UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No. 0-24607
Actuate Corporation
(Exact name of Registrant as specified in its charter)
Delaware 94-3193197
(State of incorporation) (I.R.S. Employer Identification No.)
701 Gateway Boulevard
South San Francisco, California 94080
(650) 837-2000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
--------------
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Outstanding as of
Title of Class September 30, 2001
-------------- ------------------
Common Stock, par value $.001 per share 60,190,691
Actuate Corporation
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000 .............................................................. 3
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 2001 and 2000 .................................. 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000 .................................................... 5
Notes to Condensed Consolidated Financial Statements ............................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................................... 27
Item 6. Exhibits and Reports on Form 8-K ............................................ 27
Signature ............................................................................ 28
2
Part I. Financial Information
Item 1. Financial Statements
ACTUATE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000 (1)
(unaudited)
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents................................... $ 33,803 $ 26,928
Accounts receivable, net.................................... 33,675 32,991
Other current assets........................................ 3,888 2,630
----------------- -----------------
Total current assets.......................................... 71,366 62,549
Property and equipment, net................................... 13,303 10,190
Goodwill and other purchased intangible assets, net........... 33,837 24,193
Other assets ................................................. 1,671 1,390
----------------- -----------------
$ 120,177 $ 98,322
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 4,870 $ 4,254
Accrued compensation........................................ 4,629 5,941
Other accrued liabilities................................... 10,738 6,584
Deferred revenue............................................ 22,303 22,108
Income tax payable.......................................... 2,571 425
----------------- -----------------
Total current liabilities..................................... 45,111 39,312
----------------- -----------------
Long-term obligations......................................... 1,789 2,033
----------------- -----------------
Stockholders' equity:
Common stock................................................ 60 58
Additional paid-in capital.................................. 86,898 67,623
Deferred stock compensation................................. (39) (81)
Cumulative translation adjustment........................... 324 231
Accumulated deficit......................................... (13,966) (10,854)
----------------- -----------------
Total stockholders' equity................................ 73,277 56,977
----------------- -----------------
$ 120,177 $ 98,322
================= =================
(1) The condensed balance sheet at December 31, 2000 has been derived from
the audited consolidated financial statements at that date, but does not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ACTUATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
2001 2000 2001 2000
------------ ------------ ----------- -----------
Revenues:
License fees........................................ $ 17,415 $ 19,415 $ 61,460 $ 49,071
Services............................................ 10,786 10,090 34,789 23,666
------------ ------------ ----------- -----------
Total revenues........................................ 28,201 29,505 96,249 72,737
------------ ------------ ----------- -----------
Costs and expenses:
Cost of license fees................................ 563 649 1,723 1,404
Cost of services.................................... 6,278 5,993 21,374 14,253
Sales and marketing................................. 13,703 12,848 45,149 32,411
Research and development............................ 4,836 4,046 13,935 10,629
General and administrative.......................... 2,877 1,971 7,663 5,042
Amortization of goodwill and other purchased
intangibles........................................ 3,120 2,060 7,587 5,087
Restructuring costs................................. 362 - 859 -
------------ ------------ ----------- -----------
Total costs and expenses.......................... 31,739 27,567 98,290 68,826
------------ ------------ ----------- -----------
Income (loss) from operations......................... (3,538) 1,938 (2,041) 3,911
Interest and other income, net........................ 291 184 962 640
------------ ------------ ----------- -----------
Income (loss) before income taxes..................... (3,247) 2,122 (1,079) 4,551
Provision for income taxes............................ 435 807 2,033 1,472
------------ ------------ ----------- -----------
Net income (loss)..................................... $ (3,682) $ 1,315 $ (3,112) $ 3,079
============ ============ =========== ===========
Basic income (loss) per share......................... $ (0.06) $ 0.02 $ (0.05) $ 0.06
============ ============ =========== ===========
Shares used in basic per share calculation............ 60,069 56,462 58,914 55,875
============ ============ =========== ===========
Diluted income (loss) per share....................... $ (0.06) $ 0.02 $ (0.05) $ 0.05
============ ============ =========== ===========
Shares used in diluted per share calculation.......... 60,069 64,788 58,914 64,073
============ ============ =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ACTUATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended September 30,
--------------------------------------------
2001 2000
---------------------- --------------------
Operating activities
Net income (loss)................................................... $ (3,112) $ 3,079
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Amortization of deferred compensation.......................... 42 47
Amortization of goodwill and other purchased
intangibles................................................... 7,587 5,087
Depreciation................................................... 2,964 1,779
Changes in operating assets and liabilities:
Accounts receivable......................................... (222) (10,691)
Other current assets........................................ (1,239) (724)
Accounts payable............................................ (1,221) 1,187
Accrued compensation........................................ (1,429) 581
Other accrued liabilities................................... (350) 1,322
Deferred revenue............................................ 195 7,618
Income taxes payable........................................ 2,146 1,424
--------------------- -------------------
Net cash provided by operating activities........................... 5,361 10,709
--------------------- -------------------
Investing activities
Purchases of property and equipment................................. (6,076) (8,876)
Proceeds from maturity of short-term investments.................... - 17,549
Acquisition of Tidestone Technologies, Inc., net of cash
assumed............................................................ (164) -
Acquisition of Open Software Technology, LLC, net of
cash assumed....................................................... - (7,300)
Acquisition of EnterpriseSoft business.............................. - (2,450)
Acquisition of shares of Actuate Japan.............................. - (1,506)
Net change in other assets.......................................... (281) (710)
--------------------- -------------------
Net cash used in investing activities............................... (6,521) (3,293)
--------------------- -------------------
Financing activities
Proceeds from issuance of common stock.............................. 8,642 4,350
Payment of bank loan................................................ (700) (250)
--------------------- -------------------
Net cash provided by financing activities........................... 7,942 4,100
--------------------- -------------------
Net increase in cash and cash equivalents........................... 6,782 11,516
Effect of foreign exchange rate changes on cash..................... 93 (11)
Cash and cash equivalents at the beginning of the period............ 26,928 6,604
--------------------- -------------------
Cash and cash equivalents at the end of the period.................. $ 33,803 $ 18,109
===================== ===================
Non cash financing activities:
Common stock issued and options assumed in connection with acquisitions ....... $ 10,634 $ 9,553
===================== =====================
Consideration payable in future in connection with the acquisition of Open
Software Technology, LLC ...................................................... $ - $ 2,033
===================== =====================
Supplemental disclosure of cash flow information:
Interest paid ................................................................. $ 4 $ 4
===================== =====================
Income taxes paid ............................................................. $ 303 $ 426
===================== =====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ACTUATE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements of
Actuate Corporation are unaudited, but include all normal recurring adjustments
which we believe to be necessary for the fair presentation of the financial
position, results of operations, and changes in cash flows for the periods
presented. The preparation of the financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Despite our best effort to establish good
faith estimates and assumptions, actual results may differ.
The interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 2000
as filed with the Securities and Exchange Commission on March 12, 2001. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Interim results of operations for the three and nine months
ended September 30, 2001 are not necessarily indicative of operating results for
the full fiscal year.
In May 2001, we completed the acquisition of Tidestone Technologies, Inc.
("Tidestone"), a software technology company. The acquisition was accounted for
under the purchase method of accounting. As prescribed by generally accepted
accounting principles, the Condensed Consolidated Statements of Operations
include Tidestone's operating results from the date of acquisition.
Revenue Recognition
Revenue from license fees from sales of software products directly to
end-user customers or indirect channel partners is recognized as revenue after
execution of a license agreement or receipt of a definitive purchase order, and
shipment of the product, if no vendor obligations remain, there are no
uncertainties surrounding product acceptance, the license fees are fixed or
determinable, and collection of the license fee is considered probable. Our
products do not require significant customization. The majority of end user
license revenues are derived from end user customer orders for specific
individual products. These types of transactions are recognized as revenue
generally upon shipment of product, assuming that all other revenue recognition
criteria are met. Advance payments from end-users, in arrangements in which the
end user customer has the right to future unspecified products, are deferred and
recognized as revenue ratably over the estimated term of the period, typically
one year, during which the end-user is entitled to receive the products. If the
license agreement contains extended payment terms that would indicate that the
fee is not fixed or determinable, revenue is recognized as the payments become
due, assuming that all other revenue recognition criteria are met.
License arrangements with e.Business application vendors, resellers and
distributors ("Channel Partners") 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
7
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 Channel Partner'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 when performed. When we provide a
software license and the related maintenance for one bundled price, the fair
value of the maintenance, based on the price charged for that element
separately, is deferred and recognized ratably over the term of the respective
agreement.
Based upon our interpretation of current available guidance, we believe our
revenue recognition policies are in accordance with Statement of Position No.
97-2 "Software Revenue Recognition", as amended.
Net Income (Loss) Per Share
Basic net income (loss) per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
Diluted net income (loss) per share is computed using the weighted-average
number of common and dilutive common equivalent shares outstanding during the
period. Common equivalent shares consist of the shares issuable upon the
exercise of stock options (using the treasury stock method).
A reconciliation of shares used in the calculation of basic and diluted net
income (loss) per share follows (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------------
2001 2000 2001 2000
---------- ---------- ----------- ---------
Numerator:
Net income (loss) ............................................... $ (3,682) $ 1,315 $ (3,112) $ 3,079
========== ========== =========== =========
Denominator:
Weighted-average common shares outstanding ....................... 60,217 56,853 59,088 56,356
Weighted-average shares subject to repurchase .................... (148) (391) (174) (481)
---------- ---------- ----------- ---------
Denominator for basic income (loss) per share .................... 60,069 56,462 58,914 55,875
Weighted-average shares subject to repurchase .................... - 391 - 481
Weighted-average employee stock options outstanding .............. - 7,935 - 7,717
---------- ---------- ----------- ---------
Denominator for diluted income (loss) per share ................... 60,069 64,788 58,914 64,073
========== ========== =========== =========
Basic net income (loss) per share ................................. $ (0.06) $ 0.02 $ (0.05) $ 0.06
========== ========== =========== =========
Diluted net income (loss) per share ............................... $ (0.06) $ 0.02 $ (0.05) $ 0.05
========== ========== =========== =========
8
Comprehensive Income
Comprehensive income includes foreign currency translation gains and losses
and other unrealized gains and losses that have been previously excluded from
net income and reflected instead in equity. A summary of comprehensive income
follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
------- ------- ------- -------
Net income (loss) ....................................... $(3,682) $ 1,315 $(3,112) $ 3,079
Unrealized gain on short-term investments ............... - 3 - 3
Foreign currency translation adjustment, net of tax
effect ................................................. 180 (6) 58 (11)
------- ------- ------- -------
Comprehensive income (loss) ............................. $(3,502) $ 1,312 $(3,054) $ 3,071
======= ======= ======= =======
Accounting for Derivative Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. Our adoption of SFAS 133 on January 1, 2001
had no material effect on the financial statements, as we currently do not
utilize derivative instruments.
Recent Accounting Pronouncement
In July 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interest will be prohibited. SFAS 142 requires that
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
new standards. Other intangible assets will continue to be amortized over their
useful lives.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the fiscal quarter of 2002. Application of the
non-amortization provisions of the new standards is expected to result in an
increase in our net income or decrease in our net loss. However, we are still
assessing the financial impact of the new standard. During 2002, we will perform
the required impairment tests of goodwill and indefinite-lived intangible assets
as of January 1, 2002 and have not yet determined what the effect of these tests
will be on our earnings and financial position.
2. Acquisition
On May 30, 2001, we acquired all of the outstanding stock of Tidestone, a
software technology company. The results of operations of Tidestone are included
in our financial statements from the date of acquisition. The total purchase
price was $10.8 million, consisting of 857,594 shares of our common stock and
assumed options with a fair market value of approximately $10.6 million and
other acquisition-related expenses of $164,000. This acquisition was accounted
for as a purchase, with the excess of the purchase price over the estimated fair
value of the net liabilities assumed ($5.9 million)
9
being allocated to developed technology ($3.6 million), customer list ($2.0
million), assembled workforce ($900,000), non-compete agreements ($900,000),
trademarks ($700,000) and goodwill ($8.4 million). In addition, approximately
$200,000 of the purchase price was allocated to deferred compensation, which
primarily represents the pro-rata portion of the intrinsic value of the unvested
options at the date of acquisition. Goodwill and other intangibles arising from
the acquisition are being amortized on a straight-line basis over periods not
exceeding four years.
The following unaudited pro forma financial information assumes the
acquisition occurred at the beginning of the periods in which the acquisition
took place and, for comparative purposes, at the beginning of the immediately
preceding year. These results have been prepared for informational purposes only
and are not necessarily indicative of the operating results that would have
occurred had the acquisition been made as discussed above. In addition, they are
not intended to be a projection of future results (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ------------ ------------
Revenues ............................................ $ 28,201 $ 30,749 $ 97,896 $ 76,365
Net income (loss) ................................... $ (3,682) $ 32 $ (7,482) $ (627)
Diluted net income (loss) per share ................. $ (0.06) $ - $ (0.13) $ (0.01)
3. Restructuring costs
During the second and third quarter of fiscal 2001, we announced and began
to implement restructuring actions that resulted in aggregate charges of
$497,000 and $362,000, respectively. The restructuring costs consist entirely of
severance payments, payroll taxes and extended medical benefits. The
restructuring actions are expected to result in the elimination of approximately
15% of our worldwide workforce. As of September 30, 2001, we eliminated 107
positions worldwide, across all levels and functions.
The following table depicts the restructuring activity during the first
nine months of fiscal 2001 (in thousands):
Severance and
Related Charges
---------------
Balance at March 31, 2001 .......... $ -
Increase ........................... 497
Cash payments ...................... (259)
-----------
Balance at June 30, 2001 ........... 238
Increase ........................... 362
Cash payments ...................... (387)
-----------
Balance at September 30, 2001 ...... $ 213
===========
4. Income Taxes
The provision for income taxes was calculated using the estimated annual
effective tax rate that takes into account unbenefited net operating losses in
foreign jurisdictions, research and development tax credits and the effect of
nondeductible charges relating to amortization of goodwill.
10
5. Stock Repurchase Program
On September 19, 2001, our board of directors authorized a stock repurchase
program of up to $6 million of our common stock. As of September 30, 2001, we
have repurchased 200,000 shares or $825,205 of the common stock under this
program.
6. Geographic Information
Our primary operations are located in the United States. Revenues from
international sources related to export sales, primarily to Europe and Japan.
Our revenues by geographic area were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
North America ............ $ 21,178 $ 25,397 $ 74,712 $ 63,469
Europe ................... 5,313 2,920 16,819 7,628
Asia Pacific and others .. 1,710 1,188 4,718 1,640
---------- ---------- ---------- ----------
$ 28,201 $ 29,505 $ 96,249 $ 72,737
========== ========== ========== ==========
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the historical
financial information and the notes thereto included in Item 1 of this Quarterly
Report on Form 10-Q and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K
for the year ended December 31, 2000 as filed with the Securities and Exchange
Commission on March 12, 2001.
The statements contained in this Form 10-Q that are not purely historical
are forward looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, including statements regarding Actuate's
expectations, beliefs, hopes, intentions, plans or strategies regarding the
future. All forward-looking statements in this Form 10-Q are based upon
information available to Actuate as of the date hereof, and Actuate assumes no
obligation to update any such forward-looking statements. Actual results could
differ materially from Actuate's current expectations. Factors that could cause
or contribute to such differences include, but are not limited to, the risks
discussed in the section titled "Risk Factors That May Affect Future Results" in
this Form 10-Q.
Overview
We are a leading provider of Information Delivery software products and
services for e.Business. Our e.Reporting software products enable organizations
to deliver high-value business information to the Internet for use by customers,
employees and partners.
We sell software products through two primary means: (i) directly to end
user customers through our direct sales force and (ii) through 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
Channel Partners resell our software products to end user customers. Our
revenues are derived primarily from license fees for software products and, to a
lesser extent, fees for services relating to such products, including software
maintenance and support, consulting and training. In June 1999, we acquired all
of the outstanding shares of Actuate Holding, B.V. ("BV"), the parent company of
our distributors based in France, Germany and the United Kingdom. In February
2000, we acquired all of the outstanding shares of OST, a software consulting
firm. In March 2000, we acquired all the assets of EnterpriseSoft, a developer
of Java software products. In April 2000, we purchased additional shares of
Actuate Japan from existing shareholders raising our equity ownership of Actuate
Japan to 67%. In May 2001, we acquired all of the outstanding shares of
Tidestone, a software technology company. The results of operations of BV, OST,
EnterpriseSoft, Actuate Japan and Tidestone, and the fair value of assets
acquired and liabilities assumed are included in the consolidated financial
statements from the date of acquisition or the date of majority ownership, as
applicable.
We were incorporated in California in November 1993 and reincorporated in
Delaware in July 1998. Our corporate headquarters are located at 701 Gateway
Boulevard, South San Francisco, California 94080, our telephone number is
650-837-2000 and our website address is www.actuate.com.
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated.
12
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
License fees ................................................. 62% 66% 64% 67%
Services ..................................................... 38 34 36 33
-------- -------- -------- --------
Total revenues .......................................... 100 100 100 100
-------- -------- -------- --------
Costs and expenses:
License fees ................................................. 2 2 2 2
Services ..................................................... 22 20 22 20
Sales and marketing .......................................... 49 44 47 44
Research and development ..................................... 17 14 14 15
General and administrative ................................... 10 7 8 7
Amortization of goodwill and other purchased intangibles...... 11 7 8 7
Restructuring costs .......................................... 1 - 1 -
-------- -------- -------- --------
Total costs and expenses ................................ 112 94 102 95
-------- -------- -------- --------
Income (loss) from operations ................................... (12) 6 (2) 5
Interest and other income, net .................................. 1 1 1 1
-------- -------- -------- --------
Income (loss) before income taxes ............................... (11) 7 (1) 6
Provision for income taxes ...................................... 2 3 2 2
-------- -------- -------- --------
Net income (loss) ............................................... (13)% 4% (3)% 4%
======== ======== ======== ========
Revenues
Total revenues decreased 4% from $29.5 million for the quarter ended
September 30, 2000 to $28.2 million for the quarter ended September 30, 2001.
Total revenues increased 32% from $72.7 million for the nine months ended
September 30, 2000 to $96.2 million for the nine months ended September 30,
2001. Sales outside of North America were $7.6 million, or 27% of total revenues
for the third quarter of 2001, compared to $4.1 million, or 14% of total
revenues for the third quarter of 2000. For the nine months ended September 30,
2001, sales outside of North America were $23.2 million, or 24% of total
revenues as compared to $9.3 million, or 13% of total revenues for the nine
months ended September 30, 2000. We believe that weak economic conditions in
North America and Europe have caused our customers and prospective customers to
significantly decrease spending on information technology. We currently expect
weak economic conditions and reduced information technology spending to continue
at least through the remainder of fiscal 2001. We currently anticipate that our
total revenues for the fourth quarter will be approximately $28 million.
License fees. Revenues from license fees decreased 10% from $19.4 million
for the third quarter of 2000 to $17.4 million for the third quarter of 2001.
For the nine months ended September 30, 2001, license revenues were $61.5
million, an increase of 25% over license revenues of $49.1 million for the nine
months ended September 30, 2000. The decrease in license fee revenues for the
quarter was primarily due to weakened economic conditions in North America and
Europe. As a percentage of total revenues, license fee revenues decreased from
66% in the third quarter of 2000 to 62% in the third
13
quarter of 2001. For the nine months ended September 30, 2001, license fee
revenues as a percentage of total revenues were 64% compared to 67% for the nine
months ended September 30, 2000.
Services. Service revenues increased 7% from $10.1 million for the third
quarter of 2000 to $10.8 million for the third quarter of 2001. For the nine
months ended September 30, 2001, service revenues were $34.8 million, an
increase of 47% over service revenue of $23.7 million for the nine months ended
September 30, 2000. The increase in service revenues was due to the increase in
professional services revenues related to increase in demand for our
professional services, and an increase in the installed base of customers
receiving ongoing maintenance and support. As a percentage of total revenues,
service revenues increased from 34% in the third quarter of 2000 to 38% in the
third quarter of 2001. For the nine months ended September 30, 2001, service
revenues as a percentage of total revenues were 36% compared to 33% for the nine
months ended September 30, 2000.
Costs and expenses
Cost of license fees. Cost of license fees consists primarily of production
and packaging costs, localization costs and personnel and related costs. Cost of
license fees decreased from $649,000, or 3% of revenues from license fees, for
the third quarter of 2000 to $563,000, or 3% of revenues from license fees, for
the third quarter of 2001. Cost of license fees increased from $1.4 million, or
3% of revenues from license fees, for the nine months ended September 30, 2000
to $1.7 million, or 3% of revenues from license fees for the nine months ended
September 30, 2001. We expect our cost of license fees as a percentage of
revenues from license fees to be approximately 3% of revenues from license fees
for the remainder of fiscal 2001.
Cost of services. Cost of services consists primarily of personnel and
related costs, facilities costs incurred in providing software maintenance and
support, training and consulting services, as well as third-party costs incurred
in providing training and consulting services. Cost of services increased from
$6.0 million, or 59% of service revenues, for the third quarter of 2000 to $6.3
million, or 58% of service revenues, for the third quarter of 2001. Cost of
services increased from $14.3 million, or 60% of service revenues, for the nine
months ended September 30, 2000 to $21.4 million, or 61% of service revenues,
for the nine months ended September 30, 2001. The increase in cost of services
in absolute dollars was primarily due to the continued expansion of our customer
support and professional service organizations and to increased contracting with
third-party consultants to meet our customers' professional service needs. We
expect that cost of services will continue to increase in both absolute dollars
and as a percentage of service revenues in the future as we continue to expand
our customer support organization to meet customer demands for our services and
to rely more on third-party consultants to provide professional services on our
behalf, which has a higher cost and lower margin than if we perform the services
with our personnel.
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, promotional expenses, travel and entertainment, and facility
costs. Sales and marketing expenses increased from $12.8 million, or 44% of
total revenues for the third quarter of 2000 to $13.7 million, or 49% of total
revenues for the third quarter of 2001. Sales and marketing expenses increased
from $32.4 million, or 44% of total revenues for the nine months ended September
30, 2000 to $45.1 million, or 47% of total revenues for the nine months ended
September 30, 2001. The increase in both absolute dollars and as a percentage of
total revenues was primarily due to hiring additional sales and marketing
personnel, increased travel expenses associated with increased headcount, higher
sales commissions associated with increased revenues during the nine-month
period and increased marketing program expenses. We completed a planned
reduction of our North America as well as foreign sales and marketing workforce
14
during the third quarter of 2001 and we currently expect our sales and marketing
expenses in absolute dollars to be about the same range for the remainder of the
fiscal year.
Research and development. Research and development expenses are expensed as
incurred and consist primarily of personnel and related costs associated with
product development. Research and development expenses increased from $4.0
million, or 14% of total revenues for the third quarter of 2000 to $4.8 million,
or 17% of total revenues for the third quarter of 2001. Research and development
expenses increased from $10.6 million, or 15% of total revenues for the nine
months ended September 30, 2000 to $13.9 million, or 14% of total revenues for
the nine months ended September 30, 2001. The increase in research and
development expenses in absolute dollars was primarily due to the hiring of
additional engineering personnel and consultants. The increase as a percentage
of total revenues for the quarter was due to the decrease in total revenues. We
anticipate that we will continue to devote substantial resources to research and
development and that these expenses will increase in absolute dollars in future
periods.
General and administrative. General and administrative expenses consist
primarily of personnel and related costs for finance, staffing, legal, human
resources, information systems and general management, as well as amortization
of deferred compensation related to certain stock option grants. General and
administrative expenses increased from $2.0 million, or 7% of total revenues for
the third quarter of 2000 to $2.9 million, or 10% of total revenues for the
third quarter of 2001. General and administrative expenses increased from $5.0
million, or 7% of total revenues for the nine months ended September 30, 2000 to
$7.7 million, or 8% of total revenues for the nine months ended September 30,
2001. The increase in general and administrative expenses in both absolute
dollars and as a percentage of total revenues was primarily due to increased
personnel and related costs and the inclusion of idle facility expenses in the
amount of $930,000 and $1.4 million for the three- and nine-month periods,
respectively. We expect that general and administrative expenses will increase
in absolute dollars in future periods.
Amortization of goodwill and other purchased intangibles. In June 1999, we
acquired all of the outstanding stock of BV for cash. This acquisition was
accounted for as a purchase and we recognized $9.6 million of goodwill and other
intangible assets. In February 2000, we acquired all of the outstanding stock of
OST for cash and stock. This acquisition was also accounted for as a purchase
and we recognized $13.1 million of goodwill and other intangible assets. In
March 2000, we acquired all the assets of EnterpriseSoft for cash and stock and
recognized $8.7 million of goodwill and other intangible assets. In April 2000,
we purchased additional shares of Actuate Japan from existing shareholders
raising our equity ownership to 67%. We recognized $1.5 million of goodwill and
other intangibles as a result of consolidating Actuate Japan financial
statements as prescribed by generally accepted accounting principles. In May
2001, we acquired all of the outstanding stock of Tidestone for stock. The
acquisition was accounted for as a purchase and we recognized $16.9 million of
goodwill and other intangible assets. In the three- and nine-month periods ended
September 30, 2001, we recorded a charge of $3.1 million and $7.6 million,
respectively, for the amortization of goodwill and other purchased intangibles
relating to these acquisitions, as compared to $2.1 million and $5.1 million for
the three- and nine-month periods ended September 30, 2000, respectively.
Goodwill and other purchased intangibles arising from these acquisitions are
being amortized on a straight-line basis over periods not exceeding four years.
In July 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interest will be prohibited. SFAS 142 requires that
goodwill and
15
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the new
standards. Other intangible assets will continue to be amortized over their
useful lives.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the fiscal quarter of 2002. Application of the
non-amortization provisions of the new standards is expected to result in an
increase in our net income or decrease in our net loss. However, we are still
assessing the financial impact of the new standard. During 2002, we will perform
the required impairment tests of goodwill and indefinite-lived intangible assets
as of January 1, 2002 and have yet determined what the effect of these tests
will be on our earnings and financial position.
Restructuring costs. Restructuring costs for the three- and nine-month
periods were $362,000 and $859,000, respectively, consisting entirely of
severance and other payroll related costs that were incurred in connection with
a reduction of our worldwide workforce.
Interest and Other Income, Net
Interest and other income, net, are comprised primarily of interest income
earned by us on cash and short-term investments. Interest and other income, net,
for the three months ended September 30, 2001 were $291,000 as compared with
interest and other income, net of $184,000 for the three months ended September
30, 2000. For the nine months ended September 30, 2001, interest and other
income, net, were $962,000 as compared with interest and other income, net of
$640,000 for the nine months ended September 30, 2000. The increase was due
primarily to higher cash and investment balances from which interest is earned.
Provision for Income Taxes
We recorded an income tax provision of $435,000 and $2.0 million in the
three months and nine months ended September 30, 2001, respectively. The income
tax provision for the same period of last fiscal year was $807,000 and
$1,472,000, respectively. The decrease in income tax provision for the three
months ended September 30, 2001 from the same period of last fiscal year is
primarily due to the change in estimated operating income for the remaining
quarter of this fiscal year. The income tax provision recorded for the nine
months ended September 30, 2001 reflects the impact of non-deductible
acquisition costs and research and development tax credits as well as foreign
tax expenses.
Liquidity and Capital Resources
As of September 30, 2001, we had cash and cash equivalents of $33.8
million, an increase of $6.9 million over the December 31, 2000 balance. Net
cash provided by operating activities was $5.4 million in the nine months ended
September 30, 2001, and $10.8 million in the nine months ended September 30,
2000. For the nine-month period ended September 30, 2001, cash provided by
operating activities was primarily due to increases in amortization,
depreciation and income taxes payable that were offset by decreases in net loss,
other current assets, accounts payable and accrued compensation. For the
nine-month period ended September 30, 2000, net cash provided by operating
activities was primarily due to increases in deferred revenue and net income as
adjusted for amortization and depreciation that were offset by increase in
accounts receivable.
Net cash used in investing activities was $6.5 million in the nine months
ended September 30, 2001, and $3.3 million in the nine months ended September
30, 2000. For the nine months ended September 30, 2001, net cash used in
investing activities was primarily due to purchases of property and
16
equipment. For the nine months ended September 30, 2000, net cash used in
investing activities was primarily due to purchases of property and equipment
for our new South San Francisco facilities, the acquisitions of OST and the
EnterpriseSoft business and the purchase of additional shares in Actuate Japan,
which was offset by maturity and sale of our short-term investments.
Net cash provided by financing activities was $7.9 million in the nine
months ended September 30, 2001, and $4.1 million in the nine months ended
September 30, 2000. During both periods, net cash provided by financing
activities was primarily from the proceeds derived from issuance of common stock
under the employee stock purchase and stock option plans.
On September 19, 2001, our board of directors authorized a stock repurchase
program of up to $6 million of our common stock. As of September 30, 2001, we
have repurchased 200,000 shares or $825,205 of the common stock under this
program.
We believe that current cash balances and any cash generated from
operations will be sufficient to meet our cash needs for working capital and
capital expenditures for at least the next twelve months. Thereafter, if cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or obtain credit facilities. The sale of
additional equity could result in additional dilution to our stockholders. A
portion of our cash may be used to acquire or invest in complementary
businesses, including the purchase of the remaining interest of our subsidiary
in Japan, or products or to obtain the right to use complementary technologies.
From time to time, in the ordinary course of business, we evaluate potential
acquisitions of such businesses, products or technologies.
17
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-Q, including the financial statements and the notes
thereto.
OUR OPERATING RESULTS MAY BE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO
MEET OUR ESTIMATES OF QUARTERLY AND ANNUAL OPERATING RESULTS OR WE FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF
OUR STOCK MAY DECREASE SIGNIFICANTLY.
The susceptibility of our operating results to significant fluctuations
makes any prediction, including our estimates, of future operating results
unreliable. In addition, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and you should not rely on them
as indications of our future performance. Our operating results have in the
past, and may in the future, vary significantly due to factors such as the
following:
- demand for our products;
- the size and timing of significant orders for our products;
- a slow down or a decrease in spending on information technology by
our current and/or prospective customers;
- general domestic and international economic and political conditions;
- sales cycles and sales performance of our indirect channel partners;
- continued successful relationships and the establishment of new
relationships with e.Business application vendors;
- the management and expansion of our international operations;
- changes in our level of operating expenses and our ability to control
costs;
- ability to make new products commercially available in a timely
manner;
- budgeting cycles of our customers;
- changes in pricing policies by us or our competitors;
- 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; and
- changes in our sales incentive plans.
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. Booking of orders in the
third quarter of 2001 was negatively impacted by the September 11/th/ terrorist
attacks and future terrorists acts or war-time conditions are likely to impact
the booking orders in future periods. Furthermore, several factors may require
us, in accordance with accounting principles
18
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 any plans for expansion,
including plans to increase our sales and marketing and research and development
efforts, are based in significant part on our expectations of future revenues
and are relatively fixed in the short-term. If revenues fall below our
expectations and we are unable to quickly reduce our spending in response, our
business, operating results and financial condition are likely to be harmed.
Based upon all of the factors described above, we have a limited ability to
forecast future revenues and expenses, and it is likely that in some future
quarter our operating results will be below our estimates or the expectations of
public market analysts and investors. In the event that operating results are
below our estimates or other expectations, the price of our common stock could
decline.
IF WE DO NOT SUCCESSFULLY EXPAND OUR DISTRIBUTION CHANNELS AND DEVELOP AND
MAINTAIN RELATIONSHIPS WITH E.BUSINESS APPLICATION VENDORS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as e.Business
application vendors, resellers and distributors ("Channel Partners"). Our
revenues from license fees resulting from sales through Channel Partners were
approximately 44% in the first nine months of 2001, 45% in fiscal 2000 and 39%
in fiscal 1999. Our ability to achieve significant revenue growth in the future
will depend in large part on the success of our sales force and in further
establishing and maintaining relationships with Channel Partners. 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 Channel Partners to sell and support
our products. If the sales and implementation cycles of our Channel Partners are
lengthy or variable or our e.Business application vendors experience
difficulties
19
embedding our technology into their products or we fail to train the sales and
customer support personnel of such Channel Partners in a timely fashion, our
business, operating results and financial condition would be harmed.
Although we are currently investing, and plan to continue to invest,
significant resources to expand and develop relationships with e.Business
application vendors, we have at times experienced and continue to experience
difficulty in establishing and maintaining these relationships. If we are unable
to successfully expand these distribution channels and secure license agreements
with additional e.Business application vendors on commercially reasonable terms,
including significant up front payments of minimum license fees, and extend
existing license agreements with existing e.Business and application vendors on
commercially reasonable terms, our operating results would be harmed. Any
inability by us to maintain existing or establish new relationships with Channel
Partners, including systems integrations, 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 as well as general
economic and political events. 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 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.
20
IF WE FAIL TO EXPAND OUR INTERNATIONAL OPERATIONS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
During the first nine months of 2001 and the fiscal years 2000 and 1999, we
derived 24%, 11% and 14% of our total revenues, respectively, from sales outside
the United States. Our ability to achieve revenue growth in the future will
depend in large part on our success in increasing revenues from international
sales. We intend to continue to invest significant resources to expand our sales
and support operations outside North America and to enter additional
international markets. In order to expand international sales, we must establish
additional foreign operations, expand our international channel management and
support organizations, hire additional personnel, recruit additional
international distributors and increase the productivity of existing
international distributors. If we are not successful in expanding international
operations in a timely and cost-effective manner, our business, operating
results and financial condition could be harmed.
WE MAY MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE NUMEROUS RISKS.
The Information Delivery software business is highly competitive, and as
such, our growth is dependent upon market growth and our ability to enhance our
existing products, introduce new products on a timely basis and expand our
distribution channels and professional services organization. One of the ways we
have addressed and will continue to address these issues is through acquisitions
of other companies. Acquisitions involve numerous risks, including the
following:
- difficulties in integration of the operations, technologies, and
products of the acquired companies;
- the risk of diverting management's attention from normal daily
operations of the business;
- negative impact to our financial condition and results of operations
resulting from combining the acquired company's financial condition
and results of operations with our financial statements;
- risks of entering markets in which we have no or limited direct prior
experience; and
- the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently risky,
and we cannot assure you that any acquisition will be successful and will not
materially adversely affect our business, operating results or financial
condition. Failure to successfully integrate acquired companies and technologies
with us could harm our business and operating results.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
Our market is intensely competitive and characterized by rapidly changing
technology and evolving standards. Our competition comes in five principal
forms:
- direct competition from current or future software vendors such as
Business Objects S.A., Crystal Decisions (a division of Seagate
Technology, LLC.), and Brio Technology, Inc.;
21
- indirect competition from vendors of Business Intelligence tools such as
Cognos, Inc., MicroStrategy Incorporated and Microsoft that integrate
reporting functionality with such tools;
- indirect competition from e.Business software vendors such as SAP and
Oracle, to the extent they include Information Delivery functionality in
their applications;
- competition from other e.Business software vendors and Internet
development tool vendors; and
- competition from the information technology departments of current or
potential customers that may develop Information Delivery solutions
internally which may be cheaper and more customized than our products.
Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sales of their products than we may. Also, most current and
potential competitors, including companies such as Oracle and Microsoft, have
greater name recognition and the ability to leverage significant installed
customer bases. These companies could integrate competing Information Delivery
software with their products, resulting in a loss of market share for us. We
expect additional competition as other established and emerging companies enter
the Information Delivery software market and new products and technologies are
introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins, longer sales cycles and loss of market
share, any of which would harm our business, operating results and financial
condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the Information Delivery needs of
our prospective customers. Also our current or future 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
22
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 a number of subsidiaries whose primary business purpose is the
marketing, sale support and distribution of our software products. We have very
limited experience in the management of international operations. We also have a
number of distributors located worldwide. International operations are subject
to a number of risks, any of which could harm our business, operating results
and financial conditions. These risks include the following:
- political and economic instability;
- costs of localizing products for foreign countries;
- difficulty in hiring employees in foreign countries;
- trade laws and business practices favoring local competition;
- dependence on local vendors;
- compliance with multiple, conflicting and changing government laws and
regulations;
- longer sales and payment cycles;
- import and export restrictions and tariffs;
- difficulties in staffing and managing foreign operations;
- greater difficulty or delay in accounts receivable collection;
- foreign currency exchange rate fluctuations; and
- multiple and conflicting tax laws and regulations.
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
23
foreign currency exposure. If we are not successful in any future foreign
exchange hedging transactions that we engage in, our business, operating results
and financial condition could be harmed.
TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT OUR
INTERNAL SYSTEMS, PROCEDURES AND CONTROLS. IF WE ARE UNABLE TO DO SO
SUCCESSFULLY, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our expansion in the number of employees and the scope of operations over
the past few years has placed and will continue to place a significant strain on
our management, information systems and resources. Any acquisitions made by us
will also put a significant strain on our management, information systems and
resources. In addition, we expect that an expansion of our international
operations will lead to increased financial and administrative demands
associated with managing our international operations and managing an increasing
number of relationships with foreign partners and customers and expanded
treasury functions to manage foreign currency risks. Our future operating
results will also depend on our ability to further develop indirect channels and
expand our support organization to accommodate growth in our installed base. If
we fail to manage our expansion effectively, our business, operating results and
financial condition would be harmed.
OUR INABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL IN THE FUTURE
WOULD SERIOUSLY HARM OUR BUSINESS.
Our success depends to a significant degree upon the efforts of certain key
management, sales, marketing, customer support and research and development
personnel. We believe that our future success will depend in large part upon our
continuing ability to attract and retain highly skilled managerial, sales,
marketing, customer support and research and development personnel. Like other
software companies, we face intense competition for such personnel, and we have
experienced and will continue to experience difficulty in recruiting and
retaining qualified personnel. This is particularly true in the San Francisco
Bay Area, where the employment market for qualified sales, marketing, customer
support and research and development personnel continues to be competitive in
spite of recently announced workforce reduction in the region.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers and other key engineering, sales, marketing and customer support
personnel. None of our officers or key employees is bound by an employment
agreement for any specific term. If we lose the service of one or more of our
key employees, or if one or more of our executive officers or key employees
decide to join a competitor or otherwise compete directly or indirectly with us,
this could have a significant adverse effect on our business.
THERE ARE RISKS ASSOCIATED WITH THE SOFTWARE INDUSTRY.
The software industry is experiencing a significant downturn, in connection
with the decline in general economic conditions, which has resulted in a
decrease of budgets for management information systems. This change in economic
conditions has resulted in a slowdown of the purchase of Internet based software
products and has affected our operating results and financial conditions. We
expect this economic downturn to continue and, thus, our operating results and
financial condition may be below
24
our forecasts and investor expectations and 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. The sale
and support of our products may entail the risk of such claims, which are likely
to be substantial in light of the use of our products in business-critical
applications. A product liability claim brought against us could seriously harm
our business, operating results and financial condition.
IF THE PROTECTION OF OUR PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS COULD BE
SERIOUSLY HARMED.
We have two issued and two pending U.S. patents and we rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our proprietary technology. For
example, we license our software pursuant to shrink-wrap or signed license
agreements, which impose certain restrictions on licensees' ability to utilize
the software. In addition, we seek to avoid disclosure of our intellectual
property, including requiring those persons with access to our proprietary
information to execute confidentiality agreements with us and restricting access
to our source code. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of many countries do not protect our proprietary
rights to as great an extent as do the 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.
Third parties may claim that our current or future products infringe such
parties' intellectual property rights. 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
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without merit, could be time-consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all. A successful claim of product infringement against us and our
failure or inability to license the infringed or similar technology could harm
our business, operating results and financial condition.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR STOCKHOLDERS.
The market price of shares of our common stock has been and is likely to
continue to be highly volatile and may be significantly affected by factors such
as the following:
- changes in the economic and political conditions in the United States
and abroad;
- actual or anticipated fluctuations in our operating results;
- terrorist attack or war-time conditions;
- announcements of technological innovations;
- new products or new contracts announced by us or our competitors;
- developments with respect to copyrights or proprietary rights;
- price and volume fluctuations in the stock market;
- conditions and trends in the software and other technology industries;
- changes in corporate purchasing of e.Business application software;
- the announcement of mergers or acquisitions;
- adoption of new accounting standards affecting the software industry;
- changes in financial estimates by securities analysts; and
- the purchase or sale of our common stock by "day traders".
In addition, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against such company. If we are involved in such litigation, it
could result in substantial costs and a diversion of management's attention and
resources and could harm our business, operating results and financial
condition.
CERTAIN OF OUR CHARTER PROVISIONS AND DELAWARE LAW, MAY PREVENT OR DETER A
CHANGE IN CONTROL OF ACTUATE.
Actuate's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated ("Bylaws"),
contain certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of Actuate or unsolicited 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.
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Part II. Other Information
Item 1. Legal Proceedings
We are not involved in any legal proceedings that are material to our
business or financial condition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 7, 2001.
Actuate Corporation
(Registrant)
By: /s/ DANIEL A. GAUDREAU
______________________________________
Daniel A. Gaudreau
Chief Financial Officer, Senior Vice
President of Finance (Principal
Financial and Accounting Officer)
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