10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended December 31, 2008

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, Bldg. B

Austin, Texas 78727

(Address of principal executive offices) (Zip code)

(512) 231-6000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15d 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.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 2, 2009 there were 18,874,153 shares of the Registrant’s common stock outstanding.

 

 

 


Table of Contents

PERVASIVE SOFTWARE INC.

FORM 10-Q

INDEX

 

          Page

PART I.

   FINANCIAL INFORMATION   
Item 1.   

Financial Statements

   3
  

Condensed Consolidated Balance Sheets at December 31, 2008 and June 30, 2008

   3
  

Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2008 and 2007

   4
  

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2008 and 2007

   5
  

Notes to Condensed Consolidated Financial Statements

   6
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   10
Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

   19
Item 4.   

Controls and Procedures

   20

PART II.

   OTHER INFORMATION   
Item 1A.   

Risk Factors

   22
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   33
Item 4.   

Submission of Matters to a Vote of Security Holders

   33
Item 5.   

Other Information

   33
Item 6.   

Exhibits

   34

SIGNATURES

   35


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

PERVASIVE SOFTWARE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     December 31,
2008
   June 30,
2008
     (Unaudited)     

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 15,165    $ 33,190

Marketable securities

     29,714      11,759

Trade accounts receivable, net

     5,446      5,581

Deferred income tax assets

     735      744

Prepaid expenses and other current assets

     1,360      1,249
             

Total current assets

     52,420      52,523

Property and equipment, net

     1,542      1,474

Purchased technology, net

     78      626

Goodwill

     38,508      38,508

Deferred income tax assets

     1,781      1,310

Other assets

     247      303
             

Total assets

   $ 94,576    $ 94,744
             

Liabilities and Stockholders’ Equity

     

Current liabilities:

     

Trade accounts payable

   $ 248    $ 352

Accrued payroll and payroll related costs

     1,947      1,753

Deferred rent and lease related accruals

     1,128      1,253

Other accrued expenses

     1,629      1,765

Deferred revenues

     6,464      6,345
             

Total current liabilities

     11,416      11,468

Stockholders’ equity:

     

Common stock

     75,696      78,595

Retained earnings

     7,464      4,681
             

Total stockholders’ equity

     83,160      83,276
             

Total liabilities and stockholders’ equity

   $ 94,576    $ 94,744
             

See accompanying notes.

 

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PERVASIVE SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

     Three months ended
December 31,
    Six months ended
December 31,
 
     2008     2007     2008     2007  

Revenues:

        

Product licenses

   $ 7,163     $ 7,155     $ 15,317     $ 14,181  

Service and other

     4,026       3,187       7,759       6,331  
                                

Total revenue

     11,189       10,342       23,076       20,512  

Costs and expenses:

        

Cost of product license revenues

     427       691       918       1,223  

Cost of service and other revenues

     1,277       1,047       2,389       2,107  

Sales and marketing

     4,556       4,305       9,106       8,585  

Research and development

     2,571       2,617       5,106       5,162  

General and administrative

     1,221       1,241       2,691       2,671  
                                

Total costs and expenses

     10,052       9,901       20,210       19,748  
                                

Operating income

     1,137       441       2,866       764  

Interest and other income, net

     175       459       385       1,042  

Income tax provision

     (153 )     (215 )     (809 )     (568 )
                                

Net income

   $ 1,159     $ 685     $ 2,442     $ 1,238  
                                

Basic earnings per share

   $ 0.07     $ 0.03     $ 0.14     $ 0.06  
                                

Diluted earnings per share

   $ 0.06     $ 0.03     $ 0.13     $ 0.06  
                                

See accompanying notes.

 

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PERVASIVE SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Six months ended
December 31,
 
     2008     2007  

Cash from operations

    

Net income

   $ 2,442     $ 1,238  

Adjustments to reconcile net income to net cash provided by operations:

    

Depreciation and amortization

     961       1,081  

Write-off of purchased technology

     —         147  

Non-cash stock compensation expense

     774       949  

Non-cash changes in deferred tax assets

     (462 )     (160 )

Changes in current operating assets and liabilities:

    

Trade accounts receivable

     61       382  

Prepaid expenses and other current assets

     (116 )     153  

Accounts payable and accrued liabilities

     (56 )     412  

Deferred revenue

     202       (392 )
                

Net cash provided by operations

     3,806       3,810  

Cash from investing activities

    

Purchases of property and equipment

     (477 )     (275 )

Sales and purchases of marketable securities, net

     (17,736 )     2,823  

(Increase) decrease in other assets

     55       (54 )
                

Net cash provided by (used in) investing activities

     (18,158 )     2,494  

Cash from financing activities

    

Proceeds from exercise of stock options

     24       285  

Purchase of treasury stock

     (3,695 )     (3,601 )
                

Net cash used in financing activities

     (3,671 )     (3,316 )

Effect of exchange rate on cash and cash equivalents

     (2 )     43  
                

Increase (decrease) in cash and cash equivalents

     (18,025 )     3,031  

Cash and cash equivalents of beginning of period

     33,190       31,563  
                

Cash and cash equivalents at end of period

   $ 15,165     $ 34,594  
                

See accompanying notes.

 

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PERVASIVE SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008

(Unaudited)

1. General and Basis of Financial Statements

The unaudited interim condensed consolidated financial statements include the accounts of Pervasive Software Inc. and its majority-owned subsidiaries (collectively, the “Company” or “Pervasive”). All intercompany accounts and transactions have been eliminated in consolidation.

The financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state the Company’s financial position, results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended June 30, 2008, which are contained in the Company’s Annual Report filed on Form 10-K on September 8, 2008 (File No. 000-23043). The results of operations for the three and six month periods ended December 31, 2008 and 2007 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

2. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

 

     Three months ended
December 31,
   Six months ended
December 31,
     2008    2007    2008    2007

Numerator:

           

Net income

   $ 1,159    $ 685    $ 2,442    $ 1,238
                           

Denominator:

           

Denominator for basic earnings per share – weighted average shares

     17,759      20,160      18,028      20,305

Effect of dilutive securities

     678      322      604      359
                           

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions

     18,437      20,482      18,632      20,664
                           

Basic earnings per share

   $ 0.07    $ 0.03    $ 0.14    $ 0.06
                           

Diluted earnings per share

   $ 0.06    $ 0.03    $ 0.13    $ 0.06
                           

3. Cash, Cash Equivalents and Short-term Investments

The Company considers all highly liquid investment securities with an original maturity of three months or less at the date of purchase to be cash equivalents.

Short-term investments consist of marketable securities that are classified as “available for sale”, excluding cash equivalents as described above.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

 

  1. Level 1 Inputs – quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to obtain at the measurement date. This level provides the most reliable evidence of fair value.

 

  2. Level 2 Inputs – inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability. Level 2 assets consist of marketable debt and equity instruments with quoted market prices that are traded in less active markets or priced using a quoted market price for similar instruments. Examples of assets currently utilizing Level 2 inputs are U.S. agency securities, commercial paper and municipal bonds.

 

  3. Level 3 Inputs – Used to measure fair value assets and liabilities that little, if any, market activity exists at the measurement date. These inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Short-term investments consisted of the following (in thousands):

 

     Fair Value
Hierarchy
   December 31, 2008    June 30, 2008
        Cost    Unrealized
Gain
(Loss)
   Estimated
Fair
Value
   Cost    Unrealized
Gain
(Loss)
   Estimated
Fair
Value

Marketable securities:

                    

Municipal bonds and U.S. government agencies

   Level 2    $ 29,466    $ 248    $ 29,714    $ 11,726    $ 33    $ 11,759
                                            
      $ 29,466    $ 248    $ 29,714    $ 11,726    $ 33    $ 11,759
                                            

Short-term marketable securities are classified as “available-for-sale” and are presented at estimated fair value with any unrealized gains or losses included in other comprehensive income (loss). Realized gains and losses are computed based on the specific identification method. Realized gains and losses were not material for the periods presented. The Company endeavors to utilize the best available information in measuring fair value. For short-term investments, fair values are based on quoted market prices where available. Based on the inputs used to estimate fair values for short-term investments, the Company has determined that our short-term marketable securities are Level 2 in the fair value hierarchy.

4. Comprehensive Income

The components of comprehensive income are as follows:

 

     Three months ended
December 31,
   Six months ended
December 31,
     2008    2007    2008    2007

Net Income

   $ 1,159    $ 685    $ 2,442    $ 1,238

Foreign currency translation adjustments

     139      18      121      54

Unrealized gain (loss) on investments

     262      9      220      50
                           

Comprehensive income

   $ 1,560    $ 712    $ 2,783    $ 1,342
                           

5. Stock Compensation

The Company accounts for stock-based compensation expense in accordance with Statement of Financial Accounting Standards (SFAS) No. 123(R). Under SFAS 123R, stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures.

The fair value of each award granted from our stock option plan during the three and six months ended December 31, 2008 and 2007 was estimated at the date of grant using the Black-Scholes option pricing model, assuming no expected dividends and the following weighted average assumptions:

 

     Three months ended
December 31,
    Six months ended
December 31,
 
     2008     2007     2008     2007  

Expected volatility (based on historical data)

     35.3 %     47.9 %     38.1 %     55.6 %

Expected life in years

     4       4       4       4  

Risk-free interest rate

     2.32 %     3.19 %     2.24 %     3.67 %

Fair value per award

   $ 1.22     $ 1.86     $ 1.34     $ 2.10  

As of December 31, 2008, $1.7 million of unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.4 years.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

6. Common Stock and Stock Options

The Company’s 2006 Equity Incentive Plan as amended (the 2006 Plan) was adopted by the Board of Directors on September 21, 2006, and approved by the stockholders on November 14, 2006, as the successor to the 1997 Stock Incentive Plan (the 1997 Plan). Outstanding options under the 1997 Plan have been incorporated into the 2006 Plan and no further option grants will be made under the 1997 Plan. The incorporated options will continue to be governed by their existing terms, unless the Plan Administrator elects to extend one or more features of the 2006 Plan to those options.

Incentive stock options may be granted to employees of the Company entitling them to purchase shares of common stock for a maximum of ten years (five years in the case of options granted to a person possessing more than 10% of the combined voting power of the company as of the date of grant). The exercise price for incentive stock options may not be less than fair market value of the common stock on the date of the grant (110% of fair market value in the case of options granted to a person possessing more than 10% of the combined voting power of the Company). Nonqualified stock options may be granted to employees, officers, directors, independent contractors and consultants of the Company. The exercise price for nonqualified stock options may not be less than 85% of the fair market value of the common stock on the date of the grant (110% of fair market value in the case of options granted to a person possessing more than 10% of the combined voting power of the Company). The Company may also award Restricted Stock and Stock Appreciation Rights subject to provisions in the 2006 Plan.

The vesting period for stock options is generally a four-year period. Options are generally exercisable by the holder only for the vested portion of each grant.

A summary of changes in common stock options during the year ended June 30, 2008 and the six month period ended December 31, 2008 is as follows:

 

     Shares     Range of Exercise
Prices
   Weighted
Average Exercise
Price

Options outstanding, June 30, 2007

   2,517,188     $ 1.06 – 16.81    $ 4.81

Granted

   249,000     $ 3.76 –   4.66    $ 4.01

Exercised

   (144,422 )   $ 1.18 –   4.20    $ 2.94

Surrendered

   (216,725 )   $ 3.70 – 16.81    $ 6.16
           

Options outstanding, June 30, 2008

   2,405,041     $ 1.06 – 16.81    $ 4.72

Granted

   63,500     $ 3.95 –   4.31    $ 4.08

Exercised

   (7,250 )   $ 3.09 –   4.05    $ 3.23

Surrendered

   (72,125 )   $ 3.72 –   8.15    $ 4.41
           

Options outstanding, December 31, 2008

   2,389,166     $ 1.06 – 16.81    $ 4.71
           

The following is additional information relating to outstanding options:

 

     Options Outstanding    Options Exercisable

Range of Exercise Price

   December 31,
2008
   June 30,
2008
   December 31,
2008

$  1.06 to $  1.71

   151,425    151,425    151,425

$  2.31 to $  4.00

   1,062,991    1,069,366    752,115

$  4.03 to $  6.00

   742,500    746,000    561,750

$  6.90 to $  9.88

   369,000    375,000    369,000

$10.00 to $16.81

   63,250    63,250    63,250
              

$  1.06 to $16.81

   2,389,166    2,405,041    1,897,540
              

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

7. Goodwill and Other Intangible Assets

As of December 31, 2008, Pervasive had goodwill in the amount of $38.5 million associated with the acquisition of Data Junction. The Company previously determined, in accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets, that it would assess the impairment of goodwill and other intangible assets with indefinite lives annually in the fourth quarter, or more frequently if other indicators of impairment arise. Other intangible assets, classified as Purchased Technology on the balance sheet, amounted to $0.1 million (net of accumulated amortization of $6.4 million) as of December 31, 2008. These intangible assets consist of developed technology, including the $6.3 million value assigned to amortizable intangible assets related to developed technology in connection with the acquisition of Data Junction during the second quarter of fiscal 2004.

The Company is amortizing intangible assets on a straight-line basis over their estimated useful lives, generally five years. Amortization expense for the three and six months ended December 31, 2008, was $0.2 million and $0.5 million, respectively. Amortization expense for intangible assets is anticipated to be approximately $0.6 million for the year ended June 30, 2009.

8. Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a framework for measuring fair value under other accounting pronouncements that require fair value measurements and expands disclosures about such measurements. SFAS No. 157 does not require any new fair value measurements, but rather it creates a consistent method for calculating fair value measurements to address non-comparability of financial statements containing fair value measurements utilizing different definitions of fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 on July 1, 2008 did not have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 provides a “Fair Value Option” under which a company may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. This Fair Value Option will be available on a contract-by-contract basis with changes in fair value recognized in earnings as those changes occur. The effective date for SFAS 159 is the beginning of each reporting entity’s first fiscal year end that begins after November 15, 2007. SFAS 159 also allows an entity to early adopt the statement as of the beginning of an entity’s fiscal year that begins after the issuance of SFAS 159, provided that the entity also adopts the requirement of SFAS No. 157. The adoption of SFAS 159 on July 1, 2008 did not have an impact on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for the Company beginning July 1, 2009 and will apply prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for the Company beginning July 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company does not believe this pronouncement will impact its financial statements.

 

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PERVASIVE SOFTWARE INC.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this Report on Form 10-Q 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. Actual results may differ materially from those indicated in such forward-looking statements. We are under no duty to update any forward-looking statements after the date of this filing on Form 10-Q to conform these statements to actual results. See “Risk Factors” in Part II, Item 1A of this Report on Form 10-Q.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:

 

   

Executive Overview that discusses at a high level our business, our operating results and some of the trends that affect our business.

 

   

Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements.

 

   

Results of Operations that begins with a table summarizing results of operations expressed as percentages of revenues for the periods presented, followed by a more detailed discussion of our revenue and expenses.

 

   

Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments.

You should note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see the section entitled “Special Note Regarding Forward-Looking Statements” at the end of Item 4 for important information to consider when evaluating such statements.

You should read this MD&A in conjunction with the Consolidated Financial Statements and related Notes in Part I, Item 1.

Executive Overview

Our Business

Pervasive Software is a global software and services company focused on helping companies get the most out of their data investments through embeddable data management and agile integration software. Our embeddable Pervasive PSQL database engine allows organizations to successfully embrace new technologies while maintaining application compatibility and robust database reliability in a near-zero database administration environment. Our agile, multi-purpose Pervasive Data Integrator integration platform accelerates the sharing of information between multiple databases, applications, or hosted business systems and allows customers to re-use the same software for diverse integration scenarios.

Our PSQL database products continued to generate approximately two-thirds of our revenue during fiscal year 2008. Channel adoption trends for version 10 of our Pervasive PSQL database have been good since its launch in September 2007, and in June 2008 we released Pervasive PSQL Summit v10.10, which is Microsoft Certified for Windows Server 2008.

Our Integration products continued to generate the remaining one-third of our revenue. These products and services continue to be well-received by our existing and new customers, including end users and commercial software developers alike.

Our solid results in both of our core product lines allow us to continue to fund our commitment to innovation. We will continue to invest in innovation by allocating dedicated funds for research focused on new ways to serve our existing customers and attract new customers. Our innovation efforts in fiscal year 2007 and 2008 resulted in the introduction and further development of three new product and service offerings:

 

   

Pervasive DataTools—downloadable, subscription-based, functional subsets of our Pervasive Data Integrator product,

 

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Pervasive DataSolutions—subscription-based integration as a service delivered on-premises or as a multi-tenant service hosted by Pervasive and potentially by our ISV customers, and

 

   

Pervasive DataRush—our Java engine and library designed to enable software developers to capture the parallel processing capabilities of multi-core technologies for data-intensive applications, presently at Release Candidate phase and with initial lighthouse customer projects successfully completed.

For more than two decades, Pervasive products have delivered value with a compelling combination of performance, flexibility, reliability and low total cost of ownership. In addition, significant portions of our database and integration flagship product lines are embeddable into commercial applications for sale predominantly to small to mid-sized enterprises (SMEs) through a well-developed channel of independent software vendors (ISVs), Software-as-a-Service (SaaS) vendors, value-added resellers (VARs) and system integrators.

We develop, market, sell and support our offerings worldwide through our principal office in Austin, Texas and through international offices in Brussels, Frankfurt, Paris and London and a joint venture in Japan.

Our Operating Results

Our comparative results for the second fiscal quarter ended December 31, 2008:

 

   

Revenue was $11.2 million and $10.3 million in the second fiscal quarter ending December 31, 2008 and 2007, respectively.

 

   

Net income was $1.2 million and $0.7 million in the second fiscal quarter ending December 31, 2008 and 2007, respectively. Net income in the second fiscal quarter included an increase in revenue of $0.8 million, an increase in operating expense of $0.2 million, reduced interest income of $0.3 million, and a decrease in our income tax provision of $0.1 million for a combined net increase of net income of $0.5 million for the second quarter of fiscal year 2009.

 

   

Operating income, a financial measure before interest income and taxes, was $1.1 million and $0.4 million in the second fiscal quarter ending December 31, 2008 and 2007, respectively.

 

   

We continued to generate positive cash flow from operations with $1.0 and $1.3 million in the second fiscal quarter ending December 31, 2008 and 2007, respectively. We ended the second quarter of fiscal year 2009 with $44.9 million in cash and marketable securities.

 

   

We acquired 768,000 shares of our common stock, at a cost of approximately $3.1 million in the second fiscal quarter ending December 31, 2008. Issued and outstanding shares of common stock as of December 31, 2008 totaled approximately 18.3 million.

Market Trends

Over the past 20 years, businesses of all sizes have invested billions of dollars in application software that enabled them to automate and simplify their business processes. As the sales and implementation of these application packages proliferated, including increasingly heterogeneous environments that use both SaaS and on-premises software, organizations have faced increasing data and application infrastructure challenges and an entire software market segment emerged to address these challenges. The past growth of the infrastructure software market in the United States, we believe, can primarily be traced to the demand for technologies that extend the use of established systems, enable the rapid deployment of new applications, and improve the ability to collaborate and communicate with customers and suppliers.

 

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At the same time, we believe that the software markets as a whole are going through a maturation and commoditization phase. As markets mature and commoditize, having a “value” orientation—delivering the highest performance with the lowest TCO—becomes increasingly critical. We believe infrastructure software will be a key ingredient for small to mid-sized businesses and departments within enterprises that seek to integrate and streamline their back-end systems and eliminate delays in the management and execution of critical processes. Infrastructure software includes, among other things, application development tools, integration tools and solutions, business intelligence, database, and security solutions.

We believe that maturation and commoditization trends in the software market, increasing SaaS proliferation, trends in the SME market, and trends in the data and application integration market will favor Pervasive. We believe the market for data infrastructure software, in particular, is experiencing significant market disruption due to the high cost of many competing, more labor-intensive solutions. We further believe well-established value leaders tend to prevail in maturing and cost-sensitive markets, and Pervasive, with its strengths in high-performance, low-cost data management and integration solutions, is well-positioned to benefit from the trends in these markets. In addition, the ability to deliver preconfigured packaged integration solutions offers the opportunity to attract non-technical users and address unmet market needs. While the economic slowdown in the U.S. continues, we believe our value orientation and reputation as an established vendor with highly reliable offerings positions Pervasive to continue to prosper.

Risks to our Success

Risks and uncertainties include, among others, our ability to attract and retain existing and/or new customers; our ability to issue new products or releases of solutions that meet customers’ needs or achieve acceptance by the Company’s customers; changes to current accounting policies which may have a significant, adverse impact upon the Company’s financial results; the introduction of new products by competitors or the entry of new competitors; our ability to preserve our key strategic relationships; our ability to hire and retain key employees; and economic and political conditions in the US and abroad. All of these factors, as well as those discussed in Item 1A—Risk Factors, may result in significant fluctuations in our quarterly operating results and/or our ability to sustain or increase our profitability.

Going Forward

In 2009, the Company is focused on:

 

   

the continued marketing of the most recent major release of our embedded database product, Pervasive PSQL Summit v10.10, which is Microsoft Certified for Windows Server 2008;

 

   

growing the sales of our integration product line both through direct sales and through highly leverageable indirect channels;

 

   

continuing the investment in new product and service innovation, including the further advancement of our innovation initiatives from fiscal 2008: Pervasive DataSolutions (to take advantage of market trends in Integration-as-a-Service) and Pervasive DataRush (to serve new application development capturing the parallel processing capabilities of new-generation multi-core technologies). We are increasing our innovation investments again in fiscal 2009.

 

   

and, the continued focus on generating profitable results and positive cash flows, while we look for opportunities to reduce our issued and outstanding shares, putting to work our approved share repurchase program.

 

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We remain committed to a strategic balance of investment in both our flagship and emerging products while also maintaining an intense focus on operating profitability.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following represent our critical accounting policies:

 

   

Revenue Recognition

 

   

Sales Returns and Bad Debt Reserves

 

   

Goodwill and Other Intangible Assets

 

   

Stock-Based Compensation Expense

 

   

Taxes

Revenue Recognition – We license our software through OEM license agreements with software developers, or ISVs and through shrink-wrap software licenses, sold through ISVs, value-added resellers, or VARs, systems integrators and distributors, or direct to end users. Revenues are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant Company obligations with regard to implementation remain, the fee is fixed or determinable and collectability is probable. Revenues related to OEM license agreements involving nonrefundable fixed minimum license fees are generally recognized upon delivery of the product master or first copy if no significant vendor obligations remain. Per copy royalties related to OEM license agreements in excess of a fixed minimum amount are recognized as revenue when such amounts are reported to us. Revenue from post contract support and the right to receive unspecified upgrades is recognized ratably over the contract term. We generally provide telephone support to customers and end users in the 30 days immediately following the sale at no additional charge and at a minimal cost per call. We accrue the cost of providing this support. Revenue from consulting services and training is recognized when the related services are performed. We enter into agreements with certain distributors that provide for certain stock rotation and price protection rights. These rights allow the distributor to return product in a non-cash exchange for other products or for credits against future purchases. Revenue from shipping and handling is recognized at the shipping date. Shipping and handling costs are included in costs of product license revenues in the Consolidated Statements of Income.

Where software licenses are sold with maintenance or other services, we allocate the total fee to the various elements based on the fair values of the elements. We determine the fair value of each element in the arrangement based on vendor-specific objective evidence (“VSOE”) of fair value. VSOE of fair value is based upon the normal pricing and discounting

 

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practices for those products and services when sold separately and, for support services, is additionally measured by the renewal rate. If we do not have VSOE for one of the delivered elements of an arrangement, but do have VSOE for all undelivered elements, we use the residual method to record revenue. Under the residual method, the arrangement fee is first allocated to the undelivered elements based upon their VSOE of fair value; the remaining arrangement fee, including any discount, is allocated to the delivered element. If the residual method is not used, discounts, if any, are applied proportionately to each element included in the arrangement based on each element’s fair value without regard to the discount.

Sales Returns and Bad Debt Reserves – We reserve the cost of estimated sales returns, stock rotation and price protection rights as well as uncollectible accounts based on experience. We evaluate quarterly the adequacy of the reserve for sales returns, stock rotation and price protection. Because these reserves are based on our judgments and estimates, our reserves may not be adequate to cover actual sales returns and other allowances. If our reserves are not adequate, our net sales could be adversely affected.

Goodwill and Other Intangible Assets – We assess whether goodwill and indefinite-lived intangibles are impaired on an annual basis and review for triggering events on an ongoing basis. Upon determining the existence of goodwill and/or indefinite-lived intangibles impairment, we measure impairment based on the amount by which the book value of goodwill and/or indefinite-lived intangibles exceeds its fair value. The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstance that would indicate that, more likely than not, the book value of goodwill and/or indefinite-lived intangibles has been impaired.

Stock-Based Compensation Expense – We account for employee share-based compensation costs, to include stock options and restricted stock, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”) and Staff Accounting Bulletin No. 107, “Share-Based Payment.” We utilize the Black-Scholes option pricing model to estimate the fair value of employee stock option compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Historical volatility was used in estimating the fair value of our share-based awards rather than implied volatility, while the expected life was estimated to be four years based on historical trends since our initial public offering. Further, as required under SFAS 123R, we now estimate forfeitures for options granted, which are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. The estimated fair value is charged to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options having no vesting restrictions and being fully transferable. Accordingly, our estimate of fair value may not represent the value assigned by a third-party in an arms-length transaction. While our estimate of fair value and the associated charge to earnings materially impacts our results of operations, it has no impact on our cash position.

Taxes – Under the liability method of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“Statement 109”), deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

We estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our consolidated financial statements. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes and net operating loss and tax credit carryforwards. These differences result in deferred tax assets and liabilities. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not more likely than not, we establish a valuation allowance. At December 31, 2008 and June 30, 2008, our valuation allowance was $2.2 million and $2.9 million, respectively. Further, our foreign net operating loss and state tax credit carryforwards are subject to potential expiration if not utilized by certain dates in the future.

 

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We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are frequently under audit by tax authorities in various jurisdictions. Prior to July 1, 2007, accruals for tax contingencies were provided for in accordance with the requirements of SFAS No. 5, Accounting for Contingencies. Although we believe we have appropriate support for the positions taken on our tax returns, we have recorded a liability for our best estimate of the probable loss on certain of these positions. We believe that our accruals for tax liabilities are adequate for all open years, based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter, which matters result primarily from intercompany transfer pricing. Although we believe our recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore our assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. Although we believe the estimates and assumptions supporting our assessments are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and recorded assets and liabilities. Based on the results of an audit or litigation, a material effect on our income tax provision, net income, or cash flows in the period or periods for which that determination is made could result. Due to the complexity involved, we are not able to estimate the range of reasonably possible losses in excess of amounts recorded.

Results of Operations

The following table sets forth for the periods indicated the percentage of revenues represented by certain lines in our Consolidated Statements of Income:

 

     Three months ended
December 31,
    Six months ended
December 31,
 
     2008     2007     2008     2007  

Revenues:

        

Product licenses

   64 %   69 %   66 %   69 %

Services and other

   36     31     34     31  
                        

Total revenue

   100     100     100     100  

Costs and expenses:

        

Cost of product license revenues

   4     7     4     6  

Cost of service and other expenses

   11     10     10     10  

Sales and marketing

   41     42     39     42  

Research and development

   23     25     22     25  

General and administrative

   11     12     12     13  
                        

Total costs and expenses

   90     96     87     96  
                        

Operating income

   10     4     13     4  

Interest and other income, net

   1     5     2     5  

Income tax provision

   (1 )   (2 )   (4 )   (3 )
                        

Net income

   10 %   7 %   11 %   6 %
                        

 

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Revenues

Revenue from our embedded database product, Pervasive PSQL, increased in fiscal year 2008 relative to fiscal year 2007. We believe the increase in 2008 was due to the release of our latest version of Pervasive PSQL version 10 (released September 2007). Our embedded database and related products represented approximately 66% of our revenue in fiscal year 2008. In addition, we believe the integration products we acquired in fiscal year 2004 as a result of our acquisition of Data Junction Corporation represent a growth opportunity as we invest in revenue synergies and opportunities presented by the acquired business, combined with our historical database business and channels. Our integration products represented approximately 34% of our revenue in fiscal year 2008. 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 revenues were $11.2 million in the three months ended December 31, 2008, an increase of 8% over the $10.3 million reported for the comparable period in the prior fiscal year. Our revenues for the six-month period ending December 31, 2008 increased 13% to $23.1 million as compared to $20.5 million for the comparable period in the prior fiscal year. Our product license revenues were $7.2 million in the three months ended December 31, 2008, consistent with the $7.2 million for the comparable period in the prior fiscal year. Our product license revenues for the six-month period ending December 31, 2008 were $15.3 million, an increase of 8% over the $14.2 million for the comparable period in the prior fiscal year. Our service and other revenues were $4.0 million in the three months ended December 31, 2008, an increase of 26% over the $3.2 million for the comparable period in the prior fiscal year. Our service and other revenues for the six-month period ending December 31, 2008 were $7.8 million, an increase of 23% over the $6.3 million for the comparable period in the prior fiscal year. Service and other revenue increased due to growth in our professional services revenue, which increased from $0.6 million in the second quarter of fiscal 2008 to $1.1 million in the current fiscal quarter.

Licenses of our embedded database software operating on Microsoft based operating systems continue to represent more than 90% of our database product license revenues. We expect the percentages of our revenues attributable to licenses of our software operating on particular platforms will continue to change from time to time. We cannot be certain our revenues attributable to licenses of our software operating on Microsoft based, or any other operating system platform, will grow in the future.

International revenues, consisting of all revenues from customers located outside of North America, were $3.6 million and $3.9 million in the three months ended December 31, 2008 and 2007, respectively, representing 32% and 37% of total revenues, respectively. International revenues were $8.0 million and $7.6 million in the six months ended December 31, 2008 and 2007, representing 35% and 37% of total revenues, respectively. Our international revenues were impacted by a decline in revenue from our Japanese distributor in the amount of approximately $0.5 million in the current fiscal quarter as compared to the same quarter in the prior fiscal year. We expect that international revenues will continue to account for a significant portion of our revenues in the future.

Costs and Expenses

Cost of Product License Revenues. Cost of product license revenues consists primarily of the cost to manufacture and fulfill orders for our shrink-wrap software products, payment of license fees for third-party technologies embedded in our products and amortization and write-offs of purchased technology. Cost of product license revenues was $0.4 million and $0.7 million in the three months ended December 31, 2008 and 2007, representing 4% and 7% of total revenues, respectively. Cost of product license revenues was $0.9 million and $1.2 million for the six-month period ending December 31, 2008 and 2007, representing 4% and 6% of total revenues, respectively. The decrease in cost of product license revenues is primarily the result of the write off of purchased technology in the amount of approximately $0.1 million in the second quarter of fiscal year 2008 and the completion of the amortization of purchased technology associated with the acquisition of Data Junction during the second quarter of fiscal year 2009. We anticipate that cost of product license revenues will decrease in the quarter ending March 31, 2009 as the amortization of purchased technology associated with the acquisition of Data Junction was completed in December 2008.

Cost of Service and Other Revenues. Cost of service and other revenues consists primarily of the cost to provide technical support, primarily telephone support, which is typically provided within 30 days of purchase and the costs to deliver

 

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professional services and training services to others. Cost of service and other revenues was $1.3 million and $1.0 million in the three months ended December 31, 2008 and 2007, representing 11% and 10% of total revenues, respectively. Cost of service and other revenues was $2.4 million and $2.1 million for the six-month period ending December 31, 2008 and 2007, representing 10% of total revenues in both periods. Cost of service and other revenues increased in dollar amount for the three and six months ended December 31, 2008 primarily as a result of increased staffing costs associated with the increase in professional services revenue. We anticipate that cost of service and other revenues in the near term will be consistent with the costs incurred during the three months ended December 31, 2008.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, foreign sales office expense, marketing programs and promotional expense, and travel and entertainment. Sales and marketing expenses were $4.6 million and $4.3 million in the three months ended December 31, 2008 and 2007, representing 41% and 42% of total revenues, respectively. Sales and marketing expenses were $9.1 million and $8.6 million for the six months ending December 31, 2008 and 2007, representing 39% and 42% of total revenues, respectively. The increase in sales and marketing expenses is due primarily to an increase in staffing and personnel costs in fiscal year 2009 as compared to fiscal year 2008. We expect sales and marketing expenses in the near term will be consistent with the costs incurred during the three months ended December 31, 2008.

Research and Development. Research and development expenses consist primarily of personnel and related costs. Research and development expenses were $2.6 million in each of the three months ended December 31, 2008 and 2007, representing 23% and 25% of total revenues, respectively. Research and development expenses were $5.1 million and $5.2 million for the six months ended December 31, 2008 and 2007, representing 22% and 25% of revenues, respectively. We anticipate that research and development expenses in the near term will be consistent with the costs incurred during the three months ended December 31, 2008.

General and Administrative. General and administrative expenses consist primarily of the personnel and other costs associated with our finance, human resources and administrative departments. General and administrative expenses were $1.2 million in each of the three months ended December 31, 2008 and 2007, representing 11% and 12% of total revenues, respectively. General and administrative expenses were $2.7 million for each of the six months ended December 31, 2008 and 2007, representing 12% and 13% of total revenues, respectively. We anticipate that our general and administrative expenses in the near term will be consistent with costs incurred during the three months ended December 31, 2008.

Share-based compensation expense. Share-based compensation expense reflects non-cash compensation expense associated with restricted stock purchase rights and employee stock options accounted for under SFAS 123(R). Share-based compensation expense is included in costs and expenses as follows:

 

     Three months ended
December 31,
   Six months ended
December 31,
     2008    2007    2008    2007

Cost of service and other revenues

   $ 10    $ 13    $ 20    $ 27

Sales and marketing

     79      126      167      260

Research and development

     40      59      81      123

General and administrative

     246      266      506      539
                           

Total

   $ 375    $ 464    $ 774    $ 949
                           

 

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The decrease in share-based compensation expenses in the three and six months ended December 31, 2008 as compared to the three and six months ended December 31, 2007 is primarily the result of a decrease in the number of equity based awards and a lower computed valuation of new awards relative to prior awards. We anticipate our share-based compensation expense will increase by approximately $0.1 million in the quarter ending March 31, 2009 as compared to the quarter ended December 31, 2008 based on new awards recently issued.

Interest and Other Income. Interest and other income was $0.2 million and $0.5 million for the three months ended December 31, 2008 and 2007, respectively. Interest and other income was $0.4 million and $1.0 million for the six months ended December 31, 2008 and 2007, respectively. Interest and other income decreased due to lower market interest rates and transition of a portion of the portfolio into tax exempt financial instruments in the first half of fiscal year 2008.

Provision for Income Taxes. Provision for income taxes was approximately $0.2 million in each of the three months ended December 31, 2008 and 2007. Provision for income taxes was approximately $0.8 million and $0.6 million in the six months ended December 31, 2008 and 2007, respectively. The Company’s estimated annual effective tax rate and associated provision for income taxes for the three and six months ended December 31, 2008 is based on an estimate of consolidated earnings before income taxes for fiscal 2009. The estimated annual effective tax rate is impacted primarily by estimates of non-deductible expenses, deductions related to domestic production activities and tax exempt income, the effects of state and foreign operations, and credits generated. The Company’s effective tax rate is normally reduced by research and development credits generated. The federal research credit expired December 31, 2007 and was retroactively reinstated with modifications under The Emergency Economic Stabilization Act of 2008, which was enacted on October 3, 2008. As such, our second quarter effective tax rate was less than our ongoing effective tax rate due to the effects of this retroactive reinstatement.

Liquidity and Capital Resources

Cash provided by operations was $3.8 million for each of the six months ended December 31, 2008 and 2007. Cash provided by operations for the six months ended December 31, 2008 resulted primarily from net income as adjusted for non-cash items and an increase in deferred revenue, partially offset by an increase in prepaid expense and other current assets. Cash provided by operations for the six months ended December 31, 2007 resulted primarily from net income as adjusted for non-cash items, a decrease in accounts receivable and prepaid expenses and other current assets and an increase in accounts payable and accrued liabilities, offset by a decrease in deferred revenue.

During the first six months of fiscal 2009, we invested $17.7 million in marketable securities, consisting of various taxable and tax advantaged securities. During the first six months of fiscal 2008, we received net proceeds of $2.8 million from the sale or maturity of marketable securities. In addition, we purchased property and equipment totaling approximately $0.5 and $0.3 million in the six months ended December 31, 2008 and 2007, respectively. This property consisted primarily of computer hardware and software. We expect that our capital expenditures will be consistent with the prior fiscal year.

In March 2008, we announced the authorization of a new $10.0 million stock repurchase plan which became effective on March 25, 2008. During the six months ended December 31, 2008, we repurchased 913,509 shares of common stock at a cost of approximately $3.7 million. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice.

During the six months ended December 31, 2008 and 2007, we received approximately $24,000 and $300,000, respectively, in proceeds from the exercise of stock options resulting in the issuance of shares of our common stock of approximately 7,000 and 107,000 for the six-month periods ended December 31, 2008 and 2007, respectively.

On December 31, 2008, we had $41.0 million in working capital, including $44.9 million in cash, cash equivalents and marketable securities.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The majority of our operations are based in the United States and, accordingly, the majority of our transactions are denominated in U.S. Dollars. However, we do have foreign-based operations where transactions are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative value of currencies. Currently, we have operations in Japan, Belgium, Germany, France and England and conduct transactions in the local currency of each location. If the U.S. dollar to Japanese yen rate had remained unchanged throughout fiscal 2008, the result would have been a decrease in revenue and operating income of approximately $0.6 million. If the U.S. dollar to euro rate had remained unchanged throughout fiscal 2008, the result would have been an increase in operating income of approximately $0.3 million. We monitor our foreign currency exposure and, from time to time will attempt to reduce our exposure through hedging. The impact of fluctuations in the relative value of all currencies was not material for the three months ended December 31, 2008. Although we do not anticipate any material losses in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future.

 

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ITEM 4. CONTROLS AND PROCEDURES

Our management evaluated, with the participation of our chief executive officer and chief financial officer, disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms.

There have been no changes in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Various sections of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” and elsewhere in this Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

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PART II. OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones we face. Any of the following risks could harm our business, financial condition or results of operations. In such case, 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 due to a variety of factors. Many of these factors are outside our control. These factors include:

 

   

fluctuations in demand for our products, upgrades to our products, or our services;

 

   

fluctuations in the demand for and deployment of client/server applications in which our Pervasive.SQL products are designed to be embedded;

 

   

fluctuations in demand for our products due to the potential impact of 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 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;

 

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changes in the cost of routine business activities;

 

   

gains or losses associated with discontinued operations;

 

   

changes in our business plan or strategy;

 

   

impact of severance charges associated with departing employees;

 

   

write-downs of the recorded book value of assets;

 

   

changes in generally accepted accounting principles in the United States; and

 

   

costs associated with the compliance requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

We derive a significant portion of our revenues from relatively large transactions. The sales cycles for these transactions tend to be longer than the sales cycles on smaller orders. This longer sales cycle for large transactions makes it difficult to predict the quarter in which these sales will occur. Accordingly, our operating results may fluctuate from quarter to quarter based on the existence and timing of larger transactions. A reduction in large transactions during any quarter could materially impact our revenues.

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 that this pattern may occur in the future.

Adverse 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 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. In addition, such unfavorable economic conditions may impact our customer’s ability to pay for the products they have purchased and as a consequence, our reserves for doubtful accounts and write-offs of accounts receivable may increase. There can be no assurance that we will be able to effectively promote revenue growth rates in all economic conditions.

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 substantially dependent on orders booked and shipped throughout that quarter.

 

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Our Performance Depends on Market Acceptance of Pervasive PSQL

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 Summit v10.10 (released in June 2008) and future upgrades also may be influenced by factors in our control such as product quality, relative demand for feature and functionality upgrades and any future product announcements or price changes.

Revenue from our embedded database product, Pervasive PSQL®, increased in fiscal year 2008 relative to fiscal year 2007 and decreased in fiscal year 2007 relative to fiscal year 2006. We believe the decrease in fiscal year 2007 was due to a variety of factors, including but not limited to, competition and what we believe to be the negative impact of general economic conditions on our ISV customers who build applications utilizing our database software and reduced demand for the ISVs’ software applications themselves. In addition, the decrease in fiscal year 2007 was due in part to reduced customer demand within our installed base of customers for the then current version of our database product (Version 9 released in March 2005). In September 2007, we released the latest version of our database product, PSQL Summit v10 and revenue from this product increased in fiscal year 2008 relative to fiscal 2007. Regardless, a continued reduction in our embedded database business, or our inability to grow the integration products business we acquired as a result of our acquisition of Data Junction Corporation in fiscal year 2004, could have a material adverse effect on our business, operating results and financial condition.

Our Efforts to Develop and Maintain Brand Awareness of Our Products May Not be Successful

Brand awareness is important given competition in the market for data infrastructure software products. We are aware of other companies that use the word “Pervasive” either in their marks alone or in combination with other words. We expect that it may be difficult or impossible to prevent third-party usage of the Pervasive name and variations of this name for competing goods and services. Competitors or others who use marks similar to our brand name may cause confusion among actual and potential customers, which could prevent us from achieving significant brand recognition. If we fail to promote and maintain our brand or incur significant related expenses, our business, operating results and financial condition could be materially adversely affected.

We Must Succeed in the Data Management Software Market as Well as the Data Integration Software Market if We are to 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:

 

   

growth of the data management infrastructure software market;

 

   

growth of the data integration software market;

 

   

deployment of our products by enterprises; and

 

   

emergence of substitute technologies and products.

If we are unable to succeed in these markets, our business may be harmed.

We May Face Problems in Connection With Past Acquisitions, Joint Ventures or Licensing Arrangements

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

 

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stock. We cannot be certain that 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 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 twice, most recently for an additional five-year term which expires June 30, 2012. We cannot be certain that we will continue to be able to renew our agreement with AG-TECH on terms and conditions at least as favorable to Pervasive as those contained in our present agreement. Further, we may be unable to maintain or increase Japanese market demand for our products.

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 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.

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 distributor’s payment practices, changes in the financial stability of a major distributor or any reduction in orders by such distributor, including reductions due to market or competitive conditions,

 

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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, 2008, one distributor (our joint venture partner in Japan, AG-TECH Corporation) accounted for an aggregate of approximately 13% of our revenues, as compared to 11% in the fiscal year ended June 30, 2007. Additionally, sales related to accounting software applications has, at various times, represented as much as 20% of our revenues. Furthermore, there is currently consolidation taking place among our ISVs that could narrow the number of customers who sell our products. For example, one of our ISVs, The Sage Group plc, has acquired Timberline Software Corporation, Softline Limited and ACCPAC International Inc., three of our ISVs. The Sage Group family of companies has, at various times, represented as much as 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.

We Depend on Our Indirect Sales Channel

Our failure to grow our indirect sales channel or the loss of a significant number of members of our indirect channel partners would have a material adverse effect on our business, financial condition and operating results. We derive a substantial portion of our revenues from indirect sales through a channel consisting of independent software vendors, value-added resellers, systems integrators, consultants and distributors. Our sales channel could be adversely affected by a number of factors including:

 

   

the failure of independent software vendors to develop, and the failure of value-added resellers to sell, products based on emerging platforms supported by us;

 

   

pressures placed on the sales channel to sell competing products;

 

   

our failure to adequately support the sales channel;

 

   

consolidation of certain of our indirect channel partners;

 

   

competing product lines offered by certain of our indirect channel partners; and

 

   

business model or licensing model changes of our channel partners or their competitors.

We cannot be certain we will be able to continue to attract additional indirect channel partners or retain our current partners. In addition, we cannot be certain our competitors will not attempt to recruit certain of our current or future partners. Such competitive actions may have an adverse effect on our ability to attract and retain partners.

We May Not Be Able to Develop Strategic Relationships

Our current collaborative relationships may not prove to be beneficial to us, and they may not be sustained. We may not be able to enter into successful new strategic relationships in the future, which could have a material adverse effect on our business, operating results and financial condition. From time to time, we have collaborated with other companies in areas such as product development, marketing, distribution and implementation. However, many of our current and potential strategic partners are either actual or potential competitors with us. In addition, many of our current relationships are informal or, if written, terminable with little or no notice.

We Depend on Third-Party Technology in Our Products

We rely upon certain software that we license from third parties, including software integrated with our internally developed software and used in our products to perform key functions. These third-party software licenses may not continue to be available to us on commercially reasonable terms. The loss of, or inability to maintain or obtain any of these software licenses, could result in shipment delays or reductions until we develop, identify, license and integrate equivalent software. Any delay in product development or shipment could damage our business, operating results and financial condition.

 

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We May be Unable to Protect Our Intellectual Property and Proprietary Rights

Our success depends to a significant degree upon our ability to protect our software and other proprietary technology. We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights. However, these measures afford us only limited protection. In addition, we rely in part on “shrink wrap” and “click wrap” licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. Therefore, our efforts to protect our intellectual property may not be adequate. We cannot be certain that others will not develop technologies that are similar or superior to our technology or design around the copyrights and trade secrets owned by us. Unauthorized parties may attempt to copy aspects of our products or to obtain and use information we regard as proprietary. Although we believe software piracy may be a problem, we are unable to determine the extent to which piracy of our software products occurs. In addition, portions of our source code 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. As a result of the complexities inherent in client/server and Web computing environments and in data and application integration solutions, and the performance demanded by customers for data infrastructure software products, new products and product enhancements can require long development and testing periods. As a result, significant delays in the general availability of such new releases or significant problems in the installation or implementation of such new releases could have a material adverse effect on our business, operating results and financial condition. We have experienced delays in the past in the release of new products and new product enhancements. We may not be successful in:

 

   

developing and marketing, on a timely and cost-effective basis, new products or new product enhancements that respond to technological change, evolving industry standards or customer requirements;

 

   

avoiding difficulties that could delay or prevent the successful development, introduction or marketing of these products; or

 

   

achieving market acceptance for our new products and product enhancements.

 

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Our Software May Contain Errors or Defects

Errors or defects in our products may result in loss of revenues or delay in market acceptance, and could materially adversely affect our business, operating results and financial condition. Software products such as ours may contain errors, sometimes called “bugs,” particularly when first introduced or when new versions or enhancements are released. From time to time, we discover software errors in certain of our new products after their introduction. Despite our testing, current versions, new versions or enhancements of our products may still have errors after commencement of commercial shipments. Product errors can put us at a competitive disadvantage and can be costly and time-consuming to correct.

We May Become Subject to Product or Professional Services Liability Claims

A product or professional services liability claim, whether or not successful, could damage our reputation and our business, operating results and financial condition. Our license and service agreements with our customers typically contain provisions designed to limit our exposure to potential product or service liability claims. However, these contract provisions may not preclude all potential claims. Product or professional services liability claims could require us to spend significant time and money in litigation or to pay significant damages.

We Compete with Microsoft while Simultaneously Supporting Microsoft Technologies

We currently compete with Microsoft in the market for data management products while simultaneously maintaining a working relationship with Microsoft. Microsoft has a longer operating history, a larger installed base of customers and substantially greater financial, distribution, marketing and technical resources than Pervasive. As a result, we may not be able to compete effectively with Microsoft now or in the future, and our business, operating results and financial condition may be materially adversely affected.

We expect that Microsoft’s commitment to and presence in the data management products market will continue to represent 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 continues to grow its presence in the software applications market. For example, they acquired Great Plains Software, a former channel partner of Pervasive, and Navision, both of which are accounting software vendors. Microsoft has also entered the customer relationship management software market. We believe that Microsoft will continue to grow its presence in the software applications market and in doing so, may have a negative impact on the financial stability of other software application vendors who use our products, or may influence other software application vendors to use Microsoft infrastructure software products instead of those available from Pervasive.

We believe we must maintain a working relationship with Microsoft to achieve success. 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, IBM and Progress. In particular, Sybase’s small memory footprint database software product, Adaptive Server Anywhere, and Microsoft’s product, SQL Server, directly compete with our products.

The market for our integration products is highly competitive and subject to rapidly changing technology. We principally compete against ETL (extract, transform and load) software vendors and data warehousing and application

 

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integration software providers. Such competitors include Ascential/IBM, Business Objects/SAP, Informatica, and Information Builders. In addition, we compete or may compete against database vendors that currently offer, or may develop, products with functionalities that compete with our solutions. These products typically operate specifically with these competitors’ proprietary databases. Such competitors include IBM, Microsoft, Sybase and Oracle. Competition also comes in the form of custom code, where potential customers have sufficient internal technical resources to develop solutions in-house without the aid of our products or those of our competitors. And, because there are relatively low barriers to entry in the software market, we may encounter additional competition from other established or emerging companies providing database or integration products based on existing, new or open-source technologies.

Open-source software, which is an emerging trend in the software marketplace, may impact our business as interest, demand and use increases in the database 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 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 may enter our market and could cause a change in revenue models from licensing of client/server and Web-based applications to renting applications. Our competitors may be more successful than we are in adopting these revenue models and capturing related market share.

Most of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers. In addition, some competitors have demonstrated a willingness to, or may willingly in the future, incur substantial losses as a result of deeply discounted product offerings or aggressive marketing campaigns. For example, Microsoft, Oracle, IBM and Sybase all currently license royalty-free limited versions of their database technologies. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of competitive products, than we can. There is also a substantial risk that changes in licensing models or announcements of competing products by competitors such as Microsoft, Oracle, Sybase, IBM, Progress, MySQL/Sun, Ascential/IBM, 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 that competition will increase as a result of software industry consolidation. Increased competition is likely to result in price reductions, fewer customer orders, reduced margins and loss of market share, any of which could materially adversely affect our business. We cannot be certain we will be able to compete successfully against current and future competitors or that the competitive pressures we face will not materially adversely affect our business, operating results and financial condition.

We are Susceptible to a Shift in the Market for Client/Server Applications Toward Web-Based or Hosted Applications

We have derived substantially all of our historical embedded database product revenues from the use of our products in client/server applications. We expect to rely on continued market demand for client/server applications indefinitely. However, we believe market demand may shift from client/server applications to Web-based or hosted applications. If so, we cannot be certain that our existing client/server developers will migrate to Web-based or hosted applications and continue to use our products or that other developers of Web-based or hosted applications would select our data management products. In addition, this shift could result in a change in revenue models from licensing of client/server applications to renting of Web-based or hosted applications from Software-as-a-Service 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.

 

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We Depend on International Sales and Operations

We anticipate that for the foreseeable future we will derive a significant portion of our revenues from sources outside North America. In the fiscal year ended June 30, 2008, we derived 38% of our revenues outside North America. Our international operations are generally subject to a number of risks. These risks include:

 

   

foreign laws and business practices favoring local competition;

 

   

dependence on local channel partners;

 

   

compliance with multiple, conflicting and changing government laws and regulations;

 

   

longer sales cycles;

 

   

greater difficulty or delay in collecting payments from customers;

 

   

difficulties in staffing and managing foreign operations;

 

   

foreign currency exchange rate fluctuations and the associated effects on product demand and timing of payment;

 

   

increased tax rates in certain foreign countries;

 

   

difficulties with financial reporting in foreign countries;

 

   

quality control of certain development, translation or localization activities; and

 

   

political and economic instability.

We may expand or modify our operations internationally. Despite our efforts, we may not be able to expand or modify our operations internationally in a timely and cost-effective manner. Such an outcome would limit or eliminate any sales growth internationally, which in turn would materially adversely affect our business, operating results and financial condition. Even if we successfully expand or modify our international operations, we may be unable to maintain or increase international market demand for our 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 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 shareholders generally and various organizations to reduce the rate at which companies issue stock options and restricted stock to employees, which may make it more difficult to obtain shareholder approval of equity compensation plans when required. In addition, we believe expensing stock options and restricted stock will increase shareholder pressure to limit future grants and could make it more difficult for us to grant stock options and restricted stock to employees in the future. As a result, we may lose top employees to non-public, start-up companies or may generally find it more difficult to attract, retain and motivate employees, either of which could materially and adversely affect our business, results of operations and financial condition.

We Have Anti-Takeover Provisions

Our Restated Certificate of Incorporation and Bylaws contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals that a stockholder might consider favorable. It includes provisions to authorize the issuance of “blank check” preferred stock, establish advance notice requirements for stockholder nominations for elections to the Board of Directors or for proposing matters that can be acted upon at stockholders’ meetings; eliminate the ability of stockholders to act by written consent; require super-majority voting to approve certain amendments to the Restated Certificate of Incorporation; limit the persons who may call special meetings of stockholders; and provide for a Board of Directors with staggered, three-year terms. In addition, certain provisions of Delaware law and our 1997 Stock Incentive Plan and our 2006 Equity Incentive Plan may also have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals.

Further, in October 2000, our Board of Directors approved the adoption of a shareholder rights plan whereby one preferred share purchase right was distributed for each outstanding share of our common stock. The rights are designed to assure that all of our stockholders receive fair and equal treatment in the event of any proposed takeover and to guard against partial tender offers, open market accumulations and other tactics designed to gain control without paying all stockholders a fair price. The rights were not being distributed in response to any specific effort to acquire us.

The rights become exercisable if a person or group hereafter acquires 15% or more of our common stock or announces a tender offer for 15% or more of our common stock. Such events, or if we are acquired in a merger or other business combination transaction after a person acquires 15% or more of our common stock, would entitle the right holder to purchase, at an exercise price of $18.00, a number of shares of common stock having a market value at that time of twice the right’s exercise price. Rights held by the acquiring person would become void. The Board of Directors can choose to redeem the rights at one cent per right at any time before an acquiring person hereafter acquires 15% or more of the outstanding common stock. The Rights Plan may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals.

We May Elect to Raise Additional Capital Which Might Not Be Available or Which, if Available, May Be on Terms That Are Not Favorable to Us

We may elect to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we issue equity securities, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If we borrow money, we may incur significant interest charges, which could harm our profitability. Holders of debt would also have rights, preferences or privileges senior to those of existing holders of our common stock. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our 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 eleven fiscal quarters ending December 31, 2008, the Company has acquired approximately 6.5 million shares of its common stock on the open market at a total cost of approximately $26.2 million, or approximately $4.05 price per share. The Company’s Board of Directors has approved a new stock repurchase plan effective March 25, 2008, whereby the Company may repurchase additional shares of its common stock with a value of up to $10 million, $5.6 million of which is still available as of December 31, 2008. 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 shareholders could lose confidence in us and/or our reported financial results, which may cause a negative effect on our trading price; and we could be exposed to litigation or regulatory proceedings, which may be costly or divert management attention.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Period

   Total
Number
of Shares
Purchased
   Average
Price
Paid
Per Share
   Total Number of
Shares Purchased as
Part of Publicly
Announced

Plans or Programs
   Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs

October 1, 2008 to October 31, 2008

   424,378    $ 4.03    7,602,448    $ 6,928,000

November 1, 2008 to November 30, 2008

   281,153    $ 4.01    7,883,601    $ 5,793,000

December 1, 2008 to December 31, 2008

   62,469    $ 3.70    7,946,070    $ 5,560,000
             

Total

   768,000         
             

In March 2008, we announced the authorization of a new $10.0 million stock repurchase plan which became effective on March 25, 2008. During the three months ended December 31, 2008, we repurchased 768,000 shares of common stock at a cost of approximately $3.1 million under the stock repurchase plan approved in March 2008. The transactions occurred in open market purchases. The repurchase program may be suspended or discontinued at any time without prior notice.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company’s annual meeting of the stockholders was held on November 11, 2008.

The following nominees were elected as directors, each to hold office until their three-year term expires or until their successors have been duly elected and qualified, by the vote set forth below:

 

NOMINEE

 

FOR

 

WITHHELD

Shelby H. Carter, Jr.   15,690,766   732,949
Nancy R. Woodward   15,565,706   858,009

The proposal to ratify the appointment of Grant Thornton LLP as the Company’s independent auditors for the fiscal year ending June 30, 2009 was approved by the vote set forth below:

 

FOR

 

AGAINST

 

ABSTAIN

15,958,964   425,368   39,383

 

ITEM 5. OTHER INFORMATION

There have been no material changes to the procedures by which stockholders may recommend nominees to the Company’s Board of Directors.

 

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ITEM 6. EXHIBITS

(a) Exhibits under Item 601 of Regulation S-K

 

  2.1+   Merger Agreement dated as of August 8, 2003 among Pervasive Software Inc., Ramal Acquisition Corp, Data Junction Corporation, Michael E. Hoskins, The Hoskins 2003 Charitable Remainder Unitrust with Makeup, Darrell G. Blandford, The Blandford 2003 Charitable Remainder Trust with Makeup, Gregory E. Grosh, The Gregory E. Grosh Charitable Remainder Unitrust (Gregory E. Grosh Trustee), Ron S. Dougherty and Computershare Trust Company, Inc., as escrow agent
  3.1*   Restated Certificate of Incorporation
  3.2*   Bylaws of the Company
  3.3****   Amended and Restated Bylaws of the Company
  4.1*   Reference is made to Exhibits 3.1 and 3.2
  4.2*   Specimen Common Stock certificate
  4.3***   Rights Agreement dated October 20, 2000, between the Company and Computershare Trust Company, Inc. as Rights Agent
10.1*   Form of Indemnification Agreement
10.2+++   2006 Equity Incentive Plan
10.3*   1997 Stock Incentive Plan
10.4*   First Amended and Restated 1994 Incentive Plan
10.5++   Lease agreement dated September 24, 2004 between the Company and Carr Texas Op, LP T/A Riata Corporate Park
10.6**   Form of Restricted Stock Agreement
10.7++++   Form of Stock Option Award Agreement for the Pervasive Software Inc. 2006 Equity Incentive Plan
10.8++++++   Form of Notice of Restricted Stock Award for the Pervasive Software Inc. 2006 Equity Incentive Plan
10.9++++++   Form of Notice of Grant of Restricted Stock Units for the Pervasive Software Inc. 2006 Equity Incentive Plan
10.10+++++   Form of Notice of Restricted Stock Award for the Pervasive Software Inc. 1997 Stock Incentive Plan
31.1   Rule 13a-14(a)/15d-a4(a) Certification executed by John Farr, Chief Executive Officer
31.2   Rule 13a-14(a)/15d-a4(a) Certification executed by Randall Jonkers, Chief Financial Officer
32.1   Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) executed by John Farr, Chief Executive Officer and Randall Jonkers, Chief Financial Officer

 

+

Incorporated by reference to the Company’s Current Report on Form 8-K filed August 13, 2003.

* Incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-32199).
** Incorporated by reference to the Company’s Current report on Form 8-K filed January 24, 2006.
*** Incorporated by reference to the Company’s Registration Statement on Form 8-A filed on October 24, 2000 (File No. 000-23043).
**** Incorporated by reference to the Company’s Current report on Form 8-K filed September 6, 2007.
++ Incorporated by reference to the Company’s Current Report on Form 8-K filed September 24, 2004.

+++

Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed February 5, 2007.

++++ Incorporated by reference to the Company’s Current Report on Form 8-K filed February 22, 2007.

+++++

Incorporated by reference to the Company’s Current Report on Form 8-K filed July 17, 2007.

++++++

Incorporated by reference to the Company’s Current Report on Form 8-K filed January 13, 2009.

 

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Table of Contents

SIGNATURES

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

 

Date: February 4, 2009   PERVASIVE SOFTWARE INC.
  (Registrant)
  By:  

/s/ Randall G. Jonkers

    Randall G. Jonkers
    Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

 

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Table of Contents

EXHIBIT INDEX

 

EXHIBIT
NUMBER

 

DESCRIPTION

  2.1+   Merger Agreement dated as of August 8, 2003 among Pervasive Software Inc., Ramal Acquisition Corp, Data Junction Corporation, Michael E. Hoskins, The Hoskins 2003 Charitable Remainder Unitrust with Makeup, Darrell G. Blandford, The Blandford 2003 Charitable Remainder Trust with Makeup, Gregory E. Grosh, The Gregory E. Grosh Charitable Remainder Unitrust (Gregory E. Grosh Trustee), Ron S. Dougherty and Computershare Trust Company, Inc., as escrow agent
  3.1*   Restated Certificate of Incorporation
  3.2*   Bylaws of the Company
  3.3****   Amended and Restated Bylaws of the Company
  4.1*   Reference is made to Exhibits 3.1 and 3.2
  4.2*   Specimen Common Stock certificate
  4.3***   Rights Agreement dated October 20, 2000, between the Company and Computershare Trust Company, Inc. as Rights Agent
10.1*   Form of Indemnification Agreement
10.2+++   2006 Equity Incentive Plan
10.3*   1997 Stock Incentive Plan
10.4*   First Amended and Restated 1994 Incentive Plan
10.5++   Lease agreement dated September 24, 2004 between the Company and Carr Texas Op, LP T/A Riata Corporate Park
10.6**   Form of Restricted Stock Agreement
10.7++++   Form of Stock Option Award Agreement for the Pervasive Software Inc. 2006 Equity Incentive Plan
10.8++++++   Form of Notice of Restricted Stock Award for the Pervasive Software Inc. 2006 Equity Incentive Plan
10.9++++++   Form of Notice of Grant of Restricted Stock Units for the Pervasive Software Inc. 2006 Equity Incentive Plan
10.10+++++   Form of Notice of Restricted Stock Award for the Pervasive Software Inc. 1997 Stock Incentive Plan
31.1   Rule 13a-14(a)/15d-a4(a) Certification executed by John Farr, Chief Executive Officer
31.2   Rule 13a-14(a)/15d-a4(a) Certification executed by Randall Jonkers, Chief Financial Officer
32.1   Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) executed by John Farr, Chief Executive Officer and Randall Jonkers, Chief Financial Officer

 

+

Incorporated by reference to the Company’s Current Report on Form 8-K filed August 13, 2003.

* Incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-32199).
** Incorporated by reference to the Company’s Current report on Form 8-K filed January 24, 2006.
*** Incorporated by reference to the Company’s Registration Statement on Form 8-A filed on October 24, 2000 (File No. 000-23043).
**** Incorporated by reference to the Company’s Current report on Form 8-K filed September 6, 2007.
++ Incorporated by reference to the Company’s Current Report on Form 8-K filed September 24, 2004.
+++ Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed February 5, 2007.
++++ Incorporated by reference to the Company’s Current Report on Form 8-K filed February 22, 2007.
+++++ Incorporated by reference to the Company’s Current Report on Form 8-K filed July 17, 2007.

++++++

Incorporated by reference to the Company’s Current Report on Form 8-K filed January 13, 2009.

 

36