================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24607
Actuate Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-3193197
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Gateway Boulevard
South San Francisco, California 94080
(Address of principal executive offices)
-----------------------------
(650) 837-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of each class)
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes |X| No |_|
(2) Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing price as reported on the Nasdaq Stock Market as of
February 29, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $874,667,908. Shares of
common stock held by each executive officer and director and by each person who
is known by the registrant to own 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. Share
ownership information of certain persons known by the Company to own greater
than 5% of the outstanding common stock for purposes of the preceding
calculation is based solely on information on Schedule 13G filed with the
Commission. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of February 29, 2000 there were 27,800,406 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to specified
portions of the registrant's definitive Proxy Statement to be issued in
conjunction with the Registrant's 2000 Annual Meeting of Stockholders, which is
expected to be filed not later than 120 days after the Registrant's fiscal year
ended December 31, 1999.
================================================================================
ACTUATE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
december 31, 1999
TABLE OF CONTENTS
Page
PART I.........................................................................1
Item 1. Business..........................................................1
Item 2. Properties.......................................................16
Item 3. Legal Proceedings................................................16
Item 4. Submission of Matters to a Vote of the Security Holders..........16
PART II.......................................................................17
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................17
Item 6. Selected Consolidated Financial Data.............................17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......24
Item 8. Financial Statements and Supplementary Data......................25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................25
PART III......................................................................25
Item 10. Directors and Executive Officers of the Registrant...............25
Item 11. Executive Compensation...........................................25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................25
Item 13. Certain Relationships and Related Transactions...................25
PART IV.......................................................................26
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................26
SIGNATURES....................................................................28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this report on Form 10-K under "Business," "Risk
Factors That May Affect Future Results," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere constitute
forward-looking statements within the meaning of Section 21E of the Securities
and Exchange Act of 1934. Forward-looking statements include statements
regarding Actuate's expectations, beliefs, hopes, intentions or strategies
regarding the future. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, levels of
activity, performance, or achievement to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. Such factors include, among other things,
those listed under "Risk Factors That May Affect Future Results" and elsewhere
in this Report on Form 10-K. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance, or achievements. Moreover, neither we
nor any other person assumes responsibility for the accuracy and completeness of
such statements. We are under no duty to update any of the forward-looking
statements contained in the "Letter to Stockholders" in the Annual Report or in
this Report on Form 10-K after the date hereof or to conform such statements to
actual results.
PART I
ITEM 1. BUSINESS
Overview
Actuate Corporation is a leading provider of e.Reporting solutions for
e.Business. Our e.Reporting Suite 4 allows organizations to publish high-value
business information on e.Business Web sites for use by customers, partners and
employees. e.Reporting enables a company to enhance its e.Business Web site,
beyond brochureware and transaction capabilities, with post-transaction content
such as stock portfolio reports, client statements and performance metrics,
thereby maximizing the value of corporate information and creating a more loyal
customer base. Our e.Reporting Suite 4 is a scalable, dynamic Web data
publishing platform that can be seamlessly integrated into any e.Business Web
site. Our e.Reporting system's server-centric architecture provides the building
blocks for an e.Business reporting environment of any size. Our solution's open
environment allows developers to create reports from virtually any data source
and in virtually any format required by an e.Business. Our products have been
adopted in a wide variety of industries, including financial services,
telecommunications, technology, health care and others and by a wide variety of
organizations including Fortune 1000 companies, e.Business application vendors
and dot-com start-ups. We sell our products in the United States primarily
through our direct sales force. Outside the United States, we sell our products
through our direct sales force in the countries in which we have an office and
through distributors.
Industry Background
The emergence and acceptance of the Internet and the World Wide Web has
fundamentally changed the way that consumers and businesses communicate, obtain
information, purchase goods and transact business. As the Internet has become
more accessible, functional and widely used, it has emerged as a primary
business channel alongside the telephone, paper-based communication and
face-to-face interaction. Businesses are increasingly using the Web as both a
marketing tool and distribution channel to communicate, conduct business and
strengthen relationships with customers, partners and employees.
The growth in the number of Internet users, as well as the open nature of
the Internet, has led many businesses to seek new ways to take advantage of this
global platform. The earliest business use of the Internet was the creation of
informational Web sites, which typically involved merely reformatting existing
marketing materials to create online brochures. This simple use of the Internet
to present static information was quickly supplanted by the first generation of
electronic commerce businesses.
The introduction of new technology enabled businesses to create Web sites
for online publishing, which were financed by advertising, and electronic
catalog businesses where hard goods such as books or computers could
1
be sold. These e.Businesses were primarily focused on sales of products to
consumers and quickly developed transactional infrastructures to allow consumers
to purchase products on-line. In addition, these first generation e.Businesses
were based on traditional, physical world business models and were
differentiated only by wider selection and lower prices.
The next generation of e.Business models is focusing on business to business
sales. These types of Internet transactions are often complex involving
purchasing goods and services across large organizations. Buyers can purchase
directly with on-line merchants or enter marketplaces where they can determine
pricing and availability of products from a large number of vendors. Much more
sophisticated on-line transactional systems have been introduced to facilitate
these more complex e.Business transactions.
As e.Businesses complete the transactional infrastructure to support the
vast amount of business to business transactions that will be conducted on-line,
they are seeking new Internet commerce solutions that will enable them to
develop, maintain and leverage relationships with customers and affiliates as
well as leverage the value of their Internet investment. An Internet commerce
solution that can allow a company to provide high-value structured business
content to customers, suppliers and employees on an e.Business Web site is
needed by all e.Businesses. Such a solution would publish, via the Web, all
types of critical business data relating to the operation of a business to
business Web site. The information provided by this solution must be seamlessly
integrated into the e.Business Web site, be personalized for the user of the
information and must be robust and scalable to gather all the necessary business
data and make it accessible to tens of thousands of users.
The Actuate Solution
The Actuate e.Reporting Suite 4 is an Internet commerce application that
gives an e.Business the ability to publish high-value structured business
information and deliver it as a seamlessly integrated component of any
e.Business Web site. Our e.Reporting solution can provide any type of dynamic,
personalized e.Report such as:
o Financial Statements
o Performance Metrics
o Invoices
o Sales Reports
Our e.Reporting solution allows an e.Business owner to publish structured
business content on any e.Business Web site. This gives the e.Business'
customers, suppliers and employees better access to key on-time information,
which allows them to make better decisions and allows the e.Business owner to
strengthen relationships and customer loyalty.
Our e.Reporting Suite 4 contains the following attributes:
o Design compelling content rapidly. Our open environment allows developers
to build any type of e.Report from any data source, in any format using
any calculation. Support for DHTML allows developers to design rich
interactive content without the need for a plug-in. Our e.Reporting
solution is based on an object-oriented architecture that is designed to
give developers a complete visual environment for structuring, compiling,
viewing and debugging sophisticated report designs. Our component-based
architecture enables developers to build e.Reports by dragging and
dropping standard components that can be customized and stored in
libraries for reuse.
o Integrate with any Web site. Architected specifically to leverage the
functionality of the Internet, our e.Reporting solution is designed to be
seamlessly integrated into an e.Business Web site. Without the need for
training, critical business information becomes accessible to an
e.Business' customers, suppliers and employees.
2
o Scale to tens of thousands of users. Our e.Reporting server is highly
scalable and can deliver e.Reports at a rate of 1,000,000 hits per day per
CPU. Our solution is designed to meet the Web data publishing needs of an
e.Business as the amount of data published on its e.Business Web site and
the populations of users accessing that data grows.
o Snap into Web/IT infrastructure. Our products support widely used
operating systems, Web servers and databases. Our Open Server permits the
management of many types of existing non-Actuate reports. Our products
also incorporate advanced technology, critical for Internet commerce
applications, such as page level security and XML.
Strategy
Our strategy is to be the leading provider of e.Reporting solutions. Key
elements of our strategy include:
Expand Market Leadership Position through Strategic Relationships. We
believe that we have established a leading position in the emerging market for
e.Reporting. To accelerate the adoption of the Actuate e.Reporting Suite 4 as
the standard Web data publishing solution for e.Business Web sites, we have
established strategic relationships with e.Business application vendors,
consulting firms, systems integrators and development partners. Our strategic
technology and distribution partners include Agile Software, Ariba, Aspect
Development, Cambridge Technology Partners, KPMG, Sun-Netscape Alliance,
PeopleSoft, PricewaterhouseCoopers, Siebel and Silknet Software. We intend to
further develop our existing strategic relationships and enter into new
partnerships to expand our market presence and leadership.
Extend Technology Leadership. Since inception, we have focused our
research and development efforts on developing core technologies that address
the requirements of e.Reporting. Our products integrate a number of advanced
technologies, including a patent pending method of providing page level security
in a report, advanced viewing technology incorporating Java, DHTML and XML, a
patented method of storing report objects, a multi-tier architecture and Web
access and delivery technology. In addition, we have in the past rapidly
incorporated new technology into our product offerings. We believe we are a
leader in e.Reporting technology and we intend to extend this leadership
position by continuing to devote significant resources to research and
development efforts, and by acquiring and integrating complementary
technologies.
Broaden Distribution Channels. To date, we have sold our products
primarily through our direct sales force located in the United States and we
have sold worldwide through foreign subsidiaries, e.Business application
vendors, resellers and distributors. We intend to expand our end user and
e.Business application vendor direct sales forces and tele-sales capability. In
addition, we intend to continue to leverage and grow our existing network of
e.Business application vendors, resellers and distributors and expand our
indirect distribution channel worldwide.
Leverage e.Services Capabilities. We have established successful
relationships with our clients by serving as an advisor in developing and
deploying e.Reporting applications. We are extending our direct e.Services
capabilities to provide an expanded set of services to address such areas as Web
site e.Reporting strategy, project management and application development. In
addition, we offer similar high-quality professional services capabilities
through third-party alliances and are currently focused on the development of
relationships with Global/National systems integrators. By offering our clients
a full range of e.Services on a global basis, we believe we can broaden market
awareness about the advantages of our e.Reporting solutions and create
opportunities to sell new or enhanced products to clients.
Increase International Presence. While to date our international sales
have been limited, we plan to increase our international presence. Outside the
United States, we have established subsidiaries in Australia, France, Germany
and the United Kingdom and distributor relationships throughout Europe,
Asia/Pacific and South America and Africa. We have localized versions of our
products in French, German, and Japanese. We intend to expand our international
sales capabilities by expanding our distribution channels worldwide and by
continuing the localization of our products in selected markets.
3
Products and Technology
The Actuate e.Reporting Suite 4 is a fully integrated, Web based reporting
solution that provides an organization with the ability to publish structured
data seamlessly within an e.Business Web site. Our e.Reporting solution is
comprised of a suite of products that are licensed by customers to allow the
viewing, deployment and development of e.Reports. In the case of direct sales to
end user customers, our client products are typically priced on a per user basis
and the e.Reporting Server is priced on a per CPU basis. Indirect sales are
usually either fixed price, unlimited usage arrangements or arrangements where
royalties are paid to us based on sell through to end-users. Our e.Reporting
solution includes the following products that allow organizations to bring
together all their business information into one resource that can publish such
information on any e.Business Web site.
The following table sets forth the primary products that comprise the
Actuate e.Reporting Suite 4:
Actuate Products Product Description
- -------------------------- --------------------------------------------------
Actuate e.Reporting Server Server that provides sophisticated distribution
(standard and advanced and management infrastructure, scalability,
versions) security, and snap-in integration. Also provides
the foundation for users to efficiently deploy
dynamic, structured e.Reports to an e.Business
Web site.
Actuate Developer Provides a comprehensive, object-oriented
Workbench environment for developers to create e.Reports
rapidly and maintain them easily using fewer
resources. Allows for streamlined e.Report
development and maintenance and provides smooth
integration into e.Business Web sites.
Actuate e.Report Designer Wizard driven development tool utilized by power
users to rapidly design e.Reports
Sales
We sell our 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. Our products are used by customers in a wide variety of
industries, including financial services, telecommunications, technology and
health care and by a wide variety of organizations including Fortune 1000
companies and dot-com start-ups.
The direct sales process to end user customers involves the generation of
sales leads through Web based marketing, direct mail, seminars and
telemarketing. Our field sales force typically conducts demonstrations and
presentations of our products to developers and management at customer sites as
part of the direct sales effort. We have a separate sales force that addresses
the e.Business application vendor market. These vendors integrate our products
with their applications and either resell or provide them in hosted environment
to their customers. The e.Business application vendor's end user customer is
licensed to use our products solely in conjunction with the vendor's application
with which the Actuate e.Reporting solution is integrated. We offer an upgrade
license to such end user customers, which permits them to create reports outside
the scope of the particular vendor application. eBusiness application vendors
provide the first level of post-sales support to their customers. We have also
utilized a limited number of resellers which re-market our products to their
customer base. Resellers are offered discounts on our products and sell a full
use license of the product. Our resellers do not provide post-sales support. Our
ability to achieve revenue growth in the future will depend in large part on our
success in expanding our direct sales force and in further establishing and
maintaining relationships with e.Business application vendors, distributors and
resellers.
4
International Operations
We also sell our products outside the United States through wholly-owned
subsidiaries located in Australia, France, Germany and the United Kingdom and
through numerous other distributors located in Europe, Asia/Pacific, South
America and Africa. International sales accounted for 14% and 6% of our revenue
in 1999 and 1998, respectively. Our international subsidiaries and distributors
perform some or all of the following functions: sales and marketing, systems
integration, software development, and ongoing consulting, training and customer
support. In exchange for providing such services, we offer our distributors
discounts on products and services. 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 the United States 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.
We have an agreement with our distributor operating in Japan that could
result in us acquiring this distributor. Under the terms of this agreement, we
have the right to acquire from the stockholders of the Japanese distributor and
such stockholders have the right to have us acquire from them, the outstanding
capital stock of the distributor operating in Japan. The price to be paid by us
for such stock is set forth in the agreement. In 1999 we acquired an additional
8.3% ownership interest in the distributor and currently own 16.7% of the
entity. There are certain risks associated with our potential acquisition of our
distributor operating in Japan, including diversion of management attention,
integration costs, the coordination of sales and marketing efforts and the
adverse accounting treatment of such an acquisition.
e.Services
Our e.Services organization provides high value "implementation solutions"
consulting services to customers developing and deploying an e.Reporting
solution with our products. These services include methodology, training,
application integration and performance evaluation. We also actively recruit and
train third party consulting firms to provide training and implementation
services for our products. Some of these consulting firms include Cambridge
Technology Partners, PricewaterhouseCoopers, KPMG, Enterprise Reporting Group,
Computer Task Group, Brightstar, NetBase Computing, and Benchmark Technical
Services. Due to the critical nature of e.Reporting, we believe that our
e.Services group and relationships with our consulting partners play a key role
in facilitating initial license sales and enabling customers to successfully
develop and deploy Actuate e.Reporting solutions.
Marketing
Our marketing organization is focused on building market awareness and
acceptance of our company and our products as well as on developing strategic
marketing and distribution relationships. We have a comprehensive marketing
strategy with several key components: image and awareness building, direct
marketing to both prospective and existing customers, a strong Web presence, as
well as broad-scale marketing programs in conjunction with key partners. Our
corporate marketing strategy includes print advertising, public relations
activities, trade shows and user group meetings, as well as programs to work
closely with analysts and other influential third parties. Our direct marketing
activities include extensive Web-based marketing campaigns, participation in
selected trade shows and conferences and targeted ongoing direct mail efforts to
existing and prospective customers. We also offer seminars to educate
prospective customers about our e.Reporting solution. Finally, we have invested
in building a partner and channel marketing function to conduct cooperative
marketing programs with our technology partners.
5
Customer Support
We believe that providing superior customer service is critical to the
successful sale and marketing of our products. Maintenance and support
contracts, which are typically for 12 months, are offered with the initial
license of software and may be renewed annually. Maintenance fees are typically
set at a percentage of the total license fees paid by a customer. Substantially
all of our direct sales to customers have maintenance and support contracts that
entitle the customer to software patches, updates and upgrades at no additional
cost and technical support during normal business hours. Customers purchasing
maintenance are able to access support, via email and telephone during normal
business hours. We supplement our telephone support with Web-based support
services, including access to FAQs, on line Web forums and a software patch
download area. We also offer extended and enterprise maintenance plans that give
our customers access to 24x7 support and additional support services. To improve
access to our explanatory materials, we provide on-line documentation with all
of our products. In addition, we offer, primarily through certified training
partners, classes and training programs for our products.
Research and Development
Our research and development organization is divided into teams consisting
of development engineers, product managers, quality assurance engineers and
technical writers. The research and development organization uses a
phase-oriented development process that includes the continuous monitoring of
product quality, development schedule and functionality requirements. Product
development is based on a consolidation of the requirements from existing
customers, customer support and product managers. The development group
infrastructure provides a full suite of documentation, quality assurance,
delivery and support capabilities (in addition to its design and implementation
functions) for our products. Research and development expenses were $9.3 million
for fiscal 1999, $7.4 million for fiscal 1998, and $6.2 million for fiscal 1997.
We intend to continue to make substantial investments in research and
development and related activities to maintain and enhance our product lines. We
believe that our future success will depend in large part on our ability to
support current and future releases of popular operating systems, databases and
e.Business software applications, to maintain and improve our current product
line and to timely develop or acquire new products that achieve market
acceptance. Any failure by us to do so would have a material adverse effect on
our business, operating results and financial condition.
Competition
The market in which we compete 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 vendors of reporting
solutions such as Seagate Software, Inc. (a division of Seagate
Technology, Inc.), MicroStrategy Incorporated and Brio Technology,
Inc.;
- indirect competition from vendors of OLAP and query tools such as
Hyperion Solutions Corp., Business Objects S.A., Cognos, Inc. 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 reporting functionality in
their applications;
- competition from e.Business software vendors and Web development
tool vendors; and
- competition from the information systems departments of current or
potential customers that may develop reporting 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 us. 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 Web based reporting 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 Web based
reporting
6
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 reporting needs of our
prospective customers. For example in 1999 Brio Technology, Inc. completed the
acquisition of our competitor SQRIBE Technologies, Inc. Also current or future
indirect channel partners have 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 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.
Intellectual Property Rights
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 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.
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 Web based reporting 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.
Employees
As of December 31, 1999, we had 287 full-time employees, including 140 in
sales and marketing, 66 in research and development, 50 in services and support,
and 31 in general and administrative functions. None of our employees are
represented by a collective bargaining agreement, nor have we experienced a work
stoppage. We believe our employee relations are good. We also 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 and, in particular, executive officers.
7
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 THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE
OF OUR STOCK MAY DECREASE SIGNIFICANTLY.
Our limited operating history and the susceptibility of our operating
results to significant fluctuations makes any prediction 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;
- sales cycles 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;
- the impact of consolidation by competitors and indirect channel
partners; 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 generally accepted accounting principles in
the United States, to defer recognition of license fee revenue for a significant
period of time after entering into a license agreement, including:
- 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; 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 and changes in the mix of our direct sales and indirect sales, 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
8
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 plans for
expansion, including plans to significantly 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 the expectations of public market
analysts and investors. In the event that operating results are below
expectations, the price of our common stock could decline.
OUR LIMITED OPERATING HISTORY AND LACK OF PROFITABILITY IN PRIOR YEARS MAKES
FUTURE FORECASTING DIFFICULT.
Actuate was founded in November 1993 and we began shipping the Actuate
Reporting System in January 1996. We have a limited operating history on which
to base an evaluation of our business and prospects.
We recognized net income of $3.9 million in fiscal 1999 but incurred net
losses of $3.2 million, $7.2 million and $6.1 million in fiscal 1998, 1997 and
1996, respectively. As of December 31, 1999, we had an accumulated deficit of
approximately $16.3 million. Given our history of losses, we may not have
revenue growth or profitability on a quarterly or annual basis in the future.
While we achieved significant quarter-to-quarter revenue growth in fiscal 1998
and 1999, our revenues may not increase in future periods. We cannot be certain
that we will sustain or increase our profitability on a quarterly or annual
basis. We intend to increase our operating expenses significantly in future
periods. As a result, we will need to generate significant additional revenues
to maintain profitability.
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 39% in
fiscal 1999, 41% in fiscal 1998 and 38% in fiscal 1997. Our ability to achieve
significant revenue growth in the future will depend in large part on our
success in expanding 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 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 this distribution channels and secure license agreements
with additional e.Business application vendors on commercially reasonable terms
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
9
to increase correspondingly with expenses incurred in pursuing such
relationships, would harm our business, operating results and financial
condition.
IF THE MARKET FOR WEB BASED REPORTING SOFTWARE DOES NOT GROW AS WE EXPECT OUR
BUSINESS WOULD BE SERIOUSLY HARMED.
The market for Web based reporting 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 Web based
reporting 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 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 Web
based reporting 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.
WE MAY MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE
NUMEROUS RISKS
The Web reporting 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 the need to expand our distribution
channels, develop new products and expand our professional service organization
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;
- 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 no assurance can be given that any acquisition will be successful and
will not materially adversely affect our business, operating results or
financial condition. Failure to manage growth effectively and successfully
integrate acquisitions made by us could harm our business and operating results.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The market in which we compete 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 vendors of reporting
solutions such as Seagate Software, Inc. (a division of Seagate
Technology, Inc.), MicroStrategy Incorporated and Brio Technology,
Inc.;
- indirect competition from vendors of OLAP and query tools such as
Hyperion Solutions Corp., Business Objects S.A., Cognos, Inc. 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 reporting functionality in
their applications;
- competition from e.Business software vendors and Web development
tool vendors; and
- competition from the information systems departments of current or
potential customers that may develop reporting solutions internally
which may be cheaper and more customized than our products.
10
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 us. 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 Web based reporting 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 Web based
reporting 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 reporting needs of our
prospective customers. For example in 1999 Brio Technology, Inc. completed the
acquisition of our competitor SQRIBE Technologies, Inc. Also current or future
indirect channel partners have 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 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, 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 Web based reporting, 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 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 software 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.
11
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 a 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 involve convincing the vendor's entire organization that our products
are the appropriate reporting solution for the vendor's application. This time
period does not include the sales and implementation cycles of such vendors' 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.
IF WE FAIL TO EXPAND OUR INTERNATIONAL OPERATIONS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
During 1999 and 1998, we derived 14% and 6% 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 the
United States 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.
THERE ARE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD
SERIOUSLY HARM OUR BUSINESS.
In 1999, we acquired Actuate Holding BV (BV) and established a subsidiary
in Australia. BV has three operating subsidiaries located in the United Kingdom,
France and Germany whose sole business purpose is the marketing, sale and
distribution of our software products. We have very limited experience in the
management of international operations. We also have a number of other
distributors located worldwide. International operations are subject to a number
of risks including the following:
- 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;
12
- multiple and conflicting tax laws and regulations; and
- political and economic instability.
Because the majority of our international revenues have been denominated
to date in U.S. dollars, increases in the value of the United States dollar
could increase the price of our products so that they become relatively more
expensive to customers in the local currency of a particular country, and result
in a reduction in sales and profitability in that country. 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 liabilities arising from
international operations may contribute to fluctuations in our results of
operations. Any of the foregoing factors could harm our business, operating
results and financial condition. 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 rapid expansion in the number of employees and the scope of operations
has placed and will continue to place a significant strain on our management,
information systems and resources. Any acquisitions made by us and the
relocation of our corporate headquarters to South San Francisco, California, in
March 2000 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 operations in Europe 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 1997 through December 1999, we increased our headcount from
38 to 287 full-time employees. Furthermore, significant increases in the number
of employees are anticipated during fiscal 2000 and 2001. In particular, we
currently plan to significantly expand the number of employees in sales,
customer support and marketing. Our success depends to a significant degree upon
the efforts of certain key management, sales, 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 qualified personnel, particularly in the San Francisco Bay Area,
where the employment market for qualified sales, marketing and engineering
personnel is extremely competitive.
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 support personnel and
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 employees decide to join a
competitor or otherwise compete directly or indirectly with us, this could have
a significant adverse effect on our business.
13
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 slow down of
the purchase of Web based reporting 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.
THERE ARE RISKS ASSOCIATED WITH THE POTENTIAL ACQUISITION OF OUR JAPANESE
DISTRIBUTOR
In June 1999 we acquired approximately 8% of the outstanding shares in our
Japanese distributor from one of the distributor's shareholders for
approximately $168,000 in cash. We currently own approximately 17% of our
Japanese distributor. We have a right to buy all the shares owned by other
shareholders at a price indicated in the agreement. This price increases every
year by an amount indicated in the agreement. The agreement also provides the
other shareholders right to sell us all their shares at a price indicated in the
agreement. This price increases every year by an amount indicated in the
agreement. . The purchase price could be paid in shares of our common stock,
which may have the effect of diluting existing stockholders and adversely
affecting the price of our common stock or in cash, reducing the available cash
for working capital and other purposes. We believe that any such acquisition
will be accounted for by us as a "purchase" transaction (as opposed to a pooling
of interests). This accounting treatment could cause us to recognize goodwill
and other intangible asset amortization charges in the quarters and fiscal years
immediately following the date on which such an acquisition is effected. If the
acquisition is accounted for as a "purchase" transaction, it could harm our
reported earnings per share during the periods in which we record the
amortization of intangible assets acquired. Finally, such an acquisition would
require substantial management attention, impose costs on us associated with
integrating the acquired entity, require us to coordinate sales and marketing
efforts with the Japanese distributor and subject us to additional, and
potentially substantial, regulation as an owner of foreign subsidiary. Any of
these factors could seriously harm our business, operating results and financial
condition.
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.
14
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 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 Web based reporting 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:
- 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;
- 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;
- changes in the economic conditions in the United States and abroad;
and
- the purchase or sale of our common stock by "day traders".
In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the securities of technology companies. In the past, 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
15
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 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 1998 Equity Incentive Plan 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.
ITEM 2. PROPERTIES
We will be relocating our worldwide headquarters to South San Francisco,
California in March 2000 and have entered into an eight-year lease for
approximately 64,000 square feet in this new location. Currently our
headquarters consists of 28,000 square feet in San Mateo, California. Each of
our foreign subsidiaries leases space and we also lease space in other
geographic locations throughout the United States and Canada for sales
personnel.
We believe that our existing facilities are adequate for our current needs
and that additional space sufficient to meet our needs for the foreseeable
future will be available on reasonable terms. As a result of our California
facilities being located near major earthquake fault lines, in the event of an
earthquake our business, financial condition and operating results could be
seriously harmed.
ITEM 3. LEGAL PROCEEDINGS
We are engaged in certain legal actions arising in the ordinary course of
business. Although there can be no assurance as to the outcome of such
litigation, we believe we have adequate legal defenses and we believe that the
ultimate outcome of any of these actions will not have a material effect on our
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On July 23, 1998, we completed our initial public offering of 6,900,000
shares of common stock pursuant to a Registration Statement on Form S-1 (File
No. 333-55741) which was declared effective on July 17, 1998 at a price of $5.50
per share. Of the 6,900,000 shares of common stock offered, 6,280,000 shares
were sold by us and 620,000 shares were sold by selling stockholders. The
offering was underwritten by Goldman, Sachs & Co., and Credit Suisse First
Boston. We received approximately $30.9 million from the initial public
offering, net of underwriting discounts, commissions and other offering costs
and expenses. Our common stock is traded on the Nasdaq National Market under the
symbol ACTU. The following table sets forth the high and low closing sales
prices of our common stock from July 17, 1998 to December 31, 1999 as reported
by the Nasdaq National Market for the periods indicated.
High Low
- ------------------------------- ------- -------
Third Quarter of Fiscal 1998* $ 10.22 $ 4.13
Fourth Quarter of Fiscal 1998 $ 9.88 $ 3.31
First Quarter of Fiscal 1999 $ 16.50 $ 8.38
Second Quarter of Fiscal 1999 $ 15.50 $ 8.69
Third Quarter of Fiscal 1999 $ 18.34 $ 12.06
Fourth Quarter of Fiscal 1999 $ 46.25 $ 14.81
*Commencing July 17, 1998
As of January 31, 2000, there were approximately 140stockholders of record
(which number does not include the number of stockholders whose shares are held
by a brokerage house or clearing agency, but does include such brokerage house
or clearing agency as one record holder). We believe we had approximately 4,000
beneficial owners of our common stock.
We have never paid a cash dividend on our common stock and do not intend
to pay cash dividends on our common stock in the foreseeable future.
We have used the net proceeds from the offering to fund working capital
and general corporate purposes. The funds that are not being used to fund
short-term needs have been placed in temporary investments pending future use.
On December 3, 1999, we consummated a two for one stock split. All shares
and per share data stated above have been restated to reflect the split.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations, and with the Consolidated Financial Statements and Notes
thereto which are included elsewhere in this Form 10-K. The consolidated
statement of operations data for the year ended December 31, 1999, 1998 and 1997
and the consolidated balance sheet data at
17
December 31, 1999 and 1998 are derived from the audited consolidated financial
statements included elsewhere in this Form 10-K. The consolidated statement of
operations data for the year ended December 31, 1996 and 1995 and the
consolidated balance sheet data as of December 31, 1997, 1996 and 1995 are
derived from audited consolidated financial statements that are not included in
this Form 10-K. Historical results are not necessarily indicative of results to
be anticipated in the future.
Year Ended
December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Consolidated Statement of Operations Data: (in thousands, except per share data)
Revenues:
License fees ............................................... $ 35,014 $ 17,750 $ 7,542 $ 343 $ --
Services ................................................... 11,767 4,122 1,976 308 22
-------- -------- -------- -------- --------
Total revenues ........................................ 46,781 21,872 9,518 651 22
-------- -------- -------- -------- --------
Cost of revenues:
License fees ............................................... 896 1,012 647 171 --
Services ................................................... 6,021 3,171 1,263 305 53
-------- -------- -------- -------- --------
Total cost of revenues ................................ 6,917 4,183 1,910 476 53
-------- -------- -------- -------- --------
Gross profit (loss) .............................................. 39,864 17,689 7,608 175 (31)
Operating expenses:
Sales and marketing ........................................ 22,384 11,658 7,366 2,965 847
Research and development ................................... 9,289 7,373 6,213 2,731 1,883
General and administrative ................................. 3,478 2,563 1,317 603 240
Amortization of goodwill and other purchased intangibles ... 1,590 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses .............................. 36,741 21,594 14,896 6,299 2,970
-------- -------- -------- -------- --------
Income (loss) from operations .................................... 3,123 (3,905) (7,288) (6,124) (3,001)
-------- -------- -------- -------- --------
Interest and other income, net ................................... 1,313 739 46 65 166
-------- -------- -------- -------- --------
Income (loss) before income taxes ................................ 4,436 (3,166) (7,242) (6,059) (2,835)
Provision for income taxes ....................................... 550 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ................................................ $ 3,886 $ (3,166) $ (7,242) $ (6,059) $ (2,835)
======== ======== ======== ======== ========
Basic income (loss) per share(1) ................................. $ 0.14 $ (0.20) $ (1.24) $ (1.11) $ (0.55)
======== ======== ======== ======== ========
Shares used in basic per share calculation (1) .................. 26,963 15,510 5,840 5,482 5,182
======== ======== ======== ======== ========
Diluted income (loss) per share (1) ............................. $ 0.13 $ (0.20) $ (1.24) $ (1.11) $ (0.55)
======== ======== ======== ======== ========
Shares used in diluted per share calculation (1) ................. 29,950 15,510 5,840 5,482 5,182
======== ======== ======== ======== ========
December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments .................................. $24,153 $32,730 $ 3,191 $ 1,040 $ 1,252
Working capital (deficit) ..................... 20,744 24,416 (3,318) (1,564) 637
Total assets .................................. 53,381 39,798 7,587 3,664 1,710
Long-term obligations, less current portion ... -- -- 124 213 144
Stockholders' equity (deficit) ................ 31,636 26,034 (2,202) (1,191) 870
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used in
computing net income (loss) per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-K that are not purely
historical statements are forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding our expectations, beliefs, hopes, intentions or strategies regarding
the future. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those indicated in such
forward-looking statements. See "Risk Factors that May Affect Future Results"
and "Special Note Regarding Forward-Looking Statements" in this Report on Form
10-K and the risks discussed in other reports filed by us from time to time with
the Securities and Exchange Commission.
18
Overview
We are a leading provider of e.Business reporting solutions that enable
organizations to systematically extract, publish and disseminate information
across distributed computing environments. We began shipping our first product
in January 1996. 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, training and consulting.
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. The acquisition was accounted under the purchase method of
accounting. In connection with this acquisition, we recorded $9.6 million in
goodwill and various intangible assets, which are being amortized over periods
not exceeding four years on a straight-line basis. The results of operations of
BV and the estimated fair value of assets acquired and liabilities assumed are
included in the consolidated financial statements from the date of acquisition.
License fee revenues from sales of software products directly to end user
customers are recognized as revenue after execution of a license agreement or
receipt of a definitive purchase order and shipment of the product, provided no
significant vendor obligations remain and collection of the resulting
receivables is deemed probable. Our products do not require significant
customization. The majority of license fee revenues from direct sales to end
user customers is from sales of specific individual products to such customers
and is recognized upon shipment of the applicable product. Advance payments from
end user customers, 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. These license arrangements generally
have a term of between one and five years, which can be extended upon mutual
agreement by the parties, are terminable by either party in the event of a
material breach of the license agreement by the other party if such breach is
not cured within a specified cure period, contain certain representations,
warranties and indemnities and provisions designed to limit the parties'
liability under the license agreement. Furthermore, license arrangements with
e.Business application vendors typically require that such vendors only license
our products to their customers for use with such vendor's application.
Furthermore, license arrangements with international distributors give such
international distributors the exclusive right to distribute our products to end
user customers headquartered in specified territories.
License arrangements with indirect channel partners such as e.Business
application vendors, resellers and distributors generally take the form of
either (i) fixed price arrangements in which the contracting entity has the
right to the unlimited usage, unspecified future products, and resale of the
licensed software for a specified term and pursuant to which license fee revenue
is deferred and recognized on a straight-line basis over the term of the license
agreement or (ii) arrangements pursuant to which a license fee is paid to us,
which we recognize as revenue upon shipment of all the products covered under
the arrangement, provided the fees are fixed and determinable and collection of
the resulting receivables is deemed probable.
Service revenues are primarily comprised of revenue from maintenance
agreements, training and consulting fees. Revenue from maintenance agreements is
deferred and recognized on a straight-line basis as service revenue over the
term of the related agreement, which is typically one year. Service revenues
from training and consulting services are recognized upon completion of the work
to be performed.
Our revenue recognition policies are in accordance with the American
Institute of Certified Public Accountants' Statement of Position 97-2 ("SOP
97-2") as modified by SOP 98-9.
To date we have sold our products internationally primarily through our
subsidiaries in Europe and our distributor in Japan. During 1999, 1998 and 1997,
we derived 14%, 6% and 2% 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. Although we intend to continue to invest significant
19
resources to expand our sales and support operations outside the United States
and to enter additional international markets, there can be no assurance that
such efforts will be successful. In order to successfully 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. To the extent that we are unable to do so in a
timely and cost-effective manner, our business, operating results and financial
condition could be materially adversely affected. We are a party to an agreement
with our Japanese affiliate. This agreement provides us a right to buy all the
shares owned by other shareholders at a price indicated in the agreement. This
price increases every year by an amount indicated in the agreement. The
agreement also provides the other shareholders right to sell us all their shares
at a price indicated in the agreement. This price increases every year by an
amount indicated in the agreement. In connection with such acquisition, we would
be required to pay a purchase price in registered shares of our Common Stock or
in cash, which may have the effect of diluting existing stockholders, adversely
affecting the price of our Common Stock or reducing the available cash for
working capital and other purposes. This potential acquisition could cause us to
recognize substantial goodwill and other intangible assets, and record
amortization charges in the quarters and fiscal years immediately following the
date on which such an acquisition is effected, depending upon the purchase price
paid by us for such acquisition. As a result, this potential acquisition could
have a material adverse effect on reported earnings per share during the periods
in which we record the amortization of acquired intangible assets. Finally, this
potential acquisition would require substantial management attention, impose
costs on us associated with integrating the acquired entity, require us to
coordinate sales and marketing efforts with the affiliate and subject us to
additional, and potentially substantial, regulation as an owner of foreign
subsidiaries, any of which could have a material adverse effect on our business,
operating results and financial condition.
Our limited operating history makes the prediction of future operating
results difficult and unreliable. In addition, given our limited operating
history and recent rapid growth, historical growth rates in our revenues should
not be considered indicative of future revenue growth rates or operating
results. There can be no assurance that any of our business strategies will be
successful or that we will be able to maintain profitability on a quarterly or
annual basis.
20
Results of Operations
The following table sets forth certain consolidated statement of
operations data as a percentage of total revenues for the periods indicated:
Year Ended December 31,
-----------------------
1999 1998 1997
----- ----- -----
Revenues:
License fees ................................................ 75% 81% 79%
Services .................................................... 25 19 21
--- --- ---
Total revenues ........................................... 100 100 100
--- --- ---
Cost of revenues:
License fees ............................................... 2 5 7
Services ................................................... 13 14 13
--- --- ---
Total cost of revenues .................................. 15 19 20
--- --- ---
Gross profit ................................................... 85 81 80
--- --- ---
Operating expenses:
Sales and marketing ........................................ 48 53 78
Research and development ................................... 20 34 65
General and administrative ................................. 8 12 14
Amortization of goodwill and other purchased intangibles ... 3 -- --
--- --- ---
Total operating expenses ................................ 79 99 157
--- --- ---
Income (loss) from operations .................................. 6 (18) (77)
Interest and other income, net ................................. 3 3 1
Provision for income taxes ..................................... 1 -- --
--- --- ---
Net income (loss) .............................................. 8% (15)% (76)%
--- --- ---
Revenues
Our revenues are derived from license fees and services, which include
software maintenance and support, training and consulting. Total revenues
increased by 130% from $9.5 million in fiscal 1997 to $21.9 million in fiscal
1998 and by 114% to $46.8 million in fiscal 1999. The acquisition of BV in June
1999 generated approximately $2.0 million in incremental revenues for fiscal
1999. No single customer accounted for more than 10% of our revenues for any of
the periods presented.
License Fees. Revenues from license fees increased by 135% from $7.5
million in fiscal 1997 to $17.8 million in fiscal 1998 and by 97% to $35.0
million in fiscal 1999. The increases were due primarily to increased sales to
new customers and increased follow-on sales to existing customers and, to a
lesser extent, increase in average selling prices for our products. Revenues
from license fees from our indirect channel partners, including e.Business
application vendors, resellers and distributors, accounted for 39%, 41% and 38%
of total revenues from license fees for 1999, 1998 and 1997, respectively.
Services. Revenues from services increased by 109% from $2.0 million in
fiscal 1997 to $4.1 million in fiscal 1998 and by 185% to $11.8 million in
fiscal 1999. The increases were due primarily to increases in maintenance and
support and, to a lesser extent, increases in training and consulting revenues
related to increases in our installed customer base.
Cost of Revenues
License Fees. Cost of revenues from license fees consists primarily of
product packaging, documentation and production costs, and related personnel and
overhead allocations. Cost of revenues from license fees increased from
$647,000, or 9% of revenues from license fees, in fiscal 1997 to $1.0 million,
or 6% of revenues from license fees,
21
in fiscal 1998 and decreased to $896,000, or 3% of revenues from license fees,
in fiscal 1999. The increase in absolute dollars in fiscal 1998 was primarily
due to the increase in the number of licenses sold. The decrease in absolute
dollars in fiscal 1999 was primarily due to increase in existing customers
purchasing additional licenses in which no shipments were required since
existing customers may make copies of their existing software up to the amount
of software licensed. The decrease in cost of license fees revenues as a
percentage of license fees revenues were due to improved leverage in production
and personnel costs and increase in the average selling price of our software.
We expect cost of revenues from license fees to continue to grow in absolute
dollars due to increasing licensing activity and in the event that we acquire
and resell other companies' products or technologies.
Services. Cost of services revenues 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 revenues
increased from $1.3 million, or 64% of services revenues, in fiscal 1997 to $3.2
million, or 77% of services revenues, in fiscal 1998 and to $6.0 million, or 51%
of services revenues, in fiscal 1999. The increases in absolute dollars were
primarily due to increases in customer support personnel and increased
third-party costs to support the growing needs of our customers. In fiscal 1999
cost of services revenues includes approximately $1.0 million relating to cost
of services incurred by our European subsidiaries since their acquisition in
June 1999. The increase in cost of services as a percentage of services revenues
in fiscal 1998 was due to costs of expanding our support and maintenance
organization to meet the growing customer base and the decrease in fiscal 1999
was due to efficiency and economies of scale. We expect cost of services to
continue to grow in absolute dollars as we continue to hire additional customer
support personnel.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
promotional expenses, travel and facility expenses. Sales and marketing expenses
increased by 58% from $7.4 million in fiscal 1997 to $11.7 million, or 53% of
total revenues, in fiscal 1998 and by 92% to $22.4 million, or 48% of total
revenues, in fiscal 1999. The increases in absolute dollars were primarily due
to the hiring of additional sales and marketing personnel, higher sales
commissions associated with increased revenues and increased marketing
activities. In fiscal 1999, sales and marketing expenses include approximately
$2.5 million of sales and marketing expenses incurred by our European
subsidiaries since their acquisition in June 1999. The decrease in sales and
marketing expenses as a percentage of total revenues was due to revenues
increasing at a faster rate than sales and marketing expenses. We expect that
sales and marketing expense will continue to increase in absolute dollars in
future periods as we continue to hire additional sales and marketing personnel,
establish additional sales offices, expand international distribution channels
and increase promotional activities.
Research and Development. Research and development expenses are expensed
as incurred and consist primarily of personnel and related costs associated with
the development of new products, the enhancement of existing products, quality
assurance and testing. Research and development expenses increased by 19% from
$6.2 million in fiscal 1997 to $7.4 million, or 34% of total revenues, in fiscal
1998 and by 26% to $9.3 million, or 20% of total revenues, in fiscal 1999. The
increases in absolute dollars were primarily due to increased personnel and
related costs associated with the development of new products, the enhancement
of existing products, quality assurance and testing, depreciation of capital
expenditures and facilities costs. The decreases in research and development
expenses as a percentage of total revenues were due to revenues increasing at a
faster rate than research and development expenses. We believe that a
significant level of investment in product development is essential to maintain
product leadership and anticipates research and development expenses to increase
in absolute dollars in future periods for developing new products and providing
enhancements to current products.
General and Administrative. General and administrative expenses consist
primarily of personnel and related costs for finance, human resources,
information systems and general management, as well as legal and accounting
expenses. General and administrative expenses increased by 95% from $1.3 million
in fiscal 1997 to $2.6 million, or 12% of total revenues, in fiscal 1998 and by
36% to $3.5 million, or 7% of total revenues, in fiscal 1999. The increases in
absolute dollars were primarily due to increases in personnel and related costs
and professional fees
22
necessary to manage and support our growth and facilities expansion. The
decreases as a percentage of total revenues were due to revenues increasing at a
faster rate than general and administrative expenses. We believe that general
and administrative expenses will continue to increase in absolute dollars in
future periods as we hire additional personnel to support expanded operations.
Deferred Compensation. We recorded deferred compensation of $nil in 1999,
approximately $619,000 in 1998 and $197,000 in 1997. In fiscal 1999, 1998 and
1997, we recorded amortization expense of approximately $91,000, $333,000, and
$90,000, respectively. These amounts represent the difference between the
exercise price of certain stock option grants and the deemed fair value of our
Common Stock at the time of such grants. All such deferred compensation expense
has been included in general and administrative expenses. At December 31, 1999,
we have approximately $142,000 remaining to be amortized over the corresponding
vesting period of each respective option, generally five years.
Amortization of Goodwill and Other Purchased Intangibles. In connection
with the acquisition of BV in June 1999, we incurred direct merger-related
expenses of approximately $304,000 comprised primarily of professional fees. The
acquisition was accounted for by the purchase method of accounting, which
resulted in the recognition of $9.6 million in goodwill and other intangible
assets. Goodwill and other intangibles are being amortized on a straight-line
basis over periods not exceeding four years. In fiscal 1999, we recorded
amortization expense of approximately $1.6 million. Approximately $8.0 million
remains to be amortized.
Interest and Other Income, Net
Interest and other income, net, is comprised primarily of interest income
earned by us on our cash and short-term investments. Interest and other income,
net, increased from a net income of $46,000 in fiscal 1997 to $739,000 in fiscal
1998, and increased to $1.3 million in fiscal 1999. The increases were primarily
the result of interest income earned on investment of $30.9 million in net
proceeds from our initial public offering in July 1998.
Provision for Income Taxes
Prior to 1999, we incurred losses and we had not recorded any provision
for income taxes. For 1999, the provision for income taxes was $550,000
consisting of federal and state taxes. The provision for income taxes as a
percentage of pretax income was 12%, reflecting the utilization of operating
loss carryforwards.
As of December 31, 1999, we had federal net operating loss carryforwards
of approximately $8.5 million. We also had federal research and development tax
credit carryforwards of approximately $1.5 million at December 31, 1999. The net
operating loss and credit carryforwards will expire beginning in 2008 through
2019, if not utilized.
Utilization of the net operating loss carryforwards and research and
development tax credit carryforwards may be subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization. See Note
10 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through
approximately $14.3 million in net proceeds from the private sales of preferred
stock and cash from operations. In July 1998, we completed our initial public
offering whereby we sold 6,280,000 shares of our Common Stock, adjusted for
stock split. The net proceeds to us, after deducting expenses relating to the
offering, were $30.9 million.
As of December 31, 1999, we had cash and cash equivalents of $6.6 million
and short-term investments of $17.5 million in highly liquid, high quality debt
securities and a certificate of deposit classified as available-for-sale. In
fiscal 1999, we generated positive cash flow of $1.8 million from operating
activities, and used $138,000 in fiscal 1998 and $2.8 million in fiscal 1997 in
operating activities.
23
Net cash used in investing activities was $18.5 million in fiscal 1999,
$11.8 million in fiscal 1998, and $1.3 million in fiscal 1997. In fiscal 1999,
net cash was used primarily in the acquisition of BV and purchase of short-term
investments. In fiscal 1998, net cash was used primarily for purchase of
short-term investments.
Net cash provided by financing activities was $1.4 million in fiscal 1999,
$30.8 million in fiscal 1998, and $6.0 million in fiscal 1997. Cash from
financing activities in fiscal 1999 primarily reflect net proceeds from sales of
common stock issued upon exercise of options under stock option and stock
purchase plans. Cash from financing activities in fiscal 1998 primarily reflect
net proceeds from sales of common stock issued during the initial public
offering. Cash from financing activities in fiscal 1997 primarily reflect net
proceeds from private sales of preferred stock.
We believe that our current cash balances and cash generated from
operations will be sufficient to meet our working capital and capital
expenditures requirements for at least the next twelve months. Thereafter, if
cash generated from operations is insufficient to satisfy our liquidity
requirements, we may find it necessary to sell additional equity or obtain
credit facilities. The sale of additional equity could result in additional
dilution to our current stockholders. A portion of our cash may be used to
acquire or invest in complementary businesses, including the acquisition of our
Japanese distributor, or products or to obtain the right to use complementary
technologies.
Recently Issued Accounting Pronouncement
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133, as amended, will be effective
from our fiscal year 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded 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. We believe the
adoption of SFAS 133 will not have a material effect on the financial statements
as we currently do not utilize derivative instruments.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
referred to as SAB 101. SAB 101 summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition. We are
currently in the process of evaluating SAB 101 and what effect it may have on
our financial statements. Accordingly, we have not determined whether SAB 101
will have a material impact on our financial position or results of operations.
Year 2000 Readiness
Computer systems and software must accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, many
software and computer systems that accepted only two digit entries needed to be
upgraded in order to accept dates beginning January 1, 2000. To date, we have
not experienced any date related problems with our software. In addition, we
have not been made aware of, nor have we experienced, date related problems with
any third-party software. Also, we do not believe that we will incur material
costs in the future because of date related problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During 1999, 1998 and 1997, we derived 14%, 6% and 2% of our total
revenues, respectively, from sales outside the United States. The majority of
international revenues are denominated in U.S. dollars. Our exposure to market
risk with respect to fluctuations in the relative value of currencies is
limited. However, increases in the value of the U.S. dollar could increase the
price of our products so that they become relatively more expensive to customers
in the local currency of a particular country and may result in a reduction in
sales and profitability in that country. We are also exposed to foreign exchange
rate fluctuations as the financial results of foreign subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, these
results, when translated, may vary
24
from expectations and adversely impact overall expected profitability. The
effect of foreign exchange rate fluctuations in 1999 was not material
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we invest in highly liquid and high
quality debt securities. To minimize the exposure due to adverse shift in the
general level of U.S. interest rates we invest in short-term securities and
maintain an average maturity of one year or less. Due to the short-term nature
of our investments, we believe that there is no material risk exposure.
Therefore, no quantitative tabular disclosures are required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8
are listed in Item 14(a)(1) and begin at page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding our Directors and Executive Officers is
incorporated herein by reference from the section entitled "Election of
Directors" of our definitive Proxy Statement (the "Proxy Statement") to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
for our Year 2000 Annual Meeting of Stockholders. The Proxy Statement is
anticipated to be filed within 120 days after the end of our fiscal year ended
December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation and Related
Information" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled "Stock
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Index on Page F-1.
(a)(2) Financial Statement Schedules
Schedules have been omitted because the information required to be set
forth therein is not applicable or is readily available in the financial
statements or notes thereto.
(a)(3) Exhibits
Exhibit
No. Description
--- -----------
3.1 Form of Third Amended and Restated Certificate of Incorporation.
3.2 (1) Form of Bylaws of the Registrant.
4.1 (1) Reference is made to Exhibits 3.1 and 3.2.
4.2 (1) Specimen Common Stock Certificate.
10.1 (1) Form of Indemnification Agreement.
10.2 (1) 1994 Stock Option Plan, as amended.
10.3 (1) 1998 Equity Incentive Plan.
10.4 (1) 1998 Employee Stock Purchase Plan.
10.5 (1) 1998 Non-Employee Directors Option Plan.
10.6 (1) Office Lease, as amended, between the Company and 999 BW Corporation
dated March 27, 1995.
10.7 (2) Amendment No. 7 to Office Lease between the Company and Spieker
Properties, L.P. dated September 8, 1998.
10.8 (1) Sublease Agreement between the Company and Cisco Systems, Inc. dated
January 15, 1998.
10.9 (1) Promissory Note between the Company and Actuate Japan, Co., Ltd.
dated December 27, 1997.
10.10 (1) Stockholders Agreement between the Company and Air Co., Ltd., Toshiba
Information Systems Corporation, Computer Institute of Japan, Ltd.,
Sumitomo Metal Industries and Masanori Harada, dated March 29, 1996.
10.11 (2) Letter Agreement between the Company and Actuate Japan, Co., Ltd.
dated September 17, 1998.
10.12 (2) Actuate Japan Agreement between the Company and Actuate Japan, Co.,
Ltd. dated August 15, 1998.
10.13 (1) Offer Letter between the Company and Daniel A. Gaudreau dated May 7,
1997.
10.14 (1) Offer Letter between the Company and Hamid Bahadori dated May 20,
1998.
10.15 (3) Office Building Lease between the Actuate and HMS Gateway Office,
L.P. dated August 18, 1999.
10.16 (3) First Amendment to Office Building Lease between the Actuate and HMS
Gateway Office, L.P. dated September 30, 1999.
10.17 (4)Stock Purchase Agreement dated June 4, 1999, among the Company,
Actuate Holding, B.V.and the stockholders of Actuate Holding, B.V.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney. (see page 28)
27.1 Financial Data Schedule.
- ----------
(1) Incorporated by reference to our Registration Statement on Form S-1 (File
No. 333-55741).
(2) Incorporated by reference to our Quarterly Report on Form 10-Q for the
period ended September 30, 1998.
(3) Incorporated by reference to our Quarterly Report on Form 10-Q for the
period ended September 30, 1999.
(4) Incorporated by reference to our Report on Form 8-K filed on July 2, 1999.
26
(b) Reports on Form 8-K
No reports on Form 8-K were filed by us during the fourth quarter of the
fiscal year ended December 31, 1999.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedule
See (a)(2) above.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we
have duly caused this report to be signed on our behalf by the undersigned
thereunto duly authorized.
ACTUATE CORPORATION
(Registrant)
By: /s/ DANIEL A. GAUDREAU
--------------------------------------
Daniel A. Gaudreau
Senior Vice President, Finance and
Administration and Chief Financial Officer
Date: March 29 , 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Nicolas C. Nierenberg and Daniel A.
Gaudreau, and each of them, his or her true and lawful attorneys-in-fact and
agents with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ NICOLAS C. NIERENBERG Chairman of the Board and Chief March 29, 2000
- --------------------------- Executive Officer (Principal
Nicolas C. Nierenberg Executive Officer)
/s/ DANIEL A. GAUDREAU Senior Vice President, Finance March 29, 2000
- --------------------------- and Administration and Chief
Daniel A. Gaudreau Financial Officer (Principal
Financial and Accounting
Officer)
/s/ PETER I. CITTADINI Director, President and Chief March 29, 2000
- --------------------------- Operating Officer
Peter I. Cittadini
/s/ GEORGE B. BEITZEL Director March 29, 2000
- ---------------------------
George B. Beitzel
/s/ JAMES W. BREYER Director March 29, 2000
- ---------------------------
James W. Breyer
/s/ ARTHUR C. PATTERSON Director March 29, 2000
- ---------------------------
Arthur C. Patterson
/s/ NANCY J. SCHOENDORF Director March 29, 2000
- ---------------------------
Nancy J. Schoendorf
/s/ STEVEN D. WHITEMAN Director March 29, 2000
- ---------------------------
Steven D. Whiteman
28
ACTUATE CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors............................F-2
Consolidated Balance Sheets .................................................F-3
Consolidated Statements of Operations .......................................F-4
Consolidated Statements of Stockholders' Equity .............................F-5
Consolidated Statements of Cash Flows .......................................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Actuate Corporation
We have audited the accompanying consolidated balance sheets of Actuate
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Actuate
Corporation at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 12, 2000
F-2
ACTUATE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
--------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 6,604 $ 21,808
Short-term investments .............................. 17,549 10,922
Accounts receivable, net of allowance for doubtful
accounts of $1,553 at December 31, 1999 and
$794 at December 31, 1998 ........................ 17,229 5,050
Prepaids and other current assets ................... 1,107 400
-------- --------
Total current assets ................................... 42,489 38,180
Property and equipment, net ............................ 2,438 1,405
Goodwill and other purchased intangibles ............... 8,024 --
Other assets ........................................... 430 213
-------- --------
$ 53,381 $ 39,798
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 1,749 $ 1,210
Accrued compensation ................................ 3,694 1,293
Other accrued liabilities ........................... 3,769 3,393
Deferred revenue .................................... 12,168 7,868
Income taxes payable ................................ 365 --
-------- --------
Total current liabilities .............................. 21,745 13,764
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, issuable in
series: 5,000,000 shares authorized; none
issued and outstanding at December 31, 1999 and
1998 ............................................. -- --
Common stock, $0.001 par value, 35,000,000 shares
authorized; 27,738,303 and 27,558,698 shares
issued and outstanding at December 31, 1999 and
1998, respectively ............................... 28 28
Additional paid-in capital .......................... 47,844 46,578
Note receivable from officer ........................ -- (40)
Deferred stock compensation ......................... (142) (393)
Accumulated other comprehensive income .............. 159 --
Accumulated deficit ................................. (16,253) (20,139)
-------- --------
Total stockholders' equity ............................. 31,636 26,034
-------- --------
$ 53,381 $ 39,798
======== ========
See accompanying notes.
F-3
ACTUATE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
License fees .................................... $ 35,014 $ 17,750 $ 7,542
Services ........................................ 11,767 4,122 1,976
-------- -------- --------
Total revenues .................................... 46,781 21,872 9,518
-------- -------- --------
Costs and expenses:
Cost of license fees ............................ 896 1,012 647
Cost of services ................................ 6,021 3,171 1,263
Sales and marketing ............................. 22,384 11,658 7,366
Research and development ........................ 9,289 7,373 6,213
General and administrative ...................... 3,478 2,563 1,317
Amortization of goodwill and other
purchased intangibles ......................... 1,590 _ _
-------- -------- --------
Total costs and expenses .......................... 43,658 25,777 16,806
-------- -------- --------
Income (loss) from operations ..................... 3,123 (3,905) (7,288)
Interest and other income, net .................... 1,313 739 46
-------- -------- --------
Income (loss) before income taxes ................. 4,436 (3,166) (7,242)
-------- -------- --------
Provision for income taxes ........................ 550 -- --
-------- -------- --------
Net income (loss) ................................. $ 3,886 $ (3,166) $ (7,242)
======== ======== ========
$
Basic income (loss) per share ..................... $ 0.14 $ (0.20) $ (1.24)
======== ======== ========
Shares used in basic per share
calculation ..................................... 26,963 15,510 5,840
======== ======== ========
Diluted income (loss) per share ................... $ 0.13 $ (0.20) $ (1.24)
======== ======== ========
Shares used in diluted per share
calculation ..................................... 29,950 15,510 5,840
======== ======== ========
See accompanying notes.
F-4
ACTUATE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share data)
Note
Preferred Stock Common Stock Additional Receivable Deferred
----------------- ---------------- Paid-in from Stock
Shares Amount Shares Amount Capital Officer Compensation
------ ------ ------ ------ ------- ------- ------------
Balance at December 31, 1996 ............ 11,099,610 $ 11 6,078,894 $ 6 $ 8,563 $(40) $ --
---------- ---- --------- ---- -------- ---- ---
Issuance of Series D convertible
preferred stock, net of issuance
costs of $26 .......................... 1,879,854 2 -- -- 5,827 -- --
Issuance of common stock for
services .............................. -- -- 3,210 -- 1 -- --
Issuance of common stock upon
exercise of stock options, net of
repurchases ........................... -- -- 1,620,466 2 232 -- --
Issuance of common stock for
acquisition of intellectual
property .............................. -- -- 250,000 -- 77 -- --
Deferred compensation related to
grant of stock options ................ -- -- -- -- 197 -- (197)
Amortization of deferred compensation ... -- -- -- -- -- -- 90
Net loss ................................ -- -- -- -- -- -- --
---------- ---- --------- ---- -------- ---- ---
Balance at December 31, 1997 ............ 12,979,464 13 7,952,570 8 14,897 (40) (107)
Issuance of common stock upon
exercise of stock options, net of
repurchases ........................... -- -- 346,664 1 200 -- --
Issuance of common stock in public
offering, net of issuance costs of
$3,672 ................................ -- -- 6,280,000 6 30,862 -- --
Conversion of convertible preferred
stock
into common stock .................... (12,979,464) (13) 12,979,464 13 -- -- --
Deferred compensation related to
grant of stock options ................ -- -- -- -- 619 -- (619)
Amortization of deferred compensation ... -- -- -- -- -- -- 333
Net loss ................................ -- -- -- -- -- -- --
----------- ---- ---------- --- ------ --- ----
Balance at December 31, 1998 ............ -- -- 27,558,698 28 46,578 (40) (393)
Issuance of common stock upon
exercise of stock options, net of
repurchases ........................... -- -- (42,595) -- 244 -- --
Issuance of common stock under
Employee Stock Purchase Plan .......... -- -- 222,200 -- 1,123 -- --
Amortization of deferred compensation,
net of cancellations ................. -- -- -- -- (160) -- 251
Tax benefits from employee stock
options ............................... -- -- -- -- 59 -- --
Currency translation adjustment ......... -- -- -- -- -- -- --
Payment on note receivable .............. -- -- -- -- -- 40 --
Net income .............................. -- -- -- -- -- -- --
---------- ---- --------- ---- -------- ---- ---
Balance at December 31, 1999 ............ -- $ -- 27,738,303 $ 28 $ 47,844 $ -- $(142)
=========== ==== ========== === ====== === ====
Total
Accumulated Stockholders'
other Equity (Net
Comprehensive Accumulated Capital
Income Deficit Deficiency)
------ ------- -----------
Balance at December 31, 1996 ............ $ -- $ (9,731) (1,191)
Issuance of Series D convertible
preferred stock, net of issuance
costs of $26 .......................... -- -- 5,829
Issuance of common stock for
services .............................. -- -- 1
Issuance of common stock upon
exercise of stock options, net of
repurchases ........................... -- -- 234
Issuance of common stock for
acquisition of intellectual
property .............................. -- -- 77
Deferred compensation related to
grant of stock options ................ -- -- --
Amortization of deferred compensation ... -- -- 90
Net loss ................................ -- (7,242) (7,242)
---- ------- ------
Balance at December 31, 1997 ............ -- (16,973) (2,202)
Issuance of common stock upon
exercise of stock options, net of
repurchases ........................... -- -- 201
Issuance of common stock in public
offering, net of issuance costs of
$3,672 ................................ -- -- 30,868
---- ------- ------
Conversion of convertible preferred
stock
into common stock .................... -- -- --
Deferred compensation related to
grant of stock options ................ -- -- --
Amortization of deferred compensation ... -- -- 333
Net loss ................................ -- (3,166) (3,166)
---- ------- ------
Balance at December 31, 1998 ............ -- (20,139) 26,034
Issuance of common stock upon
exercise of stock options, net of
repurchases ........................... -- -- 244
Issuance of common stock under
Employee Stock Purchase Plan .......... -- -- 1,123
Amortization of deferred compensation,
net of cancellations ................. -- -- 91
Tax benefits from employee stock
options ............................... -- -- 59
Currency translation adjustment ......... 159 -- 159
Payment on note receivable .............. -- -- 40
Net income .............................. -- 3,886 3,886
---- ------- ------
Balance at December 31, 1999 ............ $159 $(16,253) $ 31,636
==== ======= ======
See accompanying notes.
F-5
ACTUATE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Operating activities
Net income (loss) ............................... $ 3,886 $ (3,166) $ (7,242)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred compensation ......... 91 333 90
Amortization of goodwill and other
intangibles ................................. 1,590 -- --
Depreciation .................................. 1,048 695 402
Loss on disposal of fixed assets .............. -- 70 --
Issuance of common stock for services and
intellectual property ....................... -- -- 78
Change in current assets and liabilities:
Accounts receivable ......................... (12,179) (2,066) (1,111)
Other current assets ........................ (707) (228) (7)
Accounts payable ............................ 539 367 547
Accrued compensation ........................ 2,401 296 629
Income taxes payable ........................ 423 -- --
Other accrued liabilities ................... 376 1,714 1,339
Deferred revenue ............................ 4,300 1,847 2,512
-------- -------- --------
Net cash generated by (used in) operating
activities ...................................... 1,768 (138) (2,763)
-------- -------- --------
Investing activities
Purchase of property and equipment .............. (2,081) (1,074) (1,003)
Purchases of short-term investments ............. (26,445) (10,922) (290)
Proceeds from maturity of short-term
investments ..................................... 19,818 290 --
Acquisition of Actuate Holding, B.V.,
including payment of assumed net liabilities .. (9,614) -- --
Increase in other assets ........................ (217) (69) (53)
-------- -------- --------
Net cash used in investing activities ............. (18,539) (11,775) (1,346)
-------- -------- --------
Financing activities
Proceeds from issuance of stock, net of
issuance costs and repurchases ................ 1,368 31,069 234
Payments on capital lease obligations ........... -- (249) (93)
Proceeds from issuance of preferred stock ....... -- -- 5,829
Repayment of stockholder's note ................. 40 -- --
-------- -------- --------
Net cash provided by financing activities ......... 1,408 30,820 5,970
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ..................................... (15,363) 18,907 1,861
Change in cumulative translation adjustment ....... 159 -- --
Cash and cash equivalents at beginning of year .... 21,808 2,901 1,040
-------- -------- --------
Cash and cash equivalents at end of year .......... $ 6,604 $ 21,808 $ 2,901
-------- -------- --------
Supplemental disclosure of cash flow information
Interest paid ..................................... $ 56 $ 22 $ 81
======== ======== ========
Incomes taxes paid ................................ $ 130 $ -- $ --
======== ======== ========
See accompanying notes.
F-6
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Summary of Significant Accounting Policies
Description of Business
Actuate Corporation (the "Company" or "Actuate") was incorporated on
November 16, 1993 in the State of California and reincorporated in the State of
Delaware on July 7, 1998. In May 1999, we changed our name to our current name
from Actuate Software Corporation following our stockholders' approval at the
annual meeting of stockholders. We are a leading provider of e.Reporting
solutions for e.Business. Our e.Reporting Suite 4 allows organizations to
publish high-value business information on e.Business Web sites for use by
customers, partners and employees. e.Reporting enables a company to enhance its
e.Business Web site, beyond brochureware and transaction capabilities, with
post-transaction content such as stock portfolio reports, client statements and
performance metrics, thereby maximizing the value of corporate information and
creating a more loyal customer base. Our e.Reporting Suite 4 is a scalable,
dynamic Web data publishing platform that can be seamlessly integrated into any
e.Business Web site. Our e.Reporting system's server-centric architecture
provides the building blocks for an e.Business reporting environment of any
size. Our solution's open environment allows developers to create reports from
virtually any data source and in virtually any format required by an e.Business.
Our products have been adopted in a wide variety of industries, including
financial services, telecommunications, technology, health care and others and
by a wide variety of organizations including Fortune 1000 companies, e.Business
application vendors and dot-com start-ups. We sell our products in the United
States primarily through our direct sales force. Outside the United States, we
sell our products through our direct sales force in the countries in which we
have an office and through distributors.
Basis of Presentation
The consolidated financial statements include the accounts of Actuate,
Actuate Holding, B.V. ("BV") and Actuate Australia Pty Limited. All significant
intercompany transactions have been eliminated.
During 1999, we completed the acquisition of BV. The acquisition was
accounted for under the purchase method of accounting. In accordance with the
purchase method of accounting, the Consolidated Statements of Operations include
BV's operating results from the date of acquisition.
Investment in Affiliate
In 1996, we made an equity investment of approximately $95,000 in Actuate
Japan Company Ltd. ("Actuate Japan"). In June 1999, we purchased additional
shares from an existing shareholder for approximately $168,000. As of December
31, 1999, we have approximately 16.7% of the outstanding voting stock of Actuate
Japan. This investment is accounted for on the equity basis due to our ability
to exercise significant influence. Between 1996 and 1999, we provided a total of
$510,000 in the form of loans to Actuate Japan. At December 31, 1999, the
remaining loan balance was $276,000. To date, Actuate Japan has been primarily
funded by investors other than us. We believe that such investments will
continue until the stage at which Actuate Japan generates cash from its own
operations. We will continue to assess the recoverability of the remaining loan
balance. During 1999, we recognized approximately $100,000 in equity losses
relating to our investment in Actuate Japan.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
F-7
statements and the accompanying notes. Actual results could differ materially
from these estimates.
Net Revenue
Revenue from license fees from sales of software products directly to
end-user customer or indirect channel partner is recognized as revenue after
execution of a license agreement or receipt of a definitive purchase order, and
shipment of the product, if no significant vendor obligations remain, there are
no uncertainties surrounding product acceptance, the license fees are fixed and
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 upon
shipment of product. 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, 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 term
and pursuant to which license fee revenue is deferred and recognized on a
straight-line basis over the term of the license agreement or (b) arrangements
pursuant to which a license fee is paid to us, which we recognize as revenue
based on the enterprise application vendor's sell-through.
Service revenues are primarily comprised of revenue from maintenance
agreements, training and consulting 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 training and consulting 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.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-9 "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" ("SOP
98-9"). SOP 98-9 modifies Statement of Position No. 97-2 "Software Revenue
Recognition" ("SOP 97-2") by requiring revenue to be recognized using the
"residual method" if certain conditions are met. We adopted the provisions of
SOP 98-9 for the year ended December 31, 1999. The adoption of SOP 98-9 has not
had a significant effect on our consolidated financial statements.
Based upon our interpretation of current available guidance, we believe
our revenue recognition policies are in accordance with SOP 97-2, as modified by
SOP 98-9
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of cash deposited with banks and highly
liquid, high quality debt securities with original maturities of 90 days or
less. All short-term investments are classified as available-for-sale, are
carried at amortized cost, which approximates fair value, and consist of high
quality debt securities with original maturities between 90 days and one year.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentration of
credit risk consist principally of marketable investments and accounts
receivable. We place our investments with high-credit-quality multiple issuers.
We sell to a diverse customer base primarily to customers in the United States.
No single
F-8
customer has accounted for more than 10% of our sales in any period presented.
Sales for the year ended December 31, 1999, 1998 and 1997 are shown net of
customer returns of approximately $435,000, $639,000 and $290,000 respectively.
We do not require collateral on sales with credit terms. During the years ended
December 31, 1999, 1998 and 1997, respectively, we added approximately $876,000,
$548,000 and $630,000 to our bad debt reserves. Total write-offs of
uncollectible amounts were approximately $117,000, $328,000 and $139,000 in
these years, respectively.
Fair Value of Financial Instruments
The fair values for marketable debt securities are based on quoted market
prices. The carrying value of these securities approximates their fair value.
The fair value of notes was estimated by discounting the future cash flows
using the then current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. The carrying
value of the note receivable from officer approximates the fair value.
Research and Development
Research and development expenditures are expensed to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on our product development
process, technological feasibility is established upon completion of a working
model. Costs incurred by us between completion of the working model and the
point at which the product is ready for general release have been insignificant.
Through December 31, 1999, all research and development costs have been
expensed.
We adopted SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" during fiscal 1999, which requires
capitalization of certain costs incurred during the development of internal use
software. Through December 31, 1999, capitalizable costs incurred have not been
significant for any development project. Accordingly, we have charged all costs
to research and development expense in the periods they were incurred.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets that range from three to five years.
Intangible Assets
Goodwill and various intangible assets were recognized related to our
acquisition of BV in June 1999. These amounts are being amortized over a period
not exceeding four years using the straight-line method. At December 31, 1999,
gross intangible assets were $9,614,000 and related accumulated amortization was
$1,590,000 at December 31, 1999.
Impairment of Long-Lived Assets
We evaluate long-lived assets, including goodwill, for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable based on expected undiscounted cash flows attributable to
that asset. The amount of any impairment is measured as the difference between
the carrying value and the fair value of the impaired asset. There were no
long-lived assets that were considered to be impaired during the periods
presented.
F-9
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense is
included in sales and marketing expense and amounted to $25,000 in fiscal 1999,
$2,000 in fiscal 1998 and nil in fiscal 1997.
Income Taxes
Income taxes are accounted for under the liability method whereby deferred
tax asset or liability account balances are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts expected to be
realized.
Currency Translation
Actuate translates the assets and liabilities of international non-U.S.
functional currency subsidiaries into dollars at the rates of exchange in effect
at the end of the period. Revenues and expenses are translated using rates that
approximate those in effect during the period. Gains and losses from currency
translation are included in stockholders' equity in the consolidated balance
sheet. Currency transaction gains or losses are recognized in current operations
and have not been significant to our operating results in any period.
Stock Dividend
We announced a two-for-one stock split (in the form of a stock dividend)
on November 8, 1999, which was distributed at the close of business on December
2, 1999. All earnings (loss) per share amounts, as well as references to common
stock and stockholders' equity amounts have been restated as if this stock
dividend had occurred as of the earliest period presented.
Stock-Based Compensation
We grant stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. In
accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), we have elected
to follow Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees" and related interpretations and to adopt the pro
forma disclosure alternative as described in SFAS 123 in accounting for our
employee stock option plan (see Note 9).
Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average
number of outstanding shares of common stock less weighted-average shares
subject to repurchase. Diluted net income (loss) per share is computed using the
weighted-average number of shares of common stock outstanding and, when
dilutive, potential common shares from options using the treasury stock method.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued from
nominal consideration, prior to effective date of our initial public offering
(IPO), would be included in the calculation of basic and diluted net loss per
share as if they were outstanding for all periods presented. To date, we have
not had any issuance or grants for nominal consideration.
F-10
The following table presents the calculation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Net income (loss) .................................... $ 3,886 $ (3,166) $ (7,242)
======== ======== ========
Basic:
Weighted-average shares of common stock
outstanding ..................................... 27,656 16,708 7,156
Weighted-average shares subject to repurchase .... (693) (1,198) (1,316)
-------- -------- --------
Shares used in computing basic net income (loss) per
share ............................................... 26,963 15,510 5,840
======== ======== ========
Basic net income (loss) per share .................... $ 0.14 $ (0.20) $ (1.24)
======== ======== ========
Diluted:
Shares used above .................................. 26,963 15,510 5,840
Effect of dilutive potential common shares ......... 2,987 -- --
-------- -------- --------
Shares used in computing diluted net income (loss)
per share ......................................... 29,950 15,510 5,840
======== ======== ========
Diluted net income (loss) per share .................. $ 0.13 $ (0.20) $ (1.24)
======== ======== ========
The total number of potential common shares excluded from the calculation
of diluted net loss per share was 1,286,300 in fiscal year 1998 and 458,540 in
fiscal 1997. These instruments have been excluded because their effect would be
antidilutive.
Comprehensive Income (Loss)
Other comprehensive income (loss) includes currency translation
adjustments and unrealized gains or losses that are not included in net loss,
but, rather are recorded directly in stockholders' equity. Total comprehensive
income (loss) includes net income (loss) and other comprehensive income (loss).
Total comprehensive income (loss) approximated net income (loss) for all periods
presented.
Segment Information
We have organized our business in a single operating segment, the
marketing and sale of software products for developing, administering, viewing
and distributing reports in both client server and Internet environments.
Further, we derive most of our revenue from our operations in the United States.
See Note 11 for geographic information.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133, as amended, will be effective
from our fiscal year 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded 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. We believe the
adoption of SFAS 133 will not have a material effect on the financial statements
as we currently do not utilize derivative instruments.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
referred to as SAB 101. SAB 101 summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition. We are
currently in the process of evaluating SAB 101 and what effect it may have on
our
F-11
financial statements. Accordingly, we have not determined whether SAB 101 will
have a material impact on our financial position or results of operations.
2. Investment in Affiliate
In March 1996, we established a joint venture company in Japan with six
other corporate partners. We received approximately 8.3% of the equity ownership
of the venture known as Actuate Japan. In June 1999, we purchased additional
shares from an existing shareholder raising our equity ownership to 16.7%.
We have a call option for all of the shares issued to the other investors
at a fixed price indicated in the agreement that increases each year after the
third year of the joint venture company. The price to purchase the remaining
(approximately 83.3%) of Actuate Japan was approximately $2.0 million as of
December 31, 1999 and will be approximately $3.9 million as of April 2002, based
on current exchange rates.
Since March 1999, the other corporate partners have the right to sell us,
at their discretion, all of their outstanding shares at a fixed price indicated
in the agreement that increases each year. This price was approximately $2.0
million as of December 31, 1999 and will be approximately $3.9 million as of
April 2002, based on current exchange rates.
3. Acquisition
In June 1999, we acquired all of the outstanding stock of Actuate Holding,
B.V. ("BV"), the parent company of our distributors based in France, Germany and
the United Kingdom, for cash. The total purchase price was $9.6 million,
representing a payment of $6.0 million in cash and the assumption of net
liabilities of $3.6 million, which includes direct merger costs of approximately
$0.3 million. The acquisition was accounted for by the purchase method of
accounting. The results of operations of BV and the estimated fair value of
assets acquired and liabilities assumed are included in our financial statements
from the date of acquisition. The Company has allocated the excess purchase
price over the fair value of net tangible assets acquired to the following
identifiable intangible assets: $-8.6 million to customer base, $0.9 million to
assembled workforce and $0.1 million to goodwill. Intangible assets and goodwill
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 information 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): Year Ended
December 31,
Year Ended
December 31,
--------------------
1999 1998
-------- --------
Revenues ............................................... $ 48,367 $ 23,442
Net income (loss) ...................................... $ 1,554 $ (8,669)
Net income (loss) per share ............................ $ 0.05 $ (0.56)
F-12
4. Short-Term Investments
The following table summarizes the amortized cost, which approximates the
fair value of our investments and their contractual maturities (in thousands):
December 31,
--------------------
1999 1998
-------- --------
Corporate debt obligations and deposits ................ $ 20,446 $ 18,077
======== ========
Included in cash and cash equivalents .................. $ 2,897 $ 7,155
Included in short-term investments ..................... 17,549 10,922
-------- --------
Due within one year .................................... $ 20,446 $ 18,077
======== ========
5. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
--------------------
1999 1998
-------- --------
Furniture and fixtures ................................. $ 439 $ 316
Computers and purchased software ....................... 3,720 2,094
Leasehold improvements ................................. 42 --
-------- --------
4,201 2,410
Less accumulated depreciation .......................... (1,763) (1,005)
-------- --------
Property and equipment, net ............................ $ 2,438 $ 1,405
======== ========
6. Note Receivable
As of December 31, 1998, we had outstanding a note receivable under full
recourse terms from one of our officers in the amount of $40,375, for the
issuance of 269,167 shares of common stock upon exercise of the officer's stock
option. Interest accrued at the rate of 6.28% per annum. The entire principal
balance, together with all accrued interest, was repaid in 1999.
7. Bank Line of Credit
In May 1998, we obtained a bank line of credit that provided for up to
$5.0 million in borrowings. The interest rate on borrowed amounts was prime plus
2.25%. We were required to comply with various financial covenants, including a
prohibition from paying dividends. The bank line of credit expired in May 1999
and was not renewed.
8. Commitments
Operating Lease Commitments
In August 1999, we entered into an eight-year office building lease
agreement, as amended, for approximately 64,000 square feet of office space
located in South San Francisco, California. In conjunction with the signing of
the office building lease, we provided the landlord with a letter of credit in
the amount of $2.9 million as security deposit. We plan to move into the new
facilities in March 2000. The lessor of the existing San Mateo office building
has agreed to terminate the leases of the current facilities without any
financial obligation as of April 2000. Rent expense for facilities under
operating leases was approximately $1.1 million in 1999, $805,000 in 1998 and
$441,000 in 1997. Aggregate minimum lease commitments under all operating leases
are as follows (in thousands):
F-13
Fiscal year
2000................................................................ $ 2,011
2001................................................................ 1,781
2002................................................................ 1,819
2003................................................................ 1,846
2004................................................................ 1,885
Thereafter.......................................................... 6,137
--------
$ 15,467
========
9. Stockholders' Equity
Preferred Stock
Under the terms of the certificate of incorporation, the board of
directors is authorized, subject to any limitations prescribed by law, to issue
the preferred stock in one or more series. Each series shall have the rights,
preferenc4es, privileges and restrictions, such as dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the right to increase or decrease the number of
shares of any series, as the board of directors shall determine. The board of
directors may issue preferred stock with voting or conversion rights that may
have the effect of delaying ,deferring or preventing a change in control of
Actuate and could adversely affect the market price of the common stock and the
voting and other rights of the holders of common stock. We currently have no
plans to issue any of the preferred stock.
Common Stock
In July 1998, we raised $30.9 million, net of issuance costs, from an
initial public offering of 6,280,000 shares of common stock. All 12,979,464
shares of convertible preferred stock were converted into 12,979,464 shares of
our common stock upon completion of our initial public offering.
Stock Option Plans
In May 1994, our board of directors adopted the 1994 Stock Option Plan
(the "Predecessor Plan") for issuance of common stock to employees, consultants
and nonemployee directors. In May 1998, the 1998 Equity Incentive Plan (the
"Plan") was adopted by the board of directors and approved by the stockholders
in July 1998 as the successor to the Predecessor Plan. Outstanding options under
the Predecessor Plan have been incorporated into the Plan and no further options
grants will be made under the Predecessor Plan. A total of 2,600,000 shares of
common stock have been reserved for issuance under the Plan. As of December 31,
1999, there were options to purchase 1,454,543 shares outstanding under the
Predecessor Plan. Except as otherwise noted, options outstanding under the
Predecessor Plan are subject to substantially the same terms as described below
for option awards under the Plan. As of January 1 of each year, the number of
shares reserved for issuance under the Plan will be increased automatically by
the lesser of (i) 5% of the total number of shares of Common Stock then
outstanding or (ii) 1,400,000 shares.
Under the Plan, eligible participants may be awarded options to purchase
shares of common stock, stock appreciation rights ("SARs"), restricted shares or
stock units (collectively, the "Awards"). Currently no Awards have been granted
under the Plan. Options under the Plan may be incentive stock options designed
to satisfy Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") or nonstatutory stock options not designed to meet such requirements. If
restricted shares or shares issued upon the exercise of options granted under
the Plan or the Predecessor Plan are forfeited, then such shares will again
become available for awards under the Plan. If stock units, options or SARs
granted under the Plan or the Predecessor Plan are forfeited or terminated for
any other reason before being exercised, then the corresponding shares will
again become available for awards under the Plan. The exercise price for
nonstatutory and incentive stock options granted under the Plan may not be less
than 85% or 100%, respectively, of the fair market value of the common stock on
the option grant date. The Board may amend
F-14
or terminate the Plan at any time. Amendments may be subject to stockholder
approval to the extent required by applicable laws.
Options granted under the Predecessor Plan are generally exercisable upon
grant, subject to repurchase rights by us until vested. Options granted under
the Plan are exercisable when vested. Shares generally vest at the rate of 20%
after one year from the date of grant and the remaining balance vesting monthly
over the next four years. Upon a change in control, an Award will become fully
vested as to all shares subject to such Award if such Award is not assumed by
the surviving corporation or its parent and the surviving corporation or its
parent does not substitute such Award with another award of substantially the
same terms. In the event of an involuntary termination of a participant within
12 months following a change in control, the vesting of an Award will accelerate
in full. Options granted under the Predecessor Plan become fully vested upon a
change in control unless assumed or replaced with a comparable option by the
acquiring entity. At December 31, 1999 and 1998, 357,318 and 1,170,102 shares of
common stock issued under the Plan were subject to repurchase by us,
respectively. All outstanding repurchase rights under the Plan shall terminate
automatically upon the occurrence of any merger, consolidation, or disposition
of all or substantially all of our assets, except to the extent the repurchase
rights are expressly assigned to the successor corporation.
As of December 31, 1999, 6,351 shares of common stock were reserved and
available for future grants under the Plan.
1998 Non-Employee Directors Option Plan
Our 1998 Non-Employee Directors Option Plan (the "Directors Option Plan")
was adopted by our board of directors in May 1998, and approved by our
stockholders in July 1998. Under the Directors Option Plan, non-employee members
of the Board of Directors are eligible for automatic option grants. 400,000
shares of common stock have been authorized for issuance under the Directors
Option Plan. Each individual who first joins the board as a non-employee
director, whether through election or appointment, will receive at that time an
automatic option grant for 40,000 shares of common stock. With respect to the
initial automatic option grant, the option will become exercisable as to 25% of
the shares after one year of board service, with the balance of the shares
becoming exercisable ratably in 36 monthly installments over the remaining
period of optionee's board service. At each annual stockholders meeting
beginning in 1999, each current non-employee director will automatically be
granted a stock option to purchase 5,000 shares of common stock, whether or not
he or she is standing for re-election at that particular meeting, which will
become fully exercisable on the first anniversary of such meeting. Each option
will have an exercise price equal to the fair market value of the common stock
on the automatic grant date and a maximum term of ten years, subject to earlier
termination following the optionee's cessation of Board service. The Board may
amend or modify the Directors Option Plan at any time. The Directors Option Plan
will terminate on May 27, 2008, unless terminated sooner by the board. However,
vesting will automatically accelerate in full upon (i) an acquisition of Actuate
by merger, consolidation or asset sale, (ii) a tender offer for more than 50% of
the outstanding voting stock or proxy contest for Board membership or (iii) the
death or disability of the optionee while serving as a Board member. As of
December 31, 1999, 20,000 shares have been issued under the Directors Option
Plan.
As of December 31, 1999, 380,000 shares of common stock were reserved and
available for future grants under the Directors Option Plan.
F-15
Activity under all plans was as follows:
Outstanding Options
Shares --------------------------- Weighted-
Available Number of Price Per Average
For Grant Shares Share Exercise Price
--------- --------- ------------- --------------
Balance at January 1, 1997....... 157,000 1,019,500 $ 0.08-$ 0.17 $ 0.10
Additional authorization.... 2,149,200 -- -- --
Options granted............. (2,292,700) 2,292,700 $ 0.17-$ 1.05 $ 0.41
Options exercised........... -- (1,635,466) $ 0.08-$ 0.63 $ 0.15
Options forfeited........... 72,834 (72,834) $ 0.08-$ 0.31 $ 0.17
---------- ----------
Options repurchased......... 15,000 -- $ 0.17 $ 0.17
Balance at December 31, 1997..... 101,334 1,603,900 $ 0.08-$ 1.05 $ 1.30
Additional authorization ... 3,561,332 -- -- --
Options granted ............ (2,648,850) 2,648,850 $ 1.05-$ 9.63 $ 5.13
Options exercised .......... -- (438,232) $ 0.08-$ 1.50 $ 0.50
Options forfeited .......... 492,168 (492,168) $ 0.17-$ 8.06 $ 1.47
Options repurchased ........ 91,568 -- $ 0.17-$ 0.31 $ 0.18
---------- ----------
Balance at December 31, 1998 .... 1,597,552 3,322,350 $ 0.08-$ 9.63 $ 4.04
Additional authorization ... 1,377,934 -- -- --
Options granted ............ (3,366,450) 3,366,450 $ 8.75-$35.13 $18.59
Options exercised .......... -- (167,339) $ 0.08-$ 8.94 $ 1.94
Options forfeited .......... 567,381 (567,381) $ 0.08-$17.69 $ 7.23
Options repurchased ........ 209,934 -- $ 0.08-$ 1.50 $ 0.26
---------- ----------
Balance at December 31, 1999 .... 386,351 5,954,080 $ 0.08-$35.31 $12.03
========== ==========
The following table summarizes information concerning outstanding and
exercisable options:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices shares Life Price shares Price
- ------------- ---------- ----------- -------- --------- ---------
$0.08-$4.13 1,492,543 8.0 years $ 1.86 509,170 $ 1.61
$4.25-$9.69 1,530,087 8.9 years $ 7.17 247,537 $ 6.79
$9.75-$16.00 1,557,000 9.6 years $ 14.16 1,600 $ 13.41
$16.06-$35.31 1,374,450 9.8 years $ 26.05 0 $ 0.00
--------- -------
$0.08-$35.31 5,954,080 9.1 years $ 12.03 758,307 $ 3.33
========= =======
At December 31, 1999, 1998, and 1997, 731,398, 211,042 and 52,074
outstanding options were vested, respectively.
1998 Employee Stock Purchase Plan
Our 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
our board of directors in May 1998, and approved by our stockholders in July
1998. A total of 500,000 shares of common stock have been reserved for issuance
under the Purchase Plan. As of January 1 of each year, the number of shares
reserved for issuance under the Purchase Plan will be automatically increased by
300,000 shares. The Purchase Plan is intended to qualify under Section 423 of
the Code. Each calendar year, two overlapping 24-month offering periods will
commence on February 1 and August 1. Each offering period contains four
six-month accumulation periods, with purchases occurring at the end of each
six-month accumulation period. The Purchase Plan permits each eligible employee
to purchase common stock through payroll deductions, which may not exceed 15% of
an employee's cash compensation. No more than 2,000 shares may be purchased on
any accumulation date. The price of each share of common stock
F-16
purchased under the Purchase Plan will be 85% of the lower of (i) the fair
market value per share of common stock on the date immediately prior to the
first date of the applicable offering period (except that in the case of the
first offering period, the price per share was $5.50, the price offered to the
public in the initial public offering) or (ii) the date at the end of the
applicable accumulation period. Employees may end their participation in the
Purchase Plan at any time during the accumulation period, and participation ends
automatically upon termination of employment with us. As of December 31, 1999,
222,200 shares had been purchased under the Purchase Plan.
As of December 31, 1999, 577,800 shares of common stock were reserved and
available for future issuance under the Purchase Plan.
Stock Compensation
We recorded deferred compensation of approximately $619,000 in 1998 and
$197,000 in 1997. These amounts represent the difference between the exercise
price and the deemed fair value of our common stock during the periods in which
such stock options were granted. We recorded amortization of deferred
compensation as an expense of approximately $91,000 in 1999, $333,000 in 1998
and $90,000 in 1997. At December 31, 1999, we have approximately $142,000
remaining to be amortized over the corresponding vesting period of each
respective option.
Pro Forma Information
We have elected to follow APB 25 and related interpretations in accounting
for our employee stock options because, as discussed below, the alternative fair
value accounting provided for under SFAS 123 requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of our employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized.
Pursuant to SFAS 123, we are required to disclose the pro forma effects on
net income (loss) and net income (loss) per share data as if we had elected to
use the fair value approach to account for all of our employee stock-based
compensation plans. Had compensation cost for our plans been determined
consistent with the fair value approach enumerated in SFAS 123, our net income
(loss) and net income (loss) per share for the years ended December 31, 1999,
1998 and 1997 would have been as indicated below (in thousands, except per share
data):
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Net income (loss) (in thousands):
As reported ............................. $ 3,866 $ (3,166) $ (7,242)
Pro forma ............................... $ (1,940) $ (4,212) $ (7,270)
Basic net income (loss) per share:
As reported ............................. $ 0.13 $ (0.41) $ (2.48)
Pro forma ............................... $ (0.07) $ (0.54) $ (2.49)
Diluted net income (loss) per share:
As reported ............................. $ 0.14 $ (0.41) $ (2.48)
Pro forma ............................... $ (0.07) $ (0.54) $ (2.49)
These pro forma amounts may not be representative of the effects on pro
forma net income (loss) for future years as options vest over several years and
additional awards may be made in subsequent years.
The weighted-average deemed fair value of stock options granted was $13.61
in 1999, $3.92 in 1998 and $0.21 in 1997. The fair value for these options was
estimated at the date of grant using the minimum value method with the following
weighted-average assumptions for fiscal year 1997: risk-free interest rate of
approximately 6.0%, a weighted-average expected life of the option of five years
and a dividend yield of zero for all periods. For fiscal 1999 and 1998, the fair
value has been estimated using the Black-Scholes
F-17
Option Pricing Model with the following weighted-average assumptions:
1999 1998
-------- --------
Risk-free interest rate ................................ 5.91% 5.25%
Expected life (in years) ............................... 3.0 4.0
Expected volatility .................................... 87% 70%
During fiscal 1999, we issued 222,200 shares under the Purchase Plan. The
weighted-average deemed fair value of employees' stock purchase rights under the
Purchase Plan during 1999 was $4.80. The fair value of the purchase rights
granted in fiscal 1999 was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 5.77%; expected dividend yield of zero percent; expected life
of six months; and expected volatility of 87%.
10. Income Taxes
As of December 31, 1999, we had federal net operating loss carryforwards of
approximately $8.5 million. We also had federal and California research and
development tax credit carryforwards of approximately $1.5 million as of
December 31, 1999. The net operating loss and credit carryforwards will expire
beginning in 2008 through 2019, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
The provision for income taxes consists of the following (in thousands):
December 31,
--------------------
1999 1998
-------- --------
Current:
Federal ............................................ $ 437 $ --
State .............................................. 113 --
Foreign ............................................ -- --
-------- --------
$ 550 $ --
======== ========
Our actual 1999 effective tax rate differs from the U.S. statutory income
tax rate as follows:
December 31,
--------------------
1999 1998
-------- --------
U.S. federal statutory rate ........................... 35.0% (35.0%)
State taxes, net of federal tax benefit ............... 1.7% --
Nondeductible goodwill amortization ................... 11.5% --
Operating loss carryforwards (utilized) not utilized .. (35.8%) 35.0%
----- ----
Effective tax rate .................................... 12.4% 0.0%
===== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
our deferred tax assets for federal and state income taxes are as follows (in
thousands):
F-18
December 31,
--------------------
1999 1998
-------- --------
Net operating loss carryforwards ....................... $ 2,930 $ 5,400
Research credit carryforwards .......................... 1,521 1,200
Capitalized research and development ................... 451 400
Accruals and allowances not currently deductible for
tax purposes ......................................... 1,128 540
Other, net ............................................. 508 860
-------- --------
Total deferred tax assets .............................. 6,538 8,400
Valuation allowance .................................... (6,538) (8,400)
-------- --------
$ -- $ --
======== ========
The net valuation allowance increased by $1.6 million in fiscal 1998 and
$2.9 million in fiscal 1997.
11. Geographic Information
Our primary operations are located in the United States. Revenues from
international sources relate to export sales, primarily to Europe and Japan. Our
revenue by geographic area is as follows (in thousands):
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
United States ........................... $ 40,229 $ 20,470 $ 9,311
International ........................... 6,552 1,402 207
-------- -------- --------
Total ............................... $ 46,781 $ 21,872 $ 9,518
======== ======== ========
12. Contingencies
We are engaged in certain legal actions arising in the ordinary course of
business. We believe we have adequate legal defenses and believe that the
ultimate outcome of these actions will not have a material effect on our
financial position or results of operations, although there can be no assurance
as to the outcome of such litigation.
13. Subsequent Events (Unaudited)
In January 2000 at a Special Meeting of Stockholders, our stockholders
approved an amendment to our Certificate of Incorporation to increase the
authorized number of shares of Common Stock from 35,000,000 to 100,000,000 and
an amendment to our 1998 Equity Incentive Plan to increase the number of shares
authorized to be issued under the Equity Incentive Plan by 2,800,000.
In February 2000, we completed the acquisition of Open Software
Technology, LLC ("OST") for approximately $13 million in cash and Actuate common
stock. This acquisition is being accounted for under the purchase method of
accounting.
In March 2000, we signed an agreement to acquire certain assets and
liabilities of EnterpriseSoft, a sole proprietorship, for approximately $8.5
million in cash and Actuate common stock. This acquisition is being accounted
for under the purchase method of accounting.
F-19