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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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No. 0-24607
Actuate Corporation
(Exact name of Registrant as specified in its charter)
Delaware 94-3193197
(State of incorporation) (I.R.S. Employer Identification No.)
701 Gateway Boulevard
South San Francisco, California 94080
(650) 837-2000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
______________
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Title of Class Outstanding as of June 30, 2000
-------------- -------------------------------
Common Stock, par value $.001 per share 28,260,756
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Actuate Corporation
Table of Contents
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<S> <C>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999....................................................................... 3
Condensed Consolidated Statements of Operations for the three months and
six months ended June 30, 2000 and 1999................................................. 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999.................................................................. 5
Notes to Condensed Consolidated Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .................................................................. 26
Item 6. Exhibits and Reports on Form 8-K ................................................... 26
Signature ................................................................................... 27
</TABLE>
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Part I. Financial Information
Item 1. Financial Statements
ACTUATE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 (1)
(unaudited)
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 8,601 $ 6,604
Short-term investments........................................ 6,740 17,549
Accounts receivable, net...................................... 22,072 17,229
Other current assets.......................................... 1,336 1,107
-------------- --------------
Total current assets............................................. 38,749 42,489
Property and equipment, net...................................... 9,039 2,438
Goodwill and other purchased intangible assets, net.............. 28,313 8,024
Other assets..................................................... 1,677 430
-------------- --------------
77,778 $ 53,381
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 4,195 $ 1,749
Accrued compensation ......................................... 2,681 3,694
Other accrued liabilities .................................... 5,202 4,134
Deferred revenue ............................................. 19,044 12,168
-------------- --------------
Total current liabilities ...................................... 31,122 21,745
-------------- --------------
Long-term obligations 2,033 -
-------------- --------------
Stockholders' equity:
Common stock ................................................. 28 28
Additional paid-in capital ................................... 59,039 47,844
Deferred stock compensation .................................. (109) (142)
Cumulative translation adjustment ............................ 154 159
Accumulated deficit .......................................... (14,489) (16,253)
-------------- --------------
Total stockholders' equity ................................ 44,623 31,636
-------------- --------------
$ 77,778 $ 53,381
============== ==============
</TABLE>
(1) The balance sheet at December 31, 1999 has been derived from the audited
consolidated financial statements at that date, but does not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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,
----------------------------- ------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
License fees ............................................... $ 16,169 $ 7,466 $ 29,656 $ 14,088
Services ................................................... 8,248 2,347 13,576 4,038
------------- ------------- ------------- -------------
Total revenues ............................................... 24,417 9,813 43,232 18,126
------------- ------------- ------------- -------------
Operating expenses:
Cost of license fees ...................................... 334 198 755 452
Cost of services .......................................... 5,294 1,240 8,260 2,204
Sales and marketing ....................................... 10,856 4,284 19,563 8,035
Research and development................................... 3,358 2,309 6,583 4,336
General and administrative................................. 1,691 760 3,071 1,492
Amortization of goodwill and other purchased intangibles .. 2,061 368 3,027 368
------------- ------------- ------------- -------------
Total operating expenses................................ 23,594 9,159 41,259 16,887
------------- ------------- ------------- -------------
Income from operations ....................................... 823 654 1,973 1,239
Interest and other income, net................................ 207 334 456 710
------------- ------------- ------------- -------------
Income before income taxes ................................... 1,030 988 2,429 1,949
Provision for income taxes ................................... 406 110 665 225
------------- ------------- ------------- -------------
Net income ................................................... $ 624 $ 878 $ 1,764 $ 1,724
============= ============= ============= =============
Basic income per share ....................................... $ 0.02 $ 0.03 $ 0.06 $ 0.06
============= ============= ============= =============
Shares used in basic per share calculation ................... 27,951 26,626 27,774 26,574
============= ============= ============= =============
Diluted income per share ..................................... $ 0.02 $ 0.03 $ 0.06 $ 0.06
============= ============= ============= =============
Shares used in diluted per share calculation.................. 31,424 29,378 31,851 29,498
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ACTUATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Operating activities
Net income............................................................... $ 1,764 $ 1,724
Adjustment to reconcile net income to net cash
provided by operating activities:
Amortization of deferred compensation............................ 33 62
Amortization of goodwill and other purchased intangibles......... 3,027 64
Depreciation..................................................... 1,004 442
Changes in operating assets and liabilities:
Accounts receivable......................................... (3,466) (5,167)
Other current assets........................................ (229) (491)
Accounts payable............................................ 833 1,182
Accrued compensation........................................ (1,013) 669
Other accrued liabilities................................... 1,067 1,265
Deferred revenue............................................ 6,876 2,853
------------ ---------------
Net cash provided by operating activities................................ 9,896 2,603
------------ ---------------
Investing activities
Purchases of property and equipment...................................... (7,605) (707)
Proceeds from maturity of short-term investments......................... 10,809 1,482
Acquisition of European distributors, net of cash assumed................ - (9,645)
Acquisition of Open Software Technology, LLC, net of cash assumed........ (7,300) -
Acquisition of EnterpriseSoft business................................... (2,450) -
Acquisition of shares of Actuate Japan................................... (1,506) -
Net change in other assets............................................... (1,234) (139)
------------ ---------------
Net cash used in investing activities.................................... (9,286) (9,009)
------------ ---------------
Financing activities
Proceeds from issuance of common stock................................... 1,642 619
Payment of bank loan..................................................... (250) -
------------ ---------------
Net cash provided by financing activities................................ 1,392 619
------------ ---------------
Net increase (decrease) in cash and cash equivalents..................... 2,002 (5,787)
Effect of foreign exchange rate changes on cash.......................... (5) 3
Cash and cash equivalents at the beginning of the period................. 6,604 21,808
------------ ---------------
Cash and cash equivalents at the end of the period....................... $ 8,601 $ 16,024
============ ===============
</TABLE>
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<TABLE>
<S> <C> <C>
Non cash financing activities:
Common stock issued in connection with the acquisitions.......... $ 9,553 $ -
============ ===============
Consideration payable in future in connection with
the acquisition of Open Software Technology, LLC................. $ 2,033 $ -
============ ===============
Supplemental disclosure of cash flow information:
Interest paid.................................................... $ - $ 5
============ ===============
Income taxes paid................................................ $ 555 $ 38
============ ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ACTUATE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements of
Actuate Corporation are unaudited, but include all normal recurring adjustments
which we believe to be necessary for the fair presentation of the financial
position, results of operations, and changes in cash flows for the periods
presented. The preparation of the financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Despite our best effort to establish good
faith estimates and assumptions, and to manage the achievement of the same,
actual results may differ.
The interim condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 1999
as filed with the Securities and Exchange Commission on March 30, 2000. 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 months
ended June 30, 2000 are not necessarily indicative of operating results for the
full fiscal year.
In February 2000, we completed the acquisition of Open Software
Technology, LLC ("OST"). In March 2000, we acquired all the assets and business
of EnterpriseSoft. These acquisitions were accounted for under the purchase
method of accounting. As prescribed by generally accepted accounting principles,
the Condensed Consolidated Statements of Operations include these companies'
operating results from the date of acquisition. In April 2000, we purchased
additional shares of our distributor located in Japan from its other
shareholders and became the majority shareholder. We have consolidated the
results of Actuate Japan from the date that we became the majority shareholder.
Revenue Recognition
License fees from licensing 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 or
determinable, and collection of the license fee is considered probable. Our
products do not require significant customization. The majority of end user
license revenues are derived from end user customer orders for specific
individual products. Fees from these types of transactions are generally
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.
License arrangements with e.Business 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
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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 consulting service
fees, maintenance agreements and training fees. Revenue from maintenance
agreements is deferred and recognized on a straight-line basis as service
revenue over the life of the related agreement, which is typically one year.
Service revenues from consulting and training are recognized upon completion of
the work to be performed.
Net Income Per Share
Net income per share is presented under Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards No. 128 "Earnings
Per Share" ("SFAS 128"). SFAS 128 requires the presentation of basic earnings
per share and diluted earnings per share for all periods presented.
In accordance with SFAS 128, basic net income per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period. Diluted net 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).
A reconciliation of shares used in the calculation of basic and diluted
net income per share follows (in thousands, except per share data):
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------------
2000 1999 2000 1999
------- ------ -------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income......................................................... $ 624 $ 878 $ 1,764 $ 1,724
------- ------- ------- -------
Denominator:
Weighted-average common shares outstanding.......................... 28,200 27,596 28,053 27,618
Weighted-average shares subject to repurchase....................... (249) (970) (279) (1,044)
Denominator for basic income per share.............................. 27,951 26,626 27,774 26,574
Weighted-average shares subject to repurchase....................... 249 970 279 1,044
Weighted-average employee stock options outstanding................. 3,224 1,782 3,798 1,880
------- ------- ------- -------
Denominator for diluted income per share............................. 31,424 29,378 31,851 29,498
======= ======= ======= =======
Basic net income per share........................................... $ 0.02 $ 0.03 $ 0.06 $ 0.06
======= ======= ======= =======
Diluted net income per share......................................... $ 0.02 $ 0.03 $ 0.06 $ 0.06
======= ======= ======= =======
</TABLE>
Comprehensive Income
Comprehensive income includes foreign currency translation gains and
losses and other unrealized gains and losses that have been previously excluded
from net income and reflected instead in equity. A summary of comprehensive
income follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income.......................................................... $ 624 $ 878 $ 1,764 $ 1,724
Unrealized gain on short-term investments........................... (1) (3) - (1)
Foreign currency translation adjustment............................. (20) 3 (5) 3
----- ------ ------- -------
Comprehensive income................................................ $ 603 $ 878 $ 1,759 $ 1,726
===== ====== ======= =======
</TABLE>
2. Acquisitions
On February 29, 2000, we acquired all of the outstanding stock of OST
for cash and shares of common stock. The total purchase price was $13.1 million,
consisting of $7.3 million in cash, $3.2 million in stock, future cash payments
of $2.4 million over two years from the acquisition date, and approximately
$200,000 of acquired net liabilities. The acquisition was accounted for as a
purchase. The results of operations of OST and the 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 informational
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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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues........................................................ $ 24,417 $ 12,235 $ 44,537 $ 21,858
Net income...................................................... $ 624 $ 339 $ 947 $ 575
Diluted net income per share.................................... $ 0.02 $ 0.01 $ 0.03 $ 0.02
</TABLE>
On March 16, 2000, we purchased all the assets and business of
EnterpriseSoft for $8.8 million in cash and common stock. The results of
operations of EnterpriseSoft and the estimated fair value of assets acquired are
included in our financial statements from the date of acquisition. Goodwill and
other intangibles arising from the acquisition are being amortized on a
straight-line basis over periods not exceeding four years. Pro forma information
related to the purchase of EnterpriseSoft has not been presented due to
immateriality.
On April 1, 2000, we purchased additional shares of our distributor
located in Japan ("Actuate Japan") from existing shareholders for approximately
$548,000 raising our equity ownership of Actuate Japan to 67%. Accumulated
losses applicable to the minority shareholders exceed their equity capital in
Actuate Japan. This excess loss applicable to the minority shareholders has been
charged to us, as the minority shareholders are not obligated to make good
losses exceeding their equity capital.
3. Income Taxes
Tax provision was calculated using the estimated annual effective tax
rate that takes into account utilization of unbenefited net operating losses
generated in prior years and the effect of nondeductible charges relating
amortization of goodwill.
4. Subsequent Events
On July 12, 2000, our board of directors authorized a Common Stock
split on a two-for-one basis to be effected in the form of a 100% stock
dividend. The Company's stockholders of record at the close of business on
August 7, 2000 will receive one additional share of Common Stock, $0.001 par
value per share, for each share that they own on such date. Our transfer agent
will issue new shares on or about August 14, 2000, and our Common Stock will
begin trading on NASDAQ on a split-adjusted basis beginning on or about August
15, 2000. Share numbers have not been restated to reflect the split in these
financial statements.
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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, 1999 as filed with the Securities and Exchange
Commission on March 30, 2000.
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
We are a leading provider of e.Reporting solutions for e.Business. Our
e.Reporting solutions enable organizations to deliver high-value business
information to the Internet for use by customers, employees and partners.
We sell software products through two primary means: (i) directly to end
user customers through our direct sales force and (ii) through indirect channel
partners such as e.Business application vendors, resellers and distributors.
e.Business application vendors generally integrate our products with their
applications and either provide hosting services or resell them with their
products. Our other indirect channel partners resell our software products to
end user customers. Our revenues are derived primarily from license fees for
software products and, to a lesser extent, fees for services relating to such
products, including software maintenance and support, training and consulting.
In June 1999, we acquired all of the outstanding shares of Actuate Holding, B.V.
("BV"), the parent company of our distributors based in France, Germany and the
United Kingdom. In February 2000, we acquired all of the outstanding shares of
Open Software Technology, LLC ("OST"), a software consulting firm. In March
2000, we acquired all the assets of EnterpriseSoft, a developer of Java software
products. In April 2000, we purchased additional shares of our distributor in
Japan ("Actuate Japan") from existing shareholders raising our equity ownership
of Actuate Japan to 67%. The results of operations of BV, OST, EnterpriseSoft
and Actuate Japan, and the fair value of assets acquired and liabilities assumed
are included in the consolidated financial statements from the date of
acquisition (majority ownership).
We were incorporated in California in November 1993 and reincorporated in
Delaware in July 1998. In March 2000, we relocated our headquarters and our new
offices are located at 701 Gateway Boulevard, South San Francisco, California
94080 and our telephone number is 650-837-2000.
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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,
---------------------------- ---------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues:
License fees........................................ 66% 76% 69% 78%
Services............................................ 34 24 31 22
-------- ------- ------- --------
Total revenues................................. 100 100 100 100
-------- ------- ------- --------
Cost of revenues:
License fees........................................ 1 2 2 3
Services............................................ 22 12 19 12
-------- ------- ------- --------
Total cost of revenues......................... 23 14 21 15
-------- ------- ------- --------
Gross profit........................................... 77 86 79 85
-------- ------- ------- --------
Operating expenses:
Sales and marketing................................. 44 44 45 44
Research and development............................ 14 23 15 24
General and administrative.......................... 7 8 7 8
Amortization of goodwill and other purchased
intangibles........................................ 8 4 7 2
-------- ------- ------- --------
Total operating expenses......................... 73 79 74 78
-------- ------- ------- --------
Income from operations................................. 4 7 5 7
Interest and other income, net......................... 1 3 1 4
Provision for income taxes............................. 2 1 2 1
-------- ------- ------- --------
Net income............................................. 3% 9% 4% 10%
======== ======= ======= ========
</TABLE>
Revenues
Total revenues increased 149% from $9.8 million for the quarter ended June 30,
1999 to $24.4 million for the quarter ended June 30, 2000. Total revenues
increased 139% from $18.1 million for the six months ended June 30, 1999 to
$43.2 million for the six months ended June 30, 2000. During the second quarter
and first half of 2000 and 1999, no customer accounted for more than 10% of
total revenues. Sales outside of North America were $3.1 million, or 13% of
total revenues for the second quarter of 2000, compared to $1.2 million, or 12%
of total revenues for the second quarter of 1999. For the six months ended June
30, 2000, sales outside of North America were $5.2 million, or 12% of total
revenues as compared to $2.2 million, or 12% of total revenues for the six
months ended June 30, 1999.
License fees. Revenues from license fees increased 117% from $7.5 million for
the second quarter of 1999 to $16.2 million for the second quarter of 2000. For
the six months ended June 30, 2000, license revenues were $29.7 million, an
increase of 111% over license revenues of $14.1 million for the six
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months ended June 30, 1999. The increase in license fees in absolute dollars was
primarily due to increased sales to new customers and follow-on sales to
existing customers resulting from the expansion of our direct sales organization
and increased acceptance of the Actuate e.Reporting System.
Services. Service revenues increased 251% from $2.3 million for the second
quarter of 1999 to $8.2 million for the second quarter of 2000. For the six
months ended June 30, 2000, service revenues were $13.6 million, an increase of
236% over license revenue of $4.0 million for the six months ended June 30,
1999. The increase in service revenues was due to the increase in professional
services revenues related to increase in demand for our professional services,
the addition of consultants through the OST acquisition, and to a lesser extent,
an increase in the installed base of customers receiving ongoing maintenance and
support. As a percentage of total revenues, service revenues increased from 24%
in the second quarter of 1999 to 34% in the second quarter of 2000. For the six
months ended June 30, 2000, service revenues as a percentage of total revenues
were 31% compared to 22% for the six months ended June 30, 1999. We expect that
service revenues as a percentage of total revenues will increase in the future
as a result of our plan to increase our consulting staff to support any
increased demand for our professional services.
Cost of revenues
License fees. Cost of license fees consists primarily of production and
packaging costs, personnel and related costs, and facility costs. Cost of
license fees increased from $198,000, or 3% of revenues from license fees, for
the second quarter of 1999 to $334,000, or 2% of revenues from license fees, for
the first quarter of 2000. Cost of license fees increased from $452,000, or 3%
of revenues from license fees, for the six months ended June 30, 1999 to
$755,000, or 3% of revenues from license fees for the six months ended June 30,
2000. The increase in absolute dollars was primarily due to fulfilling more
orders during the quarter and six-month period. We expect cost of license fees
to increase in absolute dollars and as a percentage of revenues from license
fees in future periods due to increasing fulfillment costs, new product
releases, localization costs, royalties to third party software vendors, new
packaging of our products and printing costs associated with revised
documentation materials.
Services. Cost of services consists primarily of personnel and related costs,
facilities costs incurred in providing software maintenance and support,
training and consulting services, as well as third-party costs incurred in
providing training and consulting services. Cost of services increased from $1.2
million, or 53% of service revenues, for the second quarter of 1999 to $5.3
million, or 64% of service revenues, for the second quarter of 2000. Cost of
services increased from $2.2 million, or 55% of service revenues, for the six
months ended June 30, 1999 to $8.3 million, or 61% of service revenues, for the
six months ended June 30, 2000. The increase in absolute dollars was due to the
continued expansion of our customer support and professional service
organizations. We expect that cost of services will continue to increase in
absolute dollars in the future as we continue to expand both our customer
support and professional services organizations to meet customer demands for our
services. The increase in the cost of service as a percentage of service
revenues was due to the added infrastructure to support the growing service
organizations and to the lower operating margin of OST's consulting engagements.
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 $4.3 million, or 44% of total
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revenues for the second quarter of 1999 to $10.9 million, or 44% of total
revenues for the second quarter of 2000. Sales and marketing expenses increased
from $8.0 million, or 44% of total revenues for the six months ended June 30,
1999 to $19.6 million, or 45% of total revenues for the six months ended June
30, 2000. The increase in absolute dollars was primarily due to hiring
additional sales and marketing personnel, increased travel expenses associated
with increased headcount, higher sales commissions associated with increased
revenues and increased marketing program expenses. We expect that sales and
marketing expenses will continue to increase in absolute dollars in future
periods as we plan 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 increased from $2.3
million, or 24% of total revenues for the second quarter of 1999 to $3.4
million, or 14% of total revenues for the second quarter of 2000. Research and
development expenses increased from $4.3 million, or 24% of total revenues for
the six months ended June 30, 1999 to $6.6 million, or 15% of total revenues for
the six months ended June 30, 2000. The increase in research and development
expenses in absolute dollars was primarily due to the hiring of additional
engineering personnel. The decrease as a percentage of total revenues was due to
revenues increasing at a faster rate than research and development expenses. 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 $760,000, or
8% of total revenues for the second quarter of 1999 to $1.7 million, or 7% of
total revenues for the second quarter of 2000. General and administrative
expenses increased from $1.5 million, or 8% of total revenues for the six months
ended June 30, 1999 to $3.1 million, or 7% of total revenues for the six months
ended June 30, 2000. 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. We believe that
general and administrative expenses will increase in absolute dollars in future
periods as we continue to expand our facilities and personnel staff to meet our
growing operations.
Amortization of goodwill and other purchased intangibles. In June 1999, we
acquired all of the outstanding stock of BV for cash. This acquisition was
accounted for as a purchase and we recognized $9.6 million of goodwill and other
intangible assets. In February 2000, we acquired all of the outstanding stock of
OST for cash and stock. This acquisition was also accounted for as a purchase
and we recognized $13.1 million of goodwill and other intangible assets. In
March 2000, we acquired all the assets of EnterpriseSoft for cash and stock and
recognized $8.7 million of goodwill and other intangible assets. In April 2000,
we purchased additional shares of Actuate Japan from existing shareholders
raising our equity ownership to 67%. We recognized $1.5 million of goodwill and
other intangibles as a result of consolidating Actuate Japan financial
statements as prescribed by generally accepted accounting principles. In the
three and six-month periods ended June 30, 2000, we recorded a charge of $2.1
million and $3.0 million, respectively, for the amortization of goodwill and
other purchased intangibles relating to these acquisitions, as compared to
$368,000 for the same periods in 1999. Goodwill and other purchased intangibles
arising from these acquisitions are being amortized on a straight-line basis
over periods not exceeding four years.
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Interest and Other Income, Net
Interest and other income, net, are comprised primarily of interest income
earned by us on cash and short-term investments. Interest and other income, net,
for the three months ended June 30, 2000 were $207,000 as compared with interest
and other income, net of $334,000 for the three months ended June 30, 1999. For
the six months ended June 30, 2000, interest and other income, net, were
$456,000 as compared with interest and other income, net of $710,000 for the six
months ended June 30, 1999. The decrease was due primarily to lower cash and
investment balances from which interest is earned.
Provision for Income Taxes
We recorded an income tax provision of $406,000 and $665,000 in the three
and six-month periods ended June 30, 2000, respectively, and $110,000 and
$225,000 in the three and six-month periods ended June 30, 1999. The effective
tax rate for the three and six months ended June 30, 1999 was significantly
below the statutory rate due to the utilization of previously unbenefited net
operating loss. During the three and six months ended June 30, 2000, we
continued to utilize previously unbenefited net operating loss. However, this
benefit was offset by nondeductible goodwill charges. The effective tax rates
used are 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. In future years actual effective tax rate will increase after
utilization of all the unbenefited net operating losses generated in prior
years.
Liquidity and Capital Resources
As of June 30, 2000, we had cash and cash equivalents of $8.6 million and
short-term investments of $6.7 million in highly liquid, high quality debt
securities and a certificate of deposit classified as available-for-sale. In
addition, we obtained a letter of credit through our bank in the amount of $3.1
million as security deposit to lease our new facilities in South San Francisco.
Net cash provided by operating activities was $9.9 million in the six
months ended June 30, 2000, and $2.6 million in the six months ended June 30,
1999. For both six-month periods ended June 30, 2000 and 1999, cash provided by
operating activities was primarily due to increases in deferred revenue, and net
income as adjusted for amortization and depreciation that was offset by
decreases in accounts receivable.
Deferred revenue increased by approximately $6.9 million during the six
months ended June 30, 2000 and by $2.9 million during the six months ended June
30, 1999. The increases in deferred revenue were due to the expansion of our
customer base under maintenance contracts in addition to the signing of several
agreements with future obligations, which require us to defer revenue in
accordance with SOP 97-2.
Net cash used in investing activities was $9.3 million in the six months
ended June 30, 2000, and $9.0 million in the six months ended June 30, 1999. For
the six months ended June 30, 2000, net cash used in investing activities was
primarily due to purchases of property and equipment for our new South San
Francisco facilities, the acquisitions of OST and the EnterpriseSoft business
and the purchase of additional shares in Actuate Japan, which was offset by
maturity and sale of our short-term investments. For the comparable 1999 period,
net cash used in investing activities was due to the acquisition of BV.
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Net cash provided by financing activities was $1.4 million in the six
months ended June 30, 2000, and $619,000 in the six months ended June 30, 1999.
During both periods, net cash provided by financing activities was primarily
from the proceeds derived from issuance of common stock under the employee stock
purchase and stock option plans.
We believe that current cash balances and any cash generated from
operations will be sufficient to meet our cash needs for working capital and
capital expenditures for at least the next twelve months. Thereafter, if cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or obtain credit facilities. The sale of
additional equity could result in additional dilution to our stockholders. A
portion of our cash may be used to acquire or invest in complementary
businesses, including the purchase of the remaining interest of our distributor
in Japan, or products or to obtain the right to use complementary technologies.
From time to time, in the ordinary course of business, we evaluate potential
acquisitions of such businesses, products or technologies.
Year 2000 Readiness
Computer systems and software must accept four digit entries to distinguish
21/st/ century dates from 20/th/ century dates. As a result, many software and
computer systems that accepted only two digit entries needed to be upgraded in
order to accept dates beginning January 1, 2000. To date, we have not
experienced any date related problems with our software. In addition, we have
not been made aware of, nor have we experienced, date related problems with any
third-party software. Also, we do not believe that we will incur material costs
in the future because of date related problems.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Investors should carefully consider the following risk factors and warnings
before making an investment decision. The risks described below are not the only
ones facing Actuate. Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations. If any
of the following risks actually occur, our business, operating results or
financial condition could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose all or part of
your investment. Investors should also refer to the other information set forth
in this Report on Form 10-K, including the financial statements and the notes
thereto.
OUR OPERATING RESULTS MAY BE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO
MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE
OF OUR STOCK MAY DECREASE SIGNIFICANTLY.
The susceptibility of our operating results to significant fluctuations
makes any prediction of future operating results unreliable. In addition, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and you should not rely on them as indications of our
future performance. Our operating results have in the past, and may in the
future, vary significantly due to factors such as the following:
- demand for our products;
- the size and timing of significant orders for our products;
- sales cycles of our indirect channel partners;
- changes in pricing policies by us or our competitors;
- changes in our level of operating expenses and our ability to control
costs;
- budgeting cycles of our customers;
- ability to make new products commercially available in a timely manner;
- failure to successfully manage acquisitions made by us;
- defects in our products and other product quality problems;
- failure to meet hiring needs and unexpected personnel changes;
- the management and expansion of our international operations;
- changes in our sales incentive plans;
- continued successful relationships and the establishment of new
relationships with e.Business application vendors;
- the impact of consolidation by competitors and indirect channel
partners; and
- general domestic and international economic and political conditions.
Because our software products are typically shipped shortly after orders
are received, total revenues in any quarter are substantially dependent on
orders booked and shipped throughout that quarter. Furthermore, several factors
may require us, in accordance with generally accepted accounting principles in
the United States, to defer recognition of license fee revenue for a significant
period of time after entering into a license agreement, including:
- whether the license agreement includes both software products that are
then currently available and software products or other enhancements
that are still under development;
- whether the license agreement relates entirely or partly to then
currently undeliverable software products; and
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- whether the license agreement includes acceptance criteria that may
preclude revenue recognition prior to customer acceptance.
In addition, we may in the future experience fluctuations in our gross and
operating margins due to changes in the mix of our domestic and international
revenues, changes in the mix of our direct sales and indirect sales and changes
in the mix of license revenues and service revenues, as well as changes in the
mix among the indirect channels through which our products are offered.
A significant portion of our total revenues in any given quarter is derived
from existing customers. Our ability to achieve future revenue growth, if any,
will be substantially dependent upon our ability to increase revenues from
license fees and services from existing customers, to expand our sales force and
to increase the average size of our orders. To the extent that such increases do
not occur in a timely manner, our business, operating results and financial
condition would be harmed. Our expense levels and plans for expansion, including
plans to significantly increase our sales and marketing and research and
development efforts, are based in significant part on our expectations of future
revenues and are relatively fixed in the short-term. If revenues fall below our
expectations and we are unable to quickly reduce our spending in response, our
business, operating results and financial condition are likely to be harmed.
Based upon all of the factors described above, we have a limited ability to
forecast future revenues and expenses, and it is likely that in some future
quarter our operating results will be below the expectations of public market
analysts and investors. In the event that operating results are below
expectations, the price of our common stock could decline.
IF WE DO NOT SUCCESSFULLY EXPAND OUR DISTRIBUTION CHANNELS AND DEVELOP AND
MAINTAIN RELATIONSHIPS WITH E.BUSINESS APPLICATION VENDORS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as e.Business
application vendors, resellers and distributors. Our revenues from license fees
resulting from sales through indirect channel partners were approximately 37% in
the first six months of 2000, 39% in fiscal 1999 and 41% in fiscal 1998. Our
ability to achieve significant revenue growth in the future will depend in large
part on our success in expanding our sales force and in further establishing and
maintaining relationships with e.Business application vendors, resellers and
distributors. In particular, a significant element of our strategy is to embed
our technology in products offered by e.Business application vendors for resale
or as a hosted application to such vendors' customers and end users. We intend
to seek additional distribution arrangements with other e.Business application
vendors to embed our technology in their products and expect that these
arrangements will continue to account for a significant portion of our revenues
in future periods. Our future success will depend on the ability of our indirect
channel partners to sell and support our products. If the sales and
implementation cycles of our indirect channel partners are lengthy or variable
or our e.Business application vendors experience difficulties embedding our
technology into their products or we fail to train the sales and customer
support personnel of such indirect channel partners in a timely fashion, our
business, operating results and financial condition would be harmed.
Although we are currently investing, and plan to continue to invest,
significant resources to expand and develop relationships with e.Business
application vendors, we have at times experienced and continue to experience
difficulty in establishing and maintaining these relationships. If we are unable
to
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successfully expand these distribution channels and secure license agreements
with additional e.Business application vendors on commercially reasonable terms
and extend existing license agreements with existing e.Business and application
vendors on commercially reasonable terms, our operating results would be harmed.
Any inability by us to maintain existing or establish new relationships with
indirect channel partners or, if such efforts are successful, a failure of our
revenues to increase correspondingly with expenses incurred in pursuing such
relationships, would harm our business, operating results and financial
condition.
IF THE MARKET FOR INTERNET BASED REPORTING SOFTWARE DOES NOT GROW AS WE EXPECT
OUR BUSINESS WOULD BE SERIOUSLY HARMED.
The market for Internet 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 Internet
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
Internet based reporting and our products. However, if such expenditures do not
enable our products to achieve any significant degree of market acceptance, our
business, operating results and financial condition would be harmed.
WE MAY MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE NUMEROUS RISKS
The Internet reporting software business is highly competitive, and as
such, our growth is dependent upon market growth and our ability to enhance our
existing products, introduce new products on a timely basis and expand our
distribution channels and professional services organization. One of the ways we
have addressed and will continue to address these issues is through acquisitions
of other companies. Acquisitions involve numerous risks, including the
following:
- difficulties in integration of the operations, technologies, and
products of the acquired companies;
- the risk of diverting management's attention from normal daily
operations of the business;
- risks of entering markets in which we have no or limited direct prior
experience; and
- the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently risky,
and we cannot assure you that any acquisition will be successful and will not
materially adversely affect our business, operating results or financial
condition. Failure to successfully integrate acquired companies and technologies
with us could harm our business and operating results.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
Our market is intensely competitive and characterized by rapidly changing
technology and evolving standards. Our competition comes in five principal
forms:
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- direct competition from current or future vendors of reporting solutions
such as Seagate Software, Inc. (a division of Seagate Technology, Inc.),
MicroStrategy Incorporated and Brio Technology, Inc.;
- indirect competition from vendors of OLAP and query tools such as
Hyperion Solutions Corp., Business Objects S.A., Cognos, Inc. and
Microsoft that integrate reporting functionality with such tools;
- indirect competition from e.Business software vendors such as SAP and
Oracle, to the extent they include reporting functionality in their
applications;
- competition from e.Business software vendors and Web development tool
vendors; and
- competition from the information systems departments of current or
potential customers that may develop reporting solutions internally
which may be cheaper and more customized than our products.
Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sales of their products than us. Also, most current and potential
competitors, including companies such as Oracle and Microsoft, have greater name
recognition and the ability to leverage significant installed customer bases.
These companies could integrate competing Web based reporting software with
their products, resulting in a loss of market share for us. We expect additional
competition as other established and emerging companies enter the Internet 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. Also current or future indirect channel partners have in
the past, or may in the future, establish cooperative relationships with our
current or potential competitors, thereby limiting our ability to sell our
products through particular distribution channels. It is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could harm our ability
to obtain revenues from license fees from new or existing customers and service
revenues from existing customers on terms favorable to us. If we are unable to
compete successfully against current and future competitors our business,
operating results and financial condition would be harmed.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS COULD BE SERIOUSLY HARMED.
The market for our products is characterized by rapid technological
changes, frequent new product introductions and enhancements, changing customer
demands and evolving industry standards. Any of these factors can render
existing products obsolete and unmarketable. We believe that our future success
will depend in large part on our ability to support current and future releases
of popular operating systems, databases and e.Business software applications, to
timely develop new products that achieve market acceptance, and to meet an
expanding range of customer requirements. If the announcement or introduction of
new products by us or our competitors or any change in industry standards causes
customers to defer or cancel purchases of existing products our business,
operating results and financial condition would be harmed. As a result of the
complexities inherent in Internet based reporting, major new products and
product enhancements can require long development and
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testing periods. In addition, customers may delay their purchasing decisions in
anticipation of the general availability of new or enhanced versions of our
products. As a result, significant delays in the general availability of such
new releases or significant problems in the installation or implementation of
such new releases could harm our business, operating results and financial
condition. If we fail to successfully develop, on a timely and cost effective
basis, product enhancements or new products that respond to technological
change, evolving industry standards or customer requirements or such new
products and product enhancements fail to achieve market acceptance, our
business, operating results and financial condition may be harmed.
IF WE DO NOT RELEASE NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS IN A
TIMELY MANNER OR IF SUCH NEW PRODUCTS AND ENHANCEMENTS FAIL TO ACHIEVE MARKET
ACCEPTANCE OUR BUSINESS COULD BE SERIOUSLY HARMED.
We believe that our future success will depend in large part on the success
of new products and enhancements that we make generally available. Prior to the
release of any new products or enhancements, the products must undergo a long
development and testing period. To date, the development and testing of new
products and enhancements have taken longer than expected. In the event the
development and testing of new products and enhancements continue to take longer
than expected, the release of new products and enhancements will be delayed. If
we fail to release new products and enhancements in a timely manner, our
business, operating results and financial condition may be harmed. In addition,
if such new products and enhancements do not achieve market acceptance our
business, operating results and financial condition may be harmed.
BECAUSE THE SALES CYCLES OF OUR PRODUCTS ARE LENGTHY AND VARIABLE, OUR
QUARTERLY RESULTS MAY FLUCTUATE.
The purchase of our products by our end user customers for deployment
within a customer's organization typically involves a significant commitment of
capital and other resources, and is therefore subject to delays that are beyond
our control. These delays can arise from a customer's internal procedures to
approve large capital expenditures, budgetary constraints and the testing and
acceptance of new technologies that affect key operations. The sales cycle for
an initial order of our products is typically 3 to 6 months and the sales cycle
associated with a follow-on large scale deployment of our products typically
extends for another 6 to 9 months or longer. We may experience longer sales
cycles in the future. Additionally, sales cycles for sales of our products to
e.Business application vendors tend to be longer, ranging from 6 to 24 months or
more and involve convincing the vendor's entire organization that our products
are the appropriate reporting solution for the vendor's application. This time
period does not include the sales and implementation cycles of such vendor's own
products, which are typically significantly longer than our sales and
implementation cycles. Certain of our customers have in the past, or may in the
future, experience difficulty completing the initial implementation of our
products. Any difficulties or delays in the initial implementation by our end
user customers or our indirect channel partners could cause such customers to
reject our software or lead to the delay or non-receipt of future orders for the
large-scale deployment of our products.
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IF WE FAIL TO EXPAND OUR INTERNATIONAL OPERATIONS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
During the first six months of 2000 and the year ended 1999 and 1998, we
derived 12%, 14% and 6% of our total revenues, respectively, from sales outside
North America. Our ability to achieve revenue growth in the future will depend
in large part on our success in increasing revenues from international sales. We
intend to continue to invest significant resources to expand our sales and
support operations outside North America and to enter additional international
markets. In order to expand international sales, we must establish additional
foreign operations, expand our international channel management and support
organizations, hire additional personnel, recruit additional international
distributors and increase the productivity of existing international
distributors. If we are not successful in expanding international operations in
a timely and cost-effective manner, our business, operating results and
financial condition could be harmed.
THERE ARE MANAGEMENT AND OPERATIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS THAT COULD SERIOUSLY HARM OUR BUSINESS.
We have wholly owned subsidiaries in the United Kingdom, France, Germany
and Australia and a majority owned subsidiary in Japan 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, any of which could harm our
business, operating results and financial conditions. These risks include the
following:
- costs of localizing products for foreign countries;
- difficulty in hiring employees in foreign countries;
- trade laws and business practices favoring local competition;
- dependence on local vendors;
- compliance with multiple, conflicting and changing government laws and
regulations;
- longer sales and payment cycles;
- import and export restrictions and tariffs;
- difficulties in staffing and managing foreign operations;
- greater difficulty or delay in accounts receivable collection;
- foreign currency exchange rate fluctuations;
- multiple and conflicting tax laws and regulations; and
- political and economic instability.
We believe that an increasing portion of our revenues and costs will be
denominated in foreign currencies. To the extent such denomination in foreign
currencies does occur, gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and liabilities
arising from international operations may contribute to fluctuations in our
results of operations. Although we may from time to time undertake foreign
exchange hedging transactions to cover a portion of our foreign currency
transaction exposure, we currently do not attempt to cover any foreign currency
exposure. If we are not successful in any future foreign exchange hedging
transactions that we engage in, our business, operating results and financial
condition could be harmed.
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TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT OUR
INTERNAL SYSTEMS, PROCEDURES AND CONTROLS. IF WE ARE UNABLE TO DO SO
SUCCESSFULLY, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our rapid expansion in the number of employees and the scope of operations
has placed and will continue to place a significant strain on our management,
information systems and resources. Any acquisitions made by us will also put a
significant strain on our management, information systems and resources. In
addition, we expect that an expansion of our international operations will lead
to increased financial and administrative demands associated with managing our
international operations and managing an increasing number of relationships with
foreign partners and customers and expanded treasury functions to manage foreign
currency risks. Our future operating results will also depend on our ability to
further develop indirect channels and expand our support organization to
accommodate growth in our installed base. If we fail to manage our expansion
effectively, our business, operating results and financial condition would be
harmed.
OUR INABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL IN THE FUTURE
WOULD SERIOUSLY HARM OUR BUSINESS.
From January 1999 through June 2000, we increased our headcount from 149 to
443 full-time employees. Furthermore, significant increases in the number of
employees are anticipated during the remainder of 2000 and 2001. In particular,
we currently plan to significantly expand the number of employees in sales,
customer support and marketing. Our success depends to a significant degree upon
the efforts of certain key management, sales, customer support and research and
development personnel. We believe that our future success will depend in large
part upon our continuing ability to attract and retain highly skilled
managerial, sales, marketing, customer support and research and development
personnel. Like other software companies, we face intense competition for such
personnel, and we have experienced and will continue to experience difficulty in
recruiting and retaining qualified personnel, particularly in the San Francisco
Bay Area, where the employment market for qualified sales, marketing and
engineering personnel is extremely competitive.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers and other key engineering, sales, marketing and support personnel and
none of our officers or key employees is bound by an employment agreement for
any specific term. If we lose the service of one or more of our key employees,
or if one or more of our executive officers or employees decide to join a
competitor or otherwise compete directly or indirectly with us, this could have
a significant adverse effect on our business.
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.
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IF OUR PRODUCT CONTAINS MATERIAL DEFECTS, OUR BUSINESS COULD BE SERIOUSLY
HARMED.
Software products as complex as those offered by us often contain errors or
defects, particularly when first introduced, when new versions or enhancements
are released and when configured to individual customer computing systems. We
currently have known errors and defects in our products. Despite testing
conducted by us, if additional defects and errors are found in current versions,
new versions or enhancements of our products after commencement of commercial
shipment this could result in the loss of revenues or a delay in market
acceptance. The occurrence of any of these events could seriously harm our
business, operating results and financial condition.
IF A SUCCESSFUL PRODUCT LIABILITY CLAIM IS MADE AGAINST US, OUR BUSINESS WOULD
BE SERIOUSLY HARMED.
Although license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims, it is
possible that such limitation of liability provisions may not be effective as a
result of existing or future laws or unfavorable judicial decisions. We have not
experienced any product liability claims to date. However, the sale and support
of our products may entail the risk of such claims, which are likely to be
substantial in light of the use of our products in business-critical
applications. A product liability claim brought against us could seriously harm
our business, operating results and financial condition.
IF THE PROTECTION OF OUR PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS COULD BE
SERIOUSLY HARMED.
We have two issued and two pending U.S. patents and we rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our proprietary technology. For
example, we license our software pursuant to shrink-wrap or signed license
agreements, which impose certain restrictions on licensees' ability to utilize
the software. In addition, we seek to avoid disclosure of our intellectual
property, including requiring those persons with access to our proprietary
information to execute confidentiality agreements with us and restricting access
to our source code. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. If our means
of protecting our proprietary rights is not adequate or our competitors
independently develop similar technology, our business could be seriously
harmed.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS.
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but we cannot be certain that third parties
will not claim infringement by us with respect to current or future products. We
expect Internet based reporting software product developers will
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increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all. A successful claim of product infringement against us and our failure or
inability to license the infringed or similar technology could harm our
business, operating results and financial condition.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR STOCKHOLDERS.
The market price of shares of our common stock has been and is likely to
continue to be highly volatile and may be significantly affected by factors such
as the following:
- actual or anticipated fluctuations in our operating results;
- announcements of technological innovations;
- new products or new contracts announced by us or our competitors;
- developments with respect to copyrights or proprietary rights;
- conditions and trends in the software and other technology industries;
- changes in corporate purchasing of e.Business application software;
- the announcement of mergers or acquisitions;
- adoption of new accounting standards affecting the software industry;
- changes in financial estimates by securities analysts;
- changes in the economic conditions in the United States and abroad; and
- the purchase or sale of our common stock by "day traders".
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the securities of technology companies. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against such company. If we are
involved in such litigation, it could result in substantial costs and a
diversion of management's attention and resources and could harm our business,
operating results and financial condition.
CERTAIN OF OUR CHARTER PROVISIONS AND DELAWARE LAW, MAY PREVENT OR DETER A
CHANGE IN CONTROL OF ACTUATE.
Actuate's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated ("Bylaws"),
contain certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of Actuate or unsolicited acquisition proposals
that a stockholder might consider favorable, including provisions authorizing
the issuance of "blank check" preferred stock and eliminating the ability of
stockholders to act by written consent. In addition, certain provisions of
Delaware law and our 1998 Equity Incentive Plan may also have the effect of
discouraging, delaying or preventing a change in control of Actuate or
unsolicited acquisition proposals. The anti-takeover effect of these provisions
may also have an adverse effect on the public trading price of our common stock.
25
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Stockholders held on May 24, 2000, 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.................................. 21,543,249 73,257
Peter I. Cittadini..................................... 21,543,249 73,257
George B. Beitzel...................................... 21,541,659 74,847
Arthur C. Patterson.................................... 21,543,149 73,357
Steven D. Whiteman..................................... 21,543,034 73,472
</TABLE>
2. 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, 2000.
For: 21,607,322 Against: 5,296 Abstain: 3,888
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On March 10, 2000 and May 9, 2000, the Company filed a report on
Form 8-K and Form 8-K/A relating to the acquisition of Open Software
Technology, LLC.
26
<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 3, 2000.
Actuate Corporation
(Registrant)
By: /s/ DANIEL A. GAUDREAU
___________________________
Daniel A. Gaudreau
Chief Financial Officer, Senior Vice
President of Finance (Principal
Financial and Accounting Officer)
27
<PAGE>
ACTUATE CORPORATION
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
--------- -------------
27.1 Financial Data Schedule - June 30, 2000
28
