---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended March 31, 2002





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




For the transition period from
 to





Commission File No. 0-24607





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ACTUATE CORPORATION


(Exact name of Registrant as specified in its charter)





Delaware

94-3193197(State of incorporation)

(I.R.S. Employer Identification No.)





701 Gateway Boulevard


South San Francisco, California 94080


(650) 837-2000


(Address, including zip
code, and telephone number, including area code, of Registrants principal executive offices)





Former name, former address and
former fiscal year, if changed since last report:





None





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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.  Yes  x  No  ̈





Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.





Title of Class

Outstanding as of March 31, 2002Common Stock, par value $.001 per share

60,535,333





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ACTUATE CORPORATION





TABLE OF CONTENTS





PART 1FINANCIAL INFORMATIONItem 1.

Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001

3Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

12PART IIOTHER INFORMATIONItem 1.

Legal Proceedings

28Item 6.

Exhibits and Reports on Form 8-K

28Signature

29




2




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PART I.    FINANCIAL INFORMATION





Item 1.Financial Statements





ACTUATE CORPORATION





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)





March 31, 2002


December 31, 2001(1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
21,645


$
34,660Short-term investments


21,025



5,147Accounts receivable, net


28,245



28,870Other current assets


4,063



4,251Total current assets


74,978



72,928Property and equipment, net


11,383



12,387Goodwill, net


21,123



18,787Other intangible assets, net


8,274



11,701Other assets


1,700



1,588$
117,458


$
117,391LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
5,463


$
3,621Accrued compensation


5,159



5,976Other accrued liabilities


8,191



11,146Deferred revenue


23,927



23,978Income tax payable


17



64Total current liabilities


42,757



44,785Long-term liabilities


1,529



1,529Stockholders equity:Common stock


61



60Additional paid-in capital


91,214



88,701Deferred stock compensation


(117
)


(199
)Accumulated other comprehensive income


(466
)


(214
)Accumulated deficit


(17,520
)


(17,271
)Total stockholders equity


73,172



71,077$
117,458


$
117,391


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|(1) |  | The condensed consolidated balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date, but does not include all the
information and footnotes required by generally accepted accounting principles for complete financial statements.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The accompanying notes are an integral part of these condensed consolidated financial statements.




3




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ACTUATE CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)


(unaudited)





Three Months Ended March 31,2002


2001Revenues:License fees

$
16,906


$
23,759Services


11,895



11,749Total revenues


28,801



35,508Costs and expenses:Cost of license fees


557



619Cost of services


6,252



7,741Sales and marketing


13,321



16,258Research and development


4,847



4,420General and administrative


3,321



2,087Amortization of goodwill and other intangibles


1,091



2,061Total costs and expenses


29,389



33,186Income (loss) from operations


(588
)


2,322Interest and other income, net


189



339Income (loss) before income taxes


(399
)


2,661Benefit (provision) for income taxes


150



(998
)Net income (loss)

$
(249
)

$
1,663Basic net income (loss) per share

$
0.00


$
0.03Shares used in basic per share calculation


60,315



58,094Diluted net income (loss) per share

$
0.00


$
0.03Shares used in diluted per share calculation


60,315



63,553





The accompanying notes are an integral part of these condensed consolidated financial
statements.




4




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ACTUATE CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands, unaudited)





Three Months Ended March 31,2002


2001Operating activitiesNet income (loss)

$
(249
)

$
1,663Adjustment to reconcile net income to net cash provided by operating activities:Amortization of deferred compensation


82



14Amortization of goodwill in 2001 and other intangibles


1,091



2,061Depreciation


1,121



803Changes in operating assets and liabilities:Accounts receivable


625



(1,883
)Other current assets


188



(324
)Accounts payable


1,842



1,367Accrued compensation


(817
)


(1,775
)Other accrued liabilities


(922
)


(1,307
)Income taxes payable


(47
)


746Deferred revenue


(51
)


1,024Net cash provided by operating activities


2,863



2,389Investing activitiesPurchases of property and equipment


(117
)


(583
)Proceeds from maturity of short-term investments


4,050



Purchase of short-term investments


(19,928
)


Final purchase price payment in connection with Open Software Technology, LLC


(2,033
)


Net change in other assets


(112
)


(158
)Net cash used in investing activities


(18,140
)


(741
)Financing activitiesProceeds from issuance of common stock


2,514



4,564Net cash provided by financing activities


2,514



4,564Net increase (decrease) in cash and cash equivalents


(12,763
)


6,212Effect of exchange rate on cash


(252
)


(108
)Cash and cash equivalents at the beginning of the period


34,660



26,928Cash and cash equivalents at the end of the period

$
21,645


$
33,032





The accompanying notes are an integral part of these condensed consolidated financial
statements.




5




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ACTUATE CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








1.    Summary of Significant Accounting Policies





Basis of Presentation





The accompanying interim condensed consolidated financial
statements of Actuate Corporation are unaudited, but include all normal recurring adjustments which we believe to be necessary for the fair presentation of the financial position, results of operations, and changes in cash flows for the periods
presented. The preparation of the financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported period. Despite our best effort to establish good faith estimates and assumptions, 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 months ended March 31, 2002 are not necessarily indicative of operating
results for the full fiscal year.








Revenue Recognition





Revenues from 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.





License arrangements with e.Business Application Partners are for specified duration and require that such vendors only license our products to their
customers for use with such vendors application. Furthermore, license arrangements with distributors give such distributors the right to distribute our




6




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ACTUATE CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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.





In certain situations where customers have received payment terms outside of our customary standard terms but within one year, we have recognized
revenues upon delivery, provided that we have collected all payments as due under comparable arrangements, without providing concession, in the past.





We have not established vendor specific objective evidence of fair value (VSOE) for license sales 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 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.








Impairment of Long-Lived Assets





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. There were no long-lived assets that were considered to be impaired during the periods presented.








Net Income (Loss) Per Share





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).




7




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ACTUATE CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The following table presents the calculation of basic and diluted net income (loss)
per share (in thousands, except per share amounts):





Three Months Ended March 31,2002


2001Numerator:Net income (loss)

$
(249
)

$
1,663Denominator:Weighted-average common shares outstanding


60,342



58,297Weighted-average shares subject to repurchase


(27
)


(203
)Denominator for basic income (loss) per share


60,315



58,094Weighted-average shares subject to repurchase






203Weighted-average employee stock options outstanding






5,256Denominator for diluted income (loss) per share


60,315



63,553Basic net income (loss) per share

$
0.00


$
0.03Diluted net income (loss) per share

$
0.00


$
0.03





The total number of potential common shares excluded from the calculation of
diluted net loss per share was 3.3 million for the three months ended March 31, 2002, because their effect would be anti-dilutive.








Comprehensive Income





Comprehensive income includes
foreign currency translation gains that have been previously excluded from net income and reflected instead in equity. A summary of comprehensive income follows (in thousands):





Three Months Ended March 31,2002


2001Net income (loss)

$
(249
)

$
1,663Foreign currency translation adjustment, net of tax effect


(157
)


(108
)Comprehensive income (loss)

$
(406
)

$
1,555








2.    Goodwill and Other Intangible Assets





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.




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ACTUATE CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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. In addition, within six months of adopting the accounting standard, a transitional impairment test must be completed, and any impairments identified must be treated as a cumulative effect of a change in
accounting principle. We will complete its transitional impairment test during the quarter ending June 30, 2002.





In accordance
with SFAS 142, we discontinued the amortization of goodwill effective January 1, 2002. In addition, we recharacterized $4.1 million of acquired workforce, which is no longer defined as acquired intangible assets under SFAS 141, as goodwill.
Accordingly, no acquired workforce amortization was recognized during the three months ended March 31, 2002.





Goodwill and
intangible assets with indefinite lives consist of the following (in thousands):





March 31, 2002


December 31, 2001Goodwill

$
29,599


$
29,599Workforce (reclassified as goodwill)


4,086



Subtotal


33,685



29,599Accumulated amortization


(12,562
)


(10,812
)Goodwill and workforce, net

$
21,123


$
18,787





A reconciliation of previously reported net income (loss) and net income (loss)
per share to the amounts adjusted for the exclusion of goodwill and acquired workforce amortization, net of income tax effect, is summarized below (in thousands, except per share data):





Three Months Ended March 31,2002


2001Net income (loss) as reported

$
(249
)

$
1,663Add back: Goodwill amortization






822Add back: Workforce amortization






124Adjusted net income (loss)

$
(249
)

$
2,609Basic net income (loss) per share:Net income (loss) per share as reported

$
0.00


$
0.03Add back: Goodwill amortization






0.01Add back: Workforce amortization






0.00Adjusted net income (loss) per share

$
0.00


$
0.04Diluted net income (loss) per share:Net income (loss) per share as reported

$
0.00


$
0.03Add back: Goodwill amortization






0.01Add back: Workforce amortization






0.00Adjusted net income (loss) per share

$
0.00


$
0.04




9




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ACTUATE CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Other intangible assets consist of the following (in thousands):





As of March 31, 2002

As of December 31, 2001Gross Carrying Amount

Accumulated Amortization


Net Balance

Gross Carrying Amount

Accumulated Amortization


Net BalanceCustomer lists

$
10,600

$
(6,500
)

$
4,100

$
10,600

$
(5,742
)

$
4,858Workface (reclassified as goodwill)












4,086


(1,750
)


2,336Purchased technologies


3,610


(762
)


2,848


3,610


(537
)


3,073Non-compete agreements


1,030


(257
)


773


1,030


(192
)


838Trademark


700


(147
)


553


700


(104
)


596$
15,940

$
(7,666
)

$
8,274

$
20,026

$
(8,325
)

$
11,701





Amortization expense of other intangible assets was $1.1 million and $745,000 for
the three months ended March 31, 2002 and 2001, respectively. The estimated amortization expense for the years ending December 31, is summarized as follows (in thousands):





Amortization AmountFiscal Year2002

$
3,9852003


2,8382004


1,8062005


736$
9,365








3.    Income Taxes





The interim quarterly tax (provision) or benefit was computed using the expected annual effective tax rate multiplied by the quarterly
operating result. The expected annual effective tax rate takes into account the effect of nondeductible amortization expense of intangible assets and other nondeductible items.








4.    Geographic Information





Our primary operations are located in the United States. Revenues outside of North America come primarily from Europe and other Asia Pacific region. Our revenues by geographic area were as follows (in thousands):





Three Months Ended March 31,2002

2001Revenues:North America

$
21,135

$
27,567Europe


5,629


6,474Asia Pacific and others


2,037


1,467$
28,801

$
35,508




10




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ACTUATE CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







5.    Contingencies





In August, 2001, a lawsuit was filed in the Virginia Circuit Court for Fairfax County against us and two of our employees by MicroStrategy, Inc. 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. Actuate believes the lawsuit is without merit and intends to defend this case vigorously.





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




11




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





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








Overview





We are a leading provider of Information Delivery software products and
services for e.Business. Our e.Reporting software products enable organizations to deliver high-value business information to the Internet for use by customers, employees and partners.





We sell software products through two primary means: (i) directly to end-user customers through our direct sales force and (ii) through 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 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.





We were incorporated in California in
November 1993 and reincorporated in Delaware in July 1998. Our corporate headquarters are located at 701 Gateway Boulevard, South San Francisco, California 94080, our telephone number is 650-837-2000 and our website address is www.actuate.com.








Critical Accounting Policies and Estimates





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, income taxes, restructuring, and litigation. 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.





We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.




12




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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 normal credit period of net 30 days. Further, assessment of collectibility is particularly critical in determining
whether or not revenues should be recognized in the current market environment. We also record a small 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.





Contingencies.    We are engaged in legal actions arising in the ordinary course of business. We are required to assess the likelihood of any
adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual matter. The
required reserves, if any, may change in future due to new developments in each matter or changes in approach, such as a change in settlement strategy for a particular matter.




13




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Results of Operations





The
following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated.





Three Months Ended March 31,2002


2001Revenues:License fees

59
%

67
%Services

41


33Total revenues

100


100Costs and expenses:License fees

2


2Services

22


22Sales and marketing

46


46Research and development

17


12General and administrative

12


6Amortization of goodwill and other intangibles

4


5Total costs and expenses

103


93Income (loss) from operations

(3
)

7Interest and other income, net

1


1Income (loss) before income taxes

(2
)

8Benefit (provision) for income taxes

1


(3
)Net income (loss)

(1
)%

5
%








Revenues





Total revenues decreased 19% from $35.5 million for the quarter ended March 31, 2001 to $28.8 million for the quarter ended March 31, 2002. Sales
outside of North America were $7.7 million, or 27% of total revenues for the first quarter of 2002, compared to $7.9 million, or 22% of total revenues for the first quarter of 2001. We believe that 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
quarter of fiscal 2002.





License fees.    Revenues from license fees decreased 29% from $23.8 million
for the first quarter of 2001 to $16.9 million for the first quarter of 2002. The decrease in license fee revenues for the quarter was primarily due to weaken economic conditions in North America and Europe. As a percentage of total revenues,
license fee revenues decreased from 67% in the first quarter of 2001 to 59% in the first quarter of 2002.





Services.    Service revenues increased 1% from $11.7 million for the first quarter of 2001 to $11.9 million for the first quarter of 2002. The increase in service revenues was primarily due to a slight increase
in the installed base of customers receiving ongoing maintenance and support. As a percentage




14




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of total revenues, service revenues increased from 33% in the first quarter of 2001 to 41% in the first quarter of 2002.








Costs and expenses





Cost of License fees.    Cost of license fees consists primarily of production and packaging costs, localization costs, facility costs and personnel and related costs. Cost of license
revenues decreased from $619,000, or 3% of revenues from license fees, for the first quarter of 2001 to $557,000, or 3% of revenues from license fees, for the first quarter of 2002. The decrease 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 3% of revenues from license fees for the remainder of fiscal 2002.





Cost of Services.    Cost of service consists primarily of personnel and related costs, facilities costs incurred in
providing software maintenance and support, training and consulting services, as well as third-party costs incurred in providing training and consulting services. Cost of service decreased from $7.7 million, or 66% of service revenues, for the first
quarter of 2001 to $6.3 million, or 53% of service revenues, for the first quarter of 2002. The decrease 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. The decrease in absolute dollars was primarily due to a decrease in consulting and training revenues. We expect our cost of services as a percentage of services
revenues will decrease because we intend to continue to utilize our own personnel 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 $16.3 million, or 46% of total revenues for the first quarter of 2001 to $13.3 million, or 46% of total revenues for the first quarter of 2002. The decrease 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 the fiscal year.





Research and development.    Research and development expenses 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. Research and development expenses increased from
$4.4 million, or 12% of total revenues for the first quarter of 2001 to $4.8 million, or 17% of total revenues for the first quarter of 2002. The increase in research and development expenses in absolute dollars was primarily due to the hiring
of additional engineering personnel and consultants. The increase as a percentage of total revenues was due to decline in our total revenues in the first quarter of 2002 as compared to the first quarter of 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 in absolute dollars will continue to increase in future periods.





General and administrative.    General and administrative expenses consist primarily of personnel and related costs for
finance, human resources, information systems, general management, legal and accounting expenses, as well as idle facility cost. General and administrative expenses increased from $2.1 million, or 6% of total revenues for the first quarter of 2001
to $3.3 million, or 12% of total revenues for the first quarter of 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




15




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related costs as well as an increase in legal expenses. Our expenses for the first quarter of 2002 included approximately $935,000 in facility expenses for a
building that is currently unoccupied. We will continue to evaluate our future plans for this building and other facilities. If we reach a decision to abandon any of these facilities, we may have to accrue significant charges for the payments 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. Such charges may be material and may involve significant use of cash if we choose to
pay a settlement fee to exit any abandoned facility. We believe that general and administrative expenses will continue to increase in absolute dollars in future periods as we hire additional personnel to support expanding international operations.





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. In the three-month period ended March 31, 2002, we recorded a charge of $1.1 million for the amortization of other purchased intangibles relating to these acquisitions, as
compared to $2.1 million of amortization of goodwill and other purchased intangibles for the same period in 2001. In accordance with SFAS 142, we discontinued the amortization of goodwill effective January 1, 2002. In addition, we recharacterized
$4.1 million of acquired workforce, which is no longer defined as acquired intangible assets under SFAS 141, as goodwill. Accordingly, no acquired workforce amortization was recognized during the three months ended March 31, 2002.





Amortization of goodwill was nil and $1.3 million for the three-month periods ended March 31, 2002 and 2001, respectively. The decrease in
the amortization of goodwill is due to the adoption of SFAS 142. Amortization of other intangible assets was $1.1 million and $745,000 for the three-month periods ended March 31, 2002 and 2001, respectively. The increase in the amortization of
other intangible assets was due to acquisition of Tidestone Technologies, Inc. in the second quarter of 2001.








Interest and Other Income, Net





Interest and other income, net, are comprised primarily of interest income
earned by us on cash and short-term investments. Interest and other income, net, for the three months ended March 31, 2002 were $189,000 compared with interest and other income, net of $339,000 for the three months ended March 31, 2001. The decrease
was primarily due to lower interest rates received on our investments.








Benefit (provision) for Income Taxes





We recorded an income tax benefit of $150,000 in the three months ended March 31, 2002 and income tax provision of $998,000
in the three months ended March 31, 2001. We anticipate a 37.5% effective tax rate for 2002 and the effective tax rate used for three months ended March 31, 2001 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 period ended March 31, 2002.
Unanticipated events may occur during the remaining periods of this fiscal year that would cause revision of the expected effective tax rate.




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Liquidity and Capital Resources





As of March 31, 2002, we had cash, cash equivalents and short-term investments of $42.7 million, an increase of $2.9 million from $39.8 million at December 31, 2001; and $32.2 million in
net working capital, an increase of $4.1 million from $28.1 million at December 31, 2001.





Cash from operating
activities.    Net cash provided by operating activities was $2.9 million in the three months ended March 31, 2002, compared to $2.4 million in the three months ended March 31, 2001. For the three months ended March 31, 2002,
cash provided by operating activities was primarily due to non-cash items of amortization and depreciation and increase in accounts payable, that were offset by net loss and decreases in accrued compensation and other accrued liabilities. Net cash
provided from operating activities in the three months ended March 31, 2001 was primarily due to increases in net income as adjusted for amortization and depreciation and deferred revenue, that were offset by decreases in accounts receivable,
accrued compensation and other accrued liabilities.





Cash used in investing activities.    Net cash used in investing activities was $18.1 million in the three months ended March 31, 2002, compared to $741,000 in the three months ended March 31, 2001. For the three
months ended March 31, 2002, net cash used in investing activities was primarily due to purchases of short-term investments and the final purchase price payment related to acquisition of Open Software Technology, LLC, that were offset by the
proceeds received from maturity of short-term investments. For the three months ended March 31, 2001, net cash used in investing activities was primarily due to purchases of fixed assets.





Cash from financing activities.    Net cash provided by financing activities were $2.5 million and $4.6 million in the three months ended March 31,
2002 and 2001, respectively. During both periods, net cash provided by financing activities was from the proceeds in connection with the issuance of common stock under the employee stock purchase plan 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 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.




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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS





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





Our Operating Results May Be Volatile and Difficult to
Predict. If We Fail to Meet Our Estimates of Quarterly and Annual Operating Results or We Fail to Meet the Expectations of Public Market Analysts and Investors, the Market Price of Our Stock May Decrease Significantly.





The susceptibility of our operating results to significant fluctuations makes any prediction, 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:





| |  |  | demand for our products;
| | - |  | ------------------------




| |  |  | the size and timing of significant orders for our products;
| | - |  | -----------------------------------------------------------




| |  |  | a slow down or a decrease in spending on information technology by our current and/or prospective customers;
| | - |  | ------------------------------------------------------------------------------------------------------------




| |  |  | general domestic and international economic and political conditions;
| | - |  | ---------------------------------------------------------------------




| |  |  | sales cycles and sales performance of our indirect channel partners;
| | - |  | --------------------------------------------------------------------




| |  |  | continued successful relationships and the establishment of new relationships with e.Business application vendors;
| | - |  | ------------------------------------------------------------------------------------------------------------------




| |  |  | the management and expansion of our international operations;
| | - |  | -------------------------------------------------------------




| |  |  | changes in our level of operating expenses and our ability to control costs;
| | - |  | ----------------------------------------------------------------------------




| |  |  | ability to make new products commercially available in a timely manner;
| | - |  | -----------------------------------------------------------------------




| |  |  | budgeting cycles of our customers;
| | - |  | ----------------------------------




| |  |  | changes in pricing policies by us or our competitors;
| | - |  | -----------------------------------------------------




| |  |  | failure to successfully manage acquisitions made by us;
| | - |  | -------------------------------------------------------




| |  |  | defects in our products and other product quality problems; and
| | - |  | ---------------------------------------------------------------




| |  |  | failure to meet hiring needs and unexpected personnel changes.
| | - |  | --------------------------------------------------------------




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 11th 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:




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| |  |  | whether the license agreement includes both software products that are then currently available and software products or other enhancements that are still under development;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | whether the license agreement relates entirely or partly to then currently undeliverable software products;
| | - |  | -----------------------------------------------------------------------------------------------------------




| |  |  | whether the license agreement requires the performance of services that may preclude revenue recognition until successful completion of such services; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | whether the license agreement includes acceptance criteria that may preclude revenue recognition prior to customer acceptance.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------




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





A significant portion of our total revenues in any given quarter is derived from existing customers. Our ability to achieve future revenue
growth, if any, will be substantially dependent upon our ability to increase revenues from license fees and services from existing customers, to expand our sales force and to increase the average size of our orders. To the extent that such increases
do not occur in a timely manner, our business, operating results and financial condition would be harmed. Our expense levels and 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.





If We Do Not Successfully Expand Our
Distribution Channels and Develop and Maintain Relationships With Software Application Vendors, Our Business Would Be Seriously Harmed.





To date, we have sold our products principally through our direct sales force, as well as through indirect sales channels, such as our e.Business Application Partners, distributors and systems integrators. Our
revenues from license fees resulting from sales through indirect channel partners were approximately 38% for the first three months of 2002, 50% 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.




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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.





If the Market For Information Delivery Software Does Not Grow as We Expect, Our Business Would Be Seriously Harmed.





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.





Because the Sales Cycles of Our Products are Lengthy and Variable, Our Quarterly Results May Fluctuate.





The purchase of our products by our end-user customers for deployment within 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.




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If we Fail to Expand Our International Operations Our Business Would Be Seriously Harmed.





During the first three months of 2002 and fiscal years 2001 and 2000, we derived 27%, 23% and 15% 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.





We May Make Future
Acquisitions and Acquisitions Involve Numerous Risks





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:





| |  |  | difficulties in integration of the operations, technologies, and products of the acquired companies;
| | - |  | ----------------------------------------------------------------------------------------------------




| |  |  | the risk of diverting managements attention from normal daily operations of the business;
| | - |  | ------------------------------------------------------------------------------------------




| |  |  | negative impact to our financial condition and results of operations resulting from combining the acquired companys financial condition and results of operations with our
financial statements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | risks of entering markets in which we have no or limited direct prior experience; and
| | - |  | -------------------------------------------------------------------------------------




| |  |  | the potential loss of key employees of the acquired company.
| | - |  | ------------------------------------------------------------




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





We May not be Able to Compete Successfully Against Current and Future Competitors.





Our
market is intensely competitive and characterized by rapidly changing technology and evolving standards. Our competition comes in five principal forms:





| |  |  | direct competition from current or future software vendors such as Business Objects S.A., Crystal Decisions (a subsidiary of Seagate Technology, LLC.), and Brio Technology,
Inc.;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | indirect competition from vendors of Business Intelligence tools such as Cognos, Inc., MicroStrategy Incorporated and Microsoft that integrate reporting functionality with such
tools;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | indirect competition from e.Business software vendors such as SAP and Oracle, to the extent they include Information Delivery functionality in their applications;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | competition from other e.Business software vendors and Internet development tool vendors; and
| | - |  | ---------------------------------------------------------------------------------------------




| |  |  | competition from the information technology departments of current or potential customers that may develop Information Delivery solutions internally which may be cheaper and
more customized than our products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and
sales of their products than 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.





Our Litigation With Microstrategy Could Have a Material Adverse Effect on Our Business, Operating Results and Financial Condition





In August, 2001, a lawsuit was filed in the Virginia Circuit Court for Fairfax County against us and two of our employees by MicroStrategy, Inc. 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. 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:





| |  |  | we could be forced to stop selling our products;
| | - |  | ------------------------------------------------




| |  |  | we will incur substantial litigation costs in defense of this lawsuit;
| | - |  | ----------------------------------------------------------------------




| |  |  | we may be required to indemnify our customers;
| | - |  | ----------------------------------------------




| |  |  | we may have to use significant engineering resources to redesign our products as a result of this lawsuit;
| | - |  | ----------------------------------------------------------------------------------------------------------




| |  |  | we may be required to enter into a licensing agreement with MicroStrategy containing terms that are unfavorable to us;
| | - |  | ----------------------------------------------------------------------------------------------------------------------




| |  |  | we will be forced to commit significant engineering and management resources to resolve this lawsuit.
| | - |  | -----------------------------------------------------------------------------------------------------



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If We Do Not Respond to Rapid Technological Changes, Our Products Could Become Obsolete and
Our Business Could Be Seriously Harmed.





The market for our products is characterized by rapid technological changes,
frequent new product introductions and enhancements, changing customer demands and evolving industry standards. Any of these factors can render existing products obsolete and unmarketable. We believe that our future success will depend in large part
on our ability to support current and future releases of popular operating systems 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.





If We Do Not Release New Products and Enhancements to Existing Products in a Timely Manner or if Such New Products and Enhancements Fail to Achieve
Market Acceptance, Our Business Could Be Seriously Harmed.





We believe that our future success will depend in large part on
the success of new products and enhancements 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.





There are Management and Operational Risks Associated with Our
International Operations That Could Seriously Harm Our Business.





A substantial portion of Actuates revenues is
derived from international sales. During the first three months of 2002 and fiscal years 2001 and 2000, sales outside North America accounted for 27%, 23% and 15% 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:





| |  |  | political and economic instability;
| | - |  | -----------------------------------




| |  |  | difficulty in managing an organization spread across many countries;
| | - |  | --------------------------------------------------------------------




| |  |  | multiple and conflicting tax laws and regulations;
| | - |  | --------------------------------------------------



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| |  |  | costs of localizing products for foreign countries;
| | - |  | ---------------------------------------------------




| |  |  | difficulty in hiring employees in foreign countries;
| | - |  | ----------------------------------------------------




| |  |  | trade laws and business practices favoring local competition;
| | - |  | -------------------------------------------------------------




| |  |  | dependence on local vendors;
| | - |  | ----------------------------




| |  |  | compliance with multiple, conflicting and changing government laws and regulations;
| | - |  | -----------------------------------------------------------------------------------




| |  |  | longer sales and payment cycles;
| | - |  | --------------------------------




| |  |  | import and export restrictions and tariffs;
| | - |  | -------------------------------------------




| |  |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------




| |  |  | greater difficulty or delay in accounts receivable collection; and
| | - |  | ------------------------------------------------------------------




| |  |  | foreign currency exchange rate fluctuations.
| | - |  | --------------------------------------------




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.





To Manage Our Growth and Expansion, We Need to Improve
and Implement Our Internal Systems, Procedures and Controls. If We Are Unable to Do So Successfully, Our Business Would Be Seriously Harmed.





Our 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 Inability to Attract and Retain Highly Qualified Personnel in the Future Would Seriously Harm Our Business.





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.




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Our Executive Officers and Certain Key Personnel Are Critical to Our Business and These
Officers and Key Personnel may not Remain With Us in the Future.





Our future success depends upon the continued service of
our executive officers and other key engineering, sales, marketing and 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.





There are Risks Associated With the Software Industry





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.





If Our Product Contains Material Defects, Our Business Could Be Seriously Harmed.





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





If a Successful Product Liability Claim is Made Against us, Our Business Would Be
Seriously Harmed.





Although license agreements with our customers typically contain provisions designed to
limit our exposure to potential product liability claims, it is possible that such limitation of liability provisions may not be effective as a result of existing or future laws or unfavorable judicial decisions. The sale and support of our products
may entail the risk of such claims, which are likely to be substantial in light of the use of our products in business-critical applications. A product liability claim brought against us could seriously harm our business, operating results and
financial condition.





If the protection of Our Proprietary Rights is Inadequate, Our Business Could Be Seriously Harmed.





We have two issued and two pending U.S. patents and we rely primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. For example, we license our software pursuant to shrink-wrap or signed license agreements, which impose certain restrictions on
licensees ability to utilize the software.




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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.





Intellectual
Property Claims Against Us Can Be Costly and Could Result in the Loss of Significant Rights.





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.





Our Common Stock Price May Be Volatile, Which Could Result in Substantial Losses for Stockholders.





The market price of shares of our common stock has been and is likely to continue to be highly volatile and may be significantly affected by factors such as the following:





| |  |  | changes in the economic and political conditions in the United States and abroad;
| | - |  | ---------------------------------------------------------------------------------




| |  |  | actual or anticipated fluctuations in our operating results;
| | - |  | ------------------------------------------------------------




| |  |  | terrorist attacks or war-time conditions;
| | - |  | -----------------------------------------




| |  |  | announcements of technological innovations;
| | - |  | -------------------------------------------




| |  |  | new products or new contracts announced by us or our competitors;
| | - |  | -----------------------------------------------------------------




| |  |  | litigation;
| | - |  | -----------




| |  |  | developments with respect to copyrights or proprietary rights;
| | - |  | --------------------------------------------------------------




| |  |  | price and volume fluctuations in the stock market;
| | - |  | --------------------------------------------------




| |  |  | conditions and trends in the software and other technology industries;
| | - |  | ----------------------------------------------------------------------




| |  |  | changes in corporate purchasing of Information Delivery software;
| | - |  | -----------------------------------------------------------------




| |  |  | the announcement of mergers or acquisitions;
| | - |  | --------------------------------------------




| |  |  | adoption of new accounting standards affecting the software industry;
| | - |  | ---------------------------------------------------------------------




| |  |  | changes in financial estimates by securities analysts; and
| | - |  | ----------------------------------------------------------




| |  |  | the purchase or sale of our common stock by day traders.
| | - |  | ----------------------------------------------------------



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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.





Certain of Our Charter Provisions and Delaware Law, May Prevent or
Deter a Change in Control of Actuate.





Actuates Certificate of Incorporation, as amended and restated (the
Certificate of Incorporation), and Bylaws, as amended and restated (Bylaws), contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of Actuate or unsolicited
acquisition proposals that a stockholder might consider favorable, including provisions authorizing the issuance of blank check preferred stock and eliminating the ability of stockholders to act by written consent. In addition, certain
provisions of Delaware law and our 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.







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PART II.    OTHER INFORMATION





Item 1.Legal Proceedings





In August, 2001, a lawsuit was filed in the Virginia Circuit Court for
Fairfax County against us and two of our employees by MicroStrategy, Inc. 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. Actuate believes the lawsuit is without merit and intends to defend this case vigorously.





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





Item 6.Exhibits and Reports on Form 8-K





(a)  Exhibits:





None.





(b)  Reports on Form 8-K:





None.




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SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 9, 2002.





ACTUATE CORPORATION (Registrant)By:

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




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