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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-23043
PERVASIVE SOFTWARE INC.
(Exact name of registrant as specified in its charter)
| Delaware |
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74-2693793 |
| (State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
12365 Riata Trace Parkway, Building B
Austin, Texas 78727
(Address of principal executive offices)
(512) 231-6000
(Registrant’s telephone number, including area code)
Securities registered
pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of each class)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ¨
As of September 20, 2002 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $37,184,000. Shares of Common Stock held
by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of September 20, 2002 there were 16,662,443 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III—Portions of the registrant’s definitive Proxy Statement to be issued in conjunction with the Registrant’s Annual Meeting of Stockholders to be held on November 11, 2002.
PERVASIVE SOFTWARE INC.
FORM
10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
JUNE 30, 2002
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i
The statements contained in this Report on
Form 10-K and in the Annual Report that are not purely historical statements are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, including statements regarding the Company’s expectations,
beliefs, hopes, intentions or strategies regarding the future. These forward-looking statements involve risks and uncertainties. Our actual results may differ materially from those indicated in the forward-looking statements. Please see “Risk
Factors that May Affect Future Results,” “Special Note Regarding Forward-Looking Statements” and the factors and risks discussed in other reports filed from time to time with the Securities and Exchange Commission.
Overview
Pervasive Software is a leading worldwide provider of embedded data management solutions and services to support the development, deployment and management of mission-critical business applications. Our high-performance, flexible
database, Pervasive.SQL™, is widely installed with more than 5 million server seats licensed to
date. Pervasive.SQL offers advanced data management technology combined with a very low total cost of ownership (TCO), resulting in an average 7-to-1 improvement over another competitor’s database, according to a September 2001 Aberdeen Group
study. With Pervasive.SQL, independent software vendors (ISVs) can create sophisticated yet low-maintenance business applications that reach far beyond the desktop to easily share information from workstations to the Web. Our software is designed
for integration by ISVs into Web or client/server applications sold to small to mid-size enterprises (SMEs), which typically have environments with little to no information technology (“IT”) infrastructure and require self-tuning,
low-administration products. As a result, end-users can concentrate on running their businesses instead of managing the database underlying their applications, which is particularly critical to this large market.
Industry Background
Cahners In-Stat Group (Cahners) estimates mid-sized businesses (100-999 employees) will spend approximately $13.4 billion on computer software in 2002, consistent with Cahners’ estimates for 2001. Further, Cahners expects this
spending to grow at a modest positive annual rate of 3% until 2005. Likewise, computer software spending by small businesses (5-99 employees) is expected to show a slight increase of 3% in 2002 over estimates for last year, reaching nearly $36
billion. SMEs are clearly under continuing pressure to stretch their limited IT resources and improve productivity across their firms. However, Cahners believes the slowing economy is not expected to have a long-term effect for SMEs.
According to META Group’s Worldwide IT Trends and Benchmark Report 2002, the trends in work profiles, i.e., the
distribution of effort in IT organizations, show a return move toward prepackaged software usage with a 5.8% increase over the prior year. Packaged application vendors, specifically ones focused in the SME markets continue to drive the requirements
for embedded technologies as part of their overall solution.
We believe this macroeconomic environment will favor
Pervasive over the competition, as it heightens sensitivity to Pervasive’s strengths of high-performance, embedded solutions at a low cost. Continued pressure on the level of IT investment indicates companies are likely to continue to delay
major application conversions and instead enhance and expand the lives of current applications, many of which are packaged applications, rather than seek alternatives. Pervasive is well positioned to benefit from these extended applications, as well
as from new application development when companies look to Pervasive as the TCO leader. On the other hand, Pervasive may be negatively impacted by those SMEs who make brand-name decisions, rather than pure cost or performance decisions, when given a
choice of database for their application. Overall, Pervasive expects continued demand for Pervasive.SQL upgrades and licenses for the foreseeable future.
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Pervasive Business Model
Pervasive has operations in Austin, Texas; Brussels; Frankfurt; London; Paris and Warsaw, and a joint venture in Japan. We sell products worldwide in more than 100
countries through direct and channel distribution. Our channel includes more than 10,000 independent software vendors, developers, value-added resellers and partners who have built or deployed applications on top of our platform.
Many SME organizations with limited IT resources rely on this channel to help them develop, deploy and maintain
business-critical applications. Our products and marketing approach are specifically tailored to meet the needs of our channel partners and their customers. In particular, we have designed sales, marketing, training and licensing programs to
encourage development of new Web and client/server applications with Pervasive.SQL. We believe our sharp focus on our customers and their end-users provides us with multiple sales opportunities, a cost-effective, value-added source of service and
technical support and a large, loyal and well-educated channel that develops and deploys applications using our offerings.
The
Pervasive Core Offering
Pervasive.SQL, our core product offering, combines the high performance associated
with enterprise-class databases with numerous low-maintenance features and is ideally suited for Web and client/server based mission-critical applications deployed on a variety of the most popular operating systems.
Our offerings allow a broad range of customers to:
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Build low total cost of ownership applications for use in SME environments characterized by little to no IT infrastructure or in departments within large
enterprises; |
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Develop, upgrade or migrate applications that support a broad range of operating systems, including Windows, NetWare and Linux; and
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Embed our database inside their application, permitting development of a tightly integrated application. |
Sales of our most-recent version, Pervasive.SQL 2000i, continued strong in fiscal year 2002, a testament to its high product
quality. Development continued during the year on the next release of Pervasive.SQL. This version, V8, which is slated for release in mid-fiscal year 2003, incorporates many of the most-requested customer features and benefits, as well as a boost in
performance, providing compelling reasons for upgrades.
The Pervasive Strategy
Pervasive’s goal is to be the leading, best-value source of high-performance, embedded database and information management products
powering mission-critical applications. Our database and information management offerings are tailored to meet the specific needs of independent software vendors (ISVs) and value-added resellers (VARs) who serve the SME market, and we invest in
partnering programs that create a sense of community and communication between Pervasive and our customers. Key elements of our strategy are:
Grow Our Core Business
Leverage Our Core
Competencies—Our low total cost of ownership database is widely installed with more than 5 million server seats licensed since our inception in 1994. Many of these seats are deployed in SME organizations who have
not yet adopted the latest generation of our database products. Hence, we believe we have a significant opportunity in upgrading these seats to our current or next-generation Web and client/server database products. We plan to reach these customers
through our loyal channel of ISVs, VARs, systems integrators and consultants and continue to seek their input to guide our product development activities. We intend to conduct joint marketing programs with our channel partners and customers
encouraging upgrades to recent versions of our database, upgrades of additional user counts, upgrades to new or additional platforms, as well as upgrades of the ISVs’ applications themselves.
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Our ongoing and past investments in training and educating our customers
worldwide, our long-term relationships with ISVs and VARs and our success in encouraging them to embed our products into their applications have created a competitive advantage in the marketplace. Our channel approach is designed to further the
integration of our products into Web and client/server applications and to stimulate sales of the ISVs’ applications themselves. We intend to continue to build customer loyalty by providing significant revenue opportunities, meaningful
certification programs and other offerings via our enhanced marketing, training, consulting and lead-sharing programs, as well as by ensuring customer satisfaction through improved support programs.
Continue Our Obsession with Customer Success—Much of our success can be attributed to our obsessive focus on our
customers’ success. We intend to continue this focus and will continue to vigorously monitor customer satisfaction through both internal and external surveys and tie results to our company-wide internal bonus program. Customer feedback, for
example, has led us to expand the self-help areas of our Web site. These efforts were recently recognized by an award from the Association of Support Professionals, which named Pervasive’s Web site one of the top 10 best Web support sites in
2002.
Address Markets Which Require High-value, Embedded Database Technology—We
have excelled in simplifying the complexity associated with data management for thousands of client/server applications, representing nearly every industry in every major region of the world. It is extensive communication with a diverse set of
customers that enables us to understand their needs and prioritize the requirements for future product development. This includes identifying needs relevant to a particular horizontal or vertical market. We intend to leverage our understanding of,
as well as our success in, these markets for new business development. We have relative strength in many markets, including:
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Accounting—powering more than half of the top 20 applications for the SME market; |
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Healthcare—serving ISVs who deliver applications for use by a broad range of healthcare institutions, ranging from large hospitals to small clinics and
offices; and |
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Banking, financial services, retail point-of-sale and other markets requiring high-volume transactions. |
Develop Value-add, Third-party Partnerships—Further, we intend to explore opportunities to partner with third-party
development tool vendors where the Pervasive data management solution is a natural and compelling migration path from their proprietary data management solution, and in cases where Pervasive’s strengths of performance, embeddability and low
total cost of ownership overshadow brand preferences.
Expand the Product
Line. Pervasive has achieved success by delivering a single product—a data management solution—to run mission-critical applications in tens of thousands of companies. This has been accomplished through the
establishment and cultivation of a very large channel. We believe additional success can be achieved by expanding our product line and marketing new products to our established customer base, working exclusively through our channel. We have
developed a framework for this expansion, which we are calling the Pervasive Ecosystem. The Ecosystem is comprised of several new product categories, such as data transfer and replication, decision support, database utilities and system management
tools. We expect to accomplish this product line expansion through internal development, licensing and acquisition. Product line expansion may also be derived from the acquisition of other complementary embedded data management products and /or
companies that represent an opportunity for Pervasive to increase the size of its core customer base.
Remain Committed to Continued Profitability. Since March 2001, we have reported six consecutive quarters of improving profitability. Our improving profitability has been consistent with our quarterly
financial guidance and is a result of: 1) our sharp focus on our core data management business; 2) consistent license revenue in each of our primary geographies and channels; and 3) prudent expense management. This excellent performance was achieved
in the midst of a very difficult economic environment. We remain committed to profitability and believe it will continue through our prudent management of expenses, increasing marketing and sales productivity around the globe and as a result of our
next-generation product releases and product line expansion anticipated in fiscal year 2003.
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Offerings
Pervasive has a wide range of database and information management product offerings that enable software developers, application service providers, Web and systems integrators, consultants and
value-added resellers to quickly and easily develop, deploy and maintain Web and client/server applications for SMEs. The resulting applications enable organizations in multiple industries to automate a wide range of business critical functions. The
following table describes our comprehensive line of database products and development tools:
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Description |
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| Pervasive.SQL Server |
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High performance transactional and relational database engine targeted at high volume transaction applications and optimized for reporting, ad hoc query and
decision support systems, in Web and client/server computing environments. |
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Windows NT/ 2000, NetWare Linux |
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| Pervasive.SQL Workgroup |
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Multi-user configuration of Pervasive.SQL for environments without a dedicated network server and which allows for migration to Web and client/server with
little or no code changes. |
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Windows 95/98/ME/NT/ 2000/XP |
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| Pervasive.SQL Workstation |
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Single user version of Pervasive.SQL that allows for migration from single user to workgroup or Web and client/server with little or no code
changes. |
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Windows 95/98/ME/NT/ 2000/XP |
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| Pervasive.SQL Software Developer Kit |
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Developer kit for Pervasive.SQL that provides tight integration with leading development tools such as Microsoft’s Visual Basic, Visual C++, and Visual
Studio.NET, Magic, Borland’s JBuilder and Delphi and supports industry standards such as ODBC, JDBC, and OLE DB. |
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Windows 95/98/ME/NT/ 2000/XP, NetWare, Linux |
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| Pervasive.SQL I*net Data Server |
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Server that provides for the Internet enabling of existing Pervasive.SQL and Btrieve applications with little or no code changes. |
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| Pervasive DataExchange |
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Data Continuity Solution—maintains an up-to-date warm standby system at an offsite location with current data, to augment local tape
backup. Data Portal Solution—bridges the gap between existing systems and the Web or data warehouse. Data Synchronization Solution—automates the near real time sharing of data between locations. |
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Windows 95/98/ME/NT/ 2000/XP |
Our line of database and information management software offers the
high performance associated with enterprise databases combined with the simplicity of our low maintenance technology. These products enable our independent software vendor and value-added reseller customers to more profitably develop, deploy and
maintain Web and client/server applications that provide robust functionality and low total cost of ownership in SME environments with limited IT resources. Pervasive’s database and information management software simplifies development by
enabling developers to write applications capable of running on multiple platforms and being scalable with little or no modification from single user workstation to Web and client/server environments. Business critical applications built on our
databases enable organizations to implement Web and client/server systems and automate critical business functions without the costs and complexities typically associated with enterprise-class applications and databases.
In addition, we offer the Pervasive.SQL Software Developer Kit and our on-line Developer Center, which include tools, documentation,
sample code and licenses to enable programmers to quickly and easily develop and test applications that embed our databases. The Pervasive.SQL Software Developer Kit and our on-line Developer Center are designed to attract new independent software
vendors to the Pervasive.SQL development community and provide tight integration with leading development tools such as Microsoft’s Visual Basic,
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Visual C++, and Visual Studio.NET, Magic, Borland’s JBuilder and Delphi and supports industry standards such as ODBC, JDBC and OLE DB.
Product Characteristics
The following table
describes the principal characteristics and benefits of our database and information management product offerings.
| Product Characteristics |
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Description |
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Benefits |
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| Embeddable |
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Designed to be “hidden” inside an application, permitting development of a tightly integrated application. |
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Allows broad deployment of complex distributed applications into environments with minimal or no IT infrastructure. |
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| Small Memory Footprint |
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Internal memory requirements: Workstation/Workgroup 10 MB Server
32 MB |
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Maximizes resources available to the application and enables operation on a wide range of hardware. |
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| Simplified Data Management Features |
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Pervasive.SQL automates administrative functions, such as disk space allocation, memory and index management, which significantly reduces the need for ongoing
maintenance. |
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Requires a minimum level of IT support making complex and cost effective Web and client/server applications easily adaptable to meet ever-changing business
demands. |
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| Multi-platform Deployment |
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Pervasive.SQL supports a broad range of operating systems. Server: Windows NT/2000,
NetWare and Linux Workstation/Workgroup: Windows 95/98/ME/NT/2000/XP |
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Provides flexibility and leverages existing company standards and infrastructures, decreasing training time and increasing productivity, while allowing the user
to use the best tools for the job. |
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| Portability |
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Deployments of Pervasive.SQL can be easily migrated to any supported platform. |
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Allows development and deployment to be done on the most optimal platform that meets the business and resource requirements. |
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| Reliability |
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Pervasive.SQL is based on industry-proven technology. |
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Provides high degree of data integrity and stability to business applications. |
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| Configurability |
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Pervasive.SQL can access local and distributed data simultaneously. |
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Enables the storage and processing of databases to be distributed throughout the network. |
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| Application Scalability |
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Applications can run in any configuration from single-user workstation to supporting thousands of concurrent users in client/server and Web
environments. |
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Offers cost savings for developers and end users because a single application can be deployed in multiple configurations without modification.
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| Industry Standard Connectivity |
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Industry standard interfaces enabling any application to communicate with any database. |
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Allows ODBC, JDBC and OLE DB compliant applications to access data stored in a Pervasive.SQL database. |
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| Common MicroKernel Database Engine |
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Transactional and relational applications can simultaneously share common databases. |
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Allows developers to choose the appropriate data access method: transactional access for high volume and relational access for reporting, queries and
decision support. |
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| Advanced Replication and Synchronization Capability |
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Our DataExchange product offers targeted solutions to data movement and synchronization requirements like maintaining an offsite warm backup, driving
transactional data into a data portal and connecting remote databases. |
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Ensures mission critical data is where it is needed, when it is needed. |
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Sales and Marketing
Our sales and marketing organizations focus on our worldwide channels by targeting software developers who build Web and client/server applications and the Web and systems
integrators, consultants and value-added resellers who sell and implement the applications to end users. Our marketing organization has primary responsibility for product direction and has developed a number of programs utilized by the sales
organization to support our channel partners, such as our Original Equipment Manufacturer (“OEM”) program for independent software vendors and partner programs for Web and systems integrators, consultants and VARs. These programs are
worldwide in scope and capture leads from a variety of activities including direct response marketing and advertising, joint marketing and public relations.
Our OEM program focuses on recruiting and retention of independent software vendors worldwide who embed our products on an OEM basis. The OEM program is designed to build mutually beneficial strategic
relationships between Pervasive and our independent software vendors and generate ongoing royalties for us through licensing contracts, which are typically for three-year terms. This program offers our OEM partners joint marketing services, volume
discounts, specialized technical support, training and consulting, which enable delivery of tightly integrated solutions to end users.
Our other sales and marketing programs recruit and retain software developers and channel partners who develop applications that are designed to be deployed with shrink-wrap versions of our database products. These programs
include trade shows, direct mail, telemarketing and telesales activities and hands-on seminars that are designed to further recruit, develop, support and train software developers and channel partners to facilitate the deployment of Web and
client/server applications based on our products. If the sales volumes of these applications become sufficient, the sales group recruits these software developers into our OEM program.
The international sales organization utilizes a channel of distribution partners and OEMs worldwide. The distribution partners implement sales and marketing programs for a
particular region, typically using our distributor or master distributor programs. In addition to managing these distributor relationships, the international sales group recruits and supports software developers and channel partners with the same
programs as the domestic sales groups. We currently have international offices located in Brussels, Frankfurt, Paris, London and Warsaw and a joint venture in Japan.
Customer Service and Technical Support
We offer multiple
levels of worldwide customer services, including technical support, professional consulting services, training and product maintenance. First level, or front line, support responds to most customer inquiries that are routine in scope via telephone
and email. Second level, or back line, support responds to escalated technical issues and supports our large partners with dedicated technical expertise. Self-help support is also available via our award-winning Web site, which includes a searchable
knowledge base, answers to frequently asked questions and technical white papers. Customer service is provided at no charge for the first 30 days after initial purchase for installation questions and at any time via our Web site. After 30 days, we
offer contract and fee-based per-incident and premium support programs.
Our customer service team will, in
appropriate situations, fulfill demand for fee-based consulting services from our software developer customers and channel partners. These consulting services may include development services to migrate existing applications to the Web, upgrade
existing applications to the latest Pervasive.SQL release, and optimize database functionality through performance testing, database schema design and review, and DataExchange services. Consulting opportunities are often referred to our channel
partners to strengthen channel loyalty, build the channel’s technical ability and increase the resource base available for future growth.
Our education resources train our channel partners in the use of our products for optimal performance and feature utilization. In addition, we offer channel partner certification and authorization
programs to enhance the technical expertise of our authorized channel partners.
In order to provide a higher
quality of customer support, we have a specialized product maintenance group. This group combines traditional technical support expertise with an engineering development team to provide
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maintenance for all products, develop customer-driven enhancements to our products, issue regularly scheduled service packs and handle escalations of highly technical customer issues.
Worldwide customer support, professional services and training are provided through our corporate offices in
Austin, Texas. International customer support is complemented by our call center in Brussels, Belgium and via our recently enhanced multi-lingual support Website.
Research and Development
We have made substantial
investments in research and development through both internal development and technology acquisition. As of June 30, 2002, we had 40 employees in research and development, and our research and development expenditures for continuing operations for
fiscal 2000, 2001 and 2002 were $13.7 million, $10.5 million and $7.1 million, respectively. In July 2000, we reduced our workforce by approximately 100 employees, the majority of whom were in research and development and technical support relating
to our discontinued Tango product line. In June 2001, we reduced our workforce by approximately 40 employees, some of whom were in research and development and technical support relating to our Pervasive.SQL database products. We will continue to
invest heavily in focused research and development resources to further our vision of software development environments that dramatically simplify the development, deployment and maintenance of Web and client/server applications.
Our development efforts consist primarily of improving the performance of existing product features and adding new
differentiating product features to simplify the development and deployment of our products on multiple computer and network operating systems. We continue to focus development activities on enhancing Pervasive.SQL with performance, features and
functionality required by SME customers today and the channel of ISVs, VARs and consultants who serve them.
We
are also continuing to invest in data replication technology for deployment into customer environments where high availability and security of data is a critical need. Pervasive DataExchange offers targeted solutions to data movement and
synchronization requirements like maintaining an offsite warm backup, driving transactional data into a data portal and connecting remote databases.
Technology
Pervasive.SQL utilizes our MicroKernel Database Architecture Engine
(“MKDE”) architecture. A primary feature of the MKDE architecture is that it enables applications to have simultaneous transactional and relational access to data. Pervasive.SQL provides a number of advantages over other database
management systems including:
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Multi-platform functionality (Windows 95/98/ME/NT/2000/XP, NetWare, Linux), including complete database file compatibility between platforms;
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Integration with leading development tools such as Visual Basic, Visual C++, Visual Studio.NET, Magic, JBuilder, Delphi and COBOL;
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Support of leading standards such as ODBC, JDBC and OLE DB; |
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Scalability, from single-user workstations to workgroups, client/server systems and the Web; |
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Increased concurrency and scalability with row level locking technology; |
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History of compatibility with existing applications and data file formats to support our developer community; |
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Enhanced automatic tuning designed to increase performance and decrease cost of ownership; |
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Support for larger storage needs (up to 64 gigabytes per table); |
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Smart data management components for simplified installation and system configuration; |
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Database management utilities to expedite data import, export and recovery tasks; |
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Simultaneous transactional and relational access to the same data; and |
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Built-in database recovery capabilities. |
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Applications based on Pervasive database engines can scale from single-user
workstations to client/server and Web environments without re-linking or changing code.
The database
configurations available include the following:
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Server. In a Web environment, a small requestor module on the Web application server routes requests to the server database engine. In a networked client/server
environment, a workstation requestor routes requests to the server database engine. These configurations optimize performance and the use of application server or workstation resources. |
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Workgroup. The workgroup configuration enables shared access to data files by a small team of users. The workgroup technology is suited for environments that
support peer-to-peer networking but do not have a dedicated database server. |
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Single-User Workstation. The single-user workstation configuration provides mobile and stand-alone operation. All database components reside locally, and data
files are stored on the workstation’s disk drive. This configuration is used when the workstation is not connected to a network or when data files do not need to be shared. |
Competition
We
encounter competition for our database products primarily from large, public companies, in particular, Sybase’s small memory footprint database software product, SQL Anywhere, and Microsoft’s product, SQL Server. Microsoft has devoted
resources to making its SQL Server product increasingly applicable to the market for our products. We believe that Microsoft will continue to incorporate SQL Server technology into its operating system software and certain of its server software
offerings, possibly at no additional cost to its users. Microsoft’s activities could materially adversely affect sales of our products on the Windows platform. In addition, because there are relatively low barriers to entry in the software
market, we may encounter additional competition from other established and emerging companies.
Proprietary Rights
Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our
technology and operate without infringing on the intellectual property rights of others. We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our
proprietary rights. We also believe that factors, such as the technological and creative skills of our personnel, new research and developments, frequent product enhancements, name recognition and reliable product maintenance, are essential to
establishing and maintaining a technology leadership position. We license our database software products primarily under “shrink wrap” licenses (i.e., licenses included as part of the product packaging). Shrink-wrap licenses are not
negotiated with or signed by individual licensees, and purport to take effect upon the opening of the product package.
Employees
As of June 30, 2002, we employed 146 full-time employees, including 50 in sales and marketing, 40 in research
and development, 31 in customer service and technical support, and 25 in general and administrative. We are not subject to any collective bargaining agreement, and we believe that our relationships with our employees are good.
Facilities
Our leased headquarters facility in Austin, Texas, consists of approximately 91,000 square feet. The facility provides additional space and expansion options and is leased through September 2008. We currently lease international
offices in Brussels, Frankfurt, Paris, London and Warsaw. We continue to be obligated under a lease for office space in Toronto, which we currently have subleased to a third party.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones we face.
Any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. 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. Many of these factors are outside of our control. These factors include:
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Fluctuations in demand for our products or upgrades to our products; |
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Fluctuations in the demand for and deployment of client/server applications in which our Pervasive.SQL products are designed to be embedded;
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Fluctuations in demand for our products due to the potential deteriorating economic conditions on our customer base; |
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Seasonality of purchases and the timing of product sales and shipments; |
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Unexpected delays in introducing new products and services or improvements to existing products and services; |
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New product releases, licensing models or pricing policies by our competitors; |
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Acquisitions or mergers involving us, our competitors or customers; |
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Impact of changes to our product distribution strategy and pricing policies; |
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Loss of a significant customer or distributor; |
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Changes in purchasing and/or payment practices by our distributors or other customers; |
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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;
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Changes in the mix of domestic and international sales; |
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Impact of changes to our geographic investment levels and business models; |
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Changes in the cost of routine business activities, e.g., the increasing cost of directors and officers’ liability insurance premiums;
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Losses associated with discontinued operations; |
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Changes in our business plan or strategy; and |
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Changes in generally accepted accounting principles. |
Our revenues in fiscal year 2002 decreased from the previous fiscal year due to a combination of factors, including: competitive forces, a different discount structure in Japan following our new
business venture formed in July 2001, and what we believe to be a general softening in the packaged client/server applications market contributing to decreased orders for our Pervasive.SQL products embedded in these applications. We believe certain
of these factors could continue to negatively affect sales of our Pervasive.SQL products in the future. Significant portions of our expenses are not variable in the short term and cannot be quickly reduced to respond to decreases in revenues.
Therefore, if our revenues are below our expectations, our operating results are likely to
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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.
In July 2000, we announced a restructuring to focus on our core database business. As part of the restructuring, we recorded in the fourth
fiscal quarter of fiscal 2000, a charge of $17 million or $1.08 per share for discontinued operations related to our Tango product line. We continued to support our Tango customers until we completed the sale of the Tango technology in June 2001.
The sale, along with an ongoing assessment of future liabilities of the discontinued Tango operations, resulted in a gain from discontinued operations of $1.7 million for the quarter ended June 30, 2001. Our operating results have fluctuated in the
past due to charges relating to the discontinued Tango operations and may continue to fluctuate in future quarters depending upon the timing and nature of final disposition of remaining liabilities of the discontinued Tango product line.
In June 2001, we reduced our workforce by approximately 40 employees, or 20% of our worldwide workforce, to
further improve profitability and as a precautionary measure in light of the continued uncertain economic environment. The reduction resulted in a non-recurring charge in the fourth quarter of fiscal year 2001 of $2.5 million, including a charge for
the workforce reduction and related charges for idle leased facilities and certain intangible assets. Our operating results have fluctuated in the past due to these charges.
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.SQL products since 1986. 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 20% ownership interest in AG-TECH and the ability to elect one director to the AG-TECH Board of Directors. We cannot be certain that this venture will be successful which could result in our inability to successfully operate in
Japan. We may be unable to maintain or increase Japanese market demand for our products.
In addition, we may
experience fluctuations in our operating results based on our past and future acquisitions of businesses and product lines. For example, we incurred losses in the quarters ended December 31, 1998, December 31, 1999, March 31, 2000 and June 30, 2000;
primarily due to losses incurred by the now discontinued Tango product line.
We derive a portion of our revenues
from relatively large orders. The sales cycles for these transactions tend to be longer than the sales cycles on smaller orders. This longer sales cycle for large orders makes it difficult to predict the quarter in which these sales will occur.
Accordingly, our operating results may fluctuate from quarter to quarter based on the existence and timing of larger orders. A reduction in large orders during any quarter could materially impact our revenues.
Our revenue growth 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 or lower growth rates. There can be no assurance that we will be able to effectively promote revenue growth rates in all economic conditions.
Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results
Our business has, on occasion, experienced seasonal customer buying patterns. In recent years, we have generally experienced relatively weaker demand in the quarters ending March 31 and September 30. We believe
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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. As a result, if orders in the first month or two of a quarter fall short of expectations, it is likely we will not meet our
revenue targets for that quarter. As a result, our quarterly operating results would be materially and adversely affected.
Our
Performance Depends on Market Acceptance of Pervasive.SQL
We derive substantially all of our revenues from
the license of our Pervasive.SQL products. In particular, we are increasingly dependent on market acceptance of our Pervasive.SQL 2000 product introduced in June 1999 and related upgrades, as revenues from our older database products, Btrieve and
Pervasive.SQL 7, have declined and are expected to continue to decline in subsequent quarters. Market acceptance of Pervasive.SQL 2000 may be influenced heavily by factors outside of our control such as new product offerings or promotions by
competitors, mergers and acquisitions of customers and competitors, the product development and deployment cycles of developers and resellers who embed or bundle our products into packaged software applications and what we believe is a softening in
the market for client/server applications of the type built on Pervasive.SQL 2000. Market acceptance of Pervasive.SQL 2000 and future upgrades also may be influenced by factors in our control such as product quality, relative demand for feature and
functionality upgrades and any future product announcements or price changes.
Our Efforts to Develop and Maintain Brand Awareness of
Our Products May Not be Successful
Brand awareness is important given competition in the market for data
management products. We are aware of other companies that use the word “Pervasive” either in their marks alone or in combination with other words. We expect that it may be difficult or impossible to prevent third-party usage of the
Pervasive name and variations of this name for competing goods and services. Competitors or others 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 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. Further, future product line expansion may require us to reorganize
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by product line instead of by function and could divert management time and resources. If we are unable to fully integrate multiple products with our existing single-product operations, we may
not receive the intended benefits of such product line expansion.
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 independent software
vendors, value-added resellers and end users place their orders through distributors. A relatively small number of distributors have accounted for a significant percentage of our revenues. In the fiscal year ended June 30, 2002, two distributors
combined accounted for an aggregate of approximately 21% of our revenues, as compared to fiscal year ended June 30, 2001, when three distributors accounted for an aggregate of approximately 12% of our revenues. Additionally, we estimate that
approximately 20% of our revenues in the fiscal year ended June 30, 2002 were from sales related to accounting software applications. We expect we will continue to depend on a limited number of distributors and sales related to accounting software
applications for a significant portion of our revenues in future periods. Moreover, we expect that such distributors and sales related to accounting software applications will vary from period to period. Our distributors have not agreed to any
minimum order requirements. Although we forecast demand and plan accordingly, if a distributor purchases excess product, we may be obligated to accept the return of some products.
We Depend on Our Indirect Sales Channel
Our failure to
continue to grow our indirect sales channel or the loss of a significant number of members of our indirect channel partners would have a material adverse effect on our business, financial condition and operating results. We do not have a substantial
direct sales force, and we derive substantially all of our revenues from indirect sales through a channel consisting of independent software vendors, value-added resellers, system integrators, consultants and distributors. Our sales channel could be
adversely affected by a number of factors including:
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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
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Pressures placed on the sales channel to sell competing products; |
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Our failure to adequately support the sales channel; |
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Competing product lines offered by certain of our indirect channel partners; and |
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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 (an OEM that embeds our product into certain of its products and also a channel
partner). This will likely have, and any similar transactions may have, an adverse effect on our ability to attract and retain partners.
We May Not Be Able to Develop Strategic Relationships
Our current collaborative
relationships may not prove to be beneficial to us, and they may not be sustained. We may not be able to enter into successful new strategic relationships in the future, which could have a material
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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. 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 with laws that do not protect our proprietary rights to the same extent as the laws of the United States.
Although we are not aware that any of our products infringe upon the proprietary rights of third parties, we may be subjected
to claims of intellectual property infringement by third parties as the number of products and 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 the performance demanded by customers for data management products, new products and product enhancements can require long development and testing periods. As a result, significant delays in the
general availability of such new releases or significant problems in the installation or implementation of such new releases could have a
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material adverse effect on our business, operating results and financial condition. We have experienced delays in the past in the release of new products and new product enhancements. We may not
be successful in: