- --------
(IN THOUSANDS)
Consolidated Balance Sheet Data:
Working capital......................................... $ 1,281 $ 5,740 $ 1,768 $ 1,560 $19,815
Total assets............................................ 2,937 8,480 7,471 10,445 32,643
Long-term liabilities, net of current portion........... 958 1,006 621 -- --
Redeemable convertible preferred stock.................. -- 4,026 4,026 4,026 --
Total stockholders' equity (deficit).................... 1,562 1,061 (2,083) (394) 23,979
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-K and in the Annual
Report 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," "Special Note Regarding Forward-Looking Statements" and the
factors and risks discussed in 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(TM) 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(TM)
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, 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 upon the
later of shipment or when all significant vendor obligations have been
satisfied. Revenues related to agreements involving nonrefundable fixed minimum
license fees are generally recognized upon delivery of the product master or
first copy if no significant 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(TM), 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.
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
22
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 revenue in the third and fourth quarters of 1998 related to initial
sales of Pervasive.SQL, 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. As Pervasive.SQL has only recently been
released, there can be no assurance that future sales 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:
YEAR ENDED JUNE 30,
--------------------------
1996 1997 1998
------- ------- -------
Revenues............................................................. 100% 100% 100%
Costs and expenses:
Cost of revenues and technical support.............................. 19 14 14
Sales and marketing................................................. 52 41 42
Research and development............................................ 33 24 26
General and administrative.......................................... 19 12 9
------- ------- -------
Total costs and expenses............................................. 123 91 91
------- ------- -------
Operating income..................................................... (23) 9 9
Interest and other income........................................... 1 -- 1
------- ------- -------
Income before income taxes and minority interest..................... (22) 9 10
Provision for income taxes.......................................... (2) (2) (3)
Minority interest in earnings of subsidiary......................... -- (1) --
------- ------- -------
Net income........................................................... (24)% 6% 7%
======= ======= ======
Revenues
The Company's revenues were $13.5 million, $24.5 million and $36.7 million
for the fiscal years ended June 30, 1996, 1997 and 1998, respectively, an
increase of 81% from fiscal 1996 to 1997, and 50% from fiscal 1997 to 1998. 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, introduction of Pervasive.SQL and
expansion of its worldwide sales organization. In addition, the increase in
revenues from 1996 to 1997 was also attributable to market acceptance of price
increases for most products instituted in June 1996. 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.
Licenses of the Company's software operating on Windows NT or other
Microsoft operating systems increased to approximately 45% of the Company's
revenues in fiscal 1998 from approximately 36% in the prior year. Licenses of
the Company's software operating on NetWare represented approximately 48% of
revenues in fiscal 1998, as compared to 58% in the prior year. 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
23
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 $5.7 million, $8.3 million and $14.2 million in
fiscal 1996, 1997 and 1998, representing 43%, 34% and 39% of total revenues,
respectively. The increase in dollar amount in each period was primarily
attributable to expansion of the Company's international sales organization,
particularly in Europe. The decrease in international revenues as a percentage
of revenues from fiscal 1996 to 1997 was primarily due to the increasing
contribution to revenues from the Company's domestic OEM licensing program and,
to a lesser extent, from the June 1996 price increase. 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" and Note 14 of Notes to Consolidated Financial Statements.
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.
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 $2.6 million, $3.3
million and $5.3 million in fiscal 1996, 1997 and 1998, representing 19%, 14%
and 14% of revenues, respectively. The increase in cost of revenues and
technical support in each period was attributable to increased sales volume and
increased technical support personnel in the U.S. and in Europe. 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, marketing programs and
promotional expenses. Sales and marketing expenses were $7.0 million, $10.0
million and $15.4 million in fiscal 1996, 1997 and 1998, representing 52%, 41%
and 42% of revenues, respectively. The increase in dollar amounts from fiscal
1996 to 1997 was primarily attributable to increased costs associated with
hiring additional sales and marketing personnel and, to a lesser extent,
increased infrastructure costs associated with foreign sales office expansion,
partially offset by a reduction of approximately $1.2 million in marketing costs
associated with the Company's shift away from advertising toward more direct
mail oriented lead generation activities. Sales and marketing expenses
decreased as a percentage of revenues in fiscal 1997 primarily because of
significant revenue growth that outpaced sales and marketing expenditures. The
increase in dollar amounts from fiscal 1997 to 1998 was primarily due to
increased costs associated with hiring additional sales and marketing personnel,
the initial promotion of Pervasive.SQL 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.
24
Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses were
$4.5 million, $6.0 million and $9.6 million in fiscal 1996, 1997 and 1998,
representing 33%, 24% and 26% of revenues, respectively. The increase in dollar
amount each period was primarily due to the increased hiring of, and contracting
with, additional research and development personnel. Research and development
expenses decreased as a percentage of revenues in fiscal 1997 primarily because
of 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.
In March 1998, the Company announced a joint development initiative with
Oracle Corporation to enable application developers to create and deploy a
single application for both small businesses and large corporations without
substantial code changes. The joint development effort should also allow
existing packaged application providers to migrate their solutions to Pervasive
and Oracle databases. Research and development expenses related to the joint
development initiative with Oracle were not material for the year ended June 30,
1998, however, these expenses are expected to increase in the future.
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 $2.5 million, $2.9 million and $3.1 million in
fiscal 1996, 1997 and 1998, representing 19%, 12% and 9% of revenues,
respectively. The increase in dollar amount in each period was primarily due to
the increased staffing and associated expenses necessary to manage and support
the Company's increased scale of operations, both domestically and
internationally. General and administrative expenses decreased as a percentage
of revenue in each period primarily because of significant revenue growth that
outpaced general and administrative expenditures. 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 worldwide
operations and as a result of an increase in expenses associated with being a
public company.
Provision for Income Taxes. Provision for income taxes was approximately
$170,000, $593,000 and $1.1 million in fiscal 1996, 1997 and 1998 respectively.
The Company's effective tax rates were 26% and 28% for fiscal 1997 and 1998,
respectfully. Tax expense in fiscal 1996, and an insignificant portion of the
tax expense in fiscal 1997 and 1998, represents withholding taxes paid or
accrued to be paid to foreign countries on royalties earned by the Company. The
increase in the Company's effective tax rate for fiscal year 1998 is primarily
due to increased foreign taxes associated with the Company's increased
operations overseas.
The Company believes that, based on a number of factors, it is more likely
than not that a substantial amount of the Company's deferred tax assets may not
be realized. These factors include a limited history of profitability, recent
increases in expense levels to support the Company's growth, the lack of
carryback capacity to realize the deferred tax assets and the fact that the
Company operates in an intensely competitive market subject to rapid change.
Accordingly, the Company has recorded a valuation allowance to the extent
deferred tax assets exceed the potential benefit from carryback of deferred
items to offset current or prior year taxable income. The Company expects its
effective tax rate will increase in the future once the Company's deferred tax
asset is fully realized. See Note 4 of Notes to Consolidated Financial
Statements.
25
QUARTERLY RESULTS FROM OPERATIONS
The following table sets forth selected unaudited quarterly information for
the Company's last eight fiscal quarters. The Company believes that this
information has been prepared on the same basis as the audited consolidated
financial statements appearing in Item 8 of this Form 10-K and believes that all
necessary adjustments (consisting only of normal recurring adjustments) have
been included in the amounts stated below and present fairly the results of such
periods when read in conjunction with the audited consolidated financial
statements and notes thereto.
QUARTER ENDED:
--------------------------------------------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
1996 1996 1997 1997 1997 1997 1998 1998
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ................... $ 5,090 $ 5,676 $ 6,418 $ 7,297 $ 7,671 $ 8,470 $ 9,744 $ 10,815
Costs and expenses:
Cost of revenues and
technical support ........ 734 744 861 971 1,164 1,230 1,277 1,621
Sales and marketing ...... 1,905 2,481 2,651 2,997 3,112 3,520 4,243 4,563
Research and development . 1,120 1,204 1,691 1,981 2,251 2,292 2,511 2,502
General and administrative 709 715 672 790 630 791 795 854
--------- --------- --------- --------- --------- --------- --------- ---------
Total costs and expenses ... 4,468 5,144 5,875 6,739 7,157 7,833 8,826 9,540
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income ........... 622 532 543 558 514 637 918 1,275
Interest and other income 17 25 16 (3) (19) 218 190 184
(expense), net
Provision for income taxes (164) (144) (143) (142) (146) (258) (277) (420)
Minority interest in
(earnings) loss of
subsidiary.............. (17) (23) (44) (43) (19) (22) (17) (36)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income ................. $ 458 $ 390 $ 372 $ 370 $ 330 $ 575 $ 814 $ 1,003
========= ========= ========= ========= ========= ========= ========= =========
Basic earnings per share ... $ 2.10 $ 0.48 $ 0.36 $ 0.29 $ 0.16 $ 0.04 $ 0.06 $ 0.08
Diluted earnings per share . $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.02 $ 0.04 $ 0.05 $ 0.07
AS A PERCENTAGE OF REVENUES:
Revenues.................... 100% 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Cost of revenues and
technical support....... 14 13 13 13 15 15 13 15
Sales and marketing....... 38 44 42 41 41 42 44 42
Research and development.. 22 21 26 27 29 27 26 23
General and administrative 14 13 11 11 8 9 8 8
--------- --------- --------- --------- --------- --------- --------- ---------
Total costs and expenses.... 88 91 92 92 93 93 91 88
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income............ 12 9 8 8 7 7 9 12
Interest and other income
(expense), net.......... -- -- -- -- -- 3 2 1
Provision for income taxes (3) (2) (2) (2) (2) (3) (3) (4)
Minority interest in
(earnings) loss of
subsidiary.............. -- -- -- (1) (1) -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income.................. 9% 7% 6% 5% 4% 7% 8% 9%
========= ========= ========= ========= ========= ========= ========= =========
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Such fluctuations may result in volatility in the price
of the Company's common stock. The Company establishes its expenditure levels
based on its expectations as to future revenue, and, if revenue levels are below
expectations, expenses can be disproportionately high. As a result, a drop in
near term demand for the Company's products could significantly affect both
revenues and profits in any quarter. In the future, the Company's operating
results may fluctuate for this reason or as a result of a number of other
factors, including increased expenses, timing of product releases, increased
competition, variations in the mix of sales, announcements of new products by
the Company or its competitors and capital spending patterns of the Company's
customers. As a result of these factors, there can be no assurance that the
Company will be able to maintain profitability on a quarterly basis. See "Risk
Factors That May Affect Future Results."
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 $17.4 million, after deducting the underwriter's discount and
expenses of the offering.
In fiscal 1996, cash used in operations was $1.5 million. Cash provided by
operations was $3.7 million and $3.0 million for fiscal 1997 and 1998,
respectively. The decrease in cash generated by operations from fiscal 1997 to
1998 resulted primarily from increases in accounts receivable consistent with
the increased sales volume during fiscal 1998.
During fiscal 1998, the Company invested $4.9 million in marketable
securities, consisting of various taxable and tax advantaged securities. In
addition, the Company purchased property and equipment totaling approximately
$840,000, $2.2 million and $2.4 million in fiscal 1996, 1997 and 1998,
respectively, primarily computer hardware and software for the Company's growing
employee base. The Company expects that its capital expenditures will increase
when the Company moves to larger facilities and as the Company's employee base
grows.
26
The Company will move its headquarters from its current facility of
approximately 46,000 square feet to a new facility of approximately 70,000
square feet in the second quarter of fiscal 1999. The new facility will provide
additional space and expansion options to accommodate future growth at rental
rates per square foot consistent with the current facility. The Company expects
to incur approximately $2 million in capital expenditures and an increase in
rent expense in fiscal 1999 as a result of the move.
On February 10, 1998, the Company acquired an additional 15% ownership
interest in its majority owned subsidiary, Pervasive Software Co., Ltd.
(formerly known as Btrieve Technologies Japan, Ltd.), by acquiring stock held by
minority shareholders for approximately $270,000 in cash. After the acquisition
the Company holds 80.5% of the outstanding stock of Pervasive Software Co., Ltd.
On February 13, 1998, the Company acquired Smithware, Inc. ("Smithware") a
developer of database development and reporting components for Pervasive
products. The Company acquired Smithware for approximately $390,000 consisting
of $170,000 in cash, 23,752 shares of common stock of the Company valued at
$160,000 and acquisition costs of $60,000, plus up to an additional $80,000 of
cash and 47,502 shares of stock payable upon achievement of certain milestones
in the future. In conjunction with the acquisition, the Company repaid
Smithware's outstanding debts of approximately $110,000.
At June 30, 1998 the Company had $19.8 million in working capital including
$15.6 million in cash and cash equivalents and $4.9 million in marketable
securities. The Company has a $4.0 million revolving line of credit with a bank,
but has at no time 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 lines.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the AICPA issued Statement of Position (SOP) 97-2,
Software Revenue Recognition, which changes the requirements for revenue
recognition. In March 1998, the AICPA issued SOP 98-4, Deferral of the Effective
Date of a Provision of SOP 97-2, "Software Revenue Recognition." The Company is
required to adopt SOP 97-2 and SOP 98-4 in fiscal 1999. The Company believes
that the adoption of the SOP will not have a material effect on its 1999
financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130). This statement establishes standards for reporting and display
of comprehensive income. The Company is required to adopt Statement 130 in
fiscal 1999. The Company believes that the adoption of Statement 130 will not
affect its results of operations or financial position, but will affect the
disclosure of comprehensive items in the future.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information (Statement 131). Statement 131
establishes the standards for the manner in which public enterprises are
required to report financial and descriptive information about their operating
segments. The Company is required to adopt Statement 131 in fiscal 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.
27
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.
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.
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. 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
28
revenues or delay in market acceptance, which could have a material adverse
effect on the Company's business, operating results and financial condition.
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.
ITEM 7A 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. In fiscal
1998 the U.S. Dollar strengthened against the Japanese Yen. Had the U.S. Dollar
to Japanese Yen rate remained unchanged throughout fiscal 1998, the result would
have been an increase in revenue and operating income of approximately $430,000
and $220,000, respectively. The impact of fluctuations in the relative value of
other currencies was not material for fiscal 1998.
The Company monitors its foreign currency exposure and, from time to time
will attempt to reduce its exposure through hedging. At June 30, 1998, the
Company had two offsetting foreign currency contracts outstanding with notional
amounts of approximately $224,000. Such contracts mature in March 1999. Gains
and losses on foreign currency hedging were not material to the consolidated
financial statements for years ending June 30, 1996, 1997 and 1998.
Pervasive is subject to interest rate risk on its cash and marketable
securities investments, however, this risk is limited as the Company's
investment policy requires the Company to invest in short-term securities and
maintain an average maturity of one year or less.
29
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8
are listed in Item 14(a)(1) and begin on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors is incorporated herein by reference
from the section entitled "Election of Directors" of the Company's definitive
Proxy Statement (the "Proxy Statement") to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934, as amended, for the registrants' Annual
Meeting of Stockholders to be Held on November 4, 1998. The Proxy Statement is
anticipated to be filed within 120 days after the end of the registrant's fiscal
year ended June 30, 1998. For information regarding executive officers of the
Company, see the Information appearing under the caption "Executive Officers of
the Registrant" in Part I, Item 4a of this Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation and Related
Information" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled "Stock
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are filed as
part of this Annual Report on Form 10-K as follows:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets at June 30, 1997 and 1998.................. F-3
Consolidated Statements of Operations for each of the
three years in the period ended June 30, 1998....................... F-4
Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit) for
each of the three years in the period ended June 30, 1998........... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1998............................. F-6
Notes to the Consolidated Financial Statements......................... F-7
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts is filed on page S-1 of
this Report on Form 10-K.
All other schedules have been omitted because they are not applicable, not
required under the instructions, or the information requested is set forth in
the consolidated financial statements or related notes thereto.
(a)(3) EXHIBITS
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 (now
known as Chase Bank of Texas, 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
32
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
21.1 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
*Incorporated by reference to the Company's Registration Statement on Form S-1
(File No. 333-32199).
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the fiscal year ended June 30, 1998.
(c) EXHIBITS
See (a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULE
See (a)(2) above.
33
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.
PERVASIVE SOFTWARE INC.
(Registrant)
By: /s/ RON R. HARRIS
-----------------------------------
Ron R. Harris
President and Chief Executive officer
September 28, 1998
---------------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ RON R. HARRIS President and Chief Executive September 28, 1998
- ------------------------- Officer
Ron R. Harris (Principal Executive Officer)
/s/ JAMES R. OFFERDAHL Chief Operating Officer and September 28, 1998
- ------------------------- Chief Financial Officer
James R. Offerdahl (Principal Financial and
Accounting Officer)
/s/ NANCY R. WOODWARD Director and Chairman September 28, 1998
- ------------------------- of the Board
Nancy R. Woodward
/s/ JOSEPH C. ARAGONA Director September 28, 1998
- -------------------------
Joseph C. Aragona
/s/ DAVID A. BOUCHER Director September 28, 1998
- -------------------------
David A. Boucher
/s/ DAVID R. BRADFORD Director September 28, 1998
- -------------------------
David R. Bradford
/s/ SHELBY H. CARTER, JR. Director September 28, 1998
- -------------------------
Shelby H. Carter, Jr.
PERVASIVE SOFTWARE INC.
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets at June 30, 1997 and 1998........................F-3
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1998...........................................F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit) for each of the three years in the
period ended June 30, 1998....... ..........................................F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1998...........................................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Pervasive Software Inc.
We have audited the accompanying consolidated balance sheets of Pervasive
Software Inc. and Subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of operations, changes in redeemable convertible
preferred stock and stockholders' equity (deficit) and cash flows for each of
the three years in the period ended June 30, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pervasive Software
Inc. and Subsidiaries at June 30, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Austin, Texas
July 17, 1998
F-2
PERVASIVE SOFTWARE INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
------------------------------
1997 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents, including interest bearing
investments of $3,075 in 1997 and $15,130 in 1998............ $ 4,058 $15,587
Marketable securities.......................................... - 4,943
Trade accounts receivable, net of allowance for doubtful
accounts of $100 in 1997 and $300 in 1998.................... 2,803 5,304
Inventory...................................................... 105 350
Deferred income taxes.......................................... 157 546
Prepaid expenses and other current assets...................... 555 1,370
---------- ----------
Total current assets.............................................. 7,678 28,100
Property and equipment, net....................................... 2,664 3,667
Other assets...................................................... 103 876
---------- ----------
Total assets...................................................... $10,445 $32,643
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable......................................... $ 1,052 $ 1,382
Accrued payroll and payroll related costs...................... 517 966
Other accrued expenses......................................... 2,273 2,710
Deferred revenue............................................... 1,267 1,929
Income taxes payable........................................... 301 1,140
Deferred royalty payable - Novell.............................. 708 158
---------- ----------
Total current liabilities......................................... 6,118 8,285
Minority interest in subsidiary................................... 695 379
Redeemable convertible preferred stock............................ 4,026 -
Stockholders' equity (deficit):
Preferred stock................................................ 3,915 -
Common stock, $0.001 par value;
Authorized - 75,000,000 shares;
issued and outstanding - 1,391,611 shares in 1997 and
13,347,724 shares in 1998.................................... 205 26,270
Accumulated deficit........................................ (4,514) (2,291)
---------- ----------
Total stockholders' equity (deficit).............................. (394) 23,979
---------- ----------
Total liabilities and stockholders' equity........................ $10,445 $32,643
========== ==========
See accompanying notes.
F-3
PERVASIVE SOFTWARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
----------------------------------------------------------
1996 1997 1998
---------- --------- ----------
Revenues................................... $13,476 $24,481 $36,700
Costs and expenses:
Cost of revenues and technical support.... 2,605 3,310 5,292
Sales and marketing....................... 6,998 10,034 15,438
Research and development.................. 4,477 5,996 9,556
General and administrative................ 2,505 2,886 3,070
---------- --------- ----------
Total costs and expenses................... 16,585 22,226 33,356
---------- --------- ----------
Operating income (loss).................... (3,109) 2,255 3,344
Interest and other income................. 99 55 573
---------- --------- ----------
Income (loss) before income taxes and
minority interest......................... (3,010) 2,310 3,917
Provision for income taxes................ (170) (593) (1,101)
Minority interest in earnings of
subsidiary, net of income taxes......... (25) (127) (94)
---------- --------- ----------
Net income (loss).......................... $(3,205) $ 1,590 $ 2,722
========== ========= ==========
Basic earnings per share................... $1.90 $0.26
========= ==========
Diluted earnings per share................. $0.12 $0.18
========= ==========
See accompanying notes.
F-4
PERVASIVE SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------
REDEEMABLE TOTAL
CONVERTIBLE STOCKHOLDERS'
PREFERRED PREFERRED ACCUMULATED EQUITY
STOCK STOCK COMMON STOCK DEFICIT (DEFICIT)
------------ ---------- -------------- ------------- --------------
Balances at June 30, 1995........ $ 4,026 $ 3,915 $ - $(2,854) $ 1,061
Foreign currency translation
adjustment.................... - - - 61 61
Net loss....................... - - - (3,205) (3,205)
------------ ---------- -------------- ------------- --------------
Balances at June 30, 1996........ 4,026 3,915 - (5,998) (2,083)
Issuance of 1,389,611 shares of
common stock pursuant to the
exercise of stock options..... - - 205 - 205
Foreign currency translation
adjustment.................... - - - (106) (106)
Net income..................... - - - 1,590 1,590
------------ ---------- -------------- ------------- --------------
Balances at June 30, 1997........ 4,026 3,915 205 (4,514) (394)
Conversion of 9,713,132 shares
of preferred stock............ (4,026) (3,915) 7,941 - 4,026
Issuance of 2,000,000 shares of
common stock, net of issuance
costs of $1,168............... - - 17,432 - 17,432
Issuance of 23,752 shares of
common stock in purchase of a
business...................... - - 162 - 162
Acquisition of 74,012 treasury
shares, cumulative treasury
shares of 74,012 and cost of
$10 at June 30, 1998......... - - (10) - (10)
Issuance of 249,699 shares of
common stock pursuant to the
exercise of stock options..... - - 170 - 170
Issuance of 43,542 shares of
common stock pursuant to the
employee stock purchase plan.. - - 370 - 370
Foreign currency translation
adjustment, cumulative amount
of $(586) at June 30, 1998.... - - - (499) (499)
Net income..................... - - - 2,722 2,722
------------ ---------- -------------- ------------- --------------
Balances at June 30, 1998........ $ - $ - $26,270 $(2,291) $23,979
============ ========== ============== ============= ==============
See accompanying notes.
F-5
PERVASIVE SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
CASH FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(3,205) $ 1,590 $ 2,722
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................. 575 749 1,442
Non cash compensation expense pursuant to employee
stock purchase plan....................................... - - 469
Deferred income tax benefit................................ - (157) (782)
Other non cash items....................................... 132 6 110
Change in current assets and liabilities:
Increase in current assets................................ (1,663) (16) (3,602)
Increase in accounts payable and accrued liabilities...... 878 2,085 2,017
Increase (decrease) in deferred revenue................... 1,738 (525) 662
----------------- ----------------- -----------------
Net cash provided by (used in) operating activities.......... (1,545) 3,732 3,038
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (843) (2,161) (2,421)
Purchase of marketable securities........................... - - (23,393)
Proceeds from sale of marketable securities................. - - 18,450
Purchase of business, net of cash acquired.................. - - (333)
Purchase of minority interest............................... - - (266)
Increase in other assets.................................... - - (60)
----------------- ----------------- -----------------
Net cash used in investing activities........................ (843) (2,161) (8,023)
CASH FROM FINANCING ACTIVITIES
Proceeds from issuance of stock, net of issuance costs...... - - 17,432
Purchase of treasury stock.................................. - - (10)
Payment of royalty to Novell................................ - (370) (570)
Proceeds from exercise of stock options..................... - 205 170
----------------- ----------------- -----------------
Net cash provided by (used in) financing activities.......... - (165) 17,022
Effect of exchange rate changes on cash and cash
equivalents................................................. 31 (87) (508)
----------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents............. (2,357) 1,319 11,529
Cash and cash equivalents at beginning of year............... 5,096 2,739 4,058
----------------- ----------------- -----------------
Cash and cash equivalents at end of year..................... $ 2,739 $ 4,058 $ 15,587
================= ================= =================
See accompanying notes.
F-6
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. THE COMPANY
Pervasive Software Inc. (the Company), is a leading provider of ultra light
embedded database software designed to enable the cost-effective development,
deployment and support of low-maintenance packaged client/server applications.
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
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 $17.4 million, after deducting the underwriters' discount and other
costs of the offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company licenses its software through OEM license agreements with
independent software vendors (ISVs) and through shrink-wrap software licenses,
sold through ISVs, value-added resellers (VARs) and distributors. Revenues are
generally recognized from the license of software upon the later of shipment or
when all significant vendor obligations have been satisfied. Revenues related
to OEM license agreements involving nonrefundable fixed minimum license fees are
generally recognized upon delivery of the product master or first copy if no
significant vendor obligations remain. Per copy royalties related to OEM
license agreements in excess of a fixed minimum amount are recognized as revenue
when such amounts are reported to the Company. The Company generally provides
telephone support to customers and end users in the 30 days immediately
following the sale at no additional charge and at a minimal cost per call. When
material, the Company accrues the cost of providing this support. Revenue from
training is recognized when the related services are performed. 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,
rotation and price protection rights as well as uncollectible accounts based on
experience. Customer advances and billed amounts due from customers in excess
of revenue recognized are recorded as deferred revenue.
Software Development Costs
Software development costs incurred by the Company in connection with its
long-term development projects are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed (Statement 86). The Company
has not capitalized any internal costs through June 30, 1998 related to its
software development activities.
Advertising Costs
The Company expenses costs of producing advertising and sales related
collateral materials as incurred. Other production costs associated with direct
mail programs, placement costs associated with magazine or other printed media
and all direct costs associated with trade shows and other sales related events
are expensed when the related direct mail is sent, advertising space is used or
the event is held. These expenses in 1996, 1997 and 1998 were approximately
$1,900,000, $700,000 and $700,000, respectively.
F-7
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (Statement 109), deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and net operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
Cash and Cash Equivalents
Cash and cash equivalents include cash, certificates of deposit, and
securities with original maturities less than ninety days when purchased.
Marketable Securities
Marketable securities have been classified as available-for-sale and such
designation is reevaluated as of each balance sheet date. While the Company's
intent is to hold debt securities to maturity, they are classified as available-
for-sale because the sale of such securities may be required prior to maturity.
Realized gains and losses are recorded on the specific identification method.
Unrealized gains and losses have been insignificant for all periods presented.
All of the Company's marketable securities mature on or before June 30, 1999.
All are stated at cost, which approximates fair market value as of June 30, 1997
and 1998, and consist of the following (in thousands):
JUNE 30,
--------------------------
1997 1998
---------- ---------
Marketable securities....................
U.S. Government agencies............... $ - $3,907
Municipal bonds........................ - 1,036
---------- ---------
Total.................................... $ - $4,943
========== =========
Inventory
Inventories, consisting primarily of finished goods, are stated at the lower
of cost (first in, first out) or market. The Company utilizes the services of
fulfillment houses to manufacture, store, and ship inventory and process
returned product. The Company does not take title to product in inventory until
the point at which the product is packaged by the fulfillment houses and is
available for shipping.
Property and Equipment
Property and equipment are stated at cost and are being depreciated over
their estimated useful lives (2 to 5 years) using the straight-line method.
Leasehold improvements are amortized over the life of the lease or the estimated
useful life, whichever is shorter.
F-8
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Transactions
For the Company's foreign subsidiaries, the functional currency has been
determined to be the local currency, and therefore, assets and liabilities are
translated at year end exchange rates, and income statement items are translated
at average exchange rates prevailing during the year. Such translation
adjustments are recorded in aggregate as a component of stockholders' equity.
Gains and losses from foreign currency denominated transactions are included in
other income (expense) and were not material in 1996, 1997 or 1998.
Financial instruments, principally forward pricing contracts, are used by the
Company in the management of its foreign currency exposures. Gains and losses
on foreign currency transaction hedges are recognized in income when realized
and offset the foreign exchange gains and losses on the underlying transactions.
The Company does not hold or issue derivative financial instruments for trading
purposes.
Fair Value of Financial Instruments
Cash equivalents, accounts receivable, accounts payable, accrued liabilities
and other liabilities are stated at cost which approximates fair value due to
the short-term maturity of these instruments.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist of short-term investments, including marketable
securities, and trade receivables. The Company's short-term investments, which
are included in cash and cash equivalents and in marketable securities for
reporting purposes, are placed with high credit quality financial institutions
and issuers. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Estimated credit
losses are provided for in the financial statements and historically have been
within management's expectations.
For the year ended June 30, 1996, Distributor A accounted for $2,390,000 of
the Company's total revenues. For the year ended June 30, 1997, Distributors A
and B accounted for $2,530,000 and $4,530,000, respectively, of the Company's
total revenues. For the year ended June 30, 1998, Distributor A accounted for
$3,700,000 of the Company's total revenues. No other customers accounted for
more than 10% of the Company's revenues during the years ended June 30, 1996,
1997 or 1998.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Stock-Based Compensation
The Company has adopted the provisions of Financial Accounting Standards
Statement No. 123, Accounting for Stock Based Compensation and has elected to
account for its employee stock options under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees.
F-9
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 (Statement 128),
Earnings Per Share. Statement 128 replaced "primary" and "fully diluted"
earnings per share with "basic" and "diluted" earnings per share. All weighted
average share and earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
Recently Issued Accounting Standards
In October 1997, the AICPA issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, which changes the requirements for revenue recognition. In
March 1998, the AICPA issued SOP 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2, "Software Revenue Recognition." The Company is required
to adopt SOP 97-2 and SOP 98-4 during the year ended June 30, 1999. The Company
believes that the adoption of the SOP will not have a material effect on its
1999 financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130). This statement establishes standards for reporting and display
of comprehensive income. The Company is required to adopt Statement 130 in
fiscal 1999. The Company believes that the adoption of Statement 130 will not
affect its results of operations or financial position, but will affect the
disclosure of comprehensive items in the future.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information (Statement 131). Statement 131
establishes the standards for the manner in which public enterprises are
required to report financial and descriptive information about their operating
segments. The Company is required to adopt Statement 131 in fiscal 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.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
JUNE 30,
----------------------
1997 1998
---------- ---------
Computer equipment and purchased software................................... $ 2,881 $ 4,640
Office equipment, furniture and fixtures.................................... 932 1,461
Leasehold improvements...................................................... 213 407
---------- ---------
4,026 6,508
Less accumulated depreciation and amortization.............................. (1,362) (2,841)
---------- ---------
$ 2,664 $ 3,667
========== =========
F-10
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The components of income (loss) before income taxes and minority interest
consist of the following (in thousands):
YEAR ENDED JUNE 30,
------------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
Domestic income (loss)...................................... $(3,083) $1,384 $2,820
Foreign income.............................................. 73 926 1,097
----------------- ----------------- -----------------
Income (loss) before taxes and minority interest............ $(3,010) $2,310 $3,917
================= ================= =================
Details of the income tax provision consist of the following (in thousands):
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
Income tax provision:
Current:
Federal................................................... $ (61) $ 185 $ 942
Foreign................................................... 160 551 850
State..................................................... - 14 91
----------------- ----------------- -----------------
Total current.............................................. 99 750 1,883
----------------- ----------------- -----------------
Deferred:
Federal.................................................... 71 (157) (782)
----------------- ----------------- -----------------
Total deferred.............................................. 71 (157) (782)
----------------- ----------------- -----------------
$ 170 $ 593 $1,101
================= ================= =================
The foreign taxes include withholdings on royalties from foreign countries.
The Company's provision for income taxes differs from the expected provision
(benefit) amount computed by applying the statutory federal income tax rate of
34% to income (loss) before income taxes and minority interest for 1996, 1997
and 1998 as a result of the following (in thousands):
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
Computed at statutory rate of 34%........................... $(1,023) $ 785 $1,332
Effect of foreign operations................................ 159 236 266
State income taxes, net of federal benefit.................. - 14 60
Tax exempt interest......................................... - - (63)
Research tax credit......................................... - - (40)
Future benefits not currently recognized.................... 1,023 (428) (462)
Other....................................................... 11 (14) 8
----------------- ----------------- -----------------
$ 170 $ 593 $1,101
================= ================= =================
F-11
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The components of deferred income taxes at June 30, 1997 and 1998 are as
follows (in thousands):
JUNE 30,
----------------------
1997 1998
--------- ---------
Deferred tax assets:
Purchased technology, net........................................ $ 799 $ 747
Tax credit carryforwards......................................... 308 -
Accrued expenses not deductible for tax purposes................. 352 789
Revenue deferred for financial purposes.......................... 296 483
Other............................................................ 100 156
--------- ---------
Total deferred tax assets.................................... 1,855 2,175
Valuation allowance for deferred tax assets......................... (1,698) (1,236)
--------- ---------
Net deferred tax assets...................................... $ 157 $ 939
========= =========
Management believes that, based on a number of factors, it is more likely
than not that a substantial amount of the Company's deferred tax assets may not
be realized. These factors include the lack of a significant history of profits,
recent increases in expense levels to support the Company's growth, the lack of
carryback capacity to realize the deferred tax asset in full and the fact that
the Company operates in an intensely competitive market subject to rapid change.
Accordingly, the Company has recorded a valuation allowance to the extent
deferred tax assets exceed the potential benefit from carryback of deferred
items to offset current or prior year taxable income. During the year ended June
30, 1998, the valuation allowance was reduced by approximately $462,000
primarily due to additional carryback potential generated in the current year.
5. EMPLOYEE BENEFITS
The Company's employees are offered health and dental coverage under a
partially self-funded plan in which the Company purchases specific stop-loss
insurance coverage at $30,000 per year, per employee. The Company has also
purchased an aggregate stop-loss insurance coverage to limit its maximum annual
exposure to claims funded. Based on the policy census at June 30, 1998, such
maximum annual exposure for the policy year ending December 31, 1998 is
approximately $490,000. The Company pays a fixed fee per covered individual for
administrative costs of the administrator and the cost of the stop-loss
insurance purchased on the Company's behalf. The Company contributes 100%
toward the cost to insure each employee and 75% toward the cost to insure
dependents for which coverage is requested by the employee. Expenses for the
partially self-funded plan including premiums and claims funded for the years
ended June 30, 1996, 1997 and 1998 were approximately $255,000, $311,000 and
$508,000, respectively.
The Company has a 401(k) retirement plan which is available to all domestic,
full-time employees. The Company's expenses related to the plan were not
significant in the years ended June 30, 1996, 1997 or 1998.
6. COMMON STOCK AND STOCK OPTIONS
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors in July 1997 and approved by the
stockholders in August 1997. A total of 500,000 shares of common stock has been
reserved for issuance under the 1997 Purchase Plan. The 1997 Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code and has
consecutive and overlapping twenty-four month offering periods that begin every
six months. The 1997 Purchase Plan commenced after the completion of the
initial public offering. Each twenty-four month offering period includes four
six-month purchase periods, during which payroll deductions are accumulated and
at the end of which, shares of common stock are purchased with a participant's
accumulated payroll deductions. The 1997 Purchase Plan permits eligible
employees to purchase common stock through payroll deductions of up to 250
shares per purchase period, 500 shares in the initial purchase period ended
April 30, 1998. The price of common stock to be purchased under the 1997
Purchase Plan is 85% of the lower of the fair market value of the common stock
at the beginning of the offering period or at the end of the relevant purchase
period. In fiscal
F-12
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
1998, 43,542 shares of common stock at a price of $8.50 per share were issued
under the 1997 Purchase Plan. Shares available for purchase under the 1997
Purchase Plan were 456,458 at June 30, 1998. The Company recorded non-cash
compensation expense totaling approximately $469,000 during 1998 related to
employee withholdings under the 1997 Purchase Plan.
The Company's 1997 Stock Incentive Plan (the 1997 Plan) was adopted by the
Board of Directors on May 22, 1997, and approved by the stockholders on August
12, 1997, as the successor to the First Amended and Restated 1994 Incentive Plan
(the 1994 Plan). Outstanding options under the 1994 Plan have been incorporated
into the 1997 Plan and no further options grants will be made under the 1994
Plan. The incorporated options will continue to be governed by their existing
terms, unless the Plan Administrator elects to extend one or more features of
the 1997 Plan to those options.
Incentive stock options may be granted to employees of the Company entitling
them to purchase shares of common stock for a maximum of ten years (five years
in the case of options granted to a person possessing more than 10% of the
combined voting power of the Company as of the date of grant). The exercise
price for incentive stock options may not be less than fair market value of the
common stock on the date of the grant (110% of fair market value in the case of
options granted to a person possessing more than 10% of the combined voting
power of the Company). Nonqualified stock options may be granted to employees,
officers, directors, independent contractors and consultants of the Company.
The exercise price for nonqualified stock options may not be less than 85% of
the fair market value of the common stock on the date of the grant (110% of fair
market value in the case of options granted to a person possessing more than 10%
of the combined voting power of the Company). The Company may also award
Restricted Stock and Stock Appreciation Rights subject to provisions in the 1997
Plan.
The vesting period for stock options is generally a four-year period. Options
granted prior to July 1, 1997 are exercisable by the holder prior to vesting,
however, unvested shares are subject to repurchase by the Company at the
exercise price should the employee be terminated or leave the Company prior to
vesting in such options.
A summary of changes in common stock options during the year ended June 30,
1996, 1997 and 1998 is as follows:
WEIGHTED
AVERAGE
RANGE OF EXERCISE EXERCISE
SHARES PRICES PRICE
-------------------- ----------------------- --------------------
Options outstanding, June 30, 1995.................. 2,255,066 $0.10 - 0.13 $0.10
Granted............................................ 644,510 $0.13 $0.13
Exercised.......................................... - - -
Surrendered........................................ (108,600) $0.10 - 0.13 $0.11
-------------------- ----------------------- --------------------
Options outstanding, June 30, 1996.................. 2,790,976 $0.10 - 0.13 $0.11
Granted............................................ 1,094,018 $0.13 - 4.60 $1.17
Exercised.......................................... (1,389,611) $0.10 - 2.00 $0.15
Surrendered........................................ (235,686) $0.10 - 2.00 $0.15
-------------------- ----------------------- --------------------
Options outstanding, June 30, 1997.................. 2,259,697 $0.10 - 4.60 $0.59
Granted............................................ 726,400 $6.00 - 13.88 $8.09
Exercised.......................................... (249,699) $0.10 - 3.60 $0.72
Surrendered........................................ (177,599) $0.10 - 10.63 $1.86
-------------------- ----------------------- --------------------
Options outstanding, June 30, 1998.................. 2,558,799 $0.10 - 13.88 $1.68
==================== ======================= ====================
F-13
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
The following is additional information relating to options outstanding at
June 30, 1998:
OPTIONS OUTSTANDING
-----------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE
REMAINING
RANGE OF WEIGHTED AVERAGE CONTRACTUAL LIFE
EXERCISE PRICE NUMBER OF OPTIONS EXERCISE PRICE OF OPTIONS
-------------------------- ------------------------- ----------------------- -----------------------
$0.10 to $0.30 1,545,922 $ 0.11 6.93
$0.60 to $0.90 121,438 $ 0.74 8.52
$2.00 to $4.60 212,638 $ 3.22 8.86
$6.00 to $8.37 416,400 $ 7.51 9.28
$10.63 to $13.88 262,401 $11.94 9.74
-------------------------- ------------------------- ----------------------- -----------------------
$0.10 to $13.88 2,558,799 $0.11 to $11.94 7.60
========================== ========================= ======================= =======================
Of the options exercised, 480,486 shares remain unvested at June 30, 1998 and
may be repurchased by the Company at the option's exercise price and recorded as
treasury stock should vesting requirements not be fulfilled. At June 30, 1998,
3,184,012 shares of common stock were reserved for exercise of stock options. As
part of the Company's 1997 Plan, the number of shares of common stock available
for issuance automatically increases on July 1 each calendar year beginning July
1, 1998 and ending July 1, 2000, by an amount equal to five percent (5%) of the
shares of common stock and common stock equivalents outstanding on the trading
day immediately preceding July 1, with a maximum annual increase of 1,000,000
shares.
Pro forma compensation expense regarding net income and earnings per share is
required by Statement 123, which also requires the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to June 30, 1995, under the fair value method prescribed by Statement 123.
During fiscal 1998, the fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model and during fiscal
1997 and 1996, the fair value of each option grant was estimated using the
minimum value model, with the following weighted average assumptions:
EMPLOYEE STOCK
EMPLOYEE STOCK OPTIONS PURCHASE PLAN
--------------------------------------------------------- ----------------------------
1996 1997 1998 1998
--------------- --------------- --------------- ----------------------------
Risk free interest rate...... 5.99% 6.49% 5.80% 5.46%
Dividend yield............... 0.00% 0.00% 0.00% 0.00%
Volatility factor............ - - 0.582 0.582
Weighted average expected
life of options (in years).. 4 4 4 0.5
F-14
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the options' vesting periods and stock purchased under
the 1997 Employee Stock Purchase Plan is amortized over the six month purchase
period. The Company's pro forma information follows (in thousands, except per
share amounts):
1996 1997 1998
------------------- ---------------- ----------------
Pro forma stock based compensation expense.................... $ 2 $ 12 $ 387
Pro forma net income (loss)................................... $ (3,207) $1,578 $2,335
Pro forma basic earnings per share............................ $ - $ 1.89 $ 0.22
Pro forma diluted earnings per share.......................... $ - $ 0.12 $ 0.16
Weighted average grant date fair value........................ $ 0.03 $ 0.22 $ 4.39
Because Statement 123 is applicable only to options granted subsequent to
June 30, 1995, the pro forma effect will not be fully reflected until fiscal
1999.
7. PREFERRED STOCK
On September 25, 1997, the effective date of the Company's initial public
offering, all of the outstanding preferred stock was converted into 9,713,132
shares of common stock. In addition, the Company's Certificate of Incorporation
was amended authorizing the Board of Directors to issue preferred stock ("new
preferred stock") in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
At June 30, 1998, the Company had not issued any new preferred stock.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
YEAR ENDED JUNE 30,
---------------------------
1997 1998
----------- -----------
Numerator:
Net income.................................................. $ 1,590 $ 2,722
=========== ===========
Denominator:
Denominator for basic earnings per share - weighted average 835 10,468
shares.......................................................
Effect of dilutive securities:
Convertible preferred shares............................... 9,713 2,315
Employee stock options..................................... 2,532 1,958
----------- -----------
Potentially dilutive common shares......................... 12,245 4,273
----------- -----------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions.. 13,080 14,741
=========== ===========
Basic earnings per share......................................... $ 1.90 $ 0.26
=========== ===========
Diluted earnings per share....................................... $ 0.12 $ 0.18
=========== ===========
The Company's historical capital structure prior to its initial public
offering is not indicative of its prospective structure due to the automatic
conversion of all shares of convertible preferred stock into common stock
concurrent with the closing of the Company's anticipated initial public
offering. Accordingly, historical net income (loss) per share for the year
ended June 30, 1996 is not considered meaningful and has not been presented
herein.
F-15
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INVESTMENT IN PERVASIVE SOFTWARE CO., LTD.
In May 1995, the Company acquired a 65.5% controlling interest in a newly
formed entity, Pervasive Software Co., Ltd. ("Pervasive Japan", formerly known
as Btrieve Technologies Japan, Ltd.). Pervasive Japan was formed for the
purpose of localization, support and marketing in Japan of the Company's ultra
light embedded database products for packaged client/server applications.
On February 10, 1998, the Company acquired an additional 15% ownership
interest in Pervasive Japan by acquiring stock held by minority shareholders for
approximately $266,000 in cash, which approximated its proportionate share of
book value. The acquisition was accounted for under the purchase method. After
the acquisition, the Company holds 80.5% of the outstanding stock of Pervasive
Japan. Pervasive Japan's net assets before elimination of intercompany balances
at June 30, 1997 and 1998 were approximately $2,000,000, and $1,900,000
respectively.
Pervasive Japan had entered into various operating agreements with certain
of its former minority shareholders in which these certain shareholders provide
localization, pre- and post-sales support, management and marketing services.
Expenses related to these agreements during the period in which the related
entity was a minority shareholder were $590,000, $616,000 and $326,000 in 1996,
1997 and 1998, respectively. One of the former minority shareholders is also a
distributor for Pervasive Japan. Sales to this distributor during the period in
which the related entity was a minority shareholder were approximately
$2,390,000, $2,530,000 and $1,800,000 in 1996, 1997 and 1998, respectively.
Receivables from this former shareholder were $530,000 as of June 30, 1997.
10. 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. The Company acquired Smithware for approximately $390,000 consisting
of $170,000 in cash, 23,752 shares of common stock of the Company valued at
$160,000 and acquisition costs of $60,000, plus up to an additional $80,000 of
cash and 47,502 shares of stock payable upon achievement of certain milestones
in the future. In conjunction with the acquisition, the Company repaid
Smithware's outstanding debts of approximately $110,000. The acquisition has
been accounted for under the purchase method and, accordingly, the operating
results of Smithware have been included in the consolidated financial statements
from the date of the acquisition. The acquisition did not have a material
effect on operations. The excess of purchase price over the fair value of the
net assets ($390,000) was recorded as goodwill, is being amortized over a ten
year period and will be increased by any consideration paid upon achievement of
certain milestones in the future. As of June 30, 1998, accumulated amortization
of goodwill was approximately $13,000.
11. LINE OF CREDIT
At June 30, 1998, the Company has a $4,000,000 revolving line of credit
with a bank, but at no time has borrowed under such line. Borrowings under the
line of credit would be collateralized by substantially all accounts receivable,
inventory and equipment and bears interest at the bank's prime lending rate or
LIBOR rate at the Company's option. The revolving line of credit will expire on
September 30, 1999.
12. COMMITMENTS AND CONTINGENCIES
The Company leases its office space and is obligated for its proportionate
share of utilities and other defined operating expenses of the building. Office
rent expense for the year ended June 30, 1996, 1997 and 1998, was approximately
$451,000, $573,000 and $924,000, respectively.
F-16
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company will move its headquarters from its current facility of
approximately 46,000 square feet to a new facility of approximately 70,000
square feet in the second quarter of fiscal 1999. The new facility will provide
additional space and expansion options to accommodate future growth at rental
rates per square foot consistent with the current facility. Future minimum
lease payments at June 30, 1998, under the operating leases for office space,
net of minimum sublease rent payments, are as follows (in thousands):
1999............................. $1,148
2000............................. 1,329
2001............................. 1,299
2002............................. 1,421
2003............................. 1,466
----------
$6,663
==========
The leases for office space include options to renew the leases for
additional five year periods and are partially collateralized by letters of
credit totaling $301,000 to and in favor of the landlords.
13. FOREIGN CURRENCY SWAP AGREEMENT
The Company has entered into foreign currency swap contracts to minimize
foreign exchange exposure related to yen-denominated intercompany transactions.
At June 30, 1998, the Company had two offsetting foreign currency contracts
outstanding with notional amounts of approximately $224,000 and maturing in
March 1999. Gains and losses on currency swaps were not material to the
consolidated financial statements as of June 30, 1996, 1997 and 1998.
14. SEGMENTS OF BUSINESS AND GEOGRAPHIC AREA INFORMATION
The Company is engaged in the design, development and marketing of ultra
light embedded database products for packaged client/server applications. The
Company considers its business activities to constitute a single segment of
business.
A summary of the Company's operations by geographic area follows:
YEAR ENDED JUNE 30,
--------------------------------------------------------------
1996 1997 1998
----------------- ----------------- -------------------
Revenue:
Domestic.................................................. $ 7,747 $16,135 $22,476
Europe (all originating from U.S.)........................ 2,716 4,693 9,293
Japan..................................................... 2,425 2,863 3,877
Rest of World (all originating from U.S.)................. 588 790 1,054
----------------- ----------------- -------------------
Total...................................................... $13,476 $24,481 $36,700
================= ================= ===================
Operating income (loss)(A):
United States............................................. $(2,983) $ 361 $(1,279)
Europe (inclusive of revenue originating from U.S.)....... (202) 1,131 3,765
Japan..................................................... 76 763 858
----------------- ----------------- -------------------
Total...................................................... $(3,109) $ 2,255 $ 3,344
================= ================= ===================
Identifiable assets:
United States............................................ $ 5,646 $ 6,644 $29,253
Europe................................................... 392 810 620
Japan.................................................... 1,433 2,991 2,770
----------------- ----------------- -------------------
Total..................................................... $ 7,471 $10,445 $32,643
================= ================= ===================
(A) Operating income for Europe does not include any allocation of marketing,
product development, technical support and administrative costs incurred in
the United States.
F-17
PERVASIVE SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STATEMENTS OF CASH FLOWS
The increase in current assets reflected in the statements of cash flows is
comprised of the following (in thousands):
YEAR ENDED JUNE 30,
--------------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
(Increase) in trade accounts receivable..................... $(1,485) $(259) $(2,550)
Decrease (increase) in inventory............................ 123 (19) (234)
Decrease (increase) in prepaid expenses and other........... (301) 262 (818)
----------------- ----------------- -----------------
$(1,663) $ (16) $(3,602)
================= ================= =================
The increase in accounts payable and accrued liabilities reflected in the
statements of cash flows is comprised of the following (in thousands):
YEAR ENDED JUNE 30,
------------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
Increase (decrease) in trade accounts payable .............. $(126) $ 342 $ 289
Increase in accrued payroll and payroll related costs....... 213 57 362
Increase in income taxes refundable/payable................. 311 301 906
Increase in accrued expenses ............................... 480 1,385 460
---------------- ----------------- -----------------
$ 878 $2,085 $2,017
================ ================= =================
Supplemental disclosures:
Interest paid during the year.............................. $ - $ - $ -
================ ================= =================
Income taxes paid (refunded) during the year:
Domestic................................................. $(316) $ 376 $ 426
================ ================= =================
Foreign.................................................. $ 159 $ - $ 271
================ ================= =================
F-18
SCHEDULE II
PERVASIVE SOFTWARE INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
ADDITIONS DEDUCTIONS
BALANCE AT CHARGED TO WRITE-OFFS BALANCE
BEGINNING COSTS AND CHARGED TO AT END OF
DESCRIPTION OF PERIOD EXPENSES ALLOWANCE PERIOD
----------------- ------------------- -------------------- ---------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended June 30, 1996 $ - $ - $ - $ -
Year ended June 30, 1997 - 100 - 100
Year ended June 30, 1998 100 200 - 300
VALUATION ALLOWANCE FOR DEFERRED TAX
ASSET:
Year ended June 30, 1996 1,079 1,047 - 2,126
Year ended June 30, 1997 2,126 - 428 1,698
Year ended June 30, 1998 1,698 - 462 1,236
S-1
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
21.1 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
*Incorporated by reference to the Company's Registration Statement on Form S-1
(File No. 333-32199).