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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
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)
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(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 28, 2001, the aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $447,779,415. 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 28, 2001 there were 58,503,221 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 2001Annual Meeting of Stockholders, which is
expected to be filed not later than 120 days after the Registrant's fiscal year
ended December 31, 2000.
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ACTUATE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000
TABLE OF CONTENTS
Page
PART I........................................................................................................ 1
Item 2. Properties................................................................................ 15
Item 3. Legal Proceedings......................................................................... 15
Item 4. Submission of Matters to a Vote of the Security Holders................................... 15
PART II........................................................................................................ 15
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 15
Item 6. Selected Consolidated Financial Data....................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17
Item 7a. Quantitative and Qualitative Disclosures About Market Risk................................. 22
Item 8. Consolidated Financial Statements and Supplementary Data................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 23
PART III....................................................................................................... 23
Item 10. Directors and Executive Officers of the Registrant......................................... 23
Item 11. Executive Compensation..................................................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 23
Item 13. Certain Relationships and Related Transactions............................................. 23
PART IV........................................................................................................ 24
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 24
SIGNATURES..................................................................................................... 26
i
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 Information Delivery software
products and services for e.Business. Information Delivery along with Databases,
Content Management Systems and Application Servers, is a critical technology
component of an organization's e.Business platform. Our Actuate e.Reporting
Suite 5 (Actuate 5) product line allows companies to create, manage and deliver
secure formatted content, using operational data from multiple data sources, and
to make that high-value business content available on their e.Business Web sites
for use by customers, partners and employees. Our products and services are used
by our customers to deliver content such as transaction histories, service level
information, performance summaries, manufacturing and distribution status and
customer account information. Actuate 5 is a scalable, dynamic platform that can
be seamlessly integrated into any e.Business Web site and its server-centric
architecture provides the building blocks for an Information Delivery
environment of any size. Actuate 5's open environment allows developers to
create content from virtually any data source and present it in virtually any
format required by our customers. 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 Global 2000 companies, e.Business application vendors and Internet
start-ups. We sell our products in North America primarily through our direct
sales force and our e.Business Application Partners, who integrate and resell
Actuate software to their customers. Outside North America, 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 for many organizations. Businesses are increasingly using the
Internet 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 and
interactive nature of the Internet, has led many businesses to seek new ways to
take advantage of this global platform. To conduct business online,
organizations must develop and deploy an e.Business platform. These platforms
typically consist of four primary technology components. First, is the Database
to organize data so that its contents can easily be accessed, managed and
updated. Second, is the Content Management System which allows an e.Business to
manage and publish unstructured content, such as electronic catalogs and
marketing materials. Third, to deploy on line applications, such as the ability
to conduct complex transactions, manage supply chains and interact with
customers, the e.Business platform should include an Application Server.
1
The fourth technology component of an e.Business platform is Information
Delivery. By rapidly deploying large numbers of online applications, companies
are capturing a vast amount of information about their relationships with
customers and partners as well as information about their internal operations.
It is imperative that a company be able to deliver this information in a
personalized manner to its customers, partners and employees via the Web. An
Information Delivery solution must also seamlessly integrate into the e.Business
Web site and must be robust and scalable to support 100,000's of users.
The Actuate Solution
Actuate e.Reporting Suite 5 is an Information Delivery platform that allows
companies to create, manage and deliver secure formatted content, on their
e.Business Web sites for use by customers, partners and employees. Actuate 5
can provide any type of personalized content such as:
. Transaction histories
. Service level information
. Performance summaries
. Manufacturing and distribution status
. Customer account information
. Financial statements
Actuate 5 allows an organization to provide its customers, partners and
employees access, via the Web, to high value business content, which allows
those customers, partners and employees to make better decisions while also
allowing the organization to increase revenue, reduce costs and improve customer
service.
Actuate 5 contains the following attributes:
. Create compelling content rapidly. Our open environment, including our
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Java development environment, allows developers to create any type of
content from nearly 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. Actuate 5 is based on an object-oriented
architecture that is designed to give developers a complete visual
environment for structuring, compiling, viewing and debugging sophisticated
content. 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.
. Integrate with any Web site. Architected specifically to leverage the
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functionality of the Internet, our Information Delivery solution is
designed to be seamlessly integrated into an e.Business Web site. Critical
business information becomes accessible to a company's customers, suppliers
and employees without any need for training.
. Scale to hundreds of thousands of users. Our e.Reporting server is highly
---------------------------------------
scalable and can deliver content to 100,000's of users. Our solution is
designed to meet the Information Delivery needs of an organization as the
amount of content published on its e.Business Web site and the populations
of users accessing that information grows rapidly.
. Snap into Web/IT infrastructure. Our products support widely used
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operating systems, Web servers, databases and Internet standards. Our Open
Server permits the management of content developed with our Java
development products and many types of existing non-Actuate reports. Our
products also incorporate advanced technologies, critical for Internet
applications, such as page level security, LDAP integration and XML.
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Strategy
Our strategy is to be the leading provider of Information Delivery
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
Information Delivery. To accelerate the adoption of Actuate 5 as the standard
Information Delivery platform 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, BMC Software, Clarify, iPlanet
(Sun-Netscape Alliance), PeopleSoft, PricewaterhouseCoopers and Siebel. 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 Information Delivery. Our products integrate a number of
advanced technologies, including a patent pending method of providing page level
security in a report, LDAP integration, 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 Information Delivery 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 North America and we have sold
worldwide through the direct sales force of our 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 telesales
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 Information Delivery applications. We are extending our direct
e.Services capabilities to provide an expanded set of services to address such
areas as Web-based Information Delivery strategy, project management, security
integration and application design. 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 Information Delivery solutions and create opportunities to sell new or
additional products to clients.
Increase International Presence. We plan to increase our international
operations. Outside North America, we have established subsidiaries in
Australia, France, Germany, Japan 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 operations by increasing our international
sales force, expanding our distribution channels worldwide and by continuing the
localization of our products in selected markets.
Products and Technology
Actuate e.Reporting Suite 5 is a fully integrated, Web-based Information
Delivery suite of software products that provide an organization with the
ability to create, manage and deliver personalized content seamlessly within an
e.Business Web site. In the case of direct sales to end user customers, our
development 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.
3
The following table sets forth the primary products that comprise Actuate
5:
Actuate Products Product Description
- -------------------------------- ----------------------------------------------------------------------------
Actuate e.Reporting Server Server that provides sophisticated distribution and management
(standard, advanced and Java infrastructure, scalability, security, and snap-in integration. Also
versions) provides the foundation for users to efficiently deploy personalized,
structured content to an e.Business Web site.
Actuate Java Engine Server factory that allows the generation and management of content
developed with our e.Report Designer -- Java Edition development product.
Actuate e.Report Designer Provides a comprehensive, object-oriented environment for developers to
Professional create content rapidly and maintain that content 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.
Actuate e.Report Designer -- 100% pure Java content creation tool utilized by Java developers to rapidly
Java Edition design content
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 Global 2000
companies and Internet 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. Our telesales force conducts demonstration via
the Web and sells our products over the phone. 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 Information Delivery solution is integrated.
We offer an upgrade license to such end user customers, which permits them to
create content or reports outside the scope of the particular vendor
application. e.Business 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 and resellers.
International Operations
We also sell our products outside North America through subsidiaries
located in Australia, France, Germany, Japan and the United Kingdom and through
numerous other distributors located in Europe, Asia/Pacific, South America and
Africa. International sales accounted for 15% and 14% of our revenue in 2000 and
1999, 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
4
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.
e.Services
Our e.Services organization provides high value "implementation
solutions" consulting services to customers developing and deploying
Information Delivery solutions with our products. These services include
methodology, security integration, limited application integration and
performance evaluation. We also actively recruit and train third party
consulting firms to provide implementation services for our products. Some of
these consulting firms include PricewaterhouseCoopers, Atos Origin, Enterprise
Group, Brightstar, Innovent Solutions, Powersolv and Benchmark Technical
Services. Due to the critical nature of Information Delivery, 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 based 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, technology and other 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 Information Delivery solution. Finally, we have
invested in building a partner and channel marketing function to conduct
cooperative marketing programs with our technology partners.
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 new releases 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 online documentation
with all of our products. In addition, we offer, directly and through our
network of certified training partners, classes and training programs for our
products.
Research and Development
Our research and development organization is divided into groups consisting
of product managers, development engineers, quality assurance engineers,
technical writers and developer communications personnel. Our development
process begins with requirement specification, proceeds to functional design,
followed by technical design and concludes with implementation. Requirements
are based on the needs of customers and prospects, as
5
well as competitive, technology and industry factors. Our development group uses
detailed processes and frequent milestones during the functional and technical
design phases. During implementation, the product is built and tested daily and
our quality assurance group verifies that functionality, quality and performance
criteria are met.
Research and development expenses were $14.9 million for fiscal 2000, $9.3
million for fiscal 1999 and $7.4 million for fiscal 1998. 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 on our ability to create products that directly address our
customers' needs, leverage the latest technology innovations, are of high
quality, and support current and future releases of popular operating systems
platforms, development languages, databases, Internet standards, and e.Business
software applications. We intend 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
Our market is intensely competitive and characterized by rapidly changing
technology and evolving standards. Our competition comes in five principal
forms:
- direct competition from current or future vendors of Information
Delivery solutions such as Seagate Software (a division of Seagate
Technology, LLC.) and Brio Technology, Inc.;
- indirect competition from vendors of Business Intelligence tools such
as Hyperion Solutions Corp., Business Objects S.A., Cognos, Inc.,
MicroStrategy Incorporated and Microsoft that integrate reporting
functionality with such tools;
- indirect competition from e.Business software vendors such as SAP and
Oracle, to the extent they include Information Delivery functionality
in their applications;
- competition from other e.Business software vendors and Internet
development tool vendors; and
- competition from the information technology departments of current or
potential customers that may develop Information Delivery solutions
internally which may be cheaper and more customized than our products.
Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sales of their products than we may. Also, most current and
potential competitors, including companies such as Oracle and Microsoft, have
greater name recognition and the ability to leverage significant installed
customer bases. These companies could integrate competing Internet Information
Delivery software with their products, resulting in a loss of market share for
us. We expect additional competition as other established and emerging
companies enter the Information Delivery software market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins, longer sales cycles
and loss of market share, any of which would harm our business, operating
results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the Information Delivery needs of
our prospective customers. Also our current or future indirect channel partners
may have established in the past, or may in the future, establish cooperative
relationships with our current or potential competitors, thereby limiting our
ability to sell our products through particular distribution channels. It is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. Such competition could harm
our ability to obtain revenues from license fees from new or existing customers
and service revenues from new or existing customers on terms favorable to us.
If we are unable to compete successfully against current and future competitors
our business, operating results and financial condition would be harmed.
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
6
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 Information Delivery software product developers will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time-
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require us to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all. A successful claim of
product infringement against us and our failure or inability to license the
infringed or similar technology could harm our business, operating results and
financial condition.
Employees
As of December 31, 2000, we had 609 full-time employees, including 274 in
sales and marketing, 115 in research and development, 160 in services and
support, and 60 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.
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.
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;
7
- a slow down or a decrease in spending on information technology by our
current and/or prospective customers
- 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; and
- general domestic and international economic and political conditions.
Because our software products are typically shipped shortly after orders
are received, total revenues in any quarter are substantially dependent on
orders booked and shipped throughout that quarter. Furthermore, several factors
may require us, in accordance with accounting principles generally accepted in
the United States, to defer recognition of license fee revenue for a significant
period of time after entering into a license agreement, including:
- whether the license agreement includes both software products that are
then currently available and software products or other enhancements
that are still under development;
- whether the license agreement relates entirely or partly to then
currently undeliverable software products;
- whether the license agreement requires the performance of services
that may preclude revenue recognition until successful completion of
such services; and
- whether the license agreement includes acceptance criteria that may
preclude revenue recognition prior to customer acceptance.
In addition, we may in the future experience fluctuations in our gross and
operating margins due to changes in the mix of our domestic and international
revenues, changes in the mix of our direct sales and indirect sales and changes
in the mix of license revenues and service revenues, as well as changes in the
mix among the indirect channels through which our products are offered.
A significant portion of our total revenues in any given quarter is derived
from existing customers. Our ability to achieve future revenue growth, if any,
will be substantially dependent upon our ability to increase revenues from
license fees and services from existing customers, to expand our sales force and
to increase the average size of our orders. To the extent that such increases
do not occur in a timely manner, our business, operating results and financial
condition would be harmed. Our expense levels and 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.
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
8
resulting from sales through indirect channel partners were approximately 45% in
fiscal 2000 and 39% in fiscal 1999. Our ability to achieve significant revenue
growth in the future will depend in large part on 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 these 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 to increase correspondingly with expenses incurred in
pursuing such relationships, would harm our business, operating results and
financial condition.
IF THE MARKET FOR INFORMATION DELIVERY SOFTWARE DOES NOT GROW AS WE EXPECT OUR
BUSINESS WOULD BE SERIOUSLY HARMED.
The market for Information Delivery software products is still emerging and
we cannot be certain that it will continue to grow or that, even if the market
does grow, businesses will adopt our products. If the market for Information
Delivery software products fails to grow or grows more slowly than we expect,
our business, operating results and financial condition would be harmed. To
date, all of our revenues have been derived from licenses for our e.Reporting
software and related products and services, and we expect this to continue for
the foreseeable future. We have spent, and intend to continue to spend,
considerable resources educating potential customers and indirect channel
partners about Information Delivery and our products. However, if such
expenditures do not enable our products to achieve any significant degree of
market acceptance, our business, operating results and financial condition would
be harmed.
BECAUSE THE SALES CYCLES OF OUR PRODUCTS ARE LENGTHY AND VARIABLE, OUR QUARTERLY
RESULTS MAY FLUCTUATE.
The purchase of our products by our end user customers for deployment
within the customer's organization typically involves a significant commitment
of capital and other resources, and is therefore subject to delays that are
beyond our control. These delays can arise from a customer's internal
procedures to approve large capital expenditures, budgetary constraints and the
testing and acceptance of new technologies that affect key operations. The
sales cycle for an initial order of our products is typically 3 to 6 months and
the sales cycle associated with a follow-on large scale deployment of our
products typically extends for another 6 to 9 months or longer. We may
experience longer sales cycles in the future. Additionally, sales cycles for
sales of our products to e.Business application vendors tend to be longer,
ranging from 6 to 24 months or more and may involve convincing the vendor's
entire organization that our products are the appropriate Information Delivery
software for the vendor's application. This time period does not include the
sales and implementation cycles of such vendor's own products, which are
typically significantly longer than our sales and implementation cycles. Certain
of our customers have in the past, or may in the future, experience difficulty
completing the initial implementation of our products. Any difficulties or
delays in the initial implementation by our end user customers or our indirect
channel partners could cause such customers to reject our software or lead to
the delay or non-receipt of future orders for the large-scale deployment of our
products.
9
IF WE FAIL TO EXPAND OUR INTERNATIONAL OPERATIONS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
During fiscal 2000 and fiscal 1999, we derived 15% and 14% of our total
revenues, respectively, from sales outside North America. Our ability to
achieve revenue growth in the future will depend in large part on our success in
increasing revenues from international sales. We intend to continue to invest
significant resources to expand our sales and support operations outside North
America and to enter additional international markets. In order to expand
international sales, we must establish additional foreign operations, expand our
international channel management and support organizations, hire additional
personnel, recruit additional international distributors and increase the
productivity of existing international distributors. If we are not successful
in expanding international operations in a timely and cost-effective manner, our
business, operating results and financial condition could be harmed.
WE MAY MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE NUMEROUS RISKS
The Information Delivery software business is highly competitive, and as
such, our growth is dependent upon market growth and our ability to enhance our
existing products, introduce new products on a timely basis and expand our
distribution channels and professional services organization. One of the ways we
have addressed and will continue to address these issues is through acquisitions
of other companies. Acquisitions involve numerous risks, including the
following:
- difficulties in integration of the operations, technologies, and
products of the acquired companies;
- the risk of diverting management's attention from normal daily
operations of the business;
- risks of entering markets in which we have no or limited direct prior
experience; and
- the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently risky,
and we cannot assure you that any acquisition will be successful and will not
materially adversely affect our business, operating results or financial
condition. Failure to successfully integrate acquired companies and technologies
with us could harm our business and operating results.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
Our market is intensely competitive and characterized by rapidly changing
technology and evolving standards. Our competition comes in five principal
forms:
- direct competition from current or future vendors of Information
Delivery solutions such as Seagate Software (a division of Seagate
Technology, LLC.), and Brio Technology, Inc.;
- indirect competition from vendors of Business Intelligence tools such
as Hyperion Solutions Corp., Business Objects S.A., Cognos, Inc.,
MicroStrategy Incorporated and Microsoft that integrate reporting
functionality with such tools;
- indirect competition from e.Business software vendors such as SAP and
Oracle, to the extent they include Information Delivery functionality
in their applications;
- competition from other e.Business software vendors and Internet
development tool vendors; and
- competition from the information technology departments of current or
potential customers that may develop Information Delivery solutions
internally which may be cheaper and more customized than our products.
Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sales of their products than we may. Also, most current and
potential competitors, including companies such as Oracle and Microsoft, have
greater name recognition and the ability to leverage significant installed
customer bases. These companies could integrate competing Information Delivery
software with their products, resulting in a loss of market
10
share for us. We expect additional competition as other established and emerging
companies enter the Information Delivery software market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins, longer sales cycles
and loss of market share, any of which would harm our business, operating
results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the Information Delivery needs of
our prospective customers. Also our current or future indirect channel partners
may have established in the past, or may in the future, establish cooperative
relationships with our current or potential competitors, thereby limiting our
ability to sell our products through particular distribution channels. It is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. Such competition could harm
our ability to obtain revenues from license fees from new or existing customers
and service revenues from new or existing customers on terms favorable to us.
If we are unable to compete successfully against current and future competitors
our business, operating results and financial condition would be harmed.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS COULD BE SERIOUSLY HARMED.
The market for our products is characterized by rapid technological
changes, frequent new product introductions and enhancements, changing customer
demands and evolving industry standards. Any of these factors can render
existing products obsolete and unmarketable. We believe that our future success
will depend in large part on our ability to support current and future releases
of popular operating systems and computer programming languages, databases and
e.Business software applications, to timely develop new products that achieve
market acceptance, and to meet an expanding range of customer requirements. If
the announcement or introduction of new products by us or our competitors or any
change in industry standards causes customers to defer or cancel purchases of
existing products our business, operating results and financial condition would
be harmed. As a result of the complexities inherent in Information Delivery,
major new products and product enhancements can require long development and
testing periods. In addition, customers may delay their purchasing decisions in
anticipation of the general availability of new or enhanced versions of our
products. As a result, significant delays in the general availability of such
new releases or significant problems in the installation or implementation of
such new releases could harm our business, operating results and financial
condition. If we fail to successfully develop, on a timely and cost effective
basis, product enhancements or new products that respond to technological
change, evolving industry standards or customer requirements or such new
products and product enhancements fail to achieve market acceptance, our
business, operating results and financial condition may be harmed.
IF WE DO NOT RELEASE NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS IN A
TIMELY MANNER OR IF SUCH NEW PRODUCTS AND ENHANCEMENTS FAIL TO ACHIEVE MARKET
ACCEPTANCE OUR BUSINESS COULD BE SERIOUSLY HARMED.
We believe that our future success will depend in large part on the success
of new products and enhancements that we make generally available. Prior to the
release of any new products or enhancements, the products must undergo a long
development and testing period. To date, the development and testing of new
products and enhancements have taken longer than expected. In the event the
development and testing of new products and enhancements continue to take longer
than expected, the release of new products and enhancements will be delayed. If
we fail to release new products and enhancements in a timely manner, our
business, operating results and financial condition may be harmed. In addition,
if such new products and enhancements do not achieve market acceptance our
business, operating results and financial condition may be harmed.
THERE ARE MANAGEMENT AND OPERATIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS THAT COULD SERIOUSLY HARM OUR BUSINESS.
We have subsidiaries in Australia, France, Germany, Japan and the United
Kingdom 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 distributors located
worldwide. International
11
operations are subject to a number of risks, any of which could harm our
business, operating results and financial conditions. These risks include the
following:
- costs of localizing products for foreign countries;
- difficulty in hiring employees in foreign countries;
- trade laws and business practices favoring local competition;
- dependence on local vendors;
- compliance with multiple, conflicting and changing government laws and
regulations;
- longer sales and payment cycles;
- import and export restrictions and tariffs;
- difficulties in staffing and managing foreign operations;
- greater difficulty or delay in accounts receivable collection;
- foreign currency exchange rate fluctuations;
- multiple and conflicting tax laws and regulations; and
- political and economic instability.
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. 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 will also put a
significant strain on our management, information systems and resources. In
addition, we expect that an expansion of our international operations will lead
to increased financial and administrative demands associated with managing our
international operations and managing an increasing number of relationships with
foreign partners and customers and expanded treasury functions to manage foreign
currency risks. Our future operating results will also depend on our ability to
further develop indirect channels and expand our support organization to
accommodate growth in our installed base. If we fail to manage our expansion
effectively, our business, operating results and financial condition would be
harmed.
OUR INABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL IN THE FUTURE
WOULD SERIOUSLY HARM OUR BUSINESS.
From January 2000 through December 2000, we increased our headcount from
287 to 609 full-time employees. Furthermore, significant increases in the
number of employees are anticipated during 2001. In particular, we currently
plan to significantly expand the number of employees in sales, marketing,
customer support and research and development. Our success depends to a
significant degree upon the efforts of certain key management, sales, marketing,
customer support and research and development personnel. We believe that our
future success will depend in large part upon our continuing ability to attract
and retain highly skilled managerial, sales, marketing, customer support and
research and development personnel. Like other software companies, we face
intense competition for such personnel, and we have experienced and will
continue to experience difficulty in recruiting and retaining qualified
personnel, particularly in the San Francisco Bay Area, where the employment
market for qualified sales, marketing, customer support and research and
development personnel is extremely competitive.
12
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers and other key engineering, sales, marketing and customer support
personnel. None of our officers or key employees is bound by an employment
agreement for any specific term. If we lose the service of one or more of our
key employees, or if one or more of our executive officers or key employees
decide to join a competitor or otherwise compete directly or indirectly with us,
this could have a significant adverse effect on our business.
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 Internet based software products. If this occurs, our business,
operating results and financial condition may in the future reflect substantial
fluctuations from period to period as a consequence of buying patterns and
general economic conditions in the software industry.
IF OUR PRODUCT CONTAINS MATERIAL DEFECTS, OUR BUSINESS COULD BE SERIOUSLY
HARMED.
Software products as complex as those offered by us often contain errors or
defects, particularly when first introduced, when new versions or enhancements
are released and when configured to individual customer computing systems. We
currently have known errors and defects in our products. Despite testing
conducted by us, if additional defects and errors are found in current versions,
new versions or enhancements of our products after commencement of commercial
shipment, this could result in the loss of revenues or a delay in market
acceptance. The occurrence of any of these events could seriously harm our
business, operating results and financial condition.
IF A SUCCESSFUL PRODUCT LIABILITY CLAIM IS MADE AGAINST US, OUR BUSINESS WOULD
BE SERIOUSLY HARMED.
Although license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims, it is
possible that such limitation of liability provisions may not be effective as a
result of existing or future laws or unfavorable judicial decisions. We have
not experienced any product liability claims to date. However, the sale and
support of our products may entail the risk of such claims, which are likely to
be substantial in light of the use of our products in business-critical
applications. A product liability claim brought against us could seriously harm
our business, operating results and financial condition.
IF THE PROTECTION OF OUR PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS COULD BE
SERIOUSLY HARMED.
We have two issued and two pending U.S. patents and we rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our proprietary technology.
For example, we license our software pursuant to shrink-wrap or signed license
agreements, which impose certain restrictions on licensees' ability to utilize
the software. In addition, we seek to avoid disclosure of our intellectual
property, including requiring those persons with access to our proprietary
information to execute confidentiality agreements with us and restricting access
to our source code. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of many countries do not protect our
13
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 Information Delivery software product developers will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time-
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require us to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all. A successful claim of
product infringement against us and our failure or inability to license the
infringed or similar technology could harm our business, operating results and
financial condition.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR STOCKHOLDERS.
The market price of shares of our common stock has been and is likely to
continue to be highly volatile and may be significantly affected by factors such
as the following:
- actual or anticipated fluctuations in our operating results;
- announcements of technological innovations;
- new products or new contracts announced by us or our competitors;
- developments with respect to copyrights or proprietary rights;
- price and volume fluctuations in the stock market
- conditions and trends in the software and other technology industries;
- changes in corporate purchasing of e.Business application software;
- the announcement of mergers or acquisitions;
- adoption of new accounting standards affecting the software industry;
- changes in financial estimates by securities analysts;
- 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, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against such company. If we are involved in such litigation, it
could result in substantial costs and a diversion of management's attention and
resources and could harm our business, operating results and financial
condition.
CERTAIN OF OUR CHARTER PROVISIONS AND DELAWARE LAW, MAY PREVENT OR DETER A
CHANGE IN CONTROL OF ACTUATE.
Actuate's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated ("Bylaws"),
contain certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of Actuate or unsolicited acquisition proposals
that a stockholder might consider favorable, including provisions authorizing
the issuance of "blank check" preferred stock and eliminating the ability of
stockholders to act by written consent. In addition, certain provisions of
Delaware law and our stock option plans may also have the effect of
discouraging, delaying or preventing a change in control of Actuate or
unsolicited acquisition proposals. The anti-takeover effect of these provisions
may also have an adverse effect on the public trading price of our common stock.
14
ITEM 2. PROPERTIES
We relocated our worldwide headquarters to South San Francisco, California
in March 2000. The Company occupies this 64,000 square foot facility under an
eight-year lease. In December 2000, we entered into a ten-year lease for an
additional 50,438 square foot facility adjacent to our South San Francisco
headquarters. We expect to occupy this new facility in May 2001. Each of our
foreign subsidiaries leases space and we also lease space in other geographic
locations throughout North America 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. In addition, California has been experiencing energy power
shortages. If such power shortages result in numerous or prolonged brownouts or
blackouts, 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 our securityholders during the
fourth quarter of the fiscal year ended December 31, 2000.
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 13,800,000
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 $2.75
per share.
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 during the last two years. All share prices have been adjusted
to reflect the Company' two stock splits which occurred on December 3, 1999 and
August 15, 2000.
High Low
------------------------------- -------- ---------
First Quarter of Fiscal 1999 $ 8.25 $ 4.19
Second Quarter of Fiscal 1999 $ 7.75 $ 4.35
Third Quarter of Fiscal 1999 $ 9.17 $ 6.03
Fourth Quarter of Fiscal 1999 $23.13 $ 7.41
First Quarter of Fiscal 2000 $35.47 $17.34
Second Quarter of Fiscal 2000 $26.69 $10.00
Third Quarter of Fiscal 2000 $34.55 $21.00
Fourth Quarter of Fiscal 2000 $36.00 $14.81
As of January 31, 2001, there were approximately 144 stockholders of record
(which number does not include the number of stockholders whose shares are held
by a brokerage house or clearing agency, but does include such brokerage house
or clearing agency as one record holder). We believe we had approximately 7,925
beneficial owners of our common stock.
15
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.
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, 2000, 1999 and 1998
and the consolidated balance sheet data at December 31, 2000 and 1999 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, 1997 and 1996 and the consolidated balance sheet data as of
December 31, 1998, 1997 and 1996 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,
--------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues:
License fees................................................ $ 72,286 $35,014 $17,750 $ 7,542 $ 343
Services.................................................... 34,978 11,767 4,122 1,976 308
-------- ------- ------- ------- -------
Total revenues............................................ 107,264 46,781 21,872 9,518 651
-------- ------- ------- ------- -------
Cost of revenues:
License fees................................................ 1,959 896 1,012 647 171
Services.................................................... 20,975 6,021 3,171 1,263 305
-------- ------- ------- ------- -------
Total cost of revenues.................................... 22,934 6,917 4,183 1,910 476
-------- ------- ------- ------- -------
Gross profit.................................................. 84,330 39,864 17,689 7,608 175
Operating expenses:
Sales and marketing......................................... 48,133 22,384 11,658 7,366 2,965
Research and development.................................... 14,938 9,289 7,373 6,213 2,731
General and administrative.................................. 7,015 3,478 2,563 1,317 603
Amortization of goodwill and other purchased intangibles.... 7,147 1,590 -- -- --
-------- ------- ------- ------- -------
Total operating expenses.................................. 77,233 36,741 21,594 14,896 6,299
-------- ------- ------- ------- -------
Income (loss) from operations................................. 7,097 3,123 (3,905) (7,288) (6,124)
Interest and other income, net................................ 891 1,313 739 46 65
-------- ------- ------- ------- -------
Income (loss) before income taxes............................. 7,988 4,436 (3,166) (7,242) (6,059)
Provision for income taxes.................................... 2,589 550 -- -- --
-------- ------- ------- ------- -------
Net income (loss)............................................. $ 5,399 $ 3,886 $(3,166) $(7,242) $(6,059)
======== ======= ======= ======= =======
Basic income (loss) per share(1).............................. $ 0.10 $ 0.07 $ (0.10) $ (0.62) $ (0.55)
======== ======= ======= ======= =======
Shares used in basic per share calculation (1)............... 56,114 53,926 31,020 11,680 10,964
======== ======= ======= ======= =======
Diluted income (loss) per share (1).......................... $ 0.08 $ 0.06 $ (0.10) $ (0.62) $ (0.55)
======== ======= ======= ======= =======
Shares used in diluted per share calculation (1).............. 64,483 59,900 31,020 11,680 10,964
======== ======= ======= ======= =======
December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments....... $26,928 $24,153 $32,730 $ 3,191 $ 1,040
Working capital (deficit)............................... 23,237 20,744 24,416 (3,318) (1,564)
Total assets............................................ 98,322 53,381 39,798 7,587 3,664
Long-term obligations, less current portion............. -- -- -- 124 213
Stockholders' equity (deficit).......................... 56,977 31,636 26,034 (2,202) (1,191)
_______________________
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to used determine the number of shares used in computing
net income (loss) per share.
16
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.
Overview
We are a leading provider of Information Delivery software products and
services for e.Business. 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 from license fees for software
products and, to a lesser extent, fees for services relating to such products,
including software maintenance and support, consulting and training.
In June 1999, we acquired all of the outstanding shares of Actuate Holding,
B.V. ("BV"), the parent company of our distributors based in France, Germany and
the United Kingdom. The acquisition was accounted under the purchase method of
accounting. In connection with this acquisition, we recorded $9.6 million in
goodwill and identified 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.
In February 2000, we acquired all of the outstanding shares of Open
Software Technology LLC ("OST") for cash and shares of Actuate stock. The
acquisition was accounted under the purchase method of accounting. In connection
with this acquisition, we recorded $13.1 million in goodwill and identified
intangible assets, which are being amortized over periods not exceeding four
years on a straight-line basis. The results of operations of OST and the
estimated fair value of assets acquired and liabilities assumed are included in
the consolidated financial statements from the date of acquisition.
17
In March 2000, we purchased all the assets and business of EnterpriseSoft.
In connection with this purchase, we recorded $8.7 million in goodwill and
identified intangible assets, which are being amortized over periods not
exceeding four years on a straight-line basis. The results of operations of
EnterpriseSoft and the estimated fair value of assets acquired are included in
the consolidated financial statements from the date of purchase.
In April 2000, we purchased additional shares of our distributor in Japan
("Actuate Japan") from existing shareholders and became the majority
shareholder. We currently own 66.7% of Actuate Japan. In connection with this
purchase, we recorded $1.5 million in goodwill, which is being amortized over
four years on a straight-line basis. The results of operations of Actuate Japan
and the estimated fair value of assets acquired and liabilities assumed are
included in the consolidated financial statements from the date we became the
majority shareholder.
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, fees are
fixed or determinable, provided no 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.
License arrangements with end user customers generally give the customer a
perpetual license to use our software, 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.
License arrangements with e.Business application vendors are for specified
duration and require that such vendors only license our products to their
customers for use with such vendor's application. Furthermore, license
arrangements with distributors give such distributors the right to distribute
our products to 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 (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, (ii)
arrangements pursuant to which a license fee is paid to us, which we recognize
as revenue when no further obligations remain, provided the fees are fixed or
determinable and collection of the resulting receivables is deemed probable or
(iii) arrangements in which we recognize revenue based on the e.Business
application vendor's sell-through.
Service revenues are primarily comprised of revenue from maintenance
agreements, consulting and training fees. Revenue from maintenance agreements
is deferred and recognized on a straight-line basis as service revenue over the
term of the related agreement, which is typically one year. Service revenues
from consulting and training services are recognized upon completion of the work
to be performed.
To date we have sold our products internationally primarily through our
subsidiaries in Europe and Japan. During 2000, 1999 and 1998, we derived 15%,
14% and 6% of our total revenues, respectively, from sales outside North
America. 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 resources to expand our
sales and support operations outside North America 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. 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 materially adversely affected.
We have a limited ability to forecast future revenues and expenses, thus
the prediction of future operating results is difficult and unreliable. In
addition, historical growth rates in our revenues and earnings should not be
considered indicative of future revenue or earnings growth rates or operating
results. There can be no assurance that
18
any of our business strategies will be successful or that we will be able to
maintain profitability on a quarterly or annual basis. It is likely that in some
future quarter our operating results will be below the expectations of public
market analysts and investors, and in such event the price of our common stock
could decline.
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,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
License fees..................................... 67 % 75 % 81 %
Services......................................... 33 25 19
---- ---- ----
Total revenues................................ 100 100 100
---- ---- ----
Cost of revenues:
License fees..................................... 2 2 5
Services......................................... 19 13 14
---- ---- ----
Total cost of revenues........................ 21 15 19
---- ---- ----
Gross margin....................................... 79 85 81
---- ---- ----
Operating expenses:
Sales and marketing.............................. 45 48 53
Research and development......................... 14 20 34
General and administrative....................... 6 8 12
Amortization of goodwill and other purchased
intangibles..................................... 7 3 --
---- ---- ----
Total operating expenses...................... 72 79 99
---- ---- ----
Income (loss) from operations...................... 7 6 (18)
Interest and other income, net..................... 1 3 3
Provision for income taxes......................... (3) (1) --
---- ---- ----
Net income (loss).................................. 5 % 8 % (15)%
==== ==== ====
Revenues
Our revenues are derived from license fees and services, which include
software maintenance and support, consulting and training. Total revenues
increased by 114% from $21.9 million in fiscal 1998 to $46.8 million in fiscal
1999 and by 129% to $107.3 million in fiscal 2000. 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 97% from $17.8
million in fiscal 1998 to $35.0 million in fiscal 1999 and by 106% to $72.3
million in fiscal 2000. 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 45%, 39% and 41%
of total revenues from license fees for 2000, 1999 and 1998, respectively.
Services. Revenues from services increased by 185% from $4.1 million in
fiscal 1998 to $11.8 million in fiscal 1999 and by 197% to $35.0 million in
fiscal 2000. The increase in 2000 was due to increases in consulting revenues as
a result of our acquisition of OST, and increases in maintenance and support
related to increases in our installed customer base.
Cost of Revenues
19
License Fees. Cost of revenues from license fees consists primarily of
product packaging, documentation and production costs, and localization of our
software for international distribution. Cost of revenues from license fees
decreased from $1.0 million, or 6% of revenues from license fees, in 1998 to
$896,000, or 3% of revenues from license fees, in fiscal 1999 and increased to
$2.0 million, or 3% of revenues from license fees, in fiscal 2000. The decrease
in absolute dollars in fiscal 1999 was primarily due to an increase in existing
customers purchasing additional licenses in which no shipments were required.
The decrease in cost of license fees revenues as a percentage of license fees
revenues in fiscal 1999 was due to improved leverage in production and personnel
costs and increases in the average selling price of our software. The increase
in absolute dollars in fiscal 2000 was primarily due to packaging and production
costs to support increased sales, and, to lesser extent, increased localization
expense and royalty fees paid for embedded third party technologies. We expect
cost of revenues from license fees to continue to grow in absolute dollars due
to increasing licensing activity.
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 $3.2 million, or 77% of services revenues, in fiscal 1998 to $6.0
million, or 51% of services revenues, in fiscal 1999 and to $21.0 million, or
60% of services revenues, in fiscal 2000. The decrease in cost of services as a
percentage of services revenues in fiscal 1999 was due to efficiency and
economies of scale. The increase in absolute dollars in 2000 was primarily due
to increases in customer support personnel obtained in the OST acquisition and
increased third-party costs to support the growing needs of our customers. The
increase in cost of services as a percentage of services revenues in fiscal 2000
was due to integration costs relating to our acquisition of OST and building the
infrastructure to support our growing service organizations. We expect cost of
services to continue to grow in absolute dollars as we continue to hire
additional customer support personnel and consultants to support our customers'
demand for our services.
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 92% from $11.7 million in fiscal 1998 to $22.4 million, or
48% of total revenues, in fiscal 1999 and by 115% to $48.1 million, or 45% of
total revenues, in fiscal 2000. 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 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 26% from
$7.4 million in fiscal 1998 to $9.3 million, or 20% of total revenues, in fiscal
1999 and by 61% to $14.9 million, or 14% of total revenues, in fiscal 2000. 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 36% from $2.6
million in fiscal 1998 to $3.5 million, or 8% of total revenues, in fiscal 1999
and by 102% to $7.0 million, or 6% of total revenues, in fiscal 2000. The
increases in absolute dollars were primarily due to increases in personnel and
related costs and professional fees
20
necessary to manage and support our growth and facilities expansion. 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 aggregating
$816,000 in 1997 and 1998. 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. There was no deferred compensation in
1999 and 2000. In fiscal 2000, 1999 and 1998, we recorded amortization expense
of approximately $61,000, $91,000, and $333,000, respectively. All deferred
compensation expense has been included in general and administrative expenses.
At December 31, 2000, we have approximately $81,000 remaining to be amortized
over the corresponding vesting period of each respective option, generally five
years. Upon cancellation of the underlying stock options, the unamortized
portion has been offset against additional paid-in capital.
Amortization of Goodwill and Other Purchased Intangibles. In connection
with the acquisition of BV in June 1999, we recognized $9.6 million in goodwill
and identified intangible assets. In addition, we recognized $13.1 million in
goodwill and identified intangible assets in our acquisition of OST in February
2000 and $8.7 million in goodwill and identified intangible assets in our
acquisition of EnterpriseSoft in March 2000. In April 2000, we purchased
additional shares of Actuate Japan and became the majority shareholder. We
recognized $1.5 million in goodwill as a result of consolidating Actuate Japan's
financial statements. All of these acquisitions were accounted for by the
purchase method of accounting. Goodwill and identified intangibles are being
amortized on a straight-line basis over periods not exceeding four years. In
fiscal 2000 and 1999, we recorded amortization expense of approximately $7.1
million and $1.6 million, respectively. Approximately $24.2 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 $739,000 in fiscal 1998 to $1.3 million in
fiscal 1999, and decreased to $891,000 in fiscal 2000. The increase in 1999 was
due to interest income earned on investment from net proceeds from our initial
public offering in July 1998. The decrease in 2000 was due to lower interest
income on a lower average annual investment base as we used cash to purchase
OST, EnterpriseSoft and shares of Actuate Japan.
Provision for Income Taxes
The provision for income taxes on our pretax income was 32.4% and 12.4% in
fiscal 2000 and 1999, respectively. We incurred losses prior to 1999 and no
provision for income taxes was recorded. In general, our effective tax rate
differs from the statutory rate of 35% largely as a function of benefits
realized from prior years' losses. The increase of the 2000 effective tax rate
as compared to the 1999 effective tax rate was primarily due to non-deductible
acquisition costs and goodwill amortization expenses related to corporate merger
and acquisitions completed in fiscal 2000.
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, $30.9 million in net proceeds from our initial public offering in July
1998, and cash from operations.
As of December 31, 2000, we had cash and cash equivalents of $26.9 million.
In fiscal 2000 and 1999, we generated positive cash flow of $19.3 million and
$1.8 million, respectively, from operating activities, and used $138,000 in cash
in fiscal 1998.
Net cash used in investing activities was $5.3 million in fiscal 2000,
$18.5 million in fiscal 1999, and $11.8 million in fiscal 1998. In fiscal 2000,
cash was used primarily to purchase property and equipment for our newly
relocated and expanded facilities in South San Francisco, and for our
acquisition of OST, which was offset by proceeds from maturity of short-term
investments. In fiscal 1999, cash was used primarily in the acquisition of BV
21
and purchase of short-term investments. In fiscal 1998, cash was used primarily
for purchase of short-term investments.
Net cash provided by financing activities was $6.3 million in fiscal 2000,
$1.4 million in fiscal 1999, and $30.8 million in fiscal 1998. Cash from
financing activities in fiscal 2000 and 1999 primarily reflects the net proceeds
from the exercise of options under our stock option plan and purchases of common
stock under our stock purchase plan. Cash from financing activities in fiscal
1998 primarily reflect net proceeds from sales of common stock issued during the
initial public offering.
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 the
minority interest in 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 staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," or SAB 101. SAB 101 summarizes certain areas of the staff's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. We adopted SAB 101 in our fiscal quarter beginning
January 1, 2000. We believe that our current revenue recognition policy complies
with SAB 101. The adoption of SAB 101 did not result in a material impact on our
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB No. 25," or FIN 44. FIN 44 clarifies
the application of APB No. 25 and, among other issues, clarifies the following:
the definition of an employee for purposes of applying APB No. 25; the criteria
for determining whether a plan qualifies as a non-compensatory plan; the
accounting consequence of various modifications to the terms of the previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The application of FIN 44 has not
had a material impact on our financial position or our results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During 2000, 1999 and 1998, we derived 15%, 14% and 6% of our total
revenues, respectively, from sales outside the United States. Approximately 2%
of the revenues from our U.S. operations are overseas sales and are denominated
in U.S. dollars. Our exposure to market risk on these receivables 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 from expectations and adversely impact overall expected
profitability. The effect of foreign exchange rate fluctuations in 2000 was not
material.
22
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 2001 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, 2000.
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
"Security 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.
23
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
--- -----------
2.1 (5) Form of Purchase Agreement dated February 29, 2000, by and among
the Company, Rohit Mathur, Barry Clague, Anita Gupta and Sowmya
Narayan.
2.2 (6) Form of Purchase Agreement dated March 16, 2000, by and between
the Company and EnterpriseSoft.
3.1 (4) 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 2001 Supplemental Stock Option Plan.
10.7 (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.
10.8 (1) Promissory Note between the Company and Actuate Japan, Co., Ltd.
dated December 27, 1997.
10.9 (2) Letter Agreement between the Company and Actuate Japan, Co., Ltd.
dated September 17, 1998.
10.10 (2) Actuate Japan Agreement between the Company and Actuate Japan,
Co., Ltd. dated August 15, 1998.
10.11 (1) Offer Letter between the Company and Daniel A. Gaudreau dated May
7, 1997.
10.12 (1) Offer Letter between the Company and Hamid Bahadori dated May 20,
1998.
10.13 (3) Office Building Lease between the Actuate and HMS Gateway Office,
L.P. dated August 18, 1999.
10.14 (3) First Amendment to Office Building Lease between the Actuate and
HMS Gateway Office, L.P. dated September 30, 1999.
10.15 Office Building Lease between the Actuate and HMS Gateway Office,
L.P. dated December 21, 2000.
21.1 Subsidiaries of Actuate Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors .
24.1 Power of Attorney. (see the signature page to this Form 10-K).
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 Annual Report on Form 10-K for the period
ended December 31, 1999.
(5) Incorporated by reference to our Report on Form 8-K filed on March 10,
2000.
(6) Incorporated by reference to our Report on Form 8-K filed on March 27,
2000.
24
(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, 2000.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedule
See (a)(2) above.
25
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 9, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Peter I. Cittadini 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 Architect March 9, 2001
- --------------------------------------
Nicolas C. Nierenberg
/s/ PETER I. CITTADINI Director, President and Chief Executive March 9, 2001
- --------------------------------------
Peter I. Cittadini Officer (Principal Executive Officer)
/s/ Daniel A. Gaudreau Senior Vice President, Finance and March 9, 2001
- --------------------------------------
Daniel A. Gaudreau Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ GEORGE B. BEITZEL Director March 9, 2001
- --------------------------------------
George B. Beitzel
/s/ KENNETH E. MARSHALL Director March 9, 2001
- --------------------------------------
Kenneth E. Marshall
/s/ ARTHUR C. PATTERSON Director March 9, 2001
- --------------------------------------
Arthur C. Patterson
/s/ Steven D. Whiteman Director March 9, 2001
- --------------------------------------
Steven D. Whiteman
26
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 (Net Capital Deficiency).. F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-8
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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency) and cash
flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
January 11, 2001
F-2
ACTUATE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
-----------------------------------------
2000 1999
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 26,928 $ 6,604
Short-term investments........................................... -- 17,549
Accounts receivable, net of allowance for doubtful accounts of
$2,895 at December 31, 2000 and $1,553 at December 31, 1999..... 32,991 17,229
Prepaids and other current assets................................ 2,630 1,107
------------------ -----------------
Total current assets................................................ 62,549 42,489
Property and equipment, net......................................... 10,190 2,438
Goodwill and other purchased intangibles, net....................... 24,193 8,024
Other assets........................................................ 1,390 430
------------------ -----------------
$ 98,322 $ 53,381
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 4,254 $ 1,749
Accrued compensation............................................. 5,941 3,694
Other accrued liabilities........................................ 6,584 3,769
Deferred revenue................................................. 22,108 12,168
Income taxes payable............................................. 425 365
------------------ -----------------
Total current liabilities........................................... 39,312 21,745
------------------ -----------------
Long-term obligations............................................... 2,033 --
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,
2000 and 1999................................................... -- --
Common stock, $0.001 par value, 100,000,000 shares authorized;
57,893,282 and 55,476,606 shares issued and outstanding at
December 31, 2000 and 1999, respectively........................ 58 56
Additional paid-in capital....................................... 67,623 47,816
Deferred stock compensation...................................... (81) (142)
Accumulated other comprehensive income........................... 231 159
Accumulated deficit.............................................. (10,854) (16,253)
----------------- ----------------
Total stockholders' equity.......................................... 56,977 31,636
------------------ -----------------
$ 98,322 $ 53,381
================== =================
See accompanying notes.
F-3
ACTUATE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
-----------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues:
License fees................................................ $ 72,286 $ 35,014 $ 17,750
Services.................................................... 34,978 11,767 4,122
Total revenues................................................ 107,264 46,781 21,872
----------- ----------- -----------
Costs and expenses:
Cost of license fees........................................ 1,959 896 1,012
Cost of services............................................ 20,975 6,021 3,171
Sales and marketing......................................... 48,133 22,384 11,658
Research and development.................................... 14,938 9,289 7,373
General and administrative.................................. 7,015 3,478 2,563
Amortization of goodwill and other purchased intangibles.... 7,147 1,590 --
----------- ----------- -----------
Total costs and expenses...................................... 100,167 43,658 25,777
----------- ----------- -----------
Income (loss) from operations................................. 7,097 3,123 (3,905)
Interest and other income, net................................ 891 1,313 739
----------- ----------- -----------
Income (loss) before income taxes............................. 7,988 4,436 (3,166)
Provision for income taxes.................................... 2,589 550 --
----------- ----------- -----------
Net income (loss)............................................. $ 5,399 $ 3,886 $ (3,166)
=========== =========== ===========
Basic income (loss) per share................................. $ 0.10 $ 0.07 $ (0.10)
=========== =========== ===========
Shares used in basic per share calculation.................... 56,114 53,926 31,020
=========== =========== ===========
Diluted income (loss) per share............................... $ 0.08 $ 0.06 $ (0.10)
=========== =========== ===========
Shares used in diluted per share calculation.................. 64,483 59,900 31,020
=========== =========== ===========
See accompanying notes.
F-4
ACTUATE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share data)
Note
Additional Receivable
Preferred Stock Common Stock Paid-in from
--------------------- -------------------
Shares Amount Shares Amount Capital Officer
---------- -------- ---------- ------- ----------- ----------
Balance at January 1, 1998............................. 25,958,928 $ 26 15,905,140 $ 16 $14,876 $ (40)
Issuance of common stock upon exercise of stock
options, net of repurchases.......................... -- -- 693,328 1 200 --
Issuance of common stock in public offering, net of
issuance costs of $3,672............................. -- -- 12,560,000 13 30,855 --
Conversion of convertible preferred stock into
common stock........................................ (25,958,928) (26) 25,958,928 26 -- --
Deferred compensation related to grant of stock
options............................................. -- -- -- -- 619 --
Amortization of deferred compensation.................. -- -- -- -- -- --
Net loss............................................... -- -- -- -- -- --
----------- ------ ---------- ----- ------- ----------
Balance at December 31, 1998........................... -- -- 55,117,396 56 46,550 (40)
Comprehensive income
Net income......................................... -- -- -- -- -- --
Currency translation............................... -- -- -- -- -- --
Total comprehensive income.....................
Issuance of common stock upon exercise of stock
options, net of repurchases.......................... -- -- (85,190) -- 244 --
Issuance of common stock under Employee Stock
Purchase Plan........................................ -- -- 444,400 -- 1,123 --
Amortization of deferred compensation, net of
cancellations....................................... -- -- -- -- (160) --
Tax benefits from employee stock options............... -- -- -- -- 59 --
Payment on note receivable............................. -- -- -- -- -- 40
----------- ------ ---------- ----- ------- ----------
Balance at December 31, 1999........................... -- -- 55,476,606 56 47,816 --
Comprehensive income
Net income......................................... -- -- -- -- -- --
Currency translation............................... -- -- -- -- -- --
Total comprehensive income.....................
Issuance of common stock upon exercise of stock
options, net of repurchases and issuance costs....... -- -- 1,509,536 1 4,039 --
Issuance of common stock under Employee Stock
Purchase Plan........................................ -- -- 604,576 1 2,495 --
Amortization of deferred compensation, net of
cancellations........................................ -- -- -- -- -- --
Insurance of common stock related to Open Software
Technology acquisition............................... -- -- 102,564 -- 3,245 --
Issuance of common stock related to EnterpriseSoft
acquisition.......................................... -- -- 200,000 -- 6,257 --
Tax benefits from employee stock options............... -- -- -- -- 3,771 --
----------- ------ ---------- ----- ------- ----------
Balance at December 31, 2000........................... -- $ -- 57,893,282 $ 58 $67,623 $ --
=========== ====== ========== ===== ======= ==========
Total
Accumulated Stockholders'
Deferred other Equity (Net
Stock Comprehensive Accumulated Capital
Compensation Income Deficit Deficiency)
------------ ------------- ----------- -------------
Balance at January 1, 1998............................. $(107) $ -- $ (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............................................. (619) -- -- --
Amortization of deferred compensation.................. 333 -- -- 333
Net loss............................................... -- -- (3,166) (3,166)
----- ---- --------- ---------
Balance at December 31, 1998........................... (393) -- (20,139) 26,034
Comprehensive income
Net income......................................... -- -- 3,886 3,886
Currency translation............................... -- 159 -- 159
---------
Total comprehensive income..................... 4,045
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....................................... 251 -- -- 91
Tax benefits from employee stock options............... -- -- -- 59
Payment on note receivable............................. -- -- -- 40
----- ---- --------- ---------
Balance at December 31, 1999........................... (142) 159 (16,253) 31,636
Comprehensive income
Net income......................................... -- -- 5,399 5,399
Currency translation............................... -- 72 -- 72
---------
Total comprehensive income..................... 5,471
Issuance of common stock upon exercise of stock
options, net of repurchases and issuance costs....... -- -- -- 4,040
Issuance of common stock under Employee Stock
Purchase Plan........................................ -- -- -- 2,496
Amortization of deferred compensation, net of
cancellations........................................ 61 -- -- 61
Insurance of common stock related to Open Software
Technology acquisition............................... -- -- -- 3,245
Issuance of common stock related to EnterpriseSoft
acquisition.......................................... -- -- -- 6,257
Tax benefits from employee stock options............... -- -- -- 3,771
----- ---- --------- ---------
Balance at December 31, 2000........................... $ (81) $231 $ (10,854) $ 56,977
===== ==== ========= =========
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,
-------------------------------------------------------
2000 1999 1998
---------- ---------- ---------
Operating activities
Net income (loss)........................................... $ 5,399 $ 3,886 $ (3,166)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Amortization of deferred compensation...................... 61 91 333
Amortization of goodwill and other intangibles............. 7,147 1,590 -
Depreciation............................................... 2,778 1,048 695
Loss on disposal of fixed assets........................... - - 70
Tax benefit from exercise of stock options................. 3,771 - -
Change in operating assets and liabilities, net of effects
of acquisition:
Accounts receivable....................................... (14,281) (12,179) (2,066)
Other current assets...................................... (1,523) (707) (228)
Accounts payable.......................................... 892 539 367
Accrued compensation...................................... 2,247 2,401 296
Income taxes payable...................................... 60 423 -
Other accrued liabilities................................. 2,815 376 1,714
Deferred revenue.......................................... 9,940 4,300 1,847
---------- ---------- ---------
Net cash generated by (used in) operating activities......... 19,306 1,768 (138)
---------- ---------- ---------
Investing activities
Purchase of property and equipment.......................... (10,530) (2,081) (1,074)
Purchases of short-term investments......................... - (26,445) (10,922)
Proceeds from maturity of short-term investments............ 17,549 19,818 290
Acquisition of Actuate Holding, B.V., including payment of
assumed net liabilities.................................... - (9,614) -
Acquisition of Open Software Technology, net of cash
assumed................................................... (7,406) - -
Acquisition of EnterpriseSoft business...................... (2,500) - -
Acquisition of shares of Actuate Japan...................... (666) - -
Increase in other assets.................................... (1,787) (217) (69)
---------- ---------- ---------
Net cash used in investing activities........................ (5,340) (18,539) (11,775)
---------- ---------- ---------
Financing activities
Proceeds from issuance of stock, net of issuance costs and
repurchases................................................ 6,536 1,368 31,069
Payments on capital lease obligations....................... - - (249)
Payments of bank loan....................................... (250) - -
Repayment of stockholder's note............................. - 40 -
---------- ---------- ---------
Net cash provided by financing activities.................... 6,286 1,408 30,820
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents......... 20,252 (15,363) 18,907
Change in cumulative translation adjustment.................. 72 159 -
Cash and cash equivalents at beginning of year............... 6,604 21,808 2,901
---------- ---------- ---------
Cash and cash equivalents at end of year..................... $ 26,928 $ 6,604 $ 21,808
========== ========== =========
F-6
Non cash financing activities:
Value of common stock issued in connection with the
acquisitions................................................ $ 9,502 $ - $ -
========== ========= =========
Consideration payable in future in connection with the
acquisition of Open Software Technology..................... $ 2,033 $ - $ -
========== ========= =========
Supplemental disclosure of cash flow information
Interest paid................................................ $ 4 $ 56 $ 22
========== ========= =========
Income taxes paid............................................ $ 463 $ 130 $ -
========== ========= =========
See accompanying notes.
F-7
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
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. We are a leading provider of Information Delivery
software products and services for e.Business. Information Delivery along with
Databases, Content Management Systems and Application Servers, is a critical
technology component of an organization's e.Business platform. Our Actuate
e.Reporting Suite 5 (Actuate 5) product line allows companies to create, manage
and deliver secure formatted content, using operational data from multiple data
sources, and to make that high-value business content available on their
e.Business Web sites for use by customers, partners and employees. Our products
and services are used by our customers to deliver content such as transaction
histories, service level information, performance summaries, manufacturing and
distribution status and customer account information. Actuate 5 is a scalable,
dynamic platform that can be seamlessly integrated into any e.Business Web site
and its server-centric architecture provides the building blocks for an
Information Delivery environment of any size. Actuate 5's open environment
allows developers to create content from virtually any data source and present
it in virtually any format required by our customers. 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 Global 2000 companies, e.Business application vendors
and Internet start-ups. We sell our products in North America primarily through
our direct sales force and our e.Business Application Partners, who integrate
and resell Actuate software to their customers. Outside North America, 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 and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
During 1999, we completed the acquisition of Actuate Holding, B.V. ("BV").
During 2000, we completed the acquisition of Open Software Technology, LLC
("OST") and acquired all the assets and business of EnterpriseSoft. These
acquisitions were accounted for under the purchase method of accounting. In
accordance with the purchase method of accounting, the Consolidated Statements
of Operations include these companies' operating results from the date of
acquisition. Also during 2000, we purchased additional shares of Actuate Japan
Company Ltd. ("Actuate Japan"), our distributor located in Japan, from its
other shareholders and became the majority shareholder. As of December 31,
2000, we have approximately 66.7% of the outstanding voting stock of Actuate
Japan. We have consolidated the results of Actuate Japan from the date that we
became the majority shareholder. Accumulated losses applicable to the minority
shareholders exceed their equity capital in Actuate Japan. This excess loss
applicable to the minority shareholders has been charged to us, as the minority
shareholders are not obligated to contribute their share of losses exceeding
their equity capital.
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 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 customers or indirect channel partners is recognized as revenue after
execution of a license agreement or receipt of a definitive
F-8
purchase order, and shipment of the product, if no vendor obligations remain,
there are no uncertainties surrounding product acceptance, the license fees are
fixed or determinable, and collection of the license fee is considered probable.
Our products do not require significant customization. The majority of end user
license revenues are derived from end user customer orders for specific
individual products. These types of transactions are recognized as revenue upon
shipment of product, assuming that all other revenue recognition criteria are
met. Advance payments from end-users, in arrangements in which the end user
customer has the right to future unspecified products, are deferred and
recognized as revenue ratably over the estimated term of the period, typically
one year, during which the end-user is entitled to receive the products. If the
license agreement contains extended payment terms that would indicate that the
fee is not fixed or determinable, revenue is recognized as the payments become
due, assuming that all other revenue recognition criteria are met.
License arrangements with enterprise application vendors, resellers and
distributors generally take the form of either (a) fixed price arrangements in
which the contracting entity has the right to the unlimited usage, unspecified
future products, and sublicensing of the licensed software for a specified term
and pursuant to which license fee revenue is deferred and recognized on a
straight-line basis over the term of the license agreement, (b) arrangements
pursuant to which a license fee is paid to us, which we recognize as revenue
when no further obligations remain, provided the fees are fixed or determinable
and collection of the resulting receivables is deemed probable or (c)
arrangements in which we recognize revenue based on the e.Business application
vendor's sell-through.
Service revenues are primarily comprised of revenue from maintenance
agreements, consulting and training fees. Revenue from maintenance agreements is
deferred and recognized on a straight-line basis as service revenue over the
life of the related agreement, which is typically one year. Service revenues
from consulting and training are recognized upon completion of the work to be
performed. When we provide a software license and the related maintenance for
one bundled price, the fair value of the maintenance, based on the price charged
for that element separately, is deferred and recognized ratably over the term of
the respective agreement.
Based upon our interpretation of current available guidance, we believe our
revenue recognition policies are in accordance with Statement of Position No.
97-2 "Software Revenue Recognition", as amended.
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 based on quoted market
price, 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 customer has accounted for more than 10% of our sales in any period
presented. Sales for the year ended December 31, 2000, 1999 and 1998 are shown
net of customer returns of approximately $2.2 million, $435,000 and $639,000
respectively. We do not require collateral on sales with credit terms. During
the years ended December 31, 2000, 1999 and 1998, respectively, we added
approximately $1.6 million, $876,000 and $548,000 to our bad debt reserves.
Total write-offs of uncollectible amounts were approximately $299,000, $117,000
and $328,000 in these years, respectively. Allowance for doubtful accounts at
December 31, 1998 was $794,000.
Fair Value of Financial Instruments
The carrying amount of Actuate's cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and long-term obligations
approximate their respective fair value based on the
F-9
short timeframe to maturity or payment date.
Software Development Costs
Software development costs associated with new products and enhancements to
existing software products are expensed as incurred until technological
feasibility in the form of a working model has been established. To date, the
time period between the establishment of technological feasibility and
completion of software development has been short, and no significant
development costs have been incurred during that period. Accordingly, Actuate
has not capitalized any software development costs to date.
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 two to eight years.
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life.
Intangible Assets
Goodwill and other purchased intangibles relate to various acquisitions.
These amounts are being amortized over the expected useful life not exceeding
four years using the straight-line method. At December 31, 2000 and 1999, gross
intangible assets, including goodwill, were $33.0 million and $9.6 million,
respectively, and related accumulated amortization was $8.8 million and $1.6
million at December 31, 2000 and 1999, respectively.
Impairment of Long-Lived Assets
In accordance with the Statement of Financial Accounting No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", 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.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs are included
in sales and marketing expense and amounted to $877,000, $25,000 and $2,000 in
fiscal 2000, 1999 and 1998, respectively.
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 Dividends
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. On July 12, 2000, we announced another
F-10
two-for-one stock split in the form of a stock dividend, which was distributed
at the close of business on August 14, 2000. All earnings (loss) per share
amounts, as well as references to common stock and stockholders' equity amounts
have been restated as if these stock dividends 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 7).
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.
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,
-------------------------------------------------
2000 1999 1998
------------- ------------ ----------------
Net income (loss)............................................... $ 5,399 $ 3,886 $(3,166)
======= ======= =======
Basic:
Weighted-average shares of common stock outstanding........... 56,671 55,312 33,416
Weighted-average shares subject to repurchase................. (557) (1,386) (2,396)
------- ------- -------
Shares used in computing basic net income (loss) per share...... 56,114 53,926 31,020
======= ======= =======
Basic net income (loss) per share............................... $ 0.10 $ 0.07 $ (0.10)
======= ======= =======
Diluted:
Shares used above.............................................. 56,114 53,926 31,020
Effect of dilutive potential common shares..................... 8,369 5,974 -
------- ------- -------
Shares used in computing diluted net income (loss) per
share....................................................... 64,483 59,900 31,020
======= ======= =======
Diluted net income (loss) per share............................. $ 0.08 $ 0.06 $ (0.10)
======= ======= =======
The total number of potential common shares excluded from the calculation
of diluted net loss per share was 2,572,600 in fiscal year 1998. 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
Actuate is principally engaged in the design, development, marketing and
support of Actuate e.Reporting Suite 5. Actuate's chief operating decision
maker reviews financial information presented on a
F-11
consolidated basis, accompanied by disaggregated information about revenues by
geographic region for purposes of making operating decisions and assessing
financial performance. Accordingly, Actuate considers itself to be in a single
industry segment, specifically the license, implementation and support of its
software application.
Actuate evaluates the performance of its geographic regions based on
revenues only. Actuate does not assess the performance of its geographic regions
on other measures of income or expense, such as depreciation and amortization,
operating income or net income. In addition, as Actuate's assets are primarily
located in its corporate office in the United States and not allocated to any
specific region, Actuate does not produce reports for, or measure the
performance of, its geographic regions based on any asset-based metrics.
Therefore, geographic information is presented only for revenues in Note 9.
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 embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. 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 staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," or SAB 101. SAB 101 summarizes certain areas of the staff's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. We adopted SAB 101 in our fiscal quarter beginning
January 1, 2000. We believe that our current revenue recognition policy
complies with SAB 101. The adoption of SAB 101 did not result in a material
impact on our financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB No. 25," or FIN 44. FIN 44 clarifies
the application of APB No. 25 and, among other issues, clarifies the following:
the definition of an employee for purposes of applying APB No. 25; the criteria
for determining whether a plan qualifies as a non-compensatory plan; the
accounting consequence of various modifications to the terms of the previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The application of FIN 44 has not
had a material impact on our financial position or our 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 Actuate Japan. In June 1999, we purchased shares from an existing shareholder
raising our equity ownership to 16.7%. Then in April 2000, we became the
majority shareholder when we purchased additional shares from existing
shareholders raising our equity position to 66.7%. Goodwill arising on
consolidation was $1.5 million, which is being amortized over four years.
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 33.3%) of Actuate Japan was approximately $1.0 million as of
December 31, 2000 and will be approximately $1.4 million as of April 2002, based
on current exchange rates.
Since March 1999, the other corporate partners have had 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
F-12
approximately $1.0 million as of December 31, 2000 and will be approximately
$1.4 million as of April 2002, based on current exchange rates.
3. Acquisition
In June 1999, we acquired all of the outstanding stock of 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 $300,000. 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. Actuate
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, $900,000 to assembled workforce and $100,000 to goodwill.
Intangible assets and goodwill arising from the acquisition are being amortized
on a straight-line basis over periods not exceeding four years.
On February 29, 2000, we acquired all of the outstanding stock of OST, a
software consulting firm. The acquisition was accounted for using the purchase
method of accounting and accordingly, the purchased price was allocated to the
assets acquired and the liabilities assumed based on their estimated fair values
on the acquisition date. Since February 29, 2000, OST's results of operations
have been included in Actuate's Consolidated Statements of Operations. The
total purchase price was $13.1 million, consisting of $7.4 million in cash,
102,564 shares of Actuate's common stock with a fair value of approximately $3.2
million, future cash payments of $2.0 million to be paid on the second
anniversary of the acquisition date and other acquisition related expenses of
approximately $500,000. Of the total purchase price, approximately $100,000 has
been allocated to net tangible assets acquired, and the remainder was allocated
to intangible assets, including assembled workforce of $2.2 million, a non-
compete agreement of $100,000 and goodwill of $10.7 million. 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 of OST occurred at the beginning of the year in which the
acquisition took place and, for comparative purposes, at the beginning of the
immediately preceding year. These results have been prepared for informational
purposes only and are not necessarily indicative of the operating results that
would have occurred had the acquisition been made as discussed above. In
addition, they are not intended to be a projection of future results (in
thousands):
Year Ended
December 31,
------------ -----------
2000 1999
------------ -----------
Revenues ........................................... $108,569 $56,441
Net income ......................................... $ 4,848 $ 627
Net income per share - diluted ..................... $ 0.08 $ 0.01
On March 16, 2000, we purchased all the assets and business of
EnterpriseSoft for $8.8 million, consisting of $2.5 million in cash and 200,000
shares of Actuate's common stock with a fair value of approximately $6.3
million. The results of operations of EnterpriseSoft and the estimated fair
value of assets acquired are included in our financial statements from the date
of acquisition. Actuate has allocated the excess purchase price over the fair
value of net tangible assets acquired to the following identifiable intangible
assets: $86,000 to assembled workforce, $30,000 to non-compete agreement,
$10,000 to completed technology, and $8.6 million to goodwill. Goodwill and
other intangibles arising from the acquisition are being amortized on a
straight-line basis over periods not exceeding four years. Pro forma
information related to the purchase of EnterpriseSoft has not been presented due
to immateriality.
4. Cash Equivalents and Short-Term Investments
The following table summarizes the amortized cost, which approximates the
fair value of our
F-13
investments and their contractual maturities (in thousands):
December 31,
----------------------------------------
2000 1999
------------------- -------------------
Corporate debt obligations and deposits................... $ 11,932 $ 20,446
=========== ===========
Included in cash and cash equivalents..................... $ 11,932 $ 2,897
Included in short-term investments........................ - 17,549
----------- -----------
Due within one year....................................... $ 11,932 $ 20,446
=========== ===========
Realized and unrealized gains or losses were not significant for all periods
presented.
5. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
---------------------------------------------
2000 1999
-------------------- -------------------
Furniture and fixtures.................................... $ 3,055 $ 439
Computers and purchased software.......................... 7,003 3,720
Leasehold improvements.................................... 3,171 42
------------ -----------
13,229 4,201
Less accumulated depreciation............................. (3,039) (1,763)
------------ -----------
Property and equipment, net............................... $ 10,190 $ 2,438
============ ===========
6. Commitments
Operating Lease Commitments
Actuate leases its headquarter facilities under noncancelable operating
leases expiring in March 2008. In December 2000, we entered into a ten-year
office building lease agreement for an additional office building adjacent to
our headquarters 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 $1.6 million as security deposit. We plan to move into
the new facilities in May 2001. Rent expense for facilities under operating
leases was approximately $2.6 million in 2000, $1.1 million in 1999 and $805,000
in 1998. Aggregate minimum lease commitments under all operating leases are as
follows (in thousands):
Fiscal year
2001.............................................................. 5,426
2002.............................................................. 5,604
2003.............................................................. 5,553
2004.............................................................. 5,538
2005.............................................................. 5,663
Thereafter........................................................ 24,148
-------
$51,932
=======
7. 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,
preferences, 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,
F-14
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.
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
option grants will be made under the Predecessor Plan. Initially a total of
5,200,000 shares of common stock were reserved for issuance under the Plan. As
of December 31, 2000, there were options to purchase 1,919,886 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) 2,800,000 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 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%
or 25% after one year from the date of grant and the remaining balance vesting
monthly over the next four or three 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, 2000 and 1999,
282,682 and 714,636 shares of common stock issued under the Predecessor 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, 2000, 2,187,656 shares of common stock were reserved and
available for future grants under the Plan and Predecessor 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. 800,000
shares of common stock have been authorized for issuance under the Directors
Option Plan. Each individual
F-15
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 80,000
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 10,000 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, 2000, 670,000
shares of common stock were reserved and available for future grants under the
Directors Option Plan.
Activity under all option plans was as follows:
Shares Outstanding Options Weighted-
---------------------------------
Available Number of Price Per Average
For Grant Shares Share Exercise Price
---------- ---------- ------------ --------------
Balance at January 1, 1998........ 202,668 3,207,800 $ 0.04-$0.53 $ 0.65
Additional authorization....... 7,122,664 -- -- --
Options granted................ (5,297,700) 5,297,700 $ 0.53-$4.82 $ 2.57
Options exercised.............. -- (876,464) $ 0.04-$0.75 $ 0.25
Options forfeited.............. 984,336 (984,336) $ 0.09-$4.03 $ 0.74
Options repurchased............ 183,136 -- $ 0.09-$0.16 $ 0.09
---------- ----------
Balance at December 31, 1998...... 3,195,104 6,644,700 $ 0.04-$4.82 $ 2.02
Additional authorization....... 2,755,868 -- -- --
Options granted................ (6,732,900) 6,732,900 $4.38-$17.57 $ 9.30
Options exercised.............. -- (334,678) $0.04-$ 4.47 $ 0.97
Options forfeited.............. 1,134,762 (1,134,762) $ 0.04-$8.85 $ 3.62
Options repurchased............ 419,868 -- $.04-$ 0.75 $ 0.13
---------- ----------
Balance at December 31, 1999...... 772,702 11,908,160 $0.04-$17.66 $ 6.02
Additional authorization....... 8,373,830 -- -- --
Options granted................ (7,910,556) 7,910,556 $7.97-$36.00 $22.69
Options exercised.............. -- (1,530,036) $0.04-$17.25 $ 2.74
Options forfeited.............. 1,601,180 (1,601,180) $0.04-$34.94 $12.07
Options repurchased............ 20,500 -- $ 0.09 $ 0.09
---------- ----------
Balance at December 31, 2000...... 2,857,656 16,687,500 $0.09-$36.00 $13.64
========== ==========
The following table summarizes information concerning stock options
outstanding and exercisable under all Plans as of December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------------- ------------------------------------
Weighted-
Average
Range of Remaining Weighted- Weighted-
Exercise Number of Contractual Average Number of Average
Prices shares Life Exercise Price shares Exercise Price
- ------------------ ----------------- ------------------- ----------------- --------------- -----------------
$ 0.09-$3.53 4,186,771 7.5 years $ 2.31 1,753,059 $ 2.06
$ 4.38-$10.53 4,515,923 8.5 years $ 7.71 1,044,475 $ 7.22
$10.56-$24.00 4,543,806 9.1 years $18.39 349,537 $16.66
$24.06-$36.00 3,441,000 9.1 years $28.93 62,500 $31.19
---------- ---------
$ 0.09-$36.00 16,687,500 8.6 years $13.64 3,209,571 $ 6.00
========== =========
F-16
At December 31, 2000 and 1999, 2,273,401 and 1,462,796 outstanding options
were vested, respectively. At December 31, 1999 and 1998, 1,516,614 and
6,644,700 options were exercisable.
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 1,000,000 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 600,000 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 4,000 shares may be purchased on
any accumulation date. The price of each share of common stock 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 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, 2000, 1,048,976
shares had been purchased under the Purchase Plan.
As of December 31, 2000, 1,151,024 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 $61,000 in 2000, $91,000 in 1999 and
$333,000 in 1998. At December 31, 2000, we have approximately $81,000 remaining
to be amortized over the corresponding vesting period of each respective option.
Upon cancellation of the underlying stock options, the unamortized portion has
been offset against additional paid-in capital.
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, 2000,
1999 and 1998 would have been as indicated below (in thousands, except per share
data):
F-17
Year ended December 31,
-------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net income (loss) (in thousands):
As reported................................... $ 5,399 $ 3,866 $(3,166)
Pro forma..................................... $(46,077) $(1,940) $(4,212)
Basic net income (loss) per share:
As reported................................... $ 0.10 $ 0.07 $ (0.10)
Pro forma..................................... $ (0.82) $ (0.04) $ (0.14)
Diluted net income (loss) per share:
As reported................................... $ 0.08 $ 0.06 $ (0.10)
Pro forma..................................... $ (0.82) $ (0.04) $ (0.14)
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 $19.15
in 2000, $6.81 in 1999 and $1.96 in 1998. The fair value has been estimated
using the Black-Scholes Option Pricing Model with the following weighted-average
assumptions:
Year ended December 31,
-------------------------------------------------------
2000 1999 1998
-------------------------------------------------------
Dividends......................................... 0% 0% 0%
Risk-free interest rate........................... 5.96% 5.91% 5.25%
Expected life (in years).......................... 3.0 3.0 4.0
Expected volatility............................... 118% 87% 70%
During fiscal 2000, we issued 604,576 shares under the Purchase Plan. The
weighted-average deemed fair value of employees' stock purchase rights under the
Purchase Plan during 2000 was $4.15. The fair value of the purchase rights
granted in fiscal 2000 was estimated on the date of grant using the Black-
Scholes option pricing model with the following assumptions: risk-free interest
rate of 5.96%; expected dividend yield of zero percent; expected life of six
months; and expected volatility of 118%.
8. Income Taxes
The provision for income taxes consists of the following (in thousands):
Year ended December 31,
-------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Federal:
Current..................................... $2,926 $ 437 $ -
Deferred.................................... (675) - -
------ ----- -------
2,251 437 -
------ ----- -------
State:
Current..................................... 847 113 -
Deferred.................................... (524) - -
------ ----- -------
323 113 -
------ ----- -------
Foreign:
Current..................................... 15 - -
Deferred.................................... - - -
------ ----- -------
15 - -
------ ----- -------
Provision for income taxes.................... $2,589 $ 550 $ -
====== ===== =======
The tax benefit associated with exercises of stock options reduced taxes
currently payable as shown above by $3.8 million, $59,000 and nil for the years
ended December 31, 2000, 1999 and 1998, respectively. Such benefits were
credited to additional paid-in-capital when realized.
The difference between the provision for income taxes and the amount
computed by applying the federal statutory rate (35 percent) to income before
taxes is explained below (in thousands):
F-18
Year ended December 31,
--------------------------------------------------
2000 1999 1998
------------ -------------- ------------
Income taxes at federal statutory rate........ $2,796 $ 1,552 $ -
Non-deductible goodwill....................... 1,090 525 -
Non-deductible expense........................ 106 - -
Foreign operating loss utilized............... (241) (1,600) -
State tax, net of federal benefit............. 209 73 -
Tax credits................................... (411) - -
Tax losses carryforward....................... (960) - -
------ ------- -----
$2,589 $ 550 $ -
====== ======= =====
Significant components of deferred tax assets for federal and states are as
follows (in thousands):
December 31,
----------------------------
2000 1999
--------- ---------
Net operating loss carryforward............................... $ 3,954 $ 2,930
Research credit carryforward.................................. 1,000 1,521
Capitalized research and development.......................... 421 451
Accruals and allowances not currently deductible for tax
purposes..................................................... 2,323 1,128
Other, net.................................................... - 508
------- -------
Total deferred tax assets..................................... 7,698 6,538
Valuation allowance........................................... (6,499) (6,538)
------- -------
$ 1,199 $ --
======= =======
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", provides for the recognition of deferred tax assets if realization of
such assets is more likely than not. The net valuation allowance decreased by
$39,000 during the year ended December 31, 2000 and decreased by $1.9 million
during the year ended December 31, 1999. As of December 31, 2000 approximately
$5.0 million of the valuation allowances reflected above relates to the tax
benefits of stock option deductions, which will be credited to additional paid
in capital when realized.
As of December 31, 2000, we had net operating loss carryforward for federal
and state tax purposes of approximately $10.6 million and $2.9 million,
respectively. We also had federal research and development tax credit
carryforward of approximately $1.0 million. The federal and state operating
loss carryforward will expire at various dates beginning in year 2008 and 2001,
respectively, if not utilized.
Utilization of the net operating losses and tax credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and tax credits
before utilization.
9. 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,
-----------------------------------------
2000 1999 1998
---------- --------- ---------
Revenues:
North America................................... $ 91,329 $40,229 $20,470
Europe.......................................... 12,500 4,868 947
Asia Pacific and others......................... 3,435 1,684 455
-------- ------- -------
Total....................................... $107,264 $46,781 $21,872
======== ======= =======
No single customer has accounted for 10% or more of total revenues in
fiscal 2000, 1999 or 1998.
F-19
10. 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.
11. Selected Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited financial data for the
eight quarters ended December 31, 2000 (in thousands, except per share data).
All earnings per share amounts have been restated to reflect the two stock
dividends as if these stock dividends had occurred as of the earliest period
presented.
Quarter ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
--------- --------- ------------- ------------
Revenue...................................... $18,815 $24,417 $29,505 $34,527
Gross profit................................. $15,428 $18,789 $22,863 $27,250
Net income................................... $ 1,140 $ 624 $ 1,315 $ 2,320
Earnings per share:
Basic.................................. $ 0.02 $ 0.01 $ 0.02 $ 0.04
Diluted................................ $ 0.02 $ 0.01 $ 0.02 $ 0.04
Quarter ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------- --------- ------------- ------------
Revenue...................................... $ 8,313 $ 9,813 $12,507 $16,148
Gross profit................................. $ 7,095 $ 8,375 $10,532 $13,862
Net income................................... $ 846 $ 878 $ 936 $ 1,226
Earnings per share:
Basic.................................. $ 0.02 $ 0.02 $ 0.02 $ 0.02
Diluted................................ $ 0.01 $ 0.01 $ 0.02 $ 0.02
12. Subsequent Events (Unaudited)
In January 2001, the Company's Board of Directors adopted the 2001
Supplemental Stock Plan ("2001 Plan"). A total of 2,700,000 shares of Common
Stock have been reserved for issuance under the 2001 Plan. Employees and
consultants are eligible for awards under the 2001 Plan. Members of the board
of directors and officers of Actuate are not eligible to receive awards under
the 2001 Plan.
F-20