UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No. 0-24607
Actuate Corporation
(Exact name of Registrant as specified in its charter)
Delaware 94-3193197
(State of incorporation) (I.R.S. Employer Identification No.)
701 Gateway Boulevard
South San Francisco, California 94080
(650) 837-2000
(Address, including zip code, and telephone
number, including area code, of Registrant's principal
executive offices)
______________
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Title of Class Outstanding as of June 30, 2001
-------------- --------------------------------
Common Stock, par value $.001 per share 59,966,877
Actuate Corporation
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000 ...................................................... 3
Condensed Consolidated Statements of Operations for the three months and
six months ended June 30, 2001 and 2000 ................................ 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and 2000 ................................................. 5
Notes to Condensed Consolidated Financial Statements ...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders .................. 27
Item 6. Exhibits and Reports on Form 8-K ..................................... 27
Signature ..................................................................... 28
2
Part I. Financial Information
Item 1. Financial Statements
ACTUATE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2001 2000 (1)
(unaudited)
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 34,681 $ 26,928
Accounts receivable, net .................................... 31,893 32,991
Other current assets ........................................ 4,071 2,630
--------- ---------
Total current assets ........................................... 70,645 62,549
Property and equipment, net .................................... 13,211 10,190
Goodwill and other purchased intangible assets, net ............ 36,364 24,193
Other assets ................................................... 1,513 1,390
--------- ---------
$ 121,733 $ 98,322
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loan .................................................. $ 700 $ --
Accounts payable ........................................... 7,133 4,254
Accrued compensation ....................................... 3,637 5,941
Other accrued liabilities .................................. 9,023 6,584
Deferred revenue ........................................... 22,919 22,108
Income tax payable ......................................... 1,841 425
--------- ---------
Total current liabilities ..................................... 45,253 39,312
--------- ---------
Long-term obligations ......................................... 1,789 2,033
--------- ---------
Stockholders' equity:
Common stock ............................................... 60 58
Additional paid-in capital ................................. 84,934 67,623
Deferred stock compensation ................................ (53) (81)
Cumulative translation adjustment .......................... 34 231
Accumulated deficit ........................................ (10,284) (10,854)
--------- ---------
Total stockholders' equity .............................. 74,691 56,977
--------- ---------
$ 121,733 $ 98,322
========= =========
(1) The condensed balance sheet at December 31, 2000 has been derived from
the audited consolidated financial statements at that date, but does not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
ACTUATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------------
2001 2000 2001 2000
------------ ----------- ----------- -------------
Revenues:
License fees ................................................ $ 20,286 $ 16,169 $ 44,045 $ 29,656
Services .................................................... 12,254 8,248 24,003 13,576
------------ ----------- ----------- -------------
Total revenues ................................................ 32,540 24,417 68,048 43,232
------------ ----------- ----------- -------------
Costs and expenses:
Cost of license fees ....................................... 541 334 1,160 755
Cost of services ........................................... 7,355 5,294 15,096 8,260
Sales and marketing ........................................ 15,188 10,856 31,446 19,563
Research and development ................................... 4,679 3,358 9,099 6,583
General and administrative ................................. 2,699 1,691 4,786 3,071
Amortization of goodwill and other purchased intangibles.... 2,406 2,061 4,467 3,027
Restructuring costs ........................................ 497 -- 497 --
------------ ----------- ----------- -------------
Total costs and expenses ................................ 33,365 23,594 66,551 41,259
------------ ----------- ----------- -------------
Income (loss) from operations ................................. (825) 823 1,497 1,973
Interest and other income, net ................................ 332 207 671 456
------------ ----------- ----------- -------------
Income (loss) before income taxes ............................. (493) 1,030 2,168 2,429
Provision for income taxes .................................... 600 406 1,598 665
------------ ----------- ----------- -------------
Net income (loss) ............................................. $ (1,093) $ 624 $ 570 $ 1,764
============ =========== =========== =============
Basic income (loss) per share ................................. $ (0.02) $ 0.01 $ 0.01 $ 0.03
============ =========== =========== =============
Shares used in basic per share calculation .................... 59,032 55,902 58,563 55,548
============ =========== =========== =============
Diluted income (loss) per share ............................... $ (0.02) $ 0.01 $ 0.01 $ 0.03
============ =========== =========== =============
Shares used in diluted per share calculation .................. 59,032 62,848 63,286 63,702
============ =========== =========== =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
ACTUATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Six Months Ended June 30,
-------------------------------
2001 2000
----------- ------------
Operating activities
Net income ................................................................ $ 570 $ 1,764
Adjustment to reconcile net income to net cash
provided by operating activities:
Amortization of deferred compensation .............................. 28 33
Amortization of goodwill and other purchased
intangibles ....................................................... 4,467 3,027
Depreciation ....................................................... 1,806 1,004
Changes in operating assets and liabilities:
Accounts receivable ........................................... 1,560 (3,466)
Other current assets .......................................... (1,421) (229)
Accounts payable .............................................. 1,042 833
Accrued compensation .......................................... (2,421) (1,013)
Other accrued liabilities ..................................... (1,499) 544
Deferred revenue .............................................. 811 6,876
Income taxes payable .......................................... 1,416 523
---------- ----------
Net cash provided by operating activities ................................. 6,359 9,896
---------- ----------
Investing activities
Purchases of property and equipment ....................................... (4,827) (7,605)
Proceeds from maturity of short-term investments .......................... -- 10,809
Acquisition of Tidestone Technologies, Inc., net of cash
assumed .................................................................. (138) --
Acquisition of Open Software Technology, LLC, net of
cash assumed ............................................................. -- (7,300)
Acquisition of EnterpriseSoft business .................................... -- (2,450)
Acquisition of shares of Actuate Japan .................................... -- (1,506)
Net change in other assets ................................................ (123) (1,234)
---------- ----------
Net cash used in investing activities ..................................... (5,088) (9,286)
---------- ----------
Financing activities
Proceeds from issuance of common stock .................................... 6,679 1,642
Payment of bank loan ...................................................... -- (250)
---------- ----------
Net cash provided by financing activities ................................. 6,679 1,392
---------- ----------
Net increase in cash and cash equivalents ................................. 7,950 2,002
Effect of foreign exchange rate changes on cash ........................... (197) (5)
Cash and cash equivalents at the beginning of the period .................. 26,928 6,604
---------- ----------
Cash and cash equivalents at the end of the period ........................ $ 34,681 $ 8,601
========== ==========
5
Non cash financing activities:
Common stock issued in connection with the acquisitions ...................... $ 10,634 $ 9,553
========== ========
Consideration payable in future in connection with the
acquisition of Open Software Technology, LLC ................................. $ -- $ 2,033
========== ========
Supplemental disclosure of cash flow information:
Interest paid ................................................................ $ 4 $ --
========== ========
Income taxes paid ............................................................ $ 299 $ 555
========== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
ACTUATE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements of
Actuate Corporation are unaudited, but include all normal recurring adjustments
which we believe to be necessary for the fair presentation of the financial
position, results of operations, and changes in cash flows for the periods
presented. The preparation of the financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Despite our best effort to establish good
faith estimates and assumptions, actual results may differ.
The interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 2000
as filed with the Securities and Exchange Commission on March 12, 2001. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Interim results of operations for the three and six months
ended June 30, 2001 are not necessarily indicative of operating results for the
full fiscal year.
In May 2001, we completed the acquisition of Tidestone Technologies, Inc.
("Tidestone"), a software technology company. The acquisition was accounted for
under the purchase method of accounting. As prescribed by generally accepted
accounting principles, the Condensed Consolidated Statements of Operations
include Tidestone's operating results from the date of acquisition.
Revenue Recognition
Revenue from license fees from sales of software products directly to end-
user customers or indirect channel partners is recognized as revenue after
execution of a license agreement or receipt of a definitive purchase order, and
shipment of the product, if no vendor obligations remain, there are no
uncertainties surrounding product acceptance, the license fees are fixed or
determinable, and collection of the license fee is considered probable. Our
products do not require significant customization. The majority of end user
license revenues are derived from end user customer orders for specific
individual products. These types of transactions are recognized as revenue
generally upon shipment of product, assuming that all other revenue recognition
criteria are met. Advance payments from end-users, in arrangements in which the
end user customer has the right to future unspecified products, are deferred and
recognized as revenue ratably over the estimated term of the period, typically
one year, during which the end-user is entitled to receive the products. ___ If
the license agreement contains extended payment terms that would indicate that
the fee is not fixed or determinable, revenue is recognized as the payments
become due, assuming that all other revenue recognition criteria are met.
License arrangements with enterprise application vendors, resellers and
distributors generally take the form of either (a) fixed price arrangements in
which the contracting entity has the right to the unlimited usage, unspecified
future products, and sublicensing of the licensed software for a specified
7
term and pursuant to which license fee revenue is deferred and recognized on a
straight-line basis over the term of the license agreement, (b) arrangements
pursuant to which a license fee is paid to us, which we recognize as revenue
when no further obligations remain, provided the fees are fixed or determinable
and collection of the resulting receivables is deemed probable or (c)
arrangements in which we recognize revenue based on the e.Business application
vendor's sell-through.
Service revenues are primarily comprised of revenue from maintenance
agreements, consulting and training fees. Revenue from maintenance agreements is
deferred and recognized on a straight-line basis as service revenue over the
life of the related agreement, which is typically one year. Service revenues
from consulting and training are recognized upon completion of the work to be
performed. When we provide a software license and the related maintenance for
one bundled price, the fair value of the maintenance, based on the price charged
for that element separately, is deferred and recognized ratably over the term of
the respective agreement.
Based upon our interpretation of current available guidance, we believe our
revenue recognition policies are in accordance with Statement of Position No.
97-2 "Software Revenue Recognition", as amended.
Net Income (Loss) Per Share
Basic net income (loss) per share has been computed using the weighted-
average number of shares of common stock outstanding during the period. Diluted
net income (loss) per share is computed using the weighted-average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of the shares issuable upon the exercise of
stock options (using the treasury stock method).
A reconciliation of shares used in the calculation of basic and diluted net
income (loss) per share follows (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Numerator:
Net income (loss) ................................. $ (1,093) $ 624 $ 570 $ 1,764
============ ============ ============ ============
Denominator:
Weighted-average common shares outstanding ........ 59,204 56,400 58,751 56,106
Weighted-average shares subject to repurchase ..... (172) (498) (188) (558)
------------ ------------ ------------ ------------
Denominator for basic income (loss) per share ..... 59,032 55,902 58,563 55,548
Weighted-average shares subject to repurchase ..... -- 498 188 558
Weighted-average employee stock options outstanding -- 6,448 4,535 7,596
------------ ------------ ------------ ------------
Denominator for diluted income (loss) per share .... 59,032 62,848 63,286 63,702
============ ============ ============ ============
Basic net income (loss) per share .................. $ (0.02) $ 0.01 $ 0.01 $ 0.03
============ ============ ============ ============
Diluted net income (loss) per share ................ $ (0.02) $ 0.01 $ 0.01 $ 0.03
============ ============ ============ ============
8
Comprehensive Income
Comprehensive income includes foreign currency translation gains and losses
and other unrealized gains and losses that have been previously excluded from
net income and reflected instead in equity. A summary of comprehensive income
follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2001 2000 2001 2000
----------- --------- ----------- -----------
Net income ........................................ $ (1,093) $ 624 $ 570 $ 1,764
(loss)
Unrealized gain (loss) on short-term investments .. -- (1) -- --
Foreign currency translation adjustment, net of tax
effect ........................................... (55) (20) (122) (5)
----------- --------- ----------- -----------
Comprehensive income (loss) ....................... $ (1,148) $ 603 $ 448 $ 1,759
=========== ========= =========== ===========
Accounting for Derivative Instruments
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. Our adoption of SFAS 133 on January 1, 2001 had no material effect on the
financial statements, as we currently do not utilize derivative instruments.
Recent Accounting Pronouncement
On June 29, 2001, the Financial Accounting Standards Board ("FASB")
concluded the voting process on its business combinations project and
unanimously voted in favor of two statements: Statement No. 141, "Business
Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). These Statements will change the accounting for business
combinations and goodwill. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interest will be prohibited. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. We are currently reviewing and assessing the impact of SFAS 141 and
142 on our financial statements.
2. Acquisition
On May 30, 2001, we acquired all of the outstanding stock of Tidestone, a
software technology company. The acquisition was accounted for using the
purchase method of accounting and accordingly, the purchased price was allocated
to the assets acquired and the liabilities assumed based on their estimated fair
values on the acquisition date. The results of operations of Tidestone are
included in our financial statements from the date of acquisition. The total
purchase price was $17.4 million, consisting of 857,594 shares of our common
stock with a fair market value of approximately $10.6 million, $6.7 million of
acquired liabilities and other acquisition-related expenses of $138,000. Of the
total purchase price, approximately $500,000 was allocated to tangible assets
acquired, and the remainder was allocated to intangible assets, which included
purchased technologies of $3.6 million, customer list of $2.0 million, assembled
workforce of $900,000, non-compete agreements of $900,000, trademark of
9
$700,000 and goodwill of $8.8 million. Goodwill and other intangibles arising
from the acquisition are being amortized on a straight-line basis over periods
not exceeding four years.
The following unaudited pro forma financial information assumes the
acquisition occurred at the beginning of the periods in which the acquisition
took place and, for comparative purposes, at the beginning of the immediately
preceding year. These results have been prepared for informational purposes only
and are not necessarily indicative of the operating results that would have
occurred had the acquisition been made as discussed above. In addition, they are
not intended to be a projection of future results (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------
2001 2000 2001 2000
----------- ------------ ---------- ----------
Revenues ................... $ 32,983 $ 25,885 $ 69,695 $ 45,616
Net (loss) ................. $ (4,353) $ (437) $ (3,800) $ (628)
Diluted net (loss) per share $ (0.07) $ (0.01) $ (0.06) $ (0.01)
3. Income Taxes
The provision for income taxes was calculated using the estimated annual
effective tax rate that takes into account unbenefited net operating losses in
foreign jurisdictions, research and development tax credits and the effect of
nondeductible charges relating to amortization of goodwill.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the
historical financial information and the notes thereto included in Item 1 of
this Quarterly Report on Form 10-Q and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on
Form 10-K for the year ended December 31, 2000 as filed with the Securities and
Exchange Commission on March 12, 2001.
The statements contained in this Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, including statements regarding Actuate's
expectations, beliefs, hopes, intentions, plans or strategies regarding the
future. All forward-looking statements in this Form 10-Q are based upon
information available to Actuate as of the date hereof, and Actuate assumes no
obligation to update any such forward-looking statements. Actual results could
differ materially from Actuate's current expectations. Factors that could cause
or contribute to such differences include, but are not limited to, the risks
discussed in the section titled "Risk Factors That May Affect Future Results" in
this Form 10-Q.
Overview
We are a leading provider of Information Delivery software products and
services for e.Business. Our e.Reporting software products enable organizations
to deliver high-value business information to the Internet for use by customers,
employees and partners.
We sell software products through two primary means: (i) directly to
end user customers through our direct sales force and (ii) through indirect
channel partners such as e.Business application vendors, resellers and
distributors. e.Business application vendors generally integrate our products
with their applications and either provide hosting services or resell them with
their products. Our other indirect channel partners resell our software products
to end user customers. Our revenues are derived primarily from license fees for
software products and, to a lesser extent, fees for services relating to such
products, including software maintenance and support, consulting and training.
In June 1999, we acquired all of the outstanding shares of Actuate Holding, B.V.
("BV"), the parent company of our distributors based in France, Germany and the
United Kingdom. In February 2000, we acquired all of the outstanding shares of
OST, a software consulting firm. In March 2000, we acquired all the assets of
EnterpriseSoft, a developer of Java software products. In April 2000, we
purchased additional shares of Actuate Japan from existing shareholders raising
our equity ownership of Actuate Japan to 67%. In May 2001, we acquired all of
the outstanding shares of Tidestone, a software technology company. The results
of operations of BV, OST, EnterpriseSoft, Actuate Japan and Tidestone, and the
fair value of assets acquired and liabilities assumed are included in the
consolidated financial statements from the date of acquisition or the date of
majority ownership, as applicable.
We were incorporated in California in November 1993 and reincorporated
in Delaware in July 1998. Our corporate headquarters are located at 701 Gateway
Boulevard, South San Francisco, California 94080 and our telephone number is
650-837-2000.
11
During the second quarter of 2001, we incurred a restructuring charge
of $497,000, consisting entirely of severance and other payroll related costs in
connection with the reduction of our worldwide workforce. We also incurred
$429,000 of costs associated with our idle facility during this quarter. The
idle facility charge was included in the condensed consolidated statements of
operations as general and administrative expense.
Results of Operations
The following table sets forth certain statement of operations data as
a percentage of total revenues for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2001 2000 2001 2000
---------- ------- -------- -------
Revenues:
License fees.............................................................. 62% 66% 65% 69%
Services.................................................................. 38 34 35 31
------- ------ ------- ------
Total revenues...................................................... 100 100 100 100
------- ------ ------- ------
Cost of revenues:
License fees.............................................................. 2 1 2 2
Services.................................................................. 23 22 22 19
------- ------ ------- ------
Total cost of revenues.............................................. 25 23 24 21
------- ------ ------- ------
Gross profit................................................................ 75 77 76 79
------- ------ ------- ------
Costs and expenses:
Sales and marketing...................................................... 47 44 46 45
Research and development................................................. 14 14 13 15
General and administrative............................................... 8 7 7 7
Amortization of goodwill and other purchased intangibles................. 8 7 7 7
Restructuring costs...................................................... 2 - 1 -
------- ------ ------- ------
Total costs and expenses............................................ 78 73 74 74
------- ------ ------- ------
Income (loss) from operations............................................... (3) 4 2 5
Interest and other income, net.............................................. 1 1 1 1
------- ------ ------- ------
Income (loss) before income taxes........................................... (2) 5 3 6
Provision for income taxes.................................................. 2 2 2 2
------- ------ ------- ------
Net income (loss)........................................................... (4)% 3% 1% 4%
======= ====== ======= ======
Revenues
Total revenues increased 33% from $24.4 million for the quarter ended June 30,
2000 to $32.5 million for the quarter ended June 30, 2001. Total revenues
increased 57% from $43.2 million for the six months ended June 30, 2000 to $68.0
million for the six months ended June 30, 2001. Sales outside of North America
were $7.0 million, or 22% of total revenues for the second quarter of 2001,
compared to
12
$3.1 million, or 13% of total revenues for the second quarter of 2000. For the
six months ended June 30, 2001, sales outside of North America were $15.7
million, or 23% of total revenues as compared to $5.2 million, or 12% of total
revenues for the six months ended June 30, 2000. Weak economic conditions in
North America and Europe have caused our customers and prospective customers to
significantly decrease spending on information technology. We currently expect
weak economic conditions and reduced information technology spending to continue
at least through the remainder of fiscal 2001. We currently anticipate that our
total revenues for the third quarter will be in the range of approximately $30.0
to 32.5 million.
License fees. Revenues from license fees increased 25% from $16.2 million for
the second quarter of 2000 to $20.3 million for the second quarter of 2001. For
the six months ended June 30, 2001, license fee revenues were $44.0 million, an
increase of 49% over license fee revenues of $29.7 million for the six months
ended June 30, 2000. The increase in license fee revenues was primarily due to
increased sales to new customers and follow-on sales to existing customers
resulting from the increased acceptance of our Information Delivery software
products and the addition of revenues from the Tidestone acquisition. As a
percentage of total revenues, license fee revenues decreased from 66% in the
second quarter of 2000 to 62% in the second quarter of 2001. For the six months
ended June 30, 2001, license fee revenues as a percentage of total revenues were
65% compared to 69% for the six months ended June 30, 2000.
Services. Service revenues increased 49% from $8.2 million for the second
quarter of 2000 to $12.3 million for the second quarter of 2001. For the six
months ended June 30, 2001, service revenues were $24.0 million, an increase of
77% over license revenue of $13.6 million for the six months ended June 30,
2000. The increase in service revenues was due to the increase in professional
services revenues related to increase in demand for our professional services,
and an increase in the installed base of customers receiving ongoing maintenance
and support. As a percentage of total revenues, service revenues increased from
34% in the second quarter of 2000 to 38% in the second quarter of 2001. For the
six months ended June 30, 2001, service revenues as a percentage of total
revenues were 35% compared to 31% for the six months ended June 30, 2000.
Cost of revenues
License fees. Cost of license fees consists primarily of production and
packaging costs, personnel and related costs, and facility costs. Cost of
license fees increased from $334,000, or 2% of revenues from license fees, for
the second quarter of 2000 to $541,000, or 3% of revenues from license fees, for
the second quarter of 2001. Cost of license fees increased from $755,000, or 3%
of revenues from license fees, for the six months ended June 30, 2000 to $1.2
million, or 3% of revenues from license fees for the six months ended June 30,
2001. The increases in absolute dollars were primarily due to fulfilling more
orders during the quarter and the six-month period. We expect our cost of
license fees as a percentage of revenues from license fees to be approximately
3% of revenues from license fees for the remainder of fiscal 2001.
Services. Cost of services consists primarily of personnel and related costs,
facilities costs incurred in providing software maintenance and support,
training and consulting services, as well as third-party costs incurred in
providing training and consulting services. Cost of services increased from $5.3
million, or 64% of service revenues, for the second quarter of 2000 to $7.4
million, or 60% of service revenues, for the second quarter of 2001. Cost of
services increased from $8.3 million, or 61% of service revenues, for the six
months ended June 30, 2000 to $15.1 million, or 63% of service revenues, for the
six months ended June 30, 2001. The increase in cost of services in absolute
dollars was
13
primarily due to the continued expansion of our customer support and
professional service organizations and to increased contracting with third-party
consultants to meet our customers' professional service needs. The marginal
improvement in cost of services as a percentage of service revenues for the
second quarter of 2001 was a result of a planned workforce reduction in North
America. However, we expect that cost of services will continue to increase in
both absolute dollars and as a percentage of service revenues in the future as
we continue to expand our customer support and professional services
organizations to meet customer demands for our services and to rely on third-
party consultants to provide professional services on our behalf, which has a
higher cost and lower margin than if we perform the services with our personnel.
Costs and Expenses
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, promotional expenses, travel and entertainment, and facility
costs. Sales and marketing expenses increased from $10.9 million, or 44% of
total revenues for the second quarter of 2000 to $15.2 million, or 47% of total
revenues for the second quarter of 2001. Sales and marketing expenses increased
from $19.6 million, or 45% of total revenues for the six months ended June 30,
2000 to $31.4 million, or 46% of total revenues for the six months ended June
30, 2001. The increase in both absolute dollars and as a percentage of total
revenues was primarily due to hiring additional sales and marketing personnel,
increased travel expenses associated with increased headcount, higher sales
commissions associated with increased revenues and increased marketing program
expenses. We completed a planned reduction of our North America sales and
marketing workforce during the second quarter of 2001 and we currently expect
our sales and marketing expenses in absolute dollars to be in the same range for
the remainder of the fiscal year.
Research and development. Research and development expenses are expensed as
incurred and consist primarily of personnel and related costs associated with
product development. Research and development expenses increased from $3.4
million, or 14% of total revenues for the second quarter of 2000 to $4.7
million, or 14% of total revenues for the second quarter of 2001. Research and
development expenses increased from $6.6 million, or 15% of total revenues for
the six months ended June 30, 2000 to $9.1 million, or 13% of total revenues for
the six months ended June 30, 2001. The increase in research and development
expenses in absolute dollars was primarily due to the hiring of additional
engineering personnel. The decrease as a percentage of total revenues for the
six-month period was due to revenues increasing at a faster rate than research
and development expenses. We anticipate that we will continue to devote
substantial resources to research and development and that these expenses will
increase in absolute dollars in future periods.
General and administrative. General and administrative expenses consist
primarily of personnel and related costs for finance, staffing, legal, human
resources, information systems and general management, as well as amortization
of deferred compensation related to certain stock option grants. General and
administrative expenses increased from $1.7 million, or 7% of total revenues for
the second quarter of 2000 to $2.7 million, or 8% of total revenues for the
second quarter of 2001. General and administrative expenses increased from $3.1
million, or 7% of total revenues for the six months ended June 30, 2000 to $4.8
million, or 7% of total revenues for the six months ended June 30, 2001. The
increase in general and administrative expenses in absolute dollars was
primarily due to increased personnel and related costs and the inclusion of idle
facility expenses in the amount of $429,000. We expect that general and
administrative expenses will increase in absolute dollars in future periods.
14
Amortization of goodwill and other purchased intangibles. In June 1999, we
acquired all of the outstanding stock of BV for cash. This acquisition was
accounted for as a purchase and we recognized $9.6 million of goodwill and other
intangible assets. In February 2000, we acquired all of the outstanding stock of
OST for cash and stock. This acquisition was also accounted for as a purchase
and we recognized $13.1 million of goodwill and other intangible assets. In
March 2000, we acquired all the assets of EnterpriseSoft for cash and stock and
recognized $8.7 million of goodwill and other intangible assets. In April 2000,
we purchased additional shares of Actuate Japan from existing shareholders
raising our equity ownership to 67%. We recognized $1.5 million of goodwill and
other intangibles as a result of consolidating Actuate Japan financial
statements as prescribed by generally accepted accounting principles. In May
2001, we acquired all of the outstanding stock of Tidestone for stock. The
acquisition was accounted for as a purchase and we recognized $16.9 million of
goodwill and other intangible assets. In the three and six-month periods ended
June 30, 2001, we recorded a charge of $2.4 million and $4.5 million,
respectively, for the amortization of goodwill and other purchased intangibles
relating to these acquisitions, as compared to $2.1 million and $3.0 million for
the three and six-month periods ended June 30, 2000, respectively. Goodwill and
other purchased intangibles arising from these acquisitions are being amortized
on a straight-line basis over periods not exceeding four years.
On June 29, 2001, the FASB unanimously voted in favor of SFAS 142, which changes
the accounting for goodwill from an amortization method to an impairment-only
approach. We are currently reviewing and assessing the impact of SFAS 142 on our
financial statements.
Restructuring Costs. Restructuring costs in the amount of $497,000 consist
entirely of severance and other payroll related costs that were incurred in
connection with a planned reduction of our worldwide workforce.
Interest and Other Income, Net
Interest and other income, net, are comprised primarily of interest
income earned by us on cash and short-term investments. Interest and other
income, net, for the three months ended June 30, 2001 were $332,000 as compared
with interest and other income, net of $207,000 for the three months ended June
30, 2000. For the six months ended June 30, 2001, interest and other income,
net, were $671,000 as compared with interest and other income, net of $456,000
for the six months ended June 30, 2000. The increase was due primarily to higher
cash and investment balances from which interest is earned.
Provision for Income Taxes
We recorded an income tax provision of $600,000 and $1.6 million in the
three and six-month periods ended June 30, 2001, respectively, and $406,000 and
$665,000 in the three and six-month periods ended June 30, 2000, respectively.
The increase in income tax provision from the same period of last fiscal year is
primarily due to the effect of nondeductible charges relating to amortization of
goodwill. The income tax provision recorded for the six months ended June 30,
2001 reflects the effect of nondeductible charges relating to amortization of
goodwill, unbenefited operating losses in foreign jurisdictions as well as
research and development tax credits.
Liquidity and Capital Resources
As of June 30, 2001, we had cash and cash equivalents of $34.7 million,
an increase of $7.8 million over the December 31, 2000 balance. Net cash
provided by operating activities was $6.4 million in the six months ended June
30, 2001, compared to $9.9 million in the six months ended June 30, 2000.
15
For the six-month period ended June 30, 2001, cash provided by operating
activities was primarily due to increases in net income as adjusted for
amortization and depreciation, accounts receivable, accounts payable and income
taxes payable that were offset by decreases in other current assets, accrued
compensations and other accrued liabilities. For the six months period ended
June 30, 2000, net cash provided by operating activities was primarily due to
increases in net income as adjusted for amortization and depreciation and
deferred revenues that were offset by decreases in accounts receivable and
accrued compensation.
Net cash used in investing activities was $5.1 million in the six
months ended June 30, 2001, compared to $9.3 million in the six months ended
June 30, 2000. For the six months ended June 30, 2001, net cash used in
investing activities was primarily due to purchases of property and equipment
and expenditures capitalized in connection with the acquisition of Tidestone.
For the six months ended June 30, 2000, net cash used in investing activities
was primarily due to purchases of property and equipment for our South San
Francisco facilities, the acquisitions of OST and the EnterpriseSoft business
and the purchase of additional shares in Actuate Japan, which was offset by
maturity and sale of our short-term investments.
Net cash provided by financing activities was $6.7 million and $1.4
million in the six months ended June 30, 2001 and 2000, respectively. During
both periods, net cash provided by financing activities was primarily due to the
proceeds derived from issuance of common stock under the employee stock purchase
and stock option plans.
We believe that current cash balances and any cash generated from
operations will be sufficient to meet our cash needs for working capital and
capital expenditures for at least the next twelve months. Thereafter, if cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or obtain credit facilities. The sale of
additional equity could result in additional dilution to our stockholders. A
portion of our cash may be used to acquire or invest in complementary
businesses, including the purchase of the remaining interest of our subsidiary
in Japan, or products or to obtain the right to use complementary technologies.
From time to time, in the ordinary course of business, we evaluate potential
acquisitions of such businesses, products or technologies.
16
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Investors should carefully consider the following risk factors and
warnings before making an investment decision. The risks described below are not
the only ones facing Actuate. Additional risks that we do not yet know of or
that we currently think are immaterial may also impair our business operations.
If any of the following risks actually occur, our business, operating results or
financial condition could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose all or part of
your investment. Investors should also refer to the other information set forth
in this Report on Form 10-K, including the financial statements and the notes
thereto.
OUR OPERATING RESULTS MAY BE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO
MEET OUR ESTIMATES OF QUARTERLY AND ANNUAL OPERATING RESULTS OR WE FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF
OUR STOCK MAY DECREASE SIGNIFICANTLY.
The susceptibility of our operating results to significant fluctuations
makes any prediction, including our estimates, of future operating results
unreliable. In addition, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and you should not rely on them
as indications of our future performance. Our operating results have in the
past, and may in the future, vary significantly due to factors such as the
following:
- demand for our products;
- the size and timing of significant orders for our products;
- a slow down or a decrease in spending on information technology by
our current and/or prospective customers
- sales cycles and sales performance of our indirect channel partners;
- changes in pricing policies by us or our competitors;
- changes in our level of operating expenses and our ability to control
costs;
- budgeting cycles of our customers;
- ability to make new products commercially available in a timely
manner;
- failure to successfully manage acquisitions made by us;
- defects in our products and other product quality problems;
- failure to meet hiring needs and unexpected personnel changes;
- the management and expansion of our international operations;
- changes in our sales incentive plans;
- continued successful relationships and the establishment of new
relationships with e.Business application vendors; and
- general domestic and international economic and political conditions.
Because our software products are typically shipped shortly after
orders are received, total revenues in any quarter are substantially dependent
on orders booked and shipped throughout that quarter. Furthermore, several
factors may require us, in accordance with accounting principles generally
accepted in the United States, to defer recognition of license fee revenue for a
significant period of time after entering into a license agreement, including:
17
- whether the license agreement includes both software products that
are then currently available and software products or other
enhancements that are still under development;
- whether the license agreement relates entirely or partly to then
currently undeliverable software products;
- whether the license agreement requires the performance of services
that may preclude revenue recognition until successful completion of
such services; and
- whether the license agreement includes acceptance criteria that may
preclude revenue recognition prior to customer acceptance.
In addition, we may in the future experience fluctuations in our gross
and operating margins due to changes in the mix of our domestic and
international revenues, changes in the mix of our direct sales and indirect
sales and changes in the mix of license revenues and service revenues, as well
as changes in the mix among the indirect channels through which our products are
offered.
A significant portion of our total revenues in any given quarter is
derived from existing customers. Our ability to achieve future revenue growth,
if any, will be substantially dependent upon our ability to increase revenues
from license fees and services from existing customers, to expand our sales
force and to increase the average size of our orders. To the extent that such
increases do not occur in a timely manner, our business, operating results and
financial condition would be harmed. Our expense levels and any plans for
expansion, including plans to increase our sales and marketing and research and
development efforts, are based in significant part on our expectations of future
revenues and are relatively fixed in the short-term. If revenues fall below our
expectations and we are unable to quickly reduce our spending in response, our
business, operating results and financial condition are likely to be harmed.
Based upon all of the factors described above, we have a limited
ability to forecast future revenues and expenses, and it is likely that in some
future quarter our operating results will be below our estimates or the
expectations of public market analysts and investors. In the event that
operating results are below our estimates or other expectations, the price of
our common stock could decline.
IF WE DO NOT SUCCESSFULLY EXPAND OUR DISTRIBUTION CHANNELS AND DEVELOP AND
MAINTAIN RELATIONSHIPS WITH E.BUSINESS APPLICATION VENDORS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as e.Business
application vendors, resellers and distributors. Our revenues from license fees
resulting from sales through indirect channel partners were approximately 46% in
the first six months of 2001, 45% in fiscal 2000 and 39% in fiscal 1999. Our
ability to achieve significant revenue growth in the future will depend in large
part on the success of our sales force and in further establishing and
maintaining relationships with e.Business application vendors, resellers and
distributors. In particular, a significant element of our strategy is to embed
our technology in products offered by e.Business application vendors for resale
or as a hosted application to such vendors' customers and end users. We intend
to seek additional distribution arrangements with other e.Business application
vendors to embed our technology in their products and expect that these
arrangements will continue to account for a significant portion of our revenues
in future periods. Our future success will depend on the ability of our indirect
channel partners to sell and support our products. If the sales and
implementation cycles of our indirect channel partners are lengthy or variable
or our e.Business application vendors experience difficulties embedding our
technology into their products or we fail to
18
train the sales and customer support personnel of such indirect channel partners
in a timely fashion, our business, operating results and financial condition
would be harmed.
Although we are currently investing, and plan to continue to invest,
significant resources to expand and develop relationships with e.Business
application vendors, we have at times experienced and continue to experience
difficulty in establishing and maintaining these relationships. If we are unable
to successfully expand these distribution channels and secure license agreements
with additional e.Business application vendors on commercially reasonable terms,
including significant up front payments of minimum license fees, and extend
existing license agreements with existing e.Business and application vendors on
commercially reasonable terms, our operating results would be harmed. Any
inability by us to maintain existing or establish new relationships with
indirect channel partners or, if such efforts are successful, a failure of our
revenues to increase correspondingly with expenses incurred in pursuing such
relationships, would harm our business, operating results and financial
condition.
IF THE MARKET FOR INFORMATION DELIVERY SOFTWARE DOES NOT GROW AS WE EXPECT OUR
BUSINESS WOULD BE SERIOUSLY HARMED.
The market for Information Delivery software products is still emerging
and we cannot be certain that it will continue to grow or that, even if the
market does grow, businesses will adopt our products. If the market for
Information Delivery software products fails to grow or grows more slowly than
we expect, our business, operating results and financial condition would be
harmed. To date, all of our revenues have been derived from licenses for our
e.Reporting software and related products and services, and we expect this to
continue for the foreseeable future. We have spent, and intend to continue to
spend, considerable resources educating potential customers and indirect channel
partners about Information Delivery and our products. However, if such
expenditures do not enable our products to achieve any significant degree of
market acceptance, our business, operating results and financial condition would
be harmed.
BECAUSE THE SALES CYCLES OF OUR PRODUCTS ARE LENGTHY AND VARIABLE, OUR QUARTERLY
RESULTS MAY FLUCTUATE.
The purchase of our products by our end user customers for deployment
within the customer's organization typically involves a significant commitment
of capital and other resources, and is therefore subject to delays that are
beyond our control. These delays can arise from a customer's internal procedures
to approve large capital expenditures, budgetary constraints and the testing and
acceptance of new technologies that affect key operations. The sales cycle for
an initial order of our products is typically 3 to 6 months and the sales cycle
associated with a follow-on large scale deployment of our products typically
extends for another 6 to 9 months or longer. We may experience longer sales
cycles in the future. Additionally, sales cycles for sales of our products to
e.Business application vendors tend to be longer, ranging from 6 to 24 months or
more and may involve convincing the vendor's entire organization that our
products are the appropriate Information Delivery software for the vendor's
application. This time period does not include the sales and implementation
cycles of such vendor's own products, which are typically significantly longer
than our sales and implementation cycles. Certain of our customers have in the
past, or may in the future, experience difficulty completing the initial
implementation of our products. Any difficulties or delays in the initial
implementation by our end user customers or our indirect channel partners could
cause such customers to reject our software or lead to the delay or non-receipt
of future orders for the large-scale deployment of our products.
19
IF WE FAIL TO EXPAND OUR INTERNATIONAL OPERATIONS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
During the first six months of 2001 and the fiscal years 2000 and 1999,
we derived 23%, 11% and 14% of our total revenues, respectively, from sales
outside the United States. Our ability to achieve revenue growth in the future
will depend in large part on our success in increasing revenues from
international sales. We intend to continue to invest significant resources to
expand our sales and support operations outside North America and to enter
additional international markets. In order to expand international sales, we
must establish additional foreign operations, expand our international channel
management and support organizations, hire additional personnel, recruit
additional international distributors and increase the productivity of existing
international distributors. If we are not successful in expanding international
operations in a timely and cost-effective manner, our business, operating
results and financial condition could be harmed.
WE MAY MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE NUMEROUS RISKS
The Information Delivery software business is highly competitive, and
as such, our growth is dependent upon market growth and our ability to enhance
our existing products, introduce new products on a timely basis and expand our
distribution channels and professional services organization. One of the ways we
have addressed and will continue to address these issues is through acquisitions
of other companies. Acquisitions involve numerous risks, including the
following:
- difficulties in integration of the operations, technologies, and
products of the acquired companies;
- the risk of diverting management's attention from normal daily
operations of the business;
- negative impact to our financial condition and results of operations
resulting from combining the acquired company's financial condition
and results of operations with our financial statements;
- risks of entering markets in which we have no or limited direct
prior experience; and
- the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently
risky, and we cannot assure you that any acquisition will be successful and will
not materially adversely affect our business, operating results or financial
condition. Failure to successfully integrate acquired companies and technologies
with us could harm our business and operating results.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
Our market is intensely competitive and characterized by rapidly
changing technology and evolving standards. Our competition comes in five
principal forms:
- direct competition from current or future software vendors such as
Business Objects S.A., Crystal Decisions (a division of Seagate
Technology, LLC.), and Brio Technology, Inc.;
20
- indirect competition from vendors of Business Intelligence tools such
as Cognos, Inc., MicroStrategy Incorporated and Microsoft that
integrate reporting functionality with such tools;
- indirect competition from e.Business software vendors such as SAP and
Oracle, to the extent they include Information Delivery functionality
in their applications;
- competition from other e.Business software vendors and Internet
development tool vendors; and
- competition from the information technology departments of current or
potential customers that may develop Information Delivery solutions
internally which may be cheaper and more customized than our products.
Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sales of their products than we may. Also, most current and
potential competitors, including companies such as Oracle and Microsoft, have
greater name recognition and the ability to leverage significant installed
customer bases. These companies could integrate competing Information Delivery
software with their products, resulting in a loss of market share for us. We
expect additional competition as other established and emerging companies enter
the Information Delivery software market and new products and technologies are
introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins, longer sales cycles and loss of market
share, any of which would harm our business, operating results and financial
condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the Information Delivery needs of
our prospective customers. Also our current or future indirect channel partners
may have established in the past, or may in the future, establish cooperative
relationships with our current or potential competitors, thereby limiting our
ability to sell our products through particular distribution channels. It is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. Such competition could harm
our ability to obtain revenues from license fees from new or existing customers
and service revenues from new or existing customers on terms favorable to us. If
we are unable to compete successfully against current and future competitors our
business, operating results and financial condition would be harmed.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS COULD BE SERIOUSLY HARMED.
The market for our products is characterized by rapid technological
changes, frequent new product introductions and enhancements, changing customer
demands and evolving industry standards. Any of these factors can render
existing products obsolete and unmarketable. We believe that our future success
will depend in large part on our ability to support current and future releases
of popular operating systems and computer programming languages, databases and
e.Business software applications, to timely develop new products that achieve
market acceptance, and to meet an expanding range of customer requirements. If
the announcement or introduction of new products by us or our competitors or any
change in industry standards causes customers to defer or cancel purchases of
existing products our business, operating results and financial condition would
be harmed. As a result of the complexities inherent in Information Delivery,
major new products and product enhancements can require long development and
testing periods. In addition, customers may delay their purchasing decisions in
anticipation of the general availability of new or enhanced versions of our
products. As a
21
result, significant delays in the general availability of such new releases or
significant problems in the installation or implementation of such new releases
could harm our business, operating results and financial condition. If we fail
to successfully develop, on a timely and cost effective basis, product
enhancements or new products that respond to technological change, evolving
industry standards or customer requirements or such new products and product
enhancements fail to achieve market acceptance, our business, operating results
and financial condition may be harmed.
IF WE DO NOT RELEASE NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS IN A
TIMELY MANNER OR IF SUCH NEW PRODUCTS AND ENHANCEMENTS FAIL TO ACHIEVE MARKET
ACCEPTANCE OUR BUSINESS COULD BE SERIOUSLY HARMED.
We believe that our future success will depend in large part on the success
of new products and enhancements that we make generally available. Prior to the
release of any new products or enhancements, the products must undergo a long
development and testing period. To date, the development and testing of new
products and enhancements have taken longer than expected. In the event the
development and testing of new products and enhancements continue to take longer
than expected, the release of new products and enhancements will be delayed. If
we fail to release new products and enhancements in a timely manner, our
business, operating results and financial condition may be harmed. In addition,
if such new products and enhancements do not achieve market acceptance our
business, operating results and financial condition may be harmed.
THERE ARE MANAGEMENT AND OPERATIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS THAT COULD SERIOUSLY HARM OUR BUSINESS.
We have subsidiaries in Australia, France, Canada, Germany, Japan,
Singapore, Switzerland and the United Kingdom whose primary business purpose is
the marketing, sale support and distribution of our software products. We have
very limited experience in the management of international operations. We also
have a number of distributors located worldwide. International operations are
subject to a number of risks, any of which could harm our business, operating
results and financial conditions. These risks include the following:
- political and economic instability.
- costs of localizing products for foreign countries;
- difficulty in hiring employees in foreign countries;
- trade laws and business practices favoring local competition;
- dependence on local vendors;
- compliance with multiple, conflicting and changing government laws and
regulations;
- longer sales and payment cycles;
- import and export restrictions and tariffs;
- difficulties in staffing and managing foreign operations;
- greater difficulty or delay in accounts receivable collection;
- foreign currency exchange rate fluctuations;
- multiple and conflicting tax laws and regulations; and
We believe that an increasing portion of our revenues and costs will be
denominated in foreign currencies. To the extent such denomination in foreign
currencies does occur, gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and
22
liabilities arising from international operations may contribute to fluctuations
in our results of operations. Although we may from time to time undertake
foreign exchange hedging transactions to cover a portion of our foreign currency
transaction exposure, we currently do not attempt to cover any foreign currency
exposure. If we are not successful in any future foreign exchange hedging
transactions that we engage in, our business, operating results and financial
condition could be harmed.
TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT OUR
INTERNAL SYSTEMS, PROCEDURES AND CONTROLS. IF WE ARE UNABLE TO DO SO
SUCCESSFULLY, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our expansion in the number of employees and the scope of operations over
the past few years has placed and will continue to place a significant strain on
our management, information systems and resources. Any acquisitions made by us
will also put a significant strain on our management, information systems and
resources. In addition, we expect that an expansion of our international
operations will lead to increased financial and administrative demands
associated with managing our international operations and managing an increasing
number of relationships with foreign partners and customers and expanded
treasury functions to manage foreign currency risks. Our future operating
results will also depend on our ability to further develop indirect channels and
expand our support organization to accommodate growth in our installed base. If
we fail to manage our expansion effectively, our business, operating results and
financial condition would be harmed.
OUR INABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL IN THE FUTURE
WOULD SERIOUSLY HARM OUR BUSINESS.
From January 1, 2000 through June 30, 2001, we increased our headcount from
287 to 648 full-time employees. Even though we reduced our North America
workforce in the second quarter of 2001, we currently expect to increase the
number of employees during the second half of 2001. In particular, we currently
plan to expand the number of employees in our international operations. Our
success depends to a significant degree upon the efforts of certain key
management, sales, marketing, customer support and research and development
personnel. We believe that our future success will depend in large part upon our
continuing ability to attract and retain highly skilled managerial, sales,
marketing, customer support and research and development personnel. Like other
software companies, we face intense competition for such personnel, and we have
experienced and will continue to experience difficulty in recruiting and
retaining qualified personnel. This is particularly true in the San Francisco
Bay Area, where the employment market for qualified sales, marketing, customer
support and research and development personnel continues to be competitive in
spite of recently announced workforce reduction in the region.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers and other key engineering, sales, marketing and customer support
personnel. None of our officers or key employees is bound by an employment
agreement for any specific term. If we lose the service of one or more of our
key employees, or if one or more of our executive officers or key employees
decide to join a competitor or otherwise compete directly or indirectly with us,
this could have a significant adverse effect on our business.
23
THERE ARE RISKS ASSOCIATED WITH THE SOFTWARE INDUSTRY
The software industry has historically experienced significant periodic
downturns, often in connection with, or in anticipation of, declines in general
economic conditions during which management information systems budgets often
decrease. Such a change in economic conditions could result in a slowdown of the
purchase of Internet based software products. If this occurs, our business,
operating results and financial condition may in the future reflect substantial
fluctuations from period to period as a consequence of buying patterns and
general economic conditions in the software industry.
IF OUR PRODUCT CONTAINS MATERIAL DEFECTS, OUR BUSINESS COULD BE SERIOUSLY
HARMED.
Software products as complex as those offered by us often contain errors or
defects, particularly when first introduced, when new versions or enhancements
are released and when configured to individual customer computing systems. We
currently have known errors and defects in our products. Despite testing
conducted by us, if additional defects and errors are found in current versions,
new versions or enhancements of our products after commencement of commercial
shipment, this could result in the loss of revenues or a delay in market
acceptance. The occurrence of any of these events could seriously harm our
business, operating results and financial condition.
IF A SUCCESSFUL PRODUCT LIABILITY CLAIM IS MADE AGAINST US, OUR BUSINESS WOULD
BE SERIOUSLY HARMED.
Although license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims, it is
possible that such limitation of liability provisions may not be effective as a
result of existing or future laws or unfavorable judicial decisions. We have not
experienced any product liability claims to date. However, the sale and support
of our products may entail the risk of such claims, which are likely to be
substantial in light of the use of our products in business-critical
applications. A product liability claim brought against us could seriously harm
our business, operating results and financial condition.
IF THE PROTECTION OF OUR PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS COULD BE
SERIOUSLY HARMED.
We have two issued and two pending U.S. patents and we rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our proprietary technology. For
example, we license our software pursuant to shrink-wrap or signed license
agreements, which impose certain restrictions on licensees' ability to utilize
the software. In addition, we seek to avoid disclosure of our intellectual
property, including requiring those persons with access to our proprietary
information to execute confidentiality agreements with us and restricting access
to our source code. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of many countries do not protect our proprietary
rights to as great an extent as do the
24
laws of the United States. If our means of protecting our proprietary rights is
not adequate or our competitors independently develop similar technology, our
business could be seriously harmed.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS.
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but we cannot be certain that third parties
will not claim infringement by us with respect to current or future products. We
expect Information Delivery software product developers will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time-
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require us to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all. A successful claim of
product infringement against us and our failure or inability to license the
infringed or similar technology could harm our business, operating results and
financial condition.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR STOCKHOLDERS.
The market price of shares of our common stock has been and is likely to
continue to be highly volatile and may be significantly affected by factors such
as the following:
- changes in the economic conditions in the United States and abroad;
- actual or anticipated fluctuations in our operating results;
- announcements of technological innovations;
- new products or new contracts announced by us or our competitors;
- developments with respect to copyrights or proprietary rights;
- price and volume fluctuations in the stock market
- conditions and trends in the software and other technology
industries;
- changes in corporate purchasing of e.Business application software;
- the announcement of mergers or acquisitions;
- adoption of new accounting standards affecting the software industry;
- changes in financial estimates by securities analysts; and
- the purchase or sale of our common stock by "day traders".
In addition, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against such company. If we are involved in such litigation, it
could result in substantial costs and a diversion of management's attention and
resources and could harm our business, operating results and financial
condition.
CERTAIN OF OUR CHARTER PROVISIONS AND DELAWARE LAW, MAY PREVENT OR DETER A
CHANGE IN CONTROL OF ACTUATE.
Actuate's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated ("Bylaws"),
contain certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of Actuate or unsolicited
25
acquisition proposals that a stockholder might consider favorable, including
provisions authorizing the issuance of "blank check" preferred stock and
eliminating the ability of stockholders to act by written consent. In addition,
certain provisions of Delaware law and our stock option plans may also have the
effect of discouraging, delaying or preventing a change in control of Actuate or
unsolicited acquisition proposals. The anti-takeover effect of these provisions
may also have an adverse effect on the public trading price of our common stock.
26
Part II. Other Information
Item 1. Legal Proceedings
We are not involved in any legal proceedings that are material to our
business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Stockholders held on May 30, 2001, our
stockholders approved the following items:
1. The election of the following individuals as directors of the Company.
Authority
For Withheld
--- --------
Nicolas C. Nierenberg...................... 50,493,375 415,783
Peter I. Cittadini......................... 50,677,235 231,923
George B. Beitzel.......................... 48,563,094 2,346,064
Kenneth E. Marshall........................ 50,675,840 233,318
Arthur C. Patterson........................ 39,487,746 11,421,412
Steven D. Whiteman......................... 50,346,194 562,964
2. The ratification of the appointment of Ernst & Young LLP, Independent
Auditors as the Company's independent public accountants for the
fiscal year ending December 31, 2001.
For: 50,857,458 Against: 31,664 Abstain: 20,036
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger and Reorganization among Actuate
Corporation, TT Acquisition Corp., Tidestone Technologies, Inc.
and Michael J. Gassman, as Stockholders' Representative dated May
1, 2001
(b) Reports on Form 8-K:
None.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 3, 2001.
Actuate Corporation
(Registrant)
By: /s/ DANIEL A. GAUDREAU
______________________________________
Daniel A. Gaudreau
Chief Financial Officer, Senior Vice
President of Finance and Administration
(Principal Financial and Accounting
Officer)
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ACTUATE CORPORATION
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
- --------- -------------
2.1 Agreement and Plan of Merger and Reorganization among
Actuate Corporation, TT Acquisition Corp., Tidestone
Technologies, Inc. and Michael J. Gassman, as Stockholders'
Representative dated May 1, 2001
29