<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 June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No. 0-24607
Actuate Corporation
(Exact name of Registrant as specified in its charter)
Delaware 94-3193197
(State of incorporation) (I.R.S. Employer Identification No.)
999 Baker Way, Suite 200
San Mateo, California 94404
(650) 425-2300
(Address, including zip code, and telephone number,
including area code, of Registrant's principle executive offices)
--------------------
Former name, former address and former fiscal year, if changed since last
report:
Former name: Actuate Software Corporation
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Title of Class Outstanding as of June 30, 1999
-------------- -------------------------------
Common Stock, par value $.001 per share 13,794,363
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Actuate Corporation
Table of Contents
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holder 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
2
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Part I. Financial Information
Item 1. Financial Statements
ACTUATE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(unaudited) 1998 (1)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 16,024 $ 21,808
Short-term investments....................................................................... 9,440 10,922
Accounts receivable, net..................................................................... 10,217 5,050
Other current assets......................................................................... 891 400
-------------- --------------
Total current assets.......................................................................... 36,572 38,180
Property and equipment, net................................................................... 1,670 1,405
Goodwill and other purchased intangible assets, net........................................... 9,581 -
Other assets.................................................................................. 352 213
--------------- ---------------
$ 48,175 $ 39,798
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................ $ 2,392 $ 1,210
Accrued compensation........................................................................ 1,962 1,293
Other accrued liabilities................................................................... 4,470 3,393
Income taxes payablea...................................................................... 188 -
Deferred revenue........................................................................... 10,721 7,868
--------------- ---------------
Total current liabilities.................................................................... 19,733 13,764
--------------- ---------------
Stockholders' equity:
Common stock................................................................................ 14 14
Additional paid-in capital.................................................................. 47,011 46,592
Note receivable from officer................................................................ - (40)
Deferred stock compensation................................................................. (171) (393)
Cumulative translation adjustment........................................................... 3 -
Accumulated deficit......................................................................... (18,415) (20,139)
--------------- ---------------
Total stockholders' equity................................................................. 28,442 26,034
--------------- ---------------
$ 48,175 $ 39,798
=============== ===============
(1) The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date, but does not
include all the information and footnotes required by generally accepted accounting principles for complete financial
statements.
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
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ACTUATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
License fees................................................................ $ 7,466 $ 3,819 $14,088 $ 7,009
Services.................................................................... 2,347 881 4,038 1,754
------- ------- ------- --------
Total revenues............................................................... 9,813 4,700 18,126 8,763
------- ------- ------- --------
Operating expenses:
Cost of license fees........................................................ 198 251 452 531
Cost of services............................................................ 1,240 799 2,204 1,529
Sales and marketing......................................................... 4,284 2,752 8,035 5,467
Research and development.................................................... 2,309 1,900 4,336 3,574
General and administrative.................................................. 760 628 1,492 1,200
Amortization of goodwill and other purchased intangibles
and merger related costs................................................... 368 - 368 -
------- ------- ------- --------
Total operating expenses................................................... 9,159 6,330 16,887 12,301
------- ------- ------- --------
Income (loss) from operations................................................ 654 (1,630) 1,239 (3,538)
Equity in losses of affiliate................................................ (25) - (50) -
Interest and other income, net............................................... 359 14 760 36
------- ------- ------- --------
Income (loss) before income taxes............................................ 988 (1,616) 1,949 (3,502)
Provision for income taxes................................................... 110 - 225 -
------- ------- ------- --------
Net income (loss)............................................................ $ 878 $(1,616) $ 1,724 $(3,502)
======= ======= ======= ========
Basic income (loss) per share................................................ $0.07 $(0.47) $0.13 $(1.04)
======= ======= ======= ========
Shares used in basic per share calculation................................... 13,313 3,405 13,287 3,358
======= ======= ======= ========
Diluted income (loss) per share.............................................. $0.06 $(0.47) $0.12 $(1.04)
======= ======= ======= ========
Shares used in diluted per share calculation................................. 14,689 3,405 14,749 3,358
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
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ACTUATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
----------------------
1999 1998
-------- --------
Operating activities
Net income (loss)..................................... $ 1,724 $ (3,502)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of deferred compensation.............. 62 133
Amortization of goodwill and other intangibles .... 64 -
Depreciation....................................... 442 315
Loss on disposal of fixed assets .................... - 70
Changes in operating assets and liabilities:
Accounts receivable................................ (5,167) (878)
Other current assets............................... (491) (125)
Accounts payable................................... 1,182 504
Accrued compensation............................... 669 (97)
Other accrued liabilities.......................... 1,077 1,261
Income taxes payable .............................. 188 -
Deferred revenue................................... 2,853 636
-------- --------
Net cash provided by (used in) operating activities .... 2,603 (1,683)
-------- --------
Investing activities
Purchases of property and equipment..................... (707) (518)
Proceeds from maturity of short-term investments........ 1,482 290
Acquisition of European distributors, net
of cash assumed........................................ (9,645) -
Net change in other assets.............................. (139) (33)
-------- --------
Net cash used in investing activities .................. (9,009) (261)
-------- --------
Financing activities
Proceeds from issuance of common stock.................. 619 114
Payments on capital lease obligations................... - (68)
-------- --------
Net cash provided by financing activities .............. 619 46
-------- --------
Net decrease in cash and cash equivalents .............. (5,787) (1,898)
Effect of foreign exchange rate changes on cash ........ 3 -
Cash and cash equivalents at the beginning of the year.. 21,808 2,901
-------- --------
Cash and cash equivalents at the end of the period...... $ 16,024 $ 1,003
======== ========
Supplemental disclosure of cash flow information
Interest paid $ 5 $ 19
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
5
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ACTUATE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summary of Significant Accounting Policies
Basis of Presentation
On June 18, 1999, Actuate Corporation completed the acquisition of Actuate
Holding BV ("BV"). The acquisition was accounted for under the purchase method
of accounting. In accordance with the purchase method of accounting, the
Condensed Consolidated Statements of Operations include BV's operating results
from the date of acquisition. The Condensed Consolidated Balance Sheet as of
June 30, 1999 includes the accounts of BV.
The accompanying interim condensed consolidated financial statements of
Actuate Corporation are unaudited, but include all normal recurring adjustments
which our 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 our Annual Report on Form 10-
K for the year ended December 31, 1998 as filed with the Securities and Exchange
Commission on March 12, 1999. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. Interim results
of operations for the three and six-month periods ended June 30, 1999 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. We account for our
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 and
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
Revenue from license fees from sales of software products directly to end-
user customers or indirect channel partners is recognized as revenue after
execution of a license agreement or receipt of a definitive purchase order, and
shipment of the product, if no significant vendor obligations remain, there are
no uncertainties surrounding product acceptance, the license fees are fixed and
determinable, and collection of the license fee is considered probable. Our
products do not require significant customization. The majority of end user
license revenues are derived from end user customer orders for specific
individual products. These types of transactions are recognized as revenue upon
shipment of product. Advance payments from end-users, in arrangements in which
the end user customer has the right to future unspecified products, are deferred
and recognized as revenue ratably over the estimated term of the period,
typically one year, during which the end-user is entitled to receive the
products.
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License arrangements with enterprise application vendors, resellers and
distributors generally take the form of either (a) fixed price arrangements in
which the contracting entity has the right to the unlimited usage, unspecified
future products, and sublicensing of the licensed software for a specified term
and pursuant to which license fee revenue is deferred and recognized on a
straight-line basis over the term of the license agreement or (b) arrangements
pursuant to which a royalty is paid to us and is recognized as revenue based on
the sell-through of our software.
Service revenues are primarily comprised of revenue from maintenance
agreements, training and consulting fees. Revenue from maintenance agreements is
deferred and recognized on a straight-line basis as service revenue over the
life of the related agreement, which is typically one year. Service revenues
from training and consulting are recognized upon completion of the work to be
performed.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Effective January 1, 1998, we 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. 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 our accounting for revenues as a result of the
adoption of SOP 97-2, as amended by Statement of Position 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2" ("SOP 98-4").
In December 1998, AICPA issued Statement of Position 98-9, "Modification
of SOP 97-2 With Respect to Certain Transactions", which amends SOP 98-4, to
extend the deferral of application of certain passages of SOP 97-2 provided by
SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. We have not yet determined the effect of
the final adoption of SOP 98-9 or its effect on how we will account for future
revenues.
Net Income (Loss) Per Share
Net income (loss) per share is presented under Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards No. 128
oEarnings Per Shareo ("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 income (loss) per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period. Diluted income per share is computed using the weighted-
average number of common and dilutive common equivalent shares outstanding
during the period. Common equivalent shares consist of the shares issuable upon
the exercise of stock options (using the treasury stock method).
Potential common shares of 479,193 and 517,718, using the treasury stock
method, were not included in the computation of diluted loss per share for the
three and six-month periods ended June 30, 1998, respectively, because we
incurred a loss in these periods and, therefore, the effect would be
antidilutive.
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A reconciliation of shares used in the calculation of basic and diluted and pro
forma net income (loss) per share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------- -------- -------- --------
Numerator:
Net income (loss)................................................................. $ 878 $ (1,616) $ 1,724 $ (3,502)
-------- -------- -------- --------
Denominator:
Weighted-average common shares outstanding........................................ 13,798 4,006 13,809 4,015
Weighted-average shares subject to repurchase..................................... (485) (601) (522) (657)
-------- -------- -------- --------
Denominator for basic income (loss) per share--
weighted-average common shares................................................... 13,313 3,405 13,287 3,358
Weighted-average shares subject to repurchase..................................... 485 - 522 -
Employee stock options............................................................ 891 - 940 -
-------- -------- -------- --------
Denominator for dilutive income (loss) per share--
weighted-average common shares and assumed conversions........................... 14,689 3,405 14,749 3,358
======== ======== ======== ========
Basic income (loss) per share...................................................... $ 0.07 $ (0.47) $ 0.13 $ (1.04)
======== ======== ======== ========
Diluted income (loss) per share................................................... $ 0.06 $ (0.47) $ 0.12 $ (1.04)
======== ======== ======== ========
</TABLE>
Comprehensive Income
During 1998, we adopted FASB's Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components. Comprehensive income includes foreign currency translation gains
and losses and other unrealized gains and losses that have been previously
excluded from net income (loss) and reflected instead in equity. A summary of
comprehensive income (loss) follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss).................................................................. $ 878 $(1,616) $ 1,724 $(3,502)
Unrealized gain (loss) on short-term investments................................... (3) - (1) -
Foreign currency translation adjustment............................................ 3 - 3 -
-------- -------- -------- --------
Comprehensive income (loss)........................................................ $ 878 $ (1,616) $ 1,726 $ (3,502)
======== ======== ======== ========
</TABLE>
Segment Information
Effective January 1, 1998, we adopted FASB's Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 superseded FASB's Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise". SFAS 131
establishes standards for the way public companies report information about
operating
8
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segments in financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Our management has organized its business in a single operating segment, the
marketing and sale of software products for developing, administering, viewing
and distributing reports in both client server and Internet environment. We sell
and support our products domestically and internationally. Further, we derive
the vast majority of our revenue from our operations in the United States.
Accounting for Derivative Instruments
In June 1998, the FASB issued Statement of Financial Accounting Standards
133, oAccounting for Derivative Instruments and Hedging Activitieso ("SFAS 133")
which will be effective for our fiscal year 2000. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 also requires that changes in the derivativeAEs fair value
be recognized in earnings unless specific hedge accounting criteria are met. We
believe that the adoption of SFAS 133 will not have a material effect on the
financial statements.
Acquisition
In June 1999, we acquired all of the outstanding stock of Actuate Holding,
B.V. ("BV") for cash. The total purchase price was $9.6 million, representing a
payment of $6.0 million in cash and the assumption of net liabilities and direct
merger costs of $3.6 million. The acquisition was accounted for as a purchase.
The results of operations of BV and the estimated fair value of assets acquired
and liabilities assumed are included in our financial statements from the date
of acquisition. Goodwill and other intangibles arising from the acquisition are
being amortized on a straight-line basis over periods not exceeding four years.
The following unaudited pro-forma financial information assumes the
acquisition occurred at the beginning of the periods in which the acquisition
took place and, for comparative purposes, at the beginning of the immediately
preceding year. These results have been prepared for information purposes only
and are not necessarily indicative of the operating results that would have
occurred had the acquisition been made as discussed above. In addition, they are
not intended to be a projection of future results (in thousands):
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
Revenues.............................................. $ 19,712 $ 9,179
Net loss ............................................. $ (608) $ (5,652)
Net loss per share.................................... $ (0.05) $ (1.68)
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the
historical financial information and the notes thereto included in Item 1 of
this Quarterly Report on Form 10-Q and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on
Form 10-K for the year ended December 31, 1998 as filed with the Securities and
Exchange Commission on March 12, 1999.
Except for historical information, the discussion in this Form 10-Q
contains forward-looking statements that involve risks and uncertainties. These
statements refer to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "expect",
"anticipate", "believe", "intend", "plan" and similar expressions. Our actual
results could differ materially from those anticipated in such forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to, the risks discussed in the section titled "Risk Factors" in this
Form 10-Q.
Overview
Actuate Corporation is a leading provider of e.Reporting solutions that
automate the creation and delivery of structured, personalized content,
providing tens of thousands of users with instant access to high-resolution,
customized business information that is seamlessly integrated into a company's
e.Business Web site.
We sell our software products directly to end user customers through our
direct sales force and through indirect channel partners such as e.Business and
enterprise application vendors, resellers and distributors. e.Business
application vendors generally integrate our products with their applications and
either embed them into their products or resell them with their products. Our
other indirect channel partners resell our software products to end user
customers. We sell our products outside the United States primarily through our
European subsidiaries and other distributors. Our revenues are derived primarily
from license fees for software products and, to a lesser extent, fees for
services relating to such products, including software maintenance and support,
training and consulting. We were incorporated in California in November 1993 and
reincorporated in Delaware in July 1998. Our principal executive offices are
located at 999 Baker Way, Suite 200, San Mateo, California 94404 and our
telephone number is 650-425-2300.
10
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Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
License fees................................................................... 76% 81% 78% 80%
Services....................................................................... 24 19 22 20
-------- -------- -------- --------
Total revenues.............................................................. 100 100 100 100
-------- -------- -------- --------
Cost of revenues:
License fees................................................................... 2 5 3 6
Services....................................................................... 12 17 12 17
-------- -------- -------- --------
Total cost of revenues...................................................... 14 22 15 23
-------- -------- -------- --------
Gross profit.................................................................... 86 78 85 77
-------- -------- -------- --------
Operating expenses:
Sales and marketing........................................................... 44 59 44 62
Research and development...................................................... 23 40 24 41
General and administrative.................................................... 8 13 8 14
Amortization of goodwill and other purchased intangibles
and merger related costs..................................................... 4 - 2 -
-------- -------- -------- --------
Total operating expenses.................................................... 79 112 78 117
-------- -------- -------- --------
Income (loss) from operations................................................... 7 (34) 7 (40)
Equity in losses of affiliate................................................... (1) - - -
Interest and other income, net.................................................. 4 - 4 -
Provision for income taxes...................................................... 1 - 1 -
-------- -------- -------- --------
Net income (loss)............................................................... 9% (34)% 10% (40)%
======== ======== ======== ========
</TABLE>
Revenues
Total revenues increased 109% from $4.7 million for the quarter ended June
30, 1998 to $9.8 million for the quarter ended June 30, 1999. Total revenues
increased 107% from $8.8 million for the six months ended June 30, 1998 to $18.1
million for the six months ended June 30, 1999. Sales outside the United States
accounted for 3% and 12% of total revenues for the second quarter of 1998 and
1999, respectively, and 4% and 12% of total revenues for the six months ended
June 30, 1998 and 1999, respectively. Revenues generated by our European
subsidiary subsequent to the acquisition date of June 18, 1999 were not
significant in the consolidated financial results.
License fees. Revenues from license fees increased 97% $3.8 million for
the second quarter of 1998 to $7.5 million for the second quarter of 1999.
Revenues from license fees increased 101% from $7.0 million for the six months
ended June 30, 1998 to $14.1 million for the six months ended June 30, 1999. The
increase in license fees was primarily due to increased sales to new customers
and to a lesser extent
11
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increased follow-on sales to existing customers resulting from the expansion of
our direct sales organization and increased acceptance of the Actuate Reporting
System.
Services. Service revenues increased 166% from $0.9 million for the second
quarter of 1998 to $2.3 million for the second quarter of 1999. Service revenues
increased 130% from $1.8 million in the six months ended June 30, 1998 to $4.0
million for the six months ended June 30, 1999. The increase in service revenues
was primarily due to the increases in installed base of customers receiving
ongoing maintenance and support and, to a lesser extent, increases in consulting
revenues related to increases in demand for our consulting services.
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 decreased from $251,000, or 7% of revenues from license fees,
for the second quarter of 1998 to $198,000, or 3% of revenues from license fees,
for the second quarter of 1999. Cost of license revenues decreased from
$531,000, or 8% of revenues from license fees, for the six months ended June 30,
1998 to $452,000, or 3% of revenues from license fees, for the six months ended
June 30, 1999. The decreases in absolute dollars and as a percentage of revenues
were primarily due to a reduction of facilities allocation costs. We expect cost
of license revenues to increase in absolute dollars and as a percentage of
revenues from license fees in future periods due to new product releases, new
packaging of our products and printing costs associated with revised
documentation materials.
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 service increased from
$799,000, or 91% of revenues from service fees, for the second quarter of 1998
to $1.2 million, or 53% of revenues from service fees, for the second quarter of
1999. Cost of service also increased from $1.5 million, or 87% of revenues from
service fees, for the six months ended June 30, 1998 to $2.2 million, or 55% of
revenues from service fees, for the six months ended June 30, 1999. The increase
in absolute dollars was due primarily to the increase in the number of customer
support personnel resulting from continued expansion of our support services
organization. Cost of service of our European subsidiary from the date of
acquisition was included and was not significant. The decline as a percentage of
service revenues was due to service revenues increasing at a faster rate than
cost of services. We expect that cost of services will continue to increase in
absolute dollars in future periods due to the inclusion of cost of service of
our European subsidiary and as we continue to hire additional customer support
and consulting 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 $2.8 million, or 59% of total
revenues for the second quarter of 1998 to $4.3 million, or 44% of total
revenues for the second quarter of 1999. Sales and marketing expenses increased
from $5.5 million, or 62% of total revenues for the six months ended June 30,
1998 to $8.0 million, or 44% of total revenues for the six months ended June 30,
1999. The increase in absolute dollars was primarily due to the hiring of
additional sales and marketing personnel, higher sales commissions associated
with increased revenues and increased marketing program expenses. Sales and
marketing expenses of our European subsidiary from the date of acquisition were
included and were not significant. The decrease as a percentage of total
revenues was due primarily to revenues increasing at a faster rate than sales
and marketing expenses. We expect that sales and marketing expenses will
continue to increase in absolute
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dollars in future periods due to the inclusion of sales and marketing expenses
of our European subsidiary, and as we continue to hire additional sales and
marketing personnel, establish additional sales offices and 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 increased from $1.9
million, or 40% of total revenues for the second quarter of 1998 to $2.3
million, or 23% of total revenues for the second quarter of 1999. Research and
development expenses increased from $3.6 million, or 41% or total revenues for
the six months ended June 30, 1998 to $4.3 million, or 24% of total revenues for
the six months ended June 30, 1999. The increase in research and development
expenses in absolute dollars was primarily due to the hiring of additional
engineering personnel. There are no research and development expenses from our
European subsidiary as they do not perform such activities. The decrease as a
percentage of total revenues was due to revenues increasing at a faster rate
than research and development expenses. We believe that a significant level of
investment for research and development is essential to maintain product and
technical leadership and we anticipate that we will continue to devote
substantial resources to research and development and that these expenses will
increase in absolute dollars in future periods.
General and administrative. General and administrative expenses consist
primarily of personnel and related costs for finance, 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 $628,000, or
13% of total revenues for the second quarter of 1998 to $760,000, or 8% of total
revenues for the second quarter of 1999. General and administrative expenses
increased from $1.2 million, or 14% of total revenues for the six months ended
June 30, 1998 to $1.5 million, or 8% of total revenues for the six months ended
June 30, 1999. The increase in general and administrative expenses in absolute
dollars was due primarily to increased personnel and related costs and
professional fees necessary to manage and support our growth. General and
administrative expenses of our European subsidiary from the date of acquisition
were included and were not significant. We believe that general and
administrative expenses will increase in absolute dollars in future periods due
to the inclusion of general and administrative expenses of our European
subsidiary and as we continue to expand our facilities and personnel staff to
meet our growing operations.
Amortization of goodwill and other purchased intangibles and merger
related costs. In June 1999, we acquired all of the outstanding stock of Actuate
Holding, B.V. ("BV") for cash. The total purchase price was $9.6 million,
representing a payment of $6.0 million in cash and the assumption of net
liabilities and direct merger cots of $3.6 million. The acquisition was
accounted for as a purchase. In the second quarter of 1999, we recorded a charge
of $368,000 for merger costs and amortization of goodwill and other purchased
intangibles. Goodwill and other purchased intangibles arising from the
acquisition are being amortized on a straight-line basis over periods not
exceeding four years.
Interest and Other Income, Net
Interest and other income, net, is comprised primarily of interest income
earned by us on cash and short-term investments. Interest and other income, net,
for the three and six months ended June 30, 1998 was $14,000 and $36,000,
respectively, as compared with interest and other income, net of $359,000 and
$760,000 for the three and six months ended June 30, 1999. The increase was due
primarily to the interest earned on the investment of the proceeds from our
initial public offering that was consummated on July 17, 1998.
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Provision for Income Taxes
In the three and six-month periods ended June 30, 1999, we recorded an
income tax provision of $110,000 and $225,000, respectively. The effective tax
rate used is based on our current estimates and forecasts of our taxable income
in multiple domestic and foreign jurisdictions. The estimated annual effective
tax rate is relatively sensitive to the results of operations in various
jurisdictions, and because actual results may differ from such projections in
future periods, the actual effective tax rate could differ materially from this
estimate.
Liquidity and Capital Resources
Since inception, we have funded operations primarily through cash from
operations and approximately $14.3 million in net proceeds from the private
sales of preferred stock. In July 1998, we completed our initial public offering
whereby we sold 3,140,000 shares of common stock. The net proceeds to us, after
deducting expenses relating to the offering, were $30.9 million.
As of June 30, 1999, we had cash and cash equivalents of $16.0 million and
short-term investments of $9.4 million in highly liquid, high quality debt
securities and a certificate of deposit classified as available-for-sale. Our
bank line of credit expired on May 25, 1999. We had no borrowings under this
line of credit and there is no immediate plan to secure credit facilities.
Net cash provided by operating activities was $2.6 million in the six
months ended June 30, 1999, compared to net cash used in operating activities of
$1.7 million in the six months ended June 30, 1998. For the six months ended
June 30, 1999, cash provided by operating activities was due primarily to
earnings plus non-cash expenses, increases in deferred revenues, accounts
payable and other accrued liabilities that were partially offset by increases in
accounts receivable. Net cash used in operating activities in the six months
ended June 30, 1998 was due primarily to losses for the period.
From December 31, 1998 to June 30, 1999, deferred revenue increased by
approximately $2.9 million to $10.7 million. The increase was due primarily to
signing of several agreements with contractual obligations to deliver future
specified products. SOP 97-2 requires us to defer the revenue from these
agreements until product delivery. We expect that deferred revenue will decline
in future periods in which we deliver the specified products.
Net cash used in investing activities was $261,000 and $9.0 million in the
six months ended June 30, 1998 and 1999, respectively. For the six months ended
June 30, 1999, net cash used in investing activities was primarily due to the
acquisition of our European distributors, and to a lesser extent, the purchase
of property and equipment that was partially offset by the maturity of short-
term investments. For the 1998 period, net cash was used primarily for the
purchase of property and equipment.
Net cash provided by financing activities was $46,000 and $619,000 in the
six months ended June 30, 1998 and 1999, respectively. For the six months ended
June 30, 1998, net cash provided by financing activities was primarily from the
proceeds from the exercises of common stock under the stock option plans. For
the six months ended June 30, 1999, net cash provided by financing activities
was primarily from the proceeds from stock purchased under the employee stock
purchase plan.
We believe that current cash balances and any cash generated from
operations and from available debt financing, will be sufficient to meet our
cash needs for working capital and capital expenditures for at least the next
twelve months. Thereafter, if cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
obtain credit facilities. The sale of additional equity could result in
additional dilution to our stockholders. A portion of our cash may be
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used to acquire or invest in complementary businesses, including the acquisition
of our Japanese distributor, or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, we evaluate potential acquisitions of such businesses, products or
technologies.
Year 2000 Compliance
Many existing computer systems and computer programs use only two digits
to identify a year. These systems and programs were designed and developed
without addressing the impact of the upcoming change in the century. If not
corrected, many computer systems and software applications could fail or create
erroneous results before, at or beyond the year 2000. We are currently taking
steps to address Year 2000 readiness in three areas, (i) our products; (ii) our
internal systems (including information technology systems such as financial
systems and non-information technology systems such as the phone system) and
(iii) third party vendors with whom we have a business relationship.
Our Year 2000 readiness plan consists of four phases. Phase One
(inventory) consists of identifying all of our systems, products and
relationships that may be impacted by Year 2000. Phase Two (assessment) involves
determining our current state of Year 2000 readiness for those areas identified
in the inventory phase and prioritizing the areas that need to be fixed based on
the importance to our operations. Phase Three (remediation) will consist of
developing a plan to make those areas identified in the assessment phase Year
2000 ready and implementing such plan. Phase Four (testing) will consist of
testing and validation of Year 2000 readiness for certain mission critical areas
as determined by us. We are currently in the testing phase with respect to our
products and will continue Year 2000 testing of our products during 1999. We are
currently in the inventory and assessment phase for our internal systems and our
third party vendors. We plan on completing remediation for any material
weaknesses discovered in these two areas by December 31, 1999. At this time, we
have not yet developed a contingency plan to address situations that may result
if our products, our internal systems or our vendors are unable to achieve year
2000 readiness. The cost of developing and implementing such a plan, if
necessary, could be material.
We have expensed costs as incurred in connection with year 2000 readiness
and such costs incurred to date have not been material. We believe that we will
continue to incur costs related to Year 2000 readiness, but at this time we are
unable to determine whether or not future costs associated with achieving Year
2000 readiness will be material. Additional costs incurred may include but are
not limited to, the cost of manufacturing and distributing free upgrades to
products that are not Year 2000 ready, the administrative costs in completing
the Year 2000 project and the cost of fixing or replacing any of our internal
systems.
Although we are dedicating resources toward attaining Year 2000 readiness
there can be no assurance that we will be successful in our effort to achieve
Year 2000 readiness. For example, through ongoing testing of our products to
validate Year 2000 readiness, we have discovered Year 2000 related errors in
certain products, which have not compromised the usability or basic
functionality of the products, and there can be no assurance that additional
Year 2000 errors or defects will not be discovered in our current and future
products. Any failure by us to make our products Year 2000 ready could result in
a decrease in sales of our products, an increase in the allocation of resources
to address Year 2000 problems of our customers without additional revenue
commensurate with such dedication of resources, or an increase in litigation
costs relating to losses suffered by our customers due to such Year 2000
problems. In addition, the failure of our internal systems or our third party
vendors to be Year 2000 ready could prevent us from manufacturing or shipping
products, providing customer support and completing transactions, all of which
could have a material adverse effect on us.
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RISK FACTORS
Actuate operates in a rapidly changing environment that involves numerous
risks and uncertainties. You should carefully consider the following risk
factors before making an investment decision. The risks described below are not
the only ones facing us. Additional risks that we do not yet know of or that we
currently think are immaterial may also harm our business operations. If any of
the following risks actually occur, our business, operating results or financial
condition would be harmed and the trading price of our common stock could
decline. You should also refer to the other information set forth in this Report
on Form 10-Q, including managementAEs discussion and analysis of financial
condition and results of operations and the financial statements and the notes
thereto.
OUR OPERATING RESULTS MAY BE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO
MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE
OF OUR STOCK MAY DECREASE SIGNIFICANTLY.
Our limited operating history and the susceptibility of our operating
results to significant fluctuations makes any prediction of future operating
results unreliable. In addition, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful and you should not rely on
them as indications of our future performance. Our operating results have in the
past, and may in the future, vary significantly due to factors such as the
following:
- demand for our products
- the size and timing of significant orders for our products
- sales cycles of our indirect channel partners
- changes in pricing policies by us or our competitors
- changes in our level of operating expenses and our ability to
control costs
- budgeting cycles of our customers
- ability to make new products commercially available in a timely
manner
- defects in our products and other product quality problems
- failure to meet hiring needs and unexpected personnel changes
- the management and expansion of our international operations
- changes in our sales incentive plans
- continued successful relationships and the establishment of new
relationships with e.Business and enterprise application vendors
- the impact of consolidation by competitors and indirect channel
partners
- general domestic and international economic and political
conditions
- the Year 2000 problem
Because our software products are typically shipped shortly after orders
are received, total revenues in any quarter are substantially dependent on
orders booked and shipped throughout that quarter. Furthermore, several factors
may require us, in accordance with GAAP, to defer recognition of license fee
revenue for a significant period of time after entering into a license
agreement, including:
- whether the license agreement includes both software products that
are then currently available and software products or other
enhancements that are still under development
- whether the license agreement relates entirely to then currently
undeliverable software products
- whether the license agreement includes non-standard acceptance
criteria that may preclude revenue recognition prior to customer
acceptance
In addition, we may in the future experience fluctuations in our gross and
operating margins due to changes in the mix of our domestic and international
revenues and changes in the mix of our direct
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sales and indirect sales, as well as changes in the mix among the indirect
channels through which our products are offered.
A significant portion of our total revenues in any given quarter is
derived from existing customers. Our ability to achieve future revenue growth,
if any, will be substantially dependent upon our ability to increase revenues
from license fees and services from existing customers, to expand our sales
force and to increase the average size of our orders. To the extent that such
increases do not occur in a timely manner, our business, operating results and
financial condition would be harmed. Our expense levels and plans for expansion,
including plans to significantly increase our sales and marketing and research
and development efforts, are based in significant part on our expectations of
future revenues and are relatively fixed in the short-term. If revenues fall
below our expectations and we are unable to quickly reduce our spending in
response, our business, operating results and financial condition are likely to
be harmed.
Based upon all of the factors described above, we have a limited ability
to forecast future revenues and expenses, and it is likely that in some future
quarter our operating results will be below the expectations of public market
analysts and investors. In the event that operating results are below
expectations, the price of our common stock could decline.
OUR LIMITED OPERATING HISTORY AND LACK OF PROFITABILITY IN PRIOR YEARS MAKES
FUTURE FORECASTING DIFFICULT.
Actuate was founded in November 1993 and we began shipping the Actuate
Reporting System in January 1996. We have a limited operating history on which
to base an evaluation of our business and prospects.
We incurred net losses of $3.2 million, $7.2 million and $6.1 million in
fiscal 1998, 1997 and 1996, respectively. As of June 30, 1999, we had an
accumulated deficit of approximately $18.4 million. Given our history of losses,
we may not have revenue growth or profitability on a quarterly or annual basis
in the future. While we achieved significant quarter-to-quarter revenue growth
in fiscal 1997 and 1998 and during the first half of 1999, our revenues may not
increase in future periods. If we do achieve profitability in any period, we
cannot be certain that we will sustain or increase such profitability on a
quarterly or annual basis. We intend to increase our operating expenses
significantly in future periods. As a result, we will need to generate
significant additional revenues to achieve and maintain profitability.
IF WE DO NOT SUCCESSFULLY EXPAND OUR DISTRIBUTION CHANNELS AND DEVELOP
RELATIONSHIPS WITH E.BUSINESS AND ENTERPRISE APPLICATION VENDORS OUR BUSINESS
WOULD BE SERIOUSLY HARMED.
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as e.Business and
enterprise application vendors, resellers and distributors. Our revenues from
license fees resulting from sales through indirect channel partners in the first
half of 1999 and in fiscal 1998 and 1997 were approximately 46%, 41% and 38%,
respectively. Our ability to achieve significant revenue growth in the future
will depend in large part on our success in expanding our sales force and in
further establishing and maintaining relationships with e.Business and
enterprise application vendors, resellers and distributors. In particular, a
significant element of our strategy is to embed our technology in products
offered by e.Business and enterprise application vendors for resale to such
vendorsAE customers and end users. We intend to seek additional distribution
arrangements with other e.Business and enterprise application vendors to embed
our technology in their products and expect that these arrangements will
continue to account for a significant portion of our revenues in
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future periods. Our future success will depend on the ability of our indirect
channel partners to sell and support our products. If the sales and
implementation cycles of our indirect channel partners are lengthy or variable
or our e.Business and enterprise application vendors experience difficulties
embedding our technology into their products or we fail to train the sales and
customer support personnel of such indirect channel partners in a timely
fashion, our business, operating results and financial condition would be
harmed.
Although we are currently investing, and plan to continue to invest,
significant resources to expand and develop relationships with e.Business and
enterprise application vendors, resellers and distributors, we have at times
experienced and continue to experience difficulty in establishing these
relationships. If we are unable to successfully expand our distribution
channels, secure license agreements with additional e.Business and enterprise
application vendors on commercially reasonable terms, or extend existing license
agreements with existing e.Business and enterprise application vendors,
resellers and distributors on commercially reasonable terms our operating
results would be harmed. Any inability by us to maintain existing or establish
new relationships with indirect channel partners or, if such efforts are
successful, a failure of our revenues to increase correspondingly with expenses
incurred in pursuing such relationships, would harm our business, operating
results and financial condition.
IF THE MARKET FOR WEB BASED REPORTING SOFTWARE DOES NOT GROW AS WE EXPECT OUR
BUSINESS WOULD BE SERIOUSLY HARMED.
The market for web based reporting software products is still emerging and
we cannot be certain that it will continue to grow or that, even if the market
does grow, businesses will adopt our products. If the market for web based
reporting products fails to grow or grows more slowly than we expect, our
business, operating results and financial condition would be harmed. To date,
all of our revenues have been derived from licenses for our reporting software
and related products and services, and we expect this to continue for the
foreseeable future. We have spent, and intend to continue to spend, considerable
resources educating potential customers and indirect channel partners about web
based reporting and our products. However, if such expenditures do not enable
our products to achieve any significant degree of market acceptance our
business, operating results and financial condition would be harmed.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The market in which we compete is intensely competitive and characterized
by rapidly changing technology and evolving standards. Our competition comes in
five principal forms:
- direct competition from current or future vendors of reporting
solutions such as Seagate Software, Inc. (a division of Seagate
Technology, Inc.) and Brio Technology, Inc.
- indirect competition from vendors of OLAP and query tools such as
Hyperion Solutions Corp., Business Objects S.A., Cognos, Inc. and
Microsoft that integrate reporting functionality with such tools
- indirect competition from enterprise application vendors such as SAP
and Oracle, to the extent they include reporting functionality in
their applications
- competition from e.Business software vendors and Web development
tool vendors
- competition from the information systems departments of current or
potential customers that may develop reporting solutions internally
which may be cheaper and more customized than our products
Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors
may be able to respond more quickly to new
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or emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than us.
Also, most current and potential competitors, including companies such as Oracle
and Microsoft, have greater name recognition and the ability to leverage
significant installed customer bases. These companies could integrate competing
enterprise reporting software with their products, resulting in a loss of market
share for us. We expect additional competition as other established and emerging
companies enter the web based reporting software market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins, longer sales cycles
and loss of market share, any of which would harm our business, operating
results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the reporting needs of our
prospective customers. For example in August 1999, Brio Technology, Inc.
completed its acquisition of our competitor SQRIBE Technologies, Inc. Also
current or future indirect channel partners have in the past, or may in the
future, establish cooperative relationships with our current or potential
competitors, thereby limiting our ability to sell our products through
particular distribution channels. It is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Such competition could harm our ability to obtain
revenues from license fees from new or existing customers, and service revenues
from existing customers on terms favorable to us. If we are unable to compete
successfully against current and future competitors our business, operating
results and financial condition would be harmed.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS COULD BE SERIOUSLY HARMED.
The market for our products is characterized by rapid technological
change, frequent new product introductions and enhancements, changing customer
demands and evolving industry standards. Any of these factors can render
existing products obsolete and unmarketable. We believe that our future success
will depend in large part on our ability to support current and future releases
of popular operating systems, databases and e.Business and enterprise software
applications, to timely develop new products that achieve market acceptance, and
to meet an expanding range of customer requirements. If the announcement or
introduction of new products by us or our competitors or any change in industry
standards causes customers to defer or cancel purchases of existing products our
business, operating results and financial condition would be harmed. As a result
of the complexities inherent in web based reporting, major new products and
product enhancements can require long development and testing periods. In
addition, customers may delay their purchasing decisions in anticipation of the
general availability of new or enhanced versions of our products. As a result,
significant delays in the general availability of such new releases or
significant problems in the installation or implementation of such new releases
could harm our business, operating results and financial condition. If we fail
to successfully develop, on a timely and cost effective basis, product
enhancements or new products that respond to technological change, evolving
industry standards or customer requirements or such new products and product
enhancements fail to achieve market acceptance, our business, operating results
and financial condition may be harmed.
IF WE DO NOT RELEASE ACTUATE E.REPORTING SUITE 4 IN A TIMELY MANNER OR IF
E.REPORTING SUITE 4 FAILS TO ACHIEVE MARKET ACCEPTANCE OUR BUSINESS COULD BE
SERIOUSLY HARMED.
We currently expect to release Actuate e.Reporting Suite 4 (Actuate 4) in
the fourth quarter of 1999. Actuate 4 is a new version of our product that
contains numerous enhancements and improvements that we believe will allow our
product to become an integral part of any e.Business web
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site. We believe that our future success will depend in large part on the
success of Actuate 4. Prior to the release of Actuate 4, the product must
undergo a long development and testing period. In the event the development and
testing of Actuate 4 takes longer than expected, the release of the product will
be delayed. If we fail to release Actuate 4 in the fourth quarter of 1999 our
business, operating results and financial condition may be harmed. In addition,
if Actuate 4 does not achieve market acceptance our business, operating results
and financial condition may be harmed.
BECAUSE THE SALES CYCLES OF OUR PRODUCTS ARE LENGTHY AND VARIABLE, OUR QUARTERLY
RESULTS MAY FLUCTUATE.
The purchase of our products by our end user customers for deployment
within a customerAEs organization typically involves a significant commitment of
capital and other resources, and is therefore subject to delays that are beyond
our control. These delays can arise from a customer's internal procedures to
approve large capital expenditures, budgetary constraints and the testing and
acceptance of new technologies that affect key operations. The sales cycle for
an initial order of our products is typically 3 to 6 months and the sales cycle
associated with a follow-on large scale deployment of our products typically
extends for another 6 to 9 months or longer. We may experience longer sales
cycles in the future. Additionally, sales cycles for sales of our products to
e.Business and enterprise application vendors tend to be longer, ranging from 6
to 24 months or more and involve convincing the vendorAEs entire organization
that our products are the appropriate reporting solution for the vendor's
application. This time period does not include the sales and implementation
cycles of such vendors' own products, which are typically significantly longer
than our sales and implementation cycles. Certain of our customers have in the
past, or may in the future, experience difficulty completing the initial
implementation of our products. Any difficulties or delays in the initial
implementation by our end user customers or our indirect channel partners, could
cause such customers to reject our software or lead to the delay or non-receipt
of future orders for the large-scale deployment of our products.
IF WE FAIL TO EXPAND OUR INTERNATIONAL OPERATIONS OUR BUSINESS WOULD BE HARMED.
During the first half of 1999 and during fiscal 1998 and 1997, we derived
13%, 6% and 2% of our total revenues, respectively, from sales outside the
United States. Our ability to achieve revenue growth in the future will depend
in large part on our success in increasing revenues from international sales. We
intend to continue to invest significant resources to expand our sales and
support operations outside the United States and to enter additional
international markets. In order to expand international sales, we must establish
additional foreign operations, expand our international channel management and
support organizations, hire additional personnel, recruit additional
international distributors and increase the productivity of existing
international distributors. If we are not successful in expanding international
operations in a timely and cost-effective manner, our business, operating
results and financial condition could be harmed.
THERE ARE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD HARM OUR
BUSINESS.
In June 1999, we acquired Actuate Holding BV (Actuate BV). Actuate BV has
three operating subsidiaries located in the United Kingdom, France and Germany
whose sole business purpose is the marketing, sale and distribution of our
software products. We have very limited experience in the management of
international operations. We also have a number of other distributors located
worldwide. International operations are subject to a number of risks including
the following:
- costs of localizing products for foreign countries
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- 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
- political and economic instability, including recent economic
conditions in Asia.
Because substantially all of our international revenues and costs to date,
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 our products so that they become relatively more expensive to customers
in the local currency of a particular country, and result in a reduction in
sales and profitability in that country. We believe that an increasing portion
of our revenues and costs will be denominated in foreign currencies. To the
extent such denomination in foreign currencies does occur, gains and losses on
the conversion to U.S. dollars of accounts receivable, accounts payable and
other monetary assets and liabilities arising from international operations may
contribute to fluctuations in our results of operations. Any of the foregoing
factors could harm our business, operating results and financial condition.
Although we may from time to time undertake foreign exchange hedging
transactions to cover a portion of our foreign currency transaction exposure, we
currently do not attempt to cover any foreign currency exposure. If we are not
successful in any future foreign exchange hedging transactions that we engage
in, our business, operating results and financial condition could be harmed.
TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT OUR
SYSTEMS, PROCEDURES AND CONTROLS. IF WE ARE UNABLE TO DO SO SUCCESSFULLY, OUR
BUSINESS WOULD BE SERIOUSLY HARMED.
Our rapid expansion in the number of employees and the scope of operations
has placed and will continue to place, a significant strain on our management,
information systems and resources. In addition, we expect that an expansion of
our international operations will lead to increased financial and administrative
demands associated with managing our operations in Europe and managing an
increasing number of relationships with foreign partners and customers and
expanded treasury functions to manage foreign currency risks. Our future
operating results will also depend on our ability to further develop indirect
channels and expand our support organization to accommodate growth in our
installed base. If we fail to manage our expansion effectively our business,
operating results and financial condition would be harmed.
OUR INABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL IN THE FUTURE
WOULD SERIOUSLY HARM OUR BUSINESS.
From January 1997 through June 1999, we increased our headcount from 38 to
199 full-time employees. Furthermore, significant increases in the number of
employees are anticipated during the remainder of 1999. In particular, we
currently plan to significantly expand the number of employees in sales,
customer support and marketing. Our success depends to a significant degree upon
the efforts of certain key management, sales, customer support and research and
development personnel. We believe that our future success will depend in large
part upon our continuing ability to attract and retain highly skilled
managerial, sales, marketing, customer support and research and development
personnel. Like other software companies, we face intense competition for such
personnel, and we have experienced and will continue to experience difficulty in
recruiting qualified personnel, particularly in the San Francisco
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Bay Area, where the employment market for qualified sales, marketing and
engineering personnel is extremely competitive.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers and other key engineering, sales, marketing and support personnel and
none of our officers or key employees is bound by an employment agreement for
any specific term. If we lose the service of one or more of our key employees,
or if one or more of our executive officers or employees decide to join a
competitor or otherwise compete directly or indirectly with us, this could have
a significant adverse effect on our business.
THERE ARE RISKS ASSOCIATED WITH THE SOFTWARE INDUSTRY
The software industry has historically experienced significant periodic
downturns, often in connection with, or in anticipation of, declines in general
economic conditions during which management information systems budgets often
decrease. Such a change in economic conditions could result in a slow down of
the purchase of web based reporting products. If this occurs, our business,
operating results and financial condition may in the future reflect substantial
fluctuations from period to period as a consequence of buying patterns and
general economic conditions in the software industry.
THERE ARE RISKS ASSOCIATED WITH THE POTENTIAL ACQUISITION OF OUR JAPANESE
DISTRIBUTOR
In June 1999 we acquired approximately 8% of the outstanding shares in our
Japanese distributor from one of the distributorAEs shareholders for
approximately $168,000 in cash. We currently own approximately 17% of our
Japanese distributor and are a party to an agreement with our Japanese
distributor and its other shareholders under which we are likely to (and under
certain circumstances, would bear substantial financial penalties if we did not)
acquire all the outstanding shares of such distributor at some point in the
future. Such an acquisition could be triggered by the shareholders of the
Japanese distributor at their discretion. The purchase price for such
acquisition would be based on a contractual formula in effect on the date of
such acquisition. The purchase price could be paid in shares of our common
stock, which may have the effect of diluting existing stockholders and adversely
affecting the price of our common stock or in cash, reducing the available cash
for working capital and other purposes. We believe that any such acquisition
will be accounted for by us as a "purchase" transaction (as opposed to a pooling
of interests). This accounting treatment could cause us to recognize 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. If the acquisition is accounted for as a "purchase" transaction, it
could harm our reported earnings per share during the periods in which we record
the amortization of intangible assets acquired. Finally, any such acquisition
would require substantial management attention, impose costs on us associated
with integrating the acquired entities, require us to coordinate sales and
marketing efforts with the acquired companies and subject us to additional, and
potentially substantial, regulation as an owner of foreign subsidiaries. Any of
these factors could harm our business, operating results and financial
condition.
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WE MAY BE ADVERSELY IMPACTED IF OUR PRODUCTS, INTERNAL SYSTEMS AND VENDORS OR
THE PRODUCTS OF OUR INDIRECT CHANNEL PARTNERS ARE NOT YEAR 2000 READY.
Any failure of our products, internal systems or third party vendorsAE
systems to be Year 2000 ready would harm our business. 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 code fields
will need to accept four digit entries to distinguish 21st century dates for
20th century dates. As a result, computer systems and/or software products used
by many companies may need to be upgraded to solve this problem. Although we are
dedicating resources toward attaining Year 2000 readiness, our efforts may not
be successful. For example, during testing of our products to validate Year 2000
readiness, we have discovered Year 2000 related errors in certain products,
which have not compromised the usability or basic functionality of the products.
We cannot be certain that we will not discover additional Year 2000 errors or
defects. Our failure to make our products Year 2000 ready could result in a
decrease in sales of our products, an increase in the allocation of resources to
address Year 2000 problems of our customers without additional revenue
commensurate with such dedication of resources, or an increase in litigation
costs relating to losses suffered by our customers due to such Year 2000
problems.
To the extent our products are embedded or bundled with other companies'
products that are not Year 2000 ready, we could be exposed to litigation from
such companies' customers, and our reputation in the marketplace and indirect
sales of our products by our indirect channel partners could be harmed. In
addition, the failure of our internal systems or third party vendors' systems
to be Year 2000 ready could prevent the us from manufacturing or shipping
products, providing customer support and completing transactions, all of which
could harm our business, operating results and financial condition. We are
currently inventorying and assessing the Year 2000 readiness of our internal
systems and vendors. We currently plan on completing remediation for any
material weaknesses in these two areas by December 31, 1999. We currently do not
have a Year 2000 contingency plan for any area and the cost of implementing a
contingency plan could be material.
IF PURCHASING PATTERNS OF OUR CUSTOMERS ARE AFFECTED BY THE YEAR 2000, OUR
BUSINESS COULD BE SERIOUSLY HARMED.
We believe that the purchasing patterns of customers and potential
customers may be impacted by Year 2000 issues. Many companies are expending
significant resources to correct or patch their current software systems to make
such systems Year 2000 ready. These expenditures may result in reduced funds
available to purchase software products such as those offered by us and our
indirect channel partners. Although we have not experienced these effects to
date, if customers defer purchases of business software because of such
expenditures, it would harm our business, operating results and financial
condition.
IF OUR PRODUCT CONTAINS MATERIAL DEFECTS, OUR BUSINESS COULD BE SERIOUSLY
HARMED.
Software products as complex as those offered by us often contain errors
or defects, particularly when first introduced, when new versions or
enhancements are released and when configured to individual customer computing
systems. We currently have known errors and defects in our products. Despite
testing conducted by us, if additional defects and errors, including Year 2000
errors, are found in current versions, new versions or enhancements of our
products after commencement of commercial shipment this could result in the loss
of revenues or a delay in market acceptance. The occurrence of any of these
events would harm on our business, operating results and financial condition.
23
<PAGE>
IF A SUCCESSFUL PRODUCT LIABILITY CLAIM IS MADE AGAINST US, OUR BUSINESS WOULD
BE SERIOUSLY HARMED.
Although license agreements with our customers typically contain
provisions designed to limit our exposure to potential product liability claims,
it is possible that such limitation of liability provisions may not be effective
as a result of existing or future laws or unfavorable judicial decisions. We
have not experienced any product liability claims to date. However, the sale and
support of our products may entail the risk of such claims, which are likely to
be substantial in light of the use of our products in business-critical
applications. A product liability claim brought against us could harm our
business, operating results and financial condition.
IF THE PROTECTION OF OUR PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS WILL BE
SERIOUSLY HARMED.
We have two issued U.S. patents and we rely primarily on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect our proprietary technology. For example, we
license our software pursuant to shrink-wrap or signed license agreements, which
impose certain restrictions on licensees' ability to utilize the software. In
addition, we seek to avoid disclosure of our intellectual property, including
requiring those persons with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code. We
seek to protect our software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of many countries do not protect our
proprietary rights to as great an extent as do the laws of the United States. If
our means of protecting our proprietary rights is not adequate or our
independently develop similar technology, our business could be seriously
harmed.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS.
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but we cannot be certain that third parties
will not claim infringement by us with respect to current or future products. We
expect web based reporting software product developers will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time-
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require us to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all. A successful claim of
product infringement against us and our failure or inability to license the
infringed or similar technology could harm our business, operating results and
financial condition.
24
<PAGE>
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR STOCKHOLDERS.
The market price of shares of our common stock has been and is likely to
continue to be highly volatile and may be significantly affected by factors such
the following:
- actual or anticipated fluctuations in our operating results
- announcements of technological innovations
- new products or new contracts announced by us or our competitors
- developments with respect to copyrights or proprietary rights
- conditions and trends in the software and other technology
industries
- changes in corporate purchasing of 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
- the purchase or sale of our common stock by "day traders"
In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the securities of technology companies. In the past, following
periods of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against such company.
If we are involved in such litigation, it could result in substantial costs and
a diversion of management's attention and resources and could harm our
business, operating results and financial condition.
EXISTING STOCKHOLDERS CAN EXERCISE SIGNIFICANT CONTROL OVER ACTUATE.
As of June 30, 1999, our executive officers and directors and their
affiliates in the aggregate beneficially owned approximately 49% of our
outstanding common stock, 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 Actuate.
CERTAIN OF OUR CHARTER PROVISIONS AND DELAWARE LAW, MAY PREVENT OR DETER A
CHANGE IN CONTROL OF ACTUATE.
Actuate's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated ("Bylaws"),
contain certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of Actuate or unsolicited acquisition proposals
that a stockholder might consider favorable, including provisions authorizing
the issuance of "blank check" preferred stock and eliminating the ability of
stockholders to act by written consent. In addition, certain provisions of
Delaware law and our 1998 Equity Incentive Plan may also have the effect of
discouraging, delaying or preventing a change in control of Actuate or
unsolicited acquisition proposals. The anti-takeover effect of these provisions
may also have an adverse effect on the public trading price of our common stock.
25
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
We are not involved in any legal proceedings that are material to our
business or financial condition.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) In connection with our IPO in 1998, we 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, we registered 3,450,000
shares of our common stock, $0.001 par value per share, of which
3,140,000 shares were sold by Actuate and 310,000 shares were sold by
Selling Stockholders. Net proceeds to us after deducting underwriting
discount and offering expenses were $30.9 million.
From August 1, 1998 to June 30, 1999, we used such net offering proceeds,
in direct or indirect payments to others, as follows:
<TABLE>
<S> <C>
Manufacturing, sales, marketing and administrative infrastructure $ 16,370,000
Research and development activities 7,565,000
Purchase of machinery and equipment and software 965,000
Acquisition of European distributors 6,000,000
--------------
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.
Item 4. Submission of Matters to a vote of Security Holders
At our Annual Meeting of Stockholders held on May 20, 1999, our
stockholders approved the following items:
1. The election of the following individuals as directors of the Company.
<TABLE>
<CAPTION>
Authority
For Withheld
--- ---------
<S> <C> <C>
Nicolas C. Nierenberg..................................................................... 10,790,098 2,620
Peter I. Cittadini........................................................................ 10,790,098 2,620
James W. Breyer........................................................................... 10,790,098 2,620
Arthur C. Patterson....................................................................... 10,790,098 2,620
Nancy J. Schoendorf....................................................................... 10,789,098 3,620
Steven D. Whiteman........................................................................ 10,790,198 2,520
</TABLE>
26
<PAGE>
2. The approval of the amendment to the Company's Certificate of
Incorporation to change the Company's name to Actuate Corporation.
For: 10,780,993 Against: 8,050 Abstain: 3,675
3. The ratification of the appointment of Ernst & Young LLP, Independent
Auditors as the Company's independent public accountants for the fiscal
year ending December 31, 1999.
For: 10,790,753 Against: 900 Abstain: 1,065
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
27
<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 August 5, 1999.
Actuate Corporation
(Registrant)
By: /s/ DANIEL A.GAUDREAU
------------------------------------
Daniel A. Gaudreau
Chief Financial Officer, Senior Vice
President of Finance (Principal
Financial and Accounting Officer)
28
<PAGE>
ACTUATE CORPORATION
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
- -------- -------------
27.1 Financial Data Schedule--June 30, 1999
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 16,024
<SECURITIES> 9,440
<RECEIVABLES> 11,367
<ALLOWANCES> 1,150
<INVENTORY> 0
<CURRENT-ASSETS> 36,572
<PP&E> 2,860
<DEPRECIATION> 1,190
<TOTAL-ASSETS> 48,175
<CURRENT-LIABILITIES> 19,733
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 28,428
<TOTAL-LIABILITY-AND-EQUITY> 48,175
<SALES> 14,088
<TOTAL-REVENUES> 18,126
<CGS> 452
<TOTAL-COSTS> 2,656
<OTHER-EXPENSES> 14,231
<LOSS-PROVISION> 391
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 1,949
<INCOME-TAX> 225
<INCOME-CONTINUING> 1,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,724
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
</TABLE>
