| PERVASIVE SOFTWARE INC ITEM 1A RISK FACTORS You should carefully consider the risks described below before making an investment decision |
| The risks and uncertainties described below are not the only ones we face |
| Any of the following risks could harm our business, financial condition or results of operations |
| In such case, the trading price of our common stock could decline, and you may lose all or part of your investment |
| Please see the “Special Note Regarding Forward-Looking Statements” elsewhere in this Report on Form 10-K Our Financial Results May Vary Significantly from Quarter to Quarter Our operating results have varied significantly from quarter to quarter at times in the past and may continue to vary significantly from quarter to quarter in the future due to a variety of factors |
| These factors include: • fluctuations in demand for our products, upgrades to our products, or our services; • fluctuations in the demand for and deployment of client/server applications in which our Pervasive |
| SQL products are designed to be embedded; • fluctuations in demand for our products due to the potential deteriorating economic conditions on our customer base; • seasonality of purchases and the timing of product sales and shipments; • unexpected delays in introducing new products and services or improvements to existing products and services; • new product releases, licensing models or pricing policies by our competitors; • acquisitions or mergers involving us, our competitors or customers; • impact of changes to our product distribution strategy and pricing policies; • lack of order backlog; • loss of a significant customer or distributor; • changes in purchasing and/or payment practices by our distributors or other customers; • a reduction in the number of independent software vendors, or ISVs, who embed our products or value-added resellers, or VARs, who sell and deploy our products; • changes in the mix of domestic and international sales; • impact of changes to our geographic investment levels and business models; • changes in the cost of routine business activities; • gains or losses associated with discontinued operations; • changes in our business plan or strategy; • impact of severance charges associated with departing employees; • write-downs of the recorded book value of assets; • changes in generally accepted accounting principles in the United States; and • costs associated with the compliance requirements of Section 404 of the Sarbanes-Oxley Act of 2002 |
| We derive a significant portion of our revenues from relatively large transactions |
| The sales cycles for these transactions tend to be longer than the sales cycles on smaller orders |
| This longer sales cycle for large transactions makes it difficult to predict the quarter in which these sales will occur |
| Accordingly, our operating results may fluctuate from quarter to quarter based on the existence and timing of larger transactions |
| A reduction in large transactions during any quarter could materially impact our revenues |
| 12 ______________________________________________________________________ [54]Table of Contents [55]Index to Financial Statements Our revenue and profitability depend on the overall demand for our products and services, which in turn depends on general economic and business conditions |
| The nature and extent of the effect of the current economic climate on our ability to sell our products and services is uncertain |
| A softening of demand for our products and services caused by weakening of the economy may result in decreased revenues |
| There can be no assurance that we will be able to effectively promote revenue growth rates in all economic conditions |
| Significant portions of our expenses are not variable in the short term and cannot be quickly reduced to respond to decreases in revenues |
| Therefore, if our revenues are below our expectations, our operating results are likely to be adversely and disproportionately affected |
| In addition, we may change our prices, modify our distribution strategy and policies, accelerate our investment in research and development, sales or marketing efforts in response to competitive pressures or pursue new market opportunities |
| Any one of these activities may further limit our ability to adjust spending in response to revenue fluctuations |
| Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results Our business has, on occasion, experienced seasonal customer buying patterns |
| In recent years, we have generally experienced relatively weaker demand in the quarter ending September 30 |
| We believe that this pattern may continue |
| In addition, we anticipate that demand for our products in Europe and Japan will decline in the summer months because of reduced corporate buying patterns during the vacation season |
| We Currently Operate Without a Backlog We generally operate with virtually no order backlog because our software products are shipped and revenue is recognized shortly after orders are received |
| This lack of backlog makes product revenues in any quarter substantially dependent on orders booked and shipped throughout that quarter |
| Our Performance Depends on Market Acceptance of Pervasive |
| SQL We derive a substantial portion of our revenues from the license of our Pervasive |
| Continued market acceptance of Pervasive |
| SQL may be influenced heavily by factors outside of our control such as new product offerings or promotions by competitors, mergers and acquisitions of customers and competitors, the product development and deployment cycles of developers and resellers who embed or bundle our products into packaged software applications and demand for applications of the type built on our products |
| Market acceptance of Pervasive |
| SQL V9 (released March 15, 2005) and future upgrades also may be influenced by factors in our control such as product quality, relative demand for feature and functionality upgrades and any future product announcements or price changes |
| Revenue from our embedded database product, Pervasive |
| We believe these decreases were due to a variety of factors, including but not limited to, increasing competition and what we believe to be the increasingly negative impact of general economic conditions on our ISV customers who build applications utilizing our database software and reduced demand for the ISVs’ software applications themselves |
| In addition, the decrease in fiscal year 2006 was due in part to reduced customer demand within our installed base of customers for the latest version of our database product (Version 9 released in March 2005) relative to the prior version, and we believe the decrease in fiscal year 2005 was due in part to the length of time since the last major version release of our database product (Version 8 in December 2002) |
| A continued reduction in our embedded database business, or our inability to grow the integration products business we acquired as a result of our acquisition of Data Junction Corporation in fiscal year 2004, could have a material adverse effect on our business, operating results and financial condition |
| Our Efforts to Develop and Maintain Brand Awareness of Our Products May Not be Successful Brand awareness is important given competition in the market for data infrastructure software products |
| We are aware of other companies that use the word “Pervasive” either in their marks alone or in combination with 13 ______________________________________________________________________ [56]Table of Contents [57]Index to Financial Statements other words |
| We expect that it may be difficult or impossible to prevent third-party usage of the Pervasive name and variations of this name for competing goods and services |
| Competitors or others who use marks similar to our brand name may cause confusion among actual and potential customers, which could prevent us from achieving significant brand recognition |
| If we fail to promote and maintain our brand or incur significant related expenses, our business, operating results and financial condition could be materially adversely affected |
| We Must Succeed in the Data Management Software Market as well as the Data Integration Software Market if we are to Realize the Expected Benefits of the Merger with Data Junction Corporation Our long-term strategic plan depends upon the successful development and introduction of products and solutions that address the needs of the data management software market as well as the data integration software market |
| In order for us to succeed in these markets, we must align strategies and objectives and focus a significant portion of our resources towards serving these markets |
| The challenges involved include the following: • coordinating software development operations in a rapid and efficient manner to ensure timely release of products to market; and • retaining key alliances |
| In addition, our success in these markets will depend on several factors, many of which are outside our control including: • growth of the data management infrastructure software market; • growth of the data integration software market; • deployment of our products by enterprises; and • emergence of substitute technologies and products |
| If we are unable to succeed in these markets we may not realize the anticipated benefits of our merger with Data Junction and our business may be harmed |
| We May Face Problems in Connection With Past Acquisitions, Joint Ventures or Licensing Arrangements In April 2005, we licensed technology from Metaserver Inc, a software development company based in New Haven, Connecticut |
| The licensed technology is a design tool that facilitates the modeling of processes and the creation of connections between processes and supporting applications and data |
| We licensed the technology for dlra493cmam000 |
| Following a productization and integration effort, this technology was made available in the first quarter of fiscal year 2006 |
| We cannot be certain that the market acceptance or demand for this new technology will meet our expectations |
| In January 2005, we entered into an offshore development, support and services agreement with Aztec Software and Technologies Limited, an outsourcing company based in Bangalore, India |
| Pursuant to the agreement, Aztec was to provide certain enhancements to PostgreSQL and certain levels of support to our customers who enter into support agreements with us related to PostgreSQL In July 2006, we decided to substantially reduce our investment and focus on our PostgreSQL initiative |
| On December 8, 2003 we announced the completion of our acquisition of privately held Data Junction Corporation, a pioneering data and application integration company based in Austin, Texas, for approximately dlra16dtta6 million in cash, net of dlra6dtta5 million of cash held by Data Junction at the time of closing of the transaction, and 5 million shares of our common stock |
| We cannot be certain that we will realize the anticipated benefits of the acquisition |
| In particular we may not realize the strategic and operational benefits we had anticipated, including greater revenue and market opportunities, maintaining industry leadership and consistent profitability |
| 14 ______________________________________________________________________ [58]Table of Contents [59]Index to Financial Statements In July 2003, we licensed technology from ABACUS Research AG, a software development company based in St |
| Gallen, Switzerland |
| The licensed technology enables users to perform advanced searches into application and Web portal data, providing sub-second responses across large databases |
| We licensed the technology for dlra600cmam000 |
| In April 2003, we purchased database transaction intelligence technology from ThinkNet Inc, a software development company based in Toronto, Ontario |
| The acquired technology provides a continuous, comprehensive and auditable view of an application’s database operations, such as who did what, when, where and how |
| SQL logging plug-in, a query and analysis module, and a sophisticated business rules engine |
| It also alerts administrators to events according to predefined business rules and reports activity efficiently for analysis |
| We acquired the technology for dlra550cmam000 in cash |
| Following a productization and integration effort, a new product, Pervasive Audit Master, was launched in the second quarter of fiscal 2004 |
| We cannot be certain that the market acceptance or demand for this new product will meet our expectations |
| In July 2001, we formed a new business venture with AG-TECH Corporation, a company developing, selling and importing packaged software, to sell and support our products in Japan |
| AG-TECH has been engaged in the sales and support of Btrieve (predecessor to Pervasive |
| SQL) and Pervasive |
| In conjunction with the joint venture, AG-TECH launched a new operating division staffed with specialists experienced in selling and supporting Pervasive |
| SQL to assume responsibility for OEM sales, packaged software sales, technical support and localization and translation of our products into Japanese |
| In connection with the new business venture, we obtained a less than 20prca ownership interest in AG-TECH and the ability to elect one director to the AG-TECH Board of Directors |
| While this venture has been successful to date, we cannot be certain that this venture will continue to be successful, which could result in our inability to successfully operate in Japan |
| In addition, as a part of our venture, we executed a three year master distributor agreement with AG-TECH, the initial term of which expired June 30, 2004 |
| This agreement has been renewed for an additional three-year term which expires June 30, 2007 |
| We cannot be certain that we will continue to be able to renew our agreement with AG-TECH on terms and conditions at least as favorable to Pervasive as those contained in our present agreement |
| Further, we may be unable to maintain or increase Japanese market demand for our products |
| We May Face Problems in Connection With Future Acquisitions, Joint Ventures or Licensing Arrangements In the future, we may acquire additional businesses, products and technologies, or enter into joint venture or licensing arrangements, that could complement, modify or expand our business |
| Our negotiations of potential acquisitions or joint ventures and our integration of acquired businesses, products or technologies could divert management time and resources |
| Any future acquisitions could require us to issue dilutive equity securities, reduce our cash and marketable securities, incur debt or contingent liabilities, amortize intangibles, or write-off purchased research and development and other acquisition-related expenses |
| If we are unable to fully integrate acquired businesses, products or technologies with our existing operations, we may not receive the intended benefits of acquisitions |
| In addition, market reactions to acquisitions are difficult to predict and if we do announce any future acquisitions, such market reactions may cause our stock price to fluctuate |
| We May Face Problems in Connection With Product Line Expansion In the future, we may acquire, license or develop additional products |
| Future product line expansion may require us to modify or expand our business and expend significant time and resources |
| If we are unable to fully integrate new products with our existing operations, we may not receive the intended benefits of such product line expansion and related expenditures |
| 15 ______________________________________________________________________ [60]Table of Contents [61]Index to Financial Statements A Small Number of Distributors and Sales Related to Accounting Software Applications Account For a Significant Percentage of Our Revenues The loss of a major distributor, changes in a distributor’s payment practices, changes in the financial stability of a major distributor or any reduction in orders by such distributor, including reductions due to market or competitive conditions combined with the potential inability to replace the distributor on a timely basis, or any modifications to our pricing or distribution channel strategy could materially adversely affect our business, operating results and financial condition |
| Many of our ISVs, VARs and end users place their orders through distributors |
| A relatively small number of distributors have accounted for a significant percentage of our revenues |
| In the fiscal year ended June 30, 2006, one distributor (our joint venture partner in Japan, AG-TECH Corporation) accounted for an aggregate of approximately 15prca of our revenues, as compared to 13prca in the fiscal year ended June 30, 2005 |
| Additionally, we estimate that approximately 20prca of our database revenues in the fiscal year ended June 30, 2006 were from sales related to accounting software applications |
| Furthermore, there is currently consolidation taking place among our ISVs that could narrow the number of customers who sell our products |
| For example, one of our ISVs, The Sage Group plc, has acquired Timberline Software Corporation, Softline Limited, and ACCPAC International Inc, three of our ISVs |
| These four ISVs together have, at various times in the past, represented as much as 10prca of our revenues |
| Accordingly, our sales to The Sage Group plc could constitute 10prca or more of our revenues in the future |
| As a result, we expect we will continue to depend on a limited number of distributors, certain of our ISV customers and sales related to accounting software applications for a significant portion of our revenues in future periods and the loss of a significant distributor or ISV customer could materially adversely affect our business, operating results and financial condition |
| Moreover, we expect that such distributors and sales related to accounting software applications will vary from period to period |
| Our distributors have not agreed to any minimum order requirements |
| Although we forecast demand and plan accordingly, if a distributor purchases excess product, we may be obligated to accept the return of some products |
| We Depend on Our Indirect Sales Channel Our failure to grow our indirect sales channel or the loss of a significant number of members of our indirect channel partners would have a material adverse effect on our business, financial condition and operating results |
| We derive a substantial portion of our revenues from indirect sales through a channel consisting of independent software vendors, value-added resellers, systems integrators, consultants and distributors |
| Our sales channel could be adversely affected by a number of factors including: • the emergence of a new platform resulting in the failure of independent software vendors to develop and the failure of value-added resellers to sell our products based on our supported platforms; • pressures placed on the sales channel to sell competing products; • our failure to adequately support the sales channel; • consolidation of certain of our indirect channel partners; • competing product lines offered by certain of our indirect channel partners; and • business model or licensing model changes of our channel partners or their competitors |
| We cannot be certain we will be able to continue to attract additional indirect channel partners or retain our current partners |
| In addition, we cannot be certain our competitors will not attempt to recruit certain of our current or future partners |
| For example, in December 2000, Microsoft (a competitor) acquired Great Plains Software (a former OEM and channel partner) |
| Any similar transactions may have an adverse effect on our ability to attract and retain partners |
| We May Not Be Able to Develop Strategic Relationships Our current collaborative relationships may not prove to be beneficial to us, and they may not be sustained |
| We may not be able to enter into successful new strategic relationships in the future, which could have a material 16 ______________________________________________________________________ [62]Table of Contents [63]Index to Financial Statements adverse effect on our business, operating results and financial condition |
| From time to time, we have collaborated with other companies in areas such as product development, marketing, distribution and implementation |
| However, many of our current and potential strategic partners are either actual or potential competitors with us |
| In addition, many of our current relationships are informal or, if written, terminable with little or no notice |
| We Depend on Third-Party Technology in Our Products We rely upon certain software that we license from third parties, including software integrated with our internally developed software and used in our products to perform key functions |
| These third-party software licenses may not continue to be available to us on commercially reasonable terms |
| The loss of, or inability to maintain or obtain any of these software licenses, could result in shipment delays or reductions until we develop, identify, license and integrate equivalent software |
| Any delay in product development or shipment could damage our business, operating results and financial condition |
| We May be Unable to Protect Our Intellectual Property and Proprietary Rights Our success depends to a significant degree upon our ability to protect our software and other proprietary technology |
| We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights |
| However, these measures afford us only limited protection |
| In addition, we rely in part on “shrink wrap” and “click wrap” licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions |
| Therefore, our efforts to protect our intellectual property may not be adequate |
| We cannot be certain that others will not develop technologies that are similar or superior to our technology or design around the copyrights and trade secrets owned by us |
| Unauthorized parties may attempt to copy aspects of our products or to obtain and use information we regard as proprietary |
| Although we believe software piracy may be a problem, we are unable to determine the extent to which piracy of our software products occurs |
| In addition, portions of our source code are developed in foreign countries, such as in India, where we use third-party service providers, with laws that do not protect our proprietary rights to the same extent as the laws of the United States |
| We may be subjected to claims of intellectual property infringement by third parties as the number of products and competitors in our industry segment continues to grow and the functionality of products in different industry segments increasingly overlaps |
| Any infringement claims, with or without merit, could be time-consuming, result in costly litigation, divert management attention and resources, cause product shipment delays or the loss or deferral of sales or require us to enter into royalty or licensing agreements |
| Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all |
| In the event of a successful claim of intellectual property infringement against us, should we fail or be unable to either license the technology or similar technology or develop alternative technology on a timely basis, our business, operating results and financial condition could be materially adversely affected |
| We Must Adapt to Rapid Technological Change Our future success will depend upon our ability to continue to enhance our current products and to develop and introduce new products on a timely basis that keep pace with technological developments and new industry standards and satisfy increasingly sophisticated customer requirements |
| Rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards characterize the market for our products |
| The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable |
| As a result of the complexities inherent in client/server and Web computing environments and in data and application integration solutions, and the performance demanded by customers for data infrastructure software products, new products and product enhancements can require long development and testing periods |
| As a result, significant delays in the general availability of such new releases or significant problems in the installation or implementation of such new releases could have a material adverse effect on our business, 17 ______________________________________________________________________ [64]Table of Contents [65]Index to Financial Statements operating results and financial condition |
| We have experienced delays in the past in the release of new products and new product enhancements |
| We may not be successful in: • 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; • avoiding difficulties that could delay or prevent the successful development, introduction or marketing of these products; or • achieving market acceptance for our new products and product enhancements |
| Our Software May Contain Errors or Defects Errors or defects in our products may result in loss of revenues or delay in market acceptance, and could materially adversely affect our business, operating results and financial condition |
| Software products such as ours may contain errors, sometimes called “bugs,” particularly when first introduced or when new versions or enhancements are released |
| From time to time, we discover software errors in certain of our new products after their introduction |
| Despite our testing, current versions, new versions or enhancements of our products may still have errors after commencement of commercial shipments |
| Product errors can put us at a competitive disadvantage and can be costly and time-consuming to correct |
| We May Become Subject to Product or Professional Services Liability Claims A product or professional services liability claim, whether or not successful, could damage our reputation and our business, operating results and financial condition |
| Our license and service agreements with our customers typically contain provisions designed to limit our exposure to potential product or service liability claims |
| However, these contract provisions may not preclude all potential claims |
| Product or professional services liability claims could require us to spend significant time and money in litigation or to pay significant damages |
| We Compete with Microsoft while Simultaneously Supporting Microsoft Technologies We currently compete with Microsoft in the market for data management products while simultaneously maintaining a working relationship with Microsoft |
| Microsoft has a longer operating history, a larger installed base of customers and substantially greater financial, distribution, marketing and technical resources than Pervasive |
| As a result, we may not be able to compete effectively with Microsoft now or in the future, and our business, operating results and financial condition may be materially adversely affected |
| We expect that Microsoft’s commitment to and presence in the data management products market will substantially increase competitive pressures |
| We believe that Microsoft will continue to incorporate SQL Server database technology into its operating system software and certain of its server software offerings, possibly at no additional cost to its users |
| Microsoft currently licenses a royalty-free limited version of its SQL Server database technology |
| We believe that Microsoft will also continue to enhance its SQL Server database technology and that Microsoft will continue to invest in various sales and marketing programs involving certain of our channel partners |
| In addition, Microsoft continues to grow its presence in the software applications market |
| For example, they acquired Great Plains Software, a former channel partner of Pervasive, and Navision, both of which are accounting software vendors |
| Microsoft has also entered the customer relationship management software market |
| We believe that Microsoft will continue to grow its presence in the software applications market and in doing so, may have a negative impact on the financial stability of other software application vendors who use our products, or may influence other software application vendors to use Microsoft infrastructure software products instead of those available from Pervasive |
| We believe we must maintain a working relationship with Microsoft to achieve success |
| Thus it is critical to our success that our products be closely 18 ______________________________________________________________________ [66]Table of Contents [67]Index to Financial Statements integrated with Microsoft technologies |
| Notwithstanding our historical and current support of Microsoft platforms, Microsoft may in the future promote technologies and standards more directly competitive with or not compatible with our technology |
| We Face Significant Competition From Other Companies We encounter competition for our embedded database products primarily from large, public companies, including Microsoft, Oracle, Sybase, IBM and Progress |
| In particular, Sybase’s small memory footprint database software product, Adaptive Server Anywhere, and Microsoft’s product, SQL Server, directly compete with our products |
| And, because there are relatively low barriers to entry in the software market, we may encounter additional competition from other established or emerging companies providing database products based on existing, new or open-source technologies |
| Open-source software, which is an emerging trend in the software marketplace, may impact our business as interest, demand and use increases in the database segment and poses a challenge to our business model, including recent efforts by proponents of open-source software to convince governments worldwide to mandate the use of open-source software in their purchase and deployments of software products |
| Firms adopting the open-source software model typically provide customers software produced by loosely associated groups of unpaid programmers and made available for license to end users at nominal cost, and earn revenue on complementary services and products, without having to bear the full costs of research and development for the open-source software |
| Because the present demand for open-source database software is largely concentrated in major corporations, our embedded database business has not been adversely affected to date |
| However, it is likely that increased adoption of Linux will drive heightened interest in other more mature software categories such as database and certain business applications |
| To the extent competing open-source software products gain increasing market acceptance, sales of our products may decline, we may have to reduce prices we charge for our products, and our revenue and operating margins may decline |
| Mass adoption of open source databases in the SME market could have a material adverse impact on our database business |
| Application service providers (ASPs) may enter our market and could cause a change in revenue models from licensing of client/server and Web-based applications to renting applications |
| Our competitors may be more successful than we are in adopting these revenue models and capturing related market share |
| The market for our integration products is highly competitive and subject to rapidly changing technology |
| We principally compete against ETL (extract, transform and load) software vendors and data warehousing and application integration software providers |
| Such competitors include Ascential/IBM, Business Objects, Embarcadero, Informatica, and Information Builders |
| In addition, we compete or may compete against database vendors that currently offer, or may develop, products with functionalities that compete with our solutions |
| These products typically operate specifically with these competitors’ proprietary databases |
| Such competitors include IBM, Microsoft, Sybase and Oracle |
| Competition also comes in the form of custom code, where potential customers have sufficient internal technical resources to develop solutions in-house without the aid of our products or those of our competitors |
| Most of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers |
| In addition, some competitors have demonstrated a willingness to, or may willingly in the future, incur substantial losses as a result of deeply discounted product offerings or aggressive marketing campaigns |
| For example, Microsoft, Oracle, IBM and Sybase all currently license royalty-free limited versions of their database technologies |
| As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of competitive products, than we can |
| There is also a substantial risk that changes in licensing models or announcements of competing products by competitors such as Microsoft, Oracle, Sybase, IBM, Progress, Ascential/IBM, Business Objects, Embarcadero, Informatica, Information Builders or others could result in the cancellation of customer 19 ______________________________________________________________________ [68]Table of Contents [69]Index to Financial Statements orders in anticipation of the introduction of such new licensing models or products |
| In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs which may limit our ability to sell our products through particular partners |
| Accordingly, new competitors or alliances among, or consolidations of, current and new competitors may emerge and rapidly gain significant market share in our current or anticipated markets |
| We also expect that competition will increase as a result of software industry consolidation |
| Increased competition is likely to result in price reductions, fewer customer orders, reduced margins and loss of market share, any of which could materially adversely affect our business |
| We cannot be certain we will be able to compete successfully against current and future competitors or that the competitive pressures we face will not materially adversely affect our business, operating results and financial condition |
| We Are Susceptible to a Shift in the Market for Client/Server Applications Toward Web-Based or Hosted Applications We have derived substantially all of our historical embedded database product revenues from the use of our products in client/server applications |
| We expect to rely on continued market demand for client/server applications indefinitely |
| However, we believe market demand may shift from client/server applications to Web-based or hosted applications |
| If so, this shift could occur before our product line has achieved market acceptance for use in Web-based or hosted applications |
| In addition, we cannot be certain that our existing client/server developers will migrate to Web-based or hosted applications and continue to use our products or that other developers of Web-based or hosted applications would select our data management products |
| Further, this shift could result in a change in revenue models from licensing of client/server applications to renting of Web-based or hosted applications from application service providers |
| A decrease in client/server application sales coupled with an inability to derive revenues from the Web-based or hosted application market could have a material adverse effect on our business, operating results and financial condition |
| We Depend on International Sales and Operations We anticipate that for the foreseeable future we will derive a significant portion of our revenues from sources outside North America |
| In the fiscal year ended June 30, 2006, we derived 37prca of our revenues outside North America |
| Our international operations are generally subject to a number of risks |
| These risks include: • foreign laws and business practices favoring local competition; • dependence on local channel partners; • compliance with multiple, conflicting and changing government laws and regulations; • longer sales cycles; • greater difficulty or delay in collecting payments from customers; • difficulties in staffing and managing foreign operations; • foreign currency exchange rate fluctuations and the associated effects on product demand and timing of payment; • increased tax rates in certain foreign countries; • difficulties with financial reporting in foreign countries; • quality control of certain development, translation or localization activities; and • political and economic instability |
| We may expand or modify our operations internationally |
| Despite our efforts, we may not be able to expand or modify our operations internationally in a timely and cost-effective manner |
| Such an outcome would limit or eliminate any sales growth internationally, which in turn would materially adversely affect our business, operating results and financial condition |
| Even if we successfully expand or modify our international operations, we may be unable to maintain or increase international market demand for our products |
| 20 ______________________________________________________________________ [70]Table of Contents [71]Index to Financial Statements We expect our international operations will continue to place financial and administrative demands on us, including operational complexity associated with international facilities, administrative burdens associated with managing relationships with foreign partners, and treasury functions to manage foreign currency risks and collections |
| We Use a Third-Party Service Provider in India and If We Are Unable to Use Such Provider Our Business Could Be Temporarily Adversely Affected We supplement the capabilities of our organization by contracting with a third-party service provider located in India |
| We may continue to allocate development and IT resources to Indian third parties, with the expectation of achieving significant efficiencies, including reducing operational costs and permitting an around-the-clock development cycle |
| Should we be unable to conduct operations in India in the future, we believe that our business could be temporarily adversely affected |
| Fluctuations in the Relative Value of Foreign Currencies Can Affect Our Business To date, the majority of our transactions have been denominated in US dollars |
| The majority of our international operating expenses and substantially all of our sales in Japan have been denominated in currencies other than the US dollar |
| Therefore, our operating results may be adversely affected by changes in the value of the US dollar |
| Certain of our international sales are denominated in US dollars, especially in Europe |
| Any strengthening of the US dollar against the currencies of countries where we sell products denominated in US dollars will increase the relative cost of our products and could negatively impact our sales in those countries |
| To the extent our international operations expand or are modified, our exposure to exchange rate fluctuations may increase |
| We have, on occasion, entered into limited hedging transactions to mitigate our exposure to currency fluctuations |
| Despite these hedging transactions, exchange rate fluctuations have caused, and will continue to cause, currency transaction gains and losses |
| Although these transactions have not resulted in material gains and losses to date, similar transactions could have a damaging effect on our business, results of operations or financial condition in future periods |
| We Must Continue to Hire and Retain Skilled Personnel Our success depends in large part on our ability to attract, motivate and retain highly skilled employees on a timely basis, particularly executive management, sales and marketing personnel, software engineers and other senior personnel |
| Our efforts to attract and retain highly skilled employees could be harmed by our past or any future workforce reductions |
| Our failure to attract and retain the highly trained technical personnel who are essential to our product development, marketing, service and support teams may limit the rate at which we can generate revenue and develop new products or product enhancements |
| This could have a material adverse effect on our business, operating results and financial condition |
| In addition, we announced in January 2006 a number of senior management changes including the replacement of our former President and Chief Executive Officer |
| Our failure to successfully manage the transition in leadership could have a material adverse effect on our business, operating results and financial condition |
| We issue stock options and restricted stock as key components of our overall compensation |
| There is growing pressure on public companies from shareholders generally and various organizations to reduce the rate at which companies issue stock options and restricted stock to employees, which may make it more difficult to obtain shareholder approval of equity compensation plans when required |
| In addition, Financial Accounting Standards Board (“FASB”) has adopted changes to generally accepted accounting principles (“GAAP”) that required us to adopt a different method of determining the compensation expense for our employee stock options and restricted stock beginning in the first quarter of fiscal 2006 |
| In addition, we believe expensing stock options and restricted stock will increase shareholder pressure to limit future grants and could make it more difficult for 21 ______________________________________________________________________ [72]Table of Contents [73]Index to Financial Statements us to grant stock options and restricted stock to employees in the future |
| As a result, we may lose top employees to non-public, start-up companies or may generally find it more difficult to attract, retain and motivate employees, either of which could materially and adversely affect our business, results of operations and financial condition |
| We Have Anti-Takeover Provisions Our Restated Certificate of Incorporation and Bylaws contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals that a stockholder might consider favorable |
| It includes provisions to authorize the issuance of “blank check” preferred stock; establish 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; eliminate the ability of stockholders to act by written consent; require super-majority voting to approve certain amendments to the Restated Certificate of Incorporation; limit the persons who may call special meetings of stockholders; and provide for a Board of Directors with staggered, three-year terms |
| In addition, certain provisions of Delaware law and our 1997 Stock Incentive Plan (the “1997 Plan”) may also have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals |
| Further, in October 2000, our Board of Directors approved the adoption of a shareholder rights plan whereby one preferred share purchase right was distributed for each outstanding share of our common stock |
| The rights are designed to assure that all of our stockholders receive fair and equal treatment in the event of any proposed takeover and to guard against partial tender offers, open market accumulations and other tactics designed to gain control without paying all stockholders a fair price |
| The rights were not being distributed in response to any specific effort to acquire us |
| The rights become exercisable if a person or group hereafter acquires 15prca or more of our common stock or announces a tender offer for 15prca or more of our common stock |
| Such events, or if we are acquired in a merger or other business combination transaction after a person acquires 15prca or more of our common stock, would entitle the right holder to purchase, at an exercise price of dlra18dtta00, a number of shares of common stock having a market value at that time of twice the right’s exercise price |
| Rights held by the acquiring person would become void |
| The Board of Directors can choose to redeem the rights at one cent per right at any time before an acquiring person hereafter acquires 15prca or more of the outstanding common stock |
| The Rights Plan may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals |
| We May Elect to Raise Additional Capital Which Might Not Be Available or Which, if Available, May Be on Terms That Are Not Favorable to Us We may elect to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all |
| If we issue equity securities, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock |
| If we borrow money, we may incur significant interest charges, which could harm our profitability |
| Holders of debt would also have rights, preferences or privileges senior to those of existing holders of our common stock |
| If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could seriously harm our business, operating results and financial condition |
| The Price of Our Stock Has Been Volatile and Could Continue to Fluctuate Substantially Our common stock is traded in the NASDAQ National Market |
| The market price of our common stock has been volatile and could fluctuate substantially based on a variety of factors outside of our control, in addition to our financial performance |
| Furthermore, stock prices for many companies, including our own, fluctuate widely for reasons that may be unrelated to operating results |
| 22 ______________________________________________________________________ [74]Table of Contents [75]Index to Financial Statements We May Be Exposed to Potential Risks if We Do Not Have an Effective System of Disclosure Controls or Internal Controls or Fail on an On-going Basis to Properly Address and Implement Section 404 of Sarbanes-Oxley We must comply, on an on-going basis, with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), including those provisions that establish the requirements for both management and auditors of public companies with respect to reporting on internal control over financial reporting |
| These requirements first became applicable to Pervasive on June 30, 2005 |
| The requirements and processes associated with Section 404 are relatively new and untested, and we cannot be certain that the measures we have taken, and will take, will be sufficient or timely completed to meet the Section 404 requirements on an on-going basis, or that we will be able to implement and maintain adequate disclosure controls and controls over our financial processes and reporting in the future |
| If we fail to maintain an effective system of disclosure controls or internal control over financial reporting, including satisfaction of the requirements of Section 404 of SOX, we may not be able to accurately or timely report on our financial results or adequately identify and reduce fraud |
| Additionally, if we were to identify any material weakness over our internal control over financial reporting, we also cannot ensure that we could correct any such material weakness to allow our management to conclude that our internal controls over financial reporting are effective in time to enable our independent registered public accounting firm to attest that such assessment will have been fairly stated in any report to be filed with the SEC or attest that we have maintained effective internal control over financial reporting |
| As a result, the financial position of our business could be harmed; current and potential future shareholders could lose confidence in us and/or our reported financial results, which may cause a negative effect on our trading price; and we could be exposed to litigation or regulatory proceedings, which may be costly or divert management attention |
| 23 ______________________________________________________________________ [76]Table of Contents [77]Index to Financial Statements 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 That May Affect Future Results,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 |
| Forward-looking statements include statements regarding the Company’s expectations, beliefs, hopes, intentions or strategies regarding the future |
| These statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements |
| Such factors include, among other things, those listed under “Risk Factors” and elsewhere in this Report on Form 10-K In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of such terms or other comparable terminology |
| Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements |
| Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements |
| We are under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results |