The Company's database software simplifies application 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 workstation to peer-to-peer and client/server environments. The Company's products currently operate on the Windows NT, NetWare, Windows 95, Windows 3.1, OS/2 Warp and DOS operating platforms. In addition, developers can embed the Company's databases into their applications, enabling organizations to implement client/server systems and automate critical business functions without the costs and complexities typically associated with enterprise-class client/server applications.

Comments
Investors will buy this stock at great peril. Of $46 million sought in the Offering, an unusually large amount for the size of the company, millions of dollars will go directly into the pockets of the founders and venture capitalists. Their shares, which will provide no funds at all to the Company, are brought together with shares that will, and both, in an undifferentiated mix, constitute this very sizable Offering.

Venture Capitalists Cash Out
The founders and venture capitalists holding stock are called "Selling Stockholders." As of today, 3 August 1997, it remains to be determined what percentage of the 11.1 million shares of the Selling Stockholders will find their way into the Offering. Assuming 4 million of these shares were part of the Offering at a share price of $6.50, then the Selling Stockholders will pocket $26 million leaving $20 million for the Company. It well may be that far less than $20 million will go to the Company, because the purpose in this round of financing apparently is not to collect funds needed for the operation or advancement of the Company; rather, it is to provide liquidity to the Selling Stockholders.

Consider the 4 companies—Austin Ventures, Triad Ventures Limited, Technologies for Information and Entertainment, and last, Technologies for Information and Publishing—which purchased 2.2 million shares of preferred stock in April, 1995 for $1.23 per share. If this stock gets sold in the Offering at $6.50 per share, they will have more than quintupled their investment in a little over 2 years.

Options May Cause Further Dilution
Furthermore, the Selling Stockholders hold options, which become immediately exercisable on 3.1 million shares. Some of these options have a strike price as low as $0.13. On a share price of $6.50 a person with 10,000 options would gain $63,700 minus some nominal premium. With such a windfall there is a good chance that more shares will enter the market at the earliest opportunity. The end result may be increased dilution of the stock. Later amendments to the prospectus will help clarify these matters.

What kind of company have the Selling Stockholders offered to the public that they should be so nicely compensated? Indeed, what precisely is the purpose of the Company going public at all? In the Use Of Proceeds section of the prospectus, this question is answered with 3 reasons—

• To provide liquidity for certain of the Company’s existing stockholders
• To facilitate future access by the Company to public equity markets
• To provide increased visibility of the Company in a marketplace where many of its competitors are publicly held companies

These reasons, though honest, are troubling, because none of them directly advances the Company into stronger market positions that would increase revenues and income. And only the first reason states a use for the proceeds, i.e., liquidity for the Selling Stockholders.

No Clearly Defined Use For The Funds
One might think that when $46 million is drawn from the checking accounts of the public, a fair percentage of the money would be used in specific, clearly identifiable ways that honor the public’s trust. Unfortunately, there is no such specificity. Those proceeds that eventually get to the Company will be used for "working capital and general corporate purposes." In other words, the Company currently has no clearly defined use for the funds.

Oink Oink
That, however, will not keep the Company away from the public trough for very long. IPOs by their nature create money-making machines, not through the products sold, but through the stock sold. The Company will have 70 million shares to sell over time, which even at $2 per share could rake in $140 million. The public is put on notice when it says in the prospectus—

The Company believes that the net proceeds from the offering, existing cash and cash equivalents and cash generated from operating activities will be adequate to meet its cash needs for at least the next 12 months. Thereafter, the Company may require additional funds to support its working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financing…." (Italics added.)

In 1997 on revenues of $24.5 million and income of $1.6 million, plus a $46 million IPO, one would hope that the Company can meet its cash needs for at least the next 12 months. This doubtless will not deter the Company from making private offerings, which months later will be seen by a decline in the stock price as the shares drift into the market diluting what is already there.

Hey, Everybody Else Is Doing It!
Equally troubling is its final reason for the IPO, namely, "…to provide increased visibility of the Company in a marketplace where many of its competitors are publicly held companies." This frivolous view corrupts the original intention of an IPO. The acquisition of needed capital given to worthy companies in order to hasten their growth is a fundamental purpose in appealing to public participation. Here it apparently is replaced by the desire to gain the image of credibility by being a publicly listed company regardless of underlying substance or its lack.

Gimme Your Money Then Go Away
Public participation will extend only to the infusion of capital. Although shareholders have one vote per share, it will give them very little control because of the way the Board of Directors and the Bylaws of the Certificate of Incorporation have been structured:

• …the Board of Directors will be divided into three classes of directors, with each class serving a staggered three-year term….
• …stockholders may amend the Bylaws…only with the affirmative vote of 75% of the Company’s capital stock.

The reason for these provisions is benign and finding favor in many corners of corporate America. They "are intended to enhance the likelihood of continuity and stability." But the prospectus acknowledges that they "also may have the effect of preventing changes in the management of the Company." We can be assured of that effect

Finally, to ensure that control will be kept among existing management, no matter how unwarranted it eventually may become, the Company, following the current trend, has subjected itself to Section 203 of the Delaware General Corporation Law, effectively denying any takeover of the Company by shareholders unless nearly impossible conditions are met.

All this adds up to the following conclusion: The Company will take your money; they will not cede control.

Our Market Is Thissssssssssss Big
Still, none of these concerns will matter if the Company achieves rapid growth. Has the Company defined a clear market segment for its products? Does it know how big the segment is? Has it explicated a strategy for capturing a share of the segment? Has the Company made a projection for the size of the segment that it expects to gain, and can it offer a strong justification for the claim?

Sadly, the Company does not win high marks in this area, either. It acknowledges itself to be "a leading provider of embedded database software," and it identifies its market segment:

The Company’s database engines, Btrieve and Scalable SQL,…enable…ISV (independent software vendors) and VAR (value added resellers) customers to develop, deploy and support packaged client/server applications that, in turn, provide robust functionality and low overall cost of ownership to their small and mid-sized customers.

However, the Company does not succeed in determining the size of this segment. The prospectus uses data from Business Research Group stating that the U.S. market for client/server software in 1996 was about $25 billion. This figure is highly suspect. At best, it blurs the difference between numerous segments of the market and consequently is not amenable to interpretation. At worst, it is simply wrong. If true, client/server software, by one estimation, would constitute 56% of the total U.S. packaged software market for 1996 of $45 billion. Also, $25 billion, which is an extraordinary size for a segment of the software market, should be reflected in the sales of those companies that are dominant players in the segment, such as Microsoft and Netscape. Such sales are not reflected.

Whatever the size, there is little light shed on the future potential of the Company, because client/server software isn’t precisely its market; the Company’s two main products are database engines. As given in the prospectus, Dataquest estimates the worldwide database market at $5.7 billion in 1996 with growth projected at $9.4 billion by 2000. Although more to the point, this segment also is too broad to be meaningful. The Company’s products apparently apply to the subsegment in which database applications are fitted into client/server systems, more specifically to small or medium-sized businesses, and more specifically still, to the ISVs and VARs servicing that niche, not to the businesses themselves. Finally, its market is circumscribed further by its strategy to focus on Microsoft platforms. On this more tightly defined niche the Company provides no data. Whether it’s a $50 million or a $5 billion market remains unknown. The Company cannot quantitatively model its own growth without knowing the size of the market.

Yesterday’s Leftovers
Without clarity on the market size there is little way in which a strategy for growth can be assessed. Strategically, the company intends to—

• Upgrade its technology
• Continue to leverage the indirect channel model
• Focus on Microsoft products
• Leverage its installed base
• Provide incentives to Netware users to upgrade to a recent version
• Continue its client-based seeding strategy
• Expand global distribution capabilities

These strategies, on the whole, continue the direction taken by the Company over the last three years. If its past history is to be believed, from revenues of $933,000 in ’94 to $24.5 million in ’97, the Company is doing extremely well without the public’s assistance. One then can be led to ask why an infusion of millions of dollars is needed for strategies that don’t carry the Company in a new direction.

And last, on the question of a projected increase in market share, the Company remains silent. We can conclude that there is no clear end to which the investors’ money will be applied.

Prediction
Many questions will be resolved in future amendments to the prospectus, e.g., initial stock price and the number of shares offered by the Selling Stockholders. In the meantime, it would be reasonable to assume roughly 7 million shares entering the market immediately. At least 13.4 million shares already have been issued to stockholders, and options add the potential for another 2.3 million shares 6 months after the Offering. A good percentage of this stock will drift into the market as people feel compelled to strike while the iron’s hot.

If the Company proceeds the way most other partially-formed companies do in their early stages of development, then we can expect that private offerings and their attendant dilution will continue unabated throughout the following years. The impetus for this is understandable: With products of moderate interest to the marketplace, and with a slow channel of distribution (ISVs and VARs), the Company will find itself accelerating its search for capital in the face of stiff competition from much larger players—Microsoft, Oracle, Informix, Sybase, and IBM—the majors of the industry whose combined sales reached $95 billion in 1996. The Company will survive only by latching onto a niche, which the others care to disregard.

Although sales growth has been excellent so far, its primary products probably don’t offer enough of a compelling story to buttress the stock through rising costs and dilutive effects. Annual growth will continue, but it likely will be harder and harder to tease out of the market. The Company has not made its case that Btrieve and Scalable SQL will deliver more than $50 million in revenues for a given year. Thus, R&D expenses will remain high as the Company seeks to hedge its position with the development of other products. New products in turn will keep their operational costs high as selling expenses grow. It’s a fair bet to expect losses for the foreseeable future while the Company grinds through significant amounts of money attempting to broaden its market. If the Company fails to sustain high growth, we can expect to find it clustered at the low end among other software companies of the same size and potential.