| EMBARCADERO TECHNOLOGIES INC Item 1A Risk Factors and elsewhere in this report should be considered carefully in evaluating our business |
| 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, we assume no responsibility for the accuracy and completeness of these statements |
| We are under no duty to update any of the forward-looking statements after the date of this report or to adjust these statements to reflect actual results |
| is a leading provider of strategic data management solutions that help companies to improve the availability, integrity, accessibility, and security of corporate data |
| The company develops, markets, sells and supports software that helps customers to manage corporate data more effectively |
| Since its founding in 1993, Embarcadero has built a broad customer base with over 11cmam000 customers, including 97 of the Fortune 100 |
| The company is headquartered in San Francisco, CA and distributes its software in the US and abroad through its sales force as well as through distributors and resellers |
| The fundamental goals of Embarcadero’s software are to help customers achieve higher returns from their investments in corporate data and to make the value of that data more evident to the business |
| In order to meet the demands of large enterprises and to attract the broadest possible customer base, the company’s software supports a variety of popular database platforms from major vendors, including Oracle^®, IBM^®, Microsoft^® and Sybase^® |
| In addition to its multi-platform capability, Embarcadero’s software also supports the lifecycle requirements of corporate databases as they move through the process of being designed, developed, deployed and managed in production |
| The company organizes its product line around three key disciplines in data management – architecture, availability and security – to focus attention on those areas where the company believes that customers have the most opportunity to extract greater value from their data infrastructure |
| Industry Background Business is becoming increasingly information driven, as more organizations rely on the productive use of data to compete effectively, to operate efficiently, and to achieve higher customer satisfaction |
| As part of this trend, the adoption of database technology has proliferated, facilitating the automation of many business processes and the adoption of packaged applications, such as ERP and CRM systems |
| Over the years, corporate databases have emerged as a principal storehouse of knowledge needed to support business decision-making |
| As corporate databases have grown in importance, so have pressures for data management professionals to deliver reliable service levels |
| Today, businesses expect IT organizations to manage the data infrastructure cost effectively while ensuring the availability, utility, and security of the underlying data |
| Despite years of investment, however, data management remains a challenge for even well-funded IT organizations due to the confluence of several factors: • Large Scale: Many large businesses make widespread use of database technology |
| Today, it is not unusual for large multinationals to operate their businesses on top of hundreds or even thousands of databases, which can be spread around the world and across many different business units |
| Managing data on such a large, distributed scale poses significant hurdles, as it becomes more difficult to operate efficiently while remaining responsive to changing business demands |
| • Rapid Growth: The challenge of managing corporate databases on a large scale is exacerbated by the rapid growth of corporate data |
| Such high growth rates make it difficult to keep database systems performing at high levels, challenge data professionals to manage larger volumes of data, 1 ______________________________________________________________________ [24]Table of Contents and stretch the ability of IT organizations to absorb the growth without increasing cost structures |
| • Technical Complexity: Most companies, particularly larger ones, have failed to standardize on a single database platform |
| This introduces technical challenges that make it more difficult to manage databases and to deliver cohesive information derived from different systems |
| • De-centralized Management: Data management teams are often aligned with business units or specific applications |
| While this gives business units greater flexibility and control over their databases, opportunities to gain global visibility over all data assets, to establish broader data standards, and to benefit from greater economies of scale may not be realized due to data inconsistencies and redundant data resulting in lower productivity |
| • Increasing Compliance Requirements: At a time when businesses are driven to make information more accessible, concerns about data privacy and security are escalating |
| Numerous, well publicized data breaches have prompted governments to enact a variety of laws that impose substantial new compliance requirements on businesses to tighten data privacy and access controls |
| These new compliance requirements place a significant burden on data management professionals |
| Failing to manage a data infrastructure effectively can result in higher costs and data that is not useful to the business |
| The large scale, rapid growth and technical complexity of the data infrastructure make it difficult for many organizations to achieve global visibility and control of their data |
| Lack of visibility into existing data assets limits the ability of IT organizations to be responsive to business demands |
| Similarly, the lack of global standards can lead to inconsistent data definitions and redundancies, which can result in higher costs, lower productivity, poorer data quality and additional effort to integrate incompatible data |
| Without the effective implementation of an overall strategy for managing data, organizations may incur higher costs for managing a large and growing data infrastructure without realizing commensurate business value from such investments |
| Embarcadero Solutions Since its founding, Embarcadero has focused on designing and developing software that meets the evolving requirements of data management professionals |
| The company organizes its product line around three key disciplines of data management in a framework defined as Strategic Data Management (SDM) |
| SDM, which is designed to be a more comprehensive approach to managing data on a broad scale, has the primary goals of helping customers extract greater business value from corporate data while achieving lower unit costs in managing their data infrastructure |
| The three key disciplines that comprise SDM and the rationale for their importance are: Data Architecture |
| The premise for embracing data architecture is to establish a blueprint for how data will support a business over time |
| By establishing a data architecture practice, an organization can gain broader visibility over its data assets and therefore be better equipped to leverage them to support key business initiatives |
| It facilitates the adoption of enterprise data standards that can improve data quality, promote data re-use, streamline integration requirements, and support the consolidation of redundant data, databases and servers |
| Data Availability |
| Over time, the cost of managing databases becomes a primary cost of ownership, eventually exceeding the initial cost of acquiring the software and hardware |
| Considering the high growth rate of corporate data, IT organizations are motivated to pursue process improvements that would enable them to achieve higher productivity in managing their data infrastructure |
| Today, data management professionals are responsible for the efficient administration of corporate databases while sustaining high service levels and remaining responsive to changing business requirements |
| In order to scale to meet these demands, IT organizations must examine opportunities to automate, streamline and simplify database administration on a broader scale |
| Data Security |
| Businesses have a growing requirement to tighten data security in an effort to protect the confidentiality of sensitive information and to control access to applications and databases |
| Regulations, such as the Sarbanes-Oxley Act, the Health Insurance Portability and Accountability Act and Basel II, are forcing businesses around the world to comply with new mandates to safeguard data privacy and to tighten data access controls |
| Corporate databases are often the primary repository for sensitive and valuable information, such as social security numbers, credit card numbers, and patient records |
| Accordingly, in order to secure data effectively, companies must adopt a comprehensive strategy to strengthen database server 2 ______________________________________________________________________ [25]Table of Contents security, regardless of platform, and undertake a series of measures to protect the data |
| To appeal to a wide variety of customers, our products work in multi-platform environments incorporating a variety of database platforms, including Oracle^®, IBM^® DB2^® UDB, Microsoft^® SQL Server^® and MySQL^® |
| Another element of our product strategy is to support the lifecycle requirements of databases as they progress through the process of being designed, developed, tested, deployed, and managed in production |
| When designing our products, we strive to make them easy to use so that both novice and expert users can become productive in using them quickly |
| Our key products and their core functionality are summarized below: Product Category Embarcadero Product Description Data Architecture ER/Studio^® Software to capture, design and document database schemas for a variety of popular database platforms |
| It serves as a mechanism for gaining visibility and control over corporate database designs and for managing the metadata that describes the underlying data structures |
| It helps customers to integrate data from disparate sources in order to deliver more meaningful information to business users |
| Describe^® Software to architect applications, particularly those that utilize databases to store application data |
| It supports the UML industry standard and helps developers to develop a blueprint for an application intended to facilitate a more productive development process |
| Data Availability DBArtisan^® Software to administer databases for a variety of popular database platforms |
| It helps database administrators and other data professionals with key tasks in managing databases, including security administration, disaster recovery, space management and schema management |
| Rapid SQL^® Software to develop database code for a variety of popular database platforms |
| It helps to improve the productivity and quality of work from database developers as they write, test and debug SQL to be deployed against a database |
| It helps customers to guard against unplanned downtime of critical databases by providing insight into internal performance and availability metrics of the target databases |
| It serves as a change control mechanism to ensure that code changes are reviewed, tested and approved before they are released into production |
| Data Security DSAuditor DSAuditor can be purchased as software or packaged in an appliance |
| The product audits how users access and manipulate data for a variety of popular database platforms |
| It helps customers to tighten data privacy and access control by providing a detailed audit trail of how sensitive data is accessed and used across the enterprise |
| We sell our software in the United States and Canada primarily through a direct sales force comprised of a telesales group and a field sales organization |
| Our sales model has enabled us to efficiently build a broad customer base |
| Our telesales group is complemented by a field sales organization that targets major accounts |
| The field sales organization facilitates penetration into major customer accounts and focuses on driving larger sales transactions and enterprise-wide implementations of our products |
| Sales cycles range between two to three months for departmental sales and up to six to twelve months for larger-scale enterprise-wide implementations |
| Embarcadero intends to build its channel sales by working closely with OEM partners, service partners and value-added resellers |
| In 2005, channel sales accounted for approximately 15dtta4prca of total revenue in North America |
| International sales |
| International sales represented 27dtta0prca and 19dtta8 % of our total revenues in 2005 and 3 ______________________________________________________________________ [26]Table of Contents 2004, respectively, and were generated primarily by Embarcadero Technologies Europe Ltd, which manages the sales, marketing, and support of our products in Europe, the Middle East, and Africa |
| In other overseas markets, we sell our products through independent distributors and through our sales office in Australia |
| We have agreements with distributors in various countries in Central and Latin America, as well as the Asia Pacific region |
| Our international distributors perform sales, marketing, and technical support functions for their local customers |
| We intend to continue to increase our international distribution by expanding direct selling efforts through Embarcadero Technologies Europe Ltd |
| and our existing distributors, as well as by developing relationships with additional international distributors |
| For a geographic breakdown of our revenue and long-lived assets, see Note 12 of our consolidated financial statements included in this report |
| Our marketing efforts are focused on driving the core business for Embarcadero Technologies while helping the new enterprise-scale products reach critical momentum in their segments |
| Key activities in 2005 included lead generation programs , building relationships with our customers, researching competition and market environments, delivering more comprehensive sales support materials, and enhancing the positioning and brand of our company and products |
| We intend to continue our marketing efforts to increase account penetration throughout our existing customer base, extend our customer base in the areas of our new product offerings, and build market share in data management |
| Customer Service and Technical Support Most customers purchase a one-year maintenance and support contract upon purchase of a software license |
| Maintenance and support contracts entitle customers to all product upgrades and technical support during the term of the contract |
| Our standard maintenance contract covers a 12-month period, is payable in advance, and is renewable at the customer’s option |
| In 2005, we introduced 24/7 tiered support services to better meet the needs of our enterprise and global customers |
| Embarcadero Technologies provides three different Support Services programs – Standard, Extended, and Premium: • Standard Support: Standard Support provides access to the knowledge and tools needed to successfully implement and use Embarcadero products |
| It includes phone, email, and web support from our support team during standard support hours; software upgrades and updates; and access to online resources including a user community that exchanges ideas and information on the use of our products |
| • Extended Support: Extended Support includes all of the benefits of Standard Support, and adds 24/7 access to phone, email, and web-based interaction with our support team |
| • Premium Support: Premium Support adds the benefits of having a named account executive responsible for overseeing the support relationship, annual advisory sessions with Embarcadero product management staff, and priority case administration |
| Our international distributors are generally responsible for providing customer service and technical support |
| Our European subsidiary, Embarcadero Technologies Europe Ltd, based in Maidenhead, United Kingdom, provides English support for its customers from 9:00 a |
| Research and Development During fiscal years 2005, 2004, and 2003, research and development expenses were dlra16dtta2 million, dlra15dtta6 million, and dlra15dtta6 million respectively |
| These amounts represented 28dtta1prca, 27dtta8prca, and 30dtta0prca respectively, of our total revenues in each of those years |
| Our research and development efforts are focused on enhancing our existing products as well as developing new applications that enable organizations to manage their corporate data and the systems that support and house that data |
| Members of our research and development group have extensive experience in databases, database management software, design, performance management, and Internet technologies |
| We organize our research and development staff into discrete engineering teams responsible for specific products, for both new development and enhancements to existing products, in each of our product segments |
| These engineering teams are located in California, Colorado, and Ontario, Canada |
| We supplement our internal software development efforts by using outside contractors and/or purchasing technology when we believe that utilizing such outside resources will help us to complete discrete programming tasks more effectively or efficiently than we can accomplish internally |
| 4 ______________________________________________________________________ [27]Table of Contents Our future success depends largely upon our ability to enhance existing products and develop new solutions that reinforce our competitive position and increase our value proposition to customers |
| We have made and will continue to make financial and organizational investments in research and development |
| Product development input is obtained through customer feedback, by monitoring evolving user requirements, and by evaluating competing products |
| Our product management group is responsible for translating customer requirements and market opportunities into product development initiatives |
| Our engineering teams are in turn responsible for executing on these product development initiatives |
| Proprietary Rights We rely on copyright and trademark laws, trade secrets, confidentiality procedures, and contractual provisions to establish and protect our proprietary rights |
| We also enter into confidentiality agreements with employees and consultants and attempt to restrict access to proprietary information on a need-to-know basis |
| We license our software products primarily under shrink-wrap licenses delivered electronically with the software products |
| Shrink-wrap licenses are not negotiated with or signed by individual licensees and purport to take effect upon installation of the product |
| These measures afford only limited protection |
| Policing unauthorized use of our products is difficult |
| In addition, the laws of some foreign countries do not protect our proprietary rights as well as United States laws |
| We may have to enter into litigation to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others with respect to our rights |
| We are not aware of any case in which we are infringing on the proprietary rights of others |
| Competition The market for our products is highly competitive, dynamic, and subject to rapidly changing technology |
| We compete primarily against other providers of data and database management, data performance and availability, enterprise data design and modeling, and data movement technologies, which include Computer Associates, Quest Software, BMC Software, IBM Borland Software Corporation, Informatica Corporation, and other independent software vendors |
| Our database products also compete with products offered by the manufacturers of the database services with which they are compatible, including Oracle, Microsoft, Sybase, MySQL, and IBM Some of these competing products are provided at no charge to the database customers |
| We expect that companies such as Oracle, Microsoft, Sybase, and IBM will continue to develop and incorporate into their products applications which compete with our products and may take advantage of their substantial financial, technical, marketing, and distribution resources in those efforts |
| We presently compete on numerous factors, including product functionality and heterogeneity, reliability, ease-of-use, performance, scalability, time-to-market, customer support, and total cost of ownership |
| We believe that we currently compete favorably overall |
| However, the market for our products is dynamic and we may not compete successfully in the future with respect to one or more of these factors |
| Employees As of December 31, 2005, we had 288 employees, 126 of whom were engaged in research and development, 111 in sales and marketing, 23 in customer service and support, and 28 in general and administration |
| Our future performance depends largely on our continuing ability to attract, train and retain highly qualified technical, sales, service, marketing, and managerial personnel |
| None of our employees is represented by a collective bargaining agreement |
| We have not experienced any work stoppages and consider our relations with our employees to be good |
| Executive Officers Our executive officers as of March 3, 2006 are shown below Name Age Position Stephen R Wong 46 President, Chief Executive Officer and Chairman of the Board Michael Shahbazian 59 Senior Vice President and Chief Financial Officer Raj P Sabhlok 42 Senior Vice President of Operations Robert Lamvik 49 Senior Vice President of Sales 5 ______________________________________________________________________ [28]Table of Contents Stephen R Wong is one of our co-founders and has served as the Chairman of our board of directors since July 1993 |
| From July 1993 until October 1999, Mr |
| Wong served as our Chief Executive Officer and since June 2000, Mr |
| Wong has served as our President and Chief Executive Officer |
| Wong served as an associate, and subsequently as a partner, of Montgomery Medical Ventures, a venture capital firm, where he specialized in technology transfer and early stage investments |
| Wong holds a BA degree from Harvard College and an MBA degree from the Harvard Business School |
| From January 2003 to August 2005, Mr |
| Shahbazian was Senior Vice President and Chief Financial Officer of Niku Corporation |
| He also served as CFO of ANDA Networks from November 2000 to November 2002, Inventa Technologies from February 2000 to November 2000, and Walker Interactive prior to February 2000 |
| Shahbazian spent nearly 20 years with Amdahl Corporation in a variety of senior finance positions |
| Shahbazian holds a BS degree in Business from California State University, Fresno, and an MBA degree from the University of Southern California |
| Raj P Sabhlok has served as our Senior Vice President of Operations since October 2005 |
| Sabhlok was employed by BMC Software, Inc, an enterprise software company, where he served as the Director of Business Development from April 1997 |
| From February 1988 until February 1995, Mr |
| Sabhlok held a number of technical, marketing and sales management positions with The Santa Cruz Operation, Inc, a UNIX software development company |
| Sabhlok holds a BA degree in Mathematics from the University of California, Santa Cruz and an MBA degree from Duke University |
| Robert Lamvik has served as our Senior Vice President of Sales since February 2004 |
| Lamvik has over twenty-five years of experience in high technology sales leadership |
| He was formerly vice president of America field operations for Sun Microsystems Software Division including iPlanet, Java Enterprise System, and Solaris sales |
| He has also held management and executive roles at Advanced Micro Devices, the Santa Cruz Operation, and Okidata Corporation |
| He holds a BS degree in Mathematical Sciences from Oregon State University |
| Additional Information The address of our internet website is www |
| embarcadero |
| We make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings, and other periodic SEC reports, along with amendments to all of those reports, as soon as reasonably practicable after we file the reports with the SEC Item 1A Risk Factors In addition to other information in this report, the following factors should be considered carefully in evaluating the Company |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties that we are unaware of or currently deem immaterial may also become important factors that may harm our business |
| Our quarterly operating results may fluctuate in future periods, and, as a result, our stock price may fluctuate or decline |
| Our operating results have fluctuated from quarter to quarter |
| We believe that quarter-to-quarter comparisons of our historical results of operations are not indicative of our future performance |
| Our revenues and operating results may continue to vary significantly from quarter to quarter due to a number of factors, including the factors discussed below |
| Seasonal variations in orders for our products also contribute to fluctuations in our quarterly operating results |
| These fluctuations are likely to cause corresponding volatility in our stock price, particularly if our operating results vary from analysts’ expectations |
| Future changes in financial accounting standards may adversely affect our reported results of operations |
| A change in accounting standards can have a significant effect on our reported results |
| New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future |
| These new accounting pronouncements may adversely affect our reported financial results |
| 6 ______________________________________________________________________ [29]Table of Contents For example, currently we calculate employee stock-based compensation expenses using the intrinsic value method, and recorded approximately dlra1dtta6 million and dlra2dtta3 million in employee compensation expense in each of fiscal years 2005 and 2004 |
| To date, we have provided disclosure on pro forma net income and net income per share as if we had applied the fair value method of accounting only in the notes to our financial statements |
| Under Statement of Financial Accounting Standards Nodtta 123(R), “Share Based Payment” (“SFAS 123(R)”), we will be required, starting from our first quarter of fiscal year 2006, to calculate compensation expense related to all share-based awards and recognize the expense in our financial statements |
| We expect such compensation expenses to be significant and will cause our net income and net income per share to be significantly reduced |
| Increased costs associated with corporate governance compliance may significantly impact the results of our operation |
| Changing laws, regulations and standards relating to corporate governance, public disclosure and compliance practices, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for companies such as ours in understanding and complying with these laws, regulations and standards |
| As a result of this uncertainty and other factors, devoting the necessary resources to comply with evolving corporate governance and public disclosure standards has resulted in increased general and administrative expenses and a diversion of management time and attention to compliance activities |
| Our compliance costs in 2005 were lower than in 2004 as we were able to better control our costs in our second year of compliance |
| However, these costs could increase in the future |
| In addition, these developments may 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 such coverage |
| Moreover, we may not be able to comply with these more stringent rules and regulations on a timely basis |
| These developments could make it more difficult for us to attract and retain qualified members of our board of directors or qualified executive officers |
| Additionally, in fiscal year 2005 we have incurred dlra0dtta2 million of additional legal, accounting and consulting costs in connection with our Audit Committee investigation completed in January 2005 |
| As a result of the investigation, our results of operations for 2005 were adversely affected |
| In addition, we will continue to incur higher general and administrative expenses as we implement, test and refine our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| We are required to undertake an annual evaluation of our internal control over financial reporting (“ICFR”) that may identify internal control weaknesses requiring remediation, which could harm our reputation and confidence in our financial reporting |
| Sarbanes-Oxley imposes duties on us, our executives, and directors |
| We completed our fiscal year 2005 evaluation of the design, remediation and testing of effectiveness of our internal control over financial reporting required to comply with the management certification and attestation by our independent registered public accounting firm as required by Section 404 of Sarbanes-Oxley (“Section 404”) |
| As of December 31, 2004, we reported that our internal control over financial reporting was not effective and identified certain material weaknesses |
| During 2005, we took actions to remediate those weaknesses |
| While our assessment, testing and evaluation of the design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that as of December 31, 2005, our ICFR were effective, we cannot predict the outcome of our testing in future periods |
| If we conclude in future periods that our ICFR is not effective, we may be required to change our ICFR to remediate deficiencies, investors may lose confidence in the reliability of our financial statements, and we may be subject to investigation and/or sanctions by regulatory authorities |
| Also, if we identify areas of our ICFR that require improvement, we could incur additional expenses to implement enhanced processes and controls to address such issues |
| Any such events could adversely affect our financial results and/or may result in a negative reaction in the stock market |
| If sales of DBArtisan fall, our revenues and income may decline |
| A significant portion of our revenues is derived from sales of our DBArtisan product |
| For the year ended December 31, 2005, DBArtisan and DBArtisan add-on products accounted for more than 39prca of our license revenues |
| We expect that sales of DBArtisan will continue to represent a substantial portion of our license revenues for the foreseeable future |
| In addition, 7 ______________________________________________________________________ [30]Table of Contents many of our customers initiate a relationship with us by purchasing DBArtisan |
| If demand for DBArtisan declines due to competition, technological change or other factors, our revenues and income may decline significantly |
| If our products do not perform as expected, we may lose customers, our costs will increase and revenues may be delayed or lost |
| Computer software such as ours often contains undetected errors and may contain design flaws |
| Errors may be found in current versions, new versions, or enhancements of our products after we make commercial shipments |
| If our software contains undetected errors, performs unreliably, or if we otherwise fail to meet our customers’ expectations, we may suffer: • loss of revenues, market share or customers; • negative publicity and harm to our reputation; • diversion of research and development and management resources; • increased maintenance and warranty costs; • legal actions by customers against us; and • increased insurance costs |
| If we do not generate new business from our existing customers and add new customers from our new or existing products, we will not be able to sustain or increase our revenues |
| Our license arrangements generally do not provide for substantial ongoing license or maintenance payments |
| Therefore, our future revenue growth depends on our success in expanding our relationships with existing customers and attracting new customers |
| Our ability to expand our relationships with existing customers and attract new customers will depend on a variety of factors, including the performance, quality, breadth, and depth of our current and future products and maintenance |
| Our failure to expand relationships with existing customers or to add new customers would reduce our future license and maintenance revenues |
| In addition, if our existing customers do not renew their support contracts, our future maintenance revenues will be adversely affected |
| Our operating results would be harmed if the recovery of information technology spending does not continue |
| The markets into which we sell our products are cyclical and are subject to general economic conditions |
| The information technology market has generally improved since the second half of 2003 |
| However, economic conditions remain uncertain and this market may decline in the future |
| During the first quarter of 2005, we experienced a slowdown in sales closure rates in the United States that may have been Company specific or a result of macroeconomic changes |
| While our closure rates improved through the remainder of 2005, any renewed slowdown in the database market or in general economic conditions would likely result in a reduction in demand for our products and our results of operations would be harmed |
| If we are not able to attract and retain qualified personnel, our business will not be able to grow |
| Our success depends on the continued service of our executive officers and other key administrative, sales and marketing, research and development, and support personnel |
| None of our executive officers or key employees is bound by an employment agreement for any specific term, and we do not maintain any key person life insurance policies |
| We have added, and we continue to recruit, new personnel into our organizations |
| Our business will not be able to grow if we cannot continue to fill these positions and attract, retain, and motivate other qualified personnel |
| Competition for qualified employees remains intense and we may not be able to attract, assimilate, or retain highly qualified personnel in the future |
| There has been in the past and there may also be in the future a shortage of personnel that possess the technical background necessary to sell, support, and develop our products effectively |
| It has also become more difficult to recruit qualified financial personnel since the implementation of the new laws, regulations and standards relating to corporate governance, public disclosure and financial reporting |
| Our financial statements have been and could again be impacted by unauthorized and improper actions of our personnel |
| As we have experienced with our recent restatements, our financial statements can be adversely impacted by our employees’ errant or improper actions |
| For instance, revenue recognition depends on, among other criteria, the terms negotiated in our contracts with our customers |
| Our personnel may act outside of their authority and negotiate additional terms without our knowledge which could impact our ability to recognize revenue in a timely manner |
| For instance, in the event 8 ______________________________________________________________________ [31]Table of Contents that our sales personnel have negotiated terms that do not appear in the contract and of which we are unaware, whether the additional terms are written or oral, we could be prevented from recognizing revenue in accordance with our policy |
| Furthermore, depending on when we learn of unauthorized actions and the size of transactions involved, we may have to restate our financial statements for a previously reported period, which could seriously harm our business, operating results and financial condition |
| The expansion of our international operations exposes us to risks |
| We expect to continue to expand our international sales and research and development operations |
| As a result, we could face a number of risks from our expanding international operations: • staffing and managing foreign operations; • complying with increased financial accounting and reporting complexities, including implementing effective internal controls across international operations; • complying with foreign redundancy notification and severance payment obligations; • potentially adverse tax consequences; • the loss of revenues and net income resulting from currency fluctuations; • compliance with a wide variety of complex foreign laws and treaties; • the impact of war or terrorist activities; • reduced protection for intellectual property rights in some countries; • licenses, tariffs and other trade barriers; • longer sales and payment cycles; and • costs and difficulties of customizing products for foreign countries |
| Further expansion of our international operations may require significant management attention and financial resources and may place burdens on our management, administrative, operational and financial infrastructure |
| Our possible investments to establish facilities in other countries may not produce desired levels of revenues or profitability, which would negatively affect our stock price |
| We invest heavily in research and development with no guarantee of return from the investments that we make |
| We have invested significant resources in the development of new products |
| If our new products are not accepted in the marketplace, we may not achieve future revenue growth and may have limited return on the investments that we have made |
| In addition, we plan to continue to invest in research and development and could fail to achieve expected returns from future investments |
| An unfavorable government review of our tax returns or changes in our effective tax rates could adversely affect our operating results |
| Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions |
| Our tax filings are subject to review or audit by the Internal Revenue Service and state, local and foreign taxing authorities |
| We exercise judgment in determining our worldwide provision for income taxes and, in the ordinary course of our business, there may be transactions and calculations where the ultimate tax determination is uncertain |
| We are currently under Internal Revenue Service (the “IRS”) audit of our United States federal income tax return for the fiscal year ended 2003 |
| As of December 31, 2005, the IRS has issued only one proposed adjustments to the amounts reflected by us on our return for dlra88cmam000 for which we have already provided a reserve |
| However, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations |
| If the IRS audit results in assessment of additional taxes due, there exists the possibility of a material adverse impact on the results in operations of the period in which the matter is ultimately resolved or an unfavorable outcome becomes probable and reasonably estimable |
| Acquisitions of companies or technologies may result in disruptions to our business |
| In October 2005, we completed the acquisition of Ambeo, a privately-held company providing database auditing and activity monitoring products, as disclosed in Note 3 to the consolidated financial statements |
| We may make additional strategic acquisitions of companies, products, or technologies as necessary in order to implement our business strategy |
| If we are unable to successfully integrate Ambeo or other acquisitions with our existing operations, we may not receive the intended benefits of such acquisitions and the revenues and operating results of the combined company may decline |
| Any acquisition may temporarily disrupt our operations and divert management’s attention from day-to-day operations |
| 9 ______________________________________________________________________ [32]Table of Contents In addition, acquisitions may subject us to unanticipated liabilities or risks, including litigation and the costs and uncertainties related to legal proceedings |
| For example, we recently settled litigation related to our acquisition of Engineering Performance, Inc, in November 2000, incurring litigation settlement costs of approximately dlra573cmam000 in 2005 |
| While we have financed our acquisitions to date primarily through our working capital, we may incur debt or issue equity securities to finance future acquisitions |
| The issuance of equity securities for any acquisition could be substantially dilutive to our stockholders |
| In addition, our profitability may suffer due to acquisition-related expenses |
| Large sales of our products and maintenance involve a lengthy sales cycle, which could cause delays in recognizing revenue or the failure to obtain revenue |
| Our field sales focus on large sales of our products where the product packages are larger with higher starting prices and longer evaluation periods than our traditional products |
| These large sales typically involve sales cycles between six and twelve months |
| This lengthy sales cycle is due to the need to educate and convince prospective customers of the value of our products and to gain approval from more constituencies within a prospective account, including key management personnel |
| The timing of our revenues has become more difficult to forecast because of this lengthy sales cycle for large sales |
| Any delay in, or failure to complete, sales in a particular period would reduce our revenues in that period as well as in subsequent periods over which revenues for the sale may be recognized |
| If we were to experience a delay on one or more large orders, it could harm our ability to meet our forecasts for a given period |
| If our sales cycle unexpectedly lengthens in general or for one or more large sales, it could negatively affect the timing of our revenues and may cause our revenues and operating results to vary significantly from period to period |
| Our high fixed operating expenses might adversely affect our profitability if future revenue expectations are not met |
| The majority of our operating expenses consist of personnel and related expenses and facility related costs |
| These costs are relatively fixed in the short-term, and our operating decisions such as when to hire additional personnel and when to expand our facilities and infrastructure are based in large part on expectations about expected future revenues |
| If we hire personnel and enter into facilities contracts based on our expectations about future revenues, and then fail to meet those revenue expectations, we would likely have lower than expected earnings, which would negatively affect our stock price |
| If we are not able to enhance our existing products to adapt to rapid technological change, or if we introduce new products that do not achieve market acceptance, our revenues and earnings may suffer and we may experience loss of market share |
| The market for our products is characterized by rapid technological change, frequent product introductions and enhancements, uncertain product lifecycles, and changes in customer demands and industry standards |
| Our success depends on our ability to continue to: • enhance our current products; • introduce new products that keep pace with technological developments and market conditions; • satisfy increasingly complicated customer requirements; • integrate our products with multiple database platforms; and • modify our products as database platforms change |
| However, due to the nature of computing environments, new products and product enhancements could require longer development and testing periods than we currently anticipate |
| Moreover, if we develop new products that do not achieve market acceptance, we may not be able to recoup development and marketing expenses, which could harm our operating results |
| The introduction of new technologies and the emergence of new industry standards may render our existing products obsolete and unmarketable |
| Delays in the general availability of new releases or problems in the installation or implementation of new releases could harm our business and operating results |
| We may not be successful in developing and marketing, on a timely 10 ______________________________________________________________________ [33]Table of Contents and cost-effective basis, new products or new product enhancements that respond to technological change, evolving industry standards, or customer requirements |
| Our failure to do so would render our products obsolete and could harm our ability to compete |
| In addition, our products and product enhancements may not achieve market acceptance |
| International political instability may increase our cost of doing business and disrupt our business |
| Continued international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures, sustained military action in Afghanistan and Iraq, strained international relations with foreign governments and other international conflicts, may halt or hinder our ability to do business, may increase our costs, and may adversely affect our stock price |
| This continued instability may, for example, negatively impact the reliability and cost of transportation, negatively affect the desire of our employees and customers to travel, 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 |
| We may have future non-recurring charges in the event of goodwill impairment |
| We adopted SFAS Nodtta 142 on January 1, 2002, and, as a result, we ceased to amortize goodwill |
| We now test our goodwill for impairment on an annual basis or in the event of a significant change in our business |
| We performed our impairment test in September 2005 and determined that there had been no impairment to our goodwill |
| As of December 31, 2005, our goodwill balance was dlra13dtta9 million |
| In the future, if we determine that this goodwill has been impaired, we will be required to take a non-recurring charge to write down this asset, which would adversely affect our earnings and book value |
| We may lose market share and be required to reduce prices as a result of competition |
| The market for our products is highly competitive, dynamic, and subject to rapidly changing technology |
| Pricing pressure in the market has increased as competitors have lowered prices and engaged in more aggressive discounting |
| If such pricing pressure continues, it could have an adverse effect on our margins |
| We compete primarily against other providers of data and database management, data performance and availability, enterprise data design and modeling, and data movement technologies, which include Computer Associates, Quest Software, BMC Software, IBM Borland Software Corporation, Informatica Corporation, and other independent software vendors |
| Our products also compete with products offered by database software manufacturers, including Oracle, Microsoft, Sybase and IBM Some of these competing products are provided at no charge to their customers |
| We expect that companies such as Oracle, Microsoft, Sybase, and IBM will continue to develop and incorporate into their products applications which compete with our products and may take advantage of their substantial technical, financial, marketing and distribution resources in those efforts |
| We may not be able to compete effectively with those products or efforts, which could significantly harm our business and operating results |
| There has continued to be consolidation in our industry, such as IBM’s acquisition of Ascential Software |
| This and any future acquisitions may have the effect of improving the competitive positions of the acquired companies and weakening our competitive situation |
| To effectively compete as the industry consolidates, we may need to seek alliances with other companies in order to gain better acceptance of our products |
| We may not be able to enter into such alliances on terms favorable to us or at all |
| In addition, with our acquisition of SHC Ambeo Acquisition Corp |
| in 2005, we anticipate competing in the data security market |
| While industry analysts project the market for data security to grow rapidly, we anticipate that competition will be strong and that in addition to our traditional competitors, we likely see additional competition from new competitors with broad security expertise |
| If the market for strategic data management solutions grows, some of our competitors may increase their focus on offering software directly competitive with ours, whether by internal development, external development, or acquisition |
| Our competitors may also attempt to keep us from integrating our software with theirs, making it more difficult for our customers to adopt our software |
| If 11 ______________________________________________________________________ [34]Table of Contents such increased competition were to result in resistance to integration of our software with the software of these competitors, we may have difficulty entering markets where our competitors have strong market positions |
| Many of our competitors have longer operating histories, substantially greater financial, technical, marketing and other resources, and greater name recognition than we do |
| They also may be able to respond more quickly than we can to changes in technology or customer requirements |
| Competition could seriously impede our ability to sell additional products on acceptable terms |
| Our competitors may pursue the following actions: • develop and market new technologies that render our products obsolete, unmarketable or otherwise less competitive; • make strategic acquisitions or establish cooperative relationships among themselves or with other companies, thereby enhancing the functionality of their products; or • establish or strengthen cooperative relationships with channel or strategic partners which limit our ability to sell or to co-market products through these channels |
| Competitive pressures could reduce our market share, reduce customer orders, reduce gross margins, or require us to reduce our prices, any of which would harm our operating results |
| Our proprietary rights may be inadequately protected and infringement claims or independent development of competing technologies could harm our competitive position |
| We rely on copyright and trademark laws, trade secrets, confidentiality procedures, and contractual provisions to establish and protect our proprietary rights |
| Despite such precautions, unauthorized third parties may be able to copy aspects of our products or obtain and use information that we consider as proprietary |
| We license our software products primarily under shrink-wrap licenses delivered electronically with our software products |
| Shrink-wrap licenses are not negotiated with or signed by individual licensees and purport to take effect upon installation of the product or downloading of the product from the Internet |
| These measures afford only limited protection |
| Policing unauthorized use of our products is difficult and we are unable to determine the extent to which piracy of our software exists |
| In addition, the laws of some foreign countries do not protect our proprietary rights as well as the laws of the United States |
| We may have to enter into litigation to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others with respect to our rights |
| Litigation is generally very expensive and can divert the attention of management from daily operations |
| Accordingly, any intellectual property litigation could disrupt our operations and harm our operating results |
| Further, the cost we may need to incur in connection with the defense of such lawsuits, if significant, could harm our financial condition |
| We are not aware of any case in which we are infringing the proprietary rights of others |
| However, third parties may bring infringement claims against us |
| Any such claim is likely to be time consuming and costly to defend, could cause product delays and could force us to enter into unfavorable royalty or license agreements with third parties |
| A successful infringement claim against us could require us to enter into a license or royalty agreement with the claimant or develop alternative technology |
| However, we may not be able to negotiate favorable license or royalty agreements, if any, in connection with such claims and we may fail to develop alternative technology on a timely basis |
| Accordingly, a successful product infringement claim against us could harm our business and operating results |
| We are susceptible to business interruptions that could harm our business |
| Our operations are vulnerable to damage or interruption from computer viruses, human errors, natural disasters, telecommunications failures, intentional acts of vandalism, and other similar events |
| In particular, our corporate headquarters are located in San Francisco, which is known for its seismic activities |
| Although we have a disaster recovery plan for critical data and business applications, this does not provide assurance that we would not suffer a business interruption |
| A significant business interruption would result to losses or damages to our operation and harm our business |
| Our business interruption insurance may not be adequate to compensate us for losses that might occur, which would result in increased expenses and harm our operating results |
| 12 ______________________________________________________________________ [35]Table of Contents Certain persons have substantial control over us, which could impede stockholder approval of certain transactions |
| Our executive officers and directors, in the aggregate, beneficially held 24prca of our outstanding common stock as of December 31, 2005 |
| These stockholders, if acting together, can significantly influence all matters requiring approval by our stockholders, including the approval of equity compensation plans, the election of directors and the approval of mergers or other business combination transactions |
| We expect the price of our common stock to remain volatile, making it difficult for our stockholders to predict the return on their investment |
| Since our initial public offering, the market price of our common stock has fluctuated significantly in response to a number of factors, including: • market reactions to our announcement of the restatements of our financial statements for the years 2000, 2001, 2002 and 2003, the inability of the investing public to rely on our previously issued financial information for those years and the quarters ended March 31, June 30, and September 30, 2004 and 2003, and the delayed filing of the Form 10-K for 2004; • market reaction to our announcement of the delayed filing of our Form 10-Q for the quarter ended September 30, 2004, and the inability of the investing public to rely on our previously issued financial statements for the quarters ended March 31 and June 30, 2004; • changes in market valuation of software and technology companies; • quarterly variations in our operating results; • global and domestic economic and political conditions; • changes in financial estimates by securities analysts; • announcements that we or our competitors make related to significant contracts, acquisitions, capital commitments, strategic partnerships or product introductions or enhancements; • additions or departures of key personnel; • stock market price and volume fluctuations, which are particularly volatile among securities of software and Internet companies; and • sales of significant amounts of our common stock or other securities in the open market |
| Provisions of our charter and bylaws and Delaware law could deter takeover attempts that might be beneficial to our stockholders |
| Provisions of our amended and restated certificate of incorporation and bylaws as well as Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |
| We are subject to the provisions of Delaware law that restrict business combinations with interested stockholders, which may have the effect of inhibiting a non-negotiated merger or other business combinations |