| ALTIRIS INC ITEM 1A Risk Factors Factors That Could Affect Future Results Set forth below and elsewhere in this Annual Report on Form 10-K, and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods |
| Our quarterly operating results are difficult to predict, and if we do not meet quarterly financial expectations of securities analysts or investors, our stock price would likely decline |
| Our quarterly revenue and operating results are difficult to predict and may fluctuate from quarter to quarter |
| It is possible that our operating results in some quarters will be below market expectations |
| If this happens, the market price of our common stock would likely decline |
| As a result, we believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful, and you should not rely on them as an indication of our future performance |
| Fluctuations in our future quarterly operating results may be caused by many factors, including: • changes in demand for our products; • the size, timing and contractual terms of orders for our products; • any downturn in our customers’ and potential customers’ businesses, the domestic economy or international economies where our customers and potential customers do business; • the timing of product releases or upgrades by us or by our competitors; • any significant change in the competitive dynamics of our markets, including strategic alliances and consolidation among our competitors or our strategic partners; • changes in the mix of revenue attributable to higher-margin software products as opposed to substantially lower-margin services; • the amount and timing of operating expenses and capital expenditures relating to the expansion of our business and operations; • changes in customers’ or partners’ businesses resulting from disruptions in the geopolitical environment including military conflict or acts of terrorism in the United States or elsewhere; and • costs associated with legal proceedings, including legal fees and any adverse judgments or settlements |
| A significant portion of our software revenue in any quarter depends on orders booked and shipped in the last month, weeks or days of that quarter |
| Many of our customers are large businesses, and if an order from one or more of these large customers does not occur or is deferred, our revenue in that quarter could be substantially reduced, and we may be unable to proportionately reduce our operating expenses during a quarter in which this occurs |
| In addition, given the large number of license transactions we enter into in a given quarter, many of which are entered into in the last weeks or days of the quarter, we have in the past and may in the future experience unanticipated fluctuations in quarterly results due to difficulties associated with satisfying the various elements necessary to recognize revenue in connection with those transactions |
| Our operating expenses are based on our expectations of future revenue and are relatively fixed in the short term |
| If our revenue does not increase commensurate with those expenses, net income in a given quarter could be less than expected |
| 18 _________________________________________________________________ [71]Table of Contents If Microsoft significantly increases its market share in the systems management software market, the demand for our products and our ability to increase our market penetration could be adversely affected |
| Microsoft has delivered expanded offerings in the systems management software market that compete with our products and has announced its intention to continue to deliver competitive offerings in that market |
| Microsoft has substantially greater financial, technical and marketing resources, a larger customer base, a longer operating history, greater name recognition and more established relationships in the industry than we do |
| If Microsoft gains significant market share in the systems management market with competing products, our ability to achieve sufficient market penetration to grow our business may be impaired and the demand for our products would suffer |
| In addition, the possible perception among our customers and potential customers that Microsoft is going to be successful in delivering systems management software offerings that compete with our products may delay or change their buying decisions and limit our ability to increase market penetration and grow our business |
| If the Microsoft technologies upon which our products are dependent become incompatible with our products or lose market share, the demand for our Microsoft-based products would suffer |
| Many of our products are designed specifically for the Windows platform and designed to use current Microsoft technologies and standards, protocols and application programming interfaces |
| Although some of our products work on other platforms, such as UNIX, Linux, Macintosh and Palm, we believe that the integration between our products and Microsoft’s products is one of our competitive advantages |
| If Microsoft promotes technologies and standards, protocols and application programming interfaces that are incompatible with our technology, or promotes and supports existing or future products offered by our competitors that compete with our products, the demand for our products would suffer |
| In addition, our business would be harmed if Microsoft loses market share for its Windows products |
| We expect many of our products to be dependent on the Windows market for the foreseeable future |
| Although the market for Windows systems has grown rapidly, this growth may not continue at the same rate, or at all |
| If the market for Windows systems declines or grows more slowly than we anticipate, our ability to increase revenue could be limited |
| We believe that some of our success has depended, and will continue to depend for the foreseeable future, on our ability to continue as a complementary software provider for Microsoft’s operating systems, development platform, and business applications |
| Because we do not have any long-term arrangements with Microsoft, we cannot be certain that our relationship with Microsoft will continue or expand |
| Any deterioration of our overall relationship with Microsoft could materially harm our business and affect our ability to develop, market and sell our products |
| If we do not execute on our relationship with Dell or if Dell increases its marketing of our competitors’ systems management software products, our ability to market and sell our products through Dell will be limited and a substantial revenue source will be impaired or eliminated |
| An important part of our operating results depends on our relationship with Dell |
| The loss of significant revenue opportunities with Dell could negatively impact our results of operations |
| We have a software licensing agreement with Dell under which Dell has been granted a nonexclusive license to distribute certain of our software products and services to third parties |
| Dell also distributes some of our competitors’ systems management software products |
| If Dell decides to market additional competitive products or reduce its marketing of our products in preference to the products of our competitors, our ability to increase market penetration could be adversely affected |
| Any deterioration in our relationship with Dell could adversely affect our ability to grow our business and impair a substantial revenue source |
| 19 _________________________________________________________________ [72]Table of Contents Any deterioration of our relationships with HP could adversely affect our ability to market and sell our products and impair or eliminate a substantial revenue source |
| We have generated a substantial portion of our revenue as a result of our relationships with HP An important part of our operating results depends on our relationships with HP In recent periods, the percentage of revenue that we derive through our relationship with HP has decreased and any further loss of significant revenue from HP could negatively impact our results of operations |
| We have a license and distribution agreement with HP under which HP distributes our products to customers directly or through HP’s distributors and resellers |
| We also have an agreement with HP to develop and market an integrated product combining our server deployment and provisioning technology with HP servers |
| If either of these agreements were terminated, our business with HP would deteriorate |
| In addition, HP has acquired a number of software companies that offer products that compete or in the future may compete with some of our products |
| If HP continues to expand its software offerings, through acquiring companies in our market or otherwise, the level of revenue we derive through our relationship with HP could continue to decline and our growth prospects for our HP business could be impaired |
| HP has recently indicated that it changed the compensation structure for its sales representatives in a way that promotes the marketing and sale of HP’s acquired products |
| In addition, HP recently began an organizational restructuring, including headcount reductions, which may disrupt or eliminate existing relationships with personnel at HP and may negatively affect our ability to grow our HP business |
| Also, if HP decides to market its acquired products exclusively or otherwise significantly reduce or eliminate its marketing of our competitive products as an alternative solution for its customers, our ability to grow our HP customer business would likely be adversely affected |
| Furthermore, if our HP customer base perceives that such acquisitions or HP’s marketing strategies regarding its acquired products adversely affect our relationship with HP, our ability to grow our HP customer business could be adversely affected and a substantial revenue source could be impaired |
| Any deterioration in our overall relationships with HP could harm our business and adversely affect our ability to develop, market, and sell our products, grow our revenue or sustain profitability |
| We face strong competitors that have greater market share than we do and pre-existing relationships with our potential customers, and if we are unable to compete effectively, we might not be able to achieve sufficient market penetration to sustain profitability |
| The market for systems management products and services is rapidly evolving and highly competitive, and we expect competition in this market to persist and intensify |
| For example, Microsoft has expanded its product offerings in the systems management market and we expect Microsoft to continue to expand its presence in this market |
| We may not have the resources or expertise to compete successfully in the future |
| Many of our competitors have substantially greater financial, customer support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do |
| If our competitors increase or maintain significant market share, we might not be able to achieve sufficient market penetration to grow our business, and our operating results could be harmed |
| There has been consolidation in our markets, which we believe will continue and could lead to increased price competition and other forms of competition |
| Established companies, such as HP and Symantec, have acquired companies that compete in our markets and may continue to acquire or establish cooperative relationships with our other competitors |
| Such established companies may also develop or expand upon their own systems management product offerings |
| In addition, we may face competition in the future from large established companies, as well as from emerging companies, that have not previously entered the market for systems management software or that currently do not have products that directly compete with our products |
| It is also possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share |
| We may not be able to compete successfully against current or future competitors, and this would impact our revenue adversely and cause our business to suffer |
| 20 _________________________________________________________________ [73]Table of Contents In addition, existing and potential competitors could elect to bundle their systems management software products with, or incorporate such products into, other products developed by themselves or others, in such a manner as to make it difficult for our products to compete with such bundled or integrated products |
| Also, developers of software products with which our products must be compatible to operate could change their products so that they will no longer be compatible with our products |
| If our competitors were to bundle their products in this manner or make their products incompatible with ours, this could harm our ability to sell our products and could lead to price reductions for our products, which would likely reduce our profit margins |
| We have made and expect to continue to make acquisitions that could disrupt our operations and harm our operating results |
| Our growth is dependent on, among other things, market growth, our ability to enhance our existing products and our ability to introduce new products on a timely basis |
| As part of our strategy, we intend to continue to make investments in or acquire complementary companies, products, technologies and personnel |
| We have acquired and integrated technologies from a variety of technology companies |
| Acquisitions involve difficulties and risks to our business, including, but not limited to, the following: • potential adverse effects on our operating results from increases in intellectual property amortization, acquired in-process technology, stock compensation expense, increased compensation expense resulting from newly hired employees, and other expenses associated with integrating new technologies, personnel and business operations; • failure to integrate acquired products and technologies with our existing products and technologies; • failure to integrate product delivery, order fulfillment and other operational processes of the acquired company with our existing processes; • failure to integrate management information systems, personnel, research and development and marketing, sales and support operations; • potential loss of key employees from the acquired company; • diversion of management’s attention from other business concerns; • disruption of our ongoing business; • incurring significant expenses in evaluating the adequacy of and integrating the acquired company’s internal financial controls; • potential loss of the acquired company’s customers; • failure to realize the potential financial or strategic benefits of the acquisition; • failure to successfully further develop the acquired company’s technology, resulting in the impairment of amounts capitalized as intangible assets; • diminishing the value of the Altiris brand or reputation if an acquisition is not successful; and • unanticipated costs and liabilities, including significant liabilities that may be hidden or not reflected in the final acquisition price |
| Acquisitions may also cause us to: • issue common stock that would dilute our current stockholders’ percentage ownership; • assume liabilities; • record goodwill and non-amortizable intangible assets that would be subject to impairment testing on a regular basis and potential periodic impairment charges; • incur amortization expenses related to certain intangible assets; 21 _________________________________________________________________ [74]Table of Contents • incur large and immediate write-offs, and restructuring and other related expenses; or • become subject to litigation |
| Mergers and acquisitions of technology companies are inherently risky, and we cannot give any assurance that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition |
| If we fail to integrate successfully any future acquisitions, or the technologies associated with such acquisitions, into our company, the revenue and operating results of the combined company could decline |
| Any integration process will require significant time and resources, and we may not be able to manage the process successfully |
| If our customers are uncertain about our ability to operate on a combined basis, they could delay or cancel orders for our products |
| We may not successfully be able to evaluate or utilize the acquired technology and accurately forecast the financial impact of an acquisition transaction, including accounting charges |
| Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products or the technologies and intellectual property from which the products are derived |
| Additionally, we may have to incur debt or issue equity securities to pay for any future acquisition, either of which could affect the market price of our common stock |
| The sale of additional equity or convertible debt could result in dilution to our stockholders |
| The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations |
| If we do not expand our indirect distribution channels, we will have to rely more heavily on our direct sales force to develop our business, which could limit our ability to increase revenue and grow our business |
| Our ability to sell our products into new markets and to increase our penetration into existing markets will be impaired if we fail to expand our indirect distribution channels |
| Our sales strategy requires that we establish multiple indirect marketing channels in the United States and internationally through computer manufacturers, OEMs, VARs, systems integrators and distributors, and that we increase the number of customers licensing our products through these channels |
| Our ability to establish relationships with additional computer manufacturers will be adversely affected to the extent that computer manufacturers decide not to enter into relationships with us because of our existing relationships with other computer manufacturers with which they compete |
| In addition, the establishment or expansion of our relationships with computer manufacturers may cause other computer manufacturers with which we have relationships to reduce the level of business they conduct with us or even terminate their relationships with us, either of which would adversely affect our revenue and our ability to grow our business |
| Moreover, our channel partners must market our products effectively and be qualified to provide timely and cost effective customer support and service, which requires us to provide proper training and technical support |
| If our channel partners do not effectively market, sell and support our products or choose to place greater emphasis on products offered by our competitors, our ability to grow our business and sell our products will be negatively affected |
| We also plan to continue to expand our direct sales efforts worldwide and invest substantial resources toward this expansion |
| Despite these efforts, we may experience difficulty in recruiting and retaining qualified sales personnel |
| Because we rely heavily on our sales organizations, any failure to expand these organizations with qualified personnel could limit our ability to sell our products |
| In addition, new sales personnel, who are typically hired and trained during our first and fourth fiscal quarters, can require up to several months to begin to generate revenue from the sale of our products |
| As a result, our operating results may be adversely affected to the extent we spend considerable time and incur significant expenses on hiring and training new sales personnel who do not begin to generate revenue within several months or at all |
| 22 _________________________________________________________________ [75]Table of Contents If we fail to enhance our ability to manage effectively the significant growth in our business, then our infrastructure, management and resources will continue to be strained such that we may not be able to develop and manage our business and operations effectively |
| Our historical growth has placed, and our future growth is likely to continue to place, a significant strain on our resources |
| To manage our continued growth and geographically dispersed organization, we expect to continue to hire additional resources and expertise in our finance, operations and administrative functions |
| We also expect to expand and improve our internal systems, including our management information systems, customer relationship and support systems, and operating, administrative and financial systems and controls |
| This effort will require us to incur significant expense and make significant capital expenditures, and may divert the attention of management, sales, support and finance personnel from our core business operations, either of which may adversely affect our financial performance in one or more quarters |
| Moreover, our growth has resulted, and our expected future growth will result, in increased responsibilities of management personnel, including, without limitation, our finance and operations personnel |
| In recent years, we have experienced growth organically and through acquisitions, resulting in a significant increase in the complexity of managing the financial and operational affairs of our business |
| As a result, we have in the past, and may in the future, experience unanticipated fluctuations in our quarterly operating results as a result of the challenges of managing the financial and operational affairs of our increasingly complex, geographically dispersed organization |
| Managing this growth will require substantial resources or expertise that we may not have or otherwise be able to obtain |
| If we fail to recruit and retain sufficient and qualified management personnel, including, without limitation, in our finance and operations organization, or to implement or maintain internal systems that enable us to effectively manage our growing business and operations worldwide, our financial results in any given period may be adversely impacted and our business and financial condition could be materially harmed or our stock price may decline or experience volatility |
| If our existing customers do not purchase additional licenses or renew annual upgrade protection, our sources of revenue might be limited to new customers and our ability to grow our business might be impaired |
| Historically, we have derived, and plan to continue to derive, a significant portion of our total revenue from existing customers who purchase additional products and renew AUP Sales to existing customers represented 69prca of our revenue in 2003, 64prca in 2004, and 57prca of our revenue in 2005 |
| If our customers do not purchase additional products or renew AUP, our ability to increase or maintain revenue levels could be limited |
| Most of our current customers initially license a limited number of our products for use in a division of their enterprises |
| We actively market to these customers to have them license additional products from us and increase their use of our products on an enterprise-wide basis |
| Our customers may not license additional products and may not expand their use of our products throughout their enterprises |
| In addition, as we deploy new versions of our products or introduce new products, our current customers may not require or desire the functionality of our new products and may not ultimately license these products |
| We also depend on our installed customer base for future revenue from AUP renewal fees |
| The terms of our standard license arrangements provide for a one-time license fee and a prepayment for one year of AUP AUP is renewable annually at the option of our customers and there are no minimum payment obligations or obligations to license additional software |
| If we experience delays in developing our products, our ability to deliver product releases in a timely manner and meet customer expectations will be impaired |
| We have experienced delays in developing and releasing new versions and updates of our products and may experience similar or more significant product delays in the future |
| To date, none of these delays has materially harmed our business |
| If we are unable, for technological or other reasons, to develop and 23 _________________________________________________________________ [76]Table of Contents introduce new and improved products or enhanced versions of our existing products in a timely manner, our business and operating results could be harmed |
| Difficulties in product development, product localization or integration of acquired or licensed technologies could delay or prevent the successful introduction, marketing and delivery of new or improved products to our customers, damage our reputation in the marketplace and limit our growth |
| If our plan of organizational restructuring does not ultimately result in decreased costs and expenses at the level that we anticipate, we may not be able to align our expenses with our anticipated revenues and our strategy, and our profitability could be negatively impacted |
| On July 29, 2005, we announced that we had implemented a plan of organizational restructuring, or the Plan, primarily through involuntary terminations to take place beginning in the third quarter of 2005, consisting of headcount reductions designed to adjust expenses to a level more consistent with anticipated revenues and to better align expenditures with our strategy |
| While the Plan has thus far reduced our expenses, and we anticipate that the Plan will ultimately result in expenses at a level more consistent with anticipated revenues, the Plan will result in additional costs to us during the 2006 fiscal year, which may have a negative impact on profitability in that period |
| Moreover, developments in our business may prevent us from achieving the revenue and cost-saving goals associated with the Plan |
| Our profitability depends to a significant extent on our ability to align expenses with our anticipated revenues and our strategy, and if we are unsuccessful in aligning our costs and expenses with our anticipated revenues and our strategy, our profitability could be negatively impacted |
| If the market for service-oriented management software does not continue to develop as we anticipate, the demand for our products might be adversely affected |
| We believe that historically many companies have addressed their IT management needs for systems and applications internally and have only recently become aware of the benefits of third-party software products such as ours as these needs have become more complex |
| Our future financial performance will depend in large part on the continued growth in the number of businesses adopting third-party service-oriented management software products and their deployment of these products on an enterprise-wide basis |
| Our business and operating results may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment |
| Our business and operating results are subject to the effects of changes in general economic conditions |
| Although conditions have improved in recent periods, particularly in the United States, we remain uncertain as to future economic conditions |
| If the economic and market conditions in the United States and globally do not continue to improve, or if they deteriorate, we may experience a reduced demand for our products as a result of increasing constraints on IT capital spending as well as increased price competition, all of which could adversely impact our business and operating results |
| In addition, increased international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures, sustained police or military action in Afghanistan and Iraq, strained international relations with North Korea, and other conflicts in the Middle East and Asia, may halt or hinder our ability to do business, increase our costs and adversely affect our stock price |
| This increased instability may, for example, negatively impact the reliability and cost of transportation, adversely affect our ability to obtain adequate insurance at reasonable rates or require us to take extra security precautions for our domestic and international operations |
| In addition, this international political instability has had and may continue to have negative effects on financial markets, including significant price and volume fluctuations in securities markets |
| If this international political instability continues or escalates, our business and results of operations could be harmed and the market price of our common stock could decline |
| 24 _________________________________________________________________ [77]Table of Contents Our product sales cycles for large enterprise-wide sales often last in excess of three months and are unpredictable and our product sales cycles for sales to large businesses are typically longer than the sales cycles to small businesses, both of which make it difficult to forecast our revenues and results of operations for any given period |
| We have traditionally focused our sales efforts on the workgroups and divisions of our customers, resulting in a sales cycle ranging between 30 and 90 days or even longer |
| We are continually increasing our efforts to generate enterprise-wide sales, which often have sales cycles that extend beyond that experienced with sales to workgroups or divisions |
| In addition, our sales to larger enterprises have increased in recent periods |
| If we do not correctly forecast the timing of our sales in a given period, the amount of revenue we recognize in that period could be negatively impacted, which could negatively affect our operating results |
| In addition, the failure to complete sales, especially large, enterprise-wide sales, in a particular period could significantly reduce revenue in that period, as well as in subsequent periods over which revenue for the sale would likely be recognized |
| The sales cycle associated with the purchase of our products is subject to a number of significant risks over which we have little or no control, including: • customers’ budgetary constraints, internal acceptance requirements and procurement procedures; • concerns about the introduction or announcement of our competitors’ new products; • announcements by Microsoft relating to Windows; and • potential downturns in the IT market and in economic conditions generally |
| Our industry changes rapidly due to evolving technological standards, and our future success will depend on our ability to continue to meet the sophisticated and changing needs of our customers |
| Our future success will depend on our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging technologies, including technologies related to the development of Windows and other operating systems generally |
| If we do not enhance our products to meet these evolving needs, we may not remain competitive and be able to grow our business |
| We will have to develop and introduce enhancements to our existing products and any new products on a timely basis to keep pace with technological developments, evolving industry standards, changing customer requirements and competitive products that may render existing products and services obsolete |
| In addition, because our products are dependent upon Windows and other operating systems, we will need to continue to respond to technological advances in these operating systems, including major revisions |
| Our position in the market for systems management software for Windows and other systems and applications could be eroded rapidly by our competitors’ product advances |
| Consequently, the lifecycles of our products are difficult to estimate |
| We expect that our product development efforts will continue to require substantial investments, and we may lack the necessary resources to make these investments on a timely basis |
| Errors in our products and product liability claims asserted against us could adversely affect our reputation and business and result in unexpected expenses and loss of market share |
| Because our software products are complex, they may contain errors or “bugs” that can be detected at any point in a product’s lifecycle |
| While we continually test our products for errors and work with customers through our customer support services to identify and correct bugs, errors in our products may be found in the future even after our products have been commercially introduced |
| Detection of any significant errors may result in, among other things, loss of, or delay in, market acceptance and sales of our products, diversion of development resources, injury to our reputation, or increased service and warranty costs |
| Product errors could harm our business and have a material adverse effect on our results of operations |
| Moreover, because our products primarily support other systems and applications, such as Windows, any software errors or bugs in the operating 25 _________________________________________________________________ [78]Table of Contents systems or applications may result in errors in the performance of our software, and it may be difficult or impossible to determine where the errors reside |
| While we carry insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted |
| A material product liability claim could harm our business, result in unexpected expenses and damage our reputation |
| Our license agreements with our customers typically contain provisions designed to limit exposure to potential product liability claims |
| Our standard software licenses provide that if our products fail to meet the designated standard, we will correct or replace such products or refund fees paid for such products |
| Our standard agreements in many jurisdictions also provide that we will not be liable for indirect or consequential damages caused by the failure of our products |
| However, such warranty and limitation of liability provisions are not effective under the laws of certain jurisdictions |
| Although no product liability suits have been filed to date, the sale and support of our products entails the risk of such claims |
| We rely on our intellectual property rights, and our inability to protect these rights could impair our competitive advantage, divert management attention, require additional development time and resources or cause us to incur substantial expense to enforce our rights, which could harm our ability to compete and generate revenue |
| Our success is dependent upon protecting our proprietary technology |
| We rely primarily on a combination of copyright, patent, trade secret and trademark laws, as well as confidentiality procedures and contractual provisions to protect our proprietary rights |
| These laws, procedures and provisions provide only limited protection |
| We currently own patents issued in the United States and have patent applications pending in the United States and under the Patent Cooperation Treaty |
| However, our patents may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers |
| In addition, patents may not be issued on our current or future technologies |
| Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary |
| In particular, we may provide our licensees with access to proprietary information underlying our licensed products which they may improperly use or disclose |
| Additionally, our competitors may independently design around patents and other proprietary rights we hold |
| Policing unauthorized use of software is difficult and some foreign laws do not protect our proprietary rights to the same extent as United States laws |
| We believe litigation has been necessary and that it may be necessary in the future to enforce our intellectual property rights or determine the validity and scope of the proprietary rights of others |
| Litigation has resulted, and we believe that it will increasingly result, in substantial costs and diversion of resources and management attention |
| If third parties assert that our products or technologies infringe their intellectual property rights, our reputation and ability to license or sell our products could be harmed |
| In addition, these types of claims could be costly to defend and result in our loss of significant intellectual property rights |
| We expect that software product developers, such as ourselves, will increasingly be subject to infringement claims, whether the claims have merit or not, as the number of products and competitors in the software industry segment grows and the functionality of products in different industry segments overlap |
| Also, third parties notify us from time to time that our products may infringe their intellectual property rights |
| If such notice evolves into a formal claim or litigation, there would be costs associated with defending such claims, whether the claims have merit or not, which could harm our business |
| Any such claims could also harm our relationships with existing customers and may deter future customers from licensing our products |
| In addition, in any current or potential dispute involving our intellectual property, our customers or distributors of our products could also become the target of litigation, which could trigger our indemnification obligations in certain of our license and service agreements |
| Any such claims, with or without merit, could be time consuming, result in costly litigation, including costs related to any damages we may owe resulting from such litigation, cause product shipment delays or result in loss of intellectual 26 _________________________________________________________________ [79]Table of Contents property rights which would require us to obtain licenses which may not be available on acceptable terms or at all |
| If we are unable to retain key personnel, our ability to manage our business effectively and continue our growth could be negatively impacted |
| Our future success will depend to a significant extent on the continued service of our executive officers and certain other key employees |
| Of particular importance to our continued operations are our President and Chief Executive Officer, Greg Butterfield, and our Chief Technology Officer, Dwain Kinghorn |
| None of our executive officers are bound by an employment agreement and a substantial amount of the stock options granted to our executive officers have vested |
| If we lose the services of one or more of our executive officers or key employees, or if one or more of them decide to join a competitor or otherwise compete directly or indirectly with us, our business could be harmed |
| Searching for replacements for our key personnel could divert management’s time and result in increased operating expenses |
| If we cannot continually attract and retain sufficient and qualified management, technical and other personnel, our ability to manage our business successfully and commercially introduce products could be negatively affected |
| Our future success will depend on our ability to attract and retain experienced, highly qualified management, technical, research and development, and sales and marketing personnel |
| The development and sales of our products could be impacted negatively if we do not attract and retain these personnel |
| Competition for qualified personnel in the computer software industry is intense, and in the past we have experienced difficulty in recruiting qualified personnel, especially technical and sales personnel |
| Moreover, we intend to expand the scope of our international operations and these plans will require us to attract experienced management, sales, marketing and customer support personnel for our international offices |
| We expect competition for qualified personnel to remain intense, and we may not succeed in attracting or retaining these personnel |
| In addition, new employees generally require substantial training in the use of our products, which will require substantial resources and management attention |
| We are subject to risks inherent in doing business internationally that could impair our ability to expand into foreign markets |
| Sales to international customers represented approximately 33prca of our revenue in 2003, approximately 36prca of our revenue in 2004, and approximately 37prca of our revenue in 2005 |
| Our international revenue is attributable principally to sales to customers in Europe and Asia Pacific |
| Our international operations are, and any expanded international operations will be, subject to a variety of risks associated with conducting business internationally that could harm our business, including the following: • longer payment cycles; • seasonal reductions in business activity in certain foreign countries, such as the summer months in Europe; • increases in tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries; • limited or unfavorable intellectual property protection in certain foreign countries; • unfavorable laws that increase the risks of doing business in certain foreign countries; • fluctuations in currency exchange rates; • increased administrative expenses; • the possible lack of financial and political stability in foreign countries that prevent overseas sales and growth; • restrictions against repatriation of earnings from our international operations; 27 _________________________________________________________________ [80]Table of Contents • potential adverse tax consequences; and • difficulties in staffing and managing international operations, including the difficulty in managing a geographically dispersed workforce in compliance with diverse local laws and customs |
| Fluctuations in the value of foreign currencies could result in currency transaction losses |
| As we expand our international operations, we expect that our international business will continue to be conducted in foreign currencies |
| Fluctuations in the value of foreign currencies relative to the United States Dollar have caused, and we expect such fluctuations to continue to increasingly cause, currency transaction gains and losses |
| We cannot predict the effect of exchange rate fluctuations upon future quarterly and annual operating results |
| We may experience currency losses in the future |
| To date, we have not adopted a hedging program to protect us from risks associated with foreign currency fluctuations |
| Future changes in accounting standards, particularly changes affecting revenue recognition and accounting for stock options, and other new regulations could cause unexpected revenue or earnings fluctuations |
| Future changes in accounting standards, particularly changes affecting revenue recognition, could require us to change our accounting policies |
| These changes could cause deferment of revenue recognized in current periods to subsequent periods or accelerate recognition of deferred revenue to current periods, each of which could cause shortfalls in meeting securities analysts’ and investors’ expectations |
| Since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages |
| We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with Altiris |
| The Financial Accounting Standards Board, or FASB, among other agencies and entities, has made changes to GAAP that, when effective, will require us to record an additional charge to earnings for employee stock option grants (SFAS 123, as revised) |
| This change will negatively impact our earnings |
| In addition, new regulations proposed by The Nasdaq National Market requiring stockholder approval in connection with stock option plans has already made it more difficult for us to provide stock options to employees |
| To the extent that new regulations also make it more expensive to grant options to employees, we may incur increased accounting compensation costs, we may change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business |
| Compliance with new rules and regulations concerning corporate governance may be costly, which could harm our business |
| We will continue to incur significant legal, accounting and other expenses to comply with regulatory requirements |
| The Sarbanes-Oxley Act of 2002, together with rules implemented by the SEC and Nasdaq, has required and will require us to make changes in our corporate governance, public disclosure and compliance practices, which changes have had, and may continue to have, an adverse effect on our profitability |
| These rules and regulations have increased our legal and financial compliance costs, and have made some activities more difficult, such as stockholder approval of any new stock option plans |
| In addition, we have incurred significant costs and will continue to incur costs in connection with ensuring that we are in compliance with rules promulgated by the SEC regarding internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 |
| These regulatory requirements may in the future make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage |
| These developments could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers |
| We are presently 28 _________________________________________________________________ [81]Table of Contents evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result; however, if these costs prove significant, they could further diminish our profitability |
| If we fail to implement and maintain adequate internal systems and effective internal control over financial reporting, our ability to manage our business and provide reliable financial reporting could be impaired and our management and auditors may be precluded from certifying effective internal control over financial reporting, which could harm our business reputation and cause our stock price to decline |
| From time to time, in our ongoing effort to improve business and operational processes and our internal control over financial reporting, we or our auditors have determined and may in the future determine that “significant deficiencies” or “material weaknesses” (as such terms are defined under PCAOB accounting standards) exist or that our internal control over financial reporting may otherwise require improvement |
| For example, in connection with the preparation of our financial statements for the period ended June 30, 2005, it was determined that the financial results for the period, as reported in our earnings release on August 3, 2005, had not correctly accounted for the stock-based compensation charge for certain stock purchase rights approved and issued during the period |
| In the process of determining the adjustments to be made to our financial statements, management identified certain control deficiencies in our internal control over financial reporting relating to the accounting for the compensation charge |
| While we believe that we have taken or are taking appropriate steps to remediate control deficiencies we have encountered in the past, such as those described above, we may encounter additional control deficiencies in the future |
| Moreover, if control deficiencies exist in our internal control over information systems, including that which we have previously identified and have sought or are seeking to remediate, our ability to reliably provide financial statements in accordance with GAAP could be impaired, which would lead to a loss of investor and customer confidence and a sustained material decline in our stock price |
| Pursuant to the Sarbanes-Oxley Act of 2002 and rules of the SEC promulgated pursuant to that act, our management will be required to evaluate the effectiveness of our internal control over financial reporting and to disclose management’s assessment of the effectiveness of our internal control over financial reporting |
| If, in the future, our management concludes that there are one or more material weaknesses in our internal control over financial reporting, our management will not be permitted to conclude that our internal control over financial reporting is effective |
| In such a case, investors may lose confidence in the reliability of our financial reporting, which may harm our business reputation and cause our stock price to decline |
| The market price for our common stock may be particularly volatile, and our stockholders may be unable to resell their shares at a profit |
| The market price of our common stock has been subject to significant fluctuations and may continue to fluctuate or decline |
| Since our initial public offering in May 2002, the price of our common stock has ranged from an intra-day low of dlra4dtta50 to an intra-day high of dlra39dtta20 |
| The stock markets have experienced significant price and trading volume fluctuations |
| The market for technology stocks has been extremely volatile and frequently reaches levels that bear no relationship to the past or present operating performance of those companies |
| General economic conditions, such as recession or interest rate or currency rate fluctuations in the United States or abroad, could negatively affect the market price of our common stock |
| In addition, our operating results may be below the expectations of securities analysts and investors |
| If this were to occur, the market price of our common stock would likely significantly decrease |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company |
| Such litigation could result in substantial cost and a diversion of management’s attention and resources |
| 29 _________________________________________________________________ [82]Table of Contents The market price of our common stock may fluctuate in response to various factors, some of which are beyond our control |
| These factors include, but are not limited to, the following: • changes in market valuations or earnings of our competitors or other technology companies; • actual or anticipated fluctuations in our operating results; • changes in financial estimates or investment recommendations by securities analysts who follow our business; • technological advances or introduction of new products by us or our competitors; • the loss of key personnel; • our sale of common stock or other securities in the future; • public announcements regarding material developments in our business, including acquisitions or other strategic transactions; • public announcements regarding material transactions or other developments involving our strategic partners, customers or competitors that are perceived by the market to affect our business prospects; • intellectual property or litigation developments; • changes in business or regulatory conditions; • the trading volume of our common stock; and • disruptions in the geopolitical environment, including war in the Middle East or elsewhere or acts of terrorism in the United States or elsewhere |
| We have implemented anti-takeover provisions that could make it more difficult to acquire us |
| Our certificate of incorporation, our bylaws and Delaware law contain provisions that may inhibit potential acquisition bids for us and prevent changes in our management |
| Certain provisions of our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transaction |
| In addition, we have agreements with strategic partners that contain provisions which in the event of a change of control allow such partners to terminate the agreements |
| These provisions of our charter documents and agreements could have the effect of discouraging others from making tender offers for our shares, and as a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts |
| These provisions may also prevent changes in our management |
| These provisions include: • authorizing only the Chairman of the board of directors, the Chief Executive Officer or the President of Altiris to call special meetings of stockholders; • establishing advance notice procedures with respect to stockholder proposals and the nomination of candidates for election of directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors; • prohibiting stockholders action by written consent; • classifying our board of directors into three classes so that the directors in each class will serve staggered three-year terms; • eliminating cumulative voting in the election of directors; and • authorizing the issuance of shares of undesignated preferred stock without a vote of stockholders |