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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
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 number: 0-24607
ACTUATE CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 94-3193197 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
951 Mariners Island Boulevard,
San Mateo, California 94404
(650) 645-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title Of Each Class |
Name Of Each Exchange On Which Registered | |
| Common Stock, $0.001 par value | Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ¨ No x
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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of June 30, 2012, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $318,118,331 based on the closing sale price as reported on The Nasdaq Global Market.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at February 28, 2013 | |
|
|
| |
| Common Stock, $0.001 par value | 47,735,963 |
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to specified portions of the registrant’s definitive Proxy Statement for its 2013 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2012.
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Annual Report on Form 10-K
for the fiscal year ended December 31, 2012
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report on Form 10-K under “Business,” “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. Forward-looking statements include statements regarding Actuate’s expectations, beliefs or strategies regarding the future. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements contained in this Report on Form 10-K after the date hereof or to conform such statements to actual results. Readers are cautioned not to place undue reliance on forward-looking statements and should carefully review the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein and the risk factors described in other documents Actuate files from time to time with the Securities and Exchange Commission, including current reports on Form 8-K and quarterly reports on Form 10-Q filed by Actuate during 2012.
| ITEM 1. | BUSINESS |
Actuate Software Corporation was incorporated in November 1993 in the State of California and reincorporated in the State of Delaware in July 1998 as Actuate Corporation (“We”, “Actuate” or the “Company”). Actuate provides software and services to develop and deploy business analytics and customer communications applications. Applications built on ActuateOne®, a suite of integrated commercial products built around the open source BIRT (Business Intelligence and Reporting Tools) project with the Eclipse Foundation, deliver business and consumer insights to people throughout the enterprise. ActuateOne was created to ensure organizations are ready for the ongoing, exponential growth of Big Data and the proliferation of mobile touch devices. With ActuateOne organizations can design applications to provide all stakeholders, including employees, customers, partners and citizens, with content that they can easily understand, access and analyze relevant information to maximize revenue, cut costs, improve customer satisfaction, streamline operations, create competitive advantage and make better decisions. Actuate’s goal is to ensure that all end users can seamlessly incorporate information and business analysis into their day-to-day activities and decision-making, opening up unexplored avenues for improving corporate performance.
Actuate’s telephone number is +1 650-645-3000. Actuate maintains Web sites at www.actuate.com, www.birt-exchange.com, www.birt-exchange.org, www.birtperformanceanalytics.com, www.xenos.com, www.birtondemand.com and www.quiterian.com. The information posted on our Web sites is not incorporated into this Annual Report.
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Actuate Executive Officers
Actuate’s executive officers as of February 13, 2013 are as follows:
| Name |
Offices | |
| Nicolas C. Nierenberg |
Chairman of the Board and Chief Architect | |
| Peter I. Cittadini |
Director, President and Chief Executive Officer | |
| Daniel A. Gaudreau |
Senior Vice President, Operations and Chief Financial Officer | |
| N. Nobby Akiha |
Senior Vice President, Marketing | |
| Thomas E. McKeever |
Senior Vice President, General Counsel, Chief Compliance Officer, Corporate Development and Secretary |
Nicolas C. Nierenberg, 56, has been Chairman of the Board of Directors since he co-founded Actuate in November 1993 and became Actuate’s Chief Architect in August 2000. Mr. Nierenberg was also Chief Executive Officer of Actuate from November 1993 until August 2000 and President from November 1993 until October 1998. Prior to founding Actuate, from April 1993 to November 1993, Mr. Nierenberg worked as a consultant for Accel Partners, a venture capital firm, evaluating investment opportunities in the enterprise software market. Mr. Nierenberg co-founded Unify Corporation, which develops and markets relational database development tools. Mr. Nierenberg held a number of positions at Unify including, Chairman of the Board of Directors, Chief Executive Officer, President, Vice President, Engineering and Chief Technical Officer. Mr. Nierenberg is currently the CEO of Persyst Development Corporation and is on its Board of Directors.
Peter I. Cittadini, 57, has been Chief Executive Officer of Actuate since August 2000 and has been the President of Actuate since October 1998. Mr. Cittadini was Actuate’s Chief Operating Officer from October 1998 until August 2000 and served as Actuate’s Executive Vice President from January 1995 to October 1998. From 1992 to 1995, Mr. Cittadini held a number of positions at Interleaf, Inc., an enterprise software publishing company, including Senior Vice President of Worldwide Operations responsible for worldwide sales, marketing, customer support and services. From 1985 to 1991, Mr. Cittadini held a number of positions at Oracle Corporation, including Vice President, Northeast Division.
Daniel A. Gaudreau, 65, has been Senior Vice President, Operations and Chief Financial Officer since January 2006 and served as Senior Vice President, Finance and Administration and Chief Financial Officer from January 1999 through December 2005, and Vice President, Finance and Administration and Chief Financial Officer from February 1997 to January 1999. From January 1994 to February 1997, Mr. Gaudreau served as Vice President, Finance and Chief Financial Officer of Plantronics, Inc., a publicly traded telephone headset manufacturing company, where he was responsible for all financial and administrative operations. From January 1990 to January 1994, Mr. Gaudreau was Vice President, Finance and Chief Financial Officer at Ready Systems, an operating systems software company. Prior to that, Mr. Gaudreau spent two years at Apple Computer as the Controller of Fremont Manufacturing Operations, prior to which he spent 18 years at General Electric where he held various financial management positions.
N. Nobby Akiha, 55, has been Senior Vice President, Marketing since July 2006 and Vice President, Marketing from August 2000 to July 2006. From August 1994 to July 2000, Mr. Akiha was Vice President, Marketing and Business Development at Inference Corporation. From October 1993 to July 1994, Mr. Akiha was a Senior Consultant at Regis McKenna, Inc. Prior to that, Mr. Akiha was Director of Marketing Communications at Interactive Development Environments and a Group Product Manager at Oracle Corporation.
Thomas E. McKeever, 45, has been Senior Vice President, General Counsel, Chief Compliance Officer, Corporate Development and Secretary since January 2009 and served as General Counsel, Vice President Corporate Development and Secretary since May 2006. Mr. McKeever was formerly with Sun Microsystems,
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Inc., was an associate in several law firms in the San Francisco Bay Area and served as a law clerk to the Honorable Lawrence T. Lydick of the United States District Court for the Central District of California (Orange County).
Industry Background
We believe organizations are readying their systems and processes for the ongoing, exponential growth of Big Data (large and diverse data sets) and the proliferation of mobile touch devices. These trends have created a necessity for technology that can bridge the gap between new interfaces presented by touch devices and the vast volume, variety and velocity of Big Data securely—without preprocessing and without requiring new investment in dated data storage mechanisms, such as data warehouses. Organizations need to deliver personalized information, to any size of end user community and ensure that sensitive applications and data are secured, all while meeting rising consumer performance expectations.
In parallel, we believe organizations are striving to maximize corporate performance by better analyzing, mining and presenting the information captured by applications implemented to manage business areas such as sales, marketing, services, finance, manufacturing, distribution and human resources. Organizations have also been seeking to use data to make informed decisions regarding day-to-day operations and to formulate high-level strategy. These efforts have been largely unsuccessful due to the hard-to-use nature of traditional BI and analytics tools and a shortage of individuals that have the skills to access and manipulate Big Data sources to answer complex business questions.
ActuateOne—Business Intelligence, Analytics and Reporting: Actuate offers ActuateOne for customers to develop and deploy custom Business Intelligence, analytic and customer facing information applications targeting browsers and mobile touch devices. These applications deliver rich, interactive content and analysis hosted in cloud, Platform-as-a-service (PaaS) and on-premises deployments. ActuateOne is built on BIRT, an open source project that Actuate founded and co-leads. BIRT is used by more than 2 million developers around the globe and has been downloaded over 12 million times.
ActuateOne seeks to fulfill the vision that Actuate has maintained since the inception of BIRT: to redefine information consumption by moving away from sets of disparate tools to a composite of capabilities within a single environment on any data set. ActuateOne provides one infrastructure for development and deployment, utilizing one design, one server and one unified end-user experience to meet the dynamically changing needs of information consumers. The BIRT iHub, the centerpiece of ActuateOne enables organizations to connect to virtually any data source, including Big Data, to perform analysis, predictive analytics and visual data mining.
ActuateOne seeks to assure that 100% of users inside and outside the firewall can gain value from all enterprise information assets, including their Big Data stores. ActuateOne provides a platform upon which Global 9000 organizations (companies with annual revenues greater than $1 billion) and packaged application software vendors develop and deploy mission-critical BI, analytics, customer communications and information applications that deliver visually rich, interactive content. Such applications retrieve business information from distributed data stores such as Hadoop, relational databases, real-time data feeds and print streams to deliver as dashboards, interactive web pages, spreadsheets, mobile content and visual analytic capabilities to customers, partners and employees around the globe. Flexible deployment options can support all projects, no matter how small or large. Our products and services are used by our customers to develop and deploy applications across a range of business functions including financial management, sales management, account management, and customer self-service.
Actuate offers a complete suite of licensable, BIRT-based BI, analytics, visual data mining and reporting features within the integrated ActuateOne suite, providing 64-bit, in-memory analytics, user configurable dashboards, ad-hoc query, interactive mobile and web content, brochure-quality reporting, and spreadsheet analysis. These capabilities are powered by a single BIRT-based design and deployed with Actuate’s BIRT iHub to assure continuous, yet personalized BI and information application experience that maximizes user adoption.
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BIRT iHub provides multiple options for ActuateOne solutions:
BIRT onDemand: In 2010 Actuate introduced BIRT onDemand, Actuate’s PaaS for BI, analytics and reporting. BIRT onDemand supports the current version of BIRT and comes with an intuitive user interface that delivers all the features of ActuateOne including end user configurable dashboards, in-memory analytics, ad-hoc authoring, mobility and interactive reports. BIRT onDemand provides a unique, multi-vendor, multi-tenant platform for BIRT-based cloud applications offering the flexibility of both end-user and “instance-based” subscription models.
Customer Communications Management: In November 2012, ActuateOne for Customer Communications Management (CCM) was introduced as a solution to manage high volume customer communications for the enterprise. It delivers an integrated solution for enterprises to design, process, store and deliver customer communications without the need to assemble disparate applications. ActuateOne for CCM, assists organizations in aggregating customer data for campaign analysis, creating targeted customer communications, meeting regulatory archival requirements and delivering communications to customers via their desired channels, whether through mail or digital channels such as online and mobile devices.
Performance Analytics: ActuateOne for Performance Analytics is designed to deliver business user driven data discovery, analysis, and performance improvement at all organizational levels on a single platform. It is available both on-premise and in the cloud, and is realized through a collaborative self-service environment. Using ActuateOne for Performance Analytics, users can build their own or access pre-built tactical, operational and strategic dashboards and scorecards. Alternatively, users can access visual data mining, social media and predictive analytic capabilities to analyze, manage and improve complex business variables with minimal reliance on IT.
BIRT Analytics: The latest addition to ActuateOne, BIRT Analytics is a standalone analytics tool that dramatically simplifies data analysis, providing analysts and business users with functionality to make better decisions in the age of Big Data. BIRT Analytics combines the ease of use of desktop-centric data discovery tools with the power of sophisticated analytic products typically reserved for data scientists.
Strategy
Our goal is to be the leader in delivering custom BI, analytic, customer communications and information applications by increasing the richness, interactivity and effectiveness of enterprise information for everyone, everywhere. Actuate delivers ActuateOne for both customer and employee-facing applications deployed on premises, to mobile touch devices or in the cloud. ActuateOne boasts unmatched scalability, high-performance, reliability and security. Its capabilities and collaborative development architecture are backed by the world’s largest open source business application developer community using BIRT, the Eclipse Foundation’s only top level Business Intelligence and reporting project. Key elements of our strategy include:
Extend Technology Leadership. Since inception, we have focused our research and development efforts on developing core technologies that address the extreme requirements of developing and deploying enterprise class Business Intelligence, Customer Communications and Performance Analytics information applications. Our products integrate a number of advanced technologies, including patented methods of processing a query joining data stored in different repositories; providing page level security in a report; LDAP integration; advanced viewing technology incorporating Java, PDF, DHTML, Unicode, XML, AJAX, Flash and Web services; patented methods of storing and accessing data and semi-structured data; a multi-tier architecture; Web access and delivery technology; Enterprise Information Integration (EII) data access technology; patented spreadsheet technology; patent-pending assistive technology for the visually impaired; and intuitive Performance Management interfaces such as Briefing Books. The Company was granted one patent during 2012. We believe that we provide a leading open standards based BI platform and we intend to extend this leadership position by continuing to devote significant resources to research and development efforts, and by acquiring and integrating complementary technologies when and if appropriate.
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Broaden Distribution Channels. To date, our products have been sold worldwide by our direct sales force and through our software application vendors, original equipment manufacturers (OEMs), resellers, and systems integrators. In addition, we intend to continue to leverage and grow our existing network of OEMs, systems integrators, and resellers and expand our indirect distribution channel worldwide.
Focus on Key Application Areas. We believe our technology is uniquely focused to meet customer requirements for custom BI and information applications for specific business functions such as financial management, customer self-service, customer statement delivery and management, sales management, account management, workforce management and Performance Management. We intend to continue to focus on these areas within our sales and marketing functions as well as provide more complete customer information solutions through targeted partnering and technology development.
Expand Market Leadership Position through Strategic Relationships. To accelerate the adoption of our products, we have established strategic relationships with leading software application vendors, systems integrators, consulting firms, specialized Performance Management consultants and development partners. We intend to further develop our existing strategic relationships and enter into new partnerships to expand our market presence and leadership.
International Presence. Outside North America, we have established subsidiaries in a number of countries and have reseller relationships throughout Europe, Middle East and Asia/Pacific region. We have localized versions of our products in French, German, Spanish, and Japanese and we also support Chinese, Korean, and right-to-left reporting. We intend to grow our international operations by expanding our indirect distribution channels worldwide and by continuing the localization of our products in selected markets. International sales accounted for 24%, 21%, and 21% of our total revenues in 2012, 2011, and 2010, respectively.
Leverage Open Source. We are building a growing community of developers that have adopted BIRT. We offer a number of value added commercial products and services that build on the open source BIRT project that increase the interactivity, security, scalability and reliability of custom BI and information applications and we intend to offer additional commercial products and services including those based on Xenos Customer Communications Management and BIRT Analytics’ visual data mining and predictive analytics technology in the future.
Leverage Professional Services Capabilities. We have established successful relationships with our customers by serving as an advisor in developing and deploying Business Analytics and information applications. Our direct Professional Services capabilities provide services to address areas such as application development strategy, project management, security integration and application design. In addition, we offer similar high-quality Professional Services capabilities through third-party alliances and are currently focused on the development of relationships with global and national systems integrators. By offering our clients a broad range of Professional Services on a global basis, we believe that we can broaden market awareness about the advantages of our platform and of BIRT and create opportunities to sell new or additional products to clients.
Products and Technology
ActuateOne
ActuateOne describes Actuate’s flagship product suite, consisting of commercial BIRT-based products and features to efficiently develop and deploy custom Business Analytics and customer facing information applications. These ActuateOne applications are developed using BIRT and deployed on the BIRT iHub and include rich data visualizations, such as dashboards, analytics, interactive reports presented on web pages and mobile devices.
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ActuateOne extends Eclipse BIRT to deliver rich, highly interactive enterprise and customer-facing information applications. Organizations that want to visualize structured data and documents as custom Business Analytics and customer facing information applications with BIRT as its foundation can use the product line to:
| • | Build information-rich interactive content using BIRT: including HTML5-based visualizations, dashboards and dynamic statements for any interface or device. |
| • | Leverage Actuate’s industry leading performance, scale, reliability and security. |
| • | Develop BIRT applications efficiently: using a developer-centric design environment and open Application Programming Interfaces (“APIs”). |
The release of ActuateOne builds on the Company’s strategy to drive cost effective, efficient commercial deployment of custom Business Analytics and customer facing information applications by:
| • | Lowering resource costs associated with application development, maintenance and deployment by tapping into the skill sets and shared resources of a large and growing community of Eclipse and BIRT developers. |
| • | Increasing developer agility and productivity, by promoting interoperability and standards-based development, extensibility and integration to allow BIRT to fit seamlessly and effortlessly within today’s and tomorrow’s environments. |
| • | Striving to meet continuously evolving self-service requirements by encouraging user participation across the community from developers to everyday consumers. These users can refine their own information for their personal and current need through a variety of interactive features and engaging interfaces. |
| • | Introducing licensing models and practices that offer purchasing flexibility without compromising the value of the software. Customers have the flexibility to license Actuate products on a per CPU Core basis for performance and scalability; on a capacity-based work unit basis for pace-based value; on a Named User basis for installation flexibility, and on instance-based capacity for cloud-centric flexibility. OEMs and resellers can also license the product and upon application based usage or on a royalty basis. While many of these practices are product or situationally specific, these alternatives offer choices for customers and projects large and small. |
BIRT
In August 2004 Actuate joined a community committed to the implementation of a universal platform called the Eclipse Foundation (“Eclipse Foundation”) as strategic developer and board member. Actuate proposed the BIRT project to the Eclipse open-source community for review at the same time. The Eclipse Foundation approved the project in September 2004. Actuate is co-leading the development of BIRT, the industry’s first open Business Intelligence and Reporting platform, which was first made available in June 2005. A new version of BIRT has been released in the June timeframe annually.
BIRT has a global developer base of over 2 million and has been downloaded more than 12 million times.
BIRT Designer Pro is based on the Open Source Eclipse BIRT Designer. This thick client, developer tool creates BIRT designs, metadata definitions, cube definitions, ad-hoc templates, reusable components and reports used by professional application developers and report developers to build dynamic, interactive custom Business Analytics and information applications. Commercial features added to the open source include hundreds of Adobe Flash and HTML5-based animated graphical widgets, commercial data connectors and JDBC drivers for popular databases, drivers to access BIRT report and Xenos-parsed documents as data sources, design perspectives for creating metadata, building cubes and traversing data lineage.
BIRT includes a built-in interactive viewer for content review and also connects and publishes project contents to BIRT iHub in one click. It also publishes content to BIRT onDemand accounts.
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BIRT iHub
BIRT iHub powers, integrates and manages BIRT-based information and analytic applications in the new age of mobility and big data. This scalable platform generates, manages and securely delivers interactive, actionable business information to employees, customers and partners. BIRT iHub can integrate information from any data source and application, and can be phased in, adding features and resources as required.
The BIRT iHub is designed to broaden the ActuateOne infrastructure so that organizations can nimbly deploy solutions designed to:
| • | Access and combine increasingly diverse data sources, including Big Data, cloud and social media to understand more about their business; |
| • | Cater to increased consumption of information on touch devices, such as tablets and smartphones; |
| • | Visualize, profile, associate and mine huge sets of information to quickly and easily discover, analyze and even predict key business outcomes to improve competitive advantage; |
| • | Allow information-centric applications to evolve with user needs, thus enabling deployment of a larger number of simple apps for wider audiences; |
| • | Accelerate development cycles and creation of applications that deliver a faster time to value; |
| • | Take advantage of flexible virtualization to scale and contract their applications as appropriate in public/private/hybrid clouds and via SaaS and PaaS environments; |
| • | Allows any IT staffer to efficiently deploy as developers become less specialized and their skills sets become more horizontal; |
| • | Embrace emerging data management and mobile technologies. |
BIRT Analytics
BIRT Analytics is an interrogative tool designed to allow business users to uncover trends, visually mine for unknown correlations, or perform time-series extrapolation for forecasts on both traditional and Big Data assets such as social media, Internet data, machine generated data and traditional corporate sources. BIRT Analytics supports:
| • | Fast results—Business users go from raw data to analysis in minutes without IT intervention; |
| • | Visual Data Mining—Users explore, find correlations, perform set analysis, profile data, etc. in a highly visual environment; |
| • | Predictive Analytics—Analysts can predict outcomes using time-series analysis; |
| • | Big Data sources—User can integrate Hadoop®, social, web statistics, demographics and corporate data all at once |
| • | Very fast data acquisition turn-around times—Analysts can work quickly, even with billions of records |
BIRT Analytics insights feed KPIs, dashboards, reports, customer communications and mobile content, which can then be shared across the organization via the ActuateOne platform.
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ActuateOne for Customer Communications Management
ActuateOne for CCM is designed to give customers the flexibility to integrate individual components within their existing infrastructures or to deploy the complete solution to manage the end-to-end process of enterprise customer communications, including:
| • | Data Acquisition and Analytics: Delivering the right messages to relevant customers is the key to successful campaigns. ActuateOne for CCM brings Actuate’s industry leading analytics to customer communications management, enabling organizations to create market driven strategies through the analysis of customer data. Communications can be defined to insert directed trans-promo, next best actions and targeted marketing messages tailored to each targeted customer segment. |
| • | Document Composition: Creating customer communications by taking raw data from varying data sources to create targeted and personalized customer communications for both modern interactive and traditional print delivery. Through the use of definable templates, ActuateOne for CCM enables organizations to more quickly create customer communications with organizational branding, customer data and messages for different customer segments. |
| • | Document Processing and Transformation: ActuateOne for CCM is designed to manage the end to end communications process from data acquisition to analysis, composition, archive and delivery to end consumers for print and electronic consumption. It is designed to automate the process for communicating with storage archives by extracting data for metadata indexes and enabling transactional data for seamless search and retrieval. With the ability to define and automate business processes, ActuateOne for CCM is designed to give administrators the ability to control, log and audit the entire communications process. |
| • | Electronic Archiving: ActuateOne for CCM is designed to provide the storage capabilities to efficiently search and retrieval, and enable the retention and disposition of documents to satisfy industry specific regulatory requirements. With its built-in system audit, logging and reports, ActuateOne for CCM provides a 360° view of the system, letting administrators identify potential concerns before they become problems and performance bottlenecks. |
| • | Multi-channel Delivery: ActuateOne for CCM is designed to enable organizations provide customer communications across multiple delivery channels. It facilitates secure internal and external access of customer communications, enabling organizations to efficiently deliver content to internal users and online to external end customers. ActuateOne for CCM leverages a single composition design to enable delivery for print, web, mobile and touch devices. |
| • | Portal Technology: ActuateOne for CCM is designed to connect customer facing applications with relevant content to increase functionality. This solution delivers communications in traditional static formats like PDFs for simple statement review, as well as interactive formats that allows users to aggregate, manipulate and graph data directly within the customer facing application. |
ActuateOne for Performance Analytics
ActuateOne® for Performance Analytics is an integrated solution is designed so that all levels in an organization can discover trends and anomalies, analyze key business processes and drive performance improvements. ActuateOne for Performance Analytics sits on top of BIRT iHub, and is designed based on Actuate’s experience of delivering over 600 performance improvement deployments.
ActuateOne for Performance Analytics is designed to deliver an end to end solution to create tactical, operational and strategic dashboards and scorecards from any enterprise data; allowing business users to visualize, discover, analyze, manage and improve complex business processes in a single, collaborative environment—with minimal reliance on IT. Unlike traditional performance analytics products, ActuateOne for Performance Analytics is designed to move beyond simple data display, to deliver a comprehensive view of
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enterprise intelligence—allowing users to understand the cause and effect of business events against key metrics and KPIs, as well as to collaboratively see relationships that generate insights to improve performance.
Customers
Our customers operate in a wide variety of industries, including financial services, government, high technology, health care, manufacturing, pharmaceuticals, telecommunications, utilities, automotive, education, entertainment, travel, retail and others.
Sales
We sell our software and services worldwide through two primary channels: (i) directly to corporate and government customers through our direct sales force and (ii) through indirect channel partners such as original equipment manufacturers (“OEMs”), systems integrators, and resellers.
Direct Sales Organization. Our direct sales force focuses most of its sales efforts on Global 9000 companies and public sector organizations. The direct sales process involves the generation of sales leads through Web-based marketing, direct mail, seminars and telemarketing. As part of the direct sales effort, our field sales force typically conducts demonstrations and presentations of our products to developers and managers at customer sites. We maintain sales offices in a number of locations throughout North America, Europe and Asia/Pacific.
OEM Sales Organization. A separate sales force addresses the OEM market. Our OEMs integrate our products for distribution with their applications either directly or in hosted environments. The OEM’s end-user customer is licensed to use our products solely in conjunction with the OEM’s application.
Systems Integrators. We have a business development group that focuses on establishing and maintaining relationships with systems integrators. Systems integrators typically re-market our products to their customer base as part of a software application being built for a customer. Systems integrators are offered discounts on our products and sell a full use license of the product. Our systems integrators do not typically provide post-sales support.
Resellers. Resellers are typically given the non-exclusive right to market our software in a specific territory and are offered discounts on our products. Resellers typically provide customers with some post-sales support and services.
Marketing
Our marketing organization is focused on generating leads, building market awareness and promoting acceptance of our Company and our products, as well as on developing strategic marketing, technology and other relationships. We have a comprehensive marketing strategy with several key components:
| • | Image awareness and credibility building, |
| • | Direct marketing to both prospective and existing customers, |
| • | A strong Web and social media presence, |
| • | Comprehensive sales support materials as well as broad-scale marketing programs in conjunction with key partners. |
Our corporate marketing strategy includes online advertising, search engine optimization and marketing, public relations activities, road shows/seminars, trade shows and user group meetings. We also engage in programs to work closely with industry analysts and other influential third parties. Our direct marketing activities
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include extensive Web-based marketing campaigns, participation in selected trade shows and conferences and targeted ongoing email efforts to existing and prospective customers. We also offer seminars, both in-person and over the Web, to educate prospective customers about custom BI and information applications built with our industry leading platform. Finally, we have invested in building a partner and channel marketing function to conduct cooperative marketing programs with our partners.
Professional Services
Our Professional Services organization provides high value consulting services to customers developing and deploying BI and information applications using our products. These services include application development strategy, project management, security integration and application design. We also actively recruit and train third party consulting firms to provide consulting services for our products. Due to the critical nature of customer BI and information applications built with our industry leading platform, we believe that our Professional Services group and relationships with our consulting partners play a key role in facilitating initial license sales and enabling customers to successfully develop and deploy Actuate-based applications. In addition, we offer, directly and through our network of certified training partners, classes and training programs for our products.
Customer Service
We believe that providing superior customer service is critical to successfully selling and marketing our products. Our maintenance and support contracts are typically for 12 months, and may be renewed annually. Maintenance fees are typically set at either a percentage of the total license fees paid by a customer or a percentage of the list price of the underlying products. Maintenance and support contracts entitle the customer to receive software patches, updates and enhancements, when and if available. Customers purchasing maintenance are able to access Actuate’s local support centers located in the United States, Canada, Singapore, and Switzerland via email and telephone during normal business hours. We supplement our telephone support with Web-based support services, including access to cases, resolutions, online Web forums and a software patch download area. We also offer an extended maintenance plan that gives our customers access to 24x7 support and additional support services. To improve access to our explanatory materials, we provide online documentation with all of our products.
Research and Development
Our research and development organization is divided into groups, typically consisting of product managers, development engineers, quality assurance engineers, technical writers and developer communications personnel. Our development process begins with requirement specification, followed by functional and technical design, and concludes with implementation. Requirements are based on the needs of customers and prospects, as well as competitive, technological and industry factors.
We have development centers located in San Mateo, California; Overland Park, Kansas; Shanghai, China; Barcelona, Spain and Toronto, Canada. Research and development expenses were approximately $24.0 million, $24.3 million, and $24.8 million in fiscal years 2012, 2011, and 2010, respectively. We intend to continue to invest in research and development and related activities to maintain and enhance our product lines. We believe that our future success will depend on our ability to create products that directly address our customers’ needs, are of high quality, and leverage the latest technological innovations. These products must also support current and future releases of popular operating systems platforms, development languages, databases, Internet standards, and enterprise software applications. We intend to maintain and improve our current product line and to timely develop or acquire new products. Our ability to achieve future revenue growth will depend in large part on the market acceptance of our current and future products.
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Competition
Our market is intensely competitive and characterized by rapidly changing technology, evolving standards and new product releases by our competitors that are marketed to compete directly with our products. Our competition comes in five principal forms:
| • | Competition from current or future Business Intelligence, data discovery and Big Data software vendors such as Information Builders, Qlik Tech, Pentaho, Jaspersoft, MicroStrategy and Tableau, each of which offers reporting products; |
| • | Competition from other large software vendors such as IBM, Microsoft, Oracle and SAP, to the extent they sell BI, Analytics, Customer Communications Management, Big Data and Performance Management capabilities as separate products or include similar functionality with their applications or databases; |
| • | Competition from other software vendors and software development tool vendors including providers of open-source software products that may develop scalable custom Business Analytics, Performance Management, Customer Communications Management, Big Data and Information Applications products; |
| • | Competition from the IT departments of current or potential customers that may develop scalable custom Business Intelligence, Analytics, Performance Management, Customer Communications Management, Big Data and information applications products internally, which may be cheaper and more customized than the Company’s products; and |
| • | Competition from BIRT. The Company expects that BIRT, which is free, may in the short term cannibalize some smaller sales of its custom Business Intelligence and information applications products. |
Most of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sales of their products than we may. Also, most current and potential competitors have greater name recognition and the ability to leverage a significant installed customer base. These companies have released and can continue to release competing BI, Analytics, Customer Communications Management and Performance Management applications or significantly increase the functionality of their existing reporting software products. We expect additional competition as other established and emerging companies enter the BI and information applications market and new products and technologies are introduced.
Intellectual Property Rights
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 click-wrap or signed license agreements that impose certain restrictions on licensees’ ability to utilize the software. In addition, we take precautions to avoid disclosure of our intellectual property. These precautions include requiring those persons with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. We seek to protect our software, documentation, and other written materials under trade secret patent, copyright and trademark laws, which afford only limited protection. We also have a small number of issued and pending U.S. patents expiring at varying times ranging from 2015 to 2030. The expiration of any such patents would not have a material effect on our business.
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Employees
As of December 31, 2012, we had 622 full-time employees, including 208 in sales and marketing, 180 in research and development, 120 in services and support, and 114 in general and administrative functions. None of our employees are represented by a collective bargaining agreement, nor have we experienced a work stoppage.
Website Access to Actuate’s Reports
Our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, are available free of charge through our Web site at www.actuate.com as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. Information contained on our Web site is not part of or incorporated into this report.
Financial Information about Segments and Geographic Areas
We have one reporting segment (see note 1 to our consolidated financial statements). Refer to our consolidated financial statements and related footnotes for details and discussions regarding our revenues, profit, total assets and other financial information about the geographic areas in which we are engaged in business.
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| ITEM 1A. | RISK FACTORS |
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 harmed. 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.
THE COMPANY’S OPERATING RESULTS MAY BE VOLATILE AND DIFFICULT TO PREDICT. IF IT FAILS TO MEET ITS ESTIMATES OF FUTURE OPERATING RESULTS OR IT FAILS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF ITS STOCK MAY DECREASE SIGNIFICANTLY.
The susceptibility of the Company’s operating results to significant fluctuations makes any prediction, including the Company’s estimates of future operating results, difficult. In addition, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and investors should not rely on them as indications of the Company’s future performance. The Company’s operating results have in the past varied, and may in the future vary significantly due to factors such as the following:
| • | Demand for its products; |
| • | The size and timing of significant orders for its products; |
| • | A slowdown or a decrease in spending on information technology by its current and/or prospective customers; |
| • | Competition from products that are directly competitive with its products; |
| • | Lost revenue from introduction or market acceptance of open source products that are directly competitive with its products; |
| • | The management, performance and expansion of its international operations; |
| • | Foreign currency exchange rate fluctuations; |
| • | Customers’ desire to consolidate their purchases of Rich Information Applications, Performance Management, Business Intelligence or Print Stream software to one or a very small number of vendors from which a customer has already purchased software; |
| • | General domestic and international economic and political conditions, including war, terrorism, and the threat of war or terrorism; |
| • | Sales cycles and sales performance of its indirect channel partners; |
| • | Changes in the way it and its competitors price their respective products and services, including maintenance and transfer fees; |
| • | Continued successful relationships and the establishment of new relationships with OEMs; |
| • | Changes in its level of operating expenses and its ability to control costs; |
| • | The cost, outcome or publicity surrounding any pending or threatened lawsuits; |
| • | Ability to make new products and product enhancements commercially available in a timely manner; |
| • | Ability to effectively launch new or enhanced products, including the timely education of the Company’s sales, marketing and consulting personnel with respect to such new or enhanced products; |
| • | Customers delaying purchasing decisions in anticipation of new products or product enhancements; |
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| • | Budgeting cycles of its customers; |
| • | Failure to successfully manage acquisitions and integrate acquired companies; |
| • | Defects in products and other product quality problems; |
| • | Failure to successfully meet hiring needs including for qualified professional services employees and unexpected personnel changes; |
| • | Changes in the market segments and types of customers where it focuses sales and marketing efforts; |
| • | Changes in perpetual licensing models to term-or subscription-based models with respect to which license revenue is not fully recognizable at the time of initial sale; |
| • | Changes in service models with respect to which consulting services are performed on a fixed-fee, rather than variable fee, basis; and |
| • | Potential impairments of goodwill, intangibles and other investments. |
Because the Company’s 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 the Company, in accordance with accounting principles generally accepted in the United States, to defer recognition of license fee revenue for a significant period of time after entering into a license agreement, including:
| • | Whether the license agreement includes both software products that are then currently available and software products or other enhancements that are still under development; |
| • | Whether the license agreement relates entirely or partly to software products that are currently not available; |
| • | Whether the license agreement requires the performance of services that may preclude revenue recognition until successful completion of such services; |
| • | Whether the license agreement includes acceptance criteria that may preclude revenue recognition prior to customer acceptance; |
| • | Whether the license agreement includes undelivered elements (including limited terms or durations) that may preclude revenue recognition prior to customer acceptance; and |
| • | Whether the license agreement includes extended payment terms that may delay revenue recognition until the payment becomes due. |
In addition, the Company may in the future experience fluctuations in its gross and operating margins due to changes in the mix of its domestic and international revenues, changes in the mix of its 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 its products are offered.
A significant portion of the Company’s total revenues in any given quarter is derived from existing customers. The Company’s ability to achieve future revenue growth, if any, will be substantially dependent upon its ability to increase revenues from license fees and services from existing customers, to expand its customer base and to increase the average size of its orders. To the extent that such increases do not occur in a timely manner, the Company’s business, operating results and financial condition would be harmed.
The Company’s expense levels and any plans for expansion are based in significant part on its expectations of future revenues and are relatively fixed in the short-term. If revenues fall below expectations and the Company is unable to respond quickly by reducing its spending, the Company’s business, operating results, and financial condition could be harmed.
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The Company often implements changes to its license pricing structure for all of its products including increased prices and modified licensing parameters. If these changes are not accepted by the Company’s current customers or future customers, its business, operating results, and financial condition could be harmed.
Based upon all of the factors described above, the Company has a limited ability to forecast the amount and mix of future revenues and expenses and, the Company’s actual operating results may from time to time fall below its estimates or the expectations of public market analysts and investors which is likely to cause the price of the Company’s common stock to decline.
OUR DEBT COVENANTS IN OUR CREDIT AGREEMENT RESTRICT OUR FINANCIAL AND OPERATIONAL FLEXIBILITY.
Our Credit Agreement contains a number of financial covenants, which, among other things, may require us to maintain specified financial ratios and impose certain limitations on us with respect to lines of business, mergers, investments and acquisitions, additional indebtedness, distributions, guarantees, liens and encumbrances. Our ability to meet the financial ratios can be affected by operating performance or other events beyond our control, and we cannot assure you that we will meet those ratios and failure to do so may cause an event of default under the Credit Agreement. Our indebtedness under the Credit Agreement is secured by a lien on substantially all of our assets and of our subsidiaries, by a pledge of our subsidiaries’ stock and by a guarantee of our subsidiaries. If the amounts outstanding under the Credit Agreement were accelerated due to an event of default, the lenders could proceed against such available collateral by forcing the sales of these assets.
THE COMPANY HAS MADE, AND MAY IN THE FUTURE MAKE, ACQUISITIONS, WHICH INVOLVE NUMEROUS RISKS.
The Company’s business is highly competitive, and as such, its growth is dependent upon its ability to expand its market, enhance its existing products, introduce new products on a timely basis and expand its distribution channels and professional services organizations. In order to achieve these objectives, the Company had pursued and will continue to pursue acquisitions of other companies.
Generally, acquisitions including that of Quiterian S. L. involve numerous risks, including the following:
| • | The benefits of the acquisition not materializing as planned or not materializing within the time periods or to the extent anticipated; |
| • | The Company’s ability to manage acquired entities’ people and processes that are headquartered in separate geographical locations from the Company’s headquarters; |
| • | The possibility that the Company will pay more than the value it derives from the acquisition; |
| • | Difficulties in integration of the operations, technologies, and products of the acquired companies; |
| • | The assumption of certain known and unknown liabilities of the acquired companies; |
| • | Difficulties in retaining key relationships with customers, partners and suppliers of the acquired company, the loss of recurring revenue from multiple subsidiaries of one large multi-national organization or the ability to sell and support certain third party software. |
| • | The risk of diverting management’s attention from normal daily operations of the business; |
| • | The Company’s ability to issue new releases of the acquired company’s products on existing or other platforms; |
| • | Negative impact to the Company’s financial condition and results of operations and the potential write down of impaired goodwill and intangible assets resulting from the consolidation of financial statements; |
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| • | Risks of entering markets in which the Company has 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 the Company cannot be certain that any acquisition will be successful and will not materially harm the Company’s business, operating results or financial condition.
INTELLECTUAL PROPERTY CLAIMS AGAINST THE COMPANY CAN BE COSTLY AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS.
Third parties may claim that the Company’s current or future products infringe their intellectual property rights. The Company has been subject to infringement claims in the past and it expects that companies in the Business Intelligence, Analytics, Big Data, Performance Management and Customer Communications Management software market will increasingly be subject to infringement claims as the number of products and/or competitors in its 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 significant litigation and other expenses, divert management’s attention and resources, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. A successful claim of product infringement against the Company and its failure or inability to license the infringed or similar technology could materially harm the Company’s business, operating results and financial condition.
COMPUTER “HACKERS” MAY DAMAGE OUR SYSTEMS, SERVICES AND PRODUCTS, AND BREACHES OF DATA PROTECTION COULD IMPACT OUR BUSINESS.
Computer programmers and hackers may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions or cause interruptions or shutdowns of our internal systems and services. If successful, any of these events could damage our computer systems or those of our customers and could disrupt or prevent us from providing timely maintenance and support for our software platform. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. The costs to us to eliminate or alleviate security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and the efforts to address these problems could result in interruptions, delays, cessation of service and loss of existing or potential customers and may impede our sales, manufacturing, distribution and other critical functions.
In the course of our regular business operations and providing maintenance and support services to our customers, we process and transmit proprietary information and sensitive or confidential data, including personal information of employees, customers and others. Breaches in security could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, which could result in potential regulatory actions, litigation and potential liability for us, as well as the loss of existing or potential customers and damage to our brand and reputation.
THE COMPANY MAY NOT BE ABLE TO PROTECT ITS SOURCE CODE FROM COPYING.
Source code, the detailed program commands for our operating systems and other software programs, is critical to our business. Although we take significant measures to protect the secrecy of large portions of our source code, unauthorized disclosure or reverse engineering of a significant portion of our source code could make it easier for third parties to compete with our products by copying functionality, which could adversely affect our revenue and operating margins.
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IF THE COMPANY FAILS TO GROW REVENUE FROM INTERNATIONAL OPERATIONS AND EXPAND ITS INTERNATIONAL OPERATIONS ITS BUSINESS WOULD BE SERIOUSLY HARMED.
The Company’s total revenues derived from sales outside North America were 24%, 21% and 21% for fiscal years 2012, 2011 and 2010, respectively. Its ability to achieve revenue growth in the future will depend in large part on its success in increasing revenues from international sales. The Company intends to continue to invest significant resources to expand its sales and support operations outside North America and to potentially enter additional international markets. In order to expand international sales, the Company must establish additional foreign operations, expand its international channel management and support organizations, hire additional personnel, recruit additional international resellers and increase the productivity of existing international resellers. If it is not successful in expanding international operations in a timely and cost-effective manner, the Company’s business, operating results and financial condition could be materially harmed.
IF THE COMPANY DOES NOT SUCCESSFULLY EXPAND ITS DISTRIBUTION CHANNELS AND DEVELOP AND MAINTAIN RELATIONSHIPS WITH OEMs, ITS BUSINESS WOULD BE SERIOUSLY HARMED.
To date, the Company has sold its products principally through its direct sales force, as well as through indirect sales channels, such as its OEMs, resellers and systems integrators. The Company’s revenues from license fees resulting from sales through indirect channel partners were approximately 32%, 31%, and 58% of total revenues from license fees for fiscal years 2012, 2011 and 2010, respectively. The higher ratio of license fees through indirect channel partners experienced in fiscal 2010 was primarily attributed to the IBM transaction. The Company’s ability to achieve significant revenue growth in the future will depend in large part on the success of its sales force in further establishing and maintaining relationships with indirect channel partners. In particular, a significant element of the Company’s strategy is to embed its technology in products offered by OEMs for resale or as a hosted application to such OEMs’ customers and end-users. The Company also intends to establish and expand its relationships with resellers and systems integrators so that such resellers and systems integrators will increasingly recommend its products to their clients. The Company’s future success will depend on the ability of its indirect channel partners to sell and support its products. If the sales and implementation cycles of its indirect channel partners are lengthy or variable or its OEMs experience difficulties embedding the Company’s technology into their products, or if it fails to train the sales and customer support personnel of such indirect channel partners in a timely or effective fashion, the Company’s business, operating results and financial condition would be materially harmed.
Although the Company is currently investing, and plans to continue to invest, significant resources to expand and develop relationships with OEMs and resellers, it has at times experienced and continues to experience difficulty in establishing and maintaining these relationships. If the Company is unable to successfully expand this distribution channel and secure license agreements with additional OEMs and resellers on commercially reasonable terms, including significant up-front payments of minimum license fees, and extend existing license agreements with existing OEMs on commercially reasonable terms, the Company’s operating results would be adversely affected. Any inability by the Company to maintain existing or establish new relationships with indirect channel partners, including systems integrators and resellers, or, if such efforts are successful, a failure of the Company’s revenues to increase correspondingly with expenses incurred in pursuing such relationships, would materially harm the Company’s business, operating results and financial condition.
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THE COMPANY MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST ITS CURRENT AND FUTURE COMPETITORS.
The Company’s market is intensely competitive and characterized by rapidly changing technology, evolving standards and product releases by the Company’s competitors that are marketed to compete directly with the Company’s products. The Company’s competition comes in five principal forms:
| • | Competition from current or future Business Intelligence, data discovery and Big Data software vendors such as Information Builders, Qlik Tech, Pentaho, Jaspersoft, MicroStrategy and Tableau, each of which offers reporting products; |
| • | Competition from other large software vendors such as IBM, Microsoft, Oracle and SAP, to the extent they sell BI, Analytics, Customer Communications Management, Big Data and Performance Management capabilities as separate products or include similar functionality with their applications or databases; |
| • | Competition from other software vendors and software development tool vendors including providers of open-source software products that may develop scalable custom Business Analytics, Performance Management, Customer Communications Management, Big Data and Information Applications products; |
| • | Competition from the IT departments of current or potential customers that may develop scalable custom Business Intelligence, Analytics, Big Data, Performance Management, Customer Communications Management and information applications products internally, which may be cheaper and more customized than the Company’s products; and |
| • | Competition from Eclipse BIRT. The Company expects that BIRT, which is free, may in the short term cannibalize some smaller sales of its custom Business Intelligence and information applications products. |
Many of the Company’s current and potential competitors have significantly greater financial, technical, marketing and other resources than it does. 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 the Company. Also, most current and potential competitors have greater name recognition and the ability to leverage a significant installed customer base. These companies have released and can continue to release competing Business Intelligence, Analytics, Big Data, Performance Management and Customer Communications Management software products or significantly increase the functionality of their existing software products, either of which could result in a loss of market share for the Company. The Company expects additional competition as other established and emerging companies enter the Business Intelligence, Analytics, Big Data, Performance Management and Customer Communications Management 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 the Company’s business, operating results and financial condition.
Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to address the needs of the Company’s customers. Also, the Company’s current or future channel partners may have established in the past, or may in the future, establish cooperative relationships with the Company’s current or potential competitors, thereby limiting the Company’s ability to sell its 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 reduce the Company’s revenues from license fees and services from new or existing customers on terms favorable to us. If the Company is unable to compete successfully against current and future competitors, the Company’s business, operating results and financial condition would be materially harmed.
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IF THE MARKET FOR BUSINESS INTELLIGENCE, RICH INFORMATION APPLICATIONS, PRINT STREAM AND PERFORMANCE MANAGEMENT SOFTWARE DOES NOT GROW AS THE COMPANY EXPECTS, ITS BUSINESS WOULD BE SERIOUSLY HARMED.
The Company cannot be certain that the market for Business Intelligence, Analytics, Customer Communications Management, Big Data and Performance Management software products will continue to grow or that, even if the market does grow, businesses will purchase the Company’s products. If the market for Business Intelligence, Analytics, Customer Communications Management, Big Data and Performance Management software products declines, fails to grow or grows more slowly than the Company expects, its business, operating results and financial condition would be harmed. To date, all of the Company’s revenues have been derived from licenses for its Business Intelligence, Analytics, Customer Communications Management, Big Data and Performance Management related products and services, and it expects this to continue for the foreseeable future. The Company has spent, and intends to continue to spend, considerable resources educating potential customers and indirect channel partners about Business Intelligence, Analytics, Customer Communications Management, Big Data and Performance Management software and products. However, if such expenditures do not enable its products to achieve any significant degree of market acceptance, the Company’s business, operating results and financial condition would be materially harmed.
BECAUSE THE SALES CYCLES OF THE COMPANY’S PRODUCTS ARE LENGTHY AND VARIABLE, ITS QUARTERLY RESULTS MAY FLUCTUATE.
The purchase of the Company’s products by its end-user customers for deployment within the customer’s organization typically involves a significant commitment of capital and other resources, and is therefore subject to delays that are beyond the Company’s control. These delays can arise from a customer’s internal procedures to approve large capital expenditures, budgetary constraints, the testing and acceptance of new technologies that affect key operations and general economic and political events. The sales cycle for initial orders and larger follow-on orders for the Company’s products can be lengthy and variable. Additionally, sales cycles for sales of the Company’s products to OEMs tend to be longer, ranging from 6 to 24 months or more, and may involve convincing the OEMs’ entire organization that the Company’s products are the appropriate software for their applications. This time period does not include the sales and implementation cycles of such OEMs’ own products, which can be longer than the Company’s sales and implementation cycles. Certain of the Company’s customers have in the past, or may in the future, experience difficulty completing the initial implementation of the Company’s products. Any difficulties or delays in the initial implementation by the Company’s end-user customers or indirect channel partners could cause such customers or partners to reject the Company’s software or lead to the delay or non-receipt of future orders for the large-scale deployment of its products, in which case the Company’s business, operating results and financial condition would be materially harmed.
ADVANCES IN HARDWARE AND SOFTWARE TECHNOLOGY MAY CAUSE OUR SOFTWARE REVENUE TO DECLINE.
In the past, the Company has licensed software for a certain number of “processors” or “CPUs” to many of its customers. Advances in hardware technology, including, but not limited to, greater CPU clock speeds, multiple-core processors and virtualization, have afforded software performance gains to some customers, causing them to defer additional software purchases from the Company. The occurrence of any of these events, and other future advances, could seriously harm the Company’s business, operating results and financial condition. Use of the Company’s software on more advanced hardware than the hardware on which the software was originally installed, without payment of a fee, is prohibited by the terms of applicable license agreements or Company policies. The Company intends to require compliance with such terms. As a result of its enforcement efforts, customers may defer or cease purchasing additional software or maintenance and support. The occurrence of any of these events could materially harm the Company’s business, operating results and financial condition.
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DECLINING RENEWAL OF MAINTENANCE SERVICES ON OUR OLDER SOFTWARE SALES PRODUCTS
The Company has historically experienced a high maintenance renewal rate across its various product lines. As certain of the Company’s products age, these renewal rates may not be sustained unless the Company is successful in providing its customers with more advanced functionality and the levels of support that they require. If this trend continues, the Company’s business, operating results and financial condition could be materially harmed.
IF THE COMPANY IS UNABLE TO FAVORABLY ASSESS THE EFFECTIVENESS OF ITS INTERNAL CONTROL OVER FINANCIAL REPORTING IN FUTURE PERIODS OR IF THE COMPANY’S INDEPENDENT AUDITORS ARE UNABLE TO PROVIDE AN UNQUALIFIED ATTESTATION REPORT ON SUCH ASSESSMENT, THE COMPANY’S STOCK PRICE COULD BE ADVERSELY AFFECTED.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), the Company’s management is required to report on, and its independent auditors are required to attest to, the effectiveness of the Company’s internal controls over financial reporting on an annual basis. The Company’s assessment, testing and evaluation of the design and operating effectiveness of its internal control over financial reporting are ongoing. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012, and has concluded that our internal control over financial reporting was effective. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework.
There were no significant changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
If in future periods the Company concludes that its internal control over financial reporting is not effective, it may be required to change its internal control over financial reporting to remediate deficiencies. The Company cannot predict the outcome of its testing in future periods as risks exist that present controls may not be effective in the future periods and consequently investors may lose confidence in the reliability of the Company’s financial statements, causing the Company’s stock price to decline.
SECTION 404 AND REGULATORY CHANGES HAVE CAUSED THE COMPANY TO INCUR INCREASED COSTS AND OPERATING EXPENSES, INCLUDING ADDITIONAL COST AND EXPENSES ASSOCIATED WITH HIRING QUALIFIED PERSONNEL TO COMPLY WITH SUCH REGULATORY REQUIREMENT.
The Sarbanes-Oxley Act of 2002 and regulatory changes by the SEC and Nasdaq have caused the Company to incur significant increased costs. In particular, the rules governing the standards that must be met for management to assess its internal controls over financial reporting under Section 404 are complex, and require significant documentation, testing and possible remediation. This ongoing process of reviewing, documenting and testing the Company’s internal controls over financial reporting has resulted in, and will likely continue to result in ongoing cost to the Company. Furthermore, achieving and maintaining compliance with Sarbanes-Oxley and other new rules and regulations has and will continue to require the Company to hire additional personnel and to use additional outside legal, accounting and advisory services.
In addition, any acquisitions made by the Company will also put a significant strain on its management, information systems and resources. Any expansion of the Company’s international operations will lead to increased financial and administrative demands associated with managing its international operations and managing an increasing number of relationships with foreign partners and customers and expanded treasury functions to manage foreign currency risks, all of which will require the Company to incur additional cost to implement necessary changes to maintain effective internal controls over financial reporting.
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IF THE COMPANY DOES NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, ITS PRODUCTS COULD BECOME OBSOLETE.
The market for the Company’s 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. The Company believes that its future success will depend in large part on its ability to support current and future releases of popular operating systems and computer programming languages, databases and 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 the Company or its competitors or any change in industry standards causes customers to defer or cancel purchases of existing products, the Company’s business, operating results and financial condition would be harmed.
As a result of the complexities inherent in Business Intelligence, Analytics, Customer Communications Management, Big Data and Performance Management software, major new products and product enhancements can require long development and testing periods. In addition, customers may delay their purchasing decisions in anticipation of the general availability of new or enhanced versions of the Company’s products. As a result, significant delays in the general availability of such new releases or significant problems in the installation or implementation of such new releases could harm the Company’s business, operating results and financial condition. If the Company fails 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, the Company’s business, operating results and financial condition would be harmed.
IF THE COMPANY DOES NOT RELEASE NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS IN A TIMELY MANNER OR IF SUCH NEW PRODUCTS AND ENHANCEMENTS, INCLUDING THE COMPANY’S OPEN SOURCE PROJECT, FAIL TO ACHIEVE MARKET ACCEPTANCE, THE COMPANY’S BUSINESS COULD BE SERIOUSLY HARMED.
The Company believes that its future success will depend in large part on the success of new products and enhancements to its products that it makes 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 the Company fails to release new products and enhancements in a timely manner, its business, operating results and financial condition would be harmed. In addition, if such new products and enhancements do not achieve market acceptance, the Company’s business, operating results and financial condition would be harmed.
The Company has developed a BIRT open source product through its involvement in the Eclipse Foundation. The Company believes that BIRT and a commercial version of BIRT will be widely adopted by Java developers and will result in such developers recommending to their employees and customers that they license the Company’s commercially available products. If BIRT does not achieve market acceptance and result in promoting sales of commercial products, the Company’s business, operating results and financial condition may be harmed.
THE SUCCESS OF THE COMPANY’S OPEN-SOURCE BIRT INITIATIVE IS DEPENDENT ON BUILDING A DEVELOPER COMMUNITY AROUND BIRT AND CONVERTING THEM TO COMMERCIAL OFFERINGS.
The success of the Company’s BIRT initiative is dependent on the open source contributions of third-party programmers and corporations, and if they cease to make these contributions to the Eclipse open source project,
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the BIRT project, or the general open source movement, the Company’s BIRT product strategy could be adversely affected. If key members, or a significant percentage, of this group of developers or corporations decides to cease development of Eclipse, BIRT or other open source applications, the Company would have to either rely on another party (or parties) to develop these technologies, develop them itself or adapt its open source product strategy accordingly. The Company must convert some open source BIRT developers to purchasing commercial products. This could increase the Company’s development expenses, delay its product releases and upgrades or adversely impact customer acceptance of open source offerings.
IF SECURITY MEASURES REGARDING OUR BIRT ONDEMAND AND PERFORMANCE MANAGEMENT ONDEMAND SERVICES ARE BREACHED AND UNAUTHORIZED ACCESS IS OBTAINED TO A CUSTOMER’S DATA OR OUR DATA OR OUR INFORMATION TECHNOLOGY SYSTEMS, WE MAY INCUR SIGNIFICANT LEGAL AND FINANCIAL EXPOSURE AND LIABILITIES.
Our BIRT onDemand and Performance Management onDemand services involve the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise, during transfer of data to additional data centers or at any time, and result in someone obtaining unauthorized access to our customers’ data or our data, including our intellectual property and other confidential business information, or our information technology systems. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers’ data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could lead to legal liability.
FROM TIME TO TIME, WE MAY BE INVOLVED IN LEGAL PROCEEDINGS ABOUT WHICH WE ARE UNABLE TO ASSESS OUR EXPOSURE AND WHICH COULD BECOME SIGNIFICANT LIABILITIES UPON JUDGMENT.
We are involved in legal proceedings from time to time. Companies in our industry have been subject to claims related to patent infringement, as well as contract and employment-related claims. At times, including now, we are also plaintiffs in litigation involving the Company’s intellectual property. We may not be able to accurately assess risk related to these suits including expenses and other potential liabilities.
THE COMPANY’S INTERNATIONAL OPERATIONS ARE SUBJECT TO SIGNIFICANT RISKS.
A substantial portion of the Company’s revenues are derived from international sales. International operations and sales are subject to a number of risks, any of which could harm the Company’s business, operating results and financial conditions. These risks include the following:
| • | Economic and political instability, including war and terrorism or the threat of war and terrorism; |
| • | Difficulty of managing an organization spread across many countries; |
| • | Multiple and conflicting tax laws and regulations; |
| • | Costs of localizing products for foreign countries; |
| • | Difficulty in hiring employees and difficulties and high costs associated with terminating employees and restructuring operations in foreign countries; |
| • | Trade laws and business practices favoring local competition; |
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| • | Dependence on local vendors; |
| • | Increasing dependence on resellers in certain geographies; |
| • | Compliance with multiple, conflicting and changing government laws and regulations; |
| • | Weaker intellectual property protection in foreign countries and potential loss of proprietary information due to piracy or misappropriation; |
| • | Longer sales cycles; |
| • | Import and export restrictions and tariffs; |
| • | Difficulties in staffing and managing foreign operations; |
| • | The significant presence of some of our competitors in certain international markets; |
| • | Greater difficulty or delay in accounts receivable collection; and |
| • | Foreign currency exchange rate fluctuations. |
The Company believes that, over time, an increasing portion of its revenues and costs will be denominated in foreign currencies. To the extent such denomination in foreign currencies does occur, gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in the Company’s results of operations. Although the Company may in the future decide to undertake foreign exchange hedging transactions to cover a portion of its foreign currency transaction exposure, it currently does not attempt to cover any foreign currency exposure. If it is not effective in any future foreign exchange hedging transactions in which it engages, the Company’s business, operating results and financial condition could be materially harmed.
THE COMPANY’S EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO ITS BUSINESS AND IT MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL IT NEEDS.
The Company’s future success depends upon the continued service of its executive officers and other key engineering, sales, marketing and customer support personnel. None of its executive officers or key employees is bound by an employment agreement for any specific term. If the Company loses the service of one or more of its executive officers or key employees, or if one or more of its executive officers or key employees decide to join a competitor or otherwise compete directly or indirectly with it, it could have a significant adverse effect on the Company’s business.
In addition, because experienced personnel in the Company’s industry are in high demand and competition for their talents is intense, the Company has relied on its ability to grant stock options as one mechanism for recruiting and retaining this highly skilled talent. Accounting standards require the expensing of stock options, which impairs the Company’s ability to provide these incentives without incurring significant compensation costs. There can be no assurance that the Company will continue to successfully attract and retain key personnel in the future.
CHANGES IN ACCOUNTING PRINCIPLES OR STANDARDS, OR IN THE WAY THEY ARE APPLIED, COULD RESULT IN UNFAVORABLE ACCOUNTING CHARGES OR EFFECTS AND UNEXPECTED FINANCIAL REPORTING FLUCTUATIONS, AND COULD ADVERSELY AFFECT OUR REPORTED OPERATING RESULTS.
We prepare our consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles and guidance. A change in existing principles or guidance
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can have a significant effect on our reported results and may retroactively affect previously reported results. Additionally, proposed accounting standards could have a significant impact on our operational processes, revenues and expenses, and could cause unexpected financial reporting fluctuations.
For example, the Financial Accounting Standards Board (“FASB”) is currently working together with the International Accounting Standards Board (“IASB”) to converge certain accounting principles and facilitate more comparable financial reporting between companies who are required to follow GAAP and those who are required to follow International Financial Reporting Standards (“IFRS”). These efforts may result in different accounting principles under GAAP, which may have a material impact on the way in which we report financial results in areas including, but not limited to, revenue recognition, lease accounting, and financial statement presentation. We expect the SEC to make a determination in the near future regarding the incorporation of IFRS into the financial reporting system for U.S. companies. A change in accounting principles from GAAP to IFRS may have a material impact on our financial statements and may retroactively adversely affect previously reported transactions.
THE COMPANY MAY BE UNABLE TO SUSTAIN OR INCREASE ITS PROFITABILITY.
While the Company was profitable in its last eight fiscal years, it incurred net losses during fiscal year 2003 and 2002. Its ability to sustain or increase profitability on a quarterly or annual basis will be affected by changes in its business. It expects its operating expenses to increase as its business grows, and it anticipates that it will make investments in its business. Therefore, the Company’s results of operations will be harmed if its revenues do not increase at a rate equal to or greater than increases in its expenses or are insufficient for it to sustain profitability.
IF THE COMPANY OVERESTIMATES REVENUES, IT MAY BE UNABLE TO REDUCE ITS EXPENSES TO AVOID OR MINIMIZE A NEGATIVE IMPACT ON ITS RESULTS OF OPERATIONS.
The Company’s revenues are difficult to forecast and are likely to fluctuate significantly from period to period. The Company bases its operating expense budgets on expected revenue trends. The Company’s estimates of sales trends may not correlate with actual revenues in a particular quarter or over a longer period of time. Variations in the rate and timing of conversion of the Company’s sales prospects into actual licensing revenues could cause it to plan or budget inaccurately and those variations could adversely affect the Company’s financial results. In particular, delays, reductions in amount or cancellation of customers’ purchases would adversely affect the overall level and timing of the Company’s revenues and its business, results of operations and financial condition could be harmed. In addition, many of its expenses, such as office and equipment leases and certain personnel costs, are relatively fixed. It may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in revenue may cause a material variation in operating results in any period.
IF THE COMPANY’S PRODUCTS CONTAIN MATERIAL DEFECTS, ITS REVENUES MAY DECLINE.
Software products as complex as those offered by the Company often contain errors or defects, particularly when first introduced, when new versions or enhancements are released and when configured to individual customer computing systems. The Company currently has known errors and defects in its products. Despite testing conducted by the Company, if additional defects and errors are found in current versions, new versions or enhancements of its products after commencement of commercial shipment, or if such errors or defects cannot be cured or repaired timely, it could result in the loss of revenues or a delay in market acceptance or an increase in the rate of return of the Company’s products. The occurrence of any of these events could materially harm the Company’s business, operating results and financial condition.
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THE COMPANY MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
Although license agreements with its customers typically contain provisions designed to limit the Company’s exposure to potential product liability claims, it is possible that such limitation of liability provisions may not be effective as a result of existing or future laws or unfavorable judicial decisions. The sale and support of the Company’s products may entail the risk of such claims, which are likely to be substantial in light of the use of its products in business-critical applications. A product liability claim brought against the Company could materially harm its business, operating results and financial condition.
THE PROTECTION OF OUR PROPRIETARY RIGHTS MAY BE INADEQUATE.
The Company has a small number of issued and pending U.S. patents expiring at varying times ranging from 2015 to 2028. The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures, contractual provisions and license keys to protect its proprietary technology. For example, the Company licenses its software pursuant to click-wrap or signed license agreements that impose certain restrictions on licensees’ ability to utilize the software. In addition, the Company seeks to avoid disclosure of its intellectual property, including by requiring those persons with access to its proprietary information to execute confidentiality agreements with the Company and by restricting access to its source code. The Company takes precautions to protect our software, certain documentation, and other written materials under trade secret and copyright laws, which afford only limited protection.
Despite the Company’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of its products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company’s products is difficult, and while it is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of many countries do not protect the Company’s proprietary rights to the same extent as the laws of the United States. If the Company’s means of protecting its proprietary rights is not adequate or its competitors independently develop similar technology, the Company’s business could be materially harmed.
IF SECURITIES OR INDUSTRY ANALYSTS DO NOT PUBLISH RESEARCH OR REPORTS OR PUBLISH UNFAVORABLE RESEARCH OR REPORTS ABOUT OUR BUSINESS, OUR STOCK PRICE AND TRADING VOLUME COULD DECLINE.
The trading market for our common stock will be influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us adversely change their recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.
THE COMPANY’S COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR STOCKHOLDERS.
The market price of shares of the Company’s 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 its operating results; |
| • | Changes in the economic and political conditions in the United States and abroad; |
| • | Terrorist attacks, war or the threat of terrorist attacks and war; |
| • | The announcement of mergers or acquisitions by the Company or its competitors; |
| • | Developments in ongoing or threatened litigation; |
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| • | Announcements of technological innovations; |
| • | Failure to comply with the requirements of Section 404 of the Sarbanes-Oxley Act; |
| • | New products, including open source products, or new contracts announced by it or its competitors; |
| • | Developments with respect to copyrights or proprietary rights; |
| • | Price and volume fluctuations in the stock market; |
| • | Changes in corporate purchasing of Business Intelligence, Analytics, Big Data, Performance Management and Customer Communications Management software; |
| • | Adoption of new accounting standards affecting the software industry; and |
| • | Changes in financial estimates by securities analysts. |
In addition, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against such companies. If the Company is involved in such litigation, it could result in substantial costs and a diversion of management’s attention and resources and could materially harm the Company’s business, operating results and financial condition.
WE CURRENTLY DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK, AND CONSEQUENTLY, YOUR ONLY OPPORTUNITY TO ACHIEVE A RETURN ON YOUR INVESTMENT IS IF THE PRICE OF OUR COMMON STOCK APPRECIATES AND YOU SELL YOUR SHARES AT A PRICE ABOVE YOUR COST.
We currently do not intend to declare or pay dividends on shares of our common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our common stock appreciates and you sell your shares at a price above your cost. There is no guarantee that the price of our common stock will ever exceed the price that you pay. Investors seeking cash dividends should not purchase our common stock.
CHANGES IN CORPORATE INCOME TAX LAWS, INCOME TAX RATES OR NEGATIVE INCOME TAX RULINGS COULD ADVERSELY IMPACT THE COMPANY’S FINANCIAL RESULTS.
The Company is taxable principally in the United States, Canada and certain jurisdictions in Europe and Asia/Pacific. All of these jurisdictions have in the past and may in the future make changes to their corporate income tax laws and/or corporate income tax rates, which could increase or decrease the Company’s future income tax provision. While the Company believes that all material income tax liabilities are reflected properly in its Consolidated Balance Sheet, it has no assurance that it will prevail in all cases in the event the taxing authorities disagree with its interpretations of the tax law. Future levels of research and development spending will impact the Company’s entitlement to related tax credits, which generally lower its effective income tax rate. Future effective income tax rates could be adversely affected if tax laws are enacted that are targeted to eliminate the benefits of the Company’s tax structure and if its earnings are lower than anticipated in jurisdictions where the Company has statutory tax rates lower than tax rates in the United States or other higher tax jurisdictions.
CERTAIN OF THE COMPANY’S CHARTER PROVISIONS AND DELAWARE LAW MAY PREVENT OR DETER A CHANGE IN CONTROL OF THE COMPANY.
The Company’s Certificate of Incorporation, as amended and restated (the “Certificate of Incorporation”), and Bylaws, as amended and restated (“Bylaws”), contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals that a stockholder might consider favorable, including provisions authorizing the issuance of “blank check” preferred stock, eliminating the ability of stockholder to act by written consent and requiring stockholders to provide
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advance notice for proposals and nomination of directors at the Annual Meeting of Stockholder. In addition, certain provisions of Delaware law and the Company’s stock option plans may also have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals. The Company has also entered into change of control agreements with its executive officers, which agreements require payment to an executive upon termination of employment within 12 months after acquisition. The anti-takeover effect of these provisions may also have an adverse effect on the public trading price of the Company’s common stock.
DEPENDENCE ON THE FINANCIAL SERVICES INDUSTRY COULD SIGNIFICANTLY AFFECT THE COMPANY’S REVENUES.
A significant portion of the Company’s revenues are derived from customers in the financial services industry and the Company expects it will continue to derive a significant portion of its revenues from these customers for the foreseeable future. Accordingly, unfavorable economic conditions adversely impacting the financial services industry has had a material adverse effect on the Company’s business, financial condition and results of operations. For example, the financial services industry has experienced and may continue to experience cyclical fluctuations in profitability, which may affect timing of, or actual purchases of, the Company’s products which would have a material adverse effect on the Company’s business, financial condition and results of operations.
CATASTROPHIC EVENTS MAY DISRUPT OUR BUSINESS.
We rely on our network infrastructure and enterprise applications, internal technology systems and our Website for our development, marketing, operational, support, hosted services and sales activities. A disruption, infiltration or failure of these systems in the event of a major earthquake, fire, power loss, telecommunications failure, software or hardware malfunctions, cyber attack, war, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data and could prevent us from fulfilling our customers’ orders. Our corporate headquarters, a significant portion of our research and development activities, certain of our data centers, and certain other critical business operations are located in the San Francisco Bay Area, which is near major earthquake faults. We have developed certain disaster recovery plans and certain backup systems to reduce the potentially adverse effect of such events, but a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
Actuate’s properties consist of leased facilities for sales and marketing, research and development, services and support and administrative personnel. Actuate’s headquarters facilities consist of approximately 58,000 square feet of office space in the San Mateo BayCenter Campus in San Mateo, California.
Actuate also leases office facilities in various locations in the United States and abroad. All facilities are leased under operating leases.
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| ITEM 3. | LEGAL PROCEEDINGS |
We are engaged in certain legal actions arising in the ordinary course of business. Although there can be no assurance as to the outcome of such litigation, we believe we have adequate legal defenses and we believe that neither the ultimate outcome of any of these actions nor ongoing litigation expense will not have a material effect on our financial position or results of operations.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on The Nasdaq Global Market and has been traded on Nasdaq since Actuate’s initial public offering in 1998. It traded under the symbol “ACTU” through November 3, 2010. On that date, we changed the stock symbol to “BIRT” and the stock has been trading under the “BIRT” symbol since that date. The following table sets forth the high and low closing sales prices of our common stock during each full quarterly period within the last two fiscal years:
| High | Low | |||||||
| First Quarter of Fiscal 2011 |
$ | 5.96 | $ | 4.63 | ||||
| Second Quarter of Fiscal 2011 |
$ | 5.86 | $ | 4.94 | ||||
| Third Quarter of Fiscal 2011 |
$ | 6.74 | $ | 5.39 | ||||
| Fourth Quarter of Fiscal 2011 |
$ | 6.72 | $ | 5.15 | ||||
| First Quarter of Fiscal 2012 |
$ | 6.54 | $ | 5.57 | ||||
| Second Quarter of Fiscal 2012 |
$ | 7.25 | $ | 6.20 | ||||
| Third Quarter of Fiscal 2012 |
$ | 7.15 | $ | 6.00 | ||||
| Fourth Quarter of Fiscal 2012 |
$ | 6.96 | $ | 5.00 | ||||
According to the records of our transfer agent, as of February 28, 2013, Actuate had 87 stockholders of record (which number does not include the number of stockholders whose shares are held by a brokerage house or clearing agency, but does include, as one record holder each such brokerage house or clearing agency).
We have never paid a cash dividend on our common stock and do not intend to pay cash dividends on our common stock in the foreseeable future.
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Performance Graph
The following performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C or the liabilities of section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act.
The following graphs compare:
| I. | The cumulative total stockholder return on the common stock of the Company from December 31, 2007 (the last trading day before the beginning of the Company’s fifth preceding fiscal year) to December 31, 2012 (the last trading day of the fiscal year ended December 31, 2012) with the cumulative total return of (i) the Total Return Index for The Nasdaq Stock Market (U.S. Companies) (the “Nasdaq Index”), (ii) the Dow Jones U.S. Software Composite Index (the “Dow Jones U.S. Software Index”) and (iii) the RDG Software Composite Index ( the “RDG Software Index”). This graph assumes the investment of $100 on December 31, 2007 in the common stock of the Company, the Nasdaq Index and the Dow Jones U.S. Software Index. |
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| II. | The cumulative total stockholder return on the common stock of the Company from December 31, 2011 to December 31, 2012 with the cumulative total return of (i) the Total Return Index for the “Nasdaq Index”, (ii) the Dow Jones U.S. Software Composite Index (the “Dow Jones U.S. Software Index”) and (iii) the RDG Software Composite Index (the “RDG Software Index”). This graph assumes the investment of $100 on January 1, 2012 in the common stock of the Company, the Nasdaq Index and the Dow Jones U.S. Software Index. |
The comparisons in the graphs above are based on historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
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The table below sets forth information regarding repurchases of Actuate common stock by Actuate during the three months ended December 31, 2012.
Issuer Purchases of Equity Securities
| Period |
Total Number of Shares Purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced programs (1) |
Maximum dollar value of shares that may yet be purchased under the program (1) |
||||||||||||
| Month #1 |
||||||||||||||||
| October 1, 2012 through October 31, 2012 |
— | $ | — | — | — | |||||||||||
| Month #2 |
||||||||||||||||
| November 1, 2012 through November 30, 2012 |
1,296,000 | $ | 5.17 | 1,296,000 | — | |||||||||||
| Month #3 |
||||||||||||||||
| December 1, 2012 through December 31, 2012 |
539,200 | $ | 5.31 | 539,200 | — | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total |
1,835,200 | $ | 5.21 | 1,835,200 | $ | 14,441,558 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| (1) | The Company’s stock repurchase program was originally announced in September 2001 and has been extended from time to time by Actuate’s Board of Directors. |
On August 2, 2012, the Board of Directors approved an ongoing extension of the Company’s share repurchase program. This extension authorized management to make additional repurchases of Actuate common stock up to an aggregate of $30 million. The share repurchase authorization does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, the volume of employee stock plan activity, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements.
These repurchased shares were recorded as treasury stock and were accounted for under the cost method. No repurchased shares have been retired.
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| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and with the Consolidated Financial Statements and Notes thereto that are included elsewhere in this Form 10-K. The Consolidated Statements of Income data for the years ended December 31, 2012, 2011 and 2010 and the Consolidated Balance Sheet data as of December 31, 2012 and 2011 are derived from the audited Consolidated Financial Statements included elsewhere in this Form 10-K. The Consolidated Statements of Income data for the years ended December 31, 2009 and 2008 and the Consolidated Balance Sheet data as of December 31, 2010, 2009 and 2008 are derived from audited Consolidated Financial Statements that are not included in this Form 10-K. Historical results are not necessarily indicative of results to be anticipated in the future.
| Year ended December 31, | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
| Consolidated Statement of Income Data: |
||||||||||||||||||||
| Revenues: |
||||||||||||||||||||
| License fees |
$ | 57,886 | $ | 49,172 | $ | 49,155 | $ | 36,146 | $ | 39,989 | ||||||||||
| Services |
80,933 | 85,771 | 82,317 | 83,187 | 91,001 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenues |
138,819 | 134,943 | 131,472 | 119,333 | 130,990 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Costs and expenses: |
||||||||||||||||||||
| Cost of license fees |
1,918 | 1,887 | 2,219 | 934 | 1,396 | |||||||||||||||
| Cost of services |
20,349 | 20,682 | 19,692 | 17,843 | 23,330 | |||||||||||||||
| Sales and marketing |
49,792 | 42,432 | 40,484 | 41,747 | 51,830 | |||||||||||||||
| Research and development |
23,996 | 24,272 | 24,850 | 20,267 | 22,035 | |||||||||||||||
| General and administrative |
22,508 | 20,903 | 23,767 | 20,315 | 18,470 | |||||||||||||||
| Amortization of purchased intangibles |
1,203 | 1,296 | 1,880 | 680 | 948 | |||||||||||||||
| Asset impairment |
— | 1,681 | — | — | — | |||||||||||||||
| Restructuring charges |
496 | 889 | 968 | 348 | 1,506 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total costs and expenses |
120,262 | 114,042 | 113,860 | 102,134 | 119,515 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income from operations |
18,557 | 20,901 | 17,612 | 17,199 | 11,475 | |||||||||||||||
| Interest income and other income (expense), net |
235 | (355 | ) | (1,579 | ) | 294 | 901 | |||||||||||||
| Interest expense |
(361 | ) | (936 | ) | (1,721 | ) | (1,404 | ) | (116 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income before provision for income taxes |
18,431 | 19,610 | 14,312 | 16,089 | 12,260 | |||||||||||||||
| Provision for (benefit from) income taxes |
8,128 | 7,623 | 3,665 | 3,910 | (1,318 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income |
$ | 10,303 | $ | 11,987 | $ | 10,647 | $ | 12,179 | $ | 13,578 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Basic net income per share (1) |
$ | 0.21 | $ | 0.25 | $ | 0.24 | $ | 0.27 | $ | 0.23 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Shares used in basic net income per share calculation (1) |
49,033 | 47,309 | 45,065 | 45,131 | 60,025 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Diluted net income per share (1) |
$ | 0.20 | $ | 0.23 | $ | 0.22 | $ | 0.25 | $ | 0.21 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Shares used in diluted net income per share calculation (1) |
52,452 | 51,497 | 49,133 | 49,396 | 65,049 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
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| December 31, | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Consolidated Balance Sheet Data: |
||||||||||||||||||||
| Cash, cash equivalents and investments |
$ | 66,450 | $ | 67,428 | $ | 79,324 | $ | 75,531 | $ | 58,441 | ||||||||||
| Working capital |
50,548 | 44,875 | 53,306 | 54,114 | 20,701 | |||||||||||||||
| Total assets |
192,515 | 176,904 | 195,631 | 169,764 | 150,512 | |||||||||||||||
| Notes payable |
843 | — | 40,000 | 30,000 | 30,000 | |||||||||||||||
| Stockholders’ equity and non-controlling interest |
125,357 | 116,863 | 92,622 | 76,019 | 56,248 | |||||||||||||||
| (1) | See Note 1 of Notes to the Consolidated Financial Statements for an explanation of the method used to determine the number of shares used in computing basic net income per share and diluted net income per share. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the other sections of this Annual Report on Form 10-K, including “Business,” “Selected Financial Data,” and “Financial Statements and Supplementary Data”, as well as the “Notes to the Consolidated Financial Statements.” This MD&A contains a number of forward-looking statements, all of which are based on our current expectations, beliefs and strategies and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Risk Factors” section.
Our actual results may differ materially from those indicated in such forward-looking statements. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K and the risks discussed in other reports we have furnished or filed from time to time with the SEC.
Our Business
General
Actuate Software Corporation was incorporated in November 1993 in the State of California and reincorporated in the State of Delaware in July 1998 as Actuate Corporation (“We”, “Actuate” or the “Company”). Actuate provides software and services to develop and deploy custom Business Intelligence, Analytics, Big Data, Performance Management and Customer Communications Management applications that deliver rich interactive content that improve customer loyalty and corporate performance. Applications built on Actuate’s open source-based platform are designed to provide all stakeholders inside and outside the firewall, including employees, customers, partners and citizens with information that they can easily access and understand to maximize revenue, cut costs, improve customer satisfaction, streamline operations, create competitive advantage and make better decisions. Our goal is to ensure that all users can use decision-making information in their day-to-day activities, opening up completely new avenues for improving corporate performance.
| December 31, | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Financial summary |
||||||||||||||||||||
| Total revenues |
$ | 138,819 | $ | 134,943 | $ | 131,472 | $ | 119,333 | $ | 130,990 | ||||||||||
| Total operating expenses |
120,262 | 114,042 | 113,860 | 102,134 | 119,515 | |||||||||||||||
| Income from operations |
18,557 | 20,901 | 17,612 | 17,199 | 11,475 | |||||||||||||||
| Operating margins |
13 | % | 15 | % | 13 | % | 14 | % | 9 | % | ||||||||||
Despite the ongoing global economic uncertainty, we have continued to achieve profitability and positive cash flows during the year. Nevertheless, our business model and longer-term financial results are not immune to a sustained economic downturn. For example, the recent domestic and global economic uncertainty resulted in reduced demand for information technology, including enterprise software and services. The direction and relative strength of the global economy continues to be uncertain and makes it difficult for us to forecast operating results and to make decisions about future investments. Information technology spending has historically declined as general economic and market conditions worsened. During challenging and uncertain economic times and in tight credit markets, many customers delay or reduce technology purchases. Contract negotiations may become more protracted or difficult if customers institute additional internal approvals for technology purchases or require more negotiation of contract terms and conditions. Such economic conditions could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable or delayed payments, slower adoption of new technologies, increased price competition and reductions in the rate at which our customers renew their maintenance agreements and procure consulting services.
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Furthermore, a significant portion of our revenues have historically been derived from customers in the financial services industry. The Company expects that it will continue to derive a significant portion of its revenues from these financial services customers for the foreseeable future. Unfavorable economic conditions have adversely impacted the financial services industry over the past several years. If this adverse trend were to continue, it would likely have a material adverse effect on the Company’s business, financial condition and results of operations.
We intend to continue to invest significant resources to expand our sales and engineering operations. In order to expand sales, we must establish additional foreign operations, expand our channel management and support organizations, hire additional personnel, recruit additional resellers and/or increase the productivity of existing resellers. Factors that may affect our operating results include the possibility of a prolonged period of limited economic growth or possible economic decline in and adverse effects of the ongoing sovereign debt crisis in Europe, including its expected negative impact on European economic growth versus the rest of the world; disruptions to the credit and financial markets in Europe, the U.S., and elsewhere; contractions or limited growth in corporate spending; adverse economic conditions that may be specific to information technology and the software industry; and risk that the size of the market for our products will not support more sales professionals.
We continue to monitor market conditions and may make adjustments to our business in order to reduce the adverse impact that changes to the economic environment could have on our business. We expect to continue to explore both organic and strategic growth opportunities. In particular, we may acquire companies or technology that can contribute to the strategic, operational and financial performance of our business.
Business Model
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 OEMs, resellers and system integrators. OEMs 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 products to end-user customers. Our revenues are derived from license fees for software products and fees for services relating to such products, including software maintenance and support, consulting and training.
Fiscal Year 2012
For the fiscal year ended December 31, 2012, we recorded total revenue of $138.8 million, an increase of 3% over fiscal 2011. License revenue was $57.9 million, an increase of 18% compared to the previous year. Our operating income decreased by 11% or $2.3 million to $18.6 million in fiscal 2012 due primarily to the expansion of our sales-generating headcount. We produced $20.3 million of operating cash flows and ended the year with $66.5 million in cash and short term investments compared with $67.4 million at December 31, 2011. Diluted earnings per share under generally accepted accounting principles in the United States of America (“U.S. GAAP”) was $0.20 in fiscal 2012 compared to $0.23 for fiscal 2011 for a decrease of 13%. During fiscal 2012, we completed our acquisition of Quiterian S.L., a privately held software company that provides visual data mining, social media analytics and predictive analytics for business and other non-technical users. We acquired 100% of the outstanding shares held by the Quiterian shareholders for $5.2 million in cash. This purchase price was entirely paid upon closing on October 16, 2012, net of a 10% holdback.
Our total headcount at the end of fiscal year 2012 was 622 compared to 553 employees at the end of last year.
Fiscal Year 2013
The Company expects that it will continue to derive a significant portion of its revenues from financial services customers for the foreseeable future. Unfavorable economic conditions starting in early fiscal year 2008
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adversely impacted IT spending in the financial services industry throughout fiscal year 2012. If this trend continues into 2013, it will likely have a material adverse effect on the Company’s business, financial condition and results of operations.
During fiscal year 2013, we expect three additional trends to continue that would have a significant impact on the results of our operations. We currently believe that corporate IT budgets will grow only modestly if at all in the fiscal year 2013, particularly among financial services companies in the United States and Western Europe. Secondly, corporations are reluctant to buy software from new vendors and we continue to witness corporations consolidating their Business Intelligence, Analytics, Big Data, Performance Management and Customer Communications Management software purchases among fewer suppliers. Finally, we expect to experience vigorous competition in the BI market. Several of our competitors have released products that are marketed to be directly competitive with our offerings. As one of the few independent BI and analytics vendors remaining, Actuate faces competition from large and well-established vendors including Microsoft, SAP, Oracle and IBM, all of which have acquired BI players to add to their technology stacks. The existence of these competitive products may require additional sales and marketing efforts to differentiate our products, which could result in extended sales cycles.
For fiscal year 2013, we will continue to pursue our strategic initiatives to improve revenue growth driven by BIRT and ActuateOne, related to Business Intelligence, Analytics, Big Data, Performance Management and Customer Communications Management markets. These initiatives are as follows:
| • | Investing in BIRT—We are continuing to make a significant investment in BIRT. BIRT has become widely adopted by developers and continues to drive demand for our BIRT-based commercially available products in the ActuateOne suite. The BIRT project is a core, long-term initiative. |
| • | Selling to IT Management—We are re-focusing our sales efforts on selling our products to IT managers who we believe generally recognize the technical advantages of our products. We hope this initiative will result in increased license revenue in the short term. |
| • | Selling to Line-of-Business Management—We are creating Business and Performance Analytics applications and software solutions to market to line-of-business managers. These offerings are in the areas of performance management, business analytics and customer self service and statementing. We hope these initiatives will result in increased license revenue over the medium-to-long term. |
| • | Selling to Global 9000 Corporations in the Financial Services Sector—We continue to focus on selling our products to Global 9000 financial services companies in an effort to increase our substantive market share in this sector. We anticipate a negative impact of the slow recovery in IT spending in this sector through 2013. However, we believe that once the issues in Financial Services are resolved, the industry will once again lead in the adoption of BI and information applications both inside and outside the firewall. |
| • | Building out and delivering on the roadmap of applying BIRT to additional data sources including hard to reach print stream data by investing in the development of BIRT based Xenos offerings. |
| • | Building out and delivering on the roadmap of Customer Communications Management capabilities by integrating Xenos offerings into the iHub. |
| • | Building out and delivering on the roadmap of BIRT Analytics capabilities by integrating Quiterian offerings into the iHub. |
We have a limited ability to forecast future revenues and expenses, thus the prediction of future operating results is difficult. In addition, historical growth rates in our revenues and earnings should not be considered indicative of future revenue or earnings growth rates or operating results. There can be no assurance that any of our business strategies will be successful or that we will be able to achieve and maintain profitability on a quarterly or annual basis. It is possible that in some future quarter our operating results will be below the expectations of public market analysts and investors, and in such event the price of our common stock could decline.
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Critical Accounting Policies, Judgments and Estimates
General. The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that can have a significant impact on the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates, assumptions and judgments on historical experience, future expectations, and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. We believe that the estimates, assumptions and judgments involved in revenue recognition, allowances for doubtful accounts, stock-based compensation, accounting for income taxes, restructuring and integration costs, allocation of purchase price of acquisitions, and the impairment of goodwill, have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting policies.
We discuss below the critical accounting estimates associated with these policies. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results. For further information on our significant accounting policies, see the discussion in Note 1 to our Consolidated Financial Statements included in this Annual Report on Form 10-K.
Revenue Recognition. Actuate generates revenues from the sales of software licenses and related services. The Company receives software license revenues from licensing its products directly to end-users and indirectly through resellers, system integrators and original equipment manufacturers (OEMs). The Company receives service revenues from maintenance contracts, consulting services and training that Actuate performs for customers. If the license agreement contains payment terms indicating that the fee is not fixed or determinable, revenues are recognized as the payments become due and payable, assuming that all other revenue recognition criteria are met. The significant judgments and estimates for revenue recognition typically relate to the timing of an amount recognized for software license fee revenue, including whether collectability is deemed probable, fees are fixed or determinable and whether or not services are essential to the functionality of the software. Changes to these assumptions would generally impact the timing and amount of revenue recognized for software related revenues.
The Company establishes vendor specific objective evidence of fair value for maintenance and support using a “bell-shaped curve” approach for certain types of license transactions, and uses a “stated maintenance renewal” approach for other categories of license transactions. When applying the “bell-shaped curve” approach the Company analyzes all maintenance renewal transactions over the past twelve months for that category of license and plots those data points on a bell-shaped curve to ensure that the a high percentage of the data points are within an acceptable margin of the established VSOE rate. This analysis is performed quarterly.
When applying the “stated renewal rate” approach, the Company ensures that the individual license transaction includes a clear and substantive renewal rate explicitly stated in the documentation for the transaction. Furthermore, the Company ensures that it has a practice of consistently renewing those transactions at the contractual rate. This is done by reviewing maintenance renewals on these contracts and making sure that a very high percentage are renewed at the renewal rates stipulated in the contract.
The application of above VSOE methodologies requires judgment, including the identification of individual elements in multiple element arrangements, whether there is objective and reliable evidence of fair value, including VSOE of fair value, for some or all elements. Changes to the elements in our sales arrangements, or our ability to establish VSOE or fair value for those elements may impact the timing of recognizing revenue which may result in a material change to the amount of revenue recorded in a given period.
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The Company assesses the collectability of fees from end-users based on payment history and current credit profile. When a customer is not deemed credit-worthy, revenues are deferred and recognized upon cash receipt. Our standard payment terms are net 30 days, although we do offer payment terms beyond that in some cases. We periodically provide extended payment terms and we consider any fees due beyond 365 days to not be fixed or determinable. In such cases, judgment is required in determining the appropriate timing of revenue recognition.
See Note 1 to the consolidated financial statements for further information regarding revenue recognition.
Allowance for Doubtful Accounts. Our accounts receivable is subject to collection risks. Our gross accounts receivable is reserved against this risk through an allowance for doubtful accounts. This allowance is for estimated losses resulting from the inability of our customers to make required payments. It is a significant estimate and is regularly evaluated by us for adequacy by taking into consideration a combination of factors. We look at factors such as past experience, credit quality of the customer, age of the receivable balance, and current economic conditions. These factors are reviewed to determine whether a specific reserve for bad debt should be recorded to reduce the related receivable to the amount believed to be collectible. We also cease recognizing future revenues on any outstanding domestic maintenance renewal invoices which are older than 90 days past due.
We also record unspecified reserves for bad debt for all other customers based on a variety of factors, including length of time the receivables are past due and historical experience. A reserve percentage is applied to various aged categories of receivables based on historical experience to determine how much of an unspecified reserve is needed. The use of different estimates or assumptions could produce different allowance balances. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Accounts are charged against the allowance for doubtful accounts once collection efforts are unsuccessful. Historically, such losses have been within management’s expectations.
Stock-based Compensation. We recognize stock-based compensation expense over the service period for awards that are expected to vest based on the fair value measurement for all share-based payment awards made to our employees and directors, including employee stock options, restricted stock units and employee stock purchases. We calculate the fair value of each stock option award on the date of grant using the Black-Scholes-Merton option pricing model. The determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. The use of a Black-Scholes-Merton model requires extensive actual employee exercise behavior data and a number of complex assumptions including expected life, expected volatility, risk-free interest rate and expected forfeiture rate. As a result, the future stock-based compensation expense may differ from our historical amounts. Our estimate of volatility is based upon the historical volatility experienced in our stock price. To the extent volatility of our stock price increases in the future, our estimates of the fair value of options granted in the future could increase, thereby increasing stock-based compensation expense in future periods. In addition, we apply an expected forfeiture rate when amortizing stock-based compensation expense. Our estimate of the forfeiture rate is based primarily upon historical experience. To the extent we revise this estimate in the future our stock-based compensation expense could be materially impacted in the quarter of revision, as well as in following quarters. Our estimate of the expected term of options granted is derived from historical share option exercise experience. In the future, we may change our estimate of the expected term, which would impact the fair value of our options granted in the future.
Income Taxes. We provide for the effect of income taxes in our Consolidated Financial Statements using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryovers, and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax
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rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. We also apply a two-step approach to determining the financial statement recognition and measurement of uncertain tax positions.
Income tax expense or benefit is recognized for the amount of taxes payable or refundable for the current year, and for deferred tax assets and liabilities for the tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We must make significant assumptions, judgments and estimates to determine our current provision (benefit) for income taxes, our deferred tax assets and liabilities, and any valuation allowance to be recorded against our deferred tax assets. Our judgments, assumptions and estimates relating to the current provision (benefit) for income taxes include the geographic mix and amount of income (loss), our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Our judgments also include anticipating the tax positions we will record in the financial statements before actually preparing and filing the tax returns. Our estimates and assumptions may differ from the actual results as reflected in our income tax returns and we record the required adjustments when they are identified or resolved. Changes in our business, tax laws or our interpretation of tax laws, and developments in current and future tax audits, could significantly impact the amounts provided for income taxes in our results of operations, financial position, or cash flows.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carry-forwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. To make this assessment, we take into account predictions of the amount and category of taxable income from various sources and all available positive and negative evidence about these possible sources of taxable income. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which the strength of the evidence can be objectively verified. Based on the analysis of positive and negative factors noted above, we have no valuation allowance against U.S. federal deferred tax assets. In the current year, management determined that it was “more likely than not” that the Company’s California research and development (R&D) credits would not be realized based on the size of the R&D credit carry-forward and the R&D credits being generated exceeding the R&D credits being utilized. As such, a full valuation allowance was recorded against the Company’s deferred tax asset for California R&D credit carry-forwards. We maintain a full valuation allowance against deferred tax assets in foreign jurisdictions with a history of losses and a partial valuation allowance in foreign jurisdictions where operating results beyond a certain time frame are less reliable. If, in the future, we determine that these deferred tax assets are more likely than not to be realized, a release of all or part, of the related valuation allowance could result in an income tax benefit in the period such determination is made.
We only recognize an income tax expense or benefit with respect to uncertain tax positions in our financial statements that we judge is more likely than not to be sustained solely on its technical merits in a tax audit, including resolution of any related appeals or litigation processes. To make this judgment, we must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If an income tax position meets the more likely than not recognition threshold, then we must measure the amount of the tax benefit to be recognized by determining the largest amount of tax benefit that has a greater than a 50% likelihood of being realized upon effective settlement with a taxing authority that has full knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible settlement outcomes. To determine if a tax position is effectively settled, we must also estimate the likelihood that a taxing authority would review a tax position after a tax examination has otherwise been completed. We must also determine when it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease in the 12 months after each fiscal year-end. These judgments are difficult because a taxing authority may change its behavior as a result of our disclosures in our financial statements. We must reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or
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circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision.
Accrual for Restructuring Charges. We incurred certain restructuring charges that were a combination of reductions in workforce, exits of idle facilities and disposals of fixed assets. These restructuring charges were based on actual and estimated costs incurred, including estimates of sublease income on portions of our idle facilities. We periodically update the estimates based on market conditions and in accordance with our restructuring plans. Updates to estimates of sublease income were not significant in fiscal years 2012, 2011 and 2010.
Acquisitions—Purchase Price Allocation. We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed, based on their respective fair values at the acquisition date. The excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets, if any, is recorded as goodwill. Management estimates the fair value of assets and liabilities based upon quoted market prices, and widely accepted valuation techniques. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
| • | future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents; |
| • | expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; |
| • | the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio; and |
| • | discount rates. |
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue obligations assumed.
While we use our estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, subsequent adjustments, if any, are recorded to our consolidated statements of operations. For additional discussion, see Note 2, “Acquisitions” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Valuation of Goodwill. We evaluate goodwill, at a minimum, on an annual basis in the fourth quarter of each fiscal year, and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The Company begins its impairment test by applying a “Market” approach. Given the Company has one reporting unit; this approach involves comparing the market capitalization of the Company to its carrying value. If this “Market” approach derives a fair value that significantly exceeds the carrying value of the Company then no further testing is performed. However, if the “Market” approach indicates the fair value does not significantly exceed the carrying value of the Company, we perform a supplemental calculation of the estimated fair value of the reporting unit using an “Income” approach.
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We then consider the results of both the “Market” approach and “Income” approach to determine whether or not it is necessary to move to the second step of the goodwill impairment analysis in order to measure the amount of any impairment loss.
Thus far, the “Market” approach has consistently indicated that the estimated fair value of the reporting unit was significantly higher than the carrying value. Therefore, we have determined that there has been no impairment and consequently it has not been necessary to perform a supplemental “Income” approach to the valuation.
Results of Operations
The following table sets forth certain Consolidated Statement of Income data as a percentage of total revenues for the periods indicated:
| Year Ended December 31, |
||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Revenues: |
||||||||||||
| License fees |
42 | % | 36 | % | 37 | % | ||||||
| Services |
58 | 64 | 63 | |||||||||
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|
|
|
|
|
|
|||||||
| Total revenues |
100 | 100 | 100 | |||||||||
|
|
|
|
|
|
|
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| Costs and expenses: |
||||||||||||
| Cost of license fees |
2 | 1 | 2 | |||||||||
| Cost of services |
15 | 15 | 15 | |||||||||
| Sales and marketing |
36 | 31 | 31 | |||||||||
| Research and development |
17 | 18 | 19 | |||||||||
| General and administrative |
16 | 16 | 18 | |||||||||
| Amortization of purchased intangibles |
1 | 1 | 1 | |||||||||
| Asset impairment |
— | 1 | — | |||||||||
| Restructuring charges |
— | 1 | 1 | |||||||||
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| Total costs and expenses |
87 | 84 | 87 | |||||||||
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| Income from operations |
13 | 16 | 13 | |||||||||
| Interest income and other income/(expense), net |
— | — | (1 | ) | ||||||||
| Interest expense |
— | (1 | ) | (1 | ) | |||||||
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| Income before provision for income taxes |
13 | 15 | 11 | |||||||||
| Provision for income taxes |
6 | 6 | 3 | |||||||||
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| Net income |
7 | % | 9 | % | 8 | % | ||||||
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Revenues
|
Year Ended December 31, |
2011 to 2012 |
2010 to 2011 | ||||||||||
| 2012 |
2011 |
2010 |
$ Change |
% Change |
$ Change |
% Change | ||||||
| (dollars in thousands) | ||||||||||||
| $ 138,819 | $134,943 | $131,472 | $3,876 | 3% | $3,471 | 3% | ||||||
Our revenues are derived from license fees and services, which include software maintenance and support, consulting, and training. The increase in our total revenues in fiscal 2012 was due to:
| • | Increase of 18% or approximately $8.7 million of license revenues led primarily by an increase in our Xenos related product sales as well as continued strength in BIRT related product sales, and corresponding services. |
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| • | The increase in license revenues was partially offset by lower services revenues which decreased 6% or approximately $4.8 million due mainly to higher decline rates for maintenance renewals, especially on our legacy e.Report Designer (“ERD”) product line. |
Revenues outside of North America increased by 19%, or approximately $5.3 million, from $28.6 million in fiscal 2011 to $33.9 million in fiscal year 2012. This increase was driven by a 54% or $3.4 million increase in Asia, and by 9% or $1.9 million increase in Europe. The revenue increase in Asia was driven by two transactions which resulted in combined license revenues in excess of $1 million. These international revenues represented 24% of our total revenues in fiscal 2012. Foreign currency exchange losses negatively impacted our international revenues during fiscal 2012.
Our North America revenues decreased by 1% or approximately $1.4 million primarily due to lower services revenues, which decreased by 7% or approximately $4.3 million during the year as we experienced higher decline rates for maintenance renewals especially related to our legacy ERD product line. The decrease in services revenues was partially offset by a 7% or approximately $2.9 million increase in North America license revenues, which was driven primarily by an increase in our Xenos related product sales.
For fiscal year 2012 we closed 291 transactions in excess of $100,000 and recognized license revenue of $1 million or more on 10 transactions. For fiscal year 2011 we closed 249 transactions in excess of $100,000 and recognized license revenue of $1 million or more on 7 transactions. We do not expect to rely on any one customer for our future business.
The 3% increase in our total revenues in fiscal 2011 compared to fiscal 2010 was primarily due to improving license sales in North America of 4% or $1.8 million. This increase was despite the fact that in fiscal 2010 we concluded on a large transaction with IBM regarding distributions of Actuate software by IBM. As a result of that transaction, we recorded $11 million of revenue in North America in the third quarter of fiscal 2010. Of this total, approximately $8.9 million was apportioned to license and the remaining $2.1 million to maintenance revenue. Revenues outside of North America increased by 3%, or approximately $1 million, from $27.6 million in fiscal 2010 to $28.6 million in fiscal year 2011. This increase was driven by a 32% or $1.5 million increase in Asia, offset by 2% or $500,000 decrease in Europe. These international revenues represented 21% of our total revenues in fiscal 2011. Foreign currency exchange gains positively impacted our international revenues during fiscal 2011.
No single customer accounted for more than 10% of our total revenues for any of the periods presented.
License Revenue
| (dollars in thousands) | Year Ended December 31, | 2011 to 2012 | 2010 to 2011 | |||||||||||||||||||||||||
| 2012 | 2011 | 2010 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
| North America |
$ | 44,347 | $ | 41,414 | $ | 39,650 | $ | 2,933 | 7 | % | $ | 1,764 | 4 | % | ||||||||||||||
| Europe |
8,520 | 5,436 | 7,878 | 3,084 | 57 | % | (2,442 | ) | (31 | )% | ||||||||||||||||||
| Asia Pacific |
5,019 | 2,322 | 1,627 | 2,697 | 116 | % | 695 | 43 | % | |||||||||||||||||||
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| Total license revenue |
$ | 57,886 | $ | 49,172 | $ | 49,155 | $ | 8,714 | 18 | % | $ | 17 | — | % | ||||||||||||||
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| Percentage of total revenue |
42 | % | 36 | % | 37 | % | ||||||||||||||||||||||
The 18% increase in license revenues in fiscal 2012 was driven by strong demand for our Xenos suite of products and from the sale of our BIRT based products. By region, Europe accounted for 35% or approximately $3.1 million of the increase, North America accounted for 34% or approximately $2.9 million and Asia Pacific accounted for 31% or approximately $2.7 million of the total annual increase in license revenues.
For fiscal year 2012, North America accounted for approximately 77% of the total license revenue while the Europe and Asia Pacific regions combined accounted for 23% of the total license revenues. As a percentage of
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total revenues, license fee revenues increased from 36% in fiscal year 2011 to 42% in fiscal year 2012. Total license revenues were negatively impacted by foreign currency exchange losses of approximately $250,000 during fiscal 2012.
License revenue in fiscal 2011 remained unchanged compared with fiscal 2010. Fiscal 2010 included a large transaction with IBM that resulted in approximately $8.9 million of additional license revenues. Our BIRT-based product sales increased by 70% during fiscal 2011 as we saw new customer additions, higher transaction count as well as increases in average order sizes. These positive trends in North America and Asia resulted in increased license revenues of 4%, or approximately $1.8 million and 43%, or approximately $700,000 over fiscal 2010, respectively. These positive trends were offset by weaker European license sales which decreased 31% or approximately $2.4 million in fiscal 2011 compared to 2010.
For fiscal year 2011, North America accounted for approximately 84% of the total license revenue while the Europe and Asia Pacific regions combined accounted for 16% of the total license revenues. Total license revenues were positively impacted by foreign currency exchange gains of approximately $300,000 during fiscal 2011. As a percentage of total revenues, license fee revenues decreased from 37% in fiscal year 2010 to 36% in fiscal year 2011.
Services Revenue
| (dollars in thousands) | Year Ended December 31, | 2011 to 2012 | 2010 to 2011 | |||||||||||||||||||||||||
| 2012 | 2011 | 2010 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
| North America |
$ | 60,550 | $ | 64,927 | $ | 64,181 | $ | (4,377 | ) | (7 | )% | $ | 746 | 1 | % | |||||||||||||
| Europe |
15,781 | 16,905 | 15,003 | (1,124 | ) | (7 | )% | 1,902 | 13 | % | ||||||||||||||||||
| APAC |
4,602 | 3,939 | 3,133 | 663 | 17 | % | 806 | 26 | % | |||||||||||||||||||
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| Total services revenue |
$ | 80,933 | $ | 85,771 | $ | 82,317 | $ | (4,838 | ) | (6 | )% | $ | 3,454 | 4 | % | |||||||||||||
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| Percentage of total revenue: |
58 | % | 64 | % | 63 | % | ||||||||||||||||||||||
Services revenue is comprised of maintenance and support, professional services, and training. The 6% decrease in services revenue was driven primarily by maintenance renewal declines, adverse currency exchange impacts and fewer compliance transactions during the year. Maintenance renewal revenues decreased by approximately $4 million during fiscal 2012. Of this decrease, approximately $600,000 was attributed to foreign currency exchange losses. Fewer compliance-related transactions also attributed to approximately $1.6 million of the lowered maintenance renewal revenues as these transactions typically include back maintenance. The compliance group is an internal organization established to monitor and ensure that our customers remain in full compliance with the provisions of their respective licensing agreements with Actuate. Partially offsetting these decreases were increases in maintenance and support revenues from our Xenos division.
It is important to note that we are transitioning from our legacy e.Reports product suite to our new BIRT based product offering. As our legacy products age, we have experienced higher than normal decline rates which may continue for the foreseeable future. In the mean time, BIRT is expected to become the dominant contributor to license and maintenance revenues. As this transition progresses, we expect to see our maintenance renewal decline rate improve, eventually resulting in stronger maintenance growth rates in the future.
Professional services revenues also decreased during fiscal 2012 as we continue to experience an increase in the adoption of BIRT-based projects by our customers in 2012 compared to last year. These BIRT-based projects do not require professional service to the same extent as the Company’s traditional designer products. Most of the decrease in professional services revenue was in North America and Asia, while Europe accounted for an increase over the prior year. Partially offsetting these decreases were increases in Xenos related professional services revenues.
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By region, North America accounted for approximately 75% of the total services revenue in fiscal 2012 while Europe and Asia Pacific regions accounted for 19% and 6% of the total services revenues, respectively. Most of the $1.1 million decrease in service revenue in Europe was attributed to unfavorable currency exchange rate fluctuations during fiscal 2012. The $660,000 increase in services revenues in Asia was primarily due to a large compliance transaction that included back maintenance.
During fiscal 2011, services revenue increased 4% or approximately $3.5 million driven by improved maintenance renewal rates as well as higher revenues associated with incremental license revenues during fiscal 2010 and 2011. Also, our prior year services revenues were negatively impacted due to the fact that certain revenue could not be recognized due to the impact of purchase accounting on the acquired Xenos maintenance contracts. Fiscal 2011 service revenues were also positively impacted by currency exchange rate fluctuations in Europe.
By region, North America accounted for approximately 76% of the total services revenue in fiscal 2011 while Europe and Asia Pacific regions accounted for 20% and 4% of the total services revenues, respectively. Most of the $1.9 million increase in service revenue in Europe was attributed to favorable currency exchange rate fluctuations during fiscal 2011. The $800,000 increase in Asia Pacific region was due primarily to a large transaction in Japan.
Costs and Expenses
Cost of License Fees
|
Year Ended December 31, |
2011 to 2012 |
2010 to 2011 | ||||||||||
| 2012 |
2011 |
2010 |
$ Change |
% Change |
$ Change |
% Change | ||||||
| (dollars in thousands) | ||||||||||||
| $ 1,918 | $1,887 | $2,219 | $31 | 2% | $(332) | (15)% | ||||||
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| ||||||
| (Percent of license revenue) | ||||||||||||
| 3% | 4% | 5% | ||||||||||
Cost of license fees consists primarily of salaries, production costs including printing and packaging, amortization of purchased technologies, third party royalty fees and localization costs. The increase in cost of license fees in absolute dollars for fiscal 2012, compared to the corresponding period was not significant.
The decrease in cost of license fees in absolute dollars for fiscal 2011, compared to the corresponding period was primarily related to additional production related expenses incurred during fiscal 2010 associated with the release of ActuateOne. Also in December 2010 we fully amortized the purchase technologies associated with our January 2008 acquisition of Performancesoft, which resulted in lower amortization expense in fiscal 2011 compared to the corresponding periods last year.
We expect our cost of license fees, as a percentage of revenues from license fees, to increase as a result of our acquisition of Quiterian which will result in additional amortization of purchased technology in fiscal 2013.
Cost of Services
|
Year Ended December 31, |
2011 to 2012 |
2010 to 2011 | ||||||||||
| 2012 |
2011 |
2010 |
$ Change |
% Change |
$ Change |
% Change | ||||||
| (dollars in thousands) | ||||||||||||
| $ 20,349 | $20,682 | $19,692 | $(333) | (2)% | $990 | 5% | ||||||
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| (Percent of services revenue) | ||||||||||||
| 25% | 24% | 24% | ||||||||||
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Cost of services consists primarily of personnel and related costs, stock-based compensation, facilities costs incurred providing software maintenance and support, training and consulting services, personnel cost in support of our contract compliance function, as well as third-party costs incurred in providing training and consulting services. The decrease in cost of services for fiscal 2012, compared to the corresponding period in the prior year, was due to lower compensation expense which decreased by approximately $300,000 primarily related to our compliance and maintenance renewal group. The compliance group is an internal organization established to monitor and ensure that our customers remain in full compliance with the provisions of their respective licensing agreements with Actuate. Third party consulting fees also decreased due to lower professional services revenues. Partially offsetting these decreases was higher depreciation related to our new headquarter facility, which we occupied in 2012.
The increase in cost of services for fiscal 2011, compared to the corresponding period in the prior year, was due partially to the timing of the acquisition of Xenos in February 2010, which resulted in eleven months of Xenos expenses in fiscal 2010 compared with a full year of expenses in fiscal 2011. Commission and bonus expense increased by approximately $1.1 million in fiscal 2011 due primarily to higher compliance related bookings. Improved maintenance renewal rates during the year resulted in higher maintenance and support revenues which resulted in additional bonuses to the maintenance group. In addition, we experienced increased third party consulting fees of approximately $120,000 due to a significant customer migration project in the first half of fiscal 2011, which placed a higher demand on our professional services partners as we lacked sufficient internal Actuate resources to meet the customer dates. These cost increases were partially offset by lower salaries and benefits of approximately $300,000 due to a continued decrease in our average professional services headcount and lower stock-based compensation expenses.
We currently expect cost of services to be in the range of 24% to 25% of total services revenues for fiscal 2013.
Sales and Marketing
|
Year Ended December 31, |
2011 to 2012 |
2010 to 2011 | ||||||||||
| 2012 |
2011 |
2010 |
$ Change |
% Change |
$ Change |
% Change | ||||||
| (dollars in thousands) | ||||||||||||
| $ 49,792 | $42,432 | $40,484 | $7,360 | 17% | $1,948 | 5% | ||||||
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| (Percent of total revenue) | ||||||||||||
| 36% | 31% | 31% | ||||||||||
Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, stock-based compensation, promotional expenses, travel, entertainment and facility costs. The increase in fiscal 2012 was due primarily to a $4.6 million increase in employee salaries, sales commissions and related compensation as our average sales and marketing headcount increased by 16% or 26 employees compared to fiscal 2011 as we added headcount in an effort to increase sales capacity. The increase in commissions was the result of improving license sales. Expenses related to our corporate sales kickoff, quota club, and marketing and sales presentations were higher by approximately $880,000 compared to fiscal 2011. Our corporate sales kickoff expense was higher in the current year because we held a large, single event in 2012 compared to smaller, regional events in the prior year. We also experienced increases in marketing related expenses driven mainly by BIRT road shows and depreciation expense related to our new headquarter facility, which we occupied in 2012.
The increase in fiscal 2011 was due partially to the timing of the acquisition of Xenos in February 2010, which resulted in eleven months of Xenos expenses in fiscal 2010 compared with a full year of expenses in fiscal 2011. In addition, salaries, benefits, stock-based compensation and employee travel combined to account for approximately $800,000 of the increase in fiscal 2011 expenses. The increase in salaries was due to a slight
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increase in our average year-to-date sales and marketing headcount as well as annual merit increases. Marketing program expenses increased by approximately $460,000 mainly due to the use of onsite vendors for webinars, advertising and web marketing for conference sponsorships. Also in fiscal 2011 internal marketing support costs allocated to the services group decreased due to lower professional services revenues and average headcount. Additionally, we experienced increases in recruiting and third party commission costs during fiscal 2011. Offsetting these increases was a decrease in employee training and seminars during fiscal 2011.
We currently expect our sales and marketing expenses to increase in absolute dollars in fiscal 2013 as we expect to add new sales headcount to create higher sales capacity.
Research and Development
|
Year Ended December 31, |
2011 to 2012 |
2010 to 2011 | ||||||||||
| 2012 |
2011 |
2010 |
$ Change |
% Change |
$ Change |
% Change | ||||||
| (dollars in thousands) | ||||||||||||
| $ 23,996 | $24,272 | $24,850 | $(276) | (1)% | $(578) | (2)% | ||||||
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| ||||||
| (Percent of total revenue) | ||||||||||||
| 17% | 18% | 19% | ||||||||||
Research and development costs are expensed as incurred and consist primarily of personnel and related costs associated with the development of new products, the enhancement of existing products, quality assurance and testing. The decrease in research and development expense compared to the corresponding period in the prior year was not significant.
The decrease in overall research and development expense for fiscal 2011, compared to the prior year was primarily due to restructuring of our North America product development group, partially offset by annual merit increases.
We believe that continued investments in technology and product development are essential for us to remain competitive in the markets we serve, and expect our research and development expenses as a percentage of total revenues to be in the range of 17% to 20% of total revenues for fiscal 2013.
General and Administrative
|
Year Ended December 31, |
2011 to 2012 |
2010 to 2011 | ||||||||||
| 2012 |
2011 |
2010 |
$ Change |
% Change |
$ Change |
% Change | ||||||
| (dollars in thousands) | ||||||||||||
| $ 22,508 | $20,903 | $23,767 | $1,605 | 8% | $(2,864) | (12)% | ||||||
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| (Percent of total revenue) | ||||||||||||
| 16% | 16% | 18% | ||||||||||
General and administrative expenses consist primarily of personnel costs, stock-based compensation and related costs in finance, human resources, legal and tax functions, as well as audit and legal fees and bad debt expense. The increase in general and administrative expenses compared to the corresponding period in the prior year was primarily due to higher stock-based compensation expenses and legal fees. Stock-based compensation expenses increased by approximately $1 million primarily due to the issuance of performance stock units to the senior executive team as well as a decrease in the annual forfeiture rate. Legal fees increased by approximately $1.1 million related to contract compliance matters pursued during the year. These increases were partially offset by $600,000 in lower audit and tax related expenses.
The decrease in general and administrative expenses in fiscal 2011 in both absolute dollars and as a percentage of total revenues was primarily due to reductions in legal fees resulting from successful resolution of
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several contract compliance matters prior to the end of fiscal 2010. As a result, litigation related expenses decreased by approximately $4.9 million during fiscal 2011 compared to the same period in fiscal 2010. We also incurred approximately $600,000 in acquisition related costs in fiscal 2010 due to the acquisition of Xenos. These decreases in legal and acquisition related costs were partially offset by approximately $2 million of increases in employee compensation and related expenses due to increased management bonuses associated with improved overall performance, stock-based compensation, and annual merit increases. We also experienced increase in expenses of approximately $550,000 related to various state and local tax audits which were concluded in fiscal 2011.
We anticipate our general and administrative expenses as a percentage of total revenue to remain at the current levels for fiscal 2013.
Amortization of Purchased Intangibles
|
Year Ended December 31, |
2011 to 2012 |
2010 to 2011 | ||||||||||
| 2012 |
2011 |
2010 |
$ Change |
% Change |
$ Change |
% Change | ||||||
| (dollars in thousands) | ||||||||||||
| $ 1,203 | $1,296 | $1,880 | $(93) | (7)% | $(584) | (31)% | ||||||
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| ||||||
| (Percent of total revenue) | ||||||||||||
| 1% | 1% | 1% | ||||||||||
We perform a goodwill impairment test at least annually, which we complete on October 1 of each year. These annual impairment tests have not resulted in an impairment of recorded goodwill in fiscal 2012, 2011 or 2010.
Amortization expense decreased during fiscal 2012 as compared to the same period in 2011 due to the impairment of in-process research and development (“IPR&D”) related to our acquisition of Xenos. This IPR&D was being amortized prior to impairment which occurred in June 2011. We continue to amortize the intangible assets purchased through the acquisition of Xenos on a straight-line basis over their estimated useful life of seven years. Intangible assets purchased through our acquisition of Quiterian will also be amortized on a straight-line basis over their estimated useful life of seven years.
Amortization expense decreased during fiscal 2011 as compared to the same period in fiscal 2010 as some intangibles related to our prior acquisitions were fully amortized at the end of fiscal 2010. We continue to amortize the intangible assets purchased through the acquisition of Xenos on a straight-line basis over their estimated useful life of seven years.
For fiscal 2012, we expect amortization expense related to other purchased intangible assets to increase as a result of our acquisition of Quiterian in the fourth quarter of 2012.
Asset Impairment
During fiscal 2011 we recorded $1.7 million of IPR&D impairment charges. We had previously recorded IPR&D representing the fair value of a project that was underway at Xenos at the time of acquisition. The product underlying this IPR&D item was released on June 28, 2010 and the fair value of this intangible asset was amortized on a straight-line basis over the respective estimated useful life of seven years beginning July 2010. During the second quarter of 2011, we deemed that it was necessary to impair this IPR&D due to the fact that changes in circumstances indicated to management that the carrying value of the IPR&D was not recoverable. Accordingly, we used level 3 inputs to measure the fair value associated with this IPR&D. Based on an analysis of historical sales of the product since its release in the second quarter of fiscal 2010, as well as the calculation of
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a discounted cash flow analysis projecting expected cash flows through the remaining useful life of the product, it was determined that the IPR&D balance should be impaired down to zero. The fair value of other identifiable intangible assets is based on detailed valuations using the income approach. Other intangible assets consist of purchased technology and patents, customer lists and relationships, distribution agreements, and trademarks, all of which are amortized using the straight-line method over their estimated useful lives, ranging from 5 to 7 years. We review other intangible assets for impairment as changes in circumstance or the occurrence of events suggest the carrying value may not be recoverable.
Restructuring charges
|
Year Ended December 31, |
2011 to 2012 |
2010 to 2011 | ||||||||||
| 2012 |
2011 |
2010 |
$ Change |
% Change |
$ Change |
% Change | ||||||
| (dollars in thousands) | ||||||||||||
| $ 496 | $889 | $968 | $ (393) | (44)% | $ (79) | (8)% | ||||||
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| (Percent of total revenue) | ||||||||||||
| 1% | 1% | 1% | ||||||||||
Our restructuring charges have included costs associated with reductions in workforce, exits of idle facilities and disposals of fixed assets. Our restructuring charges in 2012, 2011 and 2010 were based on actual and estimated costs incurred including estimates of sublease income on portions of our idle facilities that we periodically update based on market conditions and in accordance with our restructuring plans. These estimates were impacted by the rules governing the termination of employees, especially those in foreign countries.
During fiscal 2012, the Company incurred a restructuring charge of $496,000. Of this total, approximately $421,000 was severance and benefits related to a restructuring of our French operation and $75,000 was associated with an idle Xenos facility in Europe.
During fiscal 2011, the Company implemented restructuring actions that resulted in an aggregate charge of $889,000 and the elimination of 26 positions across our North American product development and global sales and marketing operations. Also included in the aggregate charges for the year were $316,000 of idle facilities charges related to the closure of a Xenos facility in Europe and final true-ups of operating expenses associated with an idle South San Francisco facility. These charges are based on actual and estimated costs incurred, including estimates of sublease income on portions of the Company’s idle facilities that are periodically updated based on market conditions and in accordance with restructuring plans.
During fiscal 2010, the Company implemented restructuring actions that resulted in an aggregate charge of $968,000 and elimination of 26 positions worldwide, across all levels, primarily within the sales and marketing organization. Severance and termination related charges totaled approximately $921,000. The Company also recorded idle facilities charges totaling $47,000 related to a Xenos facility in Europe.
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The following table summarizes the restructuring accrual activity for the fiscal years ended December 31, 2012, 2011 and 2010 (in thousands):
| Severance & Benefits |
Facility Related |
Total | ||||||||||
| Balance at December 31, 2009 |
$ | 415 | $ | 3,003 | $ | 3,418 | ||||||
| Restructuring charges |
921 | 47 | 968 | |||||||||
| Cash payments, net of rents collected on sublease |
(680 | ) | (2,571 | ) | (3,251 | ) | ||||||
| Reclassified as a long-term asset (1) |
— | 75 | 75 | |||||||||
| Assumed upon acquisition of Xenos (2) |
— | 106 | 106 | |||||||||
| Adjustments (3) |
(2 | ) | (29 | ) | (31 | ) | ||||||
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| Balance at December 31, 2010 |
654 | 631 | 1,285 | |||||||||
| Restructuring charges |
573 | 316 | 889 | |||||||||
| Cash payments, net of rents collected on sublease |
(1,261 | ) | (763 | ) | (2,024 | ) | ||||||
| Reclassified as a long-term asset (1) |
— | 26 | 26 | |||||||||
| Adjustments (3) |
34 | (6 | ) | 28 | ||||||||
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|
|||||||
| Balance at December 31, 2011 |
— | 204 | 204 | |||||||||
| Restructuring charges |
421 | 75 | 496 | |||||||||
| Cash payments, net of rents collected on sublease |
— | (199 | ) | (199 | ) | |||||||
| Adjustments (3) |
3 | 5 | 8 | |||||||||
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| Balance at December 31, 2012 |
$ | 424 | $ | 85 | $ | 509 | ||||||
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| (1) | The balance represents the long-term portion of the estimated operating expenses reimbursable to Actuate under its South San Francisco facility sublease agreement. |
| (2) | The balance represents idle facility-related liabilities assumed by us upon our acquisition of Xenos on February 1, 2010. |
| (3) | Adjustments reflecting the impact of foreign currency translation. |
Interest Income and Other Income (Expense), Net
| (dollars in thousands) | Year Ended December 31, | 2011 to 2012 | 2010 to 2011 | |||||||||||||||||||||||||
| 2012 | 2011 | 2010 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
| Interest income |
$ | 312 | $ | 479 | $ | 439 | $ | (167 | ) | (35 | )% | $ | 40 | 9 | % | |||||||||||||
| Foreign exchange |
(86 | ) | (1,179 | ) | (2,002 | ) | 1,093 | (93 | )% | 823 | (41 | )% | ||||||||||||||||
| Other income/(expense), net |
9 | 345 | (16 | ) | (336 | ) | (97 | )% | 361 | N/A | ||||||||||||||||||
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| Total interest income and other income (expense), net |
$ | 235 | $ | (355 | ) | $ | (1,579 | ) | $ | 590 | (166 | )% | $ | 1,224 | (78 | )% | ||||||||||||
| Interest expense |
$ | (361 | ) | $ | (936 | ) | $ | (1,721 | ) | $ | 575 | (61 | )% | $ | 785 | (46 | )% | |||||||||||
Interest income and other income (expense), net is comprised primarily of interest income earned by us on our cash and short-term investments, foreign currency exchange gains and losses, interest expense incurred on our debt facility, as well as other various charges or income which are not derived from our normal operations. Interest and other income during fiscal 2012 increased as we experienced lower currency exchange losses compared to fiscal 2011 due to a more stable currency market in Europe which resulted in lower revaluation losses in Switzerland. The revaluation of these currency amounts held in Switzerland to Swiss Francs is a required procedure in consolidating and reporting the financial results of our European operations. We also incurred lower interest expense because we did not utilize our credit facility throughout the year. During fiscal 2012, we recorded unused line fees and amortization of debt issuance costs of approximately $220,000.
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Interest and other income during fiscal 2011 increased from the same period in 2010 due primarily to currency exchange gains as a result of favorable revaluation of net monetary assets held by our Swiss subsidiary as the Euro and the British Pound strengthened against the Swiss Franc. Other income increased due to a tax refund received in fiscal 2011. Interest expense totaling approximately $441,000 was recorded on the utilized portion of our credit facility with Wells Fargo Foothill (“WFF”) during fiscal 2011 as compared to approximately $1.3 million in fiscal 2010. During fiscal 2011, we also recorded unused line fees and amortization of debt issuance costs of approximately $468,000. The lower interest expense in fiscal 2011 compared to fiscal 2010 was due to the full pay-down of the outstanding balance on our Credit Facility in May of 2011.
We expect interest and other income to increase in fiscal 2013 as we anticipate continued improvements to our cash position due to growth in our license revenues.
Provision for Income Taxes
| Year Ended December 31, | 2011 to 2012 | 2010 to 2011 | ||||||||||||||||||||||||||
| 2012 | 2011 | 2010 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
| Income tax provision |
$ | 8,128 | $ | 7,623 | $ | 3,665 | $ | 505 | 7 | % | $ | 3,958 | 108 | % | ||||||||||||||
| Effective tax rate |
44 | % | 39 | % | 26 | % | ||||||||||||||||||||||
The provision for income taxes represents Federal, State and foreign taxes as adjusted for the impact of net operating losses utilized, income tax credits benefited and the reversal or establishment of tax reserves. The provision for income taxes of $8.1 million, $7.6 million, and of $3.7 million is based on pretax income of $18.4 million, $19.6 million and $14.3 million in fiscal years 2012, 2011 and 2010, respectively. The increase in the provision for income taxes in fiscal year 2012 compared to fiscal year 2011 was primarily due to the increase of valuation allowance of $1.5 million, offset by a decrease in U.S. profit before tax. The increase in the valuation allowance in fiscal year 2012 occurred in the third quarter and was the result of management’s determination that it was “more likely than not” that the California Research and Development (“R&D”) credits would not be realized based on the size of the R&D credit carry forward and the R&D credits being generated exceeding the R&D credits being utilized. The increase in the tax provision in fiscal year 2011 compared to fiscal year 2010 was primarily due to the significant increase in U.S. profit before tax.
Liquidity and Capital Resources
Our sources of cash, cash equivalents and short-term investments are funds generated from our business operations and funds that may be drawn down under our credit facility. The following sections discuss changes in our balance sheet and cash flows, and other commitments on our liquidity and capital resources during fiscal 2012. This data should be read in conjunction with the Consolidated Statements of Cash Flows.
| (dollars in thousands) | Fiscal 2012 |
% Change 2011 to 2012 |
Fiscal 2011 |
% Change 2010 to 2011 |
Fiscal 2010 |
|||||||||||||||
| Cash, cash equivalents and investments |
$ | 66,450 | (1 | )% | $ | 67,428 | (15 | )% | $ | 79,324 | ||||||||||
| Working capital |
50,548 | 13 | % | 44,875 | (16 | )% | 53,306 | |||||||||||||
| Notes payable |
843 | 100 | % | — | (100 | )% | 40,000 | |||||||||||||
| Stockholders’ equity and non-controlling interest |
125,357 | 7 | % | 116,863 | 26 | % | 92,622 | |||||||||||||
We hold our cash, cash equivalents and investments primarily in the United States, Switzerland, and Singapore. As of December 31, 2012 approximately $24 million of the total $66.5 million of cash, cash equivalents and short term investments were held by our foreign subsidiaries. Currently, the foreign cash is not available to fund the U.S. operations. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans or cash requirements do not demonstrate a need to repatriate them to fund our U.S. operations.
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Summary of our cash flows:
| (dollars in thousands) | Fiscal 2012 |
Fiscal 2011 |
Fiscal 2010 |
|||||||||
| Net cash provided by operating activities |
$ | 20,340 | $ | 21,222 | $ | 22,144 | ||||||
| Net cash provided by (used in) investing activities |
(10,601 | ) | 17,001 | (51,118 | ) | |||||||
| Net cash provided by (used in) financing activities |
(11,605 | ) | (32,711 | ) | 7,796 | |||||||
| Effect of foreign currency exchange rates on cash and cash equivalents |
590 | (22 | ) | 1,274 | ||||||||
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| Net increase (decrease) in cash and cash equivalents |
$ | (1,276 | ) | $ | 5,490 | $ | (19,904 | ) | ||||
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Fiscal year 2012
Cash flows from operating activities: Net cash provided by operating activities was $20.3 million, resulting from net income of $10.3 million, adjusted for $9.6 million in non-cash charges and $0.4 million net change in operating assets and liabilities. The non-cash charges included depreciation and amortization, stock-based compensation, impairment of intangible assets, tax benefits related to stock benefit plans and other non-cash adjustments, and the change in valuation allowance on deferred income tax assets. Net change in operating assets and liabilities included an increase in accounts receivable due to strong bookings and billings at the end of the fiscal year, offset by increases in our deferred liabilities, which primarily consisted of lease incentives (free rent and improvements) provided by the landlord on our new headquarter facility in San Mateo, California.
Accounts Receivable, net (in thousands)
| December 31, 2012 |
December 31, 2011 |
$ Change |
% Change | |||
| $ 33,053 | $ 26,844 | 6,209 | 23% |
Our Days Sales Outstanding (DSO) was 85 days at December 31, 2012 and 70 days for the same period last year. The increase in DSO at December 31, 2012 compared to 2011 was due to a higher accounts receivable balance which resulted from strong bookings and billings at the end of 2012. We continue to closely monitor the credit quality and payment history of our existing and new customers to better identify and minimize, in advance, the risk of our customers’ potential inability to make required payments.
Our primary source of operating cash flows is the collection of accounts receivable from our customers, including maintenance which is typically billed annually in advance. Our overall maintenance revenues comprised 53% of our total revenues in fiscal 2012 and we believe that future proceeds from maintenance renewals will be one of primary sources of our operating cash flows. Our operating cash flows are also impacted by the timing of payments to our vendors for accounts payable and other liabilities. We generally pay our vendors and service providers in accordance with the invoice terms and conditions. The timing of cash payments in future periods will be impacted by the terms of accounts payable arrangements.
The primary uses of cash from operations consist of salaries, commissions and bonuses paid to our employees. We pay our employees on a semi-monthly basis in North America and on a monthly basis internationally. We generally pay our vendors within one month from receiving an invoice for services rendered. We are also contractually committed to pay rent and facility related charges in support of our worldwide operations. As of December 31, 2012, we remained contractually committed to $30.3 million in operating lease obligations related to our worldwide facilities.
We expect cash provided by operating activities to fluctuate in future periods as a result of a number of factors, including the timing of our billings and collections, our operating results, the timing and amount of tax and other liability payments and cash used to fund any future acquisitions.
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Cash flows from investing activities: Cash used in investing activities was $10.6 million and included purchase of property and equipment that was driven by the relocation to our new headquarters facility and the acquisition of Quiterian, which resulted in a net cash payment of approximately $4.5 million. The acquisition of Quiterian was net of approximately $0.5 million of acquired cash. The remaining increase in cash used primarily relates to the timing of purchases and maturities of marketable securities.
Cash flows from financing activities: Cash used in financing activities was $11.6 million driven by $25.6 million in share buybacks which resulted in the repurchase of 4,206,804 shares of Actuate stock. These cash outlays were partially offset by proceeds from exercise of employee stock options and corresponding tax benefits associated with such exercises.
Fiscal year 2011
Cash flows from operating activities: Net cash provided by operating activities was $21.2 million, resulting from net income of $12 million, adjusted for $7.1 million in non-cash charges and $2.1 million in net changes in operating assets and liabilities. The non-cash charges included depreciation and amortization, stock-based compensation, impairment of intangible assets, tax benefits related to stock benefit plans and other non-cash adjustments, and the change in valuation allowance on deferred income tax assets. Net change in operating assets and liabilities included a decrease in accounts receivable due to increased collections and improved Days Sales Outstanding (DSO), offset by increased tax payments and restructuring related liabilities.
Cash flows from investing activities: The changes in cash flows from investing activities primarily relates to acquisitions and the timing of purchases, as well as the maturities and sales of our investments in marketable securities. We also use cash to invest in capital and other assets to support our growth. Cash provided by investing activities was $17 million as we liquidated a large portion of our short-term investments in order to fully pay down the outstanding balance on our revolving line of credit with WFF. The remaining increase in cash provided primarily relates to the timing of purchases and maturities of marketable securities.
Cash flows from financing activities: Cash used in financing activities was $32.7 million as we fully paid down the outstanding balance on our revolving line of credit with WFF totaling $40 million. We used approximately $10 million to repurchase 1,600,967 shares of Actuate stock. We also paid $594,000 to a minority shareholder of Actuate Japan which exercised its rights to put its 12% equity interest in Actuate Japan. These cash outlays were partially offset by higher proceeds from exercise of employee stock options and corresponding tax benefits associated with such exercises.
Fiscal year 2010
Cash flows from operating activities: Net cash provided by operating activities was $22.1 million, resulting from net income of $10.6 million and adjusted for $8.6 million in non-cash charges and $2.9 million net change in assets and liabilities. The non-cash charges included depreciation and amortization, stock-based compensation, tax benefits related to stock benefit plans and other non-cash adjustments, and the change in valuation allowance on deferred income tax assets. Net change in assets and liabilities included a decrease in accounts receivable due to increased collections and improved Days Sales Outstanding (DSO), a decrease in prepaid expenses, and an increase in income taxes payable, offset by decreases in accrued liabilities, restructuring reserves and deferred revenue.
Cash flows from investing activities: Cash used in investing activities was $51.1 million driven primarily by the acquisition of Xenos which resulted in a net cash payment of approximately $27.3 million. This cash payment was net of approximately $6.9 million of acquired cash. We funded the acquisition by using a combination of approximately $24.3 million of Company’s cash and investment reserves and borrowed $10 million under our existing credit facility with WFF. The remaining increase in cash used primarily relates to the timing of purchases and maturities of marketable securities.
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Cash flows from financing activities: Cash provided by financing activities was $7.8 million resulting from an additional $10 million borrowing under our existing credit facility with WFF to partially fund the acquisition of Xenos which was completed in February 2010. Offsetting these proceeds were approximately $10 million in payments associated with our share buyback program that resulted in the repurchase of 2,042,612 shares of Actuate stock. Proceeds from exercise of employee stock options, offset by associated tax benefits accounted for the remainder of the net proceeds.
Other
Our cash equivalent and short-term investment portfolio as of December 31, 2012 consists of investment grade U.S. Government Agency securities, taxable money market mutual funds and taxable commercial paper and corporate notes. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer. As of December 31, 2012, we had no direct holdings in structured investment vehicles, sub-prime mortgage-backed securities or collateralized debt obligations and no exposure to these financial instruments through our indirect holdings in money market mutual funds. During fiscal years 2012, 2011 and 2010 we had no impairment charge associated with our short-term investment portfolio. While we cannot predict future market conditions or market liquidity, we regularly review our investments and associated risk profiles, which we believe will allow us to effectively manage the risks of our investment portfolio.
As a result of the challenging conditions in the financial markets, we proactively manage our cash and cash equivalents and investments balances and closely monitor our capital and stock repurchase expenditures to ensure ample liquidity. Additionally, we believe the overall credit quality of our portfolio is strong, with our global excess cash, and our cash equivalents and fixed income portfolio invested in banks and securities with a weighted-average credit rating of AA. After the recent downgrade of the U.S. long-term sovereign credit rating by Standard & Poor’s, our portfolio maintained its weighted average credit rating of AA and above. Our investments are classified as Level 1 or Level 2 investments, as measured under fair value guidance. See Note 4 of the Notes to the Consolidated Financial Statements.
Contractual Obligations and Commercial Commitments
General
The Company is engaged in certain legal actions arising in the ordinary course of business. Although there can be no assurance as to the outcome of such litigation. The Company has reserved for and estimated exposure of such litigation, believes that it has adequate legal defenses and that the ultimate outcome of any of these actions will not have a material effect on the Company’s consolidated financial position or results of operations.
Revolving credit line
In early November of 2008, the Company entered into a revolving Credit Agreement with Wells Fargo Foothill (“WFF”) and secured a revolving line of credit in the principal amount of up to $50 million. During the fourth quarter of fiscal 2008, the Company used $30 million of its cash along with $30 million of funds available through this credit facility to complete a $60 million common stock buyback. During the first quarter of 2010, the Company borrowed an additional $10 million of funds available through this credit facility to complete the acquisition of Xenos, which was completed on February 1, 2010. There are no minimum pay-down requirements under the terms of this credit facility so long as we remain in compliance with the terms of the Credit Agreement. Total costs associated with the facility, including legal and closing fees, amounted to approximately $1.1 million and were fully paid as of December 31, 2012. These costs were capitalized and are being amortized over four years in the Company’s Consolidated Financial Statements. Such assets are reflected as current assets if amortized within one year or non-current assets if amortized beyond one year. The Credit Agreement was originally for a period of four years and was originally scheduled to expire on November 3, 2012.
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In May 2011 the Company paid down the outstanding balance on its revolving line of credit. The Company used $40 million in cash and short-term investments in order to pay down this outstanding debt.
On December 29, 2011, the Company amended and re-negotiated its credit facility with Wells Fargo Capital Finance, LLC (“WFCF”). The amended credit facility provided for the following:
| • | An extension of the original agreement entered in November 2008. The termination date was extended from November 3, 2012 to November 3, 2015, |
| • | Replacement of a $125,000 commitment fee that was payable on November 3, 2011 with a closing fee of $100,000 that was paid on December 29, 2011. |
| • | A 50% reduction in the applicable internal rate on the outstanding credit balance from 3.5% to 1.75%. |
| • | A reduction in the unused line fee from 0.50% to 0.30% per year applied to the unutilized portion of the credit facility. |
The remaining unamortized costs associated with the credit facility will be amortized from the date of amendment over four years.
As of December 31, 2012, there was no balance owed on this credit facility and the balance available under the revolving credit facility was approximately $50 million. Interest is based on a floating rate plus an applicable margin based on the outstanding balance of the amount drawn under the Credit Agreement. The floating rate is determined at the Company’s election and may either be (i) London Interbank Offered Rate (“LIBOR”) or (ii) the greater of the Federal Funds Rate plus an applicable margin and the Prime Rate. If the Company’s usage of the credit line exceeds 80% of its trailing four quarters of recurring maintenance revenue, or if the sum of available funds under the Credit Agreement plus available cash is less than $10 million, the Company is required to meet certain minimum income targets and be subject to a limit on annual capital expenditures. As of December 31, 2012, the Company was able to meet the 80% test as well as the $10 million minimum cash threshold and was therefore not subject to the income or the capital expenditures covenants. The Company is required to make interest payments on any outstanding balances and pay an unused commitment fee on any unused portion of the credit line on a monthly basis.
The following table represents costs related to the Company’s credit facility (in thousands):
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Interest expense |
$ | 3 | $ | 441 | $ | 1,317 | ||||||
| Amortization of debt issuance costs |
68 | 282 | 287 | |||||||||
| Unused line fees |
152 | 186 | 56 | |||||||||
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|
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|
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|
|
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| $ | 223 | $ | 909 | $ | 1,660 | |||||||
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The Credit Agreement contains covenants, which, among other things, impose certain limitations with respect to lines of business, mergers, investments and acquisitions, additional indebtedness, distributions, guarantees, liens and encumbrances. In the event the Company does not meet the requirements specified above, a triggering event will be deemed to have occurred and the Company would be required to maintain the two financial covenants listed below:
| • | achieve income before interest and taxes, measured on a quarter-end basis, of at least the required amount set forth per the Credit Agreement, |
| • | limit the amount of capital expenditures to an amount not exceeding that set forth per the Credit Agreement. |
The Company’s indebtedness under the Credit Agreement is secured by a lien on (i) substantially all of its assets and the assets of Actuate Corporation and (ii) by a pledge of all of its stock and a portion of the stock of each of its subsidiaries.
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Notes payable
Associated with the acquisition of Quiterian on October 16, 2012, the Company inherited two loan agreements that were previously executed to finance the development of the Quiterian software. The loans were offered by the Spanish government subsidy programs and are restricted for use on development of the software. The loans are scheduled for repayment on a quarterly basis starting June, 2014 and ending September, 2022. The combined outstanding balances of these loans total approximately $843,000 and are classified as notes payable on the Company’s Consolidated Balance sheet at December 31, 2012.
Operating Lease Commitments
On November 28, 2011, the Company entered into a ten year lease agreement with a third party for approximately 58,000 square feet of office space in the BayCenter Campus in San Mateo, California. This lease is operating in nature and commenced on June 1, 2012 and will end on May 31, 2022. In addition, the lease provides for four months of free rent (rent holiday) and approximately $2.6 million in landlord incentives to be applied towards construction of improvements. At December 31, 2012, the deferred rent liability balance related to the new lease totaled approximately $3.4 million and this balance declines through May 2022 when contractual cash payments exceed the straight-line lease expense. Of this total deferred rent liability balance, approximately $260,000 was classified as short term and $3.1 million was classified as long term accrued liabilities on the Company’s Consolidated Balance Sheet at December 31, 2012. Actuate vacated its previous corporate headquarters located at the Bridgepointe Campus in July 2012 and is now using the BayCenter Campus as its corporate headquarters.
Upon the execution of the new lease, Actuate delivered to the new landlord two letters of credit totaling $225,300. These letters of credit guarantee Actuate’s contractual obligations related to the BayCenter Campus in San Mateo, California.
Actuate leases smaller office facilities in various locations in the United States and abroad. All facilities are leased under operating leases. Total rent expense was approximately $4.2 million in fiscal year 2012, $3.4 million in fiscal year 2011 and $3.5 million in fiscal year 2010.
The following table summarizes the Company’s contractual obligations as of December 31, 2012 (in thousands):
| Total | Less than 1 year |
1 – 3 years |
3 – 5 years |
Thereafter | ||||||||||||||||
| Obligations: |
||||||||||||||||||||
| Operating leases (1) |
$ | 30,308 | $ | 4,192 | $ | 7,142 | $ | 5,776 | $ | 13,198 | ||||||||||
| Interest and loan obligations (2) |
1,300 | 161 | 608 | 236 | 295 | |||||||||||||||
| Obligations for unrecognized tax benefits (3) |
2,127 | — | 2,127 | — | — | |||||||||||||||
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| Total |
$ | 33,735 | $ | 4,353 | $ | 9,877 | $ | 6,012 | $ | 13,493 | ||||||||||
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| (1) | The Company’s future contractual obligations include minimum lease payments under operating leases at December 31, 2012. |
| (2) | Estimated unused line fees related to the revolving line of Credit Agreement with WFCF and estimated interest and principal due on the notes payable funded by the Spanish government for the development of Quiterian software. |
| (3) | Represents the tax liability associated with unrecognized tax benefits estimated between 1 to 3 years. In addition, as of December 31, 2012, our unrecognized tax benefits included $2.4 million which is netted against deferred tax assets. At this time, we are unable to make a reasonably reliable estimate of the timing of payments related to the amounts netted against deferred tax assets, if any, in individual years due to |
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| uncertainties in the timing or outcomes of either actual or anticipated tax audits. As a result, these amounts are not included in the table above. See discussion on the authoritative guidance issued by the FASB on obligations for uncertain tax positions in Note 12 of our Notes to these Consolidated Financial Statements. |
Indemnification. In the normal course of business, we provide customers with indemnification provisions of varying scope against claims of intellectual property infringement by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
Recent Accounting Pronouncements
See Note 1 of our Notes to Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our Consolidated Financial Statements.
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| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of credit risk, fluctuations in interest rates and foreign exchange rates.
Foreign Currency Exchange Risk. During fiscal years 2012, 2011 and 2010 we derived 24%, 21% and 21%, respectively, of our total revenues from sales outside of North America. We face exposure to market risk on the related receivables with respect to fluctuations in the relative value of currencies. Our international revenues and expenses are denominated in foreign currencies, principally the Euro and the British Pound Sterling. The functional currency of each of our foreign subsidiaries is the local currency. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, transaction gains and losses may vary from expectations and adversely impact overall expected profitability. Our losses due to foreign exchange rate fluctuations were approximately $86,000 in fiscal 2012, $1.2 million in fiscal 2011 and approximately $2 million during fiscal 2010.
We performed a sensitivity analysis on the net monetary accounts subject to revaluation that are held primarily by our international subsidiaries. We used the following steps to determine the approximate impact of currency exchange rate fluctuations:
| • | Identified material net monetary assets held in non-functional currencies. These primarily consist of the Euro, British Pound, Canadian Dollar, and the U.S. Dollar-based net assets held by our international subsidiaries. |
| • | Applied hypothetical changes in exchange rates to these net monetary balances held by each subsidiary as identified above. The result was a hypothetical revaluation gain or loss in the subsidiary’s functional currency. |
| • | We then translated the revaluation result as described above to U.S. Dollars using the latest quarter average exchange rate. This resulted in hypothetical revaluation gains or losses before income taxes. These hypothetical results are summarized in the table below as of December 31, 2012: |
| Annual change in currency exchange (in thousands) |
||||||||||||||||||||
| -15% | -10% | -5% | +5% | +10% | +15% | |||||||||||||||
| $(4,052) | $ | (2,701 | ) | $ | (1,351 | ) | $ | 1,351 | $ | 2,701 | $ | 4,052 | ||||||||
Interest Rate Risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest primarily in highly liquid and high quality debt securities. Due to the nature of our investments, we believe that there is limited risk exposure.
Credit Risk. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments in marketable securities, and trade accounts receivable. We have policies that limit investments in investment grade securities and the amount of credit exposure to any one issuer.
We sell primarily to customers in the financial services industry, predominantly in the United States and Europe. Accordingly, unfavorable economic conditions adversely impacting the financial services industry has had a material adverse effect on the Company’s business, financial condition and results of operations. For example, the financial services industry has experienced and may continue to experience cyclical fluctuations in profitability, which may affect timing of, or actual purchases of, our products which would have a material adverse effect on the our business, financial condition and results of operations. There was no customer that accounted for more than 10% of total sales in fiscal 2012.
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We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses. We do not require collateral or other security to support customer receivables. Our credit risk is also mitigated because our customer base is diversified by geography. We generally do not use foreign exchange contracts to hedge the risk in receivables denominated in foreign currencies. We do not hold or issue derivative financial instruments for trading or speculative purposes.
We do not believe that future market equity or interest rate risks related to our marketable investments or debt obligations will have a material impact on our results of operations. The Company is not currently invested in any derivative securities.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements and supplementary data required by this Item 8 are listed in Item 14(a)(1) and begin at page F-1 of this report.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, we carried out an evaluation required by Rules 13a-15 of the Securities Exchange act of 1934, as amended, or the Exchange Act, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012. Based on the evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.
Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012, and has concluded that our internal control over financial reporting was effective. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework.
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In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, In Internal Control—Integrated Framework. Based on our assessment we believe that our internal control over financial reporting is effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
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| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item is contained in part under the caption “Actuate Executive Officers” in Part I, Item 1, of this report, and the remainder is contained in Actuate’s Proxy Statement for its 2012 Annual Meeting of Stockholders under the captions “Proposal No. 1—Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.
Adoption of Code of Ethics
Actuate has adopted a Code of Ethics and Business Conduct (the “Code”) applicable to all of its Board members, employees and executive officers, including its Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer) and Controller. We have made the Code available under the investors/corporate governance section of our website at www.actuate.com.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding (i) any amendments to the Code, or (ii) any waivers under the Code relating to our Chief Executive Officer, Chief Financial Officer or Controller, by posting such information under the investors/corporate governance section of our website at www.actuate.com.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item regarding executive compensation is incorporated herein by reference from the section entitled “Executive Compensation and Related Information” of the Proxy Statement.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” of the Proxy Statement.
Equity Compensation Plan Information
Information about our equity compensation plans at December 31, 2012 that were either approved or not approved by stockholders was as follows:
| Plan Category |
Number of securities to be issued upon exercise of outstanding options |
Weighted average exercise price of outstanding options |
Number of available securities remaining for future issuance (3) |
|||||||||
| Equity compensation plans approved by stockholders (1) |
10,690,651 | $ | 4.96 | 14,847,310 | ||||||||
| Equity compensation plans not approved by stockholders (2) |
100,418 | $ | 3.50 | 696,881 | ||||||||
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|
|
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| Total |
10,791,069 | $ | 4.95 | 15,544,191 | ||||||||
|
|
|
|
|
|
|
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| (1) | Consists of three plans: our Amended and Restated 1998 Equity Incentive Plan, 1998 Non-Employee Director Option Plan, and the 1998 Employee Stock Purchase Plan. |
| (2) | Consists of one plan: our 2001 Supplemental Stock Option Plan. See Note 9 of the Notes to Consolidated Financial Statements. |
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| (3) | Plan approved by stockholders is reduced by 50,000 shares granted to the beneficiary of a deceased senior executive and includes 6,821 in shares withheld for taxes not issued from plan reserves. |
| ITEM 13. | CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this Item regarding certain relationships and related transactions is incorporated herein by reference from the sections entitled “Certain Relationships, Related Transactions and Director Independence” of the Proxy Statement.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item regarding principal accounting fees and services is incorporated herein by reference from the section entitled “Principal Accounting Fees and Services” of the Proxy Statement.
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| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
See Index on Page F-1.
(a)(2) Financial Statement Schedules
Schedule II—Valuation and Qualifying Accounts.
Other schedules have been omitted because the information required to be set forth therein is not applicable or is readily available in the financial statements or notes thereto.
(a)(3) Exhibits
| Exhibit No. |
Description | |
| 2.1 (6) | Acquisition Agreement dated as of December 8, 2009 between Actuate Corporation and Xenos Group Inc. | |
| 3.1 (3) | Third Amended and Restated Certificate of Incorporation. | |
| 3.2 (8) | Amended and Restated Bylaws. | |
| 3.3 (12) | Amendment No. 1 to Amended and Restated Bylaws. | |
| 3.4 (14) | Amendment No. 2 to Amended and Restated Bylaws. | |
| 3.5 (15) | Amendment No. 3 to Amended and Restated Bylaws. | |
| 4.1 (2) | Specimen Common Stock Certificate. | |
| 10.1 (10)+ | Form of Indemnification Agreement. | |
| 10.2 (1)+ | 1994 Stock Option Plan, as amended. | |
| 10.3 (1)+ | Amended and Restated 1998 Equity Incentive Plan. | |
| 10.4 (1)+ | Amended and Restated 1998 Employee Stock Purchase Plan. | |
| 10.5 (1)+ | 1998 Non-Employee Directors Option Plan. | |
| 10.6 (4)+ | 2001 Supplemental Stock Option Plan. | |
| 10.7 (1)+ | Offer Letter between the Company and Daniel A. Gaudreau dated May 7, 1997. | |
| 10.10 (4) | Office Building Lease between the Actuate and HMS Gateway Office, L.P. dated December 21, 2000. | |
| 10.11 (5)+ | Form of Severance Agreement (All Section 16 Officers)—Other than Mr. Nierenberg. | |
| 10.12 (7) | Credit Agreement between Actuate and Wells Fargo Foothill, LLC dated November 5, 2008. | |
| 10.13 (9) | Office Building Sublease between Actuate and Oracle Corporation dated June 5, 2007. | |
| 10.14 (11)+ | Amendment to Amended and Restated 1998 Equity Incentive Plan. | |
| 10.15 (13)+ | Xenos Group Inc. 2000 Amended Stock Option Plan. | |
| 10.16 (10) | Confidential Agreement and Release between Oracle America, Inc. and Actuate Corporation dated June 14, 2010. | |
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| Exhibit No. |
Description | |
| 10.17 (10) | Memorandum of Understanding between Actuate Corporation and International Business Machines Corporation and MRO Software, Inc. dated September 16, 2010. | |
| 10.18 (16)+ | Amendment to the Actuate Software Corporation 1998 Equity Incentive Plan. | |
| 10.19 (17) | Lease agreements between Actuate and CA—San Mateo BayCenter Limited Partnership dated November 28, 2011. | |
| 10.20 (18) | Amendment to Credit Agreement between Actuate and Wells Fargo Capital Finance, LLC effective as of December 29, 2011. | |
| 10.21 (19)+ | Form of Restricted Stock Unit Award Agreement—Performance Vesting. | |
| 10.22+ | Form of Restricted Stock Unit Award Agreement—Time Based Vesting (as amended). | |
| 21.1 | Subsidiaries of Actuate Corporation. | |
| 23.1 | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm. | |
| 23.2 | Consent of KPMG LLP, Independent Registered Public Accounting Firm. | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer | |
| 32.1 | Section 1350 Certifications | |
| 101 | The following materials from the Annual Report on Form 10-K of Actuate Corporation for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income for the three years ended December 31, 2012, 2011 and 2010, (iii) the Consolidated Statements of Stockholder’s Equity and Comprehensive Income for the three years ended December 31, 2012, 2011 and 2010, (iv) the Consolidated Statements of Cash Flows for the three years ended December 31, 2012, 2011 and 2010, and (v) the Notes to the Consolidated Financial Statements.* | |
| * | Pursuant to Rule 406T of Regulation S-T, these interactive data files are furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended; are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended; and otherwise are not subject to liability under these sections. |
| (1) | Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-55741) filed on June 1, 1998. |
| (2) | Incorporated by reference to our Amended Registration Statement on Form S-1/A filed on June 23, 1998. |
| (3) | Incorporated by reference to our Annual Report on Form 10-K filed on March 30, 2000. |
| (4) | Incorporated by reference to our Annual Report on Form 10-K filed on March 12, 2001. |
| (5) | Incorporated by reference to our Form 8-K filed on October 25, 2007. |
| (6) | Incorporated by reference to our Annual Report on Form 10-K filed on March 10, 2010. |
| (7) | Incorporated by reference to our Form 8-K filed on November 5, 2008. |
| (8) | Incorporated by reference to our Form 8-K filed on February 3, 2009. |
| (9) | Incorporated by reference to our Form 8-K filed on June 5, 2007. |
| (10) | Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 5, 2010. |
| (11) | Incorporated by reference to our Form 8-K filed on April 23, 2009. |
| (12) | Incorporated by reference to our Form 8-K filed on January 28, 2010. |
| (13) | Incorporated by reference to our Form S-8 filed on February 4, 2010. |
| (14) | Incorporated by reference to our Form 8-K filed on July 21, 2010. |
| (15) | Incorporated by reference to our Form 8-K filed on January 24, 2011. |
| (16) | Incorporated by reference to our Quarterly Report on Form 10-Q filed on May 6, 2011. |
64
Table of Contents
| (17) | Incorporated by reference to our Form 8-K filed on November 30, 2011. |
| (18) | Incorporated by reference to our Form 8-K filed on January 3, 2012. |
| (19) | Incorporated by reference to our Form 8-K filed on May 8, 2012. |
| + | Indicates management or compensatory plan or arrangement. |
| (b) | Exhibits |
See (a)(3) above.
| (c) | Financial Statement Schedule |
See (a)(2) above.
65
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
| ACTUATE CORPORATION (Registrant) | ||
| By: | /s/ DANIEL A. GAUDREAU | |
| Daniel A. Gaudreau Senior Vice President, Operations and Chief Financial Officer | ||
Date: March 8, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /s/ NICOLAS C. NIERENBERG Nicolas C. Nierenberg |
Chairman of the Board and Chief Architect |
March 8, 2013 | ||
| /s/ PETER I. CITTADINI Peter I. Cittadini |
Director, President and Chief Executive Officer (Principal Executive Officer) |
March 8, 2013 | ||
| /s/ DANIEL A. GAUDREAU Daniel A. Gaudreau |
Senior Vice President, Operations and Chief Financial Officer (Principal Financial and Accounting Officer) |
March 8, 2013 | ||
| /s/ RAYMOND L. OCAMPO JR. Raymond L. Ocampo Jr. |
Director |
March 8, 2013 | ||
| /s/ KENNETH E. MARSHALL Kenneth E. Marshall |
Director |
March 8, 2013 | ||
| /s/ ARTHUR C. PATTERSON Arthur C. Patterson |
Director |
March 8, 2013 | ||
| /s/ STEVEN D. WHITEMAN Steven D. Whiteman |
Director |
March 8, 2013 | ||
| /s/ TIMOTHY B. YEATON Timothy B. Yeaton |
Director |
March 8, 2013 | ||
66
Table of Contents
INDEX TO FINANCIAL STATEMENTS
| Page | ||
| F-2 | ||
| F-5 | ||
| F-6 | ||
| F-7 | ||
| F-8 | ||
| F-9 | ||
| F-10 | ||
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Actuate Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Actuate Corporation and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2012. Our audit of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Actuate Corporation and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 8, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Grant Thornton LLP
San Francisco, CA
March 8, 2013
F-2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Actuate Corporation and Subsidiaries
We have audited the internal control over financial reporting of Actuate Corporation and its subsidiaries (the “Company”) as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Actuate Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Actuate Corporation and subsidiaries’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Actuate Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Actuate Corporation and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2012. Our audit of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). Our report dated March 8, 2013 expressed an unqualified opinion thereon.
/s/ Grant Thornton LLP
San Francisco, CA
March 8, 2013
F-3
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Actuate Corporation:
We have audited the accompanying consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2010 of Actuate Corporation and subsidiaries (the Company). In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule for the year ended December 31, 2010 as set forth in Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Actuate Corporation and subsidiaries as of December 31, 2010, and the results of their operations and their cash flows for the year ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule for the year ended December 31, 2010, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein for the year ended December 31, 2010.
/s/ KPMG LLP
Mountain View, California
March 11, 2011
F-4
Table of Contents
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 37,483 | $ | 38,759 | ||||
| Short-term investments |
28,967 | 28,669 | ||||||
| Accounts receivable, net of allowances of $394 and $720 at December 31, 2012 and 2011, respectively |
33,053 | 26,844 | ||||||
| Other current assets |
9,098 | 7,131 | ||||||
|
|
|
|
|
|||||
| Total current assets |
108,601 | 101,403 | ||||||
| Property and equipment, net |
7,805 | 1,927 | ||||||
| Goodwill |
51,821 | 46,424 | ||||||
| Purchased intangibles, net |
11,163 | 11,421 | ||||||
| Non-current deferred tax assets, net |
12,214 | 14,876 | ||||||
| Other assets |
911 | 853 | ||||||
|
|
|
|
|
|||||
| $ | 192,515 | $ | 176,904 | |||||
|
|
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 1,976 | $ | 1,521 | ||||
| Current portion of restructuring liabilities |
509 | 98 | ||||||
| Accrued compensation |
6,504 | 5,992 | ||||||
| Other accrued liabilities |
5,626 | 5,872 | ||||||
| Deferred revenue |
43,438 | 43,045 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
58,053 | 56,528 | ||||||
|
|
|
|
|
|||||
| Long-term liabilities: |
||||||||
| Notes payable |
843 | — | ||||||
| Other liabilities |
3,157 | 20 | ||||||
| Long-term deferred revenue |
2,978 | 1,717 | ||||||
| Long-term income taxes payable |
2,127 | 1,670 | ||||||
| Restructuring liabilities, net of current portion |
— | 106 | ||||||
|
|
|
|
|
|||||
| Total long-term liabilities |
9,105 | 3,513 | ||||||
|
|
|
|
|
|||||
| Commitments and contingencies (Notes 8 and 14) |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.001 par value, issuable in series; 5,000,000 shares authorized; none issued or outstanding |
— | — | ||||||
| Common stock, $0.001 par value, 100,000,000 shares authorized; issued 89,179,966 and 85,270,644 shares in fiscal 2012 and 2011, respectively; outstanding 48,220,978 and 48,518,460 shares in fiscal 2012 and 2011, respectively |
48 | 48 | ||||||
| Additional paid-in capital |
237,731 | 214,770 | ||||||
| Treasury stock, at cost; 40,958,988 and 36,752,184 shares in fiscal 2012 and 2011, respectively |
(172,880 | ) | (147,331 | ) | ||||
| Accumulated other comprehensive income |
2,198 | 1,419 | ||||||
| Retained earnings |
58,260 | 47,957 | ||||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
125,357 | 116,863 | ||||||
|
|
|
|
|
|||||
| $ | 192,515 | $ | 176,904 | |||||
|
|
|
|
|
|||||
See accompanying notes to Consolidated Financial Statements.
F-5
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Revenues: |
||||||||||||
| License fees |
$ | 57,886 | $ | 49,172 | $ | 49,155 | ||||||
| Services |
80,933 | 85,771 | 82,317 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total revenues |
138,819 | 134,943 | 131,472 | |||||||||
|
|
|
|
|
|
|
|||||||
| Costs and expenses: |
||||||||||||
| Cost of license fees |
1,918 | 1,887 | 2,219 | |||||||||
| Cost of services |
20,349 | 20,682 | 19,692 | |||||||||
| Sales and marketing |
49,792 | 42,432 | 40,484 | |||||||||
| Research and development |
23,996 | 24,272 | 24,850 | |||||||||
| General and administrative |
22,508 | 20,903 | 23,767 | |||||||||
| Amortization of purchased intangibles |
1,203 | 1,296 | 1,880 | |||||||||
| Asset impairment |
— | 1,681 | — | |||||||||
| Restructuring charges |
496 | 889 | 968 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total costs and expenses |
120,262 | 114,042 | 113,860 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income from operations |
18,557 | 20,901 | 17,612 | |||||||||
| Interest income and other income/(expense), net |
235 | (355 | ) | (1,579 | ) | |||||||
| Interest expense |
(361 | ) | (936 | ) | (1,721 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Income before provision for income taxes |
18,431 | 19,610 | 14,312 | |||||||||
| Provision for income taxes |
8,128 | 7,623 | 3,665 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income |
$ | 10,303 | $ | 11,987 | $ | 10,647 | ||||||
|
|
|
|
|
|
|
|||||||
| Basic net income per share |
$ | 0.21 | $ | 0.25 | $ | 0.24 | ||||||
|
|
|
|
|
|
|
|||||||
| Shares used in basic net income per share calculation |
49,033 | 47,309 | 45,065 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted net income per share |
$ | 0.20 | $ | 0.23 | $ | 0.22 | ||||||
|
|
|
|
|
|
|
|||||||
| Shares used in diluted net income per share calculation |
52,452 | 51,497 | 49,133 | |||||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to Consolidated Financial Statements.
F-6
Table of Contents
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Net income |
$ | 10,303 | $ | 11,987 | $ | 10,647 | ||||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive income (loss): |
||||||||||||
| Foreign currency translation |
727 | (22 | ) | 1,274 | ||||||||
| Net unrealized gain/(loss) on securities |
52 | (40 | ) | (10 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Total comprehensive income |
$ | 11,082 | $ | 11,925 | $ | 11,911 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to Consolidated Financial Statements.
F-7
Table of Contents
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| Common Stock | Additional Paid-in Capital |
Treasury Stock | Accumulated Other Comprehensive Income (Loss) |
Retained Earnings |
Total Stockholders’ Equity |
|||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| Balance at December 31, 2009 |
78,571,349 | $ | 45 | $ | 177,577 | (33,108,605 | ) | $ | (127,338 | ) | $ | (205 | ) | $ | 25,323 | $ | 75,402 | |||||||||||||||
| Net income |
— | — | — | — | — | — | 10,647 | 10,647 | ||||||||||||||||||||||||
| Net unrealized loss on available-for-sale securities |
— | — | — | — | — | (10 | ) | — | (10 | ) | ||||||||||||||||||||||
| Currency translation |
— | — | — | — | — | 1,274 | — | 1,274 | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
1,823,043 | 3 | 5,910 | — | — | — | — | 5,913 | ||||||||||||||||||||||||
| Issuance of common stock under Employee Stock Purchase Plan |
369,780 | — | 1,141 | — | — | — | — | 1,141 | ||||||||||||||||||||||||
| Stock-based compensation |
— | — | 5,600 | — | — | — | — | 5,600 | ||||||||||||||||||||||||
| Stock repurchase |
— | (2 | ) | — | (2,042,612 | ) | (9,997 | ) | — | — | (9,999 | ) | ||||||||||||||||||||
| Adjustment to the value of non-controlling interest in subsidiary |
— | — | (76 | ) | — | — | — | — | (76 | ) | ||||||||||||||||||||||
| Other adjustments (Xenos options assumed and converted) |
— | — | 60 | — | — | — | — | 60 | ||||||||||||||||||||||||
| Tax benefits from employee stock options |
— | — | 1,836 | — | — | 141 | — | 1,977 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2010 |
80,764,172 | $ | 46 | $ | 192,048 | (35,151,217 | ) | $ | (137,335 | ) | $ | 1,200 | $ | 35,970 | $ | 91,929 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income |
— | — | — | — | — | — | 11,987 | 11,987 | ||||||||||||||||||||||||
| Net unrealized loss on available-for-sale securities |
— | — | — | — | — | (40 | ) | — | (40 | ) | ||||||||||||||||||||||
| Currency translation |
— | — | — | — | — | (22 | ) | — | (22 | ) | ||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
4,102,658 | 4 | 12,805 | — | — | — | — | 12,809 | ||||||||||||||||||||||||
| Issuance of common stock under Employee Stock Purchase Plan |
403,814 | — | 1,562 | — | — | — | — | 1,562 | ||||||||||||||||||||||||
| Stock-based compensation |
— | — | 5,164 | — | — | — | — | 5,164 | ||||||||||||||||||||||||
| Stock repurchase |
— | (2 | ) | — | (1,600,967 | ) | (9,996 | ) | — | — | (9,998 | ) | ||||||||||||||||||||
| Adjustment to the value of non-controlling interest in subsidiary |
— | — | 99 | — | — | — | — | 99 | ||||||||||||||||||||||||
| Tax benefits from employee stock options |
— | — | 3,092 | — | — | 281 | — | 3,373 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2011 |
85,270,644 | $ | 48 | $ | 214,770 | (36,752,184 | ) | $ | (147,331 | ) | $ | 1,419 | $ | 47,957 | $ | 116,863 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income |
— | — | — | — | — | — | 10,303 | 10,303 | ||||||||||||||||||||||||
| Net unrealized gain on available-for-sale securities |
— | — | — | — | — | 52 | — | 52 | ||||||||||||||||||||||||
| Currency translation |
— | — | — | — | — | 727 | — | 727 | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
3,535,546 | 4 | 10,616 | — | — | — | — | 10,620 | ||||||||||||||||||||||||
| Issuance of common stock under Employee Stock Purchase Plan |
373,776 | 1 | 1,709 | — | — | — | — | 1,710 | ||||||||||||||||||||||||
| Stock-based compensation |
— | — | 8,018 | — | — | — | — | 8,018 | ||||||||||||||||||||||||
| Stock repurchase |
— | (5 | ) | — | (4,206,804 | ) | (25,549 | ) | — | — | (25,554 | ) | ||||||||||||||||||||
| Tax benefits from employee stock options |
— | — | 2,618 | — | — | — | — | 2,618 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2012 |
89,179,966 | $ | 48 | $ | 237,731 | (40,958,988 | ) | $ | (172,880 | ) | $ | 2,198 | $ | 58,260 | $ | 125,357 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
See accompanying notes to Consolidated Financial Statements.
F-8
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Operating activities |
||||||||||||
| Net income |
$ | 10,303 | $ | 11,987 | $ | 10,647 | ||||||
| Adjustments to reconcile net income to net cash from operating activities: |
||||||||||||
| Stock-based compensation expense, net of liability-based awards |
7,279 | 5,164 | 5,600 | |||||||||
| Excess tax benefits from stock-based compensation |
(3,054 | ) | (3,485 | ) | (760 | ) | ||||||
| Amortization of purchased intangibles |
2,306 | 2,390 | 3,103 | |||||||||
| Amortization of debt issuance cost |
70 | 282 | 287 | |||||||||
| Depreciation |
2,186 | 1,945 | 1,914 | |||||||||
| Change in valuation allowance on deferred tax assets |
475 | (716 | ) | (2,006 | ) | |||||||
| Net realized gain on Auction Rate Securities (ARS) |
— | — | (1,934 | ) | ||||||||
| Net realized loss on fair value of put option |
— | — | 1,921 | |||||||||
| Accretion/amortization on short-term investments |
180 | (185 | ) | 447 | ||||||||
| Impairment and other asset adjustments |
175 | 1,681 | — | |||||||||
| Change in operating assets and liabilities, net of effects of acquisition: |
||||||||||||
| Accounts receivable, net |
(5,690 | ) | 1,798 | 6,286 | ||||||||
| Other current assets |
(2,605 | ) | (43 | ) | 2,632 | |||||||
| Accounts payable |
(125 | ) | (173 | ) | (1,369 | ) | ||||||
| Accrued compensation |
238 | 42 | 584 | |||||||||
| Other accrued liabilities |
191 | 821 | (4,402 | ) | ||||||||
| Deferred tax assets, net of liabilities |
2,385 | 1,279 | 110 | |||||||||
| Income taxes receivable/payable |
1,127 | 975 | 3,834 | |||||||||
| Other deferred liabilities |
3,136 | (248 | ) | (501 | ) | |||||||
| Restructuring liabilities |
305 | (1,107 | ) | (2,378 | ) | |||||||
| Deferred revenue |
1,458 | (1,185 | ) | (1,871 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Net cash generated by operating activities |
20,340 | 21,222 | 22,144 | |||||||||
|
|
|
|
|
|
|
|||||||
| Investing activities |
||||||||||||
| Purchases of property and equipment |
(5,572 | ) | (640 | ) | (944 | ) | ||||||
| Proceeds from maturities of short-term investments |
31,863 | 64,383 | 29,644 | |||||||||
| Purchase of short-term investments |
(32,288 | ) | (46,853 | ) | (52,571 | ) | ||||||
| Acquisitions, net of cash acquired |
(4,465 | ) | — | (27,343 | ) | |||||||
| Net change in other non-current assets |
(139 | ) | 111 | 96 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash generated by (used in) investing activities |
(10,601 | ) | 17,001 | (51,118 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Financing activities |
||||||||||||
| Proceeds from/(pay-down) of credit facility and other debt obligations |
(1,394 | ) | (39,975 | ) | 9,981 | |||||||
| Excess tax benefits from stock-based compensation |
3,054 | 3,485 | 760 | |||||||||
| Purchase of minority shares of Actuate Japan |
— | (594 | ) | — | ||||||||
| Proceeds from issuance of common stock |
12,289 | 14,371 | 7,054 | |||||||||
| Stock repurchases |
(25,554 | ) | (9,998 | ) | (9,999 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) financing activities |
(11,605 | ) | (32,711 | ) | 7,796 | |||||||
| Effect of exchange rate changes on cash and cash equivalents |
590 | (22 | ) | 1,274 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net increase (decrease) in cash and cash equivalents |
(1,276 | ) | 5,490 | (19,904 | ) | |||||||
| Cash and cash equivalents at the beginning of the year |
38,759 | 33,269 | 53,173 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at the end of the year |
$ | 37,483 | $ | 38,759 | $ | 33,269 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental disclosure of cash flow information |
||||||||||||
| Cash paid for interest |
$ | 288 | $ | 773 | $ | 1,427 | ||||||
| Cash paid for income taxes |
$ | 3,635 | $ | 6,408 | $ | 2,475 | ||||||
See accompanying notes to Consolidated Financial Statements.
F-9
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Summary of Significant Accounting Policies |
Actuate Software Corporation was incorporated in November 1993 in the State of California and reincorporated in the State of Delaware in July 1998 as Actuate Corporation (“We”, “Actuate” or the “Company”). Actuate provides software and services to develop and deploy custom Business Intelligence and information applications that deliver rich interactive content that improve customer loyalty and corporate performance. Applications built on Actuate’s open source-based platform provide all stakeholders inside and outside the firewall, including employees, customers, partners and citizens with information that they can easily access and understand to maximize revenue, cut costs, improve customer satisfaction, streamline operations, create competitive advantage and make better decisions. Our goal is to ensure that all users can use decision-making information in their day-to-day activities, opening up completely new avenues for improving corporate performance.
Actuate’s principal executive offices are located at the BayCenter Campus in San Mateo, California. Actuate’s telephone number is 650-645-3000. Actuate maintains Web sites at www.actuate.com, www.birt-exchange.org and www.birt-exchange.com www.birtperformanceanalytics.com, www.xenos.com, www.birtondemand.com and www.quiterian.com.
Basis of Presentation
The consolidated financial statements include the accounts of Actuate and its wholly-owned subsidiaries. Actuate has offices throughout North America, Europe and Asia including offices in the United States, Canada, Switzerland, United Kingdom, Germany, Spain, Singapore, Japan and China. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. On a regular basis, Actuate evaluates estimates, including those related to the following:
| • | account receivable allowances, goodwill impairment, intangible assets, income taxes, restructuring charges, stock options and employee stock purchase plan shares, and fair value of purchase valuation allowances for deferred tax assets, consideration paid and assets acquired and liabilities assumed in business combinations. |
Actual results could differ materially from those estimates, particularly in light of the uncertain economic environment.
Revenues
Actuate generates revenues from the sales of software licenses and related services. The Company receives software license revenues from licensing its products directly to end-users and indirectly through resellers, system integrators and original equipment manufacturers (OEMs). The Company receives service revenues from maintenance contracts, consulting services and training that Actuate performs for customers.
For sales to end-user customers, Actuate recognizes license revenues when a license agreement has been signed by both parties or a definitive agreement has been received from the customer, the product has been
F-10
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
physically shipped or electronically made available, there are no unusual uncertainties surrounding the product acceptance, the fees are fixed or determinable, collectability is probable and vendor-specific objective evidence of fair value exists to allocate the fee to the undelivered elements of the arrangement. Vendor-specific objective evidence of fair value of sales to end users is based on the price charged when an element is sold separately.
Actuate has not established vendor-specific objective evidence of fair value for its licenses. Therefore, the Company recognizes revenues from software arrangements with multiple elements involving software licenses under the residual method, which means the fair value of the undelivered elements is deferred while the remaining value of the arrangement is allocated to the delivered elements. If an agreement includes a bundled fee comprised of license and services, then the company separates this bundled fee into its individual revenue components based on the VSOE of the services, with the remainder being allocated to license revenue. If the license agreement contains payment terms that would indicate that the fee is not fixed or determinable, revenues are recognized as the payments become due and payable, assuming that all other revenue recognition criteria are met.
Actuate enters into reseller and distributor arrangements that typically give such distributors and resellers the right to distribute its products to end-users headquartered in specified territories. Actuate recognizes license revenues from arrangements with U.S. resellers and distributors when there is persuasive evidence of an arrangement with the reseller or distributor, the product has been shipped, the fees are fixed or determinable, collectability is probable and vendor-specific objective evidence of fair value exists to allocate the fee to the undelivered elements of the arrangement. Actuate recognizes license revenues from arrangements with international resellers and distributors upon receipt of evidence of sell-through and when all other revenue recognition criteria have been met. If it is not practical to obtain evidence of sell-through, the Company defers revenues until the end-user has been identified and cash has been received. In some instances there is a timing difference between when a reseller completes its sale to the end-user and the period in which Actuate receives the documentation required for revenue recognition. Because Actuate delays revenue recognition until the reporting period in which the required documentation is obtained, it may recognize revenue in a period subsequent to the period in which the reseller completes the sale to its end-user.
Actuate also enters into OEM arrangements that provide for license fees based on the bundling or embedding of its products with the OEM’s products. These arrangements generally provide for fixed, irrevocable royalty payments. Actuate recognizes license fee revenues from U.S. and international OEM arrangements when a license agreement has been executed by both parties, the product has been shipped, there are no unusual uncertainties surrounding the product acceptance, the fees are fixed or determinable, collectability is probable and vendor-specific objective evidence of fair value exists to allocate the fee to the undelivered elements of the arrangement.
Actuate also has two software-as-a-service (SaaS) offerings called OnPerformance and BIRT On Demand. Actuate recognizes revenue on these licenses ratably over the term of the underlying arrangement.
The Company establishes vendor specific objective evidence of fair value for maintenance and support using a “bell-shaped curve” approach for certain types of license transactions, and uses a “stated maintenance renewal” approach for other categories of license transactions. When applying the “bell-shaped curve” approach the Company analyzes all maintenance renewal transactions over the past twelve months for that category of license and plots those data points on a bell-shaped curve to ensure that the a high percentage of the data points are within an acceptable margin of the established VSOE rate. This analysis is performed quarterly.
When applying the “state renewal rate” approach, the Company ensures that the individual license transaction includes a clear and substantive renewal rate explicitly stated in the documentation for the
F-11
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
transaction. Furthermore, the Company ensures that it has a practice of consistently renewing those transactions at the contractual rate. This is done by reviewing maintenance renewals on these contracts and making sure that a very high percentage are renewed at the renewal rates stipulated in the contract.
The Company assesses the collectability of fees from end-users based on payment history and current credit profile. When a customer is not deemed credit-worthy, revenues are deferred and recognized upon cash receipt.
Actuate recognizes maintenance revenues, which consist of fees for ongoing support and unspecified product updates, ratably over the term of the contract, typically one year. Consulting revenues are primarily related to standard implementation and configuration. Training revenues are generated from classes offered at the Company’s offices and customer locations. Revenues from consulting and training services are typically recognized as the services are performed. When a contract includes both license and service elements, the license fee is typically recognized on delivery of the software, assuming all other revenue recognition criteria are met, provided services do not include significant customization or modification of the product and are not otherwise essential to the functionality of the software.
Cash, Cash Equivalents and Investments
Cash and cash equivalents consist of cash deposited with banks and highly liquid, high-quality instruments with maturities at the date of purchase of 90 days or less. Such instruments typically include money market securities, commercial paper, and other high quality debt instruments. In accordance with Financial Accounting Standards Board (“FASB”) authoritative guidance related to accounting for certain investments in debt and equity securities, and based on its intentions regarding these instruments, the Company classifies all of its short-term investments as available-for-sale, and accounts for these investments at fair value. Short-term investments consist primarily of high quality debt securities with original maturities over 90 days, and may include corporate notes, United States government agency notes, and municipal notes. The cost of securities sold is based on the specific identification method.
Fair Values of Financial Instruments
The carrying value of the Company’s financial instruments, including cash and cash equivalents, investments, accounts receivable and accounts payable approximates fair value due to the short term nature of these instruments. The fair market value of Actuate’s long-term debt approximates its carrying value based upon current market rates of interest. The Company maintains its cash, cash equivalents and investments with high quality financial institutions and limits its investment in individual securities based on the type and credit quality associated with such investments.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains allowances for potential credit losses. There was one customer that accounted for more than 10% of the Company’s net accounts receivable balance at December 31, 2012. No customer had a balance in excess of 10% of the Company’s net accounts receivable as of December 31, 2011.
Concentration of Credit Risk
The Company’s cash and cash equivalents are mainly deposited with several major financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk on these balances. Financial instruments that potentially subject the Company to credit risk principally consist of
F-12
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
investments and accounts receivable. Actuate places its investments with high-credit-quality institutions and limits its investment in individual securities based on the type and credit quality associated with such investments. The Company sells to a diverse customer base, predominantly to customers in the United States and Europe. No single customer has accounted for more than 10% of total sales in any period presented. Actuate does not require collateral on sales with credit terms.
Allowance for Doubtful Accounts
The Company’s accounts receivable is subject to collection risks. The Company’s gross accounts receivable is reduced for this risk by an allowance for doubtful accounts. This allowance is for estimated losses resulting from the inability of Actuate’s customers to make required payments. It is an estimate and is regularly evaluated for adequacy by taking into consideration a combination of factors. The Company looks at factors such as past collection experience, credit quality of the customer, age of the receivable balance, and current economic conditions. These facts are reviewed to determine whether a specific reserve for bad debt should be recorded to reduce the related receivable to the amount believed to be collectible. The Company also ceases recognizing revenues on any outstanding domestic maintenance renewal invoices which are older than 90 days past due.
The Company also records unspecified reserves for bad debts for all other customers based on a variety of factors, including length of time the receivables are past due and historical collection experience. Reserve percentages are applied to various aged categories of receivables based on historical collection experience to determine how much of an unspecified reserve is needed. The use of different estimates or assumptions could produce different allowance balances. If the financial condition of Actuate’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Accounts are charged against the allowance for doubtful accounts once collection efforts are unsuccessful. Historically, such losses have been within management’s expectations.
Software Development Costs
Software development costs associated with new products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the time period between the establishment of technological feasibility and completion of software development has been short, and no significant development costs have been incurred during that period.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, which range from two to seven years. Leasehold improvements are amortized over the shorter of the lease term or estimated useful life, which range from four to ten years.
Goodwill and Other Purchased Intangible Assets
The Company evaluates goodwill, at a minimum, on an annual basis in the fourth quarter of each fiscal year, and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The Company begins its impairment test by applying a “Market” approach. Given the Company has one reporting unit; this approach involves comparing the market capitalization of the Company to its carrying value. If this “Market” approach derives a fair value that significantly exceeds the
F-13
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
carrying value of the Company then no further testing is performed. However, if the “Market” approach indicates the fair value does not significantly exceed the carrying value of the Company, the Company performs a supplemental calculation of the estimated fair value of the reporting unit using an “Income” approach. The Company then considers the results of both the “Market” approach and “Income” approach to determine whether or not it is necessary to move to the second step of the goodwill impairment analysis in order to measure the amount of any impairment loss.
Thus far, the “Market” approach has consistently indicated that the estimated fair value of the reporting unit was significantly higher than the carrying value.
The purchased intangible assets are being amortized over their expected useful lives of five to seven years using the straight-line method. See Note 6 for further discussion.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of any asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the excess of the carrying amount of the assets over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell.
Stock-based Compensation
The Company recognizes stock-based compensation expense over the service period for awards that are expected to vest based on the fair value measurement for all share-based payment awards made to our employees and directors, including employee stock options, restricted stock units and employee stock purchases. The Company calculates the fair value of each stock option award on the date of grant using the Black-Scholes-Merton option pricing model. The determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. The use of a Black-Scholes-Merton model requires extensive actual employee exercise behavior data and a number of complex assumptions including expected life, expected volatility, risk-free interest rate and expected forfeiture rate. As a result, the future stock-based compensation expense may differ from the Company’s historical amounts. The Company’s estimate of volatility is based upon the historical volatility experienced in its stock price. To the extent volatility of the Company’s stock price increases in the future, its estimates of the fair value of options granted in the future could increase, thereby increasing stock-based compensation expense in future periods. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expense. The Company’s estimate of the forfeiture rate is based primarily upon historical experience. To the extent the Company revises this estimate in the future its stock-based compensation expense could be materially impacted in the quarter of revision, as well as in following quarters. The Company’s estimate of the expected term of options granted is derived from historical share option exercise experience. In the future, the Company may change its estimate of the expected term, which would impact the fair value of the Company’s options granted in the future.
Acquisitions—Purchase Price Allocation.
The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed, based on their respective fair values at the acquisition date. The excess of the
F-14
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
purchase price over the fair value of the underlying acquired net tangible and intangible assets, if any, is recorded as goodwill. Management estimates the fair value of assets and liabilities based upon quoted market prices, and widely accepted valuation techniques. Although the Company believes the assumptions and estimates it has made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets the Company has acquired or may acquire in the future include but are not limited to:
| • | future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents; |
| • | expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; |
| • | the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio; and |
| • | discount rates. |
In connection with the purchase price allocations for our acquisitions, the Company estimates the fair value of the deferred revenue obligations assumed.
While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, subsequent adjustments, if any, are recorded to the Company’s consolidated statements of operations. For additional discussion, see Note 2.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs are included in sales and marketing expense and amounted to $814,000, $744,000 and $287,000 in fiscal years 2012, 2011 and 2010, respectively.
Income Taxes
We provide for the effect of income taxes in our Consolidated Financial Statements using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryovers, and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. We also apply a two-step approach to determining the financial statement recognition and measurement of uncertain tax positions.
Income tax expense or benefit is recognized for the amount of taxes payable or refundable for the current year, and for deferred tax assets and liabilities for the tax consequences of events that have been recognized in an
F-15
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
entity’s financial statements or tax returns. We must make significant assumptions, judgments and estimates to determine our current provision (benefit) for income taxes, our deferred tax assets and liabilities, and any valuation allowance to be recorded against our deferred tax assets. Our judgments, assumptions and estimates relating to the current provision (benefit) for income taxes include the geographic mix and amount of income (loss), our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Our judgments also include anticipating the tax positions we will record in the financial statements before actually preparing and filing the tax returns. Our estimates and assumptions may differ from the actual results as reflected in our income tax returns and we record the required adjustments when they are identified or resolved. Changes in our business, tax laws or our interpretation of tax laws, and developments in current and future tax audits, could significantly impact the amounts provided for income taxes in our results of operations, financial position, or cash flows.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carry-forwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. To make this assessment, we take into account predictions of the amount and category of taxable income from various sources and all available positive and negative evidence about these possible sources of taxable income. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which the strength of the evidence can be objectively verified. Based on the analysis of positive and negative factors noted above, we have no valuation allowance against U.S. federal deferred tax assets. In the current year, management determined that it was “more likely than not” that the Company’s California research and development (R&D) credits would not be realized based on the size of the R&D credit carry-forward and the R&D credits being generated exceeding the R&D credits being utilized. As such, a full valuation allowance was recorded against the Company’s deferred tax asset for California R&D credit carry-forwards. We maintain a full valuation allowance against deferred tax assets in foreign jurisdictions with a history of losses and a partial valuation allowance in foreign jurisdictions where operating results beyond a certain time frame are less reliable. If, in the future, we determine that these deferred tax assets are more likely than not to be realized, a release of all or part, of the related valuation allowance could result in an income tax benefit in the period such determination is made.
We only recognize an income tax expense or benefit with respect to uncertain tax positions in our financial statements that we judge is more likely than not to be sustained solely on its technical merits in a tax audit, including resolution of any related appeals or litigation processes. To make this judgment, we must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If an income tax position meets the more likely than not recognition threshold, then we must measure the amount of the tax benefit to be recognized by determining the largest amount of tax benefit that has a greater than a 50% likelihood of being realized upon effective settlement with a taxing authority that has full knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible settlement outcomes. To determine if a tax position is effectively settled, we must also estimate the likelihood that a taxing authority would review a tax position after a tax examination has otherwise been completed. We must also determine when it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease in the 12 months after each fiscal year-end. These judgments are difficult because a taxing authority may change its behavior as a result of our disclosures in our financial statements. We must reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision.
F-16
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Sales Taxes
The Company presents its revenues net of sales tax in its Consolidated Statements of Income.
Foreign Currency Translation
The functional currency of each of the Company’s foreign subsidiaries is the foreign subsidiary’s local currency except for the Company’s Cayman subsidiary, whose books and records are maintained in U.S. dollars, and accordingly its functional currency is the U.S. dollar. Actuate translates the assets and liabilities of its international non-U.S. functional currency subsidiaries into U.S. dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using rates that approximate those in effect during the period. Gains and losses from currency translation are included in Accumulated Other Comprehensive Income (Loss) in the accompanying Consolidated Balance Sheet. Currency transaction gains or losses are recorded in Interest Income and Other Income/(Expense), net in the accompanying Consolidated Financial Statements.
Net Income Per Share
The Company computes basic net income per share using the weighted-average number of common shares outstanding during the period, less weighted average shares subject to repurchase. The Company computes diluted net income per share using the weighted-average number of common shares and dilutive share-based awards during the period determined by using the treasury stock method.
The table below reconciles the weighted-average common shares used to calculate basic net income per share with the weighted-average common shares used to calculate diluted net income per share (in thousands).
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Weighted-average shares of common stock outstanding |
49,033 | 47,309 | 45,065 | |||||||||
| Weighted-average dilutive common equivalent shares under the treasury stock method |
3,419 | 4,188 | 4,068 | |||||||||
|
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|
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| Weighted-average common shares used in computing diluted net income per share |
52,452 | 51,497 | 49,133 | |||||||||
|
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Under the treasury stock method, stock options with exercise prices exceeding the average share price of the Company’s common stock during the applicable period are excluded from the diluted earnings per share computation. The weighted-average number of shares excluded from the calculation of diluted net income per share was 2,441,999, 3,931,634 and 6,408,087 as these would be anti-dilutive shares in fiscal years 2012, 2011 and 2010, respectively. The weighted-average number of restricted stock units excluded from the calculation of diluted net income per share was 122,072 in fiscal year 2012. There were no weighted-average anti-dilutive restricted stock units excluded from the diluted net income per share computation in fiscal years 2011 and 2010. These anti-dilutive options and RSUs could be dilutive in the future.
The weighted average exercise price of excluded stock options was $6.29, $5.89 and $5.75 for the years ended December 31, 2012, 2011 and 2010, respectively.
F-17
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Segment Information
Actuate provides software and services for Business Intelligence, Performance Management and Reporting applications. Actuate considers itself to be in a single reportable segment, specifically the license, implementation and support of its software products. Actuate’s chief operating decision maker (the Chief Executive Officer) reviews financial information presented primarily on a consolidated basis, accompanied by disaggregated information showing revenues by geographic region for purposes of making operating decisions and assessing financial performance.
Actuate evaluates the performance of its geographic regions based primarily on revenues. Actuate does not regularly assess the performance of its geographic regions on other measures of income or expense, such as operating income or net income. In addition, as Actuate’s assets are primarily located in its corporate office in the United States and not allocated to any specific region, Actuate does not produce reports for, or measure the performance of, its geographic regions based on any asset-based metrics. Therefore, geographic information is presented only for revenues in Note 13.
Recent Accounting Pronouncements
In June 2011, the FASB issued guidance on the presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present either a continuous statement of income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011, which means that it became effective for the Company beginning on January 1, 2012. The Company has elected to present total comprehensive income utilizing the two statement approach. We adopted the provisions of this guidance effective January 1, 2012, as reflected in the unaudited Condensed Statements of Comprehensive Income herein.
In September 2011, the FASB issued an accounting standard update that amends the accounting guidance on goodwill impairment testing. The amendments in this accounting standard update are intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments in this accounting standard update are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. This accounting standard updated is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which means that it became effective for the Company beginning on January 1, 2012. The adoption of this accounting standard update will not have an impact on our consolidated financial position, results of operations, or cash flows, as it is intended to simplify the assessment for goodwill impairment.
In July 2012, the FASB issued guidance regarding indefinite-lived intangibles impairment tests. The revised standard allows an entity the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determined that it is more likely than not that the asset is impaired. The new guidance will be effective in the first quarter of fiscal 2013 and early adoption is permitted. The Company does not believe the adoption of the guidance will have a material impact on its consolidated financial statements.
F-18
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| 2. | Acquisitions |
Quiterian S.L.
On October 16, 2012, the Company acquired Quiterian S.L., a privately held software company that provides visual data mining, social media analytics and predictive analytics for business and other non-technical users. Actuate acquired 100% of the outstanding shares held by the Quiterian shareholders for $5.2 million in cash. This purchase price was entirely paid upon closing, net of a 10% holdback. There are $3 million in potential additional compensation payments which may be required over the next three year period which are wholly dependent on the achievement of specific service obligations.
Under the purchase accounting method, the total purchase price was allocated to Quiterian’s net tangible and intangible assets based upon their estimated fair values as of October 16, 2012. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill.
Direct transaction costs related to the Quiterian acquisition totaling approximately $354,000 were incurred. These costs include investment banking fees, legal and accounting fees, and other external costs directly related to the acquisition. All costs were directly charged to general and administrative expense on the Consolidated Statements of Income as incurred.
The table below represents the allocation of the purchase price to the acquired net assets of Quiterian based on their estimated fair values as of October 16, 2012 and the associated estimated useful life at that date. Also, as with acquisitions that the Company has undertaken in the past, the Company has initiated structural changes in its corporate structure in order to incorporate Quiterian. These changes in Company’s organizational structure are ongoing and could affect future estimates and assumptions.
| Amount (in thousands) |
Useful life (in years) |
|||||||
| Net tangible assets and liabilities |
$ | (2,061 | ) | N/A | ||||
| Existing technology |
1,682 | 7 | ||||||
| Customer contracts and relationships |
324 | 7 | ||||||
| Goodwill |
5,255 | N/A | ||||||
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|
|||||||
| Total purchase price allocation |
$ | 5,200 | ||||||
|
|
|
|||||||
Net tangible assets and liabilities—Quiterian’ tangible assets and liabilities as of October 16, 2012 were adjusted to their estimated fair value as necessary. Among the net tangible assets assumed were approximately $505,000 in cash and cash equivalents, $519,000 in trade receivables, and $2.2 million in notes payable.
Identifiable intangible assets—Existing technology acquired primarily consists of Quiterian’ advanced analytics solution which maximizes the value of data while cutting business intelligence costs. The technology was valued using a form of the income approach known as the excess earnings method. In the excess earnings method, value is estimated as the present value of the benefits anticipated from ownership of the subject intangible asset in excess of the returns required on the investment in the contributory assets necessary to realize those benefits. It is based on the theory that all operating assets contribute to the profitability of an enterprise. Therefore, if the estimated earnings associated with a specific asset of a company rely on the use of other company assets, then the estimated earnings of the subject asset must be reduced by appropriate charges for these of these contributory assets. The fair value of the customer contracts and relationships was established using the income approach. We expect to amortize the fair value of these intangible assets on a straight-line basis over their respective estimated useful life.
F-19
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill—Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included securing buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant. No amount of goodwill is expected to be deductible for tax purposes.
Xenos Group Inc.
On February 1, 2010, Actuate completed the acquisition of Xenos Group Inc. (“Xenos”), a provider of high-performance software solutions that utilize the scalable Xenos Enterprise Server(TM) and its components to process, extract, transform, repurpose and personalize high volumes of data and documents for storage, real-time access, ePresentment, printing and delivery in numerous formats across multiple channels.
The acquisition was concluded for total consideration of approximately $34.3 million ($27.3 million, net of $6.9 million of Xenos cash at the time of the acquisition). Under the terms of the agreement, we completed our tender offer to acquire all of the outstanding shares of Xenos common stock at a price of CAD 3.50 per outstanding share. We have included the financial results of Xenos in our Consolidated Financial Statements beginning on the acquisition date.
Assets acquired and liabilities assumed were recorded at their fair values as of February 1, 2010. The total $34.3 million purchase price was comprised of the following (in thousands):
| In U.S. Dollars | ||||
| Acquisition of approximately 10 million shares of outstanding common stock of Xenos at CAD 3.50 per share in cash |
$ | 33,149 | ||
| Net payout for exercise of 707,000 of outstanding employee options at CAD 3.50 per option, (net of exercise price) |
1,123 | |||
| Estimated fair value of 30,750 earned stock options assumed and converted |
60 | |||
|
|
|
|||
| Total purchase price |
$ | 34,332 | ||
|
|
|
|||
Under the terms of the Xenos stock option plan, any outstanding options held as of the date of acquisition became immediately vested and exercisable. In connection with the acquisition, each holder of Xenos stock options was offered one of three options: 1) to surrender the Xenos options in order to receive cash equal to the difference between CAD $3.50 and the exercise price of the options for each option surrendered, 2) to exercise the options in order to receive common shares, effective immediately prior to the acquisition date (those common shares would then be acquired by Actuate at a price of CAD $3.50 per share), or 3) to exchange the Options for equivalent Actuate options to purchase common shares of Actuate. The Xenos options would be exchanged for Actuate Options at a calculated exchange ratio and are exercisable for Actuate Shares. The exchanged options would be fully vested and be exercisable on the day after the acquisition. Other terms of the Options would remain the same.
A total of 707,000 options were surrendered under option number 1 presented above. A net of $1.1 million in cash was paid to the option holders related to these surrendered options. This net amount was included in the total purchase consideration.
The Company converted options to purchase 30,750 vested shares of Xenos common stock into options to purchase approximately 19,025 shares of Actuate common stock under option 3 listed above. The estimated fair value of the stock options assumed and converted that is included in the purchase price equals $59,784. The estimated fair value of these options was determined using a Black-Scholes Merton option valuation model with
F-20
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the following assumptions: volatility of 66.73%; weighted average risk-free interest rate of .88%; and a dividend yield of 0%. The underlying stock price used in valuing the options was $5.31, which was the closing price for Actuate Stock on February 1, 2010.
Direct transaction costs related to the Xenos acquisition totaling approximately $1.1 million were incurred. These costs include investment banking fees, legal and accounting fees, and other external costs directly related to the acquisition. All costs were directly charged to general and administrative expense on the Consolidated Statements of Income as incurred.
Purchase Price Allocation
Under the purchase accounting method, the total purchase price was allocated to Xenos’ net tangible and intangible assets based upon their estimated fair values as of February 1, 2010. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill.
The table below represents the allocation of the purchase price to the acquired net assets of Xenos based on their estimated fair values as of February 1, 2010 and the associated estimated useful life at that date.
| Amount (in thousands) |
Useful life (in years) |
|||||||
| Net tangible assets and liabilities |
$ | 6,327 | N/A | |||||
| Existing technology |
7,657 | 7 | ||||||
| Customer contracts and relationships |
8,030 | 7 | ||||||
| In-process research and development (“IPR&D”) |
1,961 | 7 | ||||||
| Favorable leases |
47 | 5 | ||||||
| Goodwill |
10,310 | N/A | ||||||
|
|
|
|||||||
| Total purchase price allocation |
$ | 34,332 | ||||||
|
|
|
|||||||
Net tangible assets and liabilities—Xenos’ tangible assets and liabilities as of February 1, 2010 were adjusted to their estimated fair value as necessary. Among the net tangible assets assumed were $6.9 million in cash and cash equivalents and $1.8 million in trade receivables.
Identifiable intangible assets—Existing technology acquired primarily consists of Xenos’ Enterprise Server, Xenos D2e, Xenos terminalONE, and Xenos InfoWeb. The estimated fair value of the existing technology was determined based on the present value of the expected cash flows to be generated by each existing technology. Customer contracts and relationships consist of Xenos’ contractual relationships and customer loyalty related to their customers as well as partner customers that resell Xenos’ services to end users. We expect to amortize the fair value of these intangible assets on a straight-line basis over their respective estimated useful lives.
In-process research and development—In-process research and development (“IPR&D”) represents the fair value of a development project that was underway at Xenos and was not yet completed as of the date of the acquisition. At the date of the acquisition the development team was still in the final stages of development and was in the process of performing final fixes to the software and finalizing minor functionality. The estimated fair value was determined by estimating the net cash flows expected to be generated from the project and discounting the net cash flows to their present value. The underlying product was released on June 28, 2010 and the fair value of this intangible asset was amortized on a straight-line basis over the respective estimated useful life of seven years beginning July 2010. During the second quarter of 2011, the Company recorded $1.7 million of in-process
F-21
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
research and development (“IPR&D”) impairment charges related to this project. This impairment was deemed necessary due to the fact that changes in circumstances indicated to management that the carrying value of the IPR&D may not be recoverable. Based on an analysis of historical sales of the product since its release in the second quarter of fiscal 2010, as well as the calculation of a discounted cash flow analysis projecting expected cash flows through the remaining useful life of the product, it was determined that the IPR&D balance should be impaired down to zero.
Goodwill—Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included securing buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant.
| 3. | Investment in Actuate Japan |
Noncontrolling (minority) Interest—As of December 31, 2012, Actuate owns 100% of the outstanding voting stock of Actuate Japan Company Ltd. (“Actuate Japan”). Prior to this date, the minority shareholder of Actuate Japan had a non-expiring option to put its equity interest (non-controlling interest) in Actuate Japan to the Company and the Company had the option to call the Non-controlling interest. In the fourth quarter of fiscal 2011, the minority shareholder of Actuate Japan notified the Company that it wished to exercise its rights to put its 12% equity interest in Actuate Japan. This minority shareholder exercised its right on December 28, 2011 resulting in a payment of approximately $594,000 for this interest. As a result of this payment, non-controlling interest in Actuate Japan was reduced to zero. The difference between the adjustment to the non-controlling interest and the fair value of the consideration paid totaling approximately $99,000 and was reported as an increase to additional paid in capital in the Company’s Consolidated Balance Sheet at December 31, 2011.
Prior to this exercise by the minority shareholder, the Company measured and disclosed the redeemable non-controlling interest in accordance with the accounting guidance for non-controlling interests in subsidiaries as issued by the Financial Accounting Standards Board (“FASB”) at the calculated redemption value of the put option embedded in the non-controlling interest.
| 4. | Fair Value Measurements of Financial Assets and Liabilities |
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For certain of our financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and other current liabilities the carrying amounts approximate their fair value due to the relatively short maturity of these balances.
The Company has assets that are valued in accordance with the provisions of the authoritative guidance that addresses fair value measurements. This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
| • | Level 1—Valuations based on real-time quotes for transactions in active exchange markets involving identical assets. |
| • | Level 2—Valuations based on readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. |
| • | Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
F-22
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Assets Measured at Fair Value on a Recurring Basis
The following table represents information about the Company’s investments measured at fair value on a recurring basis (in thousands).
| Fair value of investments as of December 31, 2012 | ||||||||||||||||
| Total | Quoted Prices In Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
| Money market funds (1) |
$ | 5,595 | $ | 5,595 | $ | — | $ | — | ||||||||
| Term deposits (1) |
8,000 | 8,000 | — | — | ||||||||||||
| Commercial paper (2) |
1,599 | — | 1,599 | — | ||||||||||||
| Corporate bonds (3) |
25,368 | — | 25,368 | — | ||||||||||||
| Federal and municipal obligations (2) |
2,000 | — | 2,000 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 42,562 | $ | 13,595 | $ | 28,967 | $ | — | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Fair value of investments as of December 31, 2011 | ||||||||||||||||
| Total | Quoted Prices In Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
| Money market funds (1) |
$ | 6,082 | $ | 6,082 | $ | — | $ | — | ||||||||
| Term deposits (1) |
801 | 801 | — | — | ||||||||||||
| Commercial paper (3) |
9,991 | — | 9,991 | — | ||||||||||||
| Corporate bonds (3) |
18,286 | — | 18,286 | — | ||||||||||||
| Federal and municipal obligations (2) |
2,998 | — | 2,998 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 38,158 | $ | 6,883 | $ | 31,275 | $ | — | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Included in cash and cash equivalents in the Company’s Consolidated Balance Sheet. |
| (2) | Included in short-term investments in the Company’s Consolidated Balances Sheet. |
| (3) | Of these amounts, $0 and approximately $2.6 million were included in cash and cash equivalents at December 31, 2012 and 2011, respectively, and the remainder was included in short-term investments in the Company’s Consolidated Balance Sheet. |
Certain items in the table above are classified as Level 2 items because quoted prices in an active market are not readily accessible for those specific financial assets, or the Company may have relied on alternative pricing methods that do not rely exclusively on quoted prices to determine the fair value of the investments.
F-23
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s cash, cash equivalents, short-term investments and non-current investments are as follows (in thousands):
| Cost | Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
|||||||||||||
| Balance at December 31, 2012 |
||||||||||||||||
| Classified as cash and cash equivalents: |
||||||||||||||||
| Cash |
$ | 23,888 | $ | — | $ | — | $ | 23,888 | ||||||||
| Term deposits |
8,000 | — | — | 8,000 | ||||||||||||
| Money market funds |
5,595 | — | — | 5,595 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 37,483 | — | $ | — | 37,483 | ||||||||||||
| Classified as short-term investments: |
||||||||||||||||
| Commercial paper (4) |
1,599 | — | — | 1,599 | ||||||||||||
| Corporate bonds (4) |
25,350 | 28 | (10 | ) | 25,368 | |||||||||||
| Federal and municipal obligations (4) |
2,000 | — | — | 2,000 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 28,949 | 28 | (10 | ) | 28,967 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 66,432 | $ | 28 | $ | (10 | ) | $ | 66,450 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cost | Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
|||||||||||||
| Balance at December 31, 2011 |
||||||||||||||||
| Classified as cash and cash equivalents: |
||||||||||||||||
| Cash |
$ | 29,270 | $ | — | $ | — | $ | 29,270 | ||||||||
| Term deposits |
801 | — | — | 801 | ||||||||||||
| Money market funds |
6,082 | — | — | 6,082 | ||||||||||||
| Commercial paper |
2,000 | — | — | 2,000 | ||||||||||||
| Corporate bonds (4) |
606 | — | — | 606 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 38,759 | — | — | 38,759 | |||||||||||||
| Classified as short-term investments: |
||||||||||||||||
| Commercial paper (4) |
7,997 | — | (6 | ) | 7,991 | |||||||||||
| Corporate bonds (4) |
17,705 | 2 | (27 | ) | 17,680 | |||||||||||
| Federal and municipal obligations (4) |
3,000 | — | (2 | ) | 2,998 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 28,702 | 2 | (35 | ) | 28,669 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 67,461 | $ | 2 | $ | (35 | ) | $ | 67,428 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (4) | Securities totaling approximately $11.4 million were in an unrealized loss position at December 31, 2012. Securities totaling approximately $27 million were in an unrealized loss position at December 31, 2011. None of these securities were in a continuous unrealized loss position for greater than 12 months. |
Short-term investments are classified as available-for-sale and are recorded on the Company’s Consolidated Balance Sheet at fair market value with unrealized gains or losses reported as a separate component of Accumulated Other Comprehensive Income. At December 31, 2012 and 2011, the Company has classified all of its securities with original maturities beyond 90 days as short-term investments, even though the stated maturity dates may be one year or more beyond the current balance sheet date as these investments remain highly liquid and available for use in current operations.
F-24
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Assets Measured at Fair Value on a Nonrecurring Basis
The fair value of other identifiable intangible assets is based on detailed valuations using the income approach. Other intangible assets consist of purchased technology and patents, customer lists and relationships, distribution agreements, and trademarks, all of which are amortized using the straight-line method over their estimated useful lives, ranging from 5 to 7 years. The Company reviews other intangible assets for impairment as changes in circumstance or the occurrence of events suggest the carrying value may not be recoverable. During the second quarter of fiscal 2011, the Company recorded $1.7 million of in-process research and development (“IPR&D”) impairment charges. The Company had previously recorded IPR&D representing the fair value of a project that was underway at Xenos at the time of acquisition. The product underlying this IPR&D item was released on June 28, 2010 and the fair value of this intangible asset was amortized on a straight-line basis over the respective estimated useful life of seven years beginning July 2010. During the second quarter of 2011, the Company deemed that it was necessary to impair this IPR&D due to the fact that changes in circumstances indicated to management that the carrying value of the IPR&D was not recoverable. Accordingly, the Company used level 3 inputs to measure the fair value associated with this IPR&D. Based on an analysis of historical sales of the product since its release in the second quarter of fiscal 2010, as well as the calculation of a discounted cash flow analysis projecting expected cash flows through the remaining useful life of the product, it was determined that the IPR&D balance should be impaired down to zero.
| 5. | Property and Equipment |
Property and equipment consists of the following (in thousands):
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| Furniture and fixtures |
$ | 3,037 | $ | 1,283 | ||||
| Computers and software |
7,934 | 9,438 | ||||||
| Leasehold improvements |
5,869 | 3,534 | ||||||
|
|
|
|
|
|||||
| Total |
16,840 | 14,255 | ||||||
| Less: accumulated depreciation |
(9,035 | ) | (12,328 | ) | ||||
|
|
|
|
|
|||||
| Property and equipment, net |
$ | 7,805 | $ | 1,927 | ||||
|
|
|
|
|
|||||
Total depreciation expense on our property and equipment in the years ended December 31, 2012, 2011 and 2010 totaled approximately $2.2 million, $1.9 million and $1.9 million, respectively.
| 6. | Goodwill and Purchased Intangible Assets |
The Company performs its annual impairment test of goodwill as of October 1st of each year. Goodwill is not amortized, but is evaluated for impairment on an annual basis or when impairment indicators are present. The potential impairment is identified if the fair value of the reporting unit to which goodwill applies is less than the recorded book value of the related reporting entity, including such goodwill. Where the book value of a reporting entity, including related goodwill, is greater than the reporting entity’s fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. There have been no significant events or circumstances affecting the valuation of goodwill subsequent to the impairment test performed on October 1, 2012. As a result, the Company did not record any impairment related to its goodwill for the twelve months ended December 31, 2012.
F-25
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Following is a roll-forward of the activity that affected goodwill during the fiscal year 2012 (in thousands):
| Goodwill as of December 31, 2011 |
$ | 46,424 | ||
| Acquisition of Quiterian |
5,255 | |||
| Foreign currency translation |
142 | |||
|
|
|
|||
| Goodwill as of December 31, 2012 |
$ | 51,821 | ||
|
|
|
Other Intangibles
Other purchased intangible assets consist of the following (in thousands):
| December 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
| Gross Carrying Amount |
Acquisition of Quiterian |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Balance |
|||||||||||||||||||||||||
| Customer lists |
$ | 22,030 | $ | 330 | $ | (17,394 | ) | $ | 4,966 | $ | 22,030 | $ | — | $ | (16,199 | ) | $ | 5,831 | ||||||||||||||
| Purchased technologies |
15,659 | 1,718 | (11,202 | ) | 6,175 | 15,659 | — | (10,099 | ) | 5,560 | ||||||||||||||||||||||
| IPR&D |
— | — | — | — | 1,961 | (1,681 | ) | (280 | ) | — | ||||||||||||||||||||||
| Leases |
47 | — | (25 | ) | 22 | 47 | — | (17 | ) | 30 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| $ | 37,736 | $ | 2,048 | $ | (28,621 | ) | $ | 11,163 | $ | 39,697 | $ | (1,681 | ) | $ | (26,595 | ) | $ | 11,421 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
IPR&D represents the fair value of a project that was underway at Xenos at the time of acquisition. The product underlying this IPR&D item was released on June 28, 2010 and the fair value of this intangible asset was amortized on a straight-line basis over the estimated useful life of seven years beginning July 2010. During the second quarter of 2011, the Company recorded $1.7 million of in-process research and development (“IPR&D”) impairment charges related to this project. This impairment was deemed necessary due to the fact that changes in circumstances indicated to management that the carrying value of the IPR&D may not be recoverable. Based on an analysis of historical sales of the product since its release in the second quarter of fiscal 2010, as well as the calculation of a discounted cash flow analysis projecting expected cash flows through the remaining useful life of the product, it was determined that the IPR&D balance should be impaired down to zero. For additional discussion, see Note 2 of this Form 10-K.
During the year ended December 31, 2012, the Company recorded additions to its intangible assets of approximately $2 million related to the acquisition of Quiterian. For additional discussion, see Note 2 of this Form 10-K.
F-26
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amortization expense of purchased technology and other intangible assets was approximately $2.3 million, $2.4 million, and $3.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Of these totals, approximately $1.1 million, $1.1 million and $1.2 million were related to the amortization of purchased technologies for the years ended December 31, 2012, 2011 and 2010, respectively. Amortization of purchased technology is included in cost of license fees in the accompanying Consolidated Statement of Income. The expected remaining annual amortization expense is summarized as follows (in thousands):
| Fiscal Year |
Purchased Technology and Intangibles |
|||
| 2013 |
$ | 2,546 | ||
| 2014 |
2,543 | |||
| 2015 |
2,537 | |||
| 2016 |
2,534 | |||
| 2017 and thereafter |
1,003 | |||
|
|
|
|||
| $ | 11,163 | |||
|
|
|
|||
| 7. | Deferred Revenue |
Deferred revenue consists of the following (in thousands):
| December 31, 2012 |
December 31, 2011 |
|||||||
| Maintenance and support |
$ | 41,007 | $ | 39,478 | ||||
| Other |
5,409 | 5,284 | ||||||
|
|
|
|
|
|||||
| $ | 46,416 | $ | 44,762 | |||||
| Less: current portion |
(43,438 | ) | (43,045 | ) | ||||
|
|
|
|
|
|||||
| Long-term deferred revenue |
$ | 2,978 | $ | 1,717 | ||||
|
|
|
|
|
|||||
Maintenance and support consists of first year maintenance and support services associated with the initial purchase of Actuate’s software, and the renewal of annual maintenance and support services from customers who purchased Actuate’s software in prior periods. The maintenance and support period is generally 12 months and revenues are typically recognized on a straight-line basis over the term of the maintenance and support period.
Other deferred revenue consists of deferred license, training and consulting fees generated from arrangements, which did not meet some or all of the revenue recognition criteria consistent with the Company’s revenue recognition policy, and are, therefore, deferred until all revenue recognition criteria have been met.
| 8. | Contractual Obligations and Commercial Commitments |
General
The Company is engaged in certain legal actions arising in the ordinary course of business. Although there can be no assurance as to the outcome of such litigation, the Company believes it has adequate legal defenses and it believes that neither the ultimate outcome of any of these actions nor ongoing litigation costs will not have a material effect on the Company’s consolidated financial position or results of operations.
F-27
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revolving credit line
In early November of 2008, the Company entered into a revolving Credit Agreement with Wells Fargo Foothill (“WFF”) and secured a revolving line of credit in the principal amount of up to $50 million. During the fourth quarter of fiscal 2008, the Company used $30 million of its cash along with $30 million of funds available through this credit facility to complete a $60 million common stock buyback. During the first quarter of 2010, the Company borrowed an additional $10 million of funds available through this credit facility to complete the acquisition of Xenos, which was completed on February 1, 2010. There are no minimum pay-down requirements under the terms of this credit facility so long as we remain in compliance with the terms of the Credit Agreement. Total costs associated with the facility, including legal and closing fees, amounted to approximately $1.1 million and were fully paid as of December 31, 2012. These costs were capitalized and are being amortized over four years in the Company’s Consolidated Financial Statements. Such assets are reflected as current assets if amortized within one year or non-current assets if amortized beyond one year. The Credit Agreement was originally for a period of four years and was originally scheduled to expire on November 3, 2012.
In May 2011 the Company paid down the outstanding balance on its revolving line of credit. The Company used $40 million in cash and short-term investments in order to pay down this outstanding debt.
On December 29, 2011, the Company amended and re-negotiated its credit facility with Wells Fargo Capital Finance, LLC (“WFCF”). The amended credit facility provided for the following:
| • | An extension of the original agreement entered in November 2008. The termination date was extended from November 3, 2012 to November 3, 2015, |
| • | Replacement of a $125,000 commitment fee that was payable on November 3, 2011 with a closing fee of $100,000 that was paid on December 29, 2011. |
| • | A 50% reduction in the applicable internal rate on the outstanding credit balance from 3.5% to 1.75%. |
| • | A reduction in the unused line fee from 0.50% to 0.30% per year applied to the unutilized portion of the credit facility. |
The remaining unamortized costs associated with the credit facility will be amortized from the date of amendment over four years.
As of December 31, 2012, there was no balance owed on this credit facility and the balance available under the revolving credit facility was approximately $50 million. Interest is based on a floating rate plus an applicable margin based on the outstanding balance of the amount drawn under the Credit Agreement. The floating rate is determined at the Company’s election and may either be (i) London Interbank Offered Rate (“LIBOR”) or (ii) the greater of the Federal Funds Rate plus an applicable margin and the Prime Rate. If the Company’s usage of the credit line exceeds 80% of its trailing four quarters of recurring maintenance revenue, or if the sum of available funds under the Credit Agreement plus available cash is less than $10 million, the Company is required to meet certain minimum income targets and be subject to a limit on annual capital expenditures. As of December 31, 2012, the Company was able to meet the 80% test as well as the $10 million minimum cash threshold and was therefore not subject to the income or the capital expenditures covenants. The Company is required to make interest payments on any outstanding balances and pay an unused commitment fee on any unused portion of the credit line on a monthly basis.
F-28
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table represents costs related to the Company’s credit facility (in thousands):
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Interest expense |
$ | 3 | $ | 441 | $ | 1,317 | ||||||
| Amortization of debt issuance costs |
68 | 282 | 287 | |||||||||
| Unused line fees |
152 | 186 | 56 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 223 | $ | 909 | $ | 1,660 | |||||||
|
|
|
|
|
|
|
|||||||
The Credit Agreement contains covenants, which, among other things, impose certain limitations with respect to lines of business, mergers, investments and acquisitions, additional indebtedness, distributions, guarantees, liens and encumbrances. In the event the Company does not meet the requirements specified above, a triggering event will be deemed to have occurred and the Company would be required to maintain the two financial covenants listed below:
| • | achieve income before interest and taxes, measured on a quarter-end basis, of at least the required amount set forth per the Credit Agreement, |
| • | limit the amount of capital expenditures to an amount not exceeding that set forth per the Credit Agreement. |
The Company’s indebtedness under the Credit Agreement is secured by a lien on (i) substantially all of its assets and the assets of Actuate International Corporation and (ii) by a pledge of all of its stock and a portion of the stock of each of its subsidiaries.
Notes payable
Associated with the acquisition of Quiterian on October 16, 2012, the Company inherited two loan agreements that were previously executed to finance the development of the Quiterian software. The loans were offered by the Spanish government subsidy programs and are restricted for use on development of the software. The loans are scheduled for repayment on a quarterly basis starting June, 2014 and ending September, 2022. The combined outstanding balances of these loans total approximately $843,000 and are classified as notes payable on the Company’s Consolidated Balance sheet at December 31, 2012.
Operating Lease Commitments
On November 28, 2011, the Company entered into a ten year lease agreement with a third party for approximately 58,000 square feet of office space in the BayCenter Campus in San Mateo, California. This lease is operating in nature and commenced on June 1, 2012 and will end on May 31, 2022. In addition, the lease provides for four months of free rent (rent holiday) and approximately $2.6 million in landlord incentives to be applied towards construction of improvements. At December 31, 2012, the deferred rent liability balance related to the new lease totaled approximately $3.4 million and this balance declines through May 2022 when contractual cash payments exceed the straight-line lease expense. Of this total deferred rent liability balance, approximately $260,000 was classified as short term and $3.1 million was classified as long term accrued liabilities on the Company’s Consolidated Balance Sheet at December 31, 2012. Actuate vacated its previous corporate headquarters located at the Bridgepointe Campus in July 2012 and is now using the BayCenter Campus as its corporate headquarters.
F-29
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Upon the execution of the new lease, Actuate delivered to the new landlord two letters of credit totaling $225,300. These letters of credit guarantee Actuate’s contractual obligations related to the BayCenter Campus in San Mateo, California.
Actuate leases smaller office facilities in various locations in the United States and abroad. All facilities are leased under operating leases. Total rent expense was approximately $4.2 million in fiscal year 2012, $3.4 million in fiscal year 2011 and $3.5 million in fiscal year 2010.
The following table summarizes the Company’s contractual obligations as of December 31, 2012 (in thousands):
| Total | Less than 1 year |
1 – 3 years |
3 – 5 years |
Thereafter | ||||||||||||||||
| Obligations: |
||||||||||||||||||||
| Operating leases (1) |
$ | 30,308 | $ | 4,192 | $ | 7,142 | $ | 5,776 | $ | 13,198 | ||||||||||
| Interest and loan obligations (2) |
1,300 | 161 | 608 | 236 | 295 | |||||||||||||||
| Obligations for unrecognized tax benefits (3) |
2,127 | — | 2,127 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 33,735 | $ | 4,353 | $ | 9,877 | $ | 6,012 | $ | 13,493 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | The Company’s future contractual obligations include minimum lease payments under operating leases at December 31, 2012. |
| (2) | Estimated unused line fees related to the revolving line of Credit Agreement with WFCF and estimated interest and principal due on the notes payable funded by the Spanish government for the development of Quiterian software. |
| (3) | Represents the tax liability associated with unrecognized tax benefits estimated between 1 to 3 years. In addition, as of December 31, 2012, our unrecognized tax benefits included $2.4 million which is netted against deferred tax assets. At this time, we are unable to make a reasonably reliable estimate of the timing of payments related to the amounts netted against deferred tax assets, if any, in individual years due to uncertainties in the timing or outcomes of either actual or anticipated tax audits. As a result, these amounts are not included in the table above. See discussion on the authoritative guidance issued by the FASB on obligations for uncertain tax positions in Note 12 of our Notes to these Consolidated Financial Statements. |
Indemnification
Our license agreements include indemnification for infringement of third party intellectual property rights and certain warranties. Historically, the Company has not experienced significant claims under these contractual rights. Therefore, no amounts have been accrued relating to those indemnities and warranties.
| 9. | Stockholders’ Equity |
Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed by law, to issue preferred stock in one or more series. Each series shall have the rights, preferences, privileges and restrictions, related to dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the right to increase or decrease the number of shares of any series, as the Board of Directors shall determine. The Board of Directors may issue preferred stock with voting or conversion rights that may have
F-30
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the effect of delaying, deferring or preventing a change in control of Actuate and could adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. The Company currently has no plans to issue any preferred stock.
Stock Option Plans
Amended and Restated 1998 Equity Incentive Plan. In May 1998, the 1998 Equity Incentive Plan (the “1998 Plan”) was adopted by the Board of Directors and approved by the stockholders in July 1998. Employees, consultants and directors are eligible for awards under the 1998 Plan. The 1998 Plan was amended and restated in May 1999. Initially, a total of 5,200,000 shares of common stock were reserved for issuance under the 1998 Plan. Until January 2, 2010, on January 1 of each year, the number of shares reserved for issuance under the 1998 Plan was increased automatically by the lesser of (i) 5% of the total number of shares of common stock then outstanding or (ii) 2,800,000 shares (the “Evergreen Feature”). Effective January 2, 2010, the Evergreen Feature was terminated.
Under the 1998 Plan, eligible participants may be awarded options to purchase shares of common stock, stock appreciation rights (“SARs”), restricted shares or stock units (collectively, the “Awards”). Options under the 1998 Plan may be incentive stock options designed to satisfy Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) or non-statutory stock options not designed to meet such requirements. If restricted shares or shares issued upon the exercise of options granted under the 1998 Plan are forfeited, then such shares will again become available for Awards under the 1998 Plan. If stock units, options or SARs granted under the 1998 Plan are forfeited or terminated for any other reason before being exercised, then the corresponding shares will again become available for Awards under the 1998 Plan. The exercise price for non-statutory and incentive stock options granted under the 1998 Plan may not be less than 85% or 100%, respectively, of the fair market value of the common stock on the option grant date. The Board may amend or terminate the 1998 Plan at any time. Amendments may be subject to stockholder approval to the extent required by applicable laws. Options granted under the 1998 Plan are exercisable when vested. Shares generally vest at the rate of 20% or 25% after one year from the date of grant with the remaining balance vesting monthly over the next three or four years, with a maximum contractual life of ten years. Upon a change in control, an Award under the 1998 Plan will become fully vested as to all shares subject to such Award if such Award is not assumed by the surviving corporation or its parent and the surviving corporation or its parent does not substitute such Award with another Award of substantially the same terms. In the event of an involuntary termination of a participant within 12 months following a change in control, the vesting of an Award under the 1998 Plan will accelerate in full. All outstanding repurchase rights under the 1998 Plan shall terminate automatically upon the occurrence of any merger, consolidation, or disposition of all or substantially all of the Company’s assets, except to the extent the repurchase rights are expressly assigned to the successor corporation. As of December 31, 2012, 11,818,010 shares of common stock were reserved and available for future grants under the 1998 Option Plan.
The Board of Directors may authorize the issuance of performance stock units (“PSUs”) from the Company’s 1998 Equity Incentive Plan. PSUs are awards that vest either through a “performance condition” or “market condition”. In May 2012 the Board granted PSUs with a market condition (“MSUs”) to the Chief Executive Officer and Chief Financial Officer. Each MSU represents the right to one share of Actuate’s common stock. The actual number of MSUs which will be eligible to vest will be based on the performance of Actuate’s stock price relative to the performance of the S&P Small Cap 600 Index over a two-year vesting period, up to 200% of the MSUs initially granted. After the initial performance period, 50% of the earned award vests immediately and the remaining 50% is subject to an additional one year service period. MSUs are valued using the Monte Carlo simulation model and the compensation expense is amortized over the three year performance and service period.
F-31
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effective January 2010, restricted stock units (“RSUs”) were granted to senior management as part of the Company’s annual incentive compensation program under the Amended and Restated 1998 Equity Incentive Plan. RSUs are valued based on the closing price of the Company’s common stock on the grant date. In general, restricted stock units vest over four years with annual cliff vesting and are subject to the employees’ continuing service to the Company. For each restricted stock unit granted under the 1998 Plan, a share reserve ratio is applied for the purpose of determining the remaining number of shares reserved for future grants under the plan. The share reserve ratio is 1:1 for each restricted stock unit granted, and an equivalent of 1 share will be deducted from the share reserve for each restricted stock unit issued. Likewise, each forfeited restricted stock unit increases the number of shares available for issuance by the applicable rate at the time of forfeiture. As of December 31, 2012, a total of 873,750 RSUs were issued and granted to the Company’s senior management and non-employee Board of Directors.
In February 2011, the Board of Directors approved the acceleration of 333,333 stock options that had been previously granted to a senior executive who had passed away in December 2010. In addition, the exercise terms for these accelerated options along with 129,167 of vested options were extended from one to two years. As such, the full fair value of these options was measured as of the modification date and fully expensed at that time. Since there was no longer a performance obligation at the date of modification associated with these options, an alternate classification and accounting under GAAP was required. As a result, these accelerated options were to be measured and classified as liability rather than equity. Accordingly, at the end of each quarter, we calculate the revised fair value of these options and recognize any corresponding gain or loss to income. We will continue this accounting treatment until these options were fully exercised or when the exercise period expired on December 31, 2012. Of these share-based awards, approximately $56,000 was charged to compensation expense in fiscal year 2012. At the end of the two year exercise period on December 31, 2012 approximately $683,000 classified as other accrued liabilities were offset down to zero against expense and additional paid-in capital on the Company’s Consolidated Balance Sheet on December 31, 2012.
2001 Supplemental Stock Plan. In January 2001, the Board of Directors adopted the 2001 Supplemental Stock Plan (the “2001 Plan”). A total of 2,700,000 shares of common stock were reserved for issuance under the 2001 Plan. Employees and consultants are eligible for awards under the 2001 Plan. Members of the Board of Directors and officers of Actuate are not eligible to receive awards under the 2001 Plan.
Under the 2001 Plan, eligible participants may be awarded options to purchase shares of common stock and restricted shares only. All options granted under the 2001 Plan are non-statutory stock options. If restricted shares or shares issued upon the exercise of options granted under the 2001 Plan are forfeited, then such shares will again become available for awards under the 2001 Plan. The exercise price for non-statutory and incentive stock options granted under the 2001 Plan may not be less than 85% or 100%, respectively, of the fair market value of the common stock on the option grant date. The Board may amend or terminate the 2001 Plan at any time. Amendments may be subject to stockholder approval to the extent required by applicable laws.
Options granted under the 2001 Plan are exercisable when vested. Shares generally vest at the rate of 25% after one year from the date of grant with the remaining balance vesting monthly over the next four years, with a maximum contractual life of ten years. Upon a change in control, an award under the 2001 Plan will become fully vested as to all shares subject to such award if such award is not assumed by the surviving corporation or its parent and the surviving corporation or its parent does not substitute such award with another award of substantially the same terms. In the event of an involuntary termination of a participant within 12 months following a change in control, the vesting of an award under the 2001 Plan will accelerate in full. All outstanding repurchase rights under the 2001 Plan shall terminate automatically upon the occurrence of any merger, consolidation, or disposition of all or substantially all of the Company’s assets, except to the extent the
F-32
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
repurchase rights are expressly assigned to the successor corporation. As of December 31, 2012, 696,881 shares of common stock were reserved and available for future grants under the 2001 Option Plan.
1998 Non-Employee Director Option Plan. The 1998 Non-Employee Directors Option Plan (the “Directors Option Plan”) was adopted by the Board of Directors in May 1998, and approved by the stockholders in July 1998. The Director Option Plan provides for non-employee members of the Board of Directors to be eligible for automatic option grants. 800,000 shares of common stock have been authorized for issuance under the Directors Option Plan.
An individual who first joins the Board of Directors as a non-employee director is awarded an option to purchase 25,000 shares of the Company’s Common Stock and a restricted stock unit award (“RSU”) covering 12,500 shares of the Company’s Common Stock. These options and RSUs each have a four year vesting period tied to continued Board service. Each option has an exercise price equal to the closing price of the Company’s Common Stock on the day of the grant, and 25% will vest upon the non-employee directors’ continued Board service through the first anniversary of the award date and on an equal, monthly basis over the next 3 years of service thereafter. The first 25% of each restricted stock unit award will vest 13 months following the award date and the remainder will vest in a series of three successive equal annual installments on each of the second, third and fourth anniversaries of the award date, provided that the non-employee director continues in Board service through each such vesting date. Each non-employee director receiving an initial 12,500-share RSU award is given the opportunity to elect to defer the receipt of the shares of Actuate Common Stock that vest and become issuable pursuant to the initial RSU award. If a non-employee director makes a timely deferral election, then the shares of Actuate Common Stock in which he or she vests under the initial RSU award will be issued upon termination of Board service. In the absence of an effective deferral election, any shares of the Company’s Common Stock in which the non-employee director vests under the initial RSU award will be issued as those shares vest.
Each continuing non-employee director is awarded an option to purchase 16,000 shares of the Company’s Common Stock and an RSU award covering 8,000 shares of the Company’s Common Stock at each annual stockholders meeting. Each option has an exercise price equal to the closing price of Actuate’s Common Stock on the day of the grant, and will vest upon the non-employee director’s continued Board service through the first anniversary of the award date. Each restricted stock unit award granted to a continuing non-employee director will vest upon the non-employee director’s continued Board service through the first anniversary of the award date. Before the start of each calendar year, each of our non-employee directors is given the opportunity to elect to defer the receipt of any or all of the shares of Actuate Common Stock that vest and become issuable pursuant to the restricted stock unit award to be made to such non-employee director at the next annual stockholders meeting. If a non-employee director makes a timely deferral election, then the shares of Actuate Common Stock in which he or she vests under the RSU award will be issued upon his termination of Board service. In the absence of an effective deferral election, any shares of the Company’s Common Stock in which the non-employee director vests under the RSU award will be issued as those shares vest.
Each restricted stock unit award and each option award granted to a new or continuing non-employee director will vest in full on an accelerated basis upon (i) an approved acquisition of the Company by merger or consolidation, (ii) a sale of all or substantially all of the Company’s assets, (iii) the successful completion of a tender or exchange offer for securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities, or (iv) the death or disability of the optionee while serving as a member of the Board of Directors. Each restricted stock unit that vests will entitle the recipient to one share of the Company’s common stock on the designated issuance date for that share. All grants are made under the 1998 Plan.
F-33
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2012, 495,000 shares of common stock were reserved and available for future grants under the Directors Option Plan.
Shares issued as a result of the exercise of options under any of our plans would be fulfilled through shares currently in our existing pools. Total authorized but unissued shares of common stock were 24,563,334 as of December 31, 2012.
| Plan Summary |
Available for Grant |
Outstanding | Total Authorized But Unissued |
|||||||||
| Amended and Restated 1998 Equity Incentive Plan |
11,818,010 | 11,368,025 | 23,186,035 | |||||||||
| 2001 Supplemental Stock Plan |
696,881 | 100,418 | 797,299 | |||||||||
| 1998 Non-Employee Director Option Plan |
495,000 | 135,000 | 630,000 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Stock Plans |
13,009,891 | 11,603,443 | 24,613,334 | |||||||||
| RSUs granted inception to date, net of cancellations |
829,938 | (812,374 | ) | 17,564 | ||||||||
| RSUs Shares released |
— | — | (17,564 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Total Options Balance at December 31, 2012 |
13,839,829 | 10,791,069 | 24,613,334 | |||||||||
| Miscellaneous Stock Grant (1) |
(50,000 | ) | — | (50,000 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Total Stock Plans Balance at December 31, 2012 |
13,789,829 | 10,791,069 | 24,563,334 | |||||||||
|
|
|
|
|
|
|
|||||||
| (1) | Board approved stock grant on February 17, 2011 to the beneficiary of a deceased senior executive in recognition of services performed. |
All new employee options are subject to the same vesting schedule (twenty-five percent of the option shares will vest on the one year anniversary of the option grant date and the remaining option shares will vest in thirty-six equal monthly installments over the thirty-six month period measured from the first anniversary of the option grant date, provided the optionee continues to provide services to the Company through each applicable vesting date) and all have ten year terms.
F-34
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Activity under all (non-Xenos) plans was as follows:
| Shares Available For Grant (1) |
Outstanding Options | Weighted- Average Exercise Price |
||||||||||||||
| Number of Shares |
Price Per Share | |||||||||||||||
| Balance at December 31, 2009 |
15,910,502 | 15,828,738 | $ | 0.78-$31.19 | $ | 3.94 | ||||||||||
| Additional authorization |
2,273,137 | — | ||||||||||||||
| Options granted |
(2,734,300 | ) | 2,734,300 | $ | 4.01-$5.98 | $ | 4.93 | |||||||||
| Options exercised |
— | (1,811,442 | ) | $ | 1.49-$5.68 | $ | 3.29 | |||||||||
| Options forfeited and cancelled |
1,154,505 | (1,154,505 | ) | $ | 2.38-$31.19 | $ | 7.02 | |||||||||
|
|
|
|
|
|||||||||||||
| Balance at December 31, 2010 |
16,603,844 | 15,597,091 | $ | 0.78-$17.50 | $ | 3.95 | ||||||||||
| Options granted |
(1,937,170 | ) | 1,937,170 | $ | 4.63-$6.72 | $ | 5.51 | |||||||||
| Options exercised |
— | (4,042,132 | ) | $ | 1.49-$6.10 | $ | 3.18 | |||||||||
| Options forfeited and cancelled |
754,983 | (754,983 | ) | $ | 1.49-$17.50 | $ | 7.29 | |||||||||
|
|
|
|
|
|||||||||||||
| Balance at December 31, 2011 |
15,421,657 | 12,737,146 | $ | 0.78-$8.39 | $ | 4.24 | ||||||||||
| Options granted |
(2,161,600 | ) | 2,161,600 | $ | 5.09-$7.25 | $ | 6.30 | |||||||||
| Options exercised |
— | (3,527,905 | ) | $ | 1.49-$6.55 | $ | 3.04 | |||||||||
| Options forfeited and cancelled |
579,772 | (579,772 | ) | $ | 0.78-$7.45 | $ | 5.97 | |||||||||
|
|
|
|
|
|||||||||||||
| Balance at December 31, 2012 |
13,839,829 | 10,791,069 | $ | 1.39-$8.39 | $ | 4.95 | ||||||||||
|
|
|
|
|
|||||||||||||
| (1) | The balance of shares available for grant at December 31, 2012 includes 829,938 shares of RSUs granted inception to date, net of cancellations. Of this total, 440,000 shares were granted in fiscal 2012, a total of 207,438 in fiscal 2011 and 182,500 shares were granted in fiscal 2010. Of the 440,000 shares granted in fiscal 2012, 205,000 shares were RSUs and 235,000 shares were MSUs. No MSUs were granted in fiscal years 2011 and 2010. |
In connection with the Xenos acquisition, Actuate’s Board of Directors duly authorized the issuance of stock options to eligible employees from the Company’s 1998 Equity Incentive Plan. A total of 573,800 non-statutory stock options were issued in February of 2010 with the exercise price of $5.31. Each grant shall fully vest in four years with 25% cliff vesting at the end of year one and the remaining balance to vest in thirty-six successive monthly installments.
As an employee retention incentive, Actuate also invited Xenos employees who were holders of Xenos Options to exchange any Options that they did not exercise in connection with the Offer for options to purchase shares of common stock of Actuate on a tax-free rollover basis (an “Option Exchange”). The replacement options issued by Actuate would have the same intrinsic value as the options given up by Xenos. On February 1, 2010, 30,750 Xenos options were exchanged for 19,025 Actuate options with exercise prices ranging from $2.04 to $3.54. These options were fully vested and exercisable at the date of exchange.
F-35
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Activity under the assumed Xenos option plan was as follows:
| Shares Available For Grant |
Outstanding Options | Weighted- Average Exercise Price (1) |
||||||||||||||
| Number of Shares |
Price Per Share (1) | |||||||||||||||
| Balance at February 1, 2010 |
19,025 | — | — | — | ||||||||||||
| Options converted |
(19,025 | ) | 19,025 | $ | 2.17-$3.77 | $ | 2.90 | |||||||||
| Options exercised |
— | (11,601 | ) | $ | 2.17-$2.98 | $ | 2.71 | |||||||||
|
|
|
|
|
|||||||||||||
| Balance at December 31, 2010 |
— | 7,424 | $ | 3.08-$3.77 | $ | 3.19 | ||||||||||
| Options exercised |
— | (7,424 | ) | $ | 3.08-$3.77 | $ | 3.20 | |||||||||
|
|
|
|
|
|||||||||||||
| Balance at December 31, 2011 |
— | — | — | — | ||||||||||||
|
|
|
|
|
|||||||||||||
| (1) | In Canadian Dollars. |
The weighted-average grant date fair value of stock options granted was $3.09 in fiscal year 2012, $2.80 in fiscal year 2011 and $2.53 in fiscal year 2010. Upon the exercise of options, the Company issues new common stock from its authorized shares. The total intrinsic value of options exercised during fiscal year 2012, 2011 and 2010 was $11.1 million, $11.4 million and $3.6 million, respectively.
All vested stock options are exercisable. The following table summarizes information about stock options outstanding and exercisable as of December 31, 2012:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Range of Exercise Prices |
Number of Shares |
Weighted- Average Remaining Contractual Life |
Weighted- Average Exercise Price |
Number of Shares |
Weighted- Average Exercise Price |
|||||||||||||||
| $1.39-$3.42 |
1,012,545 | 1.35 years | $ | 2.35 | 1,012,309 | $ | 2.35 | |||||||||||||
| $3.44-$3.89 |
2,024,384 | 4.05 years | $ | 3.64 | 1,967,742 | $ | 3.64 | |||||||||||||
| $3.97-$4.80 |
1,415,621 | 6.52 years | $ | 4.67 | 1,066,049 | $ | 4.65 | |||||||||||||
| $4.84-$5.25 |
1,182,495 | 4.61 years | $ | 5.11 | 1,086,238 | $ | 5.11 | |||||||||||||
| $5.27-$5.73 |
1,693,163 | 7.75 years | $ | 5.45 | 912,230 | $ | 5.45 | |||||||||||||
| $5.74-$6.27 |
1,647,661 | 6.12 years | $ | 6.09 | 1,221,917 | $ | 6.10 | |||||||||||||
| $6.28-$6.86 |
1,556,800 | 8.98 years | $ | 6.35 | 38,030 | $ | 6.52 | |||||||||||||
| $6.88-$8.39 |
258,400 | 6.50 years | $ | 7.11 | 159,500 | $ | 7.16 | |||||||||||||
|
|
|
|
|
|||||||||||||||||
| $1.39-$8.39 |
10,791,069 | 5.85 years | $ | 4.95 | 7,464,015 | $ | 4.54 | |||||||||||||
|
|
|
|
|
|||||||||||||||||
F-36
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes information about stock options outstanding and exercisable including the intrinsic values and weighted average exercise prices and remaining contractual terms under outstanding and exercisable categories as of December 31, 2012 and 2011:
| December 31, 2012 |
December 31, 2011 |
|||||||
| Options Outstanding—Vested and Expected to Vest |
||||||||
| Vested and expected to vest, net of expected forfeitures |
10,715,803 | 12,596,852 | ||||||
| Aggregate intrinsic value (in thousands) |
$ | 9,382 | $ | 21,351 | ||||
| Weighted average exercise price per share |
$ | 4.94 | $ | 4.23 | ||||
| Weighted average remaining contractual term (in years) |
5.83 | 5.08 | ||||||
| Options Exercisable |
||||||||
| Options currently exercisable |
7,464,015 | 9,489,098 | ||||||
| Aggregate intrinsic value of currently exercisable options (in thousands) |
$ | 8,827 | $ | 18,764 | ||||
| Weighted average exercise price per share |
$ | 4.54 | $ | 3.96 | ||||
| Weighted average remaining contractual term (in years) |
4.66 | 4.09 | ||||||
As of December 31, 2012, there was approximately $4.8 million of total unrecognized compensation cost related to unvested stock options granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.15 years.
The following table summarizes activities related to restricted stock units:
| Outstanding RSUs | Weighted- Average Remaining Contractual Term (Years) |
|||||||||||||||
| Number of Units |
Weighted- Average Grant Date Fair Value ($) |
Aggregate Fair Value ($) (thousands) |
||||||||||||||
| Balance at January 1, 2010 |
— | — | — | — | ||||||||||||
| Awarded |
201,250 | $ | 4.76 | — | — | |||||||||||
| Forfeited |
(18,750 | ) | 4.80 | — | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2010 |
182,500 | 4.75 | 1.48 | $ | 1,040 | |||||||||||
| Awarded |
232,500 | 5.48 | — | — | ||||||||||||
| Released |
(5,251 | ) | 4.80 | — | — | |||||||||||
| Forfeited |
(25,062 | ) | 5.34 | — | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2011 |
384,687 | 5.15 | 1.28 | $ | 2,254 | |||||||||||
| Awarded |
205,000 | 6.40 | — | — | ||||||||||||
| Released |
(12,313 | ) | 5.28 | — | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2012 |
577,374 | 5.59 | 1.13 | $ | 3,233 | |||||||||||
|
|
|
|||||||||||||||
For each restricted stock unit granted under the 1998 Plan, a share reserve ratio is applied for the purpose of determining the remaining number of shares reserved for future grants under the plan. The share reserve ratio is 1:1 for each restricted stock unit granted, and an equivalent of 1 share will be deducted from the share reserve for each restricted stock unit issued. Likewise, each forfeited restricted stock unit increases the number of shares available for issuance by the applicable rate at the time of forfeiture.
As of December 31, 2012, a total of 577,374 RSUs will be deducted from the share reserve for future restricted stock units issued. The weighted average grant date fair value of restricted stock units granted during the year ended December 31, 2012 was $6.40 per unit.
F-37
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Number of Units |
Weighted Average Remaining Contractual Life (years) |
Aggregate Intrinsic Value (thousands) |
||||||||||
| Restricted stock units outstanding |
577,374 | 1.13 | $ | 3,233 | ||||||||
| Restricted stock units vested and expected to vest |
568,180 | 1.11 | $ | 2,246 | ||||||||
As of December 31, 2012, there was approximately $916,000 of total unrecognized compensation cost related to unvested RSUs granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.13 years.
Summary of Market-Performance Based Restricted Stock Units (“MSUs”)
MSU activity for the year ended December 31, 2012:
| Outstanding MSUs | Weighted-Average Remaining Contractual Term (Years) |
|||||||||||||||
| Number of Units |
Weighted-Average Grant Date Fair Value ($) |
Aggregate Fair Value ($) (thousands) |
||||||||||||||
| Balance at January 1, 2012 (1) |
— | — | — | |||||||||||||
| Awarded |
235,000 | $ | 8.01 | — | ||||||||||||
|
|
|
|||||||||||||||
| Balance at December 31, 2012 |
235,000 | 1.50 | $ | 1,316 | ||||||||||||
| Ending vested and expected to vest |
227,997 | 1.49 | $ | 1,277 | ||||||||||||
| (1) | There were no MSUs granted in fiscal 2011. |
Summary of Unvested Units
Activities related to unvested RSUs and MSUs for the year ended December 31, 2012:
| Unvested Units |
Units | Weighted-Average Grant Date Fair Value ($) |
||||||
| Unvested at January 1, 2012 |
326,312 | 5.26 | ||||||
| Awarded |
440,000 | 6.64 | ||||||
| Vested |
(121,063 | ) | 5.28 | |||||
|
|
|
|
|
|||||
| Unvested at December 31, 2012 |
645,249 | 6.20 | ||||||
|
|
|
|
|
|||||
Actuate Corporation 1998 Employee Stock Purchase Plan
The Actuate Corporation 1998 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted by the Board of Directors in May 1998, and approved by the stockholders in July 1998. A total of 1,000,000 shares of common stock were initially reserved for issuance under the Purchase Plan. On January 1 of each year, the number of shares reserved for issuance under the Purchase Plan is automatically increased by 600,000 shares. The Purchase Plan is intended to qualify under Section 423 of the Code. Each calendar year, two overlapping 24-month offering periods will commence on February 1 and August 1. Each offering period contains four six-month accumulation periods, with purchases occurring at the end of each six-month accumulation period. If the market price of Actuate’s stock at the end of any six-month purchase period is lower than the stock price at the
F-38
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
original grant date, the offering period is cancelled immediately after that purchase date. A new 24-month offering period is established using the then-current stock price as the base purchase price. The Purchase Plan permits each eligible employee to purchase common stock through payroll deductions, which may not exceed 15% of an employee’s cash compensation. New participants starting in any offering period may purchase up to 1000 shares per accumulation period. The price of each share of common stock purchased under the Purchase Plan will be 85% of the lower of (i) the fair market value per share of common stock on the date immediately prior to the first date of the applicable offering period or (ii) the date at the end of the applicable accumulation period. Employees may end their participation in the Purchase Plan at any time during the accumulation period, and participation ends automatically upon termination of employment with the Company. The Purchase Plan has been amended and restated to account for stock splits. During fiscal year 2012, 2011 and 2010, the Company issued 373,776 shares, 403,814 shares and 369,780 shares, respectively under the Purchase Plan, with a weighted-average purchase price of $4.57, $3.87 and $3.09, respectively. As of December 31, 2012, a total of 6,822,521 shares had been purchased under the Purchase Plan and 2,577,479 shares of common stock were reserved and available for future issuance.
As of December 31, 2012, there was approximately $335,000 of total unrecognized compensation cost related to the Purchase Plan. This cost is expected to be recognized over a weighted average period of 11.73 months.
As of December 31, 2012, the number of shares of common stock reserved for future issuance under all option plans and the Purchase Plan was 15,544,191.
Valuation and Expense of Stock-based Compensation
The Company currently uses the Black-Scholes-Merton option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the award, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.
Compensation cost for all stock-based payments granted is based on the estimated grant-date fair value estimated in accordance with the provisions of FASB’s guidance on stock compensation. The Company amortizes its stock-based compensation expense on an accelerated basis.
Stock-based compensation expense and the related income tax benefit recognized for the fiscal years ended December 31, 2012, 2011 and 2010 were as follows (in thousands):
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Stock options |
$ | 5,070 | $ | 3,823 | $ | 4,677 | ||||||
| ESPP |
534 | 842 | 508 | |||||||||
| Restricted stock units |
1,155 | 844 | 415 | |||||||||
| Market stock units |
577 | — | — | |||||||||
| Accelerated options & miscellaneous grant |
— | 338 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total stock-based compensation |
$ | 7,336 | $ | 5,847 | $ | 5,600 | ||||||
|
|
|
|
|
|
|
|||||||
| Income tax benefit |
$ | 2,538 | $ | 1,721 | $ | 1,836 | ||||||
|
|
|
|
|
|
|
|||||||
F-39
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Included in the total stock-based compensation for fiscal year ended December 31, 2012 is approximately $56,000 of stock-based compensation classified as liability based awards.
We estimate the expected term of options granted by analyzing actual historical experience of exercises and cancellations under our plans. We also look at the average length of time in which our current outstanding options are expected to be exercised or cancelled based on past experience and the vesting and contractual term. We estimate the volatility of our common stock by using historical volatility over the expected term. Our estimate of the forfeiture rate is based upon historical data from the previous twelve months. We divide options forfeited into options outstanding for the period to arrive at an annualized historical forfeiture rate. We base the risk-free interest rate used in the option valuation model on the daily Treasury yield curve interest rate published by the U.S. Department of the Treasury. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. The assumptions we use to estimate the fair value of stock options granted and stock purchase rights granted under our ESPP program for the fiscal years 2012, 2011 and 2010 are as follows:
| Options | ||||||
| Year ended December 31, | ||||||
| 2012 | 2011 | 2010 | ||||
| Dividends |
0% | 0% | 0% | |||
| Forfeiture rate |
2 – 4% | 2 – 4% | 2 – 3% | |||
| Risk-free interest rate |
0.63 – 1.01% | 0.83 – 2.21% | 1.25 – 2.25% | |||
| Expected life (in years) |
5.60 – 5.63 | 5.57 – 5.69 | 5.66 – 5.73 | |||
| Expected volatility |
53.67 – 54.17% | 53.88 – 54.96% | 54.17 – 54.73% | |||
| ESPP | ||||||
| Year ended December 31, | ||||||
| 2012 | 2011 | 2010 | ||||
| Dividends |
0% | 0% | 0% | |||
| Risk-free interest rate |
0.13 – 0.17% | 0.22 – 0.27% | 0.26 – 0.35% | |||
| Expected life (in years) |
1.25 | 1.25 | 1.25 | |||
| Expected volatility |
42.12 – 44.17% | 37.36 – 42.34% | 40.15 – 45.83% | |||
During fiscal years 2012, 2011 and 2010, Actuate issued 373,776 shares, 403,814 shares and 369,780 shares, respectively, under the Purchase Plan. The weighted-average fair value of employees’ stock purchase rights under the Purchase Plan during fiscal years 2012, 2011 and 2010 was $2.14, $1.88 and $1.67 per share, respectively.
Stock Repurchase Program
The Company’s stock repurchase program was originally announced in September 2001 and has been extended from time to time by Actuate’s Board of Directors.
On August 2, 2012, the Board of Directors approved an ongoing extension of the Company’s share repurchase program. This extension authorized management to make additional repurchases of Actuate common stock up to an aggregate of $30 million. The share repurchase authorization does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, the volume of
F-40
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
employee stock plan activity, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements. In each of the third and fourth quarters of 2012, the Company repurchased approximately 2,700,000 shares for a total of $15.6 million in the open market. As of December 31, 2012 $14.4 million remains of the $30 million authorized.
These repurchased shares were recorded as treasury stock and were accounted for under the cost method. No repurchased shares have been retired.
| 10. | Actuate 401(k) Plan |
The Company sponsors a salary deferral 401(k) plan for all of its eligible domestic employees. This plan allows employees to contribute up to 60% of their pretax salary up to the maximum dollar limitation prescribed by the Internal Revenue Service (“IRS”) Code. The maximum dollar limitation was $17,000 for fiscal year 2012. Beginning in fiscal year 2007, the Company started to match 50% of the employees’ first 3% annual contributions. The maximum match in any given plan year is calculated based on the lower of 3% of the employees’ eligible annual compensation or the then current IRS compensation wage limit. The IRS annual wage limit for fiscal year 2012 was $250,000. The Company’s contributions under the plan were charged to operations.
The following table represents the Company’s contribution activities for the following years:
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| IRS annual wage limit |
$ | 250,000 | $ | 245,000 | $ | 245,000 | ||||||
| Maximum match per employee |
3,750 | 3,675 | 3,675 | |||||||||
| Employer contributions |
$ | 368,000 | $ | 349,000 | $ | 378,000 | ||||||
| 11. | Restructuring Charges |
Historically, restructuring charges have included costs associated with reductions in workforce, exits of idle facilities and disposals of fixed assets. These restructuring charges were based on actual and estimated costs incurred including estimates of sublease income on portions of our idle facilities that we periodically update based on market conditions and in accordance with our restructuring plans. These estimates were impacted by the rules governing the termination of employees, especially those in foreign countries.
During fiscal 2012, the Company incurred a restructuring charge of $496,000. Of this total, approximately $421,000 was severance and benefits related to a restructuring of our French operation and $75,000 was associated with an idle Xenos facility in Europe.
During fiscal 2011, the Company implemented restructuring actions that resulted in an aggregate charge of $889,000 and the elimination of 26 positions across our North American product development and global sales and marketing operations. Also included in the aggregate charges for the year were $316,000 of idle facilities charges related to the closure of its Xenos facility in Europe and final true-ups of operating expenses associated with an idle South San Francisco facility. These charges are based on actual and estimated costs incurred, including estimates of sublease income on portions of the Company’s idle facilities that are periodically updated based on market conditions and in accordance with restructuring plans.
During fiscal 2010, the Company implemented restructuring actions that resulted in an aggregate charge of $968,000 and elimination of 26 positions worldwide, across all levels, primarily within the sales and marketing
F-41
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
organization. Severance and termination related charges totaled approximately $921,000. The Company also recorded idle facilities charges totaling $47,000 related to a Xenos facility in Europe.
The following table summarizes the restructuring accrual activity for the fiscal years ended December 31, 2012, 2011 and 2010 (in thousands):
| Severance & Benefits |
Facility Related |
Total | ||||||||||
| Balance at December 31, 2009 |
$ | 415 | $ | 3,003 | $ | 3,418 | ||||||
| Restructuring charges |
921 | 47 | 968 | |||||||||
| Cash payments, net of rents collected on sublease |
(680 | ) | (2,571 | ) | (3,251 | ) | ||||||
| Reclassified as a long-term asset (1) |
— | 75 | 75 | |||||||||
| Assumed upon acquisition of Xenos (2) |
— | 106 | 106 | |||||||||
| Adjustments (3) |
(2 | ) | (29 | ) | (31 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2010 |
654 | 631 | 1,285 | |||||||||
| Restructuring charges |
573 | 316 | 889 | |||||||||
| Cash payments, net of rents collected on sublease |
(1,261 | ) | (763 | ) | (2,024 | ) | ||||||
| Reclassified as a long-term asset (1) |
— | 26 | 26 | |||||||||
| Adjustments (3) |
34 | (6 | ) | 28 | ||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2011 |
— | 204 | 204 | |||||||||
| Restructuring charges |
421 | 75 | 496 | |||||||||
| Cash payments, net of rents collected on sublease |
— | (199 | ) | (199 | ) | |||||||
| Adjustments (3) |
3 | 5 | 8 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2012 |
$ | 424 | $ | 85 | $ | 509 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | The balance represents the long-term portion of the estimated operating expenses reimbursable to Actuate under its South San Francisco facility sublease agreement. |
| (2) | The balance represents idle facility-related liabilities assumed by us upon our acquisition of Xenos on February 1, 2010. |
| (3) | Adjustments reflecting the impact of foreign currency translation. |
| 12. | Income Taxes |
The following table presents the profit (loss) before income taxes for domestic and foreign operations (in thousands):
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Domestic |
$ | 12,102 | $ | 19,727 | $ | 15,761 | ||||||
| Foreign |
6,329 | (117 | ) | (1,449 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Profit before income taxes |
$ | 18,431 | $ | 19,610 | $ | 14,312 | ||||||
|
|
|
|
|
|
|
|||||||
F-42
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The provision for income taxes consists of the following (in thousands):
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Federal: |
||||||||||||
| Current |
$ | 4,243 | $ | 6,428 | $ | 4,165 | ||||||
| Deferred |
236 | 34 | 629 | |||||||||
|
|
|
|
|
|
|
|||||||
| 4,479 | 6,462 | 4,794 | ||||||||||
|
|
|
|
|
|
|
|||||||
| State: |
||||||||||||
| Current |
471 | 921 | 659 | |||||||||
| Deferred |
1,916 | 572 | 346 | |||||||||
|
|
|
|
|
|
|
|||||||
| 2,387 | 1,493 | 1,005 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Foreign: |
||||||||||||
| Current |
722 | (87 | ) | 572 | ||||||||
| Deferred |
540 | (245 | ) | (2,706 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| 1,262 | (332 | ) | (2,134 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Provision for income taxes: |
$ | 8,128 | $ | 7,623 | $ | 3,665 | ||||||
|
|
|
|
|
|
|
|||||||
The tax benefit associated with exercises of stock options reduced taxes currently payable by approximately $2.2 million, $3.1 million and $1.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. Such benefits were credited to additional paid-in capital. The tax expense associated with the increase of tax reserves related to unrecognized tax benefits was approximately $459,000 in fiscal year 2012. There was a benefit of approximately $143,000 in fiscal year 2011 and an expense of approximately $308,000 in fiscal year 2010.
The difference between provision for income taxes and the amount computed by applying the Federal statutory rate (35 percent) to income before taxes is explained below (in thousands):
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Income taxes at Federal statutory rate |
$ | 6,451 | $ | 6,864 | $ | 5,009 | ||||||
| Permanent differences |
413 | (74 | ) | 203 | ||||||||
| Tax effect of foreign operations |
(547 | ) | 208 | (512 | ) | |||||||
| Valuation allowance build (release) |
(422 | ) | (296 | ) | (1,494 | ) | ||||||
| State tax, net of Federal benefit |
2,122 | 1,135 | 705 | |||||||||
| Tax credits |
— | (297 | ) | (664 | ) | |||||||
| Increase (decrease) of tax reserves |
— | (76 | ) | 291 | ||||||||
| Other |
111 | 159 | 127 | |||||||||
|
|
|
|
|
|
|
|||||||
| Provision for income taxes: |
$ | 8,128 | $ | 7,623 | $ | 3,665 | ||||||
|
|
|
|
|
|
|
|||||||
United States income and foreign withholding taxes have not been provided on undistributed earnings for non-U.S. subsidiaries. The undistributed earnings on a book basis for non-U.S. subsidiaries are approximately $18.1 million. The Company intends to reinvest these earnings indefinitely in its operations outside the U.S. If the undistributed earnings are remitted to the U.S. these amounts would be taxable in the U.S at the current
F-43
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Federal and State tax rates net of foreign tax credits. Also, depending on the jurisdiction any distribution would potentially be subject to withholding taxes at rates applicable to that jurisdiction.
Significant components of deferred tax assets and liabilities for Federal and States are as follows (in thousands):
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| Deferred tax assets |
||||||||
| Net operating loss carry-forwards |
$ | 3,470 | $ | 3,834 | ||||
| Research credit carry-forwards |
4,385 | 3,833 | ||||||
| Accruals and allowances not currently tax deductible |
3,312 | 3,569 | ||||||
| Non-qualified stock options |
9,284 | 9,062 | ||||||
|
|
|
|
|
|||||
| Total deferred tax assets |
$ | 20,451 | $ | 20,298 | ||||
| Valuation allowance |
(3,324 | ) | (1,876 | ) | ||||
|
|
|
|
|
|||||
| Gross deferred tax assets, less valuation allowance |
$ | 17,127 | $ | 18,422 | ||||
|
|
|
|
|
|||||
| Deferred tax liabilities |
||||||||
| Fixed Assets and Acquired intangible assets |
$ | 2,687 | $ | 1,380 | ||||
|
|
|
|
|
|||||
| Net deferred tax assets: |
$ | 14,440 | $ | 17,042 | ||||
|
|
|
|
|
|||||
As of December 31, 2012, the Company had Federal net operating loss carry-forwards of approximately $1.4 million which will begin to expire in fiscal year 2023 if not utilized. As of December 31, 2012, the Company had State research tax credit carry-forwards of approximately $8.7 million. The State research credits can be carried forward indefinitely. As of December 31, 2012, the Company had net operating loss carry-forwards in foreign jurisdictions of approximately $10.7 million which will expire at various dates beginning in fiscal year 2021 if not utilized. As of December 31, 2012, the Company had tax credit carry-forwards in foreign jurisdictions of approximately $2.2 million which will expire at various dates beginning in fiscal year 2013 if not utilized.
Utilization of the net operating losses and the research tax credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 and 383 of the Internal Revenue Code and similar State provisions. The annual limitation may result in the expiration of net operating losses and tax credits before utilization.
Deferred tax assets should be recognized if realization of such assets is more likely than not. The net valuation allowance increased by approximately $1.4 million during the year ended December 31, 2012. The net valuation allowance decreased by approximately $630,000 and $1.5 million during the years ended December 31, 2011 and December 31, 2010, respectively. The approximately $1.4 million increase in the valuation allowance in fiscal year 2012 resulted primarily from the increase in the valuation allowance associated with California R&D tax credits expected not be utilized. The approximately $630,000 decrease in the valuation allowance in fiscal year 2011 resulted primarily from the decrease in the valuation allowance associated with the utilization of foreign net operating loss carryovers. The $1.5 million decrease in the valuation allowance in fiscal year 2010 resulted primarily from the decrease in the valuation allowance of the Canadian subsidiary due to the increased expected future profitability of the subsidiary after restructuring and the acquisition of Xenos. As of December 31, 2012, approximately $1.6 million of the valuation allowance reflected above is related to foreign net operating losses in jurisdictions where the Company continues to project losses or limited profitability. These amounts will be credited to tax expense if in the future the Company determines that they should be realized.
F-44
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation of the January 1, 2011 through December 31, 2012 amount of unrecognized tax benefits are as follows (in thousands):
| Beginning balance at January 1, 2011: |
$ | 4,547 | ||
| Additions based on tax positions related to the current year |
192 | |||
| Additions based on tax positions related to the prior year |
157 | |||
| Decreases based on tax positions related to the prior year |
(281 | ) | ||
|
|
|
|||
| Ending balance at December 31, 2011: |
$ | 4,615 | ||
| Additions based on tax positions related to the current year |
97 | |||
| Additions based on tax positions related to the prior year |
146 | |||
| Decreases based on tax positions related to the prior year |
(305 | ) | ||
|
|
|
|||
| Ending balance at December 31, 2012: |
$ | 4,553 | ||
|
|
|
As of December 31, 2012, the Company had total Federal, State, and foreign unrecognized tax benefits of $4.6 million. Of that total, approximately $3.2 million of the unrecognized tax benefits, if recognized would affect the effective tax rate. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. Currently, there is no accrual for the payment of interest and penalties. As of December 31, 2012, the Company does not expect any material changes to uncertain tax positions within the next twelve months.
The Company is subject to taxation in the U.S., various States, and foreign jurisdictions. Management believes that its accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. The 2009 to 2012 tax years generally remain subject to U.S., State, or non-U.S. income tax examinations.
As of December 31, 2012, the Company is under examination by the State of California for the 2005 and 2006 tax years as the statute of limitations was extended for these periods. The Company believes that it has adequately provided for any adjustments that may result from the California audit. However, the outcome of the tax audit cannot be predicted with certainty. No other Federal, State or foreign income tax audits are in progress.
Changes in tax laws and rates may affect recorded deferred tax asset and liabilities and our effective tax rate in the future. The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. Because a change in tax law is accounted for in the period of enactment, certain provisions of the Act benefitting the Company’s 2012 U.S. federal taxes, including the extension of the R&D credit and the treatment of income earned by controlled foreign corporations (look-through rule) cannot be recognized in the Company’s 2012 financial results and instead will be reflected in the Company’s 2013 financial results. We estimate that a benefit of approximately $700,000 will be accounted for as a discrete item in our tax provision for the first quarter of 2013. In addition, we expect the Act’s extension of these provisions through the end of 2013 will favorably affect our estimated annual effective tax rate for 2013 as compared to 2012.
F-45
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| 13. | Geographic Information |
Actuate’s primary operations are located in the United States. Revenues from international sources relate to export sales, primarily to Europe. Actuate’s revenues by geographic area are as follows (in thousands):
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Revenues: |
||||||||||||
| North America |
$ | 104,897 | $ | 106,341 | $ | 103,831 | ||||||
| Europe |
24,301 | 22,341 | 22,881 | |||||||||
| Asia Pacific and others |
9,621 | 6,261 | 4,760 | |||||||||
|
|
|
|
|
|
|
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| Total revenue |
$ | 138,819 | $ | 134,943 | $ | 131,472 | ||||||
|
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|
|
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| 14. | Contingencies |
The Company is engaged in certain legal actions arising in the ordinary course of business. Although there can be no assurance as to the outcome of such litigation, the Company believes it has adequate legal defenses and it believes that the ultimate outcome of any of these actions nor ongoing litigation expense will not have a material effect on the Company’s consolidated financial position or results of operations.
In the normal course of business, we provide customers with indemnification provisions of varying scope against claims of intellectual property infringement by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
| 15. | Subsequent Events |
On August 2, 2012, the Board of Directors approved an ongoing extension of the Company’s share repurchase program. This extension authorized management to make additional repurchases of Actuate common stock up to an aggregate of $30 million. The share repurchase authorization does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, the volume of employee stock plan activity, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements. Subsequent to December 31, 2012, through the date of filing this report, the Company has repurchased 1,368,831 shares totaling approximately $8.5 million in the open market under this stock repurchase plan.
In January 2013 the Board of Directors approved a modification to the Company’s 1998 Non-Employee Director Option Plan related to equity awards granted to the continuing non-employee directors. Beginning with the 2013 annual shareholder meeting, each continuing non-employee director shall receive an RSU award totaling 16,000 shares of Common Stock. All future stock option awards will be discontinued as a result of this modification.
During fiscal 2012, the Company initiated the process of deregistering its Australian subsidiary due to its lack of business activity. The Company also did not maintain an active employee presence in Australia during the course of fiscal 2012. At fiscal year end, the deregistration process was substantially complete but not finalized. On February 14, 2013, the Company received the final documents indicating that Actuate Asia Pacific Pty, Ltd. was formally deregistered and no longer remained a subsidiary of Actuate Corporation.
F-46
Table of Contents
ACTUATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| 16. | Selected Quarterly Financial Data (Unaudited) |
The following tables set forth certain unaudited financial data for the eight quarters ended December 31, 2012 (in thousands, except per share data).
| Quarter Ended | ||||||||||||||||
| March 31, 2012 |
June 30, 2012 |
September 30, 2012 |
December 31, 2012 |
|||||||||||||
| Revenues |
$ | 34,836 | $ | 36,228 | $ | 32,179 | $ | 35,576 | ||||||||
| Income from operations |
$ | 6,281 | $ | 6,225 | $ | 2,713 | $ | 3,338 | ||||||||
| Net income |
$ | 3,877 | $ | 5,561 | $ | 107 | $ | $758 | ||||||||
| Net income per share: |
||||||||||||||||
| Basic |
$ | 0.08 | $ | 0.11 | $ | 0.00 | $ | 0.02 | ||||||||
| Diluted |
$ | 0.07 | $ | 0.11 | $ | 0.00 | $ | 0.01 | ||||||||
| Shares used in computing per share amounts: |
||||||||||||||||
| Basic |
49,013 | 49,218 | 49,207 | 48,652 | ||||||||||||
| Diluted |
52,681 | 52,949 | 52,794 | 51,244 | ||||||||||||
| Quarter Ended | ||||||||||||||||
| March 31, 2011 |
June 30, 2011 |
September 30, 2011 |
December 31, 2011 |
|||||||||||||
| Revenues |
$ | 32,088 | $ | 33,738 | $ | 33,809 | $ | 35,308 | ||||||||
| Income from operations |
$ | 2,683 | $ | 3,632 | $ | 6,802 | $ | 7,784 | ||||||||
| Net income |
$ | 1,679 | $ | 581 | $ | 4,722 | $ | 5,005 | ||||||||
| Net income per share: |
||||||||||||||||
| Basic |
$ | 0.04 | $ | 0.01 | $ | 0.10 | $ | 0.10 | ||||||||
| Diluted |
$ | 0.03 | $ | 0.01 | $ | 0.09 | $ | 0.10 | ||||||||
| Shares used in computing per share amounts: |
||||||||||||||||
| Basic |
45,868 | 46,656 | 48,058 | 48,603 | ||||||||||||
| Diluted |
50,262 | 51,049 | 52,285 | 52,358 | ||||||||||||
F-47
Table of Contents
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
| Balance at beginning of period |
Additions (reductions) charged to costs and expenses |
Additions charged to other accounts(1) |
Deductions(2) | Balance at end of period |
||||||||||||||||
| Allowance for doubtful accounts: |
||||||||||||||||||||
| Year ended December 31, 2012 |
$ | 720 | $ | 107 | $ | (336 | ) | $ | (97 | ) | $ | 394 | ||||||||
| Year ended December 31, 2011 |
$ | 615 | $ | (21 | ) | $ | 449 | $ | (323 | ) | $ | 720 | ||||||||
| Year ended December 31, 2010 |
$ | 749 | $ | (14 | ) | $ | (52 | ) | $ | (68 | ) | $ | 615 | |||||||
| (1) | Represents amounts charged to revenue and deferred revenue for sales returns and other revenue related items. |
| (2) | Deductions are primarily comprised of write-offs of receivable balances against the allowance for doubtful accounts. |