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EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - PERVASIVE SOFTWARE INCd232140dex231.htm
EX-31.1 - RULE 13A-14(A)/15D-A4(A) CERTIFICATION OF CEO - PERVASIVE SOFTWARE INCd232140dex311.htm
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2011

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.

 

DELAWARE   74-2693793

(State or other jurisdiction

of incorporation)

 

(I.R.S. Employer

Identification Number)

12365 Riata Trace Parkway, Bldg. B

Austin, Texas 78727

 

 

(512) 231-6000

Securities registered pursuant to Section 12(b) of the Act:

COMMON STOCK, $.001 PAR VALUE                      NASDAQ

Securities Registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

(1)        Yes       ü       No               

(2)        Yes       ü       No               

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  þ

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

 

Larger accelerated filer    ¨       Accelerated filer    þ   
Non-accelerated filer    ¨       Smaller reporting company    þ   

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

As of December 31, 2010 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $65,723,000. Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of August 31, 2011 there were 15,930,424 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III–Portions of the registrant’s definitive Proxy Statement to be issued in conjunction with the Registrant’s Annual Meeting of Stockholders to be held on November 14, 2011.

 

 

 


Table of Contents

PERVASIVE SOFTWARE INC.

FORM 10-K ANNUAL REPORT

FOR THE FISCAL YEAR ENDED

JUNE 30, 2011

TABLE OF CONTENTS

 

PART I

     1   

Item 1.      Business

     1   

Item 1A.  Risk Factors

     13   

Item 1B.  Unresolved Staff Comments

     25   

Item 2.      Properties

     25   

Item 3.      Legal Proceedings

     25   

Item 4.      (Removed and Reserved)

     26   

PART II

     27   

Item 5.       Markets for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     27   

Item 6.      Selected Consolidated Financial Data

     28   

Item 7.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

     40   

Item 8.      Consolidated Financial Statements and Supplementary Data

     41   

Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     41   

Item 9A.  Controls and Procedures

     41   

Item 9B.  Other Information

     42   

PART III

     43   

Item 10.   Directors, Executive Officers and Corporate Governance

     43   

Item 11.   Executive Compensation

     44   

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     44   

Item 13.   Certain Relationships and Related Transactions, and Director Independence

     44   

Item 14.   Principal Accountant Fees and Services

     44   

PART IV

     45   

Item 15.   Exhibits, Financial Statements Schedules

     45   

SIGNATURES

     47   

 

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PART I

 

ITEM 1. BUSINESS

The statements contained in this Report on Form 10-K and in the annual Report that are not purely historical statements are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, including statements regarding the Company’s expectations, beliefs, hopes, intentions or strategies regarding the future. These forward-looking statements involve risks and uncertainties. Our actual results may differ materially from those indicated in the forward-looking statements. Please see “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and the factors and risks discussed in other reports filed from time to time with the Securities and Exchange Commission.

Overview

Pervasive Software (NASDAQ: PVSW) is a global leader in cloud-based and on-premises data innovation. For more than two decades, Pervasive products have delivered value to tens of thousands of customers in more than 150 countries with a compelling combination of performance, flexibility, reliability and low total cost of ownership. Pervasive delivers software to manage, integrate and analyze data, in the cloud or on-premises, throughout the entire data lifecycle. Pervasive products are often embedded within partners’ software through a well-developed channel of independent software vendors (ISVs), Software-as-a-Service (SaaS) vendors, value-added resellers (VARs) and Systems Integrators (SIs). Publicly traded since 1997 and with 42 consecutive profitable quarters through June 30, 2011, the company’s culture of profitability has enabled aggressive investment in innovation with approximately 25% of revenues invested in research and development in recent years.

The company’s two flagship product families deliver data management and data integration. The Pervasive PSQL™ database provides embeddable data management and has been deployed via millions of licensed seats since the company’s inception in 1994. The full data management product line also includes solutions for data movement and synchronization and addresses security challenges related to data integrity, accountability, continuity and availability throughout the data lifecycle. The product line is designed for integration by ISVs into client/server and Web applications which are sold predominantly to SMBs and other businesses having little to no information technology (IT) infrastructure, and requiring self-tuning, low-administration products. The product incorporates significant backward compatibility with a range of operating systems, hardware platforms (both 32 and 64 bit) and applications. The current version, Pervasive PSQL v11, is optimized for multicore and supports Internet Protocol version 6 (IPv6). Planned releases in fiscal 2012 include Pervasive PSQL Vx, designed for customers who are serious users of virtual machines and need support for live migration, fault tolerance and high availability.

The other flagship product family addresses data and application integration. Pervasive Data Integrator™ enables companies to connect data from multiple on-premises and cloud-based applications with reliable, automated integration. The extensible platform scales to integrate the rising number of applications required to run a business and can be deployed at the department level or enterprise-wide. Its lightweight embeddable architecture and breadth of connectivity also make it an attractive choice for ISVs and SaaS vendors to bundle or private-label Pervasive integration as part of their own software offerings to better meet customer requirements for application integration. The most recent release, Pervasive Data Integrator v10, includes locally installed as well as cloud-based visual designers that accelerate the creation and simplify management of flexible integration solutions. The product line also addresses data quality needs with products for comprehensive profiling of large amounts of data to assess data quality, automated fuzzy matching of potential duplicate records and the ability to merge duplicates, and look-ups for data validation against established third-party data libraries to prevent incomplete or erroneous data entry.

A more recent product team, Pervasive BusinessXchange, began with the acquisition of ChanneLinx assets on July 31, 2009. Its primary offering is the Pervasive WebDISM managed service, which provides trading

 

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partners with actionable insight into their cash flow-related business documents, including purchase orders and invoices. In fiscal 2011, Pervasive completed migration of all Pervasive WebDI customers to Windows Azure and became one of the flagship partners featured on the Windows Azure Marketplace.

Delivering potentially disruptive innovation is the dedicated focus of other teams within Pervasive, including Pervasive DataRush, Pervasive DataSolutions, and Pervasive DataCloud:

 

   

Pervasive DataRush is a software development platform that lets customers rapidly build parallel applications that deliver high throughput on big data. Pervasive DataRush fully leverages the parallel processing capabilities of multicore processors to deliver unmatched performance on a multicore server, SMP machine, cluster or Hadoop cluster. It is designed to eliminate performance bottlenecks in big data preparation and analytics.

 

   

Pervasive DataSolutions gives customers affordable, subscription-based integration delivered as configurable services on the Pervasive DataCloud. In addition to the more than 350 Pervasive DataSolutions subscribers, partners are increasingly teaming with Pervasive to create and deliver their own point-to-point hosted integration solutions.

 

   

Pervasive DataCloud, originally created as a multitenant Platform-as-a-Service for Pervasive’s packaged integration solutions, today provides a platform for a range of partner- and Pervasive-designed cloud-based offerings. The Pervasive integration sales team increasingly monetizes the Pervasive DataCloud stack by leveraging it for strategic wins with integration partners.

Pervasive’s strength is evidenced by the size and diversity of the global customer base, serving tens of thousands of customers in virtually every industry and market. We sell products in more than 150 countries through direct sales and channel distribution. We have a well-established distribution channel of ISVs, developers, VARs, systems integrators and partners who have built or deployed applications on top of our data management and data integration platforms as well as a large customer base of end users for our integration products and services. Founded in 1994, Pervasive is headquartered in Austin, Texas, with offices in Greenville, South Carolina; Brussels; Frankfurt; London; and Paris; and a joint venture in Japan. Our Web site address is www.pervasive.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our Web site, http://www.pervasive.com, as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (SEC). Additionally, you may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov.

Market Opportunity

We believe that the software markets as a whole are going through rapid change. The emergence of cloud-based infrastructure and applications is testament to the increasing demand for the scalability and rapid deployment provided by the SaaS delivery model. Organizations increasingly demand software that provides ease of use, re-usability, interoperability with widely adopted technologies, the flexibility to be deployed on-premises or in the cloud, and cost-effective maintenance. In this environment, delivering flexibility and performance with high return on investment becomes increasingly critical.

In addition, the rapid proliferation of commodity multicore hardware, along with exploding data volumes, provides opportunities for companies to leverage affordable servers and clusters of servers that have multiple cores in a single box to extract value from large volumes of data—but only if they have software that can effectively scale on multiple cores. The inevitable performance gains traditionally delivered by faster processors under “Moore’s Law” now must rely on a new generation of infrastructure software that can scale on ever-updating multicore hardware platforms.

 

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As these market disruption trends continue, we believe infrastructure software will be a key ingredient for all businesses as they 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, analytics, databases, and security solutions.

Pervasive also continues to see consolidation in markets where its data management and data integration offerings compete. In the database arena, Oracle acquired the open source Sun MySQL database while SAP acquired Sybase. For ISVs who want to avoid vendor lock-in with monolithic industry giants, Pervasive PSQL remains an attractive alternative. In the data integration market, IBM acquired CastIron Systems and Dell acquired Boomi, resulting in Pervasive being one of an increasingly small number of independent data integration providers. With a stable operating history, consistent profitability, a commitment to channel and the ability to provide a best-of-breed alternative to large technology stacks, we believe Pervasive holds a unique position as a stable yet innovative go-to partner for both channel and enterprise customers.

We believe these trends 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 technology leaders who develop deep relationships with channel partners and customers tend to prevail in cost-sensitive markets, and Pervasive, with its strengths in scalable data management, data integration, and scalable cloud delivery, is well-positioned to benefit from the trends in these markets. The economic environment remains uncertain, but Pervasive’s financial stability, strong value proposition for customers and partners, and diverse vertical and geographic markets have enabled the company to sustain profitability even in the face of economic headwinds. We believe that if an economic recovery accelerates and strengthens, our reputation as an established vendor with highly reliable offerings positions Pervasive to prosper even further.

Pervasive has a strong portfolio that consists both of established products with strong channels and recurring revenue and of innovative, cutting-edge technology that leverages potential market disruptors such as multicore hardware, cloud-based delivery models and the avalanche of big data. With a 10-year history of profitability, Pervasive remains committed to investing in technology innovation to deliver offerings that differentiate us from competitors, stay current with market trends, and deliver compelling customer value, today and in the future.

The Pervasive Strategy

Our goal is to be the leader in data innovation. We invest aggressively in research and development to deliver industry-leading software spanning data quality, movement, integration, management and analytics, both on-premises and in the cloud, across the entire data lifecycle.

Continue to Focus on Our Channel Strengths.    The company has a rich history of leveraging indirect channels to optimize our sales and marketing effectiveness and enable us to expand addressable markets in terms of geographical footprint, vertical industry and domain expertise. The data management product family that includes Pervasive PSQL reaches customers through a well-developed channel of ISVs, VARs, systems integrators, and consultants. Pervasive’s other flagship product team, which delivers data integration and data quality software, continues to increase its focus on revenue through channel partners including SIs, ISVs and SaaS vendors. In many cases these partnerships result in revenue streams that are repeated quarterly or annually. Along with an increase in subscription license revenue and support and maintenance contracts, the integration team has seen a growing percentage of recurring revenue in its overall mix. This trend was influential in the integration team posting record revenue results in each of the past four fiscal years. As large technology companies increasingly adopt cloud-based platforms to proliferate applications, Pervasive is seeing adoption of our integration software as the integration backbone of those platforms by top-tier software vendors.

Our ongoing and past investments in training and educating our customers worldwide, our long-term relationships with ISVs and VARs and our success in encouraging them to embed our products into their applications have created a competitive advantage in the marketplace. We intend to continue to build customer

 

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loyalty by providing significant revenue opportunities, meaningful certification programs and other offerings via our enhanced marketing, training, consulting and lead-sharing programs, as well as by ensuring customer satisfaction through the delivery of high-quality products and support programs.

The newer teams, Pervasive DataSolutions and Pervasive DataRush, also are investing in developing channel partner relationships, leveraging Pervasive’s heritage of long-term, productive partnering as a cornerstone of its go-to-market strategy.

Continue to Manage our Large Installed base of Database Customers.    Pervasive PSQL and its ecosystem offerings accounted for approximately 58% of fiscal 2011 revenue. The Pervasive low-TCO database is widely deployed, with millions of server seats licensed since the inception of Pervasive Software Inc. in 1994. Many of these seats are deployed in small-to-midsized organizations that have not yet adopted the latest generation of our database products. Therefore, we believe we have an opportunity in upgrading these seats to our new-generation data management products, led by Pervasive PSQL v11, as users adopt emerging technologies including multicore hardware, Internet Protocol version 6 (IPv6) and new Windows and Linux operating systems. We plan to reach these customers through our well-developed channel of ISVs, VARs, systems integrators and consultants and continue to seek their input to guide our product development activities. We intend to continue joint marketing programs with our channel partners and customers encouraging upgrades to recent versions of our database, upgrades of additional user counts, upgrades to new or additional platforms, as well as upgrades of the ISVs’ applications themselves.

Continue to Grow Our Integration Revenues.    The need for data and application integration, on-premises and in the cloud, continues to increase while the vendor landscape continues to consolidate, leaving Pervasive with growing market opportunity. We continue to deliver our suite of integration products through our existing and new channel partners, to speed and simplify the movement and transformation of data in the field when they win competitive deals, and to enable them to pre-wire their products with embedded integration to interoperate with adjacent business applications, whether in the cloud or on-premises. We help them onboard new customers rapidly and predictably, including migration of data from existing applications, and provide ongoing data integration for existing customers.

The scale of migration and integration initiatives increases significantly with the proliferation of ISV cloud-based application platforms. Today, customers expect migration and integration to be included in their solutions. Combining our deep knowledge and more than 25 years of migration and integration expertise, we provide easy-to-use, scalable migration and integration technology, services, training and partner programs. These programs help ISVs, SaaS vendors and systems integrators transform their applications into “integration ready” solutions that are scalable from one-time data migration to ongoing application integration within and beyond organizational boundaries while boosting their competitive advantage, time to revenue, customer satisfaction and cost management with self-service options.

We intend to continue investing in product development, marketing and sales activities, including expanding the range of offerings in data quality, including data profiling, data matching and de-duplication, data validation against third-party libraries, and master data management. Overall we focus on enhancing and leveraging our integration-related product lines with:

 

   

SaaS companies, including providers of cloud-based CRM, ERP, compensation management, billing, market automation, expense management, product portfolio management and talent management offerings,

 

   

ISVs, including both existing channel partners and new partners,

 

   

End users in corporate IT, healthcare, and financial services who seek to integrate multiple applications, including legacy and new, on-premises and hosted, internally or with trading partners, and

 

   

Business service providers, including those focused on payroll, tax, and employee benefits.

 

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Our integration business has achieved record revenue levels in each of the four fiscal years ending June 30, 2011, including growing recurring revenue from channels, subscriptions and maintenance. We will continue to focus on opportunities to grow our total integration revenues.

Our integration product revenues are generated predominantly in North America. However, we continue to market our expanding integration product line to our customer base internationally. International sales continue to represent approximately 10% of integration product revenues, and they grew in absolute terms in fiscal 2011 over fiscal 2010 as integration revenues grew overall. We will continue to focus on opportunities in new and existing international markets in fiscal year 2012.

Pursue Growth through Innovation in Complementary Products and Services.    Pervasive’s ongoing commitment to innovation across both its established and emerging technologies reflect the company’s focus on delivering unique value to partners and customers, in both the near term and in the future. We believe the culture of innovation gives Pervasive an edge in our ability to attract key employees, partners, and customers, as well as helping to drive visibility and recognition from key influencers, including industry analysts and media. Innovation takes place both through extending Pervasive’s existing intellectual property and through leveraging technologies from other sources, including open source and partners.

Innovation is at the core of three newer offerings, including:

 

   

Pervasive DataRush™, a software development platform that lets customers and partners rapidly build parallel applications that deliver high throughput on big data. It fully leverages the parallel processing capabilities of multicore processors to deliver unmatched performance on a multicore server, SMP machine, cluster or Hadoop cluster.

 

   

Pervasive DataCloud®, a scalable multitenant platform for hosting Pervasive- or partner-developed services.

 

   

Pervasive DataSolutions™, configurable subscription-based integration services delivered by Pervasive or by our ISV partners.

Pervasive continues to invest in all three offerings, extending their capabilities to embrace emerging technologies, partner requirements and additional markets.

Opportunistically Pursue Acquisitions of Complementary Businesses.    With a strong balance sheet and healthy cash and equivalents, Pervasive is situated to grow our business through acquisition of complementary companies and technologies where we are confident they will increase shareholder value. Attractive targets would be involved in data infrastructure software, have existing partner channels or be suited to partner channel development, and have relatively stable and mature business operations with a reasonable probability of being accretive to earnings within a few quarters of acquisition.

On July 31, 2009, Pervasive completed acquisition of assets of ChanneLinx, Inc., now operating as Pervasive Business Xchange, providing cloud-based business-to-business document exchange services. Pervasive has restructured the sales and marketing team, investing for growth through penetration of existing markets and accounts, primarily in the energy industry, and proactive efforts to develop additional markets and accounts that have the need for managed integration-as-a-service.

Remain Focused on Profitability.    With 42 consecutive profitable quarters beginning March 2001, Pervasive has a deep culture of profitability funded by revenue from Pervasive database and integration sales coupled with prudent expense management. We remain focused on delivering profitability while strategically investing in innovation and in driving market opportunities for Pervasive through channels, direct accounts and awareness among influencers.

Use of Cash.    We have meaningful cash resources relative to the size of our business and have been successful in generating positive cash flow in recent years. Continued positive cash flow generation will allow us to take advantage of suitable acquisition targets and cause us to continue to be active with our share repurchase

 

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program. We have repurchased shares of our stock on the open market in each of the 21 quarters ending June 30, 2011, totaling 10.2 million shares at a total investment of $42.4 million or approximately $4.31 per share, while maintaining a substantial $38.5 million of cash and cash equivalents on our balance sheet. We ended fiscal year 2011 with approximately $3.2 million authorized share repurchase funds remaining under our $10 million share repurchase program announced in July 2010.

Products

Pervasive Software provides innovative software and services to manage, integrate and analyze data, in the cloud or on-premises, throughout the entire data lifecycle. Pervasive products deliver value to tens of thousands of customers worldwide, often embedded within partners’ software, with breakthrough performance, flexibility, reliability and return on investment. Pervasive is distinguished by its channel-friendly product architecture and business model, enabling partners including ISVs, VARs, SIs and SaaS providers to bundle, resell or OEM Pervasive technology to complement their own core competencies.

Data Management Product Line

Pervasive PSQL is the flagship database offering, combining high-performance with low-maintenance features that support a variety of operating systems and access methods. The most recent version, Pervasive PSQL v11, has been optimized for multi-core hardware, enabling partners’ application performance to scale with the latest hardware. Pervasive PSQL v11 also includes a 64-bit ODBC driver and support for IPv6—the latest Internet protocol. Some of the key features are:

 

   

Optimized for multi-core hardware

 

   

Helps applications avoid multi-core slowdown

 

   

64-bit ODBC driver

 

   

Support for IPv6

Pervasive PSQL is complemented by an ecosystem of related data management products – Pervasive DataExchange™, Pervasive Backup Agent™ and Pervasive AuditMaster®.

Pervasive DataExchange was updated in fiscal 2011 to include all features and enhancements of earlier releases while supporting compatibility with Pervasive PSQL v11 and the Pervasive PSQL v11 64-bit Server Engine on Windows. The Pervasive DataExchange Real-Time Backup Edition replicates data from a production server to a backup server. If a system fails, clients can be redirected to the up-to-date backup. With Pervasive DataExchange, data loss and down time due to system crashes, hardware failures, or site disasters are eliminated.

Pervasive Backup Agent works with third-party backup software to ensure accurate, reliable point-in-time recovery for partial or complete backups. Pervasive Backup Agent simplifies backing up a Pervasive PSQL database with live applications. Backup Agent automatically handles all of the complex housekeeping tasks to be performed during a backup when the database is open. Backup Agent ensures integrity and consistency.

Pervasive AuditMaster tracks access at the database level, providing an audit trail, alert notification and reporting. It provides data access security and accountability; monitoring and logging of database activity; and user-defined alerts for database events. Whether the goal is reducing the risk of misuse and minimizing the effects of fraud or meeting increased expectations for security and privacy, Pervasive AuditMaster helps businesses know what’s happening with their data.

Data and Application Integration Product Line

Pervasive Software provides a range of data integration and data quality tools, on-premises and in the cloud. Our agile data integration software speeds the flow of data between applications and between organizations. Our robust technology addresses SaaS, SOA and traditional integration modes and allows customers to re-use the

 

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same software for integration scenarios that span data warehouses, real-time application integration and data exchange with trading partners.

Pervasive Data Integrator™ provides cost-effective extraction, transformation and flow of nearly any kind of data between sources throughout the organization—on a continuous, event-driven or scheduled basis in any usage scenario that you might need. Pervasive Data Integrator is easy-to-use, feature-rich and highly configurable data integration software for design, deployment and management. It allows partners and customers to design once and deploy flexibly, whether on-premises or in the cloud. The product supports connectivity to a wide range of data sources and applications, including legacy, on-premises and SaaS applications; files and databases; and Web and mainframe. Pervasive’s goal is to deliver complete connectivity to virtually any on-premises or on-demand application or data source. Pervasive Data Integrator is a highly extensible platform, allowing partners to scale, and expand their use of data integration as their needs and businesses grow.

Pervasive Data Profiler™ is one of Pervasive’s most robust data quality-related products, providing highly parallel data quality profiling, data quality analysis, de-duping, powerful data remediation, and address and other content verification and enhancement. It leverages the Pervasive DataRush highly scalable engine to leverage multi-core servers for rapid profiling of even extremely large datasets. It helps reduce costly rework, improve efficiency in issue detection, eliminate manual inspection processes and extend the reach of data quality projects with Pervasive’s extensive connectivity.

Pervasive Data MatchMerge™, another of our data quality offerings, provides a comprehensive solution for inaccurate, inconsistent and duplicate data. Pervasive Data MatchMerge provides advanced, tunable algorithms to identify potential duplicate data and can easily incorporate third-party data cleansing and standardization applications through standard APIs. This powerful combination yields an intuitive, highly accurate and extremely fast solution for identifying and resolving duplicate data problems.

Pervasive Integration Hub™ provides a comprehensive solution to a common integration scenario—a centralized hub needs to integrate with large numbers of business or trading partners, typically using different data file formats and protocols and employing different data semantics and rules. The Pervasive Integration Hub provides organizations with a central location and master process to manage profiles, define rules, and organize and validate customer data. In addition, customers may use Pervasive agent technology to access data sources behind a business partner’s firewall, as well as update and insert data back into business partner applications.

Pervasive Metadata Manager™ is a metadata management solution that automatically captures extensive design-time and production metadata in a single repository for lineage and impact analysis on integration processes, designs and interrelationships. It allows data analysts, developers and other key business and technical resources to quickly view and report on dependencies and the context of data elements. It also provides auditing for compliance needs, and to ensure the data continues to meet business objectives.

Cloud-Based Business-to-Business Document Exchange Services

The Pervasive Business Xchange team provides cloud-based B2B document exchange services that enable companies to send and receive business information in a seamless, timely and secure manner regardless of their enterprise system. Pervasive Business Xchange offers scalable solutions to suit small and medium businesses as well as Fortune 100 companies.

Pervasive WebDI is a managed service that provides trading partners with actionable insight into their cash flow-related business documents, including purchase orders and invoices. In fiscal 2011, Pervasive completed migration of all Pervasive WebDI customers to Windows Azure. The service lets customers connect with any trading partner electronically regardless of back office technology or trading format, and acquire new partners rapidly with Pervasive Business Xchange’s On-Boarding as a Service (OaaS). The service can monitor account information, order status, invoice detail reports and purchase history records for customers’ trading partners and validate transactions against business rules to reduce errors and rejects.

 

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New Product Innovation

Pervasive continues to invest aggressively to support research and new product development to both serve existing customers, partners and markets and expand to additional ones. The most significant projects have resulted in product offerings that address fast-growing markets for big data and cloud technologies.

Pervasive DataSolutions are affordable, pre-packaged integrations offered as a subscription. They support rapid configuration of integrations that automatically synchronize customer, product and order information between pre-defined endpoints including Salesforce, QuickBooks, QuickBooks Online, and FreshBooks. The product family also includes related technologies such as Pervasive Attachment Manager for Salesforce to upload and manage attachments in relation to specific Salesforce CRM accounts, contacts, and opportunities, and the Pervasive Integrated Credit Card Processor, which allows customers to use Salesforce as a virtual terminal to accept credit cards instantly.

Pervasive DataCloud®, originally designed as a platform to support Pervasive DataSolutions, now is an elastic platform-as-a-service for Pervasive products beyond Pervasive DataSolutions, as well as for partner-designed solutions. With more than 350 customers now using it, Pervasive DataCloud aligns nicely with market demand for affordable Software-as-a-Service integrations. Recent updates to the Pervasive DataCloud have enhanced security, manageability and stability.

Pervasive DataRush™, a software development platform that lets developers rapidly build parallel applications that deliver high throughput on big data. Pervasive DataRush fully leverages the parallel processing capabilities of multicore processors to deliver unmatched performance on a multicore server or SMP machine. With Pervasive DataRush version 5, introduced in fiscal 2011, the product now also supports scalable parallelism on a multicore cluster or Hadoop cluster. Another recent introduction, Pervasive TurboRush™ for Hive, speeds Hive queries, allowing them to run faster and require fewer resources. Hive is a data warehousing solution built on top of Hadoop for easy summarization, querying, and analysis of large datasets stored in Hadoop.

Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” elsewhere in this Report on Form 10-K for product line revenue information.

Sales and Marketing

Pervasive combines corporate-level awareness, public relations and analyst relations with focused product-based marketing teams driving lead-generation programs and partner development programs. Sales teams are also aligned with the product groups in order to develop expertise in their respective products, markets, use cases and delivery models, though cross-product teaming occurs as needed, particularly in enterprise accounts.

Indirect Channel Sales and Channel Marketing

Pervasive has a long and rich heritage of successfully supporting channel partners as a cornerstone of our go-to-market strategy, and we believe that provides us with operating leverage and sales and marketing efficiencies that contribute to our history of consistent profitability. Our ability to team in a productive manner with channel partners to meet their customers’ requirements effectively provides us with an expanded market footprint, a cost-effective source of service and technical support, and a loyal, well-educated channel that develops and deploys applications based on our technologies. Channel partners include developers of both packaged and SaaS applications as well as VARs, SIs and consultants who sell to and deploy applications for end customers. Pervasive products may be bundled with, embedded in or OEM’d by channel partners. Pervasive sales and marketing programs provide co-marketing, volume discounts, technical support, training and consulting to help partners gain and sustain market success. In addition, Pervasive executes marketing programs including trade shows, company-hosted events, direct mail, email campaigns, newsletters, telesales and Webinars to further recruit, develop and train software developers and channel partners to increase awareness and utilization of Pervasive products.

 

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International channel sales utilize distribution partners and OEMs worldwide, often as regionally focused partners using our distributor or master distributor programs. In addition, Pervasive’s international sales and marketing groups utilize many of the same marketing programs as the North American sales and marketing teams to increase market awareness, target influencers and prospects, and recruit and support software developers and channel partners. We currently have international offices in Brussels, Frankfurt, London and Paris and a joint venture in Japan.

Direct Sales and Marketing

In addition to channel distribution, Pervasive also engages with customers and prospects through direct sales and marketing activities. Direct marketing activities include trade shows, company-hosted events, public speaking engagements, Web marketing, social media, email campaigns, newsletters, telesales, Webinars, communities and referral programs. We also have active media relations and industry analyst relations programs to increase awareness of Pervasive within our target markets. In addition, various product teams focus on specific vertical marketing initiatives targeting financial services, healthcare, and energy. The goal of the marketing activities generally is to more deeply engage prospective customers to better understand how Pervasive products might benefit them, and to explore cross-sell and up-sell opportunities with existing customers.

Pervasive undertakes direct enterprise-focused sales activity at both the corporate and departmental levels. Sales executives employ a defined sales process supported by customer relationship management (CRM) and marketing automation software. Sales executives are supported by sales engineers who provide high-quality pre-sales technical support for product demonstrations, proposals, and proofs of concept. The majority of sales activity occurs through telephone conversations and on-line product demonstrations through the initial discovery phase to uncover potential customers’ interest and needs, which in turn drive targeted product recommendations and real-time demonstrations of relevant product capabilities. Often the sales team applies our capabilities to the prospective customer’s specific challenge via a proof of concept. In addition, the Pervasive DataSolutions products are prepackaged integration solutions primarily marketed and downloadable via the Web to allow customers to rapidly access a point-to-point integration solution through an affordable subscription.

Customer Service and Technical Support

Pervasive customers can choose from different levels of customer support and maintenance contracts. First-level support responds to most customer inquiries that are routine issues via telephone and email. In some instances, Pervasive channel partners provide first-level support. Second-level support responds to escalated technical issues and supports strategic partners and customers with dedicated technical expertise.

Technical support staff have both detailed product knowledge and a grasp of common customer usage scenarios, specific domain expertise, and a working knowledge of a variety of operating systems, applications, databases, and development environments.

Pervasive product Web sites include in-depth product information, support forums and frequently asked questions to give customers 24x7 access to documentation, maintenance releases, product demonstrations, tutorials and knowledge bases that can often allow them to get immediate relevant information and address their issues quickly and easily. Customers may also submit electronic support request forms for more detailed, particular concerns. Worldwide customer support is provided through our corporate headquarters in Austin, Texas supplemented by international partners who handle local first-level support in the local language.

Professional Services

Pervasive primarily leverages a wide range of systems integrators to bring a breadth of domain expertise to our integration and data quality implementation projects. Partners’ domain expertise may be specific to products, including CRM and ERP products, or specific to business processes such as billing, outsourcing, marketing automation or accounting.

 

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In addition to the partner network, the data integration and data quality product team also has a very capable Professional Services Group (PSG) to accelerate and maximize integration and data quality ROI for customers. The PSG can develop proofs of concept and benchmarks on a sample of a customer’s integration project or on other sample migration, integration, profiling or data cleansing processes.

PSG consultants can also help customers improve and optimize data processes or system performance. PSG works closely with clients to architect and build specialized applications and/or functionality as needed to optimize the product performance. PSG can also help clients ensure that Pervasive tools are properly embedded and have full connectivity to other internal or external applications.

The Enablement Engineering group helps partners and customers with rapid, client-oriented deployment and implementation, or long-term consulting. The team is composed of developers, product specialists and business analysts devoted to delivering partner and customer success.

The Training Services group provides regularly scheduled product training in Austin for both licensed users of Pervasive software and prospects. Specialized customer requirements can be met with supplemental training or consulting workshops to supplement regular training. The team also provides on-site courses and workshops at customer locations or via the Web as well as on-line e-learning classes. In addition, many Pervasive channel partners supplement PSG with specialized consulting expertise for customers.

Research and Development

Pervasive continues to invest aggressively in research and development. As of June 30, 2011, we had 76 employees in research and development and our research and development expenditures for fiscal year 2011 and 2010 were $11.8 million and $11.8 million, respectively. We intend to continue to invest heavily in focused research and development initiatives.

Our development efforts primarily consist of driving meaningful innovation in new and existing product lines to continuously enhance performance, extend and expand the feature set, deliver capabilities that benefit customers and differentiate our products from competitive offerings, enhance usability, and invest in emerging technologies and markets.

Our planned research and development investments in fiscal 2012 include:

 

   

Embedded database technology. We continue to invest in development resources to enhance Pervasive PSQL and related ecosystem products with performance, features and functionality that are important to our channel partners and their end customers. The database engineering team focuses on keeping the product up-to-date with evolving operating systems and other technology developments, while maintaining full backward compatibility with existing and legacy technologies and environments. Uptake of the most current Pervasive PSQL v11, which is optimized for multicore, continues to be strong. Pervasive is also investing in Pervasive PSQL Vx, a product release for partners who make extensive use of virtualization techniques, enabling them to better deliver on public, private or hybrid clouds with load balancing, failover and multi-instance scalability. We will also be introducing a capacity-based license model based on data volumes in use and number of active sessions to accommodate changing infrastructures for SaaS and cloud-based ISVs without requiring them to rewrite their applications.

 

   

Data integration. We will continue to extend Pervasive Data Integrator™ version 10 capabilities, including big data integration offerings and enhanced management and monitoring, and broaden the data quality suite, including master data management solutions, enabling us to compete successfully in a growing number of enterprise accounts.

 

   

Integration community platform. In fiscal 2012, the company will continue to enrich Pervasive Galaxy, an integration crowdsourcing/community platform built by Pervasive for and with partners that launched in May 2011 to facilitate sale and exchange of integrations, maps, processes, templates and samples.

 

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Cloud-based Platform-as-a-Service offerings. Pervasive is teaming with partners to expand Pervasive DataCloud capabilities beyond our traditional public cloud infrastructure to accommodate private and hybrid cloud environments to meet a broader range of customer and partner scenarios.

 

   

Parallel processing for multicore servers and clusters. Pervasive has taken the highly parallel, massively scalable Pervasive DataRush engine and extended its use beyond single-SMP multicore hardware to deliver scale-out capability on multi-node clusters, including Hadoop clusters. We also recently launched Pervasive TurboRush™ for Hive to accelerate performance in the open-source tool that lets users apply SQL queries to Hadoop big data stores. In fiscal 2012 Pervasive plans to release Pervasive DataRush Community Edition, a subset of the full Pervasive DataRush platform offered at no charge. The Community Edition will be integrated with Hadoop and is designed to make Map-Reduce easier to work with. The team is also collaborating with domain experts to explore bringing vertical Pervasive DataRush-based solutions to market, with initial emphasis on the telecommunications industry.

 

   

Data solutions. Pervasive will be extending our family of prepackaged solutions in addition to working closely with partners to help them leverage the Pervasive DataSolutions and Pervasive DataCloud technology to develop and market their own prepackaged solutions.

 

   

Pervasive Business Xchange. In fiscal 2011 Pervasive completed migration of all Pervasive WebDI customers to Windows Azure. The team plans to develop new vertical market focus areas in the latter half of fiscal 2012 and leverage application and data connectivity from the data integration product team to give customers last-mile connectivity.

 

   

New products, services and market. We continue to invest resources in the development of extensions to our existing products as well as the discovery of new products and services to serve our existing customers and attract new customers. In fiscal 2011, Pervasive added to its existing set of patents and continues to explore ways to leverage its patented technology, which includes patents related to data metering, parallel processing, and event-driven data transformation.

Competition

Pervasive PSQL competes with databases primarily from large public companies including Microsoft, Oracle, Sybase/SAP, IBM and Progress. In particular, Sybase’s small memory footprint database, Adaptive Server Anywhere, and Microsoft SQL Server directly compete with our embedded database product.

The market for data integration and data quality products is highly competitive and subject to rapidly changing technology. We principally compete against custom code where potential customers have internal technical resources to develop integration solutions in-house. In addition, we face competition from vendors including IBM, Informatica, Dell Boomi, Oracle, and open-source vendors including Talend and SnapLogic. Because there are relatively low barriers to entry in the software market, we may encounter additional competition from other established or emerging companies providing integration products based on existing, new or open-source technologies. However, we believe that our experience and breadth of knowledge give us an advantage over new entrants, which typically focus on niche markets rather than the broad set of capabilities Pervasive provides. While the software industry overall has a mixed record on delivering successful projects on time and on budget, we believe we have a strong history of delivering successful projects that result in satisfied, referencable customers.

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

 

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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, 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.

Employees

As of June 30, 2011, Pervasive employed approximately 252 full-time employees, including 105 in sales and marketing, 76 in research and development, 39 in professional services, customer service and technical support, and 32 in general and administrative. We are not subject to any collective bargaining agreement, and we believe that our relationships with our employees are good.

Facilities

Our leased headquarters facility in Austin, Texas, consists of approximately 94,000 square feet, approximately 14,000 of which has been subleased to a third party through September 2011. The facility provides additional space and expansion options and is leased through January 2019. We currently lease additional offices in Greenville, South Carolina; Brussels; Frankfurt; London and Paris.

 

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ITEM 1A. RISK FACTORS

You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones we face. Any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. Please see the “Special Note Regarding Forward-Looking Statements” elsewhere in this Report on Form 10-K.

Our Financial Results May Vary Significantly from Quarter to Quarter

Our operating results have varied significantly from quarter to quarter at times in the past and may continue to vary significantly from quarter to quarter in the future, which could make our future operating results difficult to predict and increase the likelihood that future results may fall below analyst or investor expectations thereby causing our stock price to decline. Such variations are due to a number of factors, many of which are outside our control. These factors include:

 

   

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 PSQL products are designed to be embedded;

 

   

fluctuations in demand for our products due to the potential impact of uncertain 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 ISVs who embed our products or VARs who sell and deploy our products;

 

   

changes in the mix of domestic and international sales;

 

   

impact of changes to our geographic investment levels and business models;

 

   

changes in the cost of routine business activities;

 

   

gains or losses associated with discontinued operations;

 

   

changes in our business plan or strategy;

 

   

impact of severance charges associated with departing employees;

 

   

write-downs of the recorded book value of assets;

 

   

impact of litigation;

 

   

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 also derive a significant portion of our revenues from relatively large transactions. The sales cycles for these transactions tend to be longer than the sales cycles on smaller orders. This longer sales cycle for large

 

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transactions makes it difficult to predict the quarter in which these sales will occur. Accordingly, our operating results may fluctuate from quarter to quarter based on the existence and timing of larger transactions. A reduction in large transactions during any quarter could materially impact our revenues.

Additionally, significant portions of our expenses are not variable in the short term and cannot be quickly reduced to respond to decreases in revenues. Therefore, if our revenues are below our expectations, our operating results are likely to be adversely and disproportionately affected. In addition, we may change our prices, modify our distribution strategy and policies, accelerate our investment in research and development, sales or marketing efforts in response to competitive pressures or pursue new market opportunities. Any one of these activities may further limit our ability to adjust spending in response to revenue fluctuations.

Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results

Our business has, on occasion, experienced seasonal customer buying patterns. In past years, we have generally experienced relatively weaker demand in the quarter ending September 30. Demand for our products in Europe and Japan will generally decline in the summer months because of reduced corporate buying patterns during the vacation season. We believe this pattern may occur in the future and may contribute to fluctuations in our quarterly operating results.

Uncertain Economic Conditions May Harm Our Operating Results

Our revenue and profitability depend on the overall demand for our products and services, which in turn depends on general economic and business conditions. The nature and extent of the effect of the recent adverse economic conditions and the subsequent economic recovery on our ability to sell our products and services is uncertain. A softening of demand for our products and services caused by uncertain economic conditions may result in decreased revenues. In addition, such uncertain economic conditions may impact our customer’s ability to pay for the products they have purchased and as a consequence, we may not be able to collect our accounts receivable balances and our reserves for doubtful accounts and write-offs of accounts receivable may increase. There can be no assurance we will be able to effectively promote revenue growth rates if the current uncertain economic conditions continue or deteriorate.

We Generally Operate Without a Backlog

We generally operate with virtually no order backlog because our software products are shipped and revenue is recognized shortly after orders are received. This lack of backlog makes product revenues in any quarter unpredictable and substantially dependent on orders booked and shipped throughout that quarter. Accordingly, a material decrease in orders in any quarter could have a materially adverse effect on our revenues and operating results.

Our Performance Depends on Market Acceptance of Pervasive PSQL and Our Integration Products

We derive a substantial portion of our revenues from the license of our Pervasive PSQL® products. Continued market acceptance of Pervasive PSQL may be influenced heavily by factors outside of our control, such as new product offerings or promotions by competitors, mergers and acquisitions of customers and competitors, the product development and deployment cycles of developers and resellers who embed or bundle our products into packaged software applications and demand for applications of the type built on our products. Market acceptance of Pervasive PSQL v11 (first released in September 2010), and future upgrades also may be influenced by factors in our control such as product quality, relative demand for feature and functionality upgrades and any future product announcements or price changes.

Revenue from our embedded database product, Pervasive PSQL, decreased in fiscal year 2011 relative to fiscal years 2009 and 2010. We believe the decrease in 2011 was primarily due to a number of relatively large

 

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transactions with database customers in 2009 and 2010. For example, we separately disclosed one relatively large transaction with database customers in each of the last three fiscal years in the amount of $3.0 million, $2.4 million and $0.9 million in fiscal years 2009, 2010 and 2011, respectively. Our embedded database and related products represented approximately 58% of our revenue in fiscal year 2011. However, our integration product revenue in fiscal year 2011 grew 9% over fiscal year 2010 and 18% over fiscal year 2009 and now represents approximately 38% of total revenue. A reduction in our embedded database business or our integration product business, could have a material adverse effect on our business, operating results and financial condition.

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

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

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

Our long-term strategic plan depends upon the successful development and introduction of products and solutions that address the needs of the data management software market as well as the data integration software market. In order for us to succeed in these markets, we must align strategies and objectives and focus a significant portion of our resources toward serving these markets.

In addition, our success in these markets will depend on several factors, many of which are outside our control including:

 

   

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.

Defects or Disruptions in Our Ability to Deliver Our Products Across Various Platforms Could Diminish Demand for Our Service and Subject Us to Substantial Liability

As we continue to provide more of our products from third party data hosting platforms, there is the potential for there to be defects or disruptions in our ability to deliver our products to our customers. These potential disruptions could result in unanticipated downtime for our customers and harm our reputation and our business. In addition, our customers may use our service in unanticipated ways that may cause a disruption in service for other customers attempting to access their data. Since our customers use our service for important aspects of their business, any errors, defects, disruptions in service or other performance problems with our service could hurt our reputation and may damage our customers’ businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales or customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation.

 

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Interruptions or Delays in Service From Our Third-Party Data Center Hosting Facilities Could Impair the Delivery of Our Service and Harm Our Business

We currently serve some of our customers from third-party data center hosting platforms. Any damage to, or failure of, the third parties’ systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.

If Our Security Measures Are Breached and Unauthorized Access is Obtained to a Customer’s Data or Our Data, Our Service May be Perceived as not Being Secure and We May Incur Significant Legal and Financial Exposure and Liabilities

While we have derived the majority of our historical revenues from on premise delivery of our products, we are increasingly offering our products on third party hosted platforms. This method of delivery of our products involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party action, employee error, malfeasance or otherwise, during transfer of data to additional data centers or at any time, and result in someone obtaining unauthorized access to our data or our customers’ data. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and someone obtains unauthorized access to our customers’ data, we could incur significant liability to our customers or significant fines and sanctions by processing networks or governmental bodies, any of which could result in harm to our business and damage to our reputation.

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

On July 31, 2009, we announced the completion of our purchase of assets of Greenville, South Carolina-based ChanneLinx, Inc. for total consideration of approximately $2.6 million in cash. We cannot be certain we will ultimately realize all of the anticipated benefits of this acquisition.

On December 8, 2003 we announced the completion of our acquisition of privately held Data Junction Corporation, a pioneering data and application integration company based in Austin, Texas, for approximately $16.6 million in cash, net of $6.5 million of cash held by Data Junction at the time of closing of the transaction, and 5 million shares of our common stock. We cannot be certain we will ultimately realize all of the anticipated benefits of the acquisition. In particular we may not realize the strategic and operational benefits we had anticipated, including greater revenue and market opportunities, maintaining industry leadership and consistent profitability.

In July 2001, we formed a business venture with AG-TECH Corporation, a company developing, selling and importing packaged software, to sell and support certain of our products in Japan. AG-TECH has been engaged in the sales and support of Btrieve (predecessor to Pervasive PSQL) and Pervasive PSQL products since 1986. In conjunction with the joint venture, AG-TECH launched a new operating division staffed with specialists experienced in selling and supporting Pervasive PSQL to assume responsibility for OEM sales, packaged software sales, technical support and localization and translation of our products into Japanese. In connection with the new business venture, we obtained a less than 20% ownership interest in AG-TECH and the ability to elect one director to the AG-TECH Board of Directors. While this venture has been successful to date, we cannot be certain that this venture will continue to be successful, which could result in our inability to successfully operate in Japan. In addition, as part of our venture, we executed a three year master distributor agreement with AG-TECH, the initial term of which expired June 30, 2004. This agreement has been renewed 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.

 

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We May Face Problems in Connection With Future Acquisitions, Joint Ventures or Licensing Agreements

In the future, we may acquire additional businesses, products and technologies, or enter into joint venture or licensing arrangements, that could complement, modify or expand our business. Our negotiations of potential acquisitions or joint ventures and our integration of acquired businesses, products or technologies could divert management time and resources. Any future acquisitions could require us to issue dilutive equity securities, reduce our cash and marketable securities, incur debt or contingent liabilities, amortize intangibles, or write-off purchased research and development and other acquisition-related expenses. If we are unable to fully integrate acquired businesses, products or technologies with our existing operations, we may not receive the intended benefits of acquisitions. In addition, market reactions to acquisitions are difficult to predict and if we do announce any future acquisitions, such market reactions may cause our stock price to fluctuate.

If Our Goodwill or Amortizable Intangible Assets Become Impaired We May Be Required to Record a Significant Charge to Earnings

Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.

We May Face Problems in Connection With Product Line Expansion

In the future, we may acquire, license or develop additional products. Future product line expansion may require us to modify or expand our business and expend significant time and resources. If we are unable to fully integrate new products with our existing operations, we may not receive the intended benefits of such product line expansion and related expenditures.

A Small Number of Distributors and Sales Related to Accounting Software Applications Account for a Significant Percentage of Our Revenues

The loss of a major distributor, changes in a distributor’s payment practices, changes in the financial stability of a major distributor or any reduction in orders by such distributor, including reductions due to market or competitive conditions, combined with the potential inability to replace the distributor on a timely basis, or any modifications to our pricing or distribution channel strategy could materially adversely affect our business, operating results and financial condition. Many of our ISVs, VARs and end users place their orders through distributors. A relatively small number of distributors have accounted for a significant percentage of our revenues. In the fiscal year ended June 30, 2011, one distributor (our joint venture partner in Japan, AG-TECH Corporation) accounted for an aggregate of approximately 11% of our revenues, as compared to 11% in the fiscal year ended June 30, 2010. Additionally, sales related to accounting software applications has, at various times, represented as much as 20% of our revenues. Furthermore, there has been consolidation taking place among our ISVs that could narrow the number of customers who sell our products. For example, one of our ISVs, The Sage Group plc, has acquired Timberline Software Corporation, Softline Limited, ACCPAC International Inc., Sage Sesame and TAS Software, five of our ISVs. The Sage Group family of companies has, at various times, represented approximately 10% of our revenues. As a result, we expect we will continue to depend on a limited number of distributors, certain of our ISV customers and sales related to accounting software applications for a significant portion of our revenues in future periods and the loss of a significant distributor or ISV customer could materially adversely affect our business, operating results and financial condition. Moreover, we expect that such distributors and sales related to accounting software applications will vary from period to period and

 

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may be impacted by recent events in Japan. 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.

Our Business Operations Could Be Negatively Impacted by the Aftereffects of the Tohoku Pacific Earthquake and Its Impact on Japan

The recent Japanese earthquake and resulting tsunami may affect our business operations. Our Japanese joint venture, AG-TECH, is located in Tokyo and operations have been relatively unaffected. However, there can be no assurances that future operations and revenue may not be seriously affected. The disaster in Japan may also result in a downturn in the Japanese economy as a whole. These occurring or potential events may seriously damage our ability to conduct business in Japan or, in the worst case, cause operations in Japan to completely cease with our business suffering a material downturn.

We Depend on Our Indirect Sales Channel

Our failure to grow our indirect sales channel or the loss of a significant number of members of our indirect channel partners would have a material adverse effect on our business, financial condition and operating results. We derive a substantial portion of our revenues from indirect sales through a channel consisting of ISVs, VARs, SIs, consultants and distributors. Our sales channel could be adversely affected by a number of factors, many of which are outside of our control, including:

 

   

the failure of ISVs to develop, and the failure of VARs 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 channel partners. In addition, we cannot be certain our competitors will not attempt to recruit certain of our current or future channel partners. Such competitive actions may have an adverse effect on our ability to attract and retain channel partners, which, in turn, may have a material adverse effect on our business, financial condition and operating results.

We May Not Be Able to Sustain or Develop Strategic Relationships

From time to time, we enter into strategic collaborative relationships with other companies in areas such as product development, marketing, distribution and implementation, which allow us to realize a variety of benefits. Many of our current strategic relationships are informal, or, if written, terminable with little or no notice. Additionally, many of our current and potential strategic partners are either actual or potential competitors with us. For these reasons, we may not be able to sustain our current strategic relationships or enter into successful new strategic relationships in the future, which could have a material adverse effect on our business, operating results and financial condition.

We Depend on Third-Party Technology in Our Products

We rely upon certain software we license from third parties, including software integrated with our internally developed software and used in our products to perform key functions. These third-party software licenses may not continue to be available to us on commercially reasonable terms. The loss of, or inability to

 

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maintain or obtain any of these software licenses, could result in product development or shipment delays or the loss or deferral of revenues until we develop, identify, license and integrate equivalent software. Any delay in product development or shipment could damage our business, operating results and financial condition.

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

Our success depends to a significant degree upon our ability to protect our software and other proprietary technology. We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights. However, these measures afford us only limited protection. In addition, we rely in 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. In the future, we may not be successful in developing and marketing, on a timely and cost-effective basis, new products or new product enhancements that respond to technological change, evolving industry standards or customer requirements, avoiding difficulties that could delay or prevent the successful development, introduction or marketing of these products, or achieving market acceptance for our new products and product enhancements, any of which could have a material adverse effect on our business, operating results and financial condition.

Our Software May Contain Errors or Defects

Software products such as ours may contain errors, sometimes called “bugs,” particularly when first introduced or when new versions or enhancements are released. From time to time, we discover software errors

 

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in certain of our new products after their introduction. Despite our testing, current versions, new versions or enhancements of our products may still have errors after commencement of commercial shipments. Errors or defects in our products may result in loss of revenues, delay in market acceptance, diversion of development resources or injury to our brand and reputation and could materially adversely affect our business, operating results and financial condition.

We May Become Subject to Product or Professional Services Liability Claims

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

We Compete with Microsoft while Simultaneously Supporting Microsoft Technologies

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

We expect that Microsoft’s commitment to and presence in the data management products market will continue to assert competitive pressure. We believe that Microsoft will continue to incorporate SQL Server database technology into its operating system software and certain of its server software offerings, possibly at no additional cost to its users. Microsoft currently licenses a royalty-free limited version of its SQL Server database technology. We believe that Microsoft will also continue to enhance its SQL Server database technology and that Microsoft will continue to invest in various sales and marketing programs involving certain of our channel partners.

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

We believe we must maintain a working relationship with Microsoft to achieve success. Many of our customers use Microsoft-based operating platforms. Thus, it is critical to our success that our products be closely integrated with Microsoft technologies. Notwithstanding our historical and current support of Microsoft platforms, Microsoft may in the future promote technologies and standards more directly competitive with or not compatible with our technology.

We Face Significant Competition From Other Companies

We encounter competition for our embedded database products primarily from large, public companies, including Microsoft, Oracle, Sybase/SAP, IBM and Progress. In particular, Sybase’s small memory footprint database software product, Adaptive Server Anywhere, and Microsoft’s product, SQL Server, directly compete with our products.

 

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The market for our integration products is highly competitive and subject to rapidly changing technology. We often compete against custom code, where potential customers have sufficient internal technical resources to develop solutions in-house. In addition, we face competition from vendors of ETL (extract, transform and load), data warehousing and application integration software products. Such competitors include IBM, Oracle, Business Objects/SAP, Informatica, and Information Builders, as well as niche vendors in specific verticals and the SaaS marketplace. In addition, we compete or may compete against database vendors that currently offer, or may develop, products with functionalities that compete with our integration solutions. These products typically operate specifically with these competitors’ proprietary databases. Such competitors include IBM, Microsoft, Sybase/SAP and Oracle. And, because there are relatively low barriers to entry in the software market, we may encounter additional competition from other established or emerging companies providing integration products based on existing, new or open-source technologies.

Open-source software, 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 have and may continue to enter our market and could cause a change in revenue models from licensing of client/server and Web-based applications to renting applications. Our competitors may be more successful than we are in adopting these revenue models and capturing related market share.

Most of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers. In addition, some competitors have demonstrated a willingness to, or may willingly in the future, incur substantial losses as a result of deeply discounted product offerings or aggressive marketing campaigns. For example, Microsoft, Oracle, IBM and Sybase all currently license royalty-free limited versions of their database technologies. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of competitive products, than we can. There is also a substantial risk that changes in licensing models or announcements of competing products by competitors such as Microsoft, Oracle, Sybase/SAP, IBM, Progress, MySQL/Oracle, Ascential/IBM, Cast Iron/IBM, Business Objects/SAP, Informatica, Information Builders or others could result in the cancellation of customer orders in anticipation of the introduction of such new licensing models or products. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs, which may limit our ability to sell our products through particular partners. Accordingly, new competitors or alliances among, or consolidations of, current and new competitors may emerge and rapidly gain significant market share in our current or anticipated markets. We also expect competition will increase as a result of software industry consolidation. Increased competition is likely to result in price reductions, fewer customer orders, reduced margins and loss of market share, any of which could materially adversely affect our business, operating results and financial condition. We cannot be certain we will be able to compete successfully against current and future competitors or that the competitive pressures we face will not materially adversely affect our business, operating results and financial condition.

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

We have derived substantially all of our historical embedded database product revenues from the use of our products in client/server applications. We expect to rely on continued market demand for client/server

 

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applications indefinitely. However, we believe market demand may shift from client/server applications to Web-based or hosted applications. If so, we cannot be certain our existing client/server developers will migrate to Web-based or hosted applications and continue to use our products or that other developers of Web-based or hosted applications would select our data management products. In addition, this shift could result in a change in revenue models from licensing of client/server applications to subscriptions of Web-based or hosted applications from SaaS vendors. A decrease in client/server application sales coupled with an inability to derive revenues from the Web-based or hosted application market could have a material adverse effect on our business, operating results and financial condition.

We Depend on International Sales and Operations

We anticipate for the foreseeable future we will derive a significant portion of our revenues from sources outside North America. In the fiscal year ended June 30, 2011, we derived 34% 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;

 

   

complexities with financial reporting in foreign countries;

 

   

quality control of certain development, translation or localization activities;

 

   

political, social and economic instability; and

 

   

reduced or different protections for intellectual property rights in some foreign countries.

We may expand or modify our operations internationally. Despite our efforts, we may not be able to expand or modify our operations internationally in a timely and cost-effective manner. Such an outcome would limit or eliminate any sales growth internationally, which in turn would materially adversely affect our business, operating results and financial condition. Even if we successfully expand or modify our international operations, we may be unable to maintain or increase international market demand for our product.

We expect our international operations will continue to place financial and administrative demands on us, including operational complexity associated with international facilities, administrative burdens associated with managing relationships with foreign partners, and treasury functions to manage foreign currency risks and collections.

Fluctuations in the Relative Value of Foreign Currencies Can Affect Our Business

To date, the majority of our transactions have been denominated in U.S. dollars. The majority of our international operating expenses and substantially all of our sales in Japan have been denominated in currencies other than the U.S. dollar. Therefore, our operating results may be adversely affected by changes in the relative value of the U.S. dollar. Certain of our international sales are denominated in U.S dollars, especially in Europe. Any strengthening of the U.S. dollar against the currencies of countries where we sell products denominated in

 

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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.

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

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

We may elect to raise additional funds, and we cannot be certain we will be able to obtain additional financing on favorable terms, if at all. If we issue equity securities, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If we borrow money, we may incur significant interest charges, which could harm our profitability. Holders of debt would also have rights, preferences or privileges senior to those of existing holders of our common stock. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our product, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could seriously harm our business, operating results and financial condition.

 

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The Price of Our Stock Has Been Volatile and Could Continue to Fluctuate Substantially

Our common stock is traded in the NASDAQ Global Market. The market price of our common stock has been volatile and could fluctuate substantially based on a variety of factors outside of our control, in addition to our financial performance. Furthermore, stock prices for many companies, including our own, fluctuate widely for reasons that may be unrelated to operating results.

During the twenty-one fiscal quarters ending June 30, 2011, the Company has acquired approximately 10.2 million shares of its common stock on the open market at a total cost of approximately $44.4 million, or approximately $4.31 price per share. The Company’s Board of Directors approved a new stock repurchase plan effective July 27, 2010, whereby the Company may repurchase additional shares of its common stock with a value of up to $10 million, of which approximately $3.2 million remains available as of June 30, 2011. 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.

Our Reported Financial Results May be Adversely Affected by New Accounting Pronouncements or Changes in Existing Accounting Standards and Practices

We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC and various organizations formed to interpret and create appropriate accounting standards and practices. New accounting pronouncements and varying interpretations of accounting standards and practices have occurred and may occur in the future. New accounting pronouncements or a change in the interpretation of existing accounting standards or practices may have a significant effect on our reported financial results and may even affect our reporting of transactions completed before the change is announced or effective.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in the “Letter to Stockholders” in the Annual Report and this Report on Form 10-K under “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. Forward-looking statements include statements regarding the Company’s expectations, beliefs, hopes, intentions or strategies regarding the future. These statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed under “Risk Factors” and elsewhere in this Report on Form 10-K.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could”, “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of such terms or other comparable terminology.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our 2011 fiscal year that remained unresolved.

 

ITEM 2. PROPERTIES

Our leased headquarters facility in Austin, Texas, consists of approximately 94,000 square feet, approximately 14,000 of which has been subleased to a third party through September 2011. The facility provides additional space and expansion options and is leased through January 2019. We currently lease offices in Greenville, South Carolina, Brussels, Frankfurt, London and Paris. We believe our existing facilities are suitable and will be adequate to meet our needs for the foreseeable future.

 

ITEM 3. LEGAL PROCEEDINGS

The company is not a party to any material legal proceeding.

On January 21, 2010, JuxtaComm-Texas Software, LLC (“JuxtaComm”) filed a complaint (as amended April 22, 2010) in the Eastern District of Texas against 20 defendants, including Pervasive, alleging patent infringement. We filed an answer to the complaint on May 5, 2010 (as amended September 13, 2010). On July 15, 2010, JuxtaComm filed its Disclosure of Asserted Claims and Infringement Contentions. We filed our patent Invalidity Contentions on September 13, 2010. On May 12, 2011, the United States Patent and Trademark Office (US PTO) issued a Final Office Action rejecting all asserted claims of the patent in question, essentially resulting in the patent being invalid. The various defendants have filed various motions to stay litigation on the matter pending completion of all appeal processes JuxtaComm might follow with the US PTO. The defendants have also filed various motions for summary judgment based on invalidity. The Court has not ruled on these various motions. Pervasive and JuxtaComm, therefore, continue to exchange correspondence and file various documents with the Court.

 

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The patent in question, United States Patent number 6,195,662 titled “System for Transforming and Exchanging Data Between Distributed Heterogeneous Computer Systems,” was issued on February 27, 2001 with a filing date of June 26, 1998. Data Junction Corporation, acquired by Pervasive in December 2003, has been in the data integration business since the mid-1980s and sold its data transformation products, which are now being used by Pervasive’s products, long prior to the filing of the JuxtaComm patent. Additionally, as evidenced by the recent action by the US PTO to reject the claims of the JuxtaComm patent, substantial “prior art” exists relating to the JuxtaComm patent to point to in our defense. We believe we will prevail either in our contentions that the JuxtaComm patent is invalid or our products do not infringe the patent. Pervasive intends to vigorously defend itself and believes the outcome of this proceeding will not have a material adverse effect on our business, operating results or financial condition.

On September 14, 2010, UnilocUSA, Inc. and Uniloc Singapore Private Ltd. (“Uniloc”) filed a complaint in the Eastern District of Texas against 12 defendants, including Pervasive, alleging patent infringement. We filed an answer to the complaint on October 25, 2010. The patent in question, United States Patent number 5,490,216 titled “System for Software Registration,” was issued on February 6, 1996. The case is currently in the discovery phase. Pervasive and Uniloc continue to exchange correspondence and file various documents with the Court. We believe our products do not infringe the patent. Pervasive intends to vigorously defend itself and believes the outcome of this proceeding will not have a material adverse effect on our business, operating results or financial condition.

 

ITEM 4. (Removed and Reserved)

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of the Company is traded in the Nasdaq Global Market under the symbol PVSW. The Company completed its initial public offering and commenced trading on September 26, 1997. The following tables set forth the high and low closing sales prices of the Company’s common stock for each quarterly period during the two years ended June 30, 2011.

 

Fiscal 2010

   High      Low  

First Quarter

   $ 6.10       $ 4.67   

Second Quarter

   $ 5.87       $ 4.67   

Third Quarter

   $ 5.49       $ 4.75   

Fourth Quarter

   $ 5.30       $ 4.66   

Fiscal 2011

   High      Low  

First Quarter

   $ 5.05       $ 4.59   

Second Quarter

   $ 5.30       $ 4.80   

Third Quarter

   $ 6.97       $ 5.15   

Fourth Quarter

   $ 7.20       $ 6.24   

As of August 31, 2011, there were approximately 235 stockholders of record (which number does not include the number of stockholders whose shares are held by a brokerage house or clearing agency, but does include such brokerage house or clearing agency as one record holder.

The Company has never paid a cash dividend on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable future.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

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
 

April 1, 2011 to April 30, 2011

                     11,445,377       $ 4,893,000   

May 1, 2011 to May 31, 2011

     102,987       $ 6.45         11,548,364       $ 4,226,000   

June 1, 2011 to June 30, 2011

     151,628       $ 6.42         11,699,992       $ 3,248,000   
  

 

 

          

Total

     254,615            

In July 2010, we announced the authorization of a new $10.0 million stock repurchase plan which became effective on July 27, 2010. During the three months ended June 30, 2011, we repurchased 254,615 shares of common stock at a cost of approximately $1.6 million under the stock repurchase plan approved on July 27, 2010. The transactions occurred in open market purchases. The repurchase program may be suspended or discontinued at any time without prior notice.

The Company had no sales of unregistered securities in fiscal year ended June 30, 2011.

 

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this Form 10-K. The consolidated statements of income data for the fiscal years ended June 30, 2009, 2010 and 2011 and the consolidated balance sheet data at June 30, 2010 and 2011 are derived from audited consolidated financial statements included elsewhere in this Form 10-K. The consolidated statements of income data for the periods ended June 30, 2007 and 2008 and the consolidated balance sheet data at June 30, 2007, 2008 and 2009 are derived from audited consolidated financial statements not included herein.

 

     Year Ended June 30,  
     2007     2008     2009     2010     2011  
     (in thousands, except per share data)  

Consolidated Statements of Income Data:

  

Revenues:

          

Product licenses

   $ 28,851      $ 29,343      $ 32,322      $ 30,764      $ 30,481   

Services and other

     11,932        13,124        14,896        16,449        17,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     40,783        42,467        47,218        47,213        48,393   

Costs and expenses:

          

Cost of product licenses

     3,437        2,229        1,287        1,199        1,352   

Cost of services and other

     4,439        4,244        4,569        4,767        5,108   

Sales and marketing

     15,349        17,949        18,697        18,887        21,265   

Research and development

     9,819        10,205        10,567        11,775        11,778   

General and administrative

     5,539        5,084        5,389        4,948        5,174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses (1)

     38,583        39,711        40,509        41,576        44,677   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,200        2,756        6,709        5,637        3,716   

Interest and other income, net

     2,269        1,659        696        208        64   

Income tax benefit (provision)

     (432     (1,405     (2,094     (1,773     (899
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     4,037        3,010        5,311        4,072        2,881   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.19      $ 0.15      $ 0.30      $ 0.24      $ 0.19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.19      $ 0.15      $ 0.29      $ 0.23      $ 0.18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing basic earnings per share

     21,475        19,558        17,646        16,622        15,100   

Shares used in computing diluted earnings per share

     21,744        19,951        18,431        17,549        16,086   
     June 30,  
     2007     2008     2009     2010     2011  
     (in thousands)  

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

   $ 31,563      $ 33,190      $ 18,029      $ 7,086      $ 8,280   

Marketable securities

     14,788        11,759        25,381        33,267        30,226   

Working capital

     43,456        41,055        41,593        38,923        36,015   

Total assets

     97,740        94,744        94,706        94,565        93,185   

Long-term liabilities, net of current portion

                                   

Total stockholders’ equity

     87,004        83,276        82,992        82,991        79,774   

 

(1) Total costs and expenses include the impact of SFAS 123(R) share-based payments of $2.1 million, $1.8 million, $1.7 million, $1.8 million and $1.7 million for the years ended June 30, 2007, 2008, 2009, 2010 and 2011, respectively. See Note 2 Summary of Significant Accounting Policies.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in the forward-looking statements. Please see the “Special Note Regarding Forward-Looking Statements” elsewhere in this Report on Form 10-K.

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 1A 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.

Executive Overview

Our Business

Pervasive is a global data innovation leader, delivering software to manage, integrate and analyze data, in the cloud or on-premises, throughout the entire data lifecycle. Our Pervasive PSQL database products generated approximately 58% of our revenue during fiscal year 2011. Channel adoption trends for version 11 of our Pervasive PSQL database have been good since its launch in September 2010. Pervasive PSQL v11 delivers improvements in performance and increased simplicity of development, deployment and ease of use, including enhanced digital license management and enhanced support for IPv6 and multi-core technologies. We also plan a release in autumn 2011 of Pervasive PSQL Vx, with improved support and pricing for use in virtual environments.

Our Integration products generated approximately 38% of our revenue during fiscal year 2011 and are well-received by our existing and new customers, including end users and commercial cloud and on-premises software developers alike. Our solid results in both of our core product lines allow us to continue to fund our commitment to innovation. We intend to 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 years 2009, 2010 and 2011 have resulted in the introduction and further development of various new product and service offerings:

 

   

Pervasive DataSolutions—subscription-based integration as a service delivered on-premises or as a multi-tenant service hosted by Pervasive and in a growing number of cases by our ISV and SI partners,

 

   

Pervasive DataRush—a software development platform that lets developers rapidly build parallel applications that deliver high throughput on big data; it fully leverages the parallel processing capabilities of multicore processors to deliver unmatched performance on a multicore server, SMP machine, cluster or Hadoop cluster,

 

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Pervasive DataCloud®—a secure and reliable on-demand services platform for Pervasive or partner cloud developers who need to rapidly create high-level or low-level on-demand data and application integration, on-demand analytics, and on-demand data profiling, and

 

   

Perasive WebDI—cloud-based B2B Document Exchange Services that enable companies to send and receive business information in a seamless, timely and secure manner regardless of their enterprise system; during fiscal 2011, we completed migration of the WebDI customer base to the newest product release and to the Microsoft Windows Azure cloud platform for enhanced scalability and stability.

For more than twenty-five years, Pervasive products have delivered value to tens of thousands of customers worldwide, often embedded within partners’ software, with breakthrough performance, flexibility, reliability and return on investment. In addition, significant portions of our database and integration flagship product lines are embeddable into commercial applications for sale predominantly through a well-developed channel of independent software vendors (ISVs), Software-as-a-Service (SaaS) vendors, value-added resellers (VARs) and system integrators. On July 31, 2009, we completed the purchase of assets from Greenville, SC-based ChanneLinx, Inc., a Web-based electronic data interchange (Web DI) technology company, for total consideration of approximately $2.6 million in cash. The acquired business, which operates as Pervasive Business Xchange, is complementary to the Company’s other products and operations.

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

Our Operating Results

Our comparative results for the fiscal year ended June 30, 2011:

 

   

Revenue was $48.4 million and $47.2 million in the fiscal years ending June 30, 2011 and 2010, respectively. The company closed two relatively large transactions with database customers representing approximately $0.9 million in revenue in the fourth quarter of fiscal year 2011 and approximately $2.4 million in revenue during the first quarter of fiscal year 2010.

 

   

Net income was $2.9 million and $4.1 million in the fiscal years ending June 30, 2011 and 2010, respectively.

 

   

We continued to generate positive cash flow from operations with $6.7 million and $6.6 million in the fiscal years ending June 30, 2011 and 2010, respectively. We ended fiscal year 2011 with $38.5 million in cash and marketable securities.

 

   

We acquired approximately 1.6 million shares of our common stock, at a cost of approximately $8.5 million in the fiscal year ending June 30, 2011. Issued and outstanding shares of common stock as of June 30, 2011 totaled approximately 15.9 million.

Market Trends

We believe that the software markets as a whole are going through rapid change. The emergence of cloud-based infrastructure and applications is testament to the increasing demand for the scalability and rapid deployment provided by the SaaS delivery model. Organizations increasingly demand software that provides ease of use, re-usability, interoperability with widely adopted technologies, the flexibility to be deployed on-premises or in the cloud, and cost-effective maintenance. In this environment, delivering flexibility and performance with high return on investment becomes increasingly critical. As these market disruption trends continue, we believe infrastructure software will be a key ingredient for all businesses as they 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, analytics, databases, and security solutions.

 

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In addition, the rapid proliferation of commodity multicore hardware, along with exploding data volumes, provides opportunities for companies to leverage affordable servers and clusters of servers that have multiple cores in a single box to extract value from large volumes of data—but only if they have software that can effectively scale on multiple cores. The inevitable performance gains traditionally delivered by faster processors under “Moore’s Law” now must rely on a new generation of infrastructure software that can scale on ever-updating multicore hardware platforms.

Pervasive also continues to see consolidation in markets where its data management and data integration offerings compete. In the database arena, Oracle acquired the open source Sun MySQL database while SAP acquired Sybase. For ISVs who want to avoid vendor lock-in with monolithic industry giants, Pervasive PSQL remains an attractive alternative. In the data integration market, IBM acquired CastIron Systems and Dell acquired Boomi, resulting in Pervasive being one of an increasingly small number of independent data integration providers. With a stable operating history, consistent profitability, a commitment to channel and the ability to provide a best-of-breed alternative to large technology stacks, we believe Pervasive holds a unique position as a stable yet innovative go-to partner for both channel and enterprise customers.

We believe these trends 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 technology leaders who develop deep relationships with channel partners and customers tend to prevail in cost-sensitive markets, and Pervasive, with its strengths in scalable data management, data integration, and scalable cloud delivery, is well-positioned to benefit from the trends in these markets. The current release of Pervasive PSQL database enables applications that embed the database to deliver significant performance improvements on dual-core, 4-core and 8-core servers. In addition, Pervasive DataCloud provides an elastic platform-as-a-service that both Pervasive and partners can leverage to deliver SaaS integrations. The economic environment remains uncertain, but Pervasive’s financial stability, strong value proposition for customers and partners, and diverse vertical and geographic markets have enabled the company to sustain profitability even in the face of economic headwinds. We believe that if an economic recovery accelerates and strengthens, our reputation as an established vendor with highly reliable offerings positions Pervasive to prosper even further.

Pervasive has a strong portfolio that consists both of established products with strong channels and recurring revenue and of innovative, cutting-edge technology that leverages potential market disruptors such as multicore hardware, cloud-based delivery models and the avalanche of big data. With a 10-year history of profitability, Pervasive remains committed to investing in technology innovation to deliver offerings that differentiate us from competitors, stay current with market trends, and deliver compelling customer value, today and in the future.

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.

 

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Going Forward

In 2012, the Company is focused on:

 

   

the continued marketing of our embedded database product, Pervasive PSQL v11, released in September 2010, and the planned release of Pervasive PSQL Vx;

 

   

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 2011 and earlier: Pervasive DataSolutions (to take advantage of market trends in Integration-as-a-Service and other on demand data solutions), Pervasive DataCloud (to provide a scalable cloud-based platform for development and deployment of both Pervasive- and partner-developed on-demand services) and Pervasive DataRush (to support development and deployment of high-throughput applications by capturing the parallel processing capabilities of proliferating multi-core technologies);

 

   

growing the Pervasive Business Xchange Web-based electronic data interchange business and customer base; 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.

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, 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

 

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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 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 in an orderly transaction between market participants. 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 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. Expected volatility is based on historical volatility, while the expected life is estimated to be 4.75 years based on historical trends. Further, we 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.

 

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Taxes—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. State tax credit carryforwards are subject to potential expiration if not utilized by certain dates in the future. The valuation allowance remaining at June 30, 2011 relates entirely to estimated expiration of state tax credit carryforwards prior to utilization.

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 occasionally under audit by tax authorities in various jurisdictions. 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.

 

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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.

 

     Year Ended June 30,  
         2009             2010             2011      

Revenues:

      

Product licenses

     68     65     63

Services and others

     32        35        37   
  

 

 

   

 

 

   

 

 

 

Total revenues

     100     100     100

Costs and expenses:

      

Cost of product licenses

     3        3        3   

Cost of services and other

     10        10        10   

Sales and marketing

     40        40        44   

Research and development

     22        25        24   

General and administrative

     11        10        11   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     86        88        92   
  

 

 

   

 

 

   

 

 

 

Operating income

     14        12        8   

Interest and other income, net

     1                 

Income tax provision

     (4     (3     (2
  

 

 

   

 

 

   

 

 

 

Net income

     11     9     6
  

 

 

   

 

 

   

 

 

 

Revenues

Revenue from our embedded database product, Pervasive PSQL, decreased in fiscal years 2011 relative to fiscal years 2009 and 2010. We believe the decrease in 2011 was primarily due to a number of relatively large transactions with database customers in fiscal years 2009 and 2010. For example, we separately disclosed one relatively large transaction with database customers in each of the last three fiscal years in the amount of $3.0 million, $2.4 million and $0.9 million in fiscal years 2009, 2010 and 2011, respectively. Our embedded database and related products represented approximately 58% of our revenue in fiscal year 2011. However, our integration product revenue in fiscal year 2011 grew 9% over fiscal year 2010 and 18% over fiscal year 2009, and now represents approximately 38% of our total revenue. A reduction in our embedded database business, or our inability to grow our integration products business, could have a material adverse effect on our business, operating results and financial condition.

We generated total revenue of $47.2 million, $47.2 million and $48.4 million for the fiscal years ended June 30, 2009, 2010 and 2011, respectively, which represents an increase of 2% from fiscal 2010 to 2011. Our product license revenues were $32.3 million, $30.8 million and $30.5 million for the fiscal years ended June 30, 2009, 2010 and 2011, respectively, which represents a decrease of 5% from fiscal 2009 to 2010, and a decrease of 1% from fiscal 2010 to 2011. Our service and other revenues were $14.9 million, $16.4 million and $17.9 million for the fiscal years ended June 30, 2009, 2010 and 2011, respectively, which represents an increase of 10% from fiscal 2009 to 2010, and an increase of 9% from fiscal 2010 to 2011.

International revenues, consisting of all revenue from customers located outside of North America, were $16.5 million, $14.2 million and $16.2 million in fiscal 2009, 2010 and 2011, representing 35%, 30% and 34% of total revenue, respectively. The increase in international revenues in fiscal year 2011 is primarily related to an increase in our database revenues in both Europe and Japan. We expect international revenue will continue to account for a significant portion of our revenue in the future.

Costs and Expenses

Cost of Product Licenses.    Cost of product licenses 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

 

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our products and amortization of purchased technology. Cost of product licenses was $1.3 million, $1.2 million and $1.4 million in fiscal 2009, 2010 and 2011, representing 3% of total revenues in each of the fiscal years. We anticipate that cost of product licenses revenue in fiscal year 2012 will be consistent with fiscal year 2011.

Cost of Services and Other.    Cost of services and other consists primarily of the cost to provide technical support, primarily telephone support, and the costs to deliver professional services and training services to others. Cost of services and other was $4.6 million, $4.8 million and $5.1 million in fiscal 2009, 2010 and 2011, representing 10% of total revenues for each of the fiscal years. We anticipate cost of services and other in fiscal year 2012 will be consistent with fiscal year 2011.

Sales and Marketing.    Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, foreign sales office expenses, travel and entertainment, marketing programs and promotional expenses. Sales and marketing expenses were $18.7 million, $18.9 million and $21.3 million in fiscal 2009, 2010 and 2011, representing 40%, 40% and 44% of total revenues, respectively. Sales and marketing expenses increased in fiscal 2011 primarily due to an increase in our sales and marketing personnel and investment in marketing programs in support of our new products and services. We anticipate sales and marketing expenses will remain consistent with fiscal year 2011 during fiscal year 2012 as we support continued growth in our integration products and in support of our new products and services.

Research and Development.    Research and development expenses consist primarily of personnel and related costs. Research and development expenses were $10.6 million, $11.8 million and $11.8 million in fiscal 2009, 2010 and 2011, representing 22%, 25% and 24% of total revenues, respectively. Research and development expenses increased in fiscal year 2010 primarily due to increased research and development spending as a result of the acquisition of ChanneLinx in July 2009. We anticipate our research and development spending in fiscal year 2012 will be consistent with fiscal year 2011.

General and Administrative.    General and administrative expenses consist primarily of personnel salaries and other costs of our finance, human resources and administrative departments. General and administrative expenses were $5.4 million, $4.9 million and $5.2 million in fiscal years 2009, 2010 and 2011, representing 11%, 10% and 11% of total revenues, respectively. We believe our general and administrative expenses in fiscal year 2012 will be consistent with fiscal year 2011.

Share-based compensation expense.    Share-based compensation expense reflects non-cash compensation expense associated with restricted stock purchase rights and employee stock options. (See Notes 2 and 6 to the Consolidated Financial Statements.) Share-based compensation expense was included in costs and expenses as follows:

 

(Amounts in thousands)

   2009      2010      2011  

Cost of service and other revenues

   $ 40       $ 46       $ 53   

Sales and marketing

     436         539         479   

Research and development

     168         252         254   

General and administrative

     1,021         917         879   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,665       $ 1,754       $ 1,665   
  

 

 

    

 

 

    

 

 

 

We believe our share-based compensation expense in fiscal year 2012 will be consistent with fiscal year 2011.

Interest and Other Income.    Interest and other income consists primarily of interest earned on various investments and was approximately $0.7 million, $0.2 million and $0.1 million in fiscal years 2009, 2010 and 2011, respectively. The decrease in interest and other income in fiscal 2010 and 2011 is primarily the result of lower yields on invested funds and investing a portion of our investments in tax-advantaged instruments.

 

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Provision for Income Taxes.    Provision for income taxes related to operations was approximately $2.1 million, $1.8 million and $0.9 million in fiscal 2009, 2010 and 2011, respectively. The provision for income taxes in fiscal years 2009, 2010 and 2011 consists of income taxes related to both our foreign and domestic operations, offset by tax credits generated and other permanent tax differences.

 

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Quarterly Results from Operations

The following table sets forth selected unaudited quarterly information for our last eight fiscal quarters. This information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Report, and we believe all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below. We also believe this information presents fairly the results of each period when read in conjunction with the audited consolidated financial statements and notes.

 

    Quarter Ended  
    Sept. 30
2009
    Dec. 31
2009
    Mar. 31
2010
    June 30
2010
    Sept. 30
2010
    Dec. 31
2010
    Mar. 31
2011
    June 30
2011
 
    (in thousands, except per share data)  

Revenues:

               

Product licenses

  $ 8,335      $ 7,393      $ 7,552      $ 7,484      $ 6,654      $ 7,119      $ 7,557      $ 9,151   

Services and other

    3,865        4,215        4,133        4,236        4,337        4,538        4,530        4,507   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    12,200        11,608        11,685        11,720        10,991        11,657        12,087        13,658   

Costs and expenses:

               

Cost of product licenses

    249        308        317        325        305        354        357        336   

Cost of services and other

    1,173        1,209        1,212        1,173        1,202        1,242        1,331        1,333   

Sales and marketing

    4,702        4,574        4,772        4,839        4,603        5,316        5,273        6,073   

Research and development

    2,944        2,974        2,895        2,962        2,859        2,845        3,015        3,059   

General and administrative

    1,393        1,162        1,164        1,229        1,266        1,318        1,291        1,299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    10,461        10,227        10,360        10,528        10,235        11,075        11,267        12,100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,739        1,381        1,325        1,192        756        582        820        1,558   

Interest and other income, net

    102        47        33        26        10        14        24        16   

Income tax provision

    (578     (450     (358     (387     (263     (174     (58     (404
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 1,263      $ 978      $ 1,000      $ 831      $ 503      $ 422      $ 786      $ 1,170   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

  $ 0.07      $ 0.06      $ 0.06      $ 0.05      $ 0.03      $ 0.03      $ 0.05      $ 0.08   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

  $ 0.07      $ 0.06      $ 0.06      $ 0.05      $ 0.03      $ 0.03      $ 0.05      $ 0.07   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a Percentage of Revenues:

               

Revenues:

               

Product licenses

    68     64     65     64     61     61     63     67

Services and other

    32        36        35        36        39        39        37        33   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    100        100        100        100        100        100        100        100   

Costs and expenses:

               

Cost of product licenses

    2        3        3        3        3        3        3        2   

Cost of services and other

    10        10        10        10        11        11        11        10   

Sales and marketing

    39        39        41        41        42        46        43        44   

Research and development

    24        26        25        25        26        24        25        22   

General and administrative

    11        10        10        11        11        11        11        10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    86        88        89        90        93        95        93        88   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    14        12        11        10        7        5        7        12   

Interest and other income, net

    1                                                    

Income tax benefit (provision)

    (5     (4     (3     (3     (2     (1            (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    10     8     8     7     5     4     7     9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our operating results have varied significantly from quarter to quarter in the past and may continue to vary significantly from quarter to quarter in the future due to a variety of factors. Such fluctuations may result in volatility in the price of our common stock. We establish our expenditure levels based on expectations as to future revenue, and, if

 

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revenue levels are below expectations, expenses can be disproportionately high. As a result, a drop in near term demand for our products could significantly affect both revenues and profits in any quarter. In the future, our operating results may fluctuate for this reason or as a result of a number of other factors, including increased expenses, timing of product releases, increased competition, variations in the mix of sales, announcements of new products by us or our competitors and capital spending patterns of our customers. As a result of these factors, there can be no assurance we will be able to maintain profitability on a quarterly basis. See “Risk Factors.”

Liquidity and Capital Resources

Cash provided by operations was $6.5 million, $6.6 million and $6.7 million for fiscal 2009, 2010 and 2011, respectively.

We invested, net, $13.5 million and $8.0 million in marketable securities in fiscal 2009 and 2010, respectively. We received net proceeds of $3.1 million from the sale or maturity of marketable securities in fiscal 2011. In addition, we purchased property and equipment totaling approximately $0.8 million, $0.6 million and $0.8 million in fiscal 2009, 2010 and 2011, respectively. This property consisted primarily of computer hardware and software for general upgrade requirements for all fiscal years.

During fiscal years 2009, 2010 and 2011, we repurchased approximately 1.9 million, 1.2 million and 1.6 million shares, respectively, of common stock at a cost of approximately $7.6 million, $6.1 million and $8.6 million, respectively. In July 2010, we announced the authorization of a new $10.0 million stock repurchase plan which became effective on July 27, 2010, of which approximately $3.2 million remains available as of June 30, 2011. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice.

During fiscal years ended June 30, 2009, 2010 and 2011, we received approximately $0.2 million, $0.4 million and $0.7 million, respectively, in proceeds from the exercise of stock options resulting in the issuance of shares of our common stock of approximately 62,000, 147,000 and 228,000 for the fiscal years ending June 30, 2009, 2010 and 2011, respectively.

We are exploring new opportunities to build, license or acquire products and services for introduction to and through our expansive worldwide channel. Any such transaction could cause us to issue dilutive equity securities, reduce our cash and marketable securities, or incur debt or contingent liabilities.

On June 30, 2011, we had $36.0 million in working capital including $38.5 million in cash, cash equivalents and marketable securities, compared to working capital of $38.9 million at June 30, 2010.

Summary Disclosures About Contractual Obligations

The following table summarizes our contractual obligations at June 30, 2011 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

 

Contractual obligations

   Payments due by period
(in thousands)
     3–5 years      More than
5 years
 
   Total      Less than
1 year
     1–3 years        

Long-Term Debt Obligations

                                       

Capital Lease Obligations

                                       

Operating Lease Obligations

   $ 10,406       $ 462       $ 2,827       $ 2,987       $ 4,130   

Purchase Obligations

                                       

Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP

                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,406       $ 462       $ 2,827       $ 2,987       $ 4,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Off-Balance Sheet Arrangements

As of June 30, 2011, we are not involved in any off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.

Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), which allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 will not have a material impact on our consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. The adoption of ASU 2011-04 will not have a material impact on our consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.

 

ITEM 7A. 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 Belgium, Germany, France and England and a joint venture in Japan, and conduct transactions in the local currency of each location. If the U.S. dollar to Japanese yen rate had remained unchanged throughout fiscal 2009, the result would have been a decrease in revenue and operating income of approximately $0.3 million. If the U.S. dollar to Japanese yen rate had remained unchanged throughout fiscal 2010, the result would have been a decrease in revenue and operating income of approximately $0.2 million. If the U.S. dollar to Japanese yen rate had remained unchanged throughout fiscal 2011, the result would have been a decrease in revenue and operating income of approximately $0.3 million. If the U.S. dollar to euro rate had remained unchanged throughout fiscal 2009, the result would have been a decrease in operating income of approximately $0.5 million. If the U.S. dollar to euro rate had remained unchanged throughout fiscal 2010, the result would have been a decrease in operating income of approximately $0.1 million. If the U.S. dollar to euro rate had remained unchanged throughout fiscal 2011, the result would have been an increase in operating income of approximately $0.4 million. The impact of fluctuations in the relative value of all other currencies for fiscal 2009, 2010 and 2011 was not material.

 

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We monitor our foreign currency exposure and, from time to time, will attempt to reduce exposure through hedging. Gains and losses on foreign currency hedging were not material to the consolidated financial statements for fiscal years ended June 30, 2009, 2010, and 2011 as such hedging activities were minimal.

We are subject to interest rate risk on our cash and marketable securities investments; however, this risk is limited as our investment policy requires us to invest in short-term securities and maintain an average maturity of one year or less.

 

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item 8 are listed in Item 15(a)(1) and begin at page F-1 of this Report.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

 

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2011, (i) the disclosure controls and procedures were effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report On Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial reporting reliability and financial statement preparation and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2011. In making the assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment, management concluded that, as of June 30, 2011, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

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The effectiveness of our internal control over financial reporting as of June 30, 2011 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report, which is included in Part IV, Item 15(a)(1) of this Report.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

ITEM 9B. OTHER INFORMATION

Not applicable.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information regarding directors and corporate governance matters is incorporated herein by reference from the section entitled “Election of Directors” of the Company’s definitive Proxy Statement (the “Proxy Statement”) to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, for the registrants’ Annual Meeting of Stockholders to be held on November 14, 2011. The Proxy Statement is anticipated to be filed within 120 days after the end of the registrant’s fiscal year ended June 30, 2011.

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company, and their ages as of August 31, 2011, and biographical summaries are as follows:

 

Name

   Age     

Position

John E. Farr

     51       President, Chief Executive Officer and Director

Randall G. Jonkers

     54       Chief Financial Officer

Michael Hoskins

     57       Chief Technology Officer and Director

Stephen Padgett

     51       Vice President, Information Technology

John E. Farr has served as our President, Chief Executive Officer and Director since January 2006. Previously, Mr. Farr served as our Chief Financial Officer from July 2001 to January 2006, as Vice President, Finance, from October 1998 to July 2001, as Director of Finance from April 1997 to October 1998 and as Controller from November 1994 to April 1997. Prior to joining Pervasive, Mr. Farr served as an auditor and in audit management for KPMG LLP, an international accounting firm, from 1982 to 1994. Mr. Farr received a B.B.A. in Accounting from Southwestern University.

Randall G. Jonkers has served as our Chief Financial Officer since January 2006 and as Vice President, Finance since October 2005. Prior to joining Pervasive, Mr. Jonkers served as CFO and Executive Vice President of WSNet, a privately owned satellite broadcasting and equipment reseller from 1998 to 2005. Mr. Jonkers also served as CFO for Healthway Communications International Inc., a privately owned high-technology company, from 1995 to 1998; in various corporate accounting and reporting roles for Dell Computer Corporation from 1989 to 1995; as an auditor for Coopers & Lybrand from 1987 to 1989; as well as active and reserve duty in the U.S. Army as a Material Management Officer and Chief Logistics Officer. Mr. Jonkers received a B.B.A. in Accounting from the University of Texas at Austin.

Michael Hoskins has served as our Chief Technology Officer since June 2004 and as General Manager of Integration Products since October 2006 (and previously from December 2003 to June 2004). Mr. Hoskins has also served as a Director since December 2003. Prior to joining Pervasive, Mr. Hoskins served as President and Director of Data Junction Corporation for 15 years. Mr. Hoskins joined Data Junction in 1988 as Vice President of Sales. Mr. Hoskins graduated from the Bowling Green State University with a bachelor of business administration and a major in finance.

Stephen Padgett has served as our Vice President, Information Technology since May 2006. Prior to joining Pervasive, Mr. Padgett was CTO and Executive Vice President, Customer Acquisitions for Supportkids, Inc., a private child support collections company, where he oversaw the development of technology and customer management from 1998 to 2003. Mr. Padgett led technology infrastructure development at Tivoli Systems, Inc., a provider of enterprise system management solutions, from 1994 to 1998. He was a Senior Manager at Dell Computer Corporation from 1989 to 1994 and a Manager for Price Waterhouse, an international accounting firm, from 1984 to 1989. Mr. Padgett received an MBA in Information Systems Management and a BBA in Communications from the University of Texas at Austin.

These are no family relationships among any of our executive officers.

 

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ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is incorporated herein by reference from the section entitled “Executive Compensation and Other Information” of the Proxy Statement.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the section entitled “Stock Ownership of Certain Beneficial Owners and Management” of the Proxy Statement. Information regarding securities authorized for issuance under our equity compensation plans is incorporated herein by reference from the section entitled “Employment Contracts and Change of Control Arrangements” of the Proxy Statement.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information regarding certain relationships and related transactions is incorporated herein by reference from the section entitled “Certain Relationships and Related Transactions” of the Proxy Statement.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning principal accountant fees and services appears in the Proxy Statement under the heading “Audit Services” and is incorporated herein by reference.

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements

The following consolidated financial statements of the Company are filed as part of this Annual Report on Form 10-K as follows:

Index to Consolidated Financial Statements

 

Reports of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets at June 30, 2010 and 2011

     F-4   

Consolidated Statements of Income for each of the three years in the period ended June 30, 2011

     F-5   

Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended June 30, 2011

     F-6   

Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2011

     F-7   

Notes to the Consolidated Financial Statements

     F-8   

(a)(2) Financial Statement Schedules

Schedule II—Valuation and Qualifying Accounts is filed on page S-1 of this Report on Form 10-K.

(b) Exhibits

 

  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 – Amended and Restated November 15, 2010
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

 

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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
10.11++++++    Form of Amended Notice of Grant of Restricted Stock Award for the Pervasive Software Inc. 2006 Equity Incentive Plan
10.12++++++    Form of Amended Notice of Grant of Restricted Stock Units for the Pervasive Software Inc. 2006 Equity Incentive Plan
10.13++++    Amendment No. 2 to the Lease between Carr Texas OP, LP and Pervasive Software Inc. dated September 24, 2004
21.1    Subsidiaries of the Company
23.1    Consent of Independent Registered Public Accounting Firm
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 Quarterly Report on Form 10-Q filed on January 26, 2011.
++ 

Incorporated by reference to the Company’s Current Report on Form 8-K filed September 28, 2004.

+++ 

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.

++++ 

Incorporated by reference to the Company’s Current Report on Form 8-K filed February 23, 2011.

(c) Any financial statement schedules required to be filed as part of this Annual Report on Form 10-K are set forth in section (a)(2) above.

All other schedules have been omitted because they are not applicable, not required under the instructions, or the information requested is set forth in the consolidated financial statements or related notes thereto.

 

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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.

 

PERVASIVE SOFTWARE INC.
(Registrant)
By:   /s/                 JOHN E. FARR
  John E. Farr
  President and Chief Executive Officer

September 13, 2011

 

Date

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ JOHN E. FARR   

President and Chief Executive Officer

and Director

  September 13, 2011
John E. Farr     
   (Principal Executive Officer)  
/s/ RANDALL G. JONKERS    Chief Financial Officer   September 13, 2011
Randall G. Jonkers    (Principal Financial and
Accounting Officer)
 
/s/ SHELBY H. CARTER, JR.    Director and Chairman of the Board   September 13, 2011
Shelby H. Carter, Jr.     
/s/ NANCY R. WOODWARD    Director   September 13, 2011
Nancy R. Woodward     
/s/ DAVID A. BOUCHER    Director   September 13, 2011
David A. Boucher     
/s/ DAVID R. BRADFORD    Director   September 13, 2011
David R. Bradford     
/s/ JEFFREY S. HAWN    Director   September 13, 2011
Jeffrey S. Hawn     
/s/ MICHAEL E. HOSKINS    Director   September 13, 2011
Michael E. Hoskins     

 

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SCHEDULE II

PERVASIVE SOFTWARE INC.

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

 

Description

   Balance at
Beginning

of Period
     Additions
Charged
to Costs
and
Expenses
     Deductions/
Write-offs
Charged to
Allowance
     Other
Additions
     Balance at
End of
Period
 

Allowance for Doubtful Accounts:

              

Year ended June 30, 2009

     290         305         35                 560   

Year ended June 30, 2010

     560         177         244                 493   

Year ended June 30, 2011

     493         502         527                 468   

Valuation Allowance for Deferred Tax Assets:

              

Year ended June 30, 2009

     2,921                 2,697                 224   

Year ended June 30, 2010

     224                                 224   

Year ended June 30, 2011

     224                                 224   

 

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PERVASIVE SOFTWARE INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Reports of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets at June 30, 2010 and 2011

     F-4   

Consolidated Statements of Income for each of the three years in the period ended June 30, 2011

     F-5   

Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended June 30, 2011

     F-6   

Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2011

     F-7   

Notes to Consolidated Financial Statements

     F-8   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Pervasive Software Inc.:

We have audited Pervasive Software Inc. (a Delaware Corporation) and subsidiaries’ (the “Company”) internal control over financial reporting as of June 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of June 30, 2011 and 2010 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the three years in the period ended June 30, 2011 and the related financial statement schedule, and our report dated September 13, 2011 expressed an unqualified opinion.

/s/ Grant Thornton LLP

Dallas, Texas

September 13, 2011

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Pervasive Software Inc:

We have audited the accompanying consolidated balance sheets of Pervasive Software Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2011 and 2010, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2011. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pervasive Software Inc. and subsidiaries as of June 30, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 13, 2011 expressed an unqualified opinion on the effective operation of the Company’s internal control over financial reporting.

/s/ Grant Thornton LLP

Dallas, Texas

September 13, 2011

 

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Table of Contents

PERVASIVE SOFTWARE INC.

CONSOLIDATED BALANCE SHEETS

 

     June 30  
     2010     2011  
     (in thousands, except
share data)
 

ASSETS

    

Current assets:

    

Cash and cash equivalents, including interest-bearing investments of $4,563 in 2010 and $4,446 in 2011

   $ 7,086      $ 8,280   

Marketable securities

     33,267        30,226   

Trade accounts receivable, net of allowance for doubtful accounts of $493 in 2010 and $468 in 2011

     8,051        8,374   

Deferred income tax assets

     650        944   

Prepaid expenses and other current assets

     1,443        1,602   
  

 

 

   

 

 

 

Total current assets

     50,497        49,426   

Property and equipment, net

     1,333        1,322   

Purchased intangibles, net

     2,140        1,613   

Goodwill

     38,508        38,508   

Deferred income tax assets

     1,301        1,833   

Other assets

     786        483   
  

 

 

   

 

 

 

Total assets

   $ 94,565      $ 93,185   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Trade accounts payable

   $ 677      $ 238   

Accrued payroll and payroll related costs

     2,008        2,479   

Deferred rent and lease related accruals

     534        1,054   

Other accrued expenses

     1,089        1,883   

Deferred revenue

     7,266        7,757   
  

 

 

   

 

 

 

Total current liabilities

     11,574        13,411   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.001 par value; Authorized—75,000,000 shares; issued 27,393,954 and 27,744,932 shares in 2010 and 2011, respectively; outstanding—17,159,932 and 15,877,279 shares in 2010 and 2011, respectively

     68,889        62,661   

Accumulated other comprehensive loss

     (1,159     (1,029

Retained earnings

     15,261        18,142   
  

 

 

   

 

 

 

Total stockholders’ equity

     82,991        79,774   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 94,565      $ 93,185   
  

 

 

   

 

 

 

See accompanying notes.

 

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PERVASIVE SOFTWARE INC.

CONSOLIDATED STATEMENTS OF INCOME

 

     Year ended June 30,  
     2009     2010     2011  
    

(in thousands,

except per share data)

 

Revenues:

      

Product licenses

   $ 32,322      $ 30,764      $ 30,481   

Services and other

     14,896        16,449        17,912   
  

 

 

   

 

 

   

 

 

 

Total revenues

     47,218        47,213        48,393   

Costs and expenses:

      

Cost of product licenses

     1,287        1,199        1,352   

Cost of services and other

     4,569        4,767        5,108   

Sales and marketing

     18,697        18,887        21,265   

Research and development

     10,567        11,775        11,778   

General and administrative

     5,389        4,948        5,174   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     40,509        41,576        44,677   
  

 

 

   

 

 

   

 

 

 

Operating income

     6,709        5,637        3,716   

Interest and other income

     696        208        64   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     7,405        5,845        3,780   

Income tax provision

     (2,094     (1,773     (899
  

 

 

   

 

 

   

 

 

 

Net income

   $ 5,311      $ 4,072      $ 2,881   
  

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.30      $ 0.24      $ 0.19   
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.29      $ 0.23      $ 0.18   
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes.

 

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Table of Contents

PERVASIVE SOFTWARE INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

     Common
Stock
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
(Deficit)
     Total
Stockholders’
Equity
 
     (in thousands, except share data)  

Balances at June 30, 2008

   $ 78,595      $ (1,197   $ 5,878       $ 83,276   

Acquisition of 1,862,752 treasury shares, cumulative treasury shares of 9,062,976 and cost of $35,001 at June 30, 2009

     (7,613            ––         (7,613

Issuance of common stock pursuant to the exercise of stock options and restricted stock awards

     215               ––         215   

Stock-based compensation expense

     1,665               ––         1,665   

Adjustment to additional paid in capital related to tax effect of stock-based awards and tax payments

     (28            ––         (28

Unrealized gain on investments

            85        ––         85   

Foreign currency translation adjustment

            81        ––         81   

Net income

                   5,311         5,311   
         

 

 

 

Total comprehensive income

            5,477   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balances at June 30, 2009

     72,834        (1,031     11,189         82,992   

Acquisition of 1,171,046 treasury shares, cumulative treasury shares of 10,234,022 and cost of $40,904 at June 30, 2010

     (6,122            ––         (6,122

Issuance of common stock pursuant to the exercise of stock options and restricted stock awards

     370               ––         370   

Stock-based compensation expense

     1,754               ––         1,754   

Adjustment to additional paid in capital related to tax effect of stock-based awards and tax payments

     53               ––         53   

Unrealized loss on investments

            (127     ––         (127

Foreign currency translation adjustment

            (1     ––         (1

Net income

                   4,072         4,072   
         

 

 

 

Total comprehensive income

            3,944   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balances at June 30, 2010

     68,889        (1,159     15,261         82,991   

Acquisition of 1,633,631 treasury shares, cumulative treasury shares of 11,867,653 and cost of $49,356 at June 30, 2011

     (8,577            ––         (8,577

Issuance of common stock pursuant to the exercise of stock options and restricted stock awards

     692               ––         692   

Stock-based compensation expense

     1,665               ––         1,665   

Adjustment to additional paid in capital related to tax effect of stock-based awards and tax payments

     (8            ––         (8

Unrealized gain on investments

            18        ––         18   

Foreign currency translation adjustment

            112        ––         112   

Net income

                   2,881         2,881   
         

 

 

 

Total comprehensive income

            3,011   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balances at June 30, 2011

   $ 62,661      $ (1,029   $ 18,142       $ 79,774   
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes.

 

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Table of Contents

PERVASIVE SOFTWARE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year ended June 30,  
     2009     2010     2011  
     (in thousands)  

Cash from operations

      

Net income

   $ 5,311      $ 4,072      $ 2,881   

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

      

Depreciation and amortization

     1,439        1,296        1,344   

Bad debt expense and other non-cash adjustments

     305        229        562   

Deferred income tax expense (benefit)

     66        37        (826

Stock-based compensation expense

     1,665        1,754        1,665   

Change in operating assets and liabilities:

      

Current assets

     (2,649     (711     (696

Accounts payable and accrued liabilities

     323        (976     1,265   

Deferred revenue

     62        862        481   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operations

     6,522        6,563        6,676   

Cash from investing activities

      

Purchase of property and equipment

     (835     (582     (793

Purchase of marketable securities

     (31,659     (46,989     (38,728

Proceeds from sale or maturity of marketable securities

     18,121        38,976        41,788   

Business acquisition

            (2,611       

(Increase) decrease in other assets and other

     76        (505     22   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (14,297     (11,711     2,289   

Cash from financing activities

      

Purchase of treasury stock

     (7,613     (6,122     (8,577

Proceeds from exercise of stock options and employee stock purchase plan

     215        370        692   
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (7,398     (5,752     (7,885

Effect of exchange rate changes on cash and cash equivalents

     12        (43     114   
  

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     (15,161     (10,943     1,194   

Cash and cash equivalents at beginning of year

     33,190        18,029        7,086   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 18,029      $ 7,086      $ 8,280   
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes.

 

F-7


Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

 

1. The Company

Pervasive Software (NASDAQ: PVSW) is a global leader in cloud-based and on-premises data innovation. For more than two decades, Pervasive products have delivered value to tens of thousands of customers in more than 150 countries with a compelling combination of performance, flexibility, reliability and low total cost of ownership. Pervasive delivers software to manage, integrate and analyze data, in the cloud or on-premises, throughout the entire data lifecycle. Pervasive products deliver value to tens of thousands of customers worldwide, often embedded within partners’ software, with breakthrough performance, flexibility, reliability and return on investment.

The embeddable Pervasive PSQL™ database engine provides robust database reliability in a near-zero database administration environment for packaged business applications. Pervasive’s multi-purpose data integration platform, available on-premises and in the cloud, accelerates the sharing of information between multiple data stores, applications, and hosted business systems and allows customers to re-use the same software for diverse integration scenarios. Pervasive DataRush™ is a software development platform that lets developers rapidly build parallel applications that deliver high throughput on big data; it fully leverages the parallel processing capabilities of multicore processors to deliver unmatched performance on a multicore server, SMP machine, cluster or Hadoop cluster.

Through Pervasive Innovation Labs, the company also invests in exploring and creating cutting edge solutions for the toughest data analysis and data delivery challenges. In addition, significant portions of our database and integration flagship product lines are embeddable into commercial applications for sale through a well-developed channel of independent software vendors (ISVs), Software-as-a-Service (SaaS) vendors, value-added resellers (VARs) and system integrators (SIs).

The Company develops, markets, sells and supports its offerings worldwide through its principal office in Austin, Texas and through additional offices in Greenville, South Carolina; Brussels; Frankfurt; Paris and London and a joint venture in Japan. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

2. Summary of Significant Accounting Policies

Revenue Recognition

The Company licenses its software through original equipment manufacturer (OEM) license agreements with software developers, or ISVs and through shrink-wrap software licenses, sold through ISVs, 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 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 the Company. Revenue from post contract support and the right to receive unspecified upgrades is recognized ratably over the contract term. The Company generally provides 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. The Company accrues the cost of providing this support. Revenue from consulting services and training is recognized when the related services are performed. The Company enters into agreements with certain

 

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Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

distributors that provide for certain stock rotation and price protection rights. These rights allow the distributor to return products in a non-cash exchange for other products or for credits against future purchases. The Company reserves for the cost of estimated sales returns, stock rotation and price protection rights as well as uncollectible accounts based on experience. Revenue from shipping and handling is recognized in product license revenue at the shipping date. Shipping and handling costs are included in Cost of product licenses in the Consolidated Statements of Income.

Where software licenses are sold with maintenance or other services, the Company allocates the total fee to the various elements based on the fair values of the elements. The Company determines 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 practices for those products and services when sold separately and, for support services, is additionally measured by the renewal rate. If the Company does not have VSOE for one of the delivered elements of an arrangement, but does have VSOE for all undelivered elements, the Company uses 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

The Company reserves the cost of estimated sales returns, stock rotation and price protection rights as well as uncollectible accounts based on experience. The Company evaluates quarterly the adequacy of the reserve for sales returns, stock rotation and price protection. Because these reserves are based on judgments and estimates, actual results could differ from the estimates.

Trade accounts receivable are recorded at the invoiced amount and are not interest bearing. Payment terms for all trade receivables are based on the underlying purchase orders, contracts, or purchase agreements and are unsecured. We maintain an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. Additions to the allowance for doubtful accounts are recorded as operating expenses. We review our trade receivables by aging category to identify specific customers with known disputes or collectability issues. In addition, we maintain an allowance for all other receivables not included in the specific reserve by applying specific percentages of projected uncollectible receivables to the various aging categories. In determining these percentages, we analyze our historical collection experience and current economic trends. We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general economic conditions in the U.S and internationally, and changes in customer financial conditions. Uncollected trade receivables are charged-off when identified by management to be unrecoverable; payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Sales Tax

We apply the net basis for sales taxes imposed on our goods and services in our consolidated statements of Income. We are required by the applicable governmental authorities to collect and remit sales taxes. Accordingly, such amounts are charged to the customer, collected and remitted directly to the appropriate jurisdictional entity.

Software Development Costs

The Company expenses software development costs as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. To date, the establishment of technological feasibility of its products has coincided with the general release of such software. As a result, the Company has not capitalized any such costs other than those recorded in connection with its acquisitions.

 

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Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Advertising Costs

The Company expenses costs of producing advertising-related and sales-related collateral materials as incurred. Other production costs associated with direct mail programs, placement costs associated with magazine or other printed media and all direct costs associated with trade shows and other sales-related events are expensed when the related direct mail is sent, advertising space is used or the event is held. These expenses in 2009, 2010 and 2011 were approximately $1.5 million, $1.4 million and $1.3 million, respectively.

Income Taxes

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.

The Company estimates its income taxes in each of the jurisdictions in which it operates as part of the process of preparing the consolidated financial statements. This process involves estimating the 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. The Company then assesses the likelihood that deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not more likely than not, it establishes a valuation allowance.

The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is periodically under audit by tax authorities in various jurisdictions. Although the Company believes it has appropriate support for the positions taken on its tax returns, the Company has recorded a liability for its best estimate of the probable loss on certain of these positions. The Company believes its accruals for tax liabilities are adequate for all open years, based on its 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 the Company believes its recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. Although the Company believes that the estimates and assumptions supporting its 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 its 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, the Company is not able to estimate the range of reasonably possible losses in excess of amounts recorded.

A reconciliation of the change in our unrecognized tax benefits for the year ended June 30, 2011 is as follows (in thousands):

 

Balance at July 1, 2009

   $ 158   

Reductions based on tax positions taken during a prior period

     (128
  

 

 

 

Balance at June 30, 2010

     30   

Other

       
  

 

 

 

Balance at June 30, 2011

   $ 30   
  

 

 

 

 

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Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

As of June 30, 2011, $30,000 of unrecognized tax benefits are attributed to uncertain tax positions that, if recognized, would affect the effective tax rate. We accrue and recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of June 30, 2011, the balance of accrued interest and penalties related to unrecognized tax benefits was approximately $13,000. We do not believe that it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of June 30, 2011.

With few exceptions, the Company and all of its major filing subsidiaries are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal year 2007.

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.

We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts.

Marketable securities are classified as “available for sale”, excluding cash equivalents as described above, and are recorded 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.

Fair value is 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. The inputs used to measure fair value are classified into the following hierarchy:

 

  1. 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. 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. Our municipal bonds and U.S agency securities are traded in inactive markets and are categorized in Level 2.

 

  3. 3. Level 3 Inputs—Used to measure fair value of 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.

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

 

    Fair
Value
Hierarchy
    June 30, 2010     June 30, 2011  
      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      $ 33,274      $ (7   $ 33,267      $ 30,213      $ 13      $ 30,226   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 33,274      $ (7   $ 33,267      $ 30,213      $ 13      $ 30,226   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The amortized cost and estimated fair value of debt and marketable equity securities at June 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

     Cost      Estimated fair
value
 

Due in one year or less

   $ 29,419,982      $ 29,430,524   

Due after one year through five years

     793,309        795,667   
  

 

 

    

 

 

 
   $ 30,213,291      $ 30,226,191   

Property and Equipment

Property and equipment are stated at cost and are being depreciated over their estimated useful lives (3 to 7 years) using the straight-line method. Leasehold improvements are amortized over the life of the lease or the estimated useful life, whichever is shorter.

Long-Lived Assets

The Company periodically reviews the carrying amounts of long-lived assets, to determine whether current events or circumstances warrant adjustment to such carrying amounts. In reviewing the carrying amounts of long-lived assets, the Company considers, among other factors, the future cash inflows expected to result from the use of the asset and its eventual disposition less the future cash outflows expected to be necessary to obtain those inflows. There were no impairments in fiscal years 2009, 2010 or 2011.

Goodwill and Other Intangible Assets

The Company assesses whether goodwill and indefinite-lived intangibles are impaired on an annual basis and reviews for triggering events on an ongoing basis. Upon determining the existence of goodwill and/or indefinite-lived intangibles impairment, the Company measures that 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 in an orderly transaction between market participants. Additional impairment assessments may be performed on an interim basis if the Company encounters 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.

Foreign Currency Transactions

For the Company’s foreign subsidiaries, the functional currency has been determined to be the local currency, and therefore, assets and liabilities are translated at year-end exchange rates, and income statement items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded in aggregate as a component of stockholders’ equity. Gains and losses from foreign currency denominated transactions are included in other income and were not significant in 2009, 2010 or 2011.

Financial instruments, principally forward pricing contracts, are used by the Company from time to time in the management of its foreign currency exposures. The fair value associated with these forward pricing contracts at June 30, 2010 and 2011 is not significant. Gains and losses on foreign currency transaction hedges are recognized in income when realized and offset the foreign exchange gains and losses on the underlying transactions. The Company does not hold or issue derivative financial instruments for trading purposes.

 

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Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Fair Value of Financial Instruments

Cash equivalents, marketable securities, accounts receivable, accounts payable, accrued liabilities and other liabilities are stated at cost which approximates fair value due to the short-term maturity of these instruments.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of short-term investments, including marketable securities, and trade receivables. The Company’s short-term investments, which are included in cash and cash equivalents and in marketable securities for reporting purposes, are placed with high credit quality financial institutions and issuers. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Estimated credit losses are provided for in the financial statements.

In July 2001, we formed a business venture with AG-TECH Corporation, a company developing, selling and importing packaged software, to sell and support certain of our products in Japan. In connection with the new business venture, we obtained a less than 20% ownership interest in AG-TECH and the ability to elect one director to the AG-TECH Board of Directors. We do not have the ability to significantly influence or control the operations of AG-TECH and therefore, account for our investment in AG-TECH on the cost method of accounting. AG-TECH Corporation is one of the Company’s distribution partners in Japan and accounted for approximately 10%, 11% and 11% of the Company’s revenue during the years ended June 30, 2009, 2010 and 2011 respectively. The AG-TECH distribution agreement has been renewed twice, most recently for an additional five-year term which expires on June 30, 2012.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Stock-Based Compensation

Employee share-based compensation expense, which includes stock options and restricted stock, is recognized on a straight-line basis over the vesting period of the underlying awards, which is generally four years for stock options and three years for restricted stock, based on the grant date fair value. The Company utilizes the Black-Scholes option pricing model to estimate the grant date fair value, which requires the input of highly subjective assumptions, including expected volatility and expected life. Expected volatility is based on historical volatility, while the expected life is estimated to be 4.75 years based on historical trends. The Company estimates forfeitures for options granted, which are not expected to vest, based on historical data. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation.

Cash received from option exercises under all share-based payment arrangements for the years ended June 30, 2009, 2010 and 2011, was $0.2 million, $0.4 million and $0.7 million, respectively. The estimated tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements was nil for the years ended June 30, 2009, June 30, 2010 and June 30, 2011.

Total compensation cost recognized in income for stock-based employee compensation awards was approximately $1.7 million, $1.8 million and $1.7 million for the fiscal years ending June 30, 2009, 2010 and 2011, respectively.

 

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PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During fiscal 2009, 2010 and 2011, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, assuming no dividends and the following weighted average assumptions:

 

         Employee Stock Options      
         2009             2010             2011      

Risk free interest rate

     1.95     1.53     2.15

Volatility factor

     .33        .31        .27   

Weighted average expected life of options (in years)

     4        4        4.75   

The weighted average estimated grant date fair value for options granted under the Company’s stock option plan during the years ended June 30, 2009, 2010 and 2011 was $1.12, $1.36 and $1.50 per share, respectively.

During fiscal years 2009, 2010 and 2011 the Company issued 774,000, 223,000 and 200,000 shares, respectively, of restricted stock with a weighted average fair value of $3.79, $5.06 and $5.58 per share, respectively. During fiscal year 2009, 2010 and 2011, the Company issued 8,000, 27,000 and 8,000 restricted stock units, respectively. The shares and units are being expensed over their expected lives of three to four years.

As of June 30, 2011, $1.3 million, $0.7 million, $0.4 million and $0.1 million of unrecognized compensation cost related to non-vested awards is expected to be recognized in fiscal years 2012, 2013, 2014 and 2015, respectively, with a weighted average period of approximately 2.1 years.

Net Income Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the weighted average number of common shares outstanding and the number of common equivalent shares which would be issued related to options and restricted shares using the treasury method, unless such additional shares are anti-dilutive.

Segments

The Company considers its business activities to be a single segment.

Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), which allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 will not have a material impact on our consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.

 

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PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. The adoption of ASU 2011-04 will not have a material impact on our consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.

 

3. Property and Equipment

Property and equipment consists of the following (in thousands):

 

     June 30,  
     2010     2011  

Computer equipment and purchased software

   $ 3,948      $ 4,130   

Office equipment, furniture and fixtures

     1,561        1,525   

Leasehold improvements

     1,412        1,412   
  

 

 

   

 

 

 
     6,921        7,067   

Less accumulated depreciation and amortization

     (5,588     (5,745
  

 

 

   

 

 

 
   $ 1,333      $ 1,322   
  

 

 

   

 

 

 

Depreciation expense is included in operating expenses and was approximately $0.8 million for each of the fiscal years ending June 30, 2009, 2010 and 2011.

 

4. Income Taxes

The components of income before income taxes consist of the following (in thousands):

 

     Year ended June 30  
     2009      2010      2011  

Domestic income

   $ 7,034       $ 5,524       $ 3,820   

Foreign income

     371         321         (40
  

 

 

    

 

 

    

 

 

 

Income before income taxes

   $ 7,405       $ 5,845       $ 3,780   
  

 

 

    

 

 

    

 

 

 

 

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PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Significant components of income tax expense (benefit) are as follows (in thousands):

 

     Year ended June 30  
     2009      2010     2011  

Income tax provision (benefit):

       

Current

       

Federal

   $ 1,843       $ 1,476      $ 1,602   

State

     71         91        83   

Foreign

     114         170        40   
  

 

 

    

 

 

   

 

 

 

Total current

     2,028         1,737        1,725   
  

 

 

    

 

 

   

 

 

 

Deferred:

       

Federal

     8         53        (791

State

     58         (17     (35

Foreign

                      
  

 

 

    

 

 

   

 

 

 

Total deferred

     66         36        (826
  

 

 

    

 

 

   

 

 

 
   $ 2,094       $ 1,773      $ 899   
  

 

 

    

 

 

   

 

 

 

The Company’s provision for income taxes differs from the expected provision computed by applying the statutory federal income tax rate of 34% to income from continuing operations before income taxes for 2009, 2010 and 2011 as a result of the following (in thousands):

 

     Year ended June 30  
     2009     2010     2011  

Computed at statutory rate of 34%

   $ 2,518      $ 1,987      $ 1,285   

State income taxes, net of federal benefit

     45        49        32   

Effect of foreign operations

     (38     17        47   

Non-deductible stock-based compensation

     153        82        54   

Deemed foreign dividends

     135        96        50   

Change in valuation allowance associated with expected realization of deferred tax assets not previously benefited

     40                 

Federal, foreign and state tax credits generated

     (594     (358     (412

Benefit of tax exempt interest income

     (64     (42     (27

Benefit of Section 199 deductions

     (158     (122     (163

Non-deductible charges

     32        44        52   

Increase (reduction) of uncertain tax positions

     25                 

Other

            20        (19
  

 

 

   

 

 

   

 

 

 
   $ 2,094      $ 1,773      $ 899   
  

 

 

   

 

 

   

 

 

 

 

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PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The components of deferred income taxes at June 30, 2010 and 2011 are as follows (in thousands):

 

     June 30,  
     2010     2011  

Deferred tax assets:

    

Domestic tax credit carryforwards

   $ 462      $ 457   

Accrued expenses and reserves

     797        1,010   

Depreciable assets

     378        187   

Stock-based compensation

     738        1,140   

Purchased technology, net

            273   
  

 

 

   

 

 

 

Total deferred tax assets

     2,375        3,067   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Prepaid expenses

     (147     (66

Purchased technology, net

     (53       
  

 

 

   

 

 

 

Total deferred tax liabilities

     (200     (66

Valuation allowance for deferred tax assets

     (224     (224
  

 

 

   

 

 

 

Net deferred tax assets

   $ 1,951      $ 2,777   
  

 

 

   

 

 

 

As of June 30, 2011, the Company expects that upon filing of its domestic tax return for fiscal year 2011 it will have state research and development credit carryforwards of approximately $0.5 million and a state temporary credit for business loss carryforwards of approximately $0.2 million. These carryforwards will begin to expire in fiscal 2021 and 2027, respectively, if not utilized.

At June 30, 2011, the Company has a valuation allowance of $0.2 million, which is primarily related to the Texas research and development carryforwards and the determination that these assets will likely expire prior to utilization.

As of June 30, 2010 and 2011, the Company had a Federal income tax receivable of $0.4 million and a Federal income tax payable of $0.4 million, respectively.

 

5. Employee Benefits

The Company’s employees are offered health coverage under a partially self-funded plan in which the Company purchases specific stop-loss insurance coverage at $50,000 ($60,000 effective July 1, 2011) per year, per employee. The Company has also purchased an aggregate stop-loss insurance coverage to limit its maximum annual exposure to claims funded. Based on the policy census at July 1, 2011, such maximum annual exposure for the policy year ending June 30, 2012 is approximately $3.0 million. The Company pays a fixed fee per covered individual for administrative costs of the administrator and the cost of the stop-loss insurance purchased on the Company’s behalf. The Company contributes 100% toward the cost to insure each employee and more than 75% toward the cost to insure dependents for which coverage is requested by the employee. Expenses for the partially self-funded plan including premiums and claims funded for the years ended June 30, 2009, 2010 and 2011 were approximately $1.3 million, $1.7 million, and $1.5 million, respectively.

The Company has a 401(k) retirement plan which is available to all domestic, full-time employees. The Company’s expenses related to the plan were not significant in the years ended June 30, 2009, 2010 or 2011. In fiscal years 2009, 2010 and 2011, the Company funded a matching contribution of 10% of participant

 

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PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

contributions made during calendar years 2008, 2009 and 2010 for all participants employed by the Company on December 31, 2008, 2009 and 2010. The amount expensed related to the match was approximately $111,000, $122,000 and $125,000 for the fiscal years ended June 30, 2009, 2010 and 2011, respectively.

 

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 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. The Company may also award Restricted Stock, Restricted Stock Units and Stock Appreciation Rights subject to provisions in the 2006 Plan.

 

Restricted Stock Awards

   Shares     Weighted Average
Grant Date

Fair Value
     Weighted  Average
Remaining
Vesting Period

(in years)
     Grant Date
Intrinsic Value
 

Outstanding and unvested as June 30, 2008

     710,500      $ 4.15         2.36       $ 2,949,705   

Granted

     774,000        3.79         2.77         2,933,700   

Vested

     (425,000     4.25                 (1,807,250

Forfeited

                            ––   
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding and unvested as June 30, 2009

     1,059,500        3.85         2.03         4,076,155   

Granted

     223,000        5.06         3.22         1,128,720   

Vested

     (182,500     4.22                 (770,831

Forfeited

     (60,000     3.80                 (228,000
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding and unvested as June 30, 2010

     1,040,000        4.04         2.36         4,206,044   

Granted

     200,000        5.58         2.48         1,115,600   

Vested

     (128,000     4.04                 (517,680

Forfeited

     (65,000     4.99                 (324,580
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding and unvested as June 30, 2011

     1,047,000      $ 4.42         1.29       $ 4,479,384   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

A summary of changes in common stock options during the year ended June 30, 2009, 2010 and 2011 is as follows:

 

     Shares     Range of
Exercise Prices
     Weighted
Average
Exercise
Price
 

Options outstanding, June 30, 2008

     2,405,041        1.06—16.81         4.72   

Granted

     268,500        3.60—  5.60         3.89   

Exercised

     (62,125     1.18—  5.65         3.46   

Surrendered

     (160,625     3.60—16.81         6.51   
  

 

 

      

Options outstanding, June 30, 2009

     2,450,791      $ 1.06—11.81       $ 4.54   

Granted

     248,500        4.79—  5.14         5.11   

Exercised

     (146,900     1.06—  4.55         2.52   

Surrendered

     (182,875     3.60—11.81         6.43   
  

 

 

      

Options outstanding, June 30, 2010

     2,369,516      $ 1.06—  8.37       $ 4.58   

Granted

     259,000        4.78—  6.42         5.54   

Exercised

     (227,935     1.06—  5.83         3.03   

Surrendered

     (96,875     3.09—  8.15         4.90   
  

 

 

      

Options outstanding, June 30, 2011

     2,303,706      $ 1.71—  8.37       $ 4.83   
  

 

 

      

The following is additional information relating to options outstanding at June 30, 2011:

 

     Options Outstanding      Options Exercisable  

Range of

Exercise Price

   Number of
Options
     Weighted-Average
Remaining
Contractual Life
Of Options
     Weighted
Average
Exercise
Price
     Number of
Options
     Weighted
Average
Exercise
Price
 

$ 1.71 to $ 4.00

     918,500         4.25       $ 3.76         824,625       $ 3.77   

$ 4.03 to $ 6.00

     1,053,206         5.69         5.04         676,330         4.89   

$ 6.90 to $ 8.37

     332,000         3.24         7.10         306,500         7.16   
  

 

 

          

 

 

    

$ 1.71 to $8.37

     2,303,706         4.76       $ 4.83         1,807,455       $ 4.77   
  

 

 

          

 

 

    

The aggregate intrinsic value (the amount by which market price exceeds the option exercise price) for options as of June 30, 2011 is as follow:

 

     Year Ended
June 30, 2011
Aggregate Intrinsic
Value

(in 000s)
 

Options outstanding at end of year

   $ 3,898   

Options exercisable at end of year

   $ 3,243   

Options exercised during year

   $ 511   

At June 30, 2011, 4,296,079 shares of common stock were reserved for future exercise of stock options and restricted stock awards. The share reserve includes 3.4 million shares subject to outstanding awards which, if forfeited, cancelled or otherwise terminated are returned to the share reserve and made available for subsequent issuance.

 

F-19


Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During fiscal years 2009, 2010 and 2011, the Company repurchased approximately 1.9 million, 1.2 million and 1.6 million shares, respectively, of common stock at a cost of approximately $7.6 million, $6.1 million and $8.6 million, respectively. In July 2010, we announced the authorization of a new $10.0 million stock repurchase plan which became effective on July 27, 2010, of which approximately $3.2 million remains available as of June 30, 2011. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice.

 

7. Earnings Per Share

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

 

     Year ended June 30  
     2009      2010      2011  

Numerator:

        

Net income

   $ 5,311       $ 4,072       $ 2,881   
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Denominator for basic earnings per share–weighted average shares

     17,646         16,622         15,100   

Effect of dilutive securities

     785         927         986   
  

 

 

    

 

 

    

 

 

 

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

     18,431         17,549         16,086   
  

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.30       $ 0.24       $ 0.19   
  

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.29       $ 0.23       $ 0.18   
  

 

 

    

 

 

    

 

 

 

At June 30, 2009, 2010 and 2011 approximately 849,000, 795,000 and 751,000 shares, respectively, were not included in the diluted earnings per share calculation since the shares are anti-dilutive.

 

8. Goodwill, Business Acquisition and Other Intangible Assets

As of June 30, 2011, Pervasive had goodwill in the amount of $38.5 million associated with the acquisition of Data Junction. The Company assesses 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. The Company has determined no impairment of existing goodwill exists as of June 30, 2011.

On July 31, 2009, the Company completed the purchase of assets from Greenville, SC-based ChanneLinx, Inc. for total consideration of approximately $2.6 million in cash. Amortization expense for intangible assets related to ChanneLinx was approximately $0.5 million and $0.5 million in fiscal years ended June 30, 2010 and 2011, respectively.

Other intangible assets, classified as Purchased Intangibles on the balance sheet, amounted to $1.6 million (net of accumulated amortization of $7.4 million) as of June 30, 2011. 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 and $2.6 million related to the acquisition of ChanneLinx in the first quarter of fiscal 2010.

 

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Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company is amortizing the intangible assets on a straight-line basis over their estimated useful lives, generally five years. Amortization expense for the years ended June 30, 2009, 2010 and 2011 was approximately $0.6 million, $0.5 million and $0.5 million, respectively. Amortization expense for intangible assets is anticipated to be approximately $0.5 million for each of the years ended June 30, 2012 through June 30, 2014.

Purchased technology consists of the following (in thousands):

 

     June 30,  
     2010     2011  

Purchased technology

   $ 8,971      $ 8,971   

Accumulated amortization

     (6,831     (7,358
  

 

 

   

 

 

 
   $ 2,140      $ 1,613   
  

 

 

   

 

 

 

 

9. Commitments and Contingencies

The Company leases its headquarters and international office space and, in some cases, is obligated for its proportionate share of utilities and other defined operating expenses of the related building. The Company records rent expense for its operating leases on a straight-line basis from the lease commencement date as specified in the lease agreement until the end of the base lease term. The Company has a facility lease that allows for free rent and escalating rental payments. The incentives are considered reductions of lease expense and are recognized on a straight-line basis over the lease term. Straight-line expenses that are greater than the actual amount paid are recorded as deferred rent and reversed over time. Incentive payments received under these leases are recorded as deferred rent and amortized against rent expense over the remaining term of the lease. Office rent expense, net of subtenant offsets, for the Company’s domestic and international offices for the years ended June 30, 2009, 2010 and 2011, was approximately $1.8 million, $1.7 million, and $1.8 million, respectively.

Future minimum lease payments, net of subtenant offsets, at June 30, 2011 under the operating leases for worldwide office space are as follows (in thousands):

 

     Future
Minimum Lease
Payments
     Subtenant Offset to
Future Minimum
Lease Payments
     Net Future
Minimum Lease
Payments
 

2012

   $ 529       $ 67       $ 462   

2013

     1,404         ––         1,404   

2014

     1,423         ––         1,423   

2015

     1,470         ––         1,470   

2016

     1,517         ––         1,517   

Thereafter

     4,130         ––         4,130   
  

 

 

    

 

 

    

 

 

 
   $ 10,473       $ 67       $ 10,406   
  

 

 

    

 

 

    

 

 

 

The Company is involved in various legal proceedings which arise from time to time in the normal course of business. While the ultimate results of such matters generally cannot be predicted with certainty, management does not expect any such matters to have a material adverse effect on the consolidated financial position and results of operations as of June 30, 2011.

 

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Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

10. Segments of Business and Geographic Area Information

The Company is engaged in the design, development and marketing of data infrastructure software. The Company considers its business activities to constitute a single segment of business.

A summary of the Company’s operations by geographic area follows (in thousands):

 

     Year ended June 30,  
     2009     2010     2011  

Revenue:

      

North America

   $ 30,685      $ 33,011      $ 32,182   

Europe (majority originating from U.S)

     10,820        8,489        9,506   

Japan

     4,663        4,951        5,459   

Rest of World (all originating from U.S.)

     1,050        762        1,246   
  

 

 

   

 

 

   

 

 

 

Total

   $ 47,218      $ 47,213      $ 48,393   
  

 

 

   

 

 

   

 

 

 

Operating income (loss) (A):

      

North America

     (4,640     (4,152     (6,255

Europe (inclusive of revenue originating from U.S.)

     6,697        4,879        4,585   

Japan

     4,652        4,910        5,386   

Rest of World (all originating from U.S.)

                     
  

 

 

   

 

 

   

 

 

 

Total

   $ 6,709      $ 5,637      $ 3,716   
  

 

 

   

 

 

   

 

 

 

Identifiable assets:

      

North America

     93,415        93,181        91,274   

Europe

     685        773        1,316   

Japan

     552        554        536   

Rest of World (all originating from U.S.)

     54        57        59   
  

 

 

   

 

 

   

 

 

 

Total

   $ 94,706      $ 94,565      $ 93,185   
  

 

 

   

 

 

   

 

 

 

 

(A) Operating income (loss) for Europe, Japan and Rest of World do not include any allocation of marketing, product development, technical support and administrative costs incurred in the United States.

 

11. Statements of Cash Flows

The changes in current assets from operations reflected in the consolidated statements of cash flows are comprised of the following (in thousands):

 

     Year ended June 30,  
     2009     2010     2011  

Trade accounts receivable

   $ (2,663   $ (388   $ (820

Prepaid expenses and other current assets

     14        (323     124   
  

 

 

   

 

 

   

 

 

 
   $ (2,649   $ (711   $ (696
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The changes in accounts payable and accrued liabilities from operations reflected in the consolidated statements of cash flows are comprised of the following (in thousands):

 

     Year ended June 30,  
     2009     2010     2011  

Trade accounts payable

   $ 667      $ (311   $ (455

Accrued payroll and payroll related costs

     256        (6     462   

Deferred rent and lease related accruals

     (325     (394     520   

Other accrued expenses

     (275     (265     738   
  

 

 

   

 

 

   

 

 

 
   $ 323      $ (976   $ 1,265   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

      

Income taxes paid during the year:

      

Domestic

   $ 2,437      $ 1,532      $ 820   
  

 

 

   

 

 

   

 

 

 

Foreign

   $ 89      $ 105      $ 107   
  

 

 

   

 

 

   

 

 

 

 

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