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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




Form 10-Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




| |  | For the quarterly period ended March 31, 2002.
| |  | ----------------------------------------------




| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




|
|

| |  | For the transition period from   to
| |  | -----------------------------------




Commission File Number 000-30293





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EMBARCADERO TECHNOLOGIES, INC.


(Exact Name of Registrant as Specified in Its Charter)





Delaware

68-0310015(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification No.)





425 MARKET STREET, SUITE 425


SAN FRANCISCO, CA 94105


(415) 834-3131


(Address of
principal executive offices)





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Indicate by
check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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. x Yes  ̈ No





The number of shares outstanding of the Registrants Common Stock as of March 31, 2002 was 27,224,397.


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EMBARCADERO TECHNOLOGIES, INC.





INDEX





PART I. FINANCIAL INFORMATION

PageITEM 1.

FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001

3Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

10ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

24PART II. OTHER INFORMATIONITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

25SIGNATURE

26




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PART I





FINANCIAL INFORMATION





ITE
M 1.    FINANCIAL STATEMENTS





EMBARCADERO TECHNOLOGIES, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except par value)


(unaudited)





March 31, 2002


December 31,     2001ASSETSCurrent Assets:Cash and cash equivalents

$
24,174


$
23,371Short-term investments


15,195



16,532Trade accounts receivable, net


7,281



6,221Prepaid expenses and other current assets


1,632



1,711Total current assets


48,282



47,835Property and equipment, net


4,160



3,766Goodwill and other intangible assets, net


18,795



19,334Deferred income taxes


4,914



4,914Other assets


456



313Total assets

$
76,607


$
76,162LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable and accrued liabilities

$
3,293


$
5,264Deferred revenue


9,723



9,099Deferred income taxes


2,317



2,317Total current liabilities


15,333



16,680Stockholders Equity:Common stock, $0.001 par value


27



27Treasury stock


(1,781
)


(1,781
)Additional paid-in capital


74,704



74,220Accumulated other comprehensive income


92



116Deferred stock-based compensation


(1,852
)


(2,531
)Accumulated deficit


(9,916
)


(10,569
)Total stockholders equity


61,274



59,482Total liabilities and stockholders equity

$
76,607


$
76,162





The accompanying notes are an integral part of these condensed consolidated financial
statements.







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EMBARCADERO TECHNOLOGIES, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)


(unaudited)





Three Months Ended March 31,2002



2001Revenues:License

$
7,096


$
9,148Maintenance


5,406



4,543Total revenues


12,502



13,691Cost of revenues:License:License, other


129



173Amortization of acquired technology


269



202Total license


398



375Maintenance:Maintenance, other


625



655Non-cash stock-based compensation


1



4Total maintenance


626



659Total cost of revenues


1,024



1,034Gross profit


11,478



12,657Operating expenses:Research and development:Research and development, other


3,717



3,411Non-cash stock-based compensation


13



45Total research and development


3,730



3,456Sales and marketing:Sales and marketing, other


4,625



4,822Non-cash stock-based compensation


250



492Total sales and marketing


4,875



5,314General and administrative:General and administrative, other


924



949Non-cash stock-based compensation


417



844Total general and administrative


1,341



1,793Amortization of goodwill and other intangible assets


385



1,405Total operating expenses


10,331



11,968Income from operations


1,147



689Interest income


176



364Other expenses






(160
)Expenses related to proposed public offering






(350
)Income before provision for income taxes and share in loss of joint venture


1,323



543Provision for income taxes


(370
)


(786
)Income (loss) before share in loss of joint venture


953



(243
)Share in loss of joint venture, net


(300
)


Net income (loss)

$
653


$
(243
)Net income (loss) per share:Basic

$
0.02


$
(0.01
)Diluted

$
0.02


$
(0.01
)Weighted average shares used in per share calculation:Basic


27,132



27,013Diluted


29,639



27,013








The accompanying notes are an integral part of
these condensed consolidated financial statements.







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EMBARCADERO TECHNOLOGIES, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)





Three Months Ended March 31,2002


2001Cash Flows from Operating Activities:Net income (loss)

$
653


$
(243
)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization


481



329Provision for doubtful accounts


143



(59
)Amortization of goodwill and other intangible assets


699



1,607Amortization of deferred stock-based compensation


679



1,385Share in loss of joint venture


417



Changes in assets and liabilities:Trade accounts receivable


(1,203
)


660Prepaid expenses and other current assets


19



1,747Deferred income taxes, net






(179
)Accounts payable and accrued liabilities


29



(187
)Deferred revenue


624



581Other assets






(100
)Net cash provided by operating activities


2,541



5,541Cash Flows from Investing Activities:Sales and maturities of investments


1,337



Purchase of property and equipment


(875
)


(594
)Technology acquired and developed


(160
)


(2,177
)Deferred payment in connection with acquisition of subsidiary


(2,000
)


Investment in joint venture


(500
)


Net cash used in investing activities


(2,198
)


(2,771
)Cash Flows from Financing Activities:Proceeds from exercise of stock options


484



261Net cash provided by financing activities


484



261Effect of exchange rate changes on cash


(24
)


Net increase in cash and cash equivalents


803



3,031Cash and cash equivalents at beginning of period


23,371



34,745Cash and cash equivalents at end of period

$
24,174


$
37,776








The accompanying notes are an integral part of
these condensed consolidated financial statements.







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EMBARCADERO TECHNOLOGIES, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





NOTE 1THE COMPANY AND BASIS OF PRESENTATION





Embarcadero Technologies, Inc. (with
its subsidiaries, collectively referred to as the Company) was incorporated in California on July 23, 1993 and reincorporated in Delaware on February 15, 2000. The Company provides software products that enable organizations to
effectively manage their database infrastructure. The Company is headquartered in San Francisco, California and has international operations in Toronto, Canada and Maidenhead, United Kingdom.





The Company markets its software and related maintenance services directly through telesales and field sales organizations in the United States, Canada and the United Kingdom, and
indirectly through independent distributors in Australia, Latin America and Japan.





The accompanying unaudited condensed
consolidated financial statements reflect all adjustments, which, in the opinion of the Company, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are normal recurring adjustments. These
financial statements have been prepared in accordance with generally accepted accounting principles related to interim financial statements and the applicable rules of the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete financial statements. The balance sheet at December 31, 2001 was derived from audited financial statements, but it does not include all disclosures
required by generally accepted accounting principles.





The financial statements and related disclosures have been prepared with
the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited
financial statements and the related notes thereto contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2001, filed on March 26, 2002.





Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2002 or for any
future period. Further, the preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the
estimates could result in a change to the estimates and impact future operating results.




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EMBARCADERO TECHNOLOGIES, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(unaudited)







NOTE 2COMPREHENSIVE INCOME (LOSS)





Other comprehensive income (loss) consists of foreign currency translation adjustments during the period. For the three months ended March 31, 2002, other comprehensive loss amounted to
approximately $24,000 and accumulated other comprehensive income was $92,000 at March 31, 2002. No such amounts existed as of March 31, 2001.





The components of comprehensive income (loss) are as follows (in thousands):





Three Months Ended March 31,2002


2001(unaudited)Net income (loss)

$
653


$
(243
)Foreign currency translation adjustments


(24
)


Comprehensive income (loss)

$
629


$
(243
)





NOTE 3EARNINGS PER SHARE





Basic net income (loss) per common share excludes the effect of potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution of securities by including stock options in the weighted average number of common shares outstanding for a period, if dilutive. For the three
months ended March 31, 2002, based on net income of $653,000 and weighted average share count of 27.1 million, net income per share, basic, was $0.02. For the same period, the inclusion of 2.5 million dilutive common stock options increased the
weighted average share count to 29.6 million but did not change net income per share, as net income per share, diluted, was $0.02. Due to a loss in 2001, there was no effect of dilutive common stock option shares on earnings per share.





For the three months ended March 31, 2002 and 2001, anti-dilutive common stock options of 1.8 million and 3.9 million, respectively, were not
included in the net income (loss) per share calculation.





NOTE 4CHANGES IN ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE
ASSETS





In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 provides specific criteria for determining which intangible assets acquired in a business combination should be reported separately from goodwill. SFAS No. 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB No. 17, Intangible Assets. It changes the accounting for goodwill from an amortization method to an impairment only approach. This pronouncement also requires that
intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets
to be Disposed of.







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EMBARCADERO TECHNOLOGIES, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(unaudited)







The Company adopted the provisions of SFAS No. 141 and SFAS No. 142 effective
January 1, 2002. As of January 1, 2002, $2.1 million of intangible assets related to workforce, net of accumulated amortization of $1.4 million, were reclassified to goodwill. As a result, approximately $10.4 million of remaining goodwill, net
will no longer be amortized but will be tested annually for impairment in accordance with the requirements of SFAS No. 142. The Company performed its annual impairment test in January 2002, showing no impairment of goodwill. As such, there was no
write down of the goodwill balance.





As required by SFAS No. 142, the results for the prior years quarter have not been
restated. A reconciliation of reported net income (loss) and earnings (loss) per share as if SFAS No. 142 had been adopted is presented as follows:





Three Months Ended March 31,2002

2001(unaudited)Net income (loss)

$
653

$
(243
)Goodwill amortization





1,020Adjusted net income

$
653

$
777Basic and diluted earnings (loss) per share

$
0.02

$
(0.01
)Goodwill amortization





0.03Adjusted diluted earnings per share

$
0.02

$
0.02





NOTE 5SEGMENT REPORTING





Operating segments are components of an enterprise about which separate financial information is available and is regularly evaluated by management, namely the chief decision maker of an
organization, in order to make operating and resource allocation decisions. By this definition, Embarcadero operates in one reportable operating segment, the design, development, marketing, sales and support of software for database and application
development and management.





The Companys geographic sales data is based on customer location as defined by the following
regions: North America, United Kingdom and Other. The Companys wholly owned subsidiary, Embarcadero Europe Ltd., transacts all sales in Europe, the Middle East and Africa. Various distributors handle sales in regions outside Europe, the Middle
East, Africa and North America.




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EMBARCADERO TECHNOLOGIES, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(unaudited)







Revenue and long-lived assets by geographic region are as follows (in thousands):





Three Months Ended March 31,Geographic Region

2002

2001(unaudited)Revenues:North America

$
9,849

$
11,636United Kingdom


1,019


1,111Other


1,634


944Total

$
12,502

$
13,691As of March 31,2002

2001(unaudited)Long lived assets:North America

$
22,735

$
22,940United Kingdom


220


160Total

$
22,955

$
23,100







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ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q, and with our managements discussion and analysis included in the Companys Annual Report on Form
10-K for the year ended December 31, 2001, filed on March 26, 2002.





Overview





We provide software products that enable organizations to effectively manage their database infrastructure. Our Database Administration, Performance
Management, Data and Application Architecture and Data Integration products offer customers comprehensive solutions for managing the database life cycle, which is the process of creating, optimizing and managing key business applications and their
underlying databases in response to evolving business requirements. By simplifying the management of the database life cycle, our products allow organizations to ensure the availability, performance and reliability of their critical business
applications.





We were incorporated in California as Client Worx, Inc. in July 1993 and changed our name to Embarcadero
Technologies, Inc. in October 1993. We reincorporated in Delaware in February 2000. At our inception, we focused on developing and marketing software for use with Sybase and Microsoft SQL Server databases. In December 1993, we introduced Rapid SQL
for Sybase and Microsoft SQL Server database development. In July 1994, we introduced DBArtisan for the administration of Sybase and Microsoft SQL Server databases. In September 1996, we released ER/Studio, our database design solution, which was
our first product to offer support for IBM DB2 Universal Database, Informix and Oracle, as well as Sybase and Microsoft SQL Server.





The success of ER/Studios multi-vendor support led us to add support for other major databases to our other products. We added Oracle support to DBArtisan in April 1997 and to Rapid SQL in January 1998. We added support for IBM DB2
Universal Database to both products in mid-1998. In 1998, we also began to enhance our products with add-ons and companion products. In October 1998, we offered our first standalone companion product, ER/Studio Viewer, which complemented the
ER/Studio product. In April 1999, we introduced DBArtisan Schema Manager as a standalone companion product and changed the product name to DBArtisan Change Manager in January 2000. In 2000, we introduced Embarcadero Job Scheduler, designed to
simplify database administration by enabling database professionals to automate their scheduling tasks and manage them from a single, easy-to-use graphical console. Also in 2000, we introduced Embarcadero SQL Debugger and Embarcadero SQL Profiler
add-ons to extend the functionality of Rapid SQL and DBArtisan.





During the fourth quarter of 2000, we completed three
acquisitions: Embarcadero Europe Ltd., Advanced Software Technologies, Inc. and EngineeringPerformance, Inc. Embarcadero Europe Ltd. serves as our sales and marketing office for Europe, the Middle East and Africa. In connection with our acquisition
of Advanced Software Technologies, Inc., we introduced GDPro (renamed Describe in 2001), an application design product.





During the first quarter of 2001, we introduced Embarcadero Performance Center and Embarcadero SQL Tuner, both of which are designed to improve the availability and performance of databases. We introduced Describe, the successor to GD Pro,
which is used to design and document enterprise applications, in the second quarter of 2001. Two new products were released during the third quarter of 2001, Data Voyager, for publishing and managing test and reference data, and Repository for
ER/Studio, for enabling collaborative database design among ER/Studio users. In the fourth quarter of 2001, we delivered DT/Studio,a java-based data integration product that can transform and move data from a number of disparate data sources
to a wide variety of relational database targets.





Sources of Revenue and Revenue Recognition Policy





Revenues are primarily derived from software license fees and related maintenance contracts. Revenues from software license fees are
recognized upon shipment, when terms are F.O.B. shipping point, provided that




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evidence of an arrangement exists, the fee is fixed or determinable and collection of the resulting receivable is
probable. Evidence of an arrangement may be an order accompanied by pre-payment via check or credit card, a signed purchase order or an equivalent form of documentation from the customer. Maintenance contracts generally cover a one-year term paid
for in advance, and revenues from maintenance contracts are recognized ratably over the contract term.





Most license orders have
multiple obligations, both deliverable products and related maintenance, and revenues are allocated to each undelivered component of the contract based on objective evidence of its fair value, which is specific to the Company. We recognize revenues
allocated when the criteria for revenue recognition set forth above are met. While some revenues are collected via credit card at the time an order is placed, customers are generally granted payment terms of net thirty days.





Products may be sold through resellers and distributors in the United States and certain international markets. Revenues from software license fees and
maintenance contracts sold through resellers or distributors are recognized under the same criteria as those sold by the Company. Distributors purchase products to fulfill specific customer orders and generally do not hold inventory of the
Companys products.





We market our software and related maintenance services directly through our telesales and field sales
organizations in the United States, Canada and the United Kingdom, and indirectly through our distribution partners worldwide. We intend to expand our international sales activities in an effort to increase revenues from foreign sales.





There can be no assurance that our license and maintenance revenues, results of operations, cash flows from operations and financial
condition will not be adversely affected in future periods as a result of continued downturns in global economic conditions and increased competitive pressures.







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RESULTS OF OPERATIONS





The following table sets forth, for the periods indicated, the percentage relationship of certain items from the Companys condensed consolidated statements of operations to total revenues:





Three Months Ended March 31,2002


2001Revenues:License

56.8
%

66.8
%Maintenance

43.2


33.2Total revenues

100.0


100.0Cost of revenues:License:License, other

1.0


1.3Amortization of acquired technology

2.2


1.5Total license

3.2


2.8Maintenance:Maintenance, other

5.0


4.8Non-cash stock-based compensation




Total maintenance

5.0


4.8Total cost of revenues

8.2


7.6Gross profit

91.8


92.4Operating expenses:Research and development:Research and development, other

29.7


24.9Non-cash stock-based compensation

0.1


0.3Total research and development

29.8


25.2Sales and marketing:Sales and marketing, other

37.0


35.2Non-cash stock-based compensation

2.0


3.6Total sales and marketing

39.0


38.8General and administrative:General and administrative, other

7.4


6.9Non-cash stock-based compensation

3.3


6.2Total general and administrative

10.7


13.1Amortization of goodwill and other intangible assets

3.1


10.3Total operating expenses

82.6


87.4Income from operations

9.2


5.0Interest income

1.4


2.7Other expenses




(1.2
)Expenses related to proposed public offering




(2.6
)Income before provision for income taxes and share in loss of joint venture

10.6


3.9Provision for income taxes

(3.0
)

(5.7
)Income (loss) before share in loss of joint venture

7.6


(1.8
)Share in loss of joint venture, net

(2.4
)

Net income (loss)

5.2
%

(1.8
)%







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##### Table of Contents




Three Months Ended March 31, 2002 and March 31, 2001





Revenues





Three Months EndedMarch 31,2002

2001(in thousands)Revenues:License

$
7,096

$
9,148Maintenance


5,406


4,543Total revenues

$
12,502

$
13,691





Total Revenues.    Total revenues were $12.5 million
and $13.7 million for the three months ended March 31, 2002 and 2001, respectively, representing a decrease of 8.7% from 2001 to 2002.





License.    License revenues were $7.1 million and $9.1 million for the three months ended March 31, 2002 and 2001, respectively, representing a decrease of 22.4% from 2001 to 2002. The
decrease in new license revenues was due to unfavorable changes in macro-economic conditions and the resulting impact on information technology related spending.





Maintenance.    Maintenance revenues were $5.4 million and $4.5 million for the three months ended March 31, 2002 and 2001 respectively, representing an
increase of 19.0% from 2001 to 2002. The increase was due to the cumulative increase in the number of licenses sold and a corresponding increase in our customer base and maintenance renewals.





Cost of Revenues





Three Months EndedMarch 31,2002

2001(in thousands)Cost of revenues:License:License, other

$
129

$
173Amortization of acquired technology


269


202Total license


398


375Maintenance:Maintenance, other


625


655Non-cash stock-based compensation


1


4Total maintenance


626


659Total cost of revenues

$
1,024

$
1,034





License.    Cost of license revenues consists
primarily of amortization of acquired technology, royalties, product media and packaging, shipping fees, duplication expenses and amortization of capitalized research and development expenses. Cost of license revenues was $398,000 and $375,000 for
the three months ended March 31, 2002 and 2001, respectively, representing an increase of 6.1% from 2001 to 2002. Excluding amortization of acquired technology, cost of license revenues decreased 25.4% from 2001 to 2002. The decrease in
absolute dollars from 2001 to 2002 correlates to the decrease in license revenue. Cost of license revenues represented 5.6% and 4.1% of license revenues in the first three months of 2002 and 2001, respectively. Excluding amortization of acquired
technology, cost of license, as a percentage of license revenue, was 1.8% and 1.9% in the first three months of 2002 and 2001, respectively. Cost of license revenues as a percentage of license revenues may vary in the future depending on the mix of
internally developed versus externally licensed products and product components.




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Maintenance.    Cost of maintenance revenues consists primarily of
customer support personnel and related expenses, including payroll, employee benefits and non-cash stock-based compensation. Cost of maintenance revenues was $626,000 and $659,000 for the three months ended March 31, 2002 and 2001, respectively,
representing a decrease of 5.0% from 2001 to 2002. Cost of maintenance revenues represented 11.6% and 14.5% of maintenance revenues in the three months ended March 31, 2002 and 2001, respectively. The decrease in cost of maintenance as a percentage
of related revenues from 2001 to 2002 was due to greater efficiencies of scale from the support organization.





Operating
Expenses





Research and Development





Three Months EndedMarch 31,2002

2001(in thousands)Research and development:Research and development, other

$
3,717

$
3,411Non-cash stock-based compensation


13


45Total research and development

$
3,730

$
3,456





Research and development expenses consist primarily of personnel and related
expenses, including payroll, employee benefits and non-cash stock-based compensation, as well as payments made to outside software development contractors. Research and development expenses were $3.7 million and $3.5 million for the three months
ended March 31, 2002 and 2001, respectively, representing an increase of 7.9% from 2001 to 2002. As a percentage of total revenues, research and development expenses were 29.8% and 25.2% in the first three months of 2002 and 2001, respectively. The
increase in absolute dollars and as a percentage of revenue from 2001 to 2002 was primarily due to an increase in research and development headcount and related expenses. We expect research and development expenses to increase in absolute dollars in
future periods as additional development personnel are hired and as we expand our product development activities.





Sales and
Marketing





Three Months EndedMarch 31,2002

2001(in thousands)Sales and marketing:Sales and marketing, other

$
4,625

$
4,822Non-cash stock-based compensation


250


492Total sales and marketing

$
4,875

$
5,314





Sales and marketing expenses consist primarily of salaries, commissions earned by
sales personnel,  non-cash stock-based compensation, trade shows, travel and other marketing communication costs, such as advertising and other marketing programs. Sales and marketing expenses were $4.9 million and $5.3 million for the three
months ended March 31, 2002 and 2001, respectively, representing a decrease of 8.3% from 2000 to 2001. The decrease in absolute dollars from 2001 to 2002 was due to a reduction in discretionary marketing spending in 2002 due to the economic
environment and in keeping with the lower license revenue in 2002 as compared to 2001. As a percentage of total revenues, sales and marketing expenses were 39.0% and 38.8% in the first three months of 2002 and 2001, respectively. Excluding non-cash
stock-based compensation, as a percentage of total revenues, sales and marketing expenses were 37.0% and 35.2% in the first three months of 2002 and 2001, respectively. We plan to continue to invest resources to expand our selling efforts and to
execute marketing programs that build the awareness and brand equity of our products. As a result of this, in addition to expected increases in commissions expense due to projected revenue growth, we expect sales and marketing expenses to increase
in absolute dollars in future periods.




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General and Administrative





Three Months Ended March 31,2002

2001(in thousands)General and administrative:General and administrative, other

$
924

$
949Non-cash stock-based compensation


417


844Total general and administrative

$
1,341

$
1,793





General and administrative expenses consist primarily of non-cash stock-based
compensation, salaries and related personnel expenses and general operating expenses. General and administrative expenses were $1.3 million and $1.8 million for the three months ended March 31, 2002 and 2001, respectively, representing a decrease of
25.2% from 2001 to 2002. As a percentage of total revenues, general and administrative expenses were 10.7% and 13.1% in the first three months of 2002 and 2001, respectively. Excluding non-cash stock based compensation, general and administrative
expenses as a percentage of total revenues were 7.4% and 6.9% in the first three months of 2002 and 2001, respectively. The increase as a percentage of total revenues was due to the decrease in revenue in 2002; general and administrative expenses in
absolute dollars, excluding non-cash stock-based compensation, were consistent year-to-year. We expect other general and administrative expenses to increase in absolute dollars in the future as we expand our administrative staff and facilities to
support larger operations.





Amortization of Goodwill and Other Intangible Assets.    In connection
with the acquisitions of Advanced Software Technologies, Inc., EngineeringPerformance, Inc., and the remaining 56% of Embarcadero Europe Ltd., we recorded $21.4 million of goodwill and other intangible assets in the fourth quarter of 2000. The total
amortization expense related to these costs was approximately $600,000 and $1.6 million in the first three months of 2002 and 2001, respectively. For the three months ended March 31, 2002 and 2001, approximately $200,000 of this amortization expense
in each of these periods was recorded as cost of license revenue and the remaining $400,000 and $1.4 million, respectively, of expense was recorded as an operating expense. The decrease in amortization expense was due to adoption of SFAS No. 142,
which required us to cease goodwill amortization except in cases of impairment (see discussion in Note 4 to the financial statements). Other intangible assets, those with identifiable lives, will continue to be amortized over their useful lives,
ranging from 2 to 4 years.





Provision for Income Taxes.    Provision for income taxes was $370,000
and $786,000 for the three months ended March 31, 2002 and 2001, respectively. The decrease in the provision for income taxes is due to an increase in projected tax credits for 2002 as well as the effects of a reduction in amortization of goodwill
and deferred compensation expenses in 2002 compared to 2001.





Share in Loss of Joint Venture.    In
September 2001, we formed a joint venture with Aztec Software, Inc. (Aztec), a California corporation and wholly owned subsidiary of Aztec Software and Technology Services Limited, an Indian software development company publicly traded
on the Bombay stock exchange. The joint venture was established to pursue new product initiatives that fall outside of our and Aztecs existing product offerings. In accordance with the terms of the agreement, Embarcadero and Aztec have each
contributed $1.0 million to the venture. We account for this venture under the equity method of accounting. For our fifty percent share in the loss of the venture in the three months ended March 31, 2002, we recorded $300,000 (net of taxes of
$117,000) as a loss from joint venture, net on our consolidated statement of operations. The future amount of income or loss recorded from the venture cannot currently be estimated. There can be no assurances that we will realize any income from our
investment in this entity.




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LIQUIDITY AND CAPITAL RESOURCES





We have funded our business to date from cash generated by our operations and financings. In April 2000, we completed our initial public offering of common stock, generating net proceeds
to us of approximately $43.0 million. As of March 31, 2002, we had cash, cash equivalents and short-term investments of $39.4 million.





Net cash provided by operating activities was $2.5 million and $5.5 million for the three months ended March 31, 2002 and 2001, respectively. The decrease from 2001 to 2002 was primarily due to changes in operating assets and liabilities
and decreases in non-cash deferred stock-based compensation and amortization expenses, partially offset by an increase in net income and the share in loss of joint venture in 2002.





Net cash used in investing activities was $2.2 million and $2.8 million for the three months ended March 31, 2002 and 2001, respectively. In both quarters, cash used in investing
activities was related to purchases of property and equipment. In the three months ended March 31, 2001, $2.2 million was used to acquire technology. In the three months ended March 31, 2002, a $2.0 million previously deferred payment was made in
connection with an acquisition completed in 2000, $1.3 million, net was provided by sales and maturities of investments and $500,000 was invested in a joint venture.





Net cash provided by financing activities came from the exercise of stock options under the Companys stock option plan and was $484,000 and $261,000 in the three months ended March
31, 2002 and 2001, respectively.





We have a $2.0 million revolving credit facility with a bank that bears interest at the prime
rate and expires on May 31, 2002. The credit facility requires that the Company maintain various quarterly financial covenants including covenants related to tangible net worth, total liabilities and profitability; we were in compliance with all
covenants at March 31, 2002. The annual fee to maintain this credit facility is $5,000 and funds drawn from this credit facility can be used for general operating activities. We have not drawn on this credit facility; accordingly, as of March 31,
2002, we had no amounts outstanding under this credit facility.





We believe that our existing cash, cash equivalents, short-term
investments and cash generated from operations will be sufficient to finance our operations through at least the next 12 to 18 months. If we fail to generate cash flow from operations in the future due to an unexpected decline in revenues or due to
a sustained increase in cash expenditures in excess of revenues generated, our cash balances may not be sufficient to fund continuing operations without obtaining additional financing. If additional financing is needed, there can be no assurance
that such financing will be available to us on commercially reasonable terms, or at all.




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Factors That May Affect Future Results





In addition to other information in this report, the following factors should be considered carefully in evaluating the Company. The risks and uncertainties described below are not
the only ones facing the Company. Additional risks and uncertainties that we are unaware of or currently deem immaterial may also become important factors that may harm our business.





Our quarterly operating results may fluctuate in future periods, and, as a result, our stock price may fluctuate or decline.





Our growth rates may not be sustainable and you should not use our past performance to predict future results. We believe that quarter-to-quarter
comparisons of our historical results of operations are not indicative of our future performance. Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, including the factors discussed below
under the captions:





| |  |  | We may be required to change our revenue recognition policies based on changing implementation guidelines and interpretations, which could cause our revenues and
operating results to fluctuate unexpectedly;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Large sales of our products and maintenance involve a lengthy sales cycle, which could cause delays in recognizing revenue or the failure to obtain revenue;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | The impact of changes in global economic conditions on our customers may cause us to fail to meet expectations, which would negatively impact the price of our
stock;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Our operating results would be harmed if the database industry continues in a downward cycle;
| | - |  | -----------------------------------------------------------------------------------------------




| |  |  | We expect to incur increases in our operating expenses in the foreseeable future, which may affect our profitability;
| | - |  | -----------------------------------------------------------------------------------------------------------------------




| |  |  | If our products do not perform as expected, we may lose customers, our costs will increase and revenues may be delayed or lost;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------




| |  |  | Acquisitions of companies or technologies may result in disruptions to our business;
| | - |  | --------------------------------------------------------------------------------------




| |  |  | We may have future non-recurring charges in the event of goodwill impairment; and
| | - |  | -----------------------------------------------------------------------------------




| |  |  | If we are not able to enhance our existing products to adapt to rapid technological change, or we introduce new products that do not achieve market acceptance, our
revenue and earnings may suffer and we may experience loss of market share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Seasonal variations in orders for our products also
contribute to fluctuations in our quarterly operating results. These fluctuations are likely to cause corresponding volatility in our stock price, particularly if our operating results vary from analysts expectations.





If sales of DBArtisan fall, our revenues and income may decline.





A large portion of our revenues currently comes from sales of our DBArtisan product. For the three months ended March 31, 2002 and the years ended December 31, 2001, 2000 and 1999,
DBArtisan accounted for approximately 45.3%, 38.7%, 46.6% and 48.3%, respectively, of our domestic license revenues. We expect that sales of DBArtisan will continue to represent a substantial portion of our license revenues for the foreseeable
future.




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In addition, many of our customers initiate a relationship with us by purchasing DBArtisan. If demand for DBArtisan
declines due to competition, technological change or other factors, our revenues and income may decline significantly.





If
we do not continue to add new customers, we will not be able to sustain or increase our revenues.





Our license
arrangements do not generally provide for substantial ongoing license or maintenance payments. Therefore, our future revenue growth depends on our continued success in attracting new customers or expanding our relationships with existing customers.
Our ability to attract new customers and expand our relationships with existing customers will depend on a variety of factors, including the performance, quality, breadth and depth of our current and future products and maintenance. Our failure to
add new customers or to expand our relationships with existing customers would reduce our future revenues.





We may be
required to change our revenue recognition policies based on changing implementation guidelines and interpretations, which may cause our revenues and operating results to fluctuate unexpectedly.





In recent years, software revenue recognition rules have been under heavy review and interpretation by various accounting authoritative and regulatory
bodies, including the American Institute for Certified Public Accountants and the Financial Accounting Standards Board. These reviews and interpretations have resulted in significant changes in the practices and standards for recognizing revenues in
software companies. The rapid pace of change in these standards could result in significantly different standards in the future. We may have to change our methods of revenue recognition to comply with new standards, and any such change could cause
deferment of revenue recognized in current periods to subsequent periods or accelerated recognition of deferred revenue to current periods, either of which could cause shortfalls in meeting securities analysts and investors expectations
in any period. Any such shortfalls could have an adverse impact on our stock price.





We invest heavily in research and
development with no guarantee of return from the investments that we make.





We are nearing the end of a cycle of
significant new product development. We have invested significant resources in the development of these new products; if our new products are not accepted in the marketplace, we could suffer a contraction of revenue growth and have limited return on
the investments that we have made. In addition, we plan to continue to invest in research and development and could suffer the same effects from these future investments.





Large sales of our products and maintenance involve a lengthy sales cycle, which could cause delays in recognizing revenue or the failure to obtain revenue.





In the past two years, large sales of our products and maintenance to individual customers have increased. These large sales typically
involve sales cycles between 6 and 12 months, which is considerably longer than our historical sales cycle. This lengthy sales cycle is due to the need to educate and convince prospective customers of the value of our products and to gain approval
from a variety of constituencies within a prospective customer, including key management personnel. The timing of our revenues has become more difficult to forecast because of this lengthy sales cycle for large sales. We may expend substantial funds
and effort to negotiate these sales with prospective customers but then be delayed in concluding, or be unable to conclude, sales of our products and maintenance. Any delay in, or failure to complete, sales in a particular period would reduce our
revenues in that period as well as in subsequent periods over which revenues for the sale may be recognized. If our sales cycle unexpectedly lengthens in general or for one or more large sales, it could negatively affect the timing of our revenues
and our revenue growth and may cause our revenues and operating results to vary significantly from period to period. If we were to experience a delay on a large order, it could harm our ability to meet our forecasts for a given period.





The impact of changes in global economic conditions on our customers may cause us to fail to meet expectations, which would negatively
impact the price of our stock.





Our operating results can vary significantly based upon the impact of changes in global
and domestic economic conditions on our customers. The domestic and economic environment in 2002 continues to be uncertain. The September 11, 2001 terrorist attacks in New York City, Washington, D.C. and Pennsylvania, and the continuing




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United States military response, has affected the economic environment. At the time of the attacks, capital
investment by businesses, particularly investments in new technology, had been experiencing substantial weakness. This weakness was aggravated by the September 11, 2001 attacks and continues into 2002. Current economic and political uncertainty
could result in further decline in new technology investments. These uncertainties could cause customers to defer or reconsider purchasing products or services if they experience a downturn in their business or if there is a further downturn in the
general economy. Such events could have a material adverse effect on our business.





Our operating results would be harmed
if the database industry continues in a downward cycle.





The markets into which we sell our products are cyclical and
are subject to general economic conditions. The database industry has experienced a downturn due to declines in general economic conditions. For example, a number of companies that sell the database platforms that our products support, including
Oracle Corporation, have reduced revenue and earnings expectations. In addition, we believe that the current economic downturn has had an impact on capital spending for database technology and related products.





We are uncertain as to how long and how deep the current downturn may be in the database market. Any continued or further slowdowns in the database
market or in general economic conditions would likely result in a reduction in demand for our products and would harm our business.





If we cannot manage our expansion effectively, our rate of growth and income may decline.





We have
recently experienced a period of expansion in our operations, both through internal growth as well as through acquisitions of companies in the United Kingdom, Colorado and Canada. This growth has placed, and will continue to place, a strain on our
management, administrative, operational and financial infrastructure and we may not be able to effectively manage our growth in the future. To support our expanding operations, we have increased the number of our full-time employees from 105 as of
December 31, 1999 to 268 as of December 31, 2000, 286 as of December 31, 2001 and 287 at March 31, 2002. We expect to hire additional employees to manage our expanding operations. Our ability to manage growth requires that we continue to improve our
operational, financial and management controls and procedures. If we are unable to manage this growth effectively, our rate of growth and our income may decline.





We expect to incur increases in our operating expenses in the foreseeable future, which may affect our profitability.





We intend to increase our operating expenses for the foreseeable future as we continue to increase our sales and marketing, research and development activities and customer support
operations. In connection with these expanded operations, we will need to increase our revenues. However, we will incur these increased expenses before we realize any increased revenues related to this spending. If these efforts do not increase
revenues, our profitability may decline.





The expansion of our international operations exposes us to risks.





One aspect of our growth strategy is to expand our international operations. For example, in the fourth quarter of
2000, we expanded our sales and marketing capabilities by acquiring a company with operations in the United Kingdom. Also in 2000, we acquired a company with operations in Canada, which expanded our research and development capabilities. As a
result, we could face a number of risks from our expanding international operations, including:





| |  |  | staffing and managing foreign operations;
| | - |  | -----------------------------------------

| |  |  | increased financial accounting and reporting complexities;
| | - |  | ----------------------------------------------------------

| |  |  | potentially adverse tax consequences;
| | - |  | -------------------------------------

| |  |  | the loss of revenues and net income resulting from currency fluctuations;
| | - |  | -------------------------------------------------------------------------

| |  |  | compliance with a wide variety of complex foreign laws and treaties;
| | - |  | --------------------------------------------------------------------



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| |  |  | reduced protection for intellectual property rights in some countries;
| | - |  | ----------------------------------------------------------------------

| |  |  | licenses, tariffs and other trade barriers;
| | - |  | -------------------------------------------

| |  |  | longer sales and payment cycles; and
| | - |  | ------------------------------------

| |  |  | costs and difficulties of customizing products for foreign countries.
| | - |  | ---------------------------------------------------------------------




Further expansion of our international operations may require significant management attention and financial resources and may place burdens on our management, administrative,
operational and financial infrastructure. Our possible investments in establishing facilities in other countries may not produce desired levels of revenue or profitability.





Our proprietary rights may be inadequately protected and infringement claims or independent development of competing technologies could harm our competitive position.





We rely on copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to
establish and protect our proprietary rights. We also enter into confidentiality agreements with employees and consultants and attempt to restrict access to proprietary information on a need-to-know basis. Despite such precautions, unauthorized
third parties may be able to copy aspects of our products or obtain and use information that we consider as proprietary.





We
license our software products primarily under shrink-wrap licenses included as part of 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 or downloading of the product from the Internet. These measures afford only limited protection. Policing unauthorized use of our products is difficult and we are unable to determine the extent to which piracy of our software exists. In
addition, the laws of some foreign countries do not protect our proprietary rights as well as United States laws.





We may have
to enter into litigation to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others with respect to our rights. Litigation is generally very expensive and can divert the attention of
management from daily operations. Accordingly, any intellectual property litigation could disrupt our operations and harm our operating results.





We are not aware of any case in which we are infringing the proprietary rights of others. However, third parties may bring infringement claims against us. Any such claim is likely to be time consuming and costly to
defend, could cause product delays and could force us to enter into unfavorable royalty or license agreements with third parties. A successful infringement claim against us could require us to enter into a license or royalty agreement with the
claimant or develop alternative technology. However, we may not be able to negotiate favorable license or royalty agreements, if any, in connection with such claims and we may fail to develop alternative technology on a timely basis. Accordingly, a
successful product infringement claim against us could harm our business and operating results.





If our products do not
perform as expected, we may lose customers, our costs will increase and revenues may be delayed or lost.





Computer
software such as ours often contains undetected errors and may contain design flaws. Errors may be found in current versions, new versions or enhancements of our products after we make commercial shipments. If our software contains undetected
errors, performs unreliably, or if we otherwise fail to meet our customers expectations, we may suffer:





| |  |  | loss of revenues, market share or customers;
| | - |  | --------------------------------------------

| |  |  | negative publicity and harm to our reputation;
| | - |  | ----------------------------------------------

| |  |  | diversion of research and development and management resources;
| | - |  | ---------------------------------------------------------------



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| |  |  | increased maintenance and warranty costs;
| | - |  | -----------------------------------------




| |  |  | legal actions by customers against us; and
| | - |  | ------------------------------------------




| |  |  | increased insurance costs.
| | - |  | --------------------------




Acquisitions of companies or technologies may result in disruptions to our business.





We may make
strategic acquisitions of companies, products or technologies as necessary in order to implement our business strategy. If we make acquisitions and are unable to successfully integrate them with our existing operations, we may not receive the
intended benefits of such acquisitions and the revenue and operating results of the combined company may decline. Any acquisition may temporarily disrupt our operations and divert managements attention from day-to-day operations. In addition,
acquisitions may subject us to unanticipated liabilities or risks.





While we have financed our acquisitions to date primarily
with working capital, we may incur debt or issue equity securities to finance future acquisitions. The issuance of equity securities for any acquisition could be substantially dilutive to our stockholders. In addition, our profitability may suffer
due to acquisition-related expenses.





We may have future non-recurring charges in the event of goodwill impairment.





We adopted SFAS No. 142 on January 1, 2002 and, as a result, we have ceased amortization of goodwill. Going forward, we
will be required to test our goodwill for impairment on an annual basis or in the event of a significant change in our business. We performed this test in January 2002 and determined that, at that time, there had been no impairment in goodwill. At
March 31, 2002 our net goodwill totaled $10.3 million. In the future, if we determine that this goodwill has been impaired, we will be required to take a non-recurring charge to write down this asset, which would adversely affect our earnings.





If we are not able to enhance our existing products to adapt to rapid technological change, or we introduce new products
that do not achieve market acceptance, our revenue and earnings may suffer and we may experience loss of market share.





The market for our products is characterized by rapid technological change, frequent product introductions and enhancements, uncertain product life cycles and changes in customer demands and industry standards. Our success depends on our
ability to continue to:





| |  |  | enhance our current products;
| | - |  | -----------------------------




| |  |  | introduce new products that keep pace with technological developments;
| | - |  | ----------------------------------------------------------------------




| |  |  | satisfy increasingly complicated customer requirements;
| | - |  | -------------------------------------------------------




| |  |  | integrate our products with multiple database platforms; and
| | - |  | ------------------------------------------------------------




| |  |  | modify our products as database platforms change.
| | - |  | -------------------------------------------------




However, due to the nature of computing environments and the performance demanded by customers for database management software, new products and product enhancements could require longer development and testing
periods than we currently anticipate. Moreover, if we develop new products that do not achieve market acceptance, we may not be able to recoup development and marketing expenses, which could harm our operating results.





The introduction of new technologies and the emergence of new industry standards may render our existing products obsolete and unmarketable. Delays in
the general availability of new releases or problems in the installation or implementation of new releases could harm our business and operating results. We may not be successful in developing and marketing, on a timely and cost-effective basis, new
products or new product enhancements that




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respond to technological change, evolving industry standards or customer requirements. Our failure to do so would render
our products obsolete and could harm our ability to compete. In addition, our products and product enhancements may not achieve market acceptance.





If we are not able to attract and retain qualified personnel, our business will not be able to grow.





Our success depends on the continued service of our executive officers and other key administrative, sales and marketing, research and development and support personnel. None of our executive officers or key employees
is bound by an employment agreement for any specific term and we do not maintain any key person life insurance policies. If we lose the services of one or more of our executive officers or key employees, or if one or more of them decide to join a
competitor or otherwise compete directly or indirectly with us, our business could be seriously harmed.





Our business will not
be able to grow if we cannot attract, retain and motivate qualified personnel. Despite the economic downturn, competition for qualified employees remains intense and we may not be able to attract, assimilate or retain highly qualified personnel in
the future. There has in the past been and there may in the future be a shortage of personnel that possess the technical background necessary to sell, support and develop our products effectively. Some of our current employees and those that we seek
to hire may be subject to non-competition or non-solicitation covenants that could further limit our ability to attract or retain qualified personnel.





We may lose market share and be required to reduce prices as a result of competition from our existing competitors, independent software vendors and manufacturers of compatible software.





The market for our products is highly competitive, dynamic and subject to rapidly changing technology. We compete primarily against other
providers of application design and database management utilities, which include Computer Associates, Quest Software, BMC Software, Rational Software and other independent software vendors. Our products also compete with products offered by database
software manufacturers, including Oracle, Microsoft, Sybase and IBM. Some of these competing products are provided at no charge to their customers. We expect that companies such as Oracle, Microsoft, Sybase and IBM will continue to develop and
incorporate into their products applications which compete with our products and may take advantage of their substantial technical, financial, marketing and distribution resources in those efforts. We may not be able to compete effectively with
those products or efforts, which could significantly harm our business and operating results.





In addition, if the market for
application design and database management products continues to grow, some of our competitors may increase their focus on offering software directly competitive with ours, whether by internal development, external development or acquisition. Our
competitors may also attempt to keep us from integrating our software with theirs, making it more difficult for our customers to adopt our software. If such increased competition were to result in resistance to integration of our software with the
software of these competitors, our business would be harmed.





Further, if a single database platform were to gain a considerably
larger share of the database market than other database platforms, we would lose our multi-platform competitive advantage and our sales would suffer. Many of our competitors have longer operating histories, substantially greater financial,
technical, marketing and other resources, and greater name recognition than we do. They also may be able to respond more quickly than we can to changes in technology or customer requirements. Competition could seriously impede our ability to sell
additional products on acceptable terms. Our competitors may:





| |  |  | develop and market new technologies that render our products obsolete, unmarketable or otherwise less competitive;
| | - |  | ------------------------------------------------------------------------------------------------------------------




| |  |  | make strategic acquisitions or establish cooperative relationships among themselves or with other companies, thereby enhancing the functionality of their products; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | establish or strengthen cooperative relationships with channel or strategic partners which limit our ability to sell or to co-market products through these channels.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Competitive pressures could reduce our market share, reduce customer orders, reduce gross
margins or require us to reduce our prices, any of which would harm our operating results.





We are susceptible to business
interruptions that could harm our business.





Our operations are vulnerable to damage or interruption from computer
viruses, human error, natural disasters, telecommunications failures, intentional acts of vandalism and similar events. In particular, our corporate headquarters are located in San Francisco, which is known for seismic activity. Although we have a
disaster recovery plan for critical data and business applications, this does not provide assurance that we would not suffer a business interruption. A significant business interruption would result in losses or damages incurred by us and would harm
our business. Our business interruption insurance may not be adequate to compensate us for losses that might occur.





Insiders have substantial control over us, which could limit others ability to influence the outcome of key transactions.





Our executive officers and directors, in the aggregate, beneficially 34.3% of our outstanding common stock as of March 31, 2002. These stockholders, if acting together, can influence significantly all matters
requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.





We expect the price of our common stock to remain volatile, making it difficult for our stockholders to predict the return on their investment.





Since our initial public offering, the market price of our common stock has fluctuated significantly in response to a number of factors, some of which are beyond our control, including:





| |  |  | changes in market valuation of software and Internet companies;
| | - |  | ---------------------------------------------------------------




| |  |  | quarterly variations in our operating results;
| | - |  | ----------------------------------------------




| |  |  | global and domestic economic conditions;
| | - |  | ----------------------------------------




| |  |  | changes in financial estimates by securities analysts;
| | - |  | ------------------------------------------------------




| |  |  | announcements that we or our competitors make related to significant contracts, acquisitions, capital commitments, strategic partnerships or product introductions or
enhancements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------




| |  |  | stock market price and volume fluctuations, which are particularly volatile among securities of software and Internet companies; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------




| |  |  | sales of significant amounts of our common stock or other securities in the open market.
| | - |  | ----------------------------------------------------------------------------------------




The market for technology and Internet-related companies has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These
fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.





Provisions of our charter and bylaws and Delaware law could deter takeover attempts that might be beneficial to our stockholders.





Provisions of our amended and restated certificate of incorporation and bylaws as well as Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our
stockholders. We are subject to the provisions of Delaware law, which restrict business combinations with interested stockholders, which may have the effect of inhibiting a non-negotiated merger or other business combinations.







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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Interest
Rate Risk





Our exposure to market risk for changes in interest rates primarily relates to our investment portfolio, which at
March 31, 2002 included fixed-income securities with a fair value of approximately $15.2 million. The values of these securities are likely to decline if interest rates increase. However, due to the short maturities of our investments, an immediate
10 percent change in interest rates is not expected to have a material effect on our near-term financial condition or results of operations.





Foreign Exchange Risk





Our operations are conducted primarily in the United States and
are denominated in United States dollars. A small but growing portion of our sales originate through our European subsidiary and are denominated in Pounds Sterling. From time to time, we enter into forward exchange contracts to hedge our European
balance sheet. Gains and losses on these contracts are generally recognized in the consolidated statement of operations at the time that the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates
on forward exchange contracts generally offset the related effect on the underlying items being hedged, use of these instruments is not expected to subject the Company to risks that would otherwise result from changes in currency exchange rates. We
do not use derivative financial instruments for trading or speculative purposes. The Company did not enter into any forward exchange contacts in the three months ended March 31, 2002. Net foreign currency gain and loss did not have a material effect
on our results of operations in the three months ended March 31, 2002 or 2001.





Forward exchange contracts are denominated in
the same currency as the underlying transactions (i.e. Pounds Sterling), and the terms of the forward exchange contracts generally match the terms of the underlying transactions. The effect of an immediate 10 percent change in exchange rates on
forward exchange contracts and the underlying hedged transactions is not expected to be material to our near-term financial condition or results of operations.




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PART II





OTHER INFORMATION





ITE
M 6.    EXHIBITS AND REPORTS ON FORM 8-K





|(a) |  | Exhibits:
|--- |  | ---------




|None |  | 
|---- |  | 




|(b) |  | Reports on Form 8-K:
|--- |  | --------------------




|None |  | 
|---- |  | 



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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





EMBARCADERO TECHNOLOGIES, INC.By:

/s/    RAJ SABHLOKRaj Sabhlok


Chief Financial Officer and Senior Vice President of Corporate Development





Date: May 14, 2002




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