<PAGE>
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, 1998
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 SOFTWARE CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3193197
(State of incorporation) (I.R.S. Employer Identification No.)
999 BAKER WAY, SUITE 270
San Mateo, California 94404
(650) 425-2300
(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: Not Applicable.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Title of Class Outstanding as of September 30, 1998
-------------- ------------------------------------
Common Stock, par value $.001 per share 13,777,766
<PAGE>
ACTUATE SOFTWARE CORPORATION
Index
-----
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets at September 30, 1998 and December 31, 1997
Condensed Statements of Operations for the Three Months and Nine Months
Ended September 30, 1998 and 1997
Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTUATE SOFTWARE CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 28,295 $ 2,901
Short-term investments....................... 3,000 290
Accounts receivable, net..................... 4,748 2,984
Other current assets......................... 544 172
--------------- --------------
Total current assets........................... 36,587 6,347
Property and equipment, net.................... 1,339 1,096
Other assets................................... 456 144
--------------- --------------
$ 38,382 $ 7,587
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable............................. $ 936 $ 843
Accrued compensation......................... 1,078 997
Other accrued liabilities.................... 3,731 1,679
Deferred revenue............................. 7,308 6,021
Capital lease obligations.................... - 125
--------------- --------------
Total current liabilities...................... 13,053 9,665
--------------- --------------
Capital lease obligations...................... - 124
--------------- --------------
Stockholders' equity (net capital deficiency):
Preferred stock, $.001 par value, 5,000,000
and 10,939,464 shares authorized; none and
6,489,732 shares issued and outstanding at
September 30, 1998 and December 31, 1997,
respectively............................... - 6
Common stock, $.001 par value, 35,000,000
and 20,000,000 shares authorized; 13,777,766
and 3,976,285 shares issued and outstanding 14 4
at September 30, 1998 and December 31, 1997,
respectively...............................
Additional paid-in capital................... 46,585 14,908
Note receivable from officer................. (40) (40)
Deferred stock compensation.................. (491) (107)
Accumulated deficit.......................... (20,739) (16,973)
--------------- --------------
Total stockholders' equity (net capital
deficiency)................................ 25,329 (2,202)
--------------- --------------
$ 38,382 $ 7,587
=============== ==============
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
ACTUATE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
License fees................................................................. $ 4,978 $ 2,203 $11,987 $ 5,032
Services..................................................................... 1,023 548 2,777 1,164
----------- ---------- ----------- ----------
Total revenues................................................................. 6,001 2,751 14,764 6,196
----------- ---------- ----------- ----------
Operating expenses:
Cost of license fees......................................................... 288 113 819 320
Cost of services............................................................. 787 338 2,316 719
Sales and marketing.......................................................... 2,968 1,988 8,435 4,902
Research and development..................................................... 1,900 2,102 5,474 4,606
General and administrative................................................... 626 411 1,826 824
----------- ---------- ----------- ----------
Total operating expenses.................................................... 6,569 4,952 18,870 11,371
Loss from operations........................................................... (568) (2,201) (4,106) (5,175)
Equity in losses of affiliate.................................................. - (10) - (26)
Interest and other income, net................................................. 304 57 340 87
----------- ---------- ----------- ----------
Net loss ...................................................................... $ (264) $(2,154) $(3,766) $(5,114)
=========== ========== =========== ==========
Basic and diluted net loss per share........................................... $ (0.02) $ (0.71) $ (0.64) $ (1.76)
=========== ========== =========== ==========
Weighted average shares outstanding used in per share calculation.............. 11,043 3,029 5,920 2,901
=========== ========== =========== ==========
Pro forma basic and diluted net loss per share................................. $ (0.02) $ (0.23) $ (0.35) $ (0.55)
=========== ========== =========== ==========
Shares used in computing pro forma basic and diluted net loss per share........ 12,595 9,519 10,764 9,234
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
ACTUATE SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------------
1998 1997
------------------------- ------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................................... $ (3,766) $ (5,114)
Adjustment to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation................................. 236 36
Depreciation.......................................................... 169 263
Loss on disposal of fixed assets...................................... 70 -
Issuance of common stock for services and
intellectual property............................................... - 78
Changes in operating assets and liabilities
Accounts receivable............................................... (1,764) (1,615)
Other current assets.............................................. (372) 77
Accounts payable.................................................. 93 516
Accrued compensation.............................................. 81 460
Other accrued liabilities......................................... 2,052 1,799
Deferred revenue.................................................. 1,287 2,181
------------------------- ------------------------
Net cash used in operating activities...................................... (1,914) (1,319)
------------------------- ------------------------
INVESTING ACTIVITIES
Purchases of property and equipment........................................ (482) (841)
Purchases of short-term investments........................................ (3,000) (290)
Proceeds from maturity of short-term investments........................... 290 -
Net change in other assets................................................. (312) (28)
------------------------- ------------------------
Net cash used in investing activities...................................... (3,504) (1,159)
------------------------- ------------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock..................................... 31,061 179
Payments on capital lease obligations...................................... (249) (106)
Proceeds from issuance of preferred stock.................................. - 5,829
---------------------------------------------------
Net cash provided by financing activities.................................. 30,812 5,902
---------------------------------------------------
Net increase in cash and cash equivalents.................................. 25,394 3,424
Cash and cash equivalents at the beginning of the year..................... 2,901 1,040
------------------------- ------------------------
Cash and cash equivalents at the end of the period......................... $ 28,295 $ 4,464
========================= ========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 22 $ 27
========================= ========================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
ACTUATE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying interim condensed financial statements of Actuate Software
Corporation (the "Company") are unaudited, but include all normal recurring
adjustments which the Company's management believes 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
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Despite
management's best effort to establish good faith estimates and assumptions, and
to manage the achievement of the same, actual results may differ.
The interim financial statements should be read in conjunction with the
financial statements and related notes included in the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on July
17, 1998. 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 month periods ended September 30, 1998 are not necessarily
indicative of operating results for the full fiscal year.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash deposited with banks and money
market accounts with original maturities of 90 days or less. The Company
accounts for its cash equivalents and investments under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." All short-term investments are classified as available-for-
sale, are carried at amortized cost, which approximates fair value, and consist
of high quality debt securities with original maturities between 90 days and one
year.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2").
Effective January 1, 1998, the Company adopted SOP 97-2. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements
such as software products, upgrades, enhancements, postcontract customer
support, installation and training to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be
based on evidence which is specific to the vendor. Evidence of the fair value
of each element is based on the price charged when the element is sold
separately, or if the element is not being sold separately, the price for each
element established by management having relevant authority. The revenue
allocated to software products, including specified upgrades or enhancements,
generally is recognized upon delivery of the products. The revenue allocated to
unspecified upgrades and updates and postcontract customer support generally is
recognized as the services are performed. If evidence of the fair value for all
elements of the arrangement does not exist, all revenue from the arrangement is
deferred until such evidence exists or until all elements are delivered. There
was no material change to the Company's accounting for revenues as a result of
the adoption of SOP 97-2.
<PAGE>
NET LOSS PER SHARE
Net loss per share is presented under Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the
presentation of basic earnings (loss) per share and diluted earnings (loss) per
share, if more dilutive, for all periods presented.
In accordance with SFAS 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period. Pro forma, basic and diluted net loss per share as presented in the
statement of operations has been computed as described above and also gives
effect, under Securities and Exchange commission guidance, to the conversion of
the convertible preferred stock that was automatically converted upon completion
of the Company's initial public offering in July 1998 (using the if-converted
method) from the original date of issuance.
A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net loss ................................................................. $ (264) $(2,154) $(3,766) $(5,114)
----------- ---------- ----------- ----------
Basic and diluted:
Weighted-average shares of common stock outstanding..................... 11,609 3,753 6,546 3,444
Weighted-average shares subject to repurchase .......................... (566) (724) (626) (543)
----------- ---------- ----------- ----------
Shares used in computing net loss per share............................... 11,043 3,029 5,920 2,901
=========== ========== =========== ==========
Basic and diluted net loss per share...................................... $ (0.02) $ (0.71) $ (0.64) $ (1.76)
=========== ========== =========== ==========
Pro forma:
Shares used in computing net loss per share............................... 11,043 3,029 5,920 2,901
Adjusted to reflect assumed conversion of preferred stock................. 1,552 6,490 4,844 6,333
----------- ---------- ----------- ----------
Shares used in computing pro forma net loss per share..................... 12,595 9,519 10,764 9,234
=========== ========== =========== ==========
Pro forma basic and diluted net loss per share............................ $ (0.02) $ (0.23) $ (0.35) $ (0.55)
=========== ========== =========== ==========
</TABLE>
COMPREHENSIVE INCOME
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"). There was no impact to the Company as a result
of the adoption of SFAS 130, as there is no difference between the Company's
reported net loss and the comprehensive net loss under SFAS 130 for the periods
presented.
SEGMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information". SFAS 131
is effective for the fiscal year ended December 31, 1998 and establishes
standards for disclosure about products, geography and major customers. The
Company expects that implementation of this standard will not have a material
effect on its financial statement disclosures.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting
<PAGE>
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. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company expects
that implementation of this standard will not have a material effect on its
financial statement disclosure.
2. COMMON STOCK
The Company consummated its initial public offering ("IPO") of common stock
on July 17, 1998. The Company sold 3,140,000 shares of its common stock
resulting in net proceeds of $30.9 million. Concurrent with the closing of the
IPO, 6,489,732 shares of the Company's convertible preferred stock were
converted into an equivalent number of shares of common stock.
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 the Company's Registration
Statement on Form S-1 as filed with the Securities and Exchange Commission on
July 17, 1998.
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 the Company's
expectations, beliefs, hopes, intentions or strategies regarding the future.
All forward looking statements in this Form 10-Q are based upon information
available to the Company as of the date hereof, and the Company assumes no
obligation to update any such forward looking statements. Actual results could
differ materially from the Company's current expectations. Factors that could
cause or contribute to such differences include, but are not limited to:
variation in demand for and acceptance of the Company's products and services,
the size and timing of sales, failure to maintain successful relationships with
and to establish new relationships with enterprise application vendors, the
level of product and price competition from existing and new competitors,
changes in the Company's level of operating expenses and its ability to control
costs, changes in the mix of domestic and international revenues and changes in
the mix of direct and indirect sales, delays in developing, marketing and
deploying new products, the ability of the Company to expand its direct sales
force and indirect distribution channels both domestically and internationally,
the Company's success in attracting and retaining key personnel, the growth of
the market for enterprise reporting, the ability of the Company to successfully
integrate technologies and businesses it may acquire in the future and general
domestic and international economic and political conditions; and other factors
and risks discussed in "Risk Factors," elsewhere in this Report and in the
Company's Securities and Exchange Commission filings.
OVERVIEW
The Company is a leading provider of enterprise reporting solutions that
enable organizations to systematically extract, publish and disseminate
information in both Internet and client/server computing environments. The
Company develops and markets software products that are designed to allow
companies to rapidly design, generate and distribute reports throughout the
enterprise, thereby increasing access to and the value of corporate data.
The Company sells its software products directly to end user customers
through its direct sales force and through indirect channel partners such as
enterprise application vendors, resellers and distributors. Enterprise
application vendors generally integrate the Company's products with their
applications and either embed them into their products or resell them with their
products. The
<PAGE>
Company's other indirect channel partners resell the Company's software products
to end user customers. The Company sells its products outside the United States
primarily through distributors. The Company's revenues are derived primarily
from license fees for software products and, to a lesser extent, fees for
services relating to such products, including software maintenance and support,
training and consulting. The Company was incorporated in California in November
1993 and reincorporated in Delaware in July 1998. The Company's principal
executive offices are located at 999 Baker Way, Suite 270, San Mateo, California
94404 and its telephone number is 650-425-2300.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
License fees..................... 83% 80% 81% 81%
Services......................... 17 20 19 19
-------- -------- -------- --------
Total revenues................. 100 100 100 100
-------- -------- -------- --------
Cost of revenues:
License fees..................... 5 4 5 5
Services......................... 13 12 16 12
-------- -------- -------- --------
Total cost of revenues......... 18 16 21 17
-------- -------- -------- --------
Gross profit....................... 82 84 79 83
-------- -------- -------- --------
Operating expenses:
Sales and marketing.............. 49 72 57 79
Research and development......... 32 77 37 74
General and administrative....... 10 15 13 13
-------- -------- -------- --------
Total operating expenses....... 91 164 107 166
-------- -------- -------- --------
Loss from operations............... (9) (80) (28) (83)
Interest and other income, net..... 5 2 2 1
-------- -------- -------- --------
Net income......................... (4)% (78)% (26)% (82)%
======== ======== ======== ========
REVENUES
Total revenues increased 118% from $2.8 million for the quarter ended
September 30, 1997 to $6.0 million for the quarter ended September 30, 1998.
Total revenues increased 138% from $6.2 million for the nine months ended
September 30, 1997 to $14.8 million for the nine months ended September 30,
1998. Sales outside the United States accounted for 3% and 4% of total revenues
for the third quarter of 1997 and 1998, respectively and sales outside the
United States accounted for 6% of total revenues for the nine months ended
September 30, 1997 and 1998.
License fees. Revenues from license fees increased 126% from $2.2 million
for the third quarter of 1997 to $5.0 million for the third quarter of 1998.
Revenues from license fees increased 138% from $5.0 million for the nine months
ended September 30, 1997 to $12.0 million for the nine months ended September
30, 1998. These increases in license fees were the result of increased sales to
new customers
<PAGE>
and increased follow-on sales to existing customers due to expansion of the
Company's direct sales organization and increased acceptance of the Actuate
Reporting System.
Services. Service revenues increased 87% from $0.5 million for the third
quarter of 1997 to $1.0 million for the third quarter of 1998. Service revenues
increased 139% from $1.2 million for the nine months ended September 30, 1997 to
$2.8 million for the nine months ended September 30, 1998. These increases in
service revenues were primarily due to the increase in maintenance and support
contracts associated with higher license fee revenues and, to a lesser extent,
increases in training and consulting revenues related to increases in the
Company's installed customer base.
COST OF REVENUES
License fees. Cost of license revenues consists primarily of production and
packaging costs, personnel and related costs, and facility costs. Cost of
license revenues increased from $113,000, or 5% of revenues from license fees,
for the third quarter of 1997 to $288,000, or 6% of revenues from license fees,
for the third quarter of 1998. Cost of license revenues increased from
$320,000, or 6% of revenues from license fees, for the nine months ended
September 30, 1997, to $819,000, or 7% of revenues from license fees, for the
nine months ended September 30, 1998. The increases in absolute dollars were
primarily due to the increase in the number of licenses sold.
Services. Cost of service 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
$338,000, or 62% of revenues from service fees, for the third quarter of 1997 to
$787,000, or 77% of revenues from service fees, for the third quarter of 1998.
Cost of services also increased from $719,000, or 62% of revenues from service
fees, for the nine months ended September 30, 1997 to $2.3 million, or 83% of
revenues from service fees, for the nine months ended September 30, 1998. The
increases in absolute dollars and as a percentage of service revenues were
primarily due to the increase in the number of customer support personnel
resulting from the Company's expansion of its support services as well as an
increase in third party training and consulting services. The Company expects
that cost of services will continue to increase in absolute dollars in future
periods as the Company continues to hire additional customer support personnel.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation, promotional expenses, travel and entertainment, and facility
costs. Sales and marketing expenses increased from $2.0 million, or 72% of
total revenues for the third quarter of 1997 to $3.0 million, or 49% of total
revenues for the third quarter of 1998. Sales and marketing expenses increased
from $4.9 million, or 79% of total revenues for the nine months ended September
30, 1997 to $8.4 million, or 57% of total revenues for the nine months ended
September 30, 1998. 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 program expenses.
The decreases as a percentage of total revenues were due primarily to revenues
increasing at a faster rate than sales and marketing expenses. The Company
expects that sales and marketing expenses will continue to increase in absolute
dollars in future periods as the Company continues 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
product development. Research and development expenses decreased from $2.1
million, or 77% of total revenues for the third quarter of 1997 to $1.9 million,
or 32% of total revenues for the third quarter of 1998. Research and development
<PAGE>
expenses increased from $4.6 million, or 74% of total revenues for the nine
months ended September 30, 1997 to $5.5 million, or 37% of total revenues for
the nine months ended September 30, 1998. The decrease in research and
development expenses in absolute dollars from the third quarter of 1997 to the
third quarter of 1998 was primarily due to higher consulting and related
development costs in the third quarter of 1997 associated with the completion of
Version 3.0 of the Actuate Reporting System, which began shipping in the fourth
quarter of 1997. The increase in research and development expenses in absolute
dollars from the nine months ended September 30, 1997 to the nine months ended
September 30, 1998 was primarily due to increases in personnel and related costs
associated with the enhancement of existing products, quality assurance and
testing, depreciation of capital expenditures and facilities costs. The
decreases as a percentage of total revenues were due to revenues increasing at a
faster rate than research and development expenses. The Company believes that a
significant level of investment for research and development is essential to
maintain product and technical leadership and anticipates that it 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, human resources,
information systems and general management, as well as legal and accounting
expenses and amortization of deferred compensation related to certain stock
option grants. General and administrative expenses increased from $411,000, or
15% of total revenues for the third quarter of 1997 to $626,000, or 10% of total
revenues for the third quarter of 1998. General and administrative expenses
increased from $824,000, or 13% of total revenues for the nine months ended
September 30, 1997 to $1.8 million, or 13% of total revenues for the nine months
ended September 30, 1998. The increases in general and administrative expenses
in absolute dollars were due primarily to increased personnel and related costs
and professional fees necessary to manage and support the Company's growth. The
Company believes that its general and administrative expenses will increase in
absolute dollars in future periods as the Company continues to hire additional
general and administrative personnel to support expanded operations.
The Company recorded deferred compensation of approximately $619,000 during
the nine months ended September 30, 1998, and the Company recorded amortization
expense of approximately $103,000 and $236,000 for the three months and nine
months ended September 30, 1998, respectively. These amounts represent the
difference between the exercise price of certain stock option grants and the
deemed fair value of the Company's Common Stock at the time of such grants. All
such deferred compensation expense has been included in general and
administrative expenses. Approximately $491,000 of remaining deferred
compensation expense will be amortized by the Company through 2002.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, is comprised primarily of interest income
earned by the Company on its cash and short-term investments. Interest and
other income, net, for the quarter and nine months ended September 30, 1997 was
$57,000 and $87,000, respectively, as compared with interest and other income,
net, of $304,000 and $340,000 for the quarter and nine months ended September
30, 1998, respectively. These increases were due primarily to the interest
earned on the investment of the proceeds from the Company's initial public
offering which was consummated on July 17, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
cash from operations and approximately $14.3 million in net proceeds from the
private sales of preferred stock. In July 1998, the Company completed its
initial public offering whereby it sold 3,140,000 shares of its common stock.
The net proceeds to the Company, after deducting expenses relating to the
offering, were $30.9 million.
<PAGE>
As of September 30, 1998, the Company had cash and cash equivalents of
$28.3 million and short-term investments of $3.0 million in a certificate of
deposit classified as available-for-sale. In addition, the Company maintains a
bank line of credit which provides for up to $5.0 million in borrowings. The
Company can borrow up to 80% of eligible accounts receivable against the line of
credit. The interest rate on any borrowed amounts is the prime rate plus 2.25%.
This line of credit requires the Company to comply with various financial
covenants, prohibits the Company from paying dividends and requires the Company
to deposit $3.0 million of the proceeds of its initial public offering with the
lender through May 25, 1999, the maturity date of the line of credit. The
Company currently has no borrowings under the line of credit.
The Company believes that its current cash balances and any cash generated
from operations and from available debt financing, will be sufficient to meet
the Company's 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 the Company's liquidity requirements, the Company may
seek to sell additional equity or obtain credit facilities. The sale of
additional equity could result in additional dilution to the Company's
stockholders. A portion of the Company's cash may be used to acquire or invest
in complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies. The Company has no current plans, agreements or
commitments, and is not currently engaged in any negotiations with respect to
any such transaction.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries in order to
distinguish 21st century dates from 20th century dates. As a result, in just
over a year, computer systems and/or software used by many companies will need
to be upgraded to comply with "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance issues. Although the Company believes that its products are Year
2000 compliant and on an ongoing basis is testing its products to validate Year
2000 compliance, there can be no assurance that Year 2000 errors or defects will
not be discovered in the Company's current and future products. Any failure by
the Company to make its products Year 2000 compliant could result in a decrease
in sales of the Company's products, an increase in the allocation of resources
to address Year 2000 problems of the Company's customers without additional
revenue commensurate with such dedication of resources, or an increase in
litigation costs relating to losses suffered by the Company's customers due to
such Year 2000 problems. The testing of the Company's products for Year 2000
compliance is part of the standard quality assurance testing done by the Company
on its products. The Company does not currently anticipate making any material
expenditures relating to the Year 2000 testing of its products. In addition, the
Company believes that the purchasing patterns of customers and potential
customers may be impacted by Year 2000 issues. Further, many companies are
expending significant resources to correct or patch their current software
systems to make such systems Year 2000 compliant. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. The occurrence of any of such events could have a material
adverse effect on the Company's business, results of operations or financial
condition. Additionally, to the extent the Company's products are embedded or
bundled with other companies' products that are not Year 2000 compliant, the
Company could be exposed to litigation from such companies' customers, and the
Company's reputation in the marketplace and indirect sales of its products by
the Company's indirect channel partners could be adversely affected, all of
which could result in a material adverse effect on the Company's business,
operating results and financial condition. The Company currently has no plans to
assess the Year 2000 compliance of the products of these companies.
Furthermore, the Company does not believe that the failure of any one of its end
user customers to be Year 2000 compliant will have a material adverse effect on
the Company's business,
<PAGE>
operating results and financial condition. However, in the event a large number
of the Company's end user customers are not Year 2000 compliant and such non-
compliance has a material adverse effect on such customers' business, the
Company's business, operating results and financial condition could be
materially adversely affected. The Company does not intend to assess the Year
2000 compliance of its end user customers.
The Company has conducted a preliminary assessment of its internal
information technology systems to identify the systems that could be affected by
the Year 2000 issue. Based on this preliminary assessment, the Company currently
has no reason to believe that its internal information technology systems are
not Year 2000 compliant. The Company intends to continue to assess the Year 2000
compliance of its internal information technology systems. To date the Company
has not made any material expenditures related to the Year 2000 compliance of
its internal information technology systems and the Company does not currently
anticipate spending any material amounts for Year 2000 remediation. There can be
no assurance that Year 2000 errors or defects will not be discovered in the
Company's internal information technology systems. In the event Year 2000 errors
or defects are discovered in the Company's internal information technology
systems and the Company is not able to remedy such errors or defect in a timely
manner or the cost to remedy such errors or defects is significant, there would
be a material adverse effect on the Company's business, results of operations or
financial condition.
RISK FACTORS
LIMITED OPERATING HISTORY; LACK OF PROFITABILITY
The Company incurred net losses of $6.1 million and $7.2 million in fiscal
1996 and 1997, respectively, and $3.8 million for the nine months ended
September 30, 1998. As of September 30, 1998, the Company had an accumulated
deficit of approximately $20.7 million. Given the Company's history of net
losses, there can be no assurance of revenue growth or profitability on a
quarterly or annual basis in the future. While the Company achieved significant
quarter-to-quarter revenue growth in fiscal 1997 and in the nine months ended
September 30, 1998, there can be no assurance that the Company's revenues will
increase in future periods. In addition, the Company intends to increase its
operating expenses significantly in future periods; therefore, the Company's
operating results in the future will be adversely affected if revenues do not
increase. Future operating results will depend on many factors, including,
among others, demand for and acceptance of the Company's products and services,
including ongoing acceptance of maintenance and other services purchased by
existing customers, continued successful relationships and the establishment of
new relationships with enterprise application vendors, the level of product and
price competition from existing and new competitors, the ability of the Company
to control costs and to develop, market and deploy new products, the ability of
the Company to expand its direct sales force and indirect distribution channels
both domestically and internationally, the Company's success in attracting and
retaining key personnel, the growth of the market for enterprise reporting and
the ability of the Company to successfully integrate technologies and businesses
it may acquire in the future. The Company was founded in November 1993 and
began shipping its Actuate Reporting System in January 1996. Accordingly, the
Company has a limited operating history on which to base an evaluation of its
business and prospects. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in rapidly evolving
markets. There can be no assurance that the Company will be successful in
addressing such risks, and the failure to do so would have a material adverse
effect on the Company's business, operating results and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's limited operating history and the susceptibility of the
Company's operating results to significant fluctuations makes any prediction of
future operating results unreliable. In
<PAGE>
addition, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. The Company's operating results have in
the past, and may in the future, vary significantly due to factors such as
demand for the Company's products, the size and timing of significant orders and
their fulfillment, sales cycles of the Company's indirect channel partners,
product life cycles, changes in pricing policies by the Company or its
competitors, changes in the Company's level of operating expenses and its
ability to control costs, budgeting cycles of its customers, software defects
and other product quality problems, hiring needs and personnel changes, the pace
of international expansion, changes in the Company's sales incentive plans,
continued successful relationships and the establishment of new relationships
with enterprise application vendors, the impact of consolidation by competitors
and indirect channel partners, and general domestic and international economic
and political conditions. In addition, the Company may, in the future,
experience fluctuations in its gross and operating margins due to changes in the
mix of domestic and international revenues and changes in the mix of direct
sales and indirect sales, as well as changes in the mix among the indirect
channels through which the Company's products are offered.
A significant portion of the Company's total revenues in any given quarter
is derived from existing customers. The Company's ability to achieve future
revenue growth, if any, will be substantially dependent upon the Company's
ability to increase revenues from license fees and services from existing
customers, to expand its sales force, to increase the quotas of its sales
employees, to have such employees achieve or exceed such quotas and to increase
the average size of its orders. To the extent that such increases do not occur
in a timely manner, the Company's business, operating results and financial
condition would be materially adversely affected. Because its software products
are typically shipped shortly after orders are received, revenues in any quarter
are substantially dependent on orders booked and shipped throughout that
quarter. Accordingly, revenues for any future quarter are difficult to predict.
Revenues from license fees are also difficult to forecast because the market for
enterprise reporting is rapidly evolving, and because the sales cycle for the
Company's products varies substantially from customer to customer and by
distribution channel and may increase in the future. The Company's expense
levels and plans for expansion, including its plans to significantly increase
its sales and marketing and research and development efforts, are based in
significant part on the Company's expectations of future revenues and are
relatively fixed in the short-term. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
Consequently, if total revenue levels are below expectations, the Company's
business, operating results and financial condition are likely to be adversely
and disproportionately affected.
Based upon all of the factors described above, the Company has limited
ability to forecast future revenues and expenses, and it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In the event that operating results are
below expectations, or in the event that adverse conditions prevail or are
perceived to prevail generally or with respect to the Company's business, the
price of the Company's common stock would be materially adversely affected.
EXPANDING DISTRIBUTION CHANNELS AND RELIANCE ON THIRD PARTIES
To date, the Company has sold its products principally through its direct
sales force, as well as through indirect sales channels, such as enterprise
application vendors, resellers and distributors. Of the Company's revenues from
license fees in 1997 and the nine months ended September 30, 1998, approximately
38% and 43%, respectively, resulted from sales through indirect channel
partners. The Company's ability to achieve significant revenue growth in the
future will depend in large part on its success in expanding its direct sales
force and in further establishing and maintaining relationships with enterprise
application vendors, resellers and distributors. In particular, a significant
element of the Company's strategy is to embed its technology in products offered
by enterprise application vendors for resale to such vendors' customers and end
users. The Company intends to seek additional distribution arrangements with
other enterprise application vendors to embed the Company's technology in their
<PAGE>
products and expects that these arrangements will continue to account for a
significant portion of the Company's revenues in future periods. The Company's
future success will depend on the ability of its indirect channel partners to
sell and support the Company's products. To the extent that the sales and
implementation cycles of the Company's indirect channel partners are lengthy or
variable in nature, that the Company's enterprise application vendors experience
difficulties embedding the Company's technology into their products or that the
Company fails to train the sales and customer support personnel of such indirect
channel partners in a timely fashion, the Company's business, operating results
and financial condition could be materially adversely affected.
Although the Company is currently investing, and plans to continue to
invest, significant resources to expand its direct sales force and to develop
relationships with enterprise application vendors, resellers and distributors,
the Company has at times experienced and continues to experience difficulty in
recruiting qualified sales personnel and in establishing necessary third-party
relationships. There can be no assurance that the Company will be able to
successfully expand its direct sales force or other distribution channels,
secure license agreements with additional enterprise application vendors on
commercially reasonable terms or at all, or extend existing license agreements
with existing enterprise application vendors, resellers and distributors on
commercially reasonable terms or at all, or that any such expansion, additional
license agreements or extension of license agreements would result in an
increase in revenues. Any inability by the Company to maintain existing or
establish new relationships with indirect channel partners or, if such efforts
are successful, a failure of the Company's revenues to increase correspondingly
with expenses incurred in pursuing such relationships, would materially and
adversely affect the Company's business, operating results and financial
condition.
DEPENDENCE ON GROWTH OF MARKET FOR ENTERPRISE REPORTING; RISKS ASSOCIATED WITH
THE SOFTWARE INDUSTRY
The market for enterprise reporting software products is still emerging and
there can be no assurance that it will continue to grow or that, even if the
market does grow, businesses will adopt the Company's products. To date, all of
the Company's revenues have been derived from licenses for its enterprise
reporting software and related products and services, and the Company expects
this to continue for the foreseeable future. The Company has spent, and intends
to continue spending, considerable resources educating potential customers and
indirect channel partners about enterprise reporting and the Company's products.
However, there can be no assurance that such expenditures will enable the
Company's products to achieve any significant degree of market acceptance, and
if the market for enterprise reporting products fails to grow or grows more
slowly than the Company currently anticipates, the Company's business, operating
results and financial condition would be materially adversely affected.
In addition, 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 enterprise reporting products. As a result, the
Company's 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.
COMPETITION
The market in which the Company competes is intensely competitive and
characterized by rapidly changing technology and evolving standards.
Competition for the Company's products comes in four principal forms: (i) direct
competition from current or future vendors of reporting solutions such as
Seagate Software, Inc. (a division of Seagate Technology, Inc.) and SQRIBE
Technologies, Inc.; (ii) indirect competition from vendors of OLAP and query
tools such as Arbor Software Corp., Business Objects S.A., Cognos, Inc. and
Microsoft Corp. ("Microsoft") that integrate reporting functionality with such
tools; (iii) indirect competition from enterprise application vendors such as
SAP Atkiengesellschaft
<PAGE>
("SAP") and Oracle Corp. ("Oracle"), to the extent they include reporting
functionality in their applications, and (iv) competition from the information
systems departments of current or potential customers that may develop reporting
solutions internally which may be cheaper and more customized than the Company's
products. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing and other resources than
the Company. Such 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 the
Company. 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 enterprise reporting software with their products, resulting in a loss
of market share for the Company. The Company expects additional competition as
other established and emerging companies enter the enterprise reporting software
market and new products and technologies are introduced. Increased competition
could result in price reductions, fewer customer orders, reduced gross margins,
longer sales cycles and loss of market share, any of which would materially
adversely affect the Company's 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 enterprise reporting needs of
the Company's prospective customers. The Company's current or future enterprise
application vendors and other indirect channel partners have in the past, or may
in the future, establish cooperative relationships with current or potential
competitors of the Company, thereby limiting the Company's ability to sell its
products through particular distribution channels. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to obtain revenues from license fees from
new or existing customers, and service revenues from existing customers on terms
favorable to the Company. Further, competitive pressures may require the Company
to reduce the price of its software. In either case, the Company's business,
financial condition, and operating results would be materially adversely
affected. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and the failure to do so
would have a material adverse effect upon the Company's business, operating
results and financial condition.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OF CERTAIN INTERNATIONAL
DISTRIBUTORS
The Company is a party to agreements with its Japanese distributor and the
parent company of its French, German and United Kingdom distributors (the
"International Distributors"), under which the Company is likely to (and under
certain circumstances, would bear substantial financial penalties if it did not)
acquire such International Distributors at some point in the future. Such an
acquisition could be triggered by the parent company of the European
distributors at its discretion beginning in January 1999, and by the Japanese
distributor at its discretion beginning in April 1999. In connection with any
such acquisition, the Company would be required to pay a purchase price (equal
to at least such distributor's last twelve months' revenues as of the date of
such acquisition) in registered shares of the Company's Common Stock or in cash,
which may have the effect of diluting existing stockholders, adversely affecting
the price of the Company's Common Stock or reducing the available cash for
working capital and other purposes. At present, the Company is unable to
predict the accounting treatment of any such acquisitions, in part because it is
unclear what accounting regulations, conventions or interpretations may prevail
in the future. If any such acquisition is accounted for by the Company as a
"purchase" transaction (as opposed to a pooling of interests), it could cause
the Company to recognize substantial goodwill and other intangible asset
amortization charges in the quarters and fiscal years immediately following the
date on which such an acquisition is effected, depending upon the purchase price
paid by the Company for such acquisition. As a result, if the acquisition is
accounted for as a "purchase" transaction, it could have a material adverse
effect on reported earnings per share during these periods in which the Company
records the amortization of intangible assets acquired. Finally, any such
acquisition
<PAGE>
would require substantial management attention, impose costs on the Company
associated with integrating the acquired entities, require the Company to
coordinate sales and marketing efforts with the acquired companies and subject
the Company to additional, and potentially substantial, regulation as an owner
of foreign subsidiaries, any of which could have a material adverse effect on
the business, operating results and financial condition of the Company.
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON PRODUCT DEVELOPMENT
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changing customer demands and evolving industry
standards, any of which can render existing products obsolete and unmarketable.
The Company believes that its future success will depend in large part on its
ability to support current and future releases of popular operating systems,
databases and enterprise software applications, to maintain and improve its
current product line, to timely develop new products that achieve market
acceptance, to maintain technological competitiveness and to meet an expanding
range of customer requirements. There can be no assurance that the announcement
or introduction of new products by the Company or its competitors or any change
in industry standards will not cause customers to defer or cancel purchases of
existing products, which could have a material adverse effect on the Company's
business, operating results and financial condition. As a result of the
complexities inherent in enterprise reporting, major new products and product
enhancements can require long development and testing periods. In addition,
customers may delay their purchasing decisions in anticipation of the general
availability of new or enhanced versions of the Company's 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 have a material adverse effect on the Company's business, operating
results and financial condition. Any failure by the Company 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 of such new products and product enhancements to
achieve market acceptance would have a material adverse effect upon the
Company's business, operating results and financial condition.
LENGTHY AND VARIABLE SALES CYCLES
The purchase of the Company's products by its end user customers for
deployment within a customer's organization typically involves a significant
commitment of capital and other resources, and is therefore subject to delays
that are beyond the Company's control, such as the customers' internal
procedures to approve large capital expenditures, budgetary constraints and the
testing and acceptance of new technologies that affect key operations. While the
sales cycle for an initial order of the Company's products is typically 3 to 6
months and the sales cycle associated with a follow-on large scale deployment of
the Company's products typically extends for another 6 to 9 months or longer,
there can be no assurance that the Company will not experience longer sales
cycles in the future. Additionally, sales cycles for sales of the Company's
software products to enterprise application vendors tend to be longer, ranging
from 6 to 24 months or more (not including the sales and implementation cycles
of such vendors' own products, which are typically significantly longer than the
Company's sales and implementation cycles) and involve convincing the vendor's
entire organization that the Company's products are the appropriate reporting
solution for the application. Certain of the Company's customers have in the
past, or may in the future, experience difficulty completing the initial
implementation of the Company's products. Any difficulties or delays in the
initial implementation at the Company's customer sites or those of its indirect
channel partners, could cause such customers to reject the Company's software or
lead to the delay or non-receipt of future orders for the large-scale deployment
of the Company's products, any of which could have a material adverse effect on
the Company's business, operating results and financial condition.
MANAGEMENT OF GROWTH; DEPENDENCE ON AND NEED FOR ADDITIONAL QUALIFIED PERSONNEL
The Company has recently experienced a significant expansion in the number
of its employees, the scope of its operating and financial systems and the
geographic area of its operations. From January
<PAGE>
1997 through September 1998, the Company increased its headcount from 38 to 131
full-time employees. Furthermore, significant increases in the number of
employees are anticipated during the remainder of 1998 and in future periods. In
particular, the Company currently plans to expand the number of employees in
sales and marketing, customer support and research and development. This growth
has resulted, and will continue to result, in new and increased responsibilities
for management personnel and may place a strain upon the Company's management,
operating and financial systems and resources. The Company expects that an
expansion of its international operations will lead to increased financial and
administrative demands associated with managing an increasing number of
relationships with foreign partners and customers and expanded treasury
functions to manage foreign currency risks. The Company's future operating
results will also depend on its ability to further develop indirect channels and
expand its support organization to accommodate growth in the Company's installed
base. The failure of the Company to manage its expansion effectively could have
a material adverse effect on the Company's business, operating results and
financial condition.
The Company's success depends to a significant degree upon the efforts of
certain key management, marketing, customer support and research and development
personnel. The Company believes that its future success will depend in large
part upon its continuing ability to attract and retain highly skilled
managerial, sales, marketing, customer support and research and development
personnel. Like other software companies, the Company faces intense competition
for such personnel, and the Company has experienced and will continue to
experience difficulty in recruiting qualified personnel, particularly in the San
Francisco Bay Area, where the employment market for qualified sales, marketing
and engineering personnel is extremely competitive. There can be no assurance
that the Company will be successful in attracting, assimilating or retaining
qualified personnel in the future. The loss of the services of one or more of
the Company's key personnel, particularly the Company's executive officers, or
the failure to attract and retain additional qualified personnel, could have a
material and adverse effect on the Company's business, operating results and
financial condition. The Company has purchased, and is the beneficiary of, a key
man life insurance policy on its Chief Executive Officer in the amount of
$2,000,000.
FAILURE TO EXPAND AND RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
During 1996, 1997 and the nine months ended September 30, 1998, the Company
derived 6%, 2% and 6% of its total revenues, respectively, from sales outside
the United States. The Company's ability to achieve revenue growth in the
future will depend in large part on its success in increasing revenues from
international sales. Although the Company intends to continue to invest
significant resources to expand its sales and support operations outside the
United States and to enter additional international markets, there can be no
assurance that such efforts will be successful. In order to successfully expand
international sales, the Company must establish additional foreign operations,
expand its international channel management and support organizations, hire
additional personnel, recruit additional international distributors and increase
the productivity of existing international distributors. To the extent that the
Company is unable to do so in a timely and cost-effective manner, the Company's
business, operating results and financial condition could be materially
adversely affected.
The Company's international operations are generally subject to a number of
risks, including costs of localizing products for 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, including recent economic conditions in
Asia. Because substantially all of the Company's international revenues and
costs, with the exception of sales in Japan, have been denominated to date in
U.S. dollars, increases in the value of the United States dollar could increase
the price of the Company's products so that they become relatively more
expensive
<PAGE>
to customers in the local currency of a particular country, and result in a
reduction in sales and profitability in that country. The Company believes that
an increasing portion of the Company's 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 the Company's
results of operations. Any of the foregoing factors could have a material
adverse effect on the Company's business, operating results and financial
condition. Although the Company may from time to time undertake foreign exchange
hedging transactions to cover a portion of its foreign currency transaction
exposure, the Company does not currently attempt to cover any foreign currency
exposure, and there can be no assurance that the Company will be successful in
any future foreign exchange hedging transactions or that such transactions, if
any, will not have a material adverse effect on the Company's business,
operating results and financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries in order to
distinguish 21st century dates from 20th century dates. As a result, in just
over a year, computer systems and/or software used by many companies will need
to be upgraded to comply with "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance issues. Although the Company believes that its products are
Year 2000 compliant and on an ongoing basis is testing its products to validate
Year 2000 compliance, there can be no assurance that Year 2000 errors or defects
will not be discovered in the Company's current and future products. Any
failure by the Company to make its products Year 2000 compliant could result in
a decrease in sales of the Company's products, an increase in the allocation of
resources to address Year 2000 problems of the Company's customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by the Company's
customers due to such Year 2000 problems. The testing of the Company's products
for Year 2000 compliance is part of the standard quality assurance testing done
by the Company on its products. The Company does not currently anticipate making
any material expenditures relating to the Year 2000 testing of its products. In
addition, the Company believes that the purchasing patterns of customers and
potential customers may be impacted by Year 2000 issues. Further, many
companies are expending significant resources to correct or patch their current
software systems to make such systems Year 2000 compliant. These expenditures
may result in reduced funds available to purchase software products such as
those offered by the Company. The occurrence of any of such events could have a
material adverse effect on the Company's business, results of operations or
financial condition. Additionally, to the extent the Company's products are
embedded or bundled with other companies' products that are not Year 2000
compliant, the Company could be exposed to litigation from such companies'
customers, and the Company's reputation in the marketplace and indirect sales of
its products by the Company's indirect channel partners could be adversely
affected, all of which could result in a material adverse effect on the
Company's business, operating results and financial condition. The Company
currently has no plans to assess the Year 2000 compliance of the products of
these companies. Furthermore, the Company does not believe that the failure of
any one of its end user customers to be Year 2000 compliant will have a material
adverse effect on the Company's business, operating results and financial
condition. However, in the event a large number of the Company's end user
customers are not Year 2000 compliant and such non-compliance has a material
adverse effect on such customers' business, the Company's business, operating
results and financial condition could be materially adversely affected. The
Company does not intend to assess the Year 2000 compliance of its end user
customers.
The Company has conducted a preliminary assessment of its internal
information technology systems to identify the systems that could be affected by
the Year 2000 issue. Based on this preliminary assessment, the Company
currently has no reason to believe that its internal information technology
systems are not Year 2000 compliant. The Company intends to continue to assess
the Year 2000
<PAGE>
compliance of its internal information technology systems. To date the Company
has not made any material expenditures related to the Year 2000 compliance of
its internal information technology systems and the Company does not currently
anticipate spending any material amounts for Year 2000 remediation. There can be
no assurance that Year 2000 errors or defects will not be discovered in the
Company's internal information technology systems. In the event Year 2000 errors
or defects are discovered in the Company's internal information technology
systems and the Company is not able to remedy such errors or defect in a timely
manner or the cost to remedy such errors or defects is significant, there would
be a material adverse effect on the Company's business, results of operations or
financial condition.
RISK OF SOFTWARE DEFECTS; PRODUCT LIABILITY
Software products as complex as those offered by the Company often contain
errors or defects, particularly when first introduced, when new versions or
enhancements are released and when configured to individual customer computing
systems. The Company currently has known errors and defects in its products.
There can be no assurance that, despite testing by the Company, additional
defects and errors, including Year 2000 errors, will not be found in current
versions, new versions or enhancements of its products after commencement of
commercial shipments, any of which could result in the loss of revenues or a
delay in market acceptance and thereby have a material adverse effect on the
Company's business, operating results and financial condition. Furthermore,
there can be no assurance that when the Company's products are deployed
enterprise-wide by customers, the Company's products will meet all of the
expectations and demands of its customers.
Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's 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 Company has not experienced any product liability
claims to date. However, the sale and support of the Company's products may
entail the risks of such claims, which are likely to be substantial in light of
the use of the Company's products in business-critical applications. A product
liability claim brought against the Company could have a material adverse effect
on the Company's business, operating results and financial condition.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The Company has one issued U.S. patent and one U.S. patent pending and
relies primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary technology. For example, the Company licenses its software
pursuant to shrinkwrap or signed license agreements, which impose certain
restrictions on licensees' ability to utilize the software. In addition, the
Company seeks to avoid disclosure of its intellectual property, including
requiring those persons with access to the Company's proprietary information
to execute confidentiality agreements with the Company and restricting access
to the Company's source code. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In
addition, the laws of many countries do not protect the Company's proprietary
rights to as great an extent as do the laws of the United States. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar technology. Any failure by the Company to meaningfully protect its
intellectual property could have a material adverse effect on the Company's
business, operating results and financial condition.
<PAGE>
To date, the Company has not been notified that its products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects enterprise reporting software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the Company's 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 the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. A successful claim of
product infringement against the Company and the failure or inability of the
Company to license the infringed or similar technology could have a material
adverse effect upon the Company's business, operating results and financial
condition.
RISK OF CHANGES IN ACCOUNTING STANDARDS
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" was
issued in October 1997 by the American Institute of Certified Public Accountants
and amended by Statement of Position 98-4 ("SOP 98-4"). The Company adopted SOP
97-2 effective January 1, 1998. Based upon its reading and interpretation of
SOP 97-2 and SOP 98-4, the Company believes its current revenue recognition
policies and practices are materially consistent with SOP 97-2 and SOP 98-4.
However, full implementation guidelines for this standard have not yet been
issued. Once available, such implementation guidance could lead to
unanticipated changes in the Company's current revenue accounting practices, and
such changes could materially adversely affect the Company's future revenue and
earnings. Such implementation guidance may necessitate significant changes in
the Company's business practices in order for the Company to continue to
recognize license fee revenue upon delivery of its software products. Such
changes may have a material adverse effect on the Company's business, operating
results and financial condition.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of shares of the Company's Common Stock is likely to be
highly volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to copyrights or proprietary rights,
conditions and trends in the software and other technology industries, changes
in corporate purchasing of enterprise application software, the Year 2000 issue,
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, general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the securities of technology companies. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against such company. There can
be no assurance that such litigation will not occur in the future with respect
to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
CONTROL OF COMPANY BY EXISTING STOCKHOLDERS
As of September 30, 1998, the executive officers and directors of the
Company and their affiliates in the aggregate beneficially owned approximately
54.2% of the outstanding common stock of the Company, assuming no exercise of
outstanding stock options. As a result, these stockholders will be able to
exercise control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
<PAGE>
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
The Company'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 the Company 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 the Company's 1998 Equity Incentive Plan may also
have the effect of discouraging, delaying or preventing a change in control of
the Company or unsolicited acquisition proposals. The anti-takeover effect of
these provisions may also have an adverse effect on the public trading price of
the Company's common stock.
SHARES ELIGIBLE FOR FUTURE SALE
In January 1999, upon expiration of (i) lock-up agreements between certain
stockholders of the Company and the representatives of the Underwriters of the
Company's initial public offering and (ii) contractual obligations between
certain stockholders and the Company, approximately 10,300,000 shares of the
Company's common stock will become eligible for sale; provided however that
certain of these shares shall be subject to the volume and manner of sale
restrictions under Rule 144 and certain of these shares will not be eligible for
sale until the underlying stock option associated with such shares vests. Sales
of a substantial number of shares of the Company's common stock could adversely
affect the market price of the common stock and could impair the Company's
ability to raise capital through the sale of equity securities.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings that are material to its
business or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) In connection with its IPO in 1998, the Company filed a
Registration Statement on Form S-1, SEC Registration No. 333-55741,
which was declared effective by the Commission on July 17, 1998.
The offering commenced on July 17, 1998 and all securities were
sold in the offering. Pursuant to the Registration Statement, the
Company registered 3,450,000 shares of its common stock, $0.001 par
value per share, of which 3,140,000 shares were sold by the Company
and 310,000 shares were sold by Selling Stockholders. Net proceeds
to the Company after deducting underwriting discount and offering
expenses were $30.9 million.
From August 1, 1998 to September 30, 1998, the Company used such net offering
proceeds, in direct or indirect payments to others, as follows:
<TABLE>
<CAPTION>
<S> <C>
Manufacturing, sales, marketing and administrative infrastructure $ 3,488,000
Research and development activities 1,330,000
Purchase of machinery and equipment and software 250,000
Temporary investments 25,832,000
-----------
Total $30,900,000
===========
</TABLE>
Each of these amounts is a reasonable estimate of the application of the net
offering proceeds. This use of proceeds does not represent a material change in
the use of proceeds described in the prospectus of the Registration Statement.
The Company's temporary investments were in cash, cash equivalents and
investment grade, short-term interest bearing securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.15 Actuate Japan Agreement between the Company and Actuate
Japan, Co., Ltd. dated August 15, 1998.
10.16 Letter Agreement between the Company and Actuate Japan,
Co., Ltd. dated September 17, 1998.
10.17 Amendment No. 7 to Office Lease between the Company and
Spieker Properties, L.P. dated September 8, 1998.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
<PAGE>
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 3, 1998.
Actuate Software Corporation
(Registrant)
By: /s/ DANIEL A. GAUDREAU
___________________________________
Daniel A. Gaudreau
Chief Financial Officer, Vice President
of Finance (Principal Financial and
Accounting Officer)
<PAGE>
ACTUATE SOFTWARE CORPORATION
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
----------- -------------
10.15 Actuate Japan Agreement between the Company and Actuate
Japan, Co., Ltd. dated August 15, 1998.
10.16 Letter Agreement between the Company and Actuate Japan, Co.,
Ltd. dated September 17, 1998.
10.17 Amendment No. 7 to Office Lease between the Company and
Spieker Properties, L.P. dated September 8, 1998.
27.1 Financial Data Schedule - September 30, 1998
<PAGE>
[LETTERHEAD OF ACTUATE]
EXHIBIT 10.15
ACTUATE JAPAN AGREEMENT
THIS ACTUATE JAPAN AGREEMENT ("AJ Agreement") dated as of August 15, 1998
(the "Effective Date"), is made by and between ACTUATE SOFTWARE CORPORATION, a
Delaware corporation ("ASC"), with its principal place of business located at
999 Baker Way, Suite 270, San Mateo, California 94404, and ACTUATE JAPAN
COMPANY, LTD., ("AJ"), a Japanese corporation with its principal offices at 2-2-
8 Roppongi Minato-ku, Tokyo 106 Japan.
WHEREAS, ASC and AJ have previously entered into that certain Master License
Agreement dated May 6, 1996 (the "License Agreement") and the Parties desire to
amend such License Agreement;
WHEREAS, ASC desires to acquire the rights to the Japanese version of the ASC
software and documentation (collectively the "Software") developed by AJ and
also have AJ assign to ASC a certain trademark registered in Japan;
NOW THEREFORE, in consideration of the promises made herein, ASC and AJ agree as
follows:
1. PAYMENT BY ASC TO AJ. In consideration of the obligations set forth below,
ASC agrees to pay to AJ 350,000 U.S dollars on or prior to October 1, 1998.
2. AMENDMENT OF LICENSE AGREEMENT.
(a) As of October 1, 1998, the Parties hereby agree to amend section
7.1(2) of the License Agreement to increase the royalty paid by
AJ to ASC for all Software sold by AJ from 35% to 40%.
(b) As of October 1, 1998, the Parties agree to amend section 8.1 of
the License Agreement by deleting the second sentence of section
8.1.
3. ASSIGNMENT OF TRADEMARK. The trademark, ACTUATE, is currently registered
to AJ in Japan. AJ hereby assigns to ASC all right, title and interest in
such trademark to ASC and AJ hereby agrees at its sole expense, to take
all steps necessary to have such trademark formally registered to ASC in
Japan, within 30 days of the Effective Date of this Agreement.
4. ASSIGNMENT OF LOCALIZED VERSION OF SOFTWARE. AJ has previously paid for
the localization of the Software into Japanese. AJ hereby assigns to ASC
all right, title and interest in the Japanese version of the Software,
including all future modifications and localization work made thereto.
5. PAYMENT FOR COMPLETION OF LOCALIZATION. Notwithstanding section 4 above,
AJ will be solely responsible for paying for the costs associated with the
completion of the localization of the documentation to the Software.
6. PAYMENT FOR FUTURE LOCALIZATION COSTS. The Parties agree to negotiate in
good faith to determine a cost sharing arrangement with respect to future
localization requirements for the Software.
1
<PAGE>
[LETTERHEAD OF ACTUATE]
IN WITNESS WHEREOF, the parties by their duly authorized representatives have
executed this AJ Agreement as of the date set forth above.
ACTUATE JAPAN COMPANY, LTD. ACTUATE SOFTWARE CORPORATION
By: /s/ Yoichi Kitayama By: /s/ Nicolas Nierenberg
Name: Yoichi Kitayama Name: Nicolas Nierenberg
Title: President Title: President
Date: 8/18/98 Date: 8/15/98
2
<PAGE>
EXHIBIT 10.16
September 17, 1998
Mr. Yoichi Kitayama
Actuate Japan Company, Ltd.
2-2-8 Roppongi Minato-ku
Tokyo 106 Japan
Dear Yoichi:
This letter will confirm our agreement with respect to the commitment of Actuate
Japan ("AJ") to repay certain monies owed to Actuate Software Corporation
("ASC"). Currently ASC holds a promissory note from AJ with a principal amount
of $164,934 plus accrued interest from December 27, 1997 (the "Promissory Note")
and as of June 30, 1998, AJ also owes ASC $127,630, consisting of earned
royalties for sales by AJ of ASC software and interest thereon ("Earned
Royalties"). Earned Royalties shall also include any royalties earned by ASC
during July and August of 1998. The interest rate is 10% per annum for all
accrued and future interest on the Promissory Note and 5% per annum for all
future interest on the Earned Royalties.
AJ agrees to repay the Promissory Note and the Earned Royalties including
interest thereon as follows:
Repayment of Promissory Note. AJ will pay to ASC a minimum of $4,500 per month
- -----------------------------
beginning on November 1, 1998 and continue such payments on the first day of
each month thereafter until the Promissory Note and future interest thereon
has been repaid in full.
Repayment of Royalties. AJ will pay to ASC a minimum of $4, 500 per month
- -----------------------
beginning on November 1, 1998 and continue such payments on the first day of
each month thereafter until the Earned Royalties and future interest thereon
have been repaid in full.
In addition, AJ agrees that in the event AJ's cash flow projections exceed the
plan previously provided to ASC, such excess cash flow will be immediately used
to pay down the amounts owed pursuant to the Promissory Note and Earned
Royalties. Furthermore, AJ agrees to pay all future royalties, beginning with
royalties earned by ASC in July 1998, to ASC within 60 days of delivering a
monthly royalty report to ASC.
Notwithstanding the repayment schedules set forth above, in the event a Japanese
Bankruptcy court orders AJ to enter into a settlement with Intranet, regarding
the repayment of monies owed by AJ to Intranet, ASC and AJ agree to enter into
good faith negotiations to amend the repayment schedules set forth in this
letter.
<PAGE>
Yoichi, if you are in agreement with the terms set forth herein, please execute
this letter below and return a copy to me.
Sincerely, Agreed and Accepted,
Actuate Software Corporation Actuate Japan Company, Ltd.
/s/ Nicolas Nierenberg /s/ Yoichi Kitayama
Nicolas Nierenberg, President Yoichi Kitayama, President
<PAGE>
EXHIBIT 10.17
LEASE AMENDMENT #7
ORIGINAL LEASE DATE: March 27, 1995
LEASE AMENDMENT DATE: September 8, 1998
LANDLORD: SPIEKER PROPERTIES, L.P.
a California limited partnership,
Successor in interest to 999 BW Corporation,
a Delaware corporation
TENANT: ACTUATE SOFTWARE CORPORATION
a California Corporation
Landlord and Tenant, by executing this Lease Amendment #7 as provided do hereby
further amend the Original Lease referred to above, as previously amended in
Lease Amendments #1 through #6, (the "Lease") as follows:
1. Premises
--------
The Premises of the Lease as defined per the Original Lease Agreement and
as previously amended, shall be amended such that effective December 1,
1998, approximately 5,491 square feet of rentable space on the second floor
of 999 Baker Way, known as suite #200, shall be added to the Original Lease
Agreement. Total square footage shall increase from 14,939 to 20,430
rentable square feet.
2. Rental
------
Rent for the Premises shall be as follows:
12/01/98-05/31/00 $58,225.50 per month. In addition to the new base
monthly rental above, Tenant shall be responsible for
its proportionate share of increases in operating
expenses over the base year per Paragraph 3 of this
Lease Agreement.
06/01/00-05/31/02 $60,268.50 per month. In addition to the new base
monthly rental above, Tenant shall be responsible for
its proportionate share of increases in operating
expenses over the base year per Paragraph 3 of this
Lease Agreement.
3. Proportionate Share
-------------------
Effective December 1, 1998, Tenant's proportionate share shall increase
from 23.76% to 32.50%.
4. Tenant Improvements
-------------------
Tenant shall accept the Premises in "as-is" condition.
All other terms and conditions of the Lease shall apply to this Lease Amendment
#7. Agreed to this 28 day of September, 1998.
-- ---------
LANDLORD:
- --------
SPIEKER PROPERTIES, L.P.
a California limited partnership
By: Spieker Properties, Inc.
a Maryland corporation,
its general partner
By: /s/ Peter H. Schnugg
--------------------
Peter H. Schnugg
<PAGE>
Its: Senior Vice President
---------------------
Date: 9/28/98
-------
TENANT:
- -------
ACTUATE SOFTWARE CORPORATION
a California Corporation
By: /s/ D A Gaudreau
----------------
Dan Gaudreau
Its: Vice President of Finance and Administration, Chief Financial Officer
---------------------------------------------------------------------
Date: 9/16/98
-------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED IN THIS FILING AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 28,295
<SECURITIES> 3,000
<RECEIVABLES> 5,467
<ALLOWANCES> 719
<INVENTORY> 0
<CURRENT-ASSETS> 36,587
<PP&E> 2,144
<DEPRECIATION> 805
<TOTAL-ASSETS> 38,382
<CURRENT-LIABILITIES> 13,053
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 25,315
<TOTAL-LIABILITY-AND-EQUITY> 38,382
<SALES> 11,987
<TOTAL-REVENUES> 14,764
<CGS> 819
<TOTAL-COSTS> 3,135
<OTHER-EXPENSES> 15,735
<LOSS-PROVISION> 1,161
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (3,766)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,766)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,766)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)
</TABLE>
