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, 2003
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-23043
PERVASIVE SOFTWARE INC.
(Exact name of registrant as specified in its charter)
| Delaware | 74-2693793 | |
| (State or other jurisdiction of incorporation or organization) |
(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.
(1) Yes ü No
(2) Yes ü No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No þ
As of December 31, 2002 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $51,345,727. 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 19, 2003 there were 16,843,352 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 in the fourth calendar quarter of 2003.
PERVASIVE SOFTWARE INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
JUNE 30, 2003
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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 5.4 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 June 2003 Aberdeen Group study. Our sophisticated database replication technology, Pervasive DataExchange, offers targeted solutions to data movement and synchronization problems like maintaining an offsite warm backup, driving transactional data into a data portal, and connecting remote databases. With Pervasive.SQL and Pervasive DataExchange, 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. In addition, we recently extended our product line with our data security product, Pervasive AuditMaster. Pervasive AuditMaster provides a new level of security for business applications by monitoring and reporting all activity occurring in a Pervasive.SQL database, leveraging deep-level capture, report and alert technology to enable monitoring of mission critical data without the high costs of application redevelopment and deployment, training, or on-going maintenance. Our software products are designed for integration by ISVs into client/server, Web and mobile 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 data management solutions underlying their applications, which is particularly critical to this large market.
Industry Background
In-Stat/MDR estimates mid-sized businesses (representing 90 thousand businesses in the U.S. with 100-999 employees) will spend approximately $14.7 billion on computer software applications in 2004, an increase of 6% over In-Stat/MDR’s estimates for 2003. Further, In-Stat/MDR expects this spending to continue to grow to more than $16.2 billion in 2006. Likewise, computer software applications spending by small businesses (representing 2.4 million businesses in the U.S. with 5-99 employees) is expected to grow 6% in 2004 over estimates for 2003, reaching nearly $35 billion. SMEs are clearly under continuing pressure to stretch their limited IT resources and improve productivity across their firms. However, In-Stat/MDR believes that as economic conditions slowly improve, growth in the number of SMEs and software application spending by those SMEs is expected to outpace growth in the large enterprise.
Similarly, Forrester Research, Inc. recently surveyed technology decision-makers at 151 North American firms with less than $500 million in revenue—56% of which have less than $100 million—to understand how small and midsize companies differ from their larger peers with respect to IT spending. They found that on average, SMEs will increase their IT spending by 15% over 2002—with the most growth concentrated in the low end of the sector.
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We believe these trends in the SME market, combined with the current overall macroeconomic environment, will continue to favor Pervasive over the competition due to heightened 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.
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 150 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 client/server, Web and mobile 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 database product offering, combines the high performance associated with enterprise-class databases with numerous low-maintenance features and is ideally suited for client/server, Web and mobile mission-critical applications deployed on a variety of the most popular operating systems.
Our offerings allow a broad range of customers to:
| • | 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; |
| • | Develop, upgrade or migrate applications that support a broad range of operating systems, including Windows, Linux and NetWare; and |
| • | Embed our database inside their application, permitting development of a tightly integrated application. |
Sales of our most-recent version, Pervasive.SQL V8, were strong in the second half of fiscal year 2003 following its release in December 2002, a testament to its high product quality. Development began during the year on the next major release of Pervasive.SQL. This version, V9, which is slated for release in the summer of 2004, incorporates many of the most-requested customer features and benefits, as well as a boost in SQL performance, providing compelling reasons for upgrades and competitive wins in the marketplace.
Pervasive DataExchange, our core replication offering, offers targeted solutions to data movement and synchronization problems like maintaining an offsite warm backup, driving transactional data into a data portal, and connecting remote databases. DataExchange solutions feature a combination of product and services customized for the business problem to be solved:
| • | Data Continuity—augments end-of-day tape backups by maintaining an up-to-date warm standby at an offsite location; |
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| • | Data Synchronization—automates the near real time sharing of data between locations, supporting the growth in the number of offices and locations and related increase in the geographic distribution of data; and |
| • | Data Portal—bridges the gap between existing transactional systems and the Web portal or the data warehouse, allowing system access for non-transactional activities, such as query and analysis, without disrupting, modifying or taxing the performance of the transactional system. |
Pervasive AuditMaster, our core security product offering, monitors and reports all activity occurring in a Pervasive.SQL database, leveraging deep-level capture, report and alert technology to enable monitoring of mission critical data without the high costs of application redevelopment and deployment, training, or on-going maintenance. This technology is particularly relevant in the accounting and healthcare markets, both of which are presently dealing with increased regulatory requirements brought about by the Sarbanes Oxley Act and the Health Insurance Portability and Accountability Act (HIPAA). AuditMaster provides data access accountability by means of three modules:
| • | Capture—The Capture module is an easily installed database plug-in. It serves somewhat like an all-seeing flight recorder, trapping every event in the database in a detailed trail. It is installed at the database level, so when the database is running, AuditMaster Capture is running, maintaining a complete log record of events occurring in the database; |
| • | Report—Once the Capture module establishes the audit trail, the Report module allows queries on it, enabling a security administrator to perform audits on the activity within the application by verifying past activities or analyzing patterns and trends; and |
| • | Alert—While Reports are historical in nature, the Alert module offers proactive surveillance of future data activity. Once defined in AuditMaster, alert triggers wait for specified events of interest based on the entire range of user actions, including creating, updating and deleting data, or even simply reading it. When a watched for event occurs, AuditMaster immediately triggers an Alert, which can take the form of an email to one or more recipients, a call to another application, or the start-up of a new application. |
In response to the growing need for ad hoc search capabilities in Pervasive.SQL powered software applications, we acquired a license to search engine technology in June 2003 for release to the global market of Pervasive.SQL ISVs. Our new search product will allow application developers to incorporate powerful text and numeric search capabilities directly into their Pervasive.SQL V8-based applications with a minimum of development effort. With our search product, developers can build custom search User Interfaces directly into their applications allowing the application’s end user to quickly search for any data in the Pervasive.SQL database using simple text queries rather than complicated SQL syntax. Matching results are returned through XML allowing the application developer to determine the best way they would like to display those results to the end user.
And, on August 8, 2003, we announced the signing of a definitive agreement to acquire privately held Data Junction Corporation, a pioneering data and application integration company based in Austin, Texas, for up to $22.1 million in cash and 5 million shares of Pervasive common stock. The transaction is valued at a total of approximately $52.1 million. The agreement has been unanimously approved by the boards of directors of Pervasive and Data Junction and is subject to the approval of the shareholders of both companies. The acquisition is expected to close in the fourth calendar quarter of 2003.
Data Junction’s primary products include the Data Junction Integration Studio, which is a comprehensive set of visual design tools for rapidly building and testing data integration processes that work with hundreds of data formats and applications. This enables design with total control over all aspects of the integration project—from creating integration maps to managing complex, event-driven flow of inter-application messages and EDI processes. Data Junction virtually created the category known as ETL (extract, transform and load) in 1986 with
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Data Junction v1.0, one of the world’s first hub-and-spoke approaches to data conversion and translation, and today is charting new ground in the development of business and application integration technologies.
The Pervasive Strategy
Pervasive’s goal is to be the leading, best-value source of high-performance, embedded data management products powering mission-critical applications. Our data management infrastructure 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:
Leverage our Core Competencies. Our low total cost of ownership database is widely installed with more than 5.4 million server seats licensed since our inception in 1994. Many of these seats are deployed in SME organizations that 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 client/server, Web and mobile 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.
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 client/server, Web and mobile 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 the delivery of high quality products and 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. These efforts were 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 and have consistently placed us in the top quartile for customer satisfaction of technology companies whose customers have been surveyed by our independent customer satisfaction survey firm, Prognostics. Commitment to customer success is a core value of Pervasive Software.
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:
| • | Accounting—powering more than half of the top 20 applications for the SME market; |
| • | 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 |
| • | Banking, financial services, retail point-of-sale and other markets requiring high-volume transactions. |
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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 complement to their product offerings, and in cases where Pervasive’s strengths of performance, embeddability and low total cost of ownership overshadow brand preferences. Agreements announced in fiscal year 2003 include agreements with Data Access Worldwide, a leading provider of data-management solutions powering the success of application developers worldwide, Intelliun Corporation, an innovator in simplifying J2EE (Java 2 Enterprise Edition) development, and Magic Software Enterprises, a leading provider of state-of-the-art development and integration technology.
Expand the Product Line. Pervasive has achieved success in the past 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 security, business intelligence and integration. In fiscal year 2003, we have announced the release of DataExchange (data security), the acquisition of AuditMaster technology (data security) and the license of full text search technology (business intelligence) and on August 8, 2003, we announced the signing of a definitive agreement to acquire Data Junction Corporation (data integration) which is scheduled to close in the fourth calendar quarter of 2003. We expect to further invest in product line expansion through continued internal development, licensing and acquisition of new products as well as the extension of existing products into new markets. 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. We further expect that product line expansion will allow us to enter new channels and new markets.
Remain Committed to Continued Profitability. Since March 2001, we have reported ten consecutive quarters of profitability. Our 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 2004.
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Offerings
Pervasive has a wide range of data 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 client/server, Web and mobile applications for SMEs and departments of large enterprises. 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 data management products and development tools:
| Product | Description | Platforms | ||
| Pervasive.SQL Server | 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. | Windows NT/ 2000/2003, Linux, NetWare | ||
| Pervasive.SQL Workgroup / Workstation | Single and multi-user configuration of Pervasive.SQL for environments without a dedicated network server and which allows for migration from one to many users including to Web and client/server with little or no code changes. | Windows 98/ME/NT/ 2000/XP/2003 | ||
| Pervasive.SQL Software Developer Kit | 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, OLE DB, and the .NET platform. | Windows 98/ME/NT/ 2000/XP/2003, Linux, NetWare | ||
| Pervasive.SQL I*net Data Server | Server that provides for the Internet enabling of existing Pervasive.SQL and Btrieve applications with little or no code changes. | Windows NT/ 2000/2003, Linux, NetWare | ||
| Pervasive DataExchange | 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. |
Windows 98/ME/NT/ 2000/XP/2003 | ||
| Pervasive AuditMaster | Monitors and reports all activity occurring in a Pervasive.SQL database, leveraging deep-level capture, report and alert technology to enable meticulous monitoring of mission critical data without the high costs of application redevelopment and deployment, training, or on-going maintenance. | Windows NT/2000/2003 | ||
| Pervasive Full Text Search | Enables users to perform advanced searches to easily find information by allowing partial match, wild card and fuzzy logic searches into application and Web portal data, consistently providing sub-second responses across large databases. | Windows NT/2000/XP/2003 | ||
Our line of data management infrastructure software offers the high performance associated with enterprise solutions 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 client/server, Web and mobile applications that provide robust functionality and low total cost of ownership in SME environments with limited IT resources. Pervasive’s data management infrastructure software simplifies development by enabling developers to write applications capable of running on multiple platforms
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and being scalable with little or no modification from single user workstation to Web and client/server environments. Business critical applications built on our data management infrastructure software enable organizations to implement client/server, Web and mobile systems and automate critical business functions without the costs and complexities typically associated with enterprise-class applications, databases and data management solutions.
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 data management solutions. 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, Visual C++, and Visual Studio.NET, Magic, Borland’s JBuilder and Delphi and supports industry standards such as ODBC, JDBC, OLE DB and the .NET platform.
Product Characteristics
The following table describes the principal characteristics and benefits of our data management product offerings.
| Product Characteristics | Description | Benefits | ||
| Embeddable | Designed to be “hidden” inside an application, permitting development of a tightly integrated application. | Allows broad deployment of complex distributed applications into environments with minimal or no IT infrastructure. | ||
| Small Memory Footprint | Internal memory requirements: Workstation/Workgroup 10 MB Server 32 MB |
Maximizes resources available to the application and enables operation on a wide range of hardware. | ||
| Simplified Data Management Features | Pervasive.SQL automates administrative functions, such as disk space allocation, memory and index management, which significantly reduces the need for ongoing maintenance. | 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. | ||
| Multi-platform Deployment | Pervasive.SQL supports a broad range of operating systems. Server: Windows NT/2000/2003, Linux and NetWare Workstation/Workgroup: Windows 98/ME/NT/2000/XP/2003 |
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. | ||
| Portability | Deployments of Pervasive.SQL can be easily migrated to any supported platform. | Allows development and deployment to be done on the most optimal platform that meets the business and resource requirements. | ||
| Reliability | Pervasive.SQL is based on industry-proven technology. | Provides high degree of data integrity and stability to business applications. | ||
| Configurability | Pervasive.SQL can access local and distributed data simultaneously. | Enables the storage and processing of databases to be distributed throughout the network. | ||
| Application Scalability | Applications can run in any configuration from single-user workstation to supporting thousands of concurrent users in client/server and Web environments. | Offers cost savings for developers and end users because a single application can be deployed in multiple configurations without modification. | ||
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| Product Characteristics | Description | Benefits | ||
| Industry Standard Connectivity | Industry standard interfaces enabling any application to communicate with any database. | Allows ODBC, JDBC, OLE DB and .NET compliant applications to access data stored in a Pervasive.SQL database. | ||
| Common MicroKernel Database Engine | Transactional and relational applications can simultaneously share common databases. | Allows a developer to choose the appropriate data access method: transactional access for high volume and relational access for reporting, queries and decision support. | ||
| Advanced Replication and Synchronization Capability | 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. | Ensures mission critical data is where it is needed, when it is needed. | ||
| Advanced Data Security Capability | Know who’s doing what to your data when, where and how with the transaction intelligence and proactive monitoring capabilities of Pervasive AuditMaster. | Prevents unauthorized and authorized users from security breaches and provides an audit trail if and when transaction forensics is performed. | ||
| Advanced Full Text Search Capability | Our full text search capability allows developers to incorporate powerful text and numeric search capabilities right into their Pervasive.SQL V8-based applications with a minimum of development effort. | Allows a developer to build custom search user interfaces directly into their applications allowing the application’s end user to quickly search for any data in the Pervasive.SQL database using the same kinds of simple text queries rather than complicated SQL syntax. | ||
Sales and Marketing
Our sales and marketing organizations focus on our worldwide channels by targeting software developers who build client/server, Web and mobile 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 data management 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 client/server, Web and mobile 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.
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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. In addition, developer level support ensures that ISVs can obtain assistance from a team knowledgeable in the ISV’s programming language and toolset of choice, resulting in a shortened time to market for the ISV’s application. 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 applications on competing databases to Pervasive.SQL, 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 the delivery of services related to our DataExchange, AuditMaster or Full Text Search offerings. 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 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, 2003, we had 50 employees in research and development, and our research and development expenditures for fiscal years 2001, 2002 and 2003 were $10.5 million, $7.1 million and $8.0 million, respectively. 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 client/server, Web and mobile applications.
Our development efforts consist primarily of driving significant levels of innovation into new and current product lines with primary goals being continuous improvement of the performance of existing product features,
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the addition of new differentiating product features to simplify the development and deployment of our products, and the on-going investment in emerging platform opportunities. 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.
We continue to invest in Pervasive AuditMaster, our core security offering, which monitors and reports all activity occurring in a Pervasive.SQL database, leveraging deep-level capture, report and alert technology to enable monitoring of mission critical data without the high costs of application redevelopment and deployment, training, or on-going maintenance. This technology is particularly relevant in the accounting and healthcare markets, both of which are presently dealing with increased regulatory requirements brought about by the Sarbanes Oxley Act and the Health Insurance Portability and Accountability Act (HIPAA).
And, we continue to invest in Pervasive Full Text Search technology which enables users to perform advanced searches to easily find information by allowing partial match, wild card and fuzzy logic searches into application and Web portal data, consistently providing sub-second responses across large 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:
| • | Multi-platform functionality (Windows 98/ME/NT/2000/XP/2003, Linux, NetWare), including complete database file compatibility between platforms; |
| • | Integration with leading development tools such as Visual Basic, Visual C++, Visual Studio.NET, Magic, JBuilder, Delphi and COBOL; |
| • | Support of leading standards such as ODBC, JDBC, OLE DB and the .NET platform; |
| • | Scalability, from single-user workstations to workgroups, client/server systems and the Web; |
| • | Increased concurrency and scalability with row level locking technology; |
| • | History of compatibility with existing applications and data file formats to support our developer community; |
| • | Enhanced automatic tuning designed to increase performance and decrease cost of ownership; |
| • | Support for larger storage needs (up to 64 gigabytes per table); |
| • | Smart data management components for simplified installation and system configuration; |
| • | Database management utilities to expedite data import, export and recovery tasks; |
| • | Simultaneous transactional and relational access to the same data; and |
| • | Built-in database recovery capabilities. |
Applications based on Pervasive database engines can scale from single-user workstations to client/server and Web environments without re-linking or changing code.
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Competition
We encounter competition for our data management products primarily from large, public companies, in particular, Sybase’s small memory footprint database software product, SQL Anywhere, and Microsoft’s database 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, 2003, we employed 160 full-time employees, including 60 in sales and marketing, 50 in research and development, 29 in customer service and technical support, and 21 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.
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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:
| • | fluctuations in demand for our products or upgrades to our products; |
| • | 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, e.g., the increasing cost of directors and officers’ liability insurance premiums; |
| • | gains or losses associated with discontinued operations; |
| • | changes in our business plan or strategy; and |
| • | changes in generally accepted accounting principles in the United States of America. |
Although our revenues grew 5% in fiscal 2003, our revenues in fiscal year 2002 decreased 12% 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 have been 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
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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.
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 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. Continued market acceptance of Pervasive.SQL 2000i and Pervasive.SQL V8 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 our products. Our latest product, Pervasive.SQL V8, was released in December 2002. Market acceptance of Pervasive.SQL 2000i, Pervasive.SQL V8 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
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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 with Our Pending Acquisition of Data Junction Corporation
On August 8, 2003, we announced the signing of a definitive agreement to acquire privately held Data Junction Corporation, a pioneering data and application integration company based in Austin, Texas, for up to $22.1 million in cash and 5 million shares of our common stock. The agreement has been unanimously approved by the boards of directors of Pervasive and Data Junction and is subject to the approval of the shareholders of both companies. The acquisition is expected to close in the fourth calendar quarter of 2003. We cannot be certain that the acquisition of Data Junction will close or be successful or that Pervasive will realize the anticipated benefits of the acquisition. We filed a Registration Statement on Form S-4 on September 23, 2003 to register the shares of our common stock to be issued to the Data Junction shareholders in connection with the merger. The Registration Statement contains detailed descriptions of the merger, the merger agreement, Data Junction and its products, and the risk factors associated with the merger and the combined company.
We May Face Problems in Connection With Past Acquisitions, Joint Ventures or Licensing Arrangements Other than the Pending Acquisition of Data Junction
In July 2003, we licensed technology from ABACUS Research A.G., 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 $600,000. Following a productization and integration effort, product availability is planned for later this calendar year. We cannot be certain that the productization and integration effort will be successful.
In April 2003, we purchased a 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. It consists of a Pervasive.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. Following a productization and integration effort, product availability is planned for later this calendar year. We acquired the technology for $550,000 in cash. We cannot be certain that the productization and integration effort will be successful.
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.
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
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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. For example, in November 1998 we purchased EveryWare Development Inc. and in July 2000 we announced a restructuring in which we recorded a charge of $17 million for discontinuing operations related to EveryWare Development. 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.