ACTUATE CORP - 10-Q Quarterly Report

	June 30, 2002 (unaudited)			December 31, 2001(1)
ASSETS
Current assets:
Cash and cash equivalents	$	16,273		$	34,660
Short-term investments		28,169			5,147
Accounts receivable, net		25,992			28,870
Other current assets		4,261			4,251

Total current assets		74,695			72,928
Property and equipment, net		10,656			12,387
Goodwill, net		21,123			18,787
Other intangible assets, net		7,372			11,701
Other assets		1,546			1,588

	$	115,392		$	117,391

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,554		$	3,621
Accrued compensation		4,344			5,976
Other accrued liabilities		8,381			11,146
Deferred revenue		22,099			23,978
Income tax payable		—			64

Total current liabilities		40,378			44,785

Long-term liabilities		1,361			1,529

Stockholders’ equity:
Common stock		61			60
Additional paid-in capital		91,447			88,701
Deferred stock compensation		(94	)		(199	)
Accumulated other comprehensive (loss)		(220	)		(214	)
Accumulated deficit		(17,541	)		(17,271	)

Total stockholders’ equity		73,653			71,077

	$	115,392		$	117,391

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Revenues:
License fees	$	13,964		$	20,286		$	30,870		$	44,045
Services		13,549			12,254			25,444			24,003

Total revenues		27,513			32,540			56,314			68,048

Costs and expenses:
Cost of license fees		503			541			1,060			1,160
Cost of services		6,422			7,355			12,674			15,096
Sales and marketing		11,619			15,188			24,940			31,446
Research and development		4,968			4,679			9,815			9,099
General and administrative		3,306			2,699			6,627			4,786
Amortization of goodwill and other intangibles		902			2,406			1,993			4,467
Restructuring costs		—			497			—			497

Total costs and expenses		27,720			33,365			57,109			66,551

Income (loss) from operations		(207	)		(825	)		(795	)		1,497
Interest and other income, net		173			332			362			671

Income (loss) before income taxes		(34	)		(493	)		(433	)		2,168
(Provision) benefit for income taxes		13			(600	)		163			(1,598	)

Net income (loss)	$	(21	)	$	(1,093	)	$	(270	)	$	570

Basic net income (loss) per share	$	0.00		$	(0.02	)	$	0.00		$	0.01

Shares used in basic per share calculation		60,570			59,032			60,443			58,563

Diluted net income (loss) per share	$	0.00		$	(0.02	)	$	0.00		$	0.01

Shares used in diluted per share calculation		60,570			59,032			60,443			63,286

	Six Months Ended June 30,
	2002			2001
Operating activities
Net income (loss)	$	(270	)	$	570
Adjustment to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		2,309			1,806
Amortization of deferred compensation		105			28
Amortization of goodwill (in 2001) and other intangibles		1,993			4,467
Changes in operating assets and liabilities:
Accounts receivable		2,878			1,560
Other current assets		(10	)		(1,421	)
Accounts payable		1,933			1,042
Accrued compensation		(1,632	)		(2,421	)
Other accrued liabilities		(732	)		(1,499	)
Deferred revenue		(1,879	)		811
Income taxes payable		(232	)		1,416

Net cash provided by operating activities		4,463			6,359

Investing activities
Purchases of property and equipment		(578	)		(4,827	)
Proceeds from maturity of short-term investments		7,048			—
Final purchase price payment of OST acquisition		(2,033	)		—
Purchases of short-term investments		(30,070	)		—
Acquisition of Tidestone Technologies, Inc., net of cash assumed		—			(138	)
Net change in other assets		42			(123	)

Net cash used in investing activities		(25,591	)		(5,088	)

Financing activities
Proceeds from issuance of common stock		2,747			6,679

Net cash provided by financing activities		2,747			6,679

Net increase (decrease) in cash and cash equivalents		(18,381	)		7,950
Effect of exchange rate on cash		(6	)		(197	)
Cash and cash equivalents at the beginning of the period		34,660			26,928

Cash and cash equivalents at the end of the period	$	16,273		$	34,681

The accompanying interim condensed consolidated financial statements of Actuate Corporation are unaudited, but include all normal recurring and non-recurring adjustments which we believe to be necessary for the fair presentation of the financial position, results of operations, and changes in cash flows for the periods presented. The non-recurring adjustments include the restructuring charges recorded in the second quarter of 2002, which consisted entirely of severance payments, payroll taxes and extended medical benefits in connection with the reduction of our worldwide workforce. The preparation of the financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Despite our best effort to establish good faith estimates and assumptions, actual results may differ.

The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 19, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Interim results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of operating results for the full fiscal year.

License fees from sales of software products directly to end-user customers or indirect channel partners are recognized as revenues after execution of a non-cancelable signed license agreement or receipt of a definitive purchase order, and shipment of the product, if no vendor obligations remain, there are no uncertainties surrounding product acceptance, the license fees are fixed or determinable, and collection of the license fee is considered probable. Probability of collection is based upon the assessment of the customer’s financial condition through the review of their current financial statements or credit reports. For follow-on sales to existing customers, prior payment history is also used to evaluate probability of collection. Our products do not require significant customization. The majority of end-user license revenues are derived from end-user customer orders for specific individual products. These types of transactions are recognized as revenues upon shipment of product, assuming that all other revenue recognition criteria are met. Advance payments from end-users, in arrangements in which the end-user customer has the right to future unspecified products, are deferred and recognized as revenues ratably over the period, typically one year, during which the end-user is entitled to receive the products. If the license agreement contains extended payment terms that would indicate that the fee is not fixed or determinable, revenues are recognized as the payments become due, assuming that all other revenue recognition criteria are met.

Furthermore, license arrangements with distributors give such distributors the right to distribute our products to customers headquartered in specified territories. License arrangements with indirect channel partners such as e.Business Application Partners, system integrators and distributors generally take the form of arrangements pursuant to which a license fee is paid to us, which we recognize as revenues when no further obligations remain, provided that the fees are fixed or determinable and collection of the resulting receivables is deemed probable. We have also entered into certain fixed price arrangements in which the contracting entity has the right to the unlimited usage, unspecified future products, and resale of the licensed software for a specified term and pursuant to which license fee revenues are deferred and recognized on a straight-line basis over the term of the license agreement.

We have not established vendor specific objective evidence of fair value (“VSOE”) for license fees and therefore we recognize revenues from arrangements with multiple elements involving software licenses under the residual method as outlined in Statement of Position No. 97-2 “Software Revenue Recognition.” To the extent that a discount exists on any of the elements, we follow the residual method and attribute that discount entirely to the delivered elements.

Service revenues consist of maintenance, consulting, training, and related services that we provide to our customers. Revenues from such services are generally recognized when performed. If services are included with a license agreement, amounts related to services are unbundled from the license fee based on VSOE as established by transactions where such services have been sold separately. When we provide a software license and the related maintenance for one bundled price, the fair value of the maintenance, based on the price charged for that element separately, is deferred and recognized ratably over the term of the respective agreement.

In October 2001, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. However, SFAS 144 retains the fundamental provisions of SFAS 121 for: 1) recognition and measurement of the impairment of long-lived assets to be held and used; and 2) measurement of long-lived assets to be disposed of by sale. SFAS 144 was adopted as of January 1, 2002. There was no impact on its adoption. Furthermore, there were no long-lived assets that were considered to be impaired during the periods presented.

Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options (using the treasury stock method).

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Numerator:
Net income (loss)	$	(21	)	$	(1,093	)	$	(270	)	$	570

Denominator:
Weighted—average common shares outstanding		60,594			59,204			60,468			58,751
Weighted—average shares subject to repurchase		(24	)		(172	)		(25	)		(188	)

Denominator for basic income (loss) per share		60,570			59,032			60,443			58,563
Weighted—average shares subject to repurchase		—			—			—			188
Weighted—average employee stock options outstanding		—			—			—			4,535

Denominator for diluted income (loss) per share		60,570			59,032			60,443			63,286

Basic net income (loss) per share	$	0.00		$	(0.02	)	$	0.00		$	0.01

Diluted net income (loss) per share	$	0.00		$	(0.02	)	$	0.00		$	0.01

The total number of common shares excluded from the calculation of diluted net income (loss) per share was 2.9 million and 4.0 million for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2001 and 2002, the number of shares excluded was 3.1 million and nil, respectively. These shares were excluded because their effect would be anti-dilutive.

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Net income (loss)	$	(21	)	$	(1,093	)	$	(270	)	$	570
Foreign currency translation adjustment, net of tax effect		154			(55	)		(4	)		(122	)

Comprehensive income (loss)	$	133		$	(1,148	)	$	(274	)	$	448

On June 29, 2001, the FASB issued SFAS 141, “Business Combinations,” which eliminates the pooling of interest method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. As of January 1, 2002, we adopted this accounting standard.

In addition, as of January 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible Assets,” which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis.

The provisions of SFAS 142 also require the completion of a transitional impairment test within six months of adopting the accounting standard, and any impairments identified must be treated as a cumulative effect of a change in accounting principle. During the quarter ended June 30, 2002, we completed the transitional impairment test, which did not result in an impairment of recorded goodwill.

	Three Months Ended June, 30						Six Months Ended June, 30
	2002			2001			2002			2001
Net income (loss) as reported	$	(21	)	$	(1,093	)	$	(270	)	$	570
Add back: Goodwill amortization		—			933			—			1,755
Add back: Workforce amortization		—			136			—			261

Adjusted net income (loss)	$	(21	)	$	(24	)	$	(270	)	$	2,586

Basic net income (loss) per share:
Net income (loss) per share as reported	$	0.00		$	(0.02	)	$	0.00		$	0.01
Add back: Goodwill amortization		—			0.02			—			0.03
Add back: Workforce amortization		—			0.00			—			0.00

Adjusted net income (loss) per share	$	0.00		$	0.00		$	0.00		$	0.04

Diluted net income (loss) per share:
Net income (loss) per share as reported	$	0.00		$	(0.02	)	$	0.00		$	0.01
Add back: Goodwill amortization		—			0.02			—			0.03
Add back: Workforce amortization		—			0.00			—			0.00

Adjusted net income (loss) per share	$	0.00		$	0.00		$	0.00		$	0.04

	As of June 30, 2002							As of December 31, 2001
	Gross Carrying Amount		Accumulated Amortization			Net Balance		Gross Carrying Amount		Accumulated Amortization			Net Balance
Customer lists	$	10,600	$	(7,068	)	$	3,532	$	10,600	$	(5,742	)	$	4,858
Workforce (reclassified as goodwill)		—		—			—		4,086		(1,750	)		2,336
Purchased technologies		3,610		(988	)		2,622		3,610		(537	)		3,073
Non-compete agreements		1,030		(321	)		709		1,030		(192	)		838
Trademark		700		(191	)		509		700		(104	)		596

	$	15,940	$	(8,568	)	$	7,372	$	20,026	$	(8,325	)	$	11,701

In August, 2001, a lawsuit was filed in the Virginia Circuit Court for Fairfax County against us and two of our employees by MicroStrategy, Incorporated (“MicroStrategy”). The lawsuit alleges that these employees, who previously worked for MicroStrategy, breached their fiduciary and contractual obligations to MicroStrategy by, among other things, misappropriating trade secrets and confidential information and soliciting MicroStrategy employees. The complaint seeks injunctive relief and damages. A trial date has been set for November 4, 2002. Actuate believes the lawsuit is without merit and intends to defend this case vigorously.

We are also engaged in certain other 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 the ultimate outcome of any of these actions will not have a material effect on our financial position or results of operations.

The following information should be read in conjunction with the historical financial information and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 19, 2002.

The statements contained in this Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding Actuate’s expectations, beliefs, hopes, intentions, plans or strategies regarding the future. All forward-looking statements in this Form 10-Q are based upon information available to Actuate as of the date hereof, and Actuate assumes no obligation to update any such forward-looking statements. Actual results could differ materially from Actuate’s current expectations. Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in the section titled “Risk Factors That May Affect Future Results” in this Form 10-Q.

We sell software products through two primary means: (i) directly to end-user customers through our direct sales force and (ii) through indirect channel partners such as e.Business application vendors, resellers and distributors. e.Business application vendors generally integrate our products with their applications and either provide hosting services or resell them with their products. Our other indirect channel partners resell our software products to end-user customers. Our revenues are derived primarily from license fees for software products and fees for services relating to such products, including software maintenance and support, consulting and training.

General. 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 accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On a regular basis, we evaluate estimates, including those related to bad debts, intangible assets and income taxes. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition. Our revenue recognition policy is significant because our revenues are a key component of our results of operations. We follow very specific and detailed guidelines, as discussed in Note 1 to Condensed Consolidated Financial Statements, in measuring revenues; however, certain judgments affect the application of our revenue policy. For example, we are required to exercise judgment in evaluating risk of concession when payments terms are beyond our normal credit period of net 30 days. Further, assessment of collectibility is particularly critical in determining whether or not revenues should be recognized. We also record a provision for estimated sales returns on product and service related sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical data we use to calculate these estimates does not properly reflect future returns, revenues could be overstated.

Goodwill and Other Intangible Assets. We have significant intangible assets, including goodwill. The determination of estimated useful lives and whether or not these assets are impaired involves significant judgments. We periodically evaluate acquired goodwill and intangible assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on market conditions and operational performances of the acquired assets. In assessing the recoverability of these assets, we must make assumptions regarding estimated future cash flows and other factors. If these estimates and related assumptions change in the future, significant impairment charges may be recorded in future periods.

Allowance for Doubtful Accounts. The allowance for doubtful accounts is established through a charge to general and administrative expenses. 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 factors such as past experience, credit quality of the customer, age of the receivable balance, individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. 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 may be required.

Allowance for Deferred Tax Assets. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income or reduce loss and increase shareholder’s equity in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

	Three Months Ended June 30,				Six Months Ended June 30,
	2002		2001		2002		2001
Revenues:
License fees	51	%	62	%	55	%	65	%
Services	49		38		45		35
Total revenues	100		100		100		100

Costs and expenses:
Cost of license fees	2		2		2		2
Cost of services	23		23		23		22
Sales and marketing	42		47		44		46
Research and development	18		14		17		13
General and administrative	12		8		12		7
Amortization of goodwill and other intangibles	3		7		3		7
Restructuring costs	—		2		—		1

Total costs and expenses	100		103		101		98

Income (loss) from operations	0		(3	)	(1	)	2
Interest and other income, net	0		1		1		1

Income (loss) before income taxes	0		(2	)	0		3
(Provision) benefit for income taxes	0		(2	)	0		(2	)

Net income (loss)	0	%	(4	)%	0	%	1	%

Total revenues decreased 15% from $32.5 million for the quarter ended June 30, 2001 to $27.5 million for the quarter ended June 30, 2002. Total revenues decreased 17% from $68.0 million for the six months ended June 30, 2001 to $56.3 million for the six months ended June 30, 2002. Sales outside of North America were $6.7 million, or 24% of total revenues for the second quarter of 2002, compared to $6.6 million, or 20% of total revenues for the second quarter of 2001. For the six months ended June 30, 2002, sales outside of North America were $14.3 million, or 25% of total revenues as compared to $14.5 million, or 21% of total revenues for the six months ended June 30, 2001. We believe that continuing weak economic conditions in North America and Europe have caused our customers and prospective customers to significantly decrease spending on information technology. We currently expect weak economic conditions and reduced information technology spending to continue at least through the second half of fiscal 2002.

License fees. Revenues from license fees decreased 31% from $20.3 million for the second quarter of 2001 to $14.0 million for the second quarter of 2002. For the six months ended June 30, 2002, license fee revenues were $30.9 million, a decrease of 30% over license fee revenues of $44.0 million for the six months ended June 30, 2001. The decrease in license fee revenues for the quarter was primarily due to weak economic conditions in North America and Europe and a corresponding decrease in the demand for our products. As a percentage of total revenues, license fee revenues decreased from 62% in the second quarter of 2001 to 51% in the second quarter of 2002. For the six months ended June 30, 2002, license fee revenues as a percentage of total revenues were 55% compared to 65% for the six months ended June 30, 2001. We are currently forecasting our total revenues for the third quarter of 2002 to be between $26.0 million and $27.0 million.

Services. Service revenues increased 11% from $12.3 million for the second quarter of 2001 to $13.5 million for the second quarter of 2002. For the six months ended June 30, 2002, service revenues were $25.4 million, an increase of 6% over service revenues of $24.0 million for the six months ended June 30, 2001. The increase in service revenues was primarily due to an increase in the installed base of customers receiving ongoing maintenance and support. As a percentage of total revenues, service revenues increased from 38% in the second quarter of 2001 to 49% in the second quarter of 2002. For the six months ended June 30, 2002, service revenues as a percentage of total revenues were 45% compared to 35% for the six months ended June 30, 2001.

Cost of License fees. Cost of license fees consists primarily of production and packaging costs, personnel and related costs, and facility costs. Cost of license fees decreased from $541,000, or 3% of revenues from license fees, for the second quarter of 2001 to $503,000, or 4% of revenues from license fees, for the second quarter of 2002. Cost of license fees decreased from $1.2 million, or 3% of revenues from license fees, for the six months ended June 30, 2001 to $1.1 million, or 3% of revenues from license fees for the six months ended June 30, 2002. The decrease in cost of license fees in absolute dollars was primarily due to fulfilling a fewer number of orders during the quarter. We expect our cost of license fees as a percentage of revenues from license fees to be approximately between 3% and 4% of revenues from license fees for the remainder of fiscal 2002.

Cost of Services. Cost of services consists primarily of personnel and related costs, facilities costs incurred in providing software maintenance and support, training and consulting services, as well as third-party costs incurred in providing training and consulting services. Cost of services decreased from $7.4 million, or 60% of service revenues, for the second quarter of 2001 to $6.4 million, or 47% of service revenues, for the second quarter of 2002. Cost of services decreased from $15.1 million, or 63% of service revenues, for the six months ended June 30, 2001 to $12.7 million, or 50% of service revenues, for the six months ended June 30, 2002. The decrease in cost of services in absolute dollars and as a percentage of services revenues was primarily due to an increase in on-going maintenance and support revenues and decreased contracting with third-party consultants to support our customers’ professional service needs. We expect our cost of services as a percentage of services revenues will decrease for the remainder of fiscal 2002 because we intend to continue to utilize our own personnel, rather than third-party consultants (which has a higher cost and lower margin), to perform a significant portion of the consulting and training services.

Sales and marketing. Sales and marketing expenses consist primarily of compensation, promotional expenses, travel and entertainment, and facility costs. Sales and marketing expenses decreased from $15.2 million, or 47% of total revenues for the second quarter of 2001 to $11.6 million, or 42% of total revenues for the second quarter of 2002. Sales and marketing expenses decreased from $31.4 million, or

46% of total revenues for the six months ended June 30, 2001 to $24.9 million, or 44% of total revenues for the six months ended June 30, 2002. The decrease in sales and marketing expenses in absolute dollars was primarily due to reduction of sales and marketing personnel, lower sales commissions associated with decreased revenues and reduced marketing program activities. We currently expect our sales and marketing expenses as a percentage of total revenues to be in about the same range for the remainder of fiscal 2002.

Research and development. Research and development expenses are expensed as incurred and consist primarily of personnel and related costs associated with product development. Research and development expenses increased from $4.7 million, or 14% of total revenues for the second quarter of 2001 to $5.0 million, or 18% of total revenues for the second quarter of 2002. Research and development expenses increased from $9.1 million, or 13% of total revenues for the six months ended June 30, 2001 to $9.8 million, or 17% of total revenues for the six months ended June 30, 2002. The increase in research and development expenses in absolute dollars was primarily due to increased engineering personnel cost associated with the completion and release of Actuate Version 6. The increase in research and development expenses as a percentage of total revenues was due to the decline in our total revenues in the second quarter as well as the first six months of 2002 as compared to the same periods of fiscal 2001. We believe that continued investments in technology and product development are essential for us to remain competitive in the markets we serve, and we expect research and development expenses as a percentage of total revenues to be in about the same range for the remainder of fiscal 2002.

General and administrative. General and administrative expenses consist primarily of personnel and related costs for finance, staffing, legal, human resources, information systems and general management, as well as idle facility cost. General and administrative expenses increased from $2.7 million, or 8% of total revenues for the second quarter of 2001 to $3.3 million, or 12% of total revenues for the second quarter of 2002. General and administrative expenses increased from $4.8 million, or 7% of total revenues for the six months ended June 30, 2001 to $6.6 million, or 12% of total revenues for the six months ended June 30, 2002. The increases in general and administrative expenses in both absolute dollars and as a percentage of total revenues were primarily due to increased personnel and related costs as well as an increase in legal and bad debt expenses. Our expenses for the second quarter and the first six months of 2002 included approximately $825,000 and $1.8 million in facility expenses for a leased facility that is currently unoccupied. We had recently announced that we made a decision to exit this leased facility and, therefore, will record a one-time charge for this idle facility in the third quarter of 2002. Please refer to the discussion of “Restructuring Costs” below for further details.

Amortization of goodwill and other intangibles. On January 1, 2002, we implemented SFAS 142, “Goodwill and Other Intangible Assets,” which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis. Accordingly, we discontinued the amortization of goodwill effective January 1, 2002. In addition, we reclassified $4.1 million of acquired workforce, which is no longer defined as acquired intangible assets under SFAS 141, as goodwill. As a result, no acquired workforce amortization was recognized during the six months ended June 30, 2002.

The provisions of SFAS 142 also require the completion of a transitional impairment test within six months of adopting the accounting standard, any impairments identified must be treated as a cumulative effect of a change in accounting principle. During the quarter ended June 30, 2002, we completed the transitional impairment test, which did not result in an impairment of recorded goodwill.

Amortization of goodwill was $nil for the three-month and six-month periods ended June 30, 2002, as compared to $1.5 million and $2.8 million for the three-month and six-month periods ended June 30, 2001, respectively. The decrease in the amortization of goodwill is due to the adoption of SFAS 142. Amortization of other intangible assets was $902,000 and $906,000 for the three months ended June 30, 2002 and 2001, respectively. For the six-month periods ended June 30, 2002 and 2001, amortization of other intangibles was $2.0 million and $1.7 million, respectively. The increase in amortization of other intangible assets was primarily due to the acquisition of Tidestone Technologies, Inc. during the second quarter of 2001.

Restructuring costs. During our quarterly conference call held on July 17, 2002, we announced that we would implement a restructuring plan, in the third quarter of 2002, to align our cost structure and operations in light of the economic conditions that we expect to face in the foreseeable future. The restructuring charges will consist of the estimated costs associated with the exit of our idle facility located in South San Francisco, California, and for our worldwide workforce reduction. The idle facility charge will primarily consist of the payments and expenses due under the remaining non-cancelable lease terms, net of anticipated sub-lease income, and for the write-down in leasehold improvements and construction in progress. The workforce reduction charge will primarily consist of severance payments and other payroll related costs. We currently anticipate that our total restructuring charges in the third quarter of 2002 will be in the range of approximately $25.0 to $28.0 million.

Interest and other income, net, are comprised primarily of interest income earned by us on cash and short-term investments. Interest and other income, net, for the three months ended June 30, 2002 were $173,000 as compared with interest and other income, net of $332,000 for the three months ended June 30, 2001. For the six months ended June 30, 2002, interest and other income, net, were $362,000 as compared with interest and other income, net of $671,000 for the six months ended June 30, 2001. The decrease was primarily due to lower interest rates received on our investments.

We recorded an income tax benefit of $13,000 in the three months ended June 30, 2002 and income tax provision of $600,000 in the same period of fiscal 2001. For the six months ended June 30, 2002, we recorded an income tax benefit of $163,000, as compared to an income tax provision of $1.6 million for the same period of fiscal 2001. We anticipate a 37.5% effective tax rate for fiscal 2002 and the effective tax rate used for three months ended June 30, 2002 was 37.5%. The expected annual tax rate takes into consideration of the nondeductible amortization expense for the intangible assets acquired in various corporate acquisitions and other nondeductible items. The net income tax benefit reflects the effect of the pretax operating loss for the three-month and six-month periods ended June 30, 2002. Unanticipated events may occur during the remaining periods of this fiscal year that would cause revision of the expected effective tax rate.

Cash from operating activities. Net cash provided from operating activities was $4.5 million during the six months ended June 30, 2002, compared to $6.4 million during the six months ended June 30, 2001. For the six-month period ended June 30, 2002, net cash provided by operating activities was primarily due to net loss adjusted by non-cash items of depreciation and amortization, increased collections of accounts receivable and increase in accounts payable, that were offset by decreases in deferred revenues, accrued compensation and other accrued liabilities. Net cash provided from operating activities in the six months ended June 30, 2001 was primarily due to net income as adjusted by non-cash items of amortization and depreciation, increased collections of accounts receivable and increases in accounts payable and income taxes payable, that were offset by decreases in accrued compensation, other accrued liabilities, and other current assets.

Cash used in investing activities. Net cash used in investing activities was $25.6 million during the six months ended June 30, 2002, compared to $5.1 million during the six months ended June 30, 2001. For the six months ended June 30, 2002, net cash used in investing activities was primarily due to purchases of short-term investments and the final purchase price payment related to the acquisition of Open Software Technology, LLC, that were offset by the proceeds received from the maturity of short-term investments. For the six months ended June 30, 2001, net cash used in investing activities was primarily due to purchases of property and equipment for our South San Francisco facilities.

Cash from financing activities. Net cash provided by financing activity was $2.7 million and $6.7 million during the six months ended June 30, 2002 and 2001, respectively. During both periods, net cash provided by financing activity represented the proceeds derived from issuance of common stock under the employee stock purchase and stock option plans.

We believe that our current cash balances and any cash generated from operations will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next twelve months. Thereafter, if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or obtain credit facilities. The sale of additional equity could result in additional dilution to our stockholders. A portion of our cash may be used to repurchase our common stock, acquire or invest in complementary businesses, including the purchase of the remaining interest of our subsidiary in Japan, or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies.

Investors should carefully consider the following risk factors and warnings before making an investment decision. The risks described below are not the only ones facing Actuate. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the following risks actually occur, our business, operating results or financial condition could be materially adversely affected. In such case, the trading price of our common stock could decline and you may lose all or part of your investment. Investors should also refer to the other information set forth in this Report on Form 10-K, including the financial statements and the notes thereto.

The susceptibility of our operating results to significant fluctuations makes any prediction, including our estimates, of future operating results unreliable. In addition, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and you should not rely on them as indications of our future performance. Our operating results have in the past, and may in the future, vary significantly due to factors such as the following:

Because our software products are typically shipped shortly after orders are received, total revenues in any quarter are substantially dependent on orders booked and shipped throughout that quarter. Booking of orders in the third quarter of 2001 was negatively impacted by the September 11^th terrorist attacks and future terrorists acts or war-time conditions are likely to impact the booking of orders in future periods. Furthermore, several factors may require us, 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:

In addition, we may in the future experience fluctuations in our gross and operating margins due to changes in the mix of our domestic and international revenues, changes in the mix of our direct sales and indirect sales and changes in the mix of license revenues and service revenues, as well as changes in the mix among the indirect channels through which our products are offered.

A significant portion of our total revenues in any given quarter is derived from existing customers. Our ability to achieve future revenue growth, if any, will be substantially dependent upon our ability to increase revenues from license fees and services from existing customers, to expand our sales force and to increase the average size of our orders. To the extent that such increases do not occur in a timely manner, our business, operating results and financial condition would be harmed. Our expense levels and any plans for expansion, including plans to increase our sales and marketing and research and development efforts, are based in significant part on our expectations of future revenues and are relatively fixed in the short-term. If revenues fall below our expectations and we are unable to quickly reduce our spending in response, our business, operating results and financial condition are likely to be harmed.

Based upon all of the factors described above, we have a limited ability to forecast future revenues and expenses, and it is likely that in some future quarter our operating results will be below our estimates or the expectations of public market analysts and investors. In the event that operating results are below our estimates or other expectations, the price of our common stock could decline.

To date, we have sold our products principally through our direct sales force, as well as through indirect sales channels, such as our e.Business Application Partners, distributors and systems integrators. Our revenues from license fees resulting from sales through indirect channel partners were approximately 34% for the first six months of 2002, 46% in fiscal 2001 and 45% in fiscal 2000. Our ability to achieve significant revenue growth in the future will depend in large part on the success of our sales force and in further establishing and maintaining relationships with indirect channel partners. In particular, a significant element of our strategy is to embed our technology in products offered by software application vendors for resale or as a hosted application to such vendors’ customers and end-users. We intend to seek additional distribution arrangements with other software application vendors to embed our technology in their products and expect that these arrangements will continue to account for a significant portion of our revenues in future periods. Our future success will depend on the ability of our indirect channel partners to sell and support our products. If the sales and implementation cycles of our indirect channel partners are lengthy or variable or our e.Business Application Partners experience difficulties embedding our technology into their products or we fail to train the sales and customer support personnel of such indirect channel partners in a timely fashion, our business, operating results and financial condition would be harmed.

Although we are currently investing, and plan to continue to invest, significant resources to expand and develop relationships with e.Business Application Partners, we have at times experienced and continue to experience difficulty in establishing and maintaining these relationships. If we are unable to successfully expand these distribution channels and secure license agreements with additional e.Business Application Partners on commercially reasonable terms, including significant up front payments of minimum license fees, and extend existing license agreements with existing e.Business Application Partners on commercially reasonable terms, our operating results would be harmed. Any inability by us to maintain existing or establish new relationships with indirect channel partners, including systems integrators, or, if such efforts are successful, a failure of our revenues to increase correspondingly with expenses incurred in pursuing such relationships, would harm our business, operating results and financial condition.

The market for Information Delivery software products is still emerging and we cannot be certain that it will continue to grow or that, even if the market does grow, businesses will purchase our products. If the market for Information Delivery software products fails to grow or grows more slowly than we expect, our business, operating results and financial condition would be harmed. To date, all of our revenues have been derived from licenses for our e.Reporting software and related products and services, and we expect this to continue for the foreseeable future. We have spent, and intend to continue to spend, considerable resources educating potential customers and indirect channel partners about Information Delivery and our products. However, if such expenditures do not enable our products to achieve any significant degree of market acceptance, our business, operating results and financial condition would be harmed.

The purchase of our products by our end-user customers for deployment within the customer’s organization typically involves a significant commitment of capital and other resources, and is therefore subject to delays that are beyond our control. These delays can arise from a customer’s internal procedures to approve large capital expenditures, budgetary constraints and the testing and acceptance of new technologies that affect key operations as well as general economic and political events. The sales cycle for an initial order of our products is typically 3 to 6 months and the sales cycle associated with a follow-on large scale deployment of our products typically extends for another 6 to 9 months or longer. We may experience longer sales cycles in the future. Additionally, sales cycles for sales of our products to e.Business Application Partners tend to be longer, ranging from 6 to 24 months or more and may involve convincing the vendor’s entire organization that our products are the appropriate Information Delivery software for the vendor’s application. This time period does not include the sales and implementation cycles of such vendor’s own products, which are typically significantly longer than our sales and implementation cycles. Certain of our customers have in the past, or may in the future, experience difficulty completing the initial implementation of our products. Any difficulties or delays in the initial implementation by our end-user customers or our indirect channel partners could cause such customers to reject our software or lead to the delay or non-receipt of future orders for the large-scale deployment of our products.

During the first six months of 2002 and fiscal years 2001 and 2000, we derived 25%, 23% and 11% of our total revenues, respectively, from sales outside North America. Our ability to achieve revenue growth in the future will depend in large part on our success in increasing revenues from international sales. We intend to continue to invest significant resources to expand our sales and support operations outside North America and to enter additional international markets. In order to expand international sales, we must establish additional foreign operations, expand our international channel management and support organizations, hire additional personnel, recruit additional international distributors and increase the productivity of existing international distributors. If we are not successful in expanding international operations in a timely and cost-effective manner, our business, operating results and financial condition could be harmed.

Our business is highly competitive, and as such, our growth is dependent upon market growth and our ability to enhance our existing products, introduce new products on a timely basis and expand our distribution channels and professional services organization. One of the ways we have addressed and will continue to address these issues is through acquisitions of other companies. Acquisitions involve numerous risks, including the following:

Mergers and acquisitions of high-technology companies are inherently risky, and we cannot assure you that any acquisition will be successful and will not materially adversely affect our business, operating results or financial condition. Failure to successfully integrate acquired companies and technologies with us could harm our business and operating results.

Many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than us. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sales of their products than we may. Also, most current and potential competitors, including companies such as Oracle and Microsoft, have greater name recognition and the ability to leverage a significant installed customer base. These companies could integrate competing Information Delivery software with their products, resulting in a loss of market share for us. We expect additional competition as other established and emerging companies enter the Information Delivery software market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, longer sales cycles and loss of market share, any of which would harm our business, operating results and financial condition.

Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to address the Information Delivery needs of our prospective customers. Also our current or future channel partners may have established in the past, or may in the future, establish cooperative relationships with our current or potential competitors, thereby limiting our ability to sell our products through particular distribution channels. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could harm our ability to obtain revenues from license fees from new or existing customers and service revenues from new or existing customers on terms favorable to us. If we are unable to compete successfully against current and future competitors our business, operating results and financial condition would be harmed.

In August, 2001, a lawsuit was filed in the Virginia Circuit Court for Fairfax County against us and two of our employees by MicroStrategy, Incorporated (“MicroStrategy). The lawsuit alleges that these employees, who previously worked for MicroStrategy, breached their fiduciary and contractual obligations to MicroStrategy by, among other things, misappropriating trade secrets and confidential information and soliciting MicroStrategy employees. The complaint seeks injunctive relief and damages. A trial date has been set for November 4, 2002. Although Actuate believes the lawsuit is without merit and intends to defend this case vigorously the potential effects on our business, operating results and financial condition may include the following:

Third parties may claim that our current or future products infringe such parties’ intellectual property rights. We expect Information Delivery software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. A successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could harm our business, operating results and financial condition.

The market for our products is characterized by rapid technological changes, frequent new product introductions and enhancements, changing customer demands and evolving industry standards. Any of these factors can render existing products obsolete and unmarketable. We believe that our future success will depend in large part on our ability to support current and future releases of popular operating systems and computer programming languages, databases and e.Business software applications, to timely develop new products that achieve market acceptance, and to meet an expanding range of customer requirements. If the announcement or introduction of new products by us or our competitors or any change in industry standards causes customers to defer or cancel purchases of existing products, our business, operating results and financial condition would be harmed. As a result of the complexities inherent in Information Delivery, major new products and product enhancements can require long development and testing periods. In addition, customers may delay their purchasing decisions in anticipation of the general availability of new or enhanced versions of our products. As a result, significant delays in the general availability of such new releases or significant problems in the installation or implementation of such new releases could harm our business, operating results and financial condition. If we fail to successfully develop, on a timely and cost effective basis, product enhancements or new products that respond to technological change, evolving industry standards or customer requirements or such new products and product enhancements fail to achieve market acceptance, our business, operating results and financial condition may be harmed.

We believe that our future success will depend in large part on the success of new products and enhancements to our products that we make generally available. Prior to the release of any new products or enhancements, the products must undergo a long development and testing period. To date, the development and testing of new products and enhancements have taken longer than expected. In the event the development and testing of new products and enhancements continue to take longer than expected, the release of new products and enhancements will be delayed. If we fail to release new products and enhancements in a timely manner, our business, operating results and financial condition may be harmed. In addition, if such new products and enhancements do not achieve market acceptance our business, operating results and financial condition may be harmed.

A substantial portion of Actuate’s revenues is derived from international sales. During the first six months of 2002 and fiscal years 2001 and 2000, sales outside North America accounted for 25%, 23% and 11% of our total revenues, respectively. International operations are subject to a number of risks, any of which could harm our business, operating results and financial conditions. These risks include the following:

We believe that an increasing portion of our revenues and costs will be denominated in foreign currencies. To the extent such denomination in foreign currencies does occur, gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations. Although we may from time to time undertake foreign exchange hedging transactions to cover a portion of our foreign currency transaction exposure, we currently do not attempt to cover any foreign currency exposure. If we are not successful in any future foreign exchange hedging transactions that we engage in, our business, operating results and financial condition could be harmed.

Our expansion in the number of employees and the scope of operations over the past few years has placed and will continue to place a significant strain on our management, information systems and resources. Any acquisitions made by us will also put a significant strain on our management, information systems and resources. In addition, we expect that an expansion of our international operations will lead to increased financial and administrative demands associated with managing our international operations and managing an increasing number of relationships with foreign partners and customers and expanded treasury functions to manage foreign currency risks. Our future operating results will also depend on our ability to further develop indirect channels and expand our support organization to accommodate growth in our installed base. If we fail to manage our expansion effectively, our business, operating results and financial condition would be harmed.

Our success depends to a significant degree upon the efforts of certain key management, sales, marketing, customer support and research and development personnel. We believe that our future success will depend in large part upon our continuing ability to attract and retain highly skilled managerial, sales, marketing, customer support and research and development personnel. Like other software companies, we face intense competition for such personnel, and we have experienced and will continue to experience difficulty in recruiting and retaining qualified personnel. This is particularly true in the San Francisco Bay Area, where the employment market for qualified sales, marketing, customer support and research and development personnel can be very competitive.

Our future success depends upon the continued service of our executive officers and other key engineering, sales, marketing and customer support personnel. None of our officers or key employees is bound by an employment agreement for any specific term. If we lose the service of one or more of our key employees, or if one or more of our executive officers or key employees decide to join a competitor or otherwise compete directly or indirectly with us, this could have a significant adverse effect on our business.

The software industry is experiencing a significant downturn in connection with the decline in general economic conditions, which has resulted in a decrease of the budgets of our customers and potential customers for information technology. This change in economic conditions has resulted in a slowdown of the purchase of Internet based software products and has affected our operating results and financial condition. We expect this economic downturn to continue and, thus, our operating results and financial condition may be below our forecasts and investor expectations and may in the future reflect substantial fluctuations from period to period as a consequence of buying patterns and general economic conditions in the software industry.

Software products as complex as those offered by us often contain errors or defects, particularly when first introduced, when new versions or enhancements are released and when configured to individual customer computing systems. We currently have known errors and defects in our products. Despite testing conducted by us, if additional defects and errors are found in current versions, new versions or enhancements of our products after commencement of commercial shipment, this could result in the loss of revenues or a delay in market acceptance. The occurrence of any of these events could seriously harm our business, operating results and financial condition.

We have two issued and two pending U.S. patents and we rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. For example, we license our software pursuant to shrink-wrap or signed license agreements, which impose certain restrictions on licensees’ ability to utilize the software. In addition, we seek to avoid disclosure of our intellectual property, including requiring those persons with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. If our means of protecting our proprietary rights is not adequate or our competitors independently develop similar technology, our business could be seriously harmed.

In addition, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against such company. If we are involved in such litigation, it could result in substantial costs and a diversion of management’s attention and resources and could harm our business, operating results and financial condition.

Actuate’s Certificate of Incorporation, as amended and restated (the “Certificate of Incorporation”), and Bylaws, as amended and restated (“Bylaws”), contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of Actuate or unsolicited acquisition proposals that a stockholder might consider favorable, including provisions authorizing the issuance of “blank check” preferred stock and eliminating the ability of stockholders to act by written consent. In addition, certain provisions of Delaware law and our stock option plans may also have the effect of discouraging, delaying or preventing a change in control of Actuate or unsolicited acquisition proposals. The anti-takeover effect of these provisions may also have an adverse effect on the public trading price of our common stock.

Delaware		94-3193197
(State of incorporation)		(I.R.S. Employer Identification No.)

Title of Class		Outstanding as of June 30, 2002
Common Stock, par value $.001 per share		60,656,407

PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001	3

	Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001	4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 4.	Submission of Matters to a Vote of Security Holders	29

Item 6.	Exhibits and Reports on Form 8-K	29

Signature		30

	June 30, 2002			December 31, 2001
Goodwill	$	29,599		$	29,599
Workforce (reclassified as goodwill)		4,086			—

Subtotal		33,685			29,599
Accumulated amortization		(12,562	)		(10,812	)

Goodwill, net	$	21,123		$	18,787

	Amortization Amount
Fiscal Year
2002	$	3,985
2003		2,838
2004		1,806
2005		736

	$	9,365

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	For	Authority Withheld
Nicolas C. Nierenberg	50,067,683	1,286,574
Peter I. Cittadini	50,067,529	1,286,728
George B. Beitzel	49,713,701	1,640,556
Kenneth E. Marshall	49,713,703	1,640,554
Arthur C. Patterson	49,718,683	1,635,574
Steven D. Whiteman	49,718,383	1,635,874


99.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

ACTUATE CORPORATION (Registrant)

By:		/s/ DANIEL A. GAUDREAU
		Daniel A. Gaudreau Chief Financial Officer, Senior Vice President of Finance (Principal Financial and Accounting Officer)