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, trading price of our common stock could decline, and you may lose all or part of your investment.
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, which could make our future operating results difficult to predict and increase the likelihood that future results may fall below
analyst or investor expectations thereby causing our stock price to decline. Such variations are due to a number of factors, many of which are outside our control. These factors include:
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fluctuations in demand for our products, upgrades to our products, or our services;
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fluctuations in the demand for and deployment of client/server applications in which our Pervasive PSQL products are designed to be embedded;
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fluctuations in demand for our products due to the potential impact of uncertain 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 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 ISVs who embed our products 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;
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gains or losses associated with discontinued operations;
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changes in our business plan or strategy;
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impact of severance charges associated with departing employees;
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write-downs of the recorded book value of assets;
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changes in generally accepted accounting principles in the United States; and
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costs associated with the compliance requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
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We also derive a significant portion of our revenues from relatively large transactions. The sales cycles for these transactions tend to
be longer than the sales cycles on smaller orders. This longer sales cycle for large transactions makes it difficult to predict the quarter in which these sales will occur. Accordingly, our operating results may fluctuate from quarter to quarter
based on the existence and timing of larger transactions. A reduction in large transactions during any quarter could materially impact our revenues.
Additionally, significant portions of our expenses are not variable in the short term and cannot be quickly reduced to respond to decreases in revenues. Therefore, if our revenues are below our
expectations, our operating results are likely to be adversely and disproportionately affected. In addition, we may change our prices, modify our distribution strategy and policies, accelerate our investment in research and development, sales or
marketing efforts in response to competitive pressures or pursue new market opportunities. Any one of these activities may further limit our ability to adjust spending in response to revenue fluctuations.
Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results
Our business has, on occasion, experienced seasonal customer buying patterns. In past years, we have generally experienced relatively
weaker demand in the quarter ending September 30. Demand for our products in Europe and Japan will generally decline in the summer months because of reduced corporate buying patterns during the vacation season. We believe this pattern may occur
in the future and may contribute to fluctuations in our quarterly operating results.
Uncertain Economic Conditions May Harm Our Operating
Results
Our revenue and profitability depend on the overall demand for our products and services, which in turn depends on
general economic and business conditions. The nature and extent of the effect of the recent adverse economic conditions and the subsequent economic recovery on our ability to sell our products and services is uncertain. A softening of demand for our
products and services caused by uncertain economic conditions may result in decreased revenues. In addition, such uncertain economic conditions may impact our customers ability to pay for the products they have purchased and as a consequence,
we may not be able to collect our accounts receivable balances and our reserves for doubtful accounts and write-offs of accounts receivable may increase. There can be no assurance we will be able to effectively promote revenue growth rates if the
current uncertain economic conditions continue or deteriorate.
We Generally 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 unpredictable and substantially dependent on orders booked and shipped throughout that quarter. Accordingly, a material decrease in orders in any quarter could have a
materially adverse effect on our revenues and operating results.
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Our Performance Depends on Market Acceptance of Pervasive PSQL and Our Integration Products
We derive a substantial portion of our revenues from the license of our Pervasive PSQL
®
products. Continued market acceptance of Pervasive PSQL may be influenced heavily by factors outside of our control,
such as new product offerings or promotions by competitors, mergers and acquisitions of customers and competitors, the product development and deployment cycles of developers and resellers who embed or bundle our products into packaged software
applications and demand for applications of the type built on our products. Market acceptance of Pervasive PSQL v11 (first released in September 2010), and future upgrades also may be influenced by factors in our control such as product quality,
relative demand for feature and functionality upgrades and any future product announcements or price changes.
Revenue in
fiscal year 2012 from our embedded database product, Pervasive PSQL, was consistent with fiscal year 2011. Our embedded database and related products represented approximately 57% of our revenue in fiscal year 2012. Our integration product revenue
in fiscal 2012 grew 4% over fiscal year 2011and represented approximately 38% of our total revenue. A reduction in our embedded database business, or our inability to grow our integration products business, could have a material adverse effect on
our business, operating results and financial condition.
Our Efforts to Develop and Maintain Brand Awareness of Our Products May Not be
Successful
Brand awareness is important given competition in the market for data infrastructure software products. We are
aware of other companies that use the word Pervasive either in their marks alone or in combination with 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 expenses in an unsuccessful attempt to promote or maintain our brand, our business, operating results and financial condition could be materially adversely affected.
We Must Succeed in the Data Management Software Market as Well as the Data Integration Software Market if We are to be Successful
Our long-term strategic plan depends upon the successful development and introduction of products and solutions that address the needs of
the data management software market as well as the data integration software market. In order for us to succeed in these markets, we must align strategies and objectives and focus a significant portion of our resources toward serving these markets.
In addition, our success in these markets will depend on several factors, many of which are outside our control including:
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growth of the data management infrastructure software market;
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growth of the data integration software market;
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deployment of our products by enterprises; and
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emergence of substitute technologies and products.
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If we are unable to succeed in these markets, our business may be harmed.
Defects or
Disruptions in Our Ability to Deliver Our Products Across Various Platforms Could Diminish Demand for Our Service and Subject Us to Substantial Liability
As we continue to provide more of our products from third party data hosting platforms, there is the potential for there to be defects or disruptions in our ability to deliver our products to our
customers. These potential disruptions could result in unanticipated downtime for our customers and harm our reputation and our business. In addition, our customers may use our service in unanticipated ways that may cause a disruption in
service for other customers attempting to access their data. Since our customers use our service for important aspects of their business, any errors, defects, disruptions in service or other
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performance problems with our service could hurt our reputation and may damage our customers' businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to us,
we could lose future sales or customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of
litigation.
Interruptions or Delays in Service From Our Third-Party Data Center Hosting Facilities Could Impair the Delivery of Our
Service and Harm Our Business
We currently serve some of our customers from third-party data center hosting platforms. Any
damage to, or failure of, the third parties systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their
subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
If Our Security Measures Are Breached and Unauthorized Access is Obtained to a Customer's Data or Our Data, Our Service May be Perceived as not Being
Secure and We May Incur Significant Legal and Financial Exposure and Liabilities
While we have derived the majority of our
historical revenues from on premise delivery of our products, we are increasingly offering our products on third party hosted platforms. This method of delivery of our products involves the storage and transmission of customers' proprietary
information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party action, employee error, malfeasance or otherwise, during
transfer of data to additional data centers or at any time, and result in someone obtaining unauthorized access to our data or our customers' data. If our security measures are breached as a result of third-party action, employee error, malfeasance
or otherwise, and someone obtains unauthorized access to our customers data, we could incur significant liability to our customers or significant fines and sanctions by processing networks or governmental bodies, any of which could result in
harm to our business and damage to our reputation.
We May Face Problems in Connection With Past Acquisitions, Joint Ventures or Licensing
Arrangements
On July 31, 2009, we announced the completion of our purchase of assets of Greenville, South
Carolina-based ChanneLinx, Inc. for total consideration of approximately $2.6 million in cash. We cannot be certain we will ultimately realize all of the anticipated benefits of this acquisition.
On December 8, 2003 we announced the completion of our acquisition of privately held Data Junction Corporation, a pioneering data
and application integration company based in Austin, Texas, for approximately $16.6 million in cash, net of $6.5 million of cash held by Data Junction at the time of closing of the transaction, and 5 million shares of our common stock. We
cannot be certain we will ultimately realize all of the anticipated benefits of the acquisition. In particular we may not realize the strategic and operational benefits we had anticipated, including greater revenue and market opportunities,
maintaining industry leadership and consistent profitability.
In July 2001, we formed a business venture with AG-TECH
Corporation, a company developing, selling and importing packaged software, to sell and support certain of our products in Japan. AG-TECH has been engaged in the sales and support of Btrieve (predecessor to Pervasive PSQL) and Pervasive PSQL
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 PSQL 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. While this venture has been successful to date, we cannot be certain that this venture will continue to be successful, which could result in our inability to successfully operate in Japan. In addition, as part of our venture, we executed
a three year master distributor agreement with AG-TECH, the initial term of which expired June 30, 2004. This agreement has been renewed three times, most recently for an additional five-year term which expires June 30, 2017. We cannot be
certain that we will continue to be able to renew our agreement with AG-TECH on terms and conditions at least as favorable to Pervasive as those contained in our present agreement.
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We May Face Problems in Connection With Future Acquisitions, Joint Ventures or Licensing Agreements
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.
If Our
Goodwill or Amortizable Intangible Assets Become Impaired We May Be Required to Record a Significant Charge to Earnings
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or
amortizable intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in
our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.
We May Face Problems in Connection With Product Line Expansion
In the
future, we may acquire, license or develop additional products. Future product line expansion may require us to modify or expand our business and expend significant time and resources. If we are unable to fully integrate new products with our
existing operations, we may not receive the intended benefits of such product line expansion and related expenditures.
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 distributors payment practices, changes in the financial stability of a major
distributor or any reduction in orders by such distributor, including reductions due to market or competitive conditions, combined with the potential inability to replace the distributor on a timely basis, or any modifications to our pricing or
distribution channel strategy could materially adversely affect our business, operating results and financial condition. Many of our ISVs, VARs and end users place their orders through distributors. A relatively small number of distributors have
accounted for a significant percentage of our revenues. In the fiscal year ended June 30, 2012, one distributor (our joint venture partner in Japan, AG-TECH Corporation) accounted for an aggregate of approximately 12% of our revenues, as
compared to 11% in the fiscal year ended June 30, 2011. Additionally, sales related to accounting software applications has, at various times, represented as much as 20% of our revenues. Furthermore, there has been consolidation taking place
among our ISVs that could narrow the number of customers who sell our products. For example, one of our ISVs, The Sage Group plc, has acquired Timberline Software Corporation, Softline Limited, ACCPAC International Inc., Sage Sesame and TAS
Software, five of our ISVs. The Sage Group family of companies has, at various times, represented approximately 10% of our revenues. As a result, we expect we will continue to depend on a limited number of distributors, certain of our ISV customers
and sales related to accounting software applications for a significant portion of our revenues in future periods and the loss of a significant distributor or ISV customer could materially adversely affect our business, operating results and
financial condition. Moreover, we expect that such distributors and sales related to accounting software applications will vary from period to period. Our distributors have not agreed to any minimum order requirements. Although we forecast demand
and plan accordingly, if a distributor purchases excess product, we may be obligated to accept the return of some products.
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We Depend on Our Indirect Sales Channel
Our failure to grow our indirect sales channel or the loss of a significant number of members of our indirect channel partners would have
a material adverse effect on our business, financial condition and operating results. We derive a substantial portion of our revenues from indirect sales through a channel consisting of ISVs, VARs, SIs, consultants and distributors. Our sales
channel could be adversely affected by a number of factors, many of which are outside of our control, including:
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the failure of ISVs to develop, and the failure of ISVs and VARs to sell, products based on emerging platforms supported by us;
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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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consolidation of certain of our indirect channel partners;
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competing product lines offered by certain of our indirect channel partners; and
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business model or licensing model changes of our channel partners or their competitors.
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We cannot be certain we will be able to continue to attract additional indirect channel partners or retain our current channel partners.
In addition, we cannot be certain our competitors will not attempt to recruit certain of our current or future channel partners. Such competitive actions may have an adverse effect on our ability to attract and retain channel partners, which, in
turn, may have a material adverse effect on our business, financial condition and operating results.
We May Not Be Able to Sustain or
Develop Strategic Relationships
From time to time, we enter into strategic collaborative relationships with other
companies in areas such as product development, marketing, distribution and implementation, which allow us to realize a variety of benefits. Many of our current strategic relationships are informal, or, if written, terminable with little or no
notice. Additionally, many of our current and potential strategic partners are either actual or potential competitors with us. For these reasons, we may not be able to sustain our current strategic relationships or enter into successful new
strategic relationships in the future, which could have a material adverse effect on our business, operating results and financial condition.
We Depend on Third-Party Technology in Our Products
We rely upon certain software 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 product development or shipment delays or the loss or deferral
of revenues 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
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part on shrink wrap and click wrap licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. Therefore,
our efforts to protect our intellectual property may not be adequate. We cannot be certain that others will not develop technologies that are similar or superior to our technology or design around the copyrights and trade secrets owned by us.
Unauthorized parties may attempt to copy aspects of our products or to obtain and use information we regard as proprietary. Although we believe software piracy may be a problem, we are unable to determine the extent to which piracy of our software
products occurs. In addition, portions of our source code have been developed in foreign countries, such as in India where we have used third-party service providers, with laws that do not protect our proprietary rights to the same extent as the
laws of the United States.
We may be subjected to claims of intellectual property infringement by third parties as the number
of products and competitors in our industry segment continues to grow and the functionality of products in different industry segments increasingly overlaps. Any infringement claims, with or without merit, could be time-consuming, result in costly
litigation, divert management attention and resources, cause product shipment delays or the loss or deferral of sales or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. In the event of a successful claim of intellectual property infringement against us, should we fail or be unable to either license the technology or similar technology or develop alternative technology
on a timely basis, our business, operating results and financial condition could be materially adversely affected.
We Must Adapt to Rapid
Technological Change
Our future success will depend upon our ability to continue to enhance our current products and to
develop and introduce new products on a timely basis that keep pace with technological developments and new industry standards and satisfy increasingly sophisticated customer requirements. Rapid technological change, frequent new product
introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards characterize the market for our products. The introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. Due to the complexities inherent in client/server and Web computing environments and in data and application integration solutions, and the performance demanded by customers
for data infrastructure software products, new products and product enhancements can require long development and testing periods. As a result, significant delays in the general availability of such new releases or significant problems in the
installation or implementation of such new releases could have a material adverse effect on our business, operating results and financial condition. We have experienced delays in the past in the release of new products and new product enhancements.
In the future, we may not be successful in developing and marketing, on a timely and cost-effective basis, new products or new product enhancements that respond to technological change, evolving industry standards or customer requirements, avoiding
difficulties that could delay or prevent the successful development, introduction or marketing of these products, or achieving market acceptance for our new products and product enhancements, any of which could have a material adverse effect on our
business, operating results and financial condition.
Our Software May Contain Errors or Defects
Software products such as ours may contain errors, sometimes called bugs, particularly when first introduced or when new
versions or enhancements are released. From time to time, we discover software errors in certain of our new products after their introduction. Despite our testing, current versions, new versions or enhancements of our products may still have errors
after commencement of commercial shipments. Errors or defects in our products may result in loss of revenues, delay in market acceptance, diversion of development resources or injury to our brand and reputation and could materially adversely affect
our business, operating results and financial condition.
We May Become Subject to Product or Professional Services Liability Claims
A product or professional services liability claim, whether or not successful, could damage our reputation and our
business, operating results and financial condition. Our license and service agreements with our customers typically contain provisions designed to limit our exposure to potential product or service liability claims. However, these contract
provisions may not preclude all potential claims. Product or professional services liability claims could require us to spend significant time and money in litigation or to pay significant damages.
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We Compete with Microsoft while Simultaneously Supporting Microsoft Technologies
We currently compete with Microsoft in the market for data management products while simultaneously maintaining a working relationship
with Microsoft. Microsoft has a longer operating history, a larger installed base of customers and substantially greater financial, distribution, marketing and technical resources than us. As a result, we may not be able to compete effectively with
Microsoft now or in the future, and our business, operating results and financial condition may be materially adversely affected.
We expect that Microsofts commitment to and presence in the data management products market will continue to assert competitive pressure. We believe that Microsoft will continue to incorporate SQL
Server database technology into its operating system software and certain of its server software offerings, possibly at no additional cost to its users. Microsoft currently licenses a royalty-free limited version of its SQL Server database
technology. We believe that Microsoft will also continue to enhance its SQL Server database technology and that Microsoft will continue to invest in various sales and marketing programs involving certain of our channel partners.
In addition, Microsoft has grown its presence in the software applications market. For example, they acquired Great Plains Software, a
former channel partner of Pervasive, and Navision, both of which are accounting software vendors. Microsoft has also entered the customer relationship management software market. We believe that Microsoft will continue to grow its presence in the
software applications market and in doing so, may have a negative impact on the financial stability of other software application vendors who use our products, or may influence other software application vendors to use Microsoft infrastructure
software products instead of those available from us.
We believe we must maintain a working relationship with Microsoft to
achieve success. Many of our customers use Microsoft-based operating platforms. Thus, it is critical to our success that our products be closely integrated with Microsoft technologies. Notwithstanding our historical and current support of Microsoft
platforms, Microsoft may in the future promote technologies and standards more directly competitive with or not compatible with our technology.
We Face Significant Competition From Other Companies
We encounter competition for our embedded database products primarily from large, public companies, including Microsoft, Oracle, Sybase/SAP, IBM and Progress. In particular, Sybases small memory
footprint database software product, Adaptive Server Anywhere, and Microsofts product, SQL Server, directly compete with our products.
The market for our integration products is highly competitive and subject to rapidly changing technology. We often compete against custom code, where potential customers have sufficient internal technical
resources to develop solutions in-house. In addition, we face competition from vendors of ETL (extract, transform and load), data warehousing and application integration software products. Such competitors include IBM, Dell Boomi, Snaplogic, Oracle,
Business Objects/SAP, Informatica, and Information Builders, as well as niche vendors in specific verticals and the SaaS marketplace. In addition, we compete or may compete against database vendors that currently offer, or may develop, products with
functionalities that compete with our integration solutions. These products typically operate specifically with these competitors proprietary databases. Such competitors include IBM, Microsoft, Sybase/SAP and Oracle. And, because there are
relatively low barriers to entry in the software market, we may encounter additional competition from other established or emerging companies providing integration products based on existing, new or open-source technologies.
Open-source software, such as that of open source offerings MySQL and Talend, may impact our business as interest, demand and use
increases in the database and integration segments and poses a challenge to our business model. Firms adopting the open-source software model typically provide customers software produced by loosely associated groups of unpaid programmers, make
licenses available to end users at nominal cost, and earn revenue on complementary services and products, without having to bear the full costs of research and development for the open-source software. To the extent
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competing open-source software products gain increasing market acceptance, sale of our products may decline, we may have to reduce prices we charge for our products, and our revenue and operating
margins may decline. Mass adoption of open source databases in the SME market could have a material adverse impact on our database business.
Software-as-a-Service (SaaS) vendors have and may continue to enter our market and could cause a change in revenue models from licensing of client/server and Web-based applications to renting
applications. Our competitors may be more successful than we are in adopting these revenue models and capturing related market share.
Most of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of
customers. In addition, some competitors have demonstrated a willingness to, or may willingly in the future, incur substantial losses as a result of deeply discounted product offerings or aggressive marketing campaigns. For example, Microsoft,
Oracle, IBM and Sybase all currently license royalty-free limited versions of their database technologies. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of competitive products, than we can. There is also a substantial risk that changes in licensing models or announcements of competing products by competitors such as Microsoft, Oracle,
Sybase/SAP, IBM, Progress, MySQL/Oracle, Ascential/IBM, Cast Iron/IBM, Boomi/Dell, Talend, Business Objects/SAP, Informatica, Information Builders or others could result in the cancellation of customer orders in anticipation of the introduction of
such new licensing models or products. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer
needs, which may limit our ability to sell our products through particular partners. Accordingly, new competitors or alliances among, or consolidations of, current and new competitors may emerge and rapidly gain significant market share in our
current or anticipated markets. We also expect competition will increase as a result of software industry consolidation. Increased competition is likely to result in price reductions, fewer customer orders, reduced margins and loss of market share,
any of which could materially adversely affect our business, operating results and financial condition. We cannot be certain we will be able to compete successfully against current and future competitors or that the competitive pressures we face
will not materially adversely affect our business, operating results and financial condition.
We are Susceptible to a Shift in the Market
for Client/Server Applications Toward Web-Based or Hosted Applications
We have derived substantially all of our historical
embedded database product revenues from the use of our products in client/server applications. We expect to rely on continued market demand for client/server applications indefinitely. However, we believe market demand may shift from client/server
applications to Web-based or hosted applications. If so, we cannot be certain our existing client/server developers will migrate to Web-based or hosted applications and continue to use our products or that other developers of Web-based or hosted
applications would select our data management products. In addition, this shift could result in a change in revenue models from licensing of client/server applications to subscriptions of Web-based or hosted applications from SaaS vendors. A
decrease in client/server application sales coupled with an inability to derive revenues from the Web-based or hosted application market could have a material adverse effect on our business, operating results and financial condition.
We Depend on International Sales and Operations
We anticipate for the foreseeable future we will derive a significant portion of our revenues from sources outside North America. In the fiscal year ended June 30, 2012, we derived 36% of our
revenues outside North America. Our international operations are generally subject to a number of risks. These risks include:
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foreign laws and business practices favoring local competition;
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dependence on local channel partners;
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compliance with multiple, conflicting and changing government laws and regulations;
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greater difficulty or delay in collecting payments from customers;
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difficulties in staffing and managing foreign operations;
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foreign currency exchange rate fluctuations and the associated effects on product demand and timing of payment;
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increased tax rates in certain foreign countries;
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complexities with financial reporting in foreign countries;
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quality control of certain development, translation or localization activities;
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political, social and economic instability; and
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reduced or different protections for intellectual property rights in some foreign countries.
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We may expand or modify our operations internationally. Despite our efforts, we may not be able to expand or modify our operations
internationally in a timely and cost-effective manner. Such an outcome would limit or eliminate any sales growth internationally, which in turn would materially adversely affect our business, operating results and financial condition. Even if we
successfully expand or modify our international operations, we may be unable to maintain or increase international market demand for our product.
We expect our international operations will continue to place financial and administrative demands on us, including operational complexity associated with international facilities, administrative burdens
associated with managing relationships with foreign partners, and treasury functions to manage foreign currency risks and collections.
Fluctuations in the Relative Value of Foreign Currencies Can Affect Our Business
To date, the majority of our transactions have been denominated in U.S. dollars. The majority of our international operating expenses and
substantially all of our sales in Japan have been denominated in currencies other than the U.S. dollar. Therefore, our operating results may be adversely affected by changes in the relative value of the U.S. dollar. Certain of our international
sales are denominated in U.S dollars, especially in Europe. Any strengthening of the U.S. dollar against the currencies of countries where we sell products denominated in U.S. dollars will increase the relative cost of our products and could
negatively impact our sales in those countries. To the extent our international operations expand or are modified, our exposure to exchange rate fluctuations may increase. We have, on occasion, entered into limited hedging transactions to mitigate
our exposure to currency fluctuations. Despite these hedging transactions, exchange rate fluctuations have caused, and will continue to cause, currency transaction gains and losses. Although these transactions have not resulted in material gains and
losses to date, similar transactions could have a damaging effect on our business, results of operations or financial condition in future periods.
We Must Continue to Hire and Retain Skilled Personnel
Our success depends
in large part on our ability to attract, motivate and retain highly skilled employees on a timely basis, particularly executive management, sales and marketing personnel, software engineers and other senior personnel. Our efforts to attract and
retain highly skilled employees could be harmed by our past or any future workforce reductions. Our failure to attract and retain the highly trained technical personnel who are essential to our product development, marketing, service and support
teams may limit the rate at which we can generate revenue and develop new products or product enhancements. This could have a material adverse effect on our business, operating results and financial condition.
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We issue stock options and restricted stock as key components of our overall compensation.
There is pressure on public companies from stockholders generally and various organizations to reduce the rate at which companies issue stock options and restricted stock to employees, which may make it more difficult to obtain stockholder approval
of equity compensation plans when required. As a result, we may lose top employees to non-public, start-up companies or may generally find it more difficult to attract, retain and motivate highly skilled employees, either of which could materially
and adversely affect our business, results of operations and financial condition.
There Are Risks and Uncertainties Associated With Our
Proposed Acquisition by Actian.
There are risks and uncertainties associated with our proposed acquisition by Actian. For
example, the acquisition may not be consummated, or may not be consummated as currently anticipated, as a result of several factors, including but not limited to the failure to satisfy the closing conditions set forth in the Merger Agreement, such
as the conditions that we obtain the approval of the stockholders holding a majority of the outstanding Common Stock of the Company and that we receive antitrust approvals. The Merger Agreement provides that, upon termination under specified
circumstances, the Company would be required to pay Actian a termination fee of approximately $4.9 million.
The Merger
Agreement also restricts us from engaging in certain actions and taking certain actions without Actians approval, which could prevent us from pursuing opportunities that may arise prior to the closing of the acquisition.
Our Business Could Be Adversely Impacted as a Result of Uncertainty Related to the Proposed Acquisition by Actian.
The proposed acquisition could cause disruptions in our business, which could have an effect on our results of operations and financial
condition. For example:
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our employees may experience uncertainty about their future roles at the Company, which might adversely affect our ability to retain and hire key
managers and other employees;
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customers and suppliers may experience uncertainty about the Companys future and seek alternative business relationships with third parties or
seek to alter their business relationships with the Company; and
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the attention of our management may be directed to transaction-related considerations and may be diverted from the day-to-day operations of our
business.
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In addition, we have incurred, and will continue to incur, significant fees for professional
services and other transaction costs in connection with the proposed acquisition, and many of these fees and costs are payable by us regardless of whether we consummate the transaction.
We Have Anti-Takeover Provisions
Our Restated Certificate of Incorporation
and Amended and Restated Bylaws contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals that a stockholder might consider favorable. These provisions
include provisions to authorize the issuance of blank check preferred stock; establish advance notice requirements for stockholder nominations for elections to the Board of Directors or for proposing matters that can be acted upon at
stockholders meetings; eliminate the ability of stockholders to act by written consent; require super-majority voting to approve certain amendments to the Restated Certificate of Incorporation; limit the persons who may call special meetings
of stockholders; and provide for a Board of Directors with staggered, three-year terms. In addition, certain provisions of Delaware law and our 1997 Stock Incentive Plan and our 2006 Equity Incentive Plan may also have the effect of discouraging,
delaying or preventing a change in control or unsolicited acquisition proposals.
We May Elect to Raise Additional Capital Which Might Not
Be Available or Which, if Available, May Be on Terms That Are Not Favorable to Us
We may elect to raise additional funds,
and we cannot be certain we will be able to obtain additional financing on favorable terms, if at all. If we issue equity securities, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights,
preferences or privileges senior to those of existing holders of our common stock. If we borrow money, we may incur significant interest charges, which could harm our profitability. Holders of debt would also have rights, preferences or privileges
senior to those of existing holders of our common stock. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our product, take advantage of future opportunities or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, operating results and financial condition.
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The Price of Our Stock Has Been Volatile and Could Continue to Fluctuate Substantially
Our common stock is traded in the NASDAQ Global Market. The market price of our common stock has been volatile and could fluctuate
substantially based on a variety of factors outside of our control, in addition to our financial performance. Furthermore, stock prices for many companies, including our own, fluctuate widely for reasons that may be unrelated to operating results.
During the twenty-seven fiscal quarters ending December 31, 2012, the Company has acquired approximately
10.5 million shares of its common stock on the open market at a total cost of approximately $46.3 million, or approximately $4.36 price per share. The Companys Board of Directors approved the current stock repurchase plan effective
July 27, 2010, whereby the Company may repurchase additional shares of its common stock with a value of up to $10 million, of which approximately $1.4 million remains available as of December 31, 2012. Depending on market conditions and
other factors, such purchases may be commenced or suspended at any time without prior notice. There can be no assurance that we will continue to buy any of our common stock under our share repurchase program or that any past or future repurchases
will have a positive impact on our stock price. Important factors that could cause us to discontinue our share repurchases include, among others, unfavorable market conditions, the market price of our common stock, the nature of other investment
opportunities presented to us from time to time, and the availability of funds necessary to continue purchasing common stock.
We May Be
Exposed to Potential Risks if We Do Not Have an Effective System of Disclosure Controls or Internal Controls or Fail on an On-going Basis to Properly Address and Implement Section 404 of Sarbanes-Oxley
We must comply, on an on-going basis, with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX), including those
provisions that establish the requirements for both management and auditors of public companies with respect to reporting on internal control over financial reporting. If we fail to maintain an effective system of disclosure controls or internal
control over financial reporting, including satisfaction of the requirements of Section 404 of SOX, we may not be able to accurately or timely report on our financial results or adequately identify and reduce the likelihood of fraud.
Additionally, if we were to identify any material weakness over our internal control over financial reporting, we also cannot ensure that we could correct any such material weakness to allow our management to conclude that our internal controls over
financial reporting are effective in time to enable our independent registered public accounting firm to attest that such assessment will have been fairly stated in any report to be filed with the SEC or attest that we have maintained effective
internal control over financial reporting. As a result, the financial position of our business could be harmed; current and potential future stockholders could lose confidence in us and/or our reported financial results, which may cause a negative
effect on our trading price; and we could be exposed to litigation or regulatory proceedings, which may be costly or divert management attention.
Our Reported Financial Results May be Adversely Affected by New Accounting Pronouncements or Changes in Existing Accounting Standards and Practices
We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles
are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC and various organizations formed to interpret and create appropriate accounting standards and practices. New accounting pronouncements and varying
interpretations of accounting standards and practices have occurred and may occur in the future. New accounting pronouncements or a change in the interpretation of existing accounting standards or practices may have a significant effect on our
reported financial results and may even affect our reporting of transactions completed before the change is announced or effective.
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