| ACTUATE CORP ITEM 1A 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 harmed |
| In such case, the trading price of our common stock could decline and you may lose all or part of your investment |
| Investors should also refer to the other information set forth in this Report on Form 10-K, including the financial statements and the notes thereto |
| THE COMPANY’S OPERATING RESULTS MAY BE VOLATILE AND DIFFICULT TO PREDICT IF IT FAILS TO MEET ITS ESTIMATES OF QUARTERLY AND ANNUAL OPERATING RESULTS OR IT FAILS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF ITS STOCK MAY DECREASE SIGNIFICANTLY The susceptibility of the Company’s operating results to significant fluctuations makes any prediction, including the Company’s estimates of future operating results, unreliable |
| In addition, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and you should not rely on them as indications of the Company’s future performance |
| The Company’s operating results have in the past varied, and may in the future vary significantly due to factors such as the following: • Demand for its products; • The size and timing of significant orders for its products; • A slowdown or a decrease in spending on information technology by its current and/or prospective customers; • The marketing by its competitors of products that are directly competitive with its products; • The management, performance and expansion of its international operations; • Foreign currency exchange rate fluctuations; • Customers’ desire to consolidate their purchases of enterprise reporting and business intelligence software to one or a very small number of vendors from which a customer has already purchased software; • General domestic and international economic and political conditions, including war, terrorism, and the threat of war or terrorism; • Sales cycles and sales performance of its indirect channel partners; • Changes in the way it and its competitors price their respective products and services, including maintenance and transfer fees; • Continued successful relationships and the establishment of new relationships with OEMs; • Changes in its level of operating expenses and its ability to control costs; • The outcome or publicity surrounding any pending or threatened lawsuits; • Ability to make new products and product enhancements commercially available in a timely manner; • Budgeting cycles of its customers; • Failure to successfully manage its acquisitions; • Defects in its products and other product quality problems; • Failure to successfully meet hiring needs and unexpected personnel changes; • Changes in the market segments and types of customers at which it focuses its sales and marketing efforts; 11 ______________________________________________________________________ [39]Table of Contents • Lost revenue due to the availability of open-source products of the Company and its competitors; • Changes in perpetual licensing models to term- or subscription-based models with respect to which license revenue is not fully recognizable at the time of initial sale; and • Changes in service models with respect to which consulting services are performed on a fixed-fee, rather than variable fee, basis |
| Because the Company’s software products are typically shipped shortly after orders are received, total revenues in any quarter are substantially dependent on orders booked and shipped throughout that quarter |
| Furthermore, several factors may require the Company, in accordance with accounting principles generally accepted in the United States, to defer recognition of license fee revenue for a significant period of time after entering into a license agreement, including: • Whether the license agreement includes both software products that are then currently available and software products or other enhancements that are still under development; • Whether the license agreement relates entirely or partly to software products that are currently not available; • Whether the license agreement requires the performance of services that may preclude revenue recognition until successful completion of such services; • Whether the license agreement includes acceptance criteria that may preclude revenue recognition prior to customer acceptance; and • Whether the license agreement includes undelivered elements (including limited terms or durations) that may preclude revenue recognition prior to customer acceptance |
| In addition, the Company may in the future experience fluctuations in its gross and operating margins due to changes in the mix of its domestic and international revenues, changes in the mix of its direct sales and indirect sales and changes in the mix of license revenues and service revenues, as well as changes in the mix among the indirect channels through which its products are offered |
| A significant portion of the Company’s total revenues in any given quarter is derived from existing customers |
| The Company’s ability to achieve future revenue growth, if any, will be substantially dependent upon its ability to increase revenues from license fees and services from existing customers, to expand its customer base and to increase the average size of its orders |
| To the extent that such increases do not occur in a timely manner, the Company’s business, operating results and financial condition would be harmed |
| The Company’s expense levels and any plans for expansion, including plans to increase its sales and marketing and research and development efforts, are based in significant part on its expectations of future revenues and are relatively fixed in the short-term |
| If revenues fall below its expectations and it is unable to reduce its spending in response quickly, the Company’s business, operating results, and financial condition are likely to be harmed |
| Based upon all of the factors described above, the Company has a limited ability to forecast the amount and mix of future revenues and expenses and it is likely that in some future quarter, the Company’s operating results will be below its estimates or the expectations of public market analysts and investors |
| In the event that operating results are below its estimates or other expectations, the price of the Company’s common stock could decline |
| THE COMPANY HAS MADE, AND MAY IN THE FUTURE MAKE, ACQUISITIONS, WHICH INVOLVE NUMEROUS RISKS The Company’s business is highly competitive, and as such, its growth is dependent upon market growth and its ability to enhance its existing products, introduce new products on a timely basis and expand its 12 ______________________________________________________________________ [40]Table of Contents distribution channels and professional services organization |
| One of the ways the Company has addressed and will continue to address these issues is through acquisitions of other companies |
| On January 5, 2006, the Company purchased all of the outstanding capital stock of performancesoft, Inc, a privately held company located in Toronto, Canada (“performancesoft”) |
| Specifically, the acquisition of performancesoft involves numerous risks, including the following: • The Company’s ability to maintain or achieve performancesoft revenue growth or to anticipate a decline in performancesoft revenue from any of its products or services; • The Company’s ability to develop and introduce performancesoft products and enhancements that respond to its customer requirements and rapid technological change; • The Company’s ability to maintain or select and implement appropriate business models and strategies within performancesoft; • The risks inherent in international operations, such as currency exchange rate fluctuations and economic and political conditions in Canada; • The performancesoft transaction was completed without the benefit of audited financial statements from performancesoft; • The performancesoft stock purchase agreement includes large escrow (dlra2dtta65 million) and earnout or contingent consideration (up to dlra13dtta5 million) provisions that could be the subject of disputes between the Company and certain former performancesoft shareholders; and • The performancesoft stock purchase agreement includes a covenant whereby the Company has agreed to keep the performancesoft subsidiary separate through fiscal 2006 |
| Generally, acquisitions (including that of performancesoft) involve numerous risks, including the following: • The benefits of the acquisition not materializing as planned or not materializing within the time periods or to the extent anticipated; • The Company’s ability to manage acquired entities’ people and processes that are headquartered in separate geographical locations from the Company’s headquarters; • The possibility that the Company will pay more than the value it derives from the acquisition; • Difficulties in integration of the operations, technologies, and products of the acquired companies; • The assumption of certain known and unknown liabilities of the acquired companies; • Difficulties in retaining key relationships with customers, partners and suppliers of the acquired company; • The risk of diverting management’s attention from normal daily operations of the business; • The Company’s ability to issue new releases of the acquired company’s products on existing or other platforms; • Negative impact to the Company’s financial condition and results of operations and the potential write down of impaired goodwill and intangible assets resulting from combining the acquired company’s financial condition and results of operations with its financial statements; • Risks of entering markets in which the Company has no or limited direct prior experience; and • The potential loss of key employees of the acquired company |
| Mergers and acquisitions of high-technology companies are inherently risky, and the Company cannot be certain that any acquisition will be successful and will not materially harm the Company’s business, operating results or financial condition |
| 13 ______________________________________________________________________ [41]Table of Contents INTELLECTUAL PROPERTY CLAIMS AGAINST THE COMPANY CAN BE COSTLY AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS Third parties may claim that the Company’s current or future products infringe their intellectual property rights |
| The Company has been subject to infringement claims in the past and it expects that companies in the Business Intelligence software market will increasingly be subject to infringement claims as the number of products and/or competitors in its industry segment grows and the functionality of products in different industry segments overlaps |
| Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation and expenses, divert management’s attention and resources, cause product shipment delays or require the Company to enter into royalty or licensing agreements |
| Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all |
| A successful claim of product infringement against the Company and its failure or inability to license the infringed or similar technology could harm the Company’s business, operating results and financial condition |
| IF THE COMPANY FAILS TO GROW REVENUE FROM INTERNATIONAL OPERATIONS AND EXPAND ITS INTERNATIONAL OPERATIONS ITS BUSINESS WOULD BE SERIOUSLY HARMED The Company’s total revenues derived from sales outside North America were 24prca, 21prca and 18prca in fiscal years 2005, 2004 and 2003, respectively |
| Its ability to achieve revenue growth in the future will depend in large part on its success in increasing revenues from international sales |
| The Company intends to continue to invest significant resources to expand its sales and support operations outside North America and to enter additional international markets |
| In order to expand international sales, the Company must establish additional foreign operations, expand its international channel management and support organizations, hire additional personnel, recruit additional international resellers and increase the productivity of existing international resellers |
| If it is not successful in expanding international operations in a timely and cost-effective manner, the Company’s business, operating results and financial condition could be harmed |
| IF THE COMPANY DOES NOT SUCCESSFULLY EXPAND ITS DISTRIBUTION CHANNELS AND DEVELOP AND MAINTAIN RELATIONSHIPS WITH OEMs, ITS BUSINESS WOULD BE SERIOUSLY HARMED To date, the Company has sold its products principally through our direct sales force, as well as through indirect sales channels, such as its OEMs, resellers and systems integrators |
| The Company’s revenues from license fees resulting from sales through indirect channel partners were approximately 37prca, 32prca, and 30prca for fiscal year 2005, 2004 and 2003, respectively |
| The Company’s ability to achieve significant revenue growth in the future will depend in large part on the success of its sales force in further establishing and maintaining relationships with indirect channel partners |
| In particular, a significant element of the Company’s strategy is to embed its technology in products offered by OEMs for resale or as a hosted application to such OEMs’ customers and end-users |
| The Company also intends to establish and expand its relationships with resellers and systems integrators so that such resellers and systems integrators will increasingly recommend its products to their clients |
| The Company’s future success will depend on the ability of its indirect channel partners to sell and support its products |
| If the sales and implementation cycles of its indirect channel partners are lengthy or variable or its OEMs experience difficulties embedding its technology into their products or it fails to train the sales and customer support personnel of such indirect channel partners in a timely or effective fashion, the Company’s business, operating results and financial condition would be harmed |
| Although the Company is currently investing, and plans to continue to invest, significant resources to expand and develop relationships with OEMs, it has at times experienced and continues to experience difficulty in establishing and maintaining these relationships |
| If the Company is unable to successfully expand this distribution channel and secure license agreements with additional OEMs on commercially reasonable terms, including significant up-front payments of minimum license fees, and extend existing license agreements with existing OEMs on commercially reasonable terms, the Company’s operating results would be harmed |
| Any inability by the Company to maintain existing or establish new relationships with indirect channel partners, 14 ______________________________________________________________________ [42]Table of Contents including systems integrators and resellers, or, if such efforts are successful, a failure of the Company’s revenues to increase correspondingly with expenses incurred in pursuing such relationships, would harm the Company’s business, operating results and financial condition |
| THE COMPANY MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST ITS CURRENT AND FUTURE COMPETITORS The Company’s market is intensely competitive and characterized by rapidly changing technology, evolving standards and product releases by the Company’s competitors that are marketed to compete directly with the Company’s products |
| The Company’s competition comes in four principal forms: • Competition from current or future business intelligence software vendors such as Business Objects, Cognos, Hyperion, Information Builders, and MicroStrategy, each of which offers enterprise reporting products; • Competition from other large software vendors such as IBM, Microsoft, Oracle and SAP, to the extent they include reporting functionality with their applications or databases; • Competition from other software vendors and software development tool vendors including providers of open-source software products; and • Competition from the IT departments of current or potential customers that may develop scalable Enterprise Reporting Applications internally, which applications may be cheaper and more customized than the Company’s products |
| Most of the Company’s current and potential competitors have significantly greater financial, technical, marketing and other resources than it does |
| These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sales of their products than the Company may |
| Also, most current and potential competitors have greater name recognition and the ability to leverage a significant installed customer base |
| These companies have released and can continue to release competing enterprise reporting software products or significantly increase the functionality of their existing reporting software products, either of which could result in a loss of market share for the Company |
| The Company expects additional competition as other established and emerging companies enter the Enterprise Reporting Application market and new products and technologies are introduced |
| Increased competition could result in price reductions, fewer customer orders, reduced gross margins, longer sales cycles and loss of market share, any of which would harm the Company’s business, operating results and financial condition |
| Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to address the needs of the Company’s prospective customers |
| Also, the Company’s current or future channel partners may have established in the past, or may in the future, establish cooperative relationships with the Company’s current or potential competitors, thereby limiting the Company’s ability to sell its products through particular distribution channels |
| It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share |
| Such competition could reduce the Company’s revenues from license fees and services from new or existing customers on terms favorable to us |
| If the Company is unable to compete successfully against current and future competitors, the Company’s business, operating results and financial condition would be harmed |
| IF THE MARKET FOR ENTERPRISE REPORTING AND PERFORMANCE MANAGEMENT APPLICATION SOFTWARE DOES NOT GROW AS THE COMPANY EXPECTS, ITS BUSINESS WOULD BE SERIOUSLY HARMED The market for Enterprise Reporting and Performance Management Application software products is still emerging and the Company cannot be certain that such market will continue to grow or that, even if the market 15 ______________________________________________________________________ [43]Table of Contents does grow, businesses will purchase the Company’s products |
| If the market for Enterprise Reporting and Performance Management Application software products fails to grow or grows more slowly than the Company expects, its business, operating results and financial condition would be harmed |
| To date, all of the Company’s revenues have been derived from licenses for its enterprise reporting software and related products and services, and it expects this to continue for the foreseeable future |
| The Company has spent, and intends to continue to spend, considerable resources educating potential customers and indirect channel partners about Enterprise Reporting and Performance Management Applications and its products |
| However, if such expenditures do not enable its products to achieve any significant degree of market acceptance, the Company’s business, operating results and financial condition would be harmed |
| BECAUSE THE SALES CYCLES OF THE COMPANY’S PRODUCTS ARE LENGTHY AND VARIABLE, ITS QUARTERLY RESULTS MAY FLUCTUATE The purchase of the Company’s products by its end-user customers for deployment within the customer’s organization typically involves a significant commitment of capital and other resources, and is therefore subject to delays that are beyond the Company’s control |
| These delays can arise from a customer’s internal procedures to approve large capital expenditures, budgetary constraints, the testing and acceptance of new technologies that affect key operations and general economic and political events |
| The sales cycle for initial orders and larger follow-on orders for the Company’s products can be lengthy and variable |
| Additionally, sales cycles for sales of the Company’s products to OEMs tend to be longer, ranging from 6 to 24 months or more and may involve convincing the vendor’s entire organization that the Company’s products are the appropriate software for the vendor’s application |
| This time period does not include the sales and implementation cycles of such vendor’s own products, which can be longer than the Company’s sales and implementation cycles |
| Certain of the Company’s customers have in the past, or may in the future, experience difficulty completing the initial implementation of Actuate’s products |
| Any difficulties or delays in the initial implementation by the Company’s end-user customers or indirect channel partners could cause such customers to reject the Company’s software or lead to the delay or non-receipt of future orders for the large-scale deployment of its products, in which case the Company’s business, operating results and financial condition would be harmed |
| ADVANCES IN HARDWARE TECHNOLOGY MAY CAUSE OUR SOFTWARE REVENUE TO DECLINE In the past, the Company has licensed software for a certain number of “processors” or “CPUs” to many of its customers |
| Advances in hardware technology, including, but not limited to, greater CPU clock speeds, multiple-core processors and virtualization, have afforded software performance gains to some customers, causing them to defer additional software purchases from the Company |
| The occurrence of any of these events, and other future advances, could seriously harm the Company’s business, operating results and financial condition |
| Furthermore, in many cases, use of the software on such advanced hardware without payment of a transfer fee is prohibited by the terms of applicable license agreements or Company policies |
| The Company intends to require compliance with such terms and as a result of its enforcement efforts, customers may defer or cease purchasing additional software or maintenance and support |
| The occurrence of any of these events could seriously harm the Company’s business, operating results and financial condition |
| IF THE COMPANY IS UNABLE TO FAVORABLY ASSESS THE EFFECTIVENESS OF ITS INTERNAL CONTROL OVER FINANCIAL REPORTING, IN FUTURE PERIODS, OR IF THE COMPANY’S INDEPENDENT AUDITORS ARE UNABLE TO PROVIDE AN UNQUALIFIED ATTESTATION REPORT ON SUCH ASSESSMENT, THE COMPANY’S STOCK PRICE COULD BE ADVERSELY AFFECTED Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), the Company’s management is required to report on, and its independent auditors are required to attest to, the effectiveness of the Company’s internal controls over financial reporting on an ongoing basis |
| The Company’s assessment, testing and evaluation 16 ______________________________________________________________________ [44]Table of Contents of the design and operating effectiveness of its internal control over financial reporting are ongoing |
| The Company identified one material weakness, which was disclosed in Section 9A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on March 16, 2005, as amended by Form 10-K/A filed with the Securities and Exchange Commission on May 2, 2005 |
| The Company cannot predict the outcome of its testing in future periods |
| If in future periods the Company concludes that its internal control over financial reporting is not effective, it may be required to change its internal control over financial reporting to remediate deficiencies, and investors may lose confidence in the reliability of its financial statements, causing the Company’s stock price to decline |
| SECTION 404 AND OTHER RECENTLY ENACTED REGULATORY CHANGES HAVE CAUSED THE COMPANY TO INCUR INCREASED COSTS AND OPERATING EXPENSES AND MAY MAKE IT MORE DIFFICULT FOR THE COMPANY TO ATTRACT AND RETAIN QUALIFIED OFFICERS AND DIRECTORS The Sarbanes-Oxley Act of 2002 and recently enacted rules of the SEC and Nasdaq have caused the Company to incur significant increased costs as it implements and responds to new requirements |
| In particular, the rules governing the standards that must be met for management to assess its internal controls over financial reporting under Section 404 are new and complex, and require significant documentation, testing and possible remediation |
| This ongoing process of reviewing, documenting and testing the Company’s internal controls over financial reporting has resulted in, and will likely continue to result in, a significant strain on the Company’s management, information systems and resources |
| Furthermore, achieving and maintaining compliance with Sarbanes-Oxley and other new rules and regulations has required the Company to hire additional personnel and has and will continue to require it to use additional outside legal, accounting and advisory services |
| Any acquisitions made by the Company will also put a significant strain on its management, information systems and resources |
| In addition, any expansion of the Company’s international operations will lead to increased financial and administrative demands associated with managing its international operations and managing an increasing number of relationships with foreign partners and customers and expanded treasury functions to manage foreign currency risks, all of which will require implementation of any changes necessary to maintain effective internal controls over financial reporting |
| Any failure to satisfy the new rules could make it more difficult for the Company to obtain certain types of insurance, including director and officer liability insurance, and it may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage |
| Alternatively, the Company may determine that it should reduce its director and officer liability insurance policy limits |
| The impact of any of these events could also make it more difficult for the Company to attract and retain qualified persons to serve on its board of directors, or as executive officers |
| IF THE COMPANY DOES NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, ITS PRODUCTS COULD BECOME OBSOLETE The market for the Company’s products is characterized by rapid technological changes, frequent new product introductions and enhancements, changing customer demands, and evolving industry standards |
| The Company believes that its future success will depend in large part on its ability to support current and future releases of popular operating systems and computer programming languages, databases and software applications, to timely develop new products that achieve market acceptance and to meet an expanding range of customer requirements |
| If the announcement or introduction of new products by the Company or its competitors or any change in industry standards causes customers to defer or cancel purchases of existing products, the Company’s business, operating results and financial condition would be harmed |
| As a result of the complexities inherent in Enterprise Reporting Applications, major new products and product enhancements can require long development and testing periods |
| In addition, customers may delay their 17 ______________________________________________________________________ [45]Table of Contents purchasing decisions in anticipation of the general availability of new or enhanced versions of the Company’s products |
| As a result, significant delays in the general availability of such new releases or significant problems in the installation or implementation of such new releases could harm the Company’s business, operating results and financial condition |
| If the Company fails to successfully develop, on a timely and cost effective basis, product enhancements or new products that respond to technological change, evolving industry standards or customer requirements or such new products and product enhancements fail to achieve market acceptance, the Company’s business, operating results and financial condition would be harmed |
| IF THE COMPANY DOES NOT RELEASE NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS IN A TIMELY MANNER OR IF SUCH NEW PRODUCTS AND ENHANCEMENTS, INCLUDING THE COMPANY’S OPEN SOURCE PROJECT, FAIL TO ACHIEVE MARKET ACCEPTANCE, THE COMPANY’S BUSINESS COULD BE SERIOUSLY HARMED The Company believes that its future success will depend in large part on the success of new products and enhancements to its products that it makes generally available |
| Prior to the release of any new products or enhancements, the products must undergo a long development and testing period |
| To date, the development and testing of new products and enhancements have taken longer than expected |
| In the event the development and testing of new products and enhancements continue to take longer than expected, the release of new products and enhancements will be delayed |
| If the Company fails to release new products and enhancements in a timely manner, its business, operating results and financial condition would be harmed |
| In addition, if such new products and enhancements do not achieve market acceptance, the Company’s business, operating results and financial condition would be harmed |
| The Company has developed a Business Intelligence Reporting Tools (“BIRT”) open source code project as part of the Eclipse open source code foundation |
| The Company hopes that BIRT and a commercialized version of BIRT will be widely adopted by Java developers and will result in such developers recommending to their companies that they license the Company’s commercially available products |
| If BIRT does not achieve market acceptance and result in promoting sales of commercially available products, the Company’s business, operating results and financial condition may be harmed |
| THE SUCCESS OF THE COMPANY’S OPEN-SOURCE BIRT INITIATIVE IS DEPENDENT ON BUILDING A DEVELOPER COMMUNITY AROUND BIRT The success of the Company’s BIRT initiative is dependent on the open source contributions of third-party programmers and corporations, and if they cease to make these contributions to the Eclipse open source project, the BIRT project, or the general open source movement, the Company’s BIRT product strategy could be adversely affected |
| If key members, or a significant percentage, of this group of developers or corporations decides to cease development of Eclipse, BIRT or other open source applications, the Company would have to either rely on another party (or parties) to develop these technologies, develop them itself or adapt its open source product strategy accordingly |
| This could increase the Company’s development expenses, delay its product releases and upgrades or adversely impact customer acceptance of open source offerings |
| THE COMPANY’S INTERNATIONAL OPERATIONS ARE SUBJECT TO SIGNIFICANT RISKS A substantial portion of the Company’s revenues is derived from international sales |
| 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: • Economic and political instability, including war and terrorism or the threat of war and terrorism; • Difficulty in managing an organization spread across many countries; • Multiple and conflicting tax laws and regulations; • Costs of localizing products for foreign countries; 18 ______________________________________________________________________ [46]Table of Contents • Difficulty in hiring employees and difficulties and high costs associated with terminating employees and restructuring operations in foreign countries; • Trade laws and business practices favoring local competition; • Dependence on local vendors; • Compliance with multiple, conflicting and changing government laws and regulations; • Weaker intellectual property protection in foreign countries and potential loss of proprietary information due to piracy or misappropriation; • Longer sales cycles; • Import and export restrictions and tariffs; • Difficulties in staffing and managing foreign operations; • The significant presence of some of our competitors in certain international markets; • Greater difficulty or delay in accounts receivable collection; and • Foreign currency exchange rate fluctuations |
| The Company believes that, over time, an increasing portion of its revenues and costs will be denominated in foreign currencies |
| To the extent such denomination in foreign currencies does occur, gains and losses on the conversion to US dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in the Company’s results of operations |
| Although the Company may in the future decide to undertake foreign exchange hedging transactions to cover a portion of its foreign currency transaction exposure, it currently does not attempt to cover any foreign currency exposure |
| If it is not successful in any future foreign exchange hedging transactions in which it engages, the Company’s business, operating results and financial condition could be harmed |
| THE COMPANY’S EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO ITS BUSINESS AND IT MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL IT NEEDS The Company’s future success depends upon the continued service of its executive officers and other key engineering, sales, marketing and customer support personnel |
| None of its officers or key employees is bound by an employment agreement for any specific term |
| If the Company loses the service of one or more of 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 it, this could have a significant adverse effect on the Company’s business |
| In addition, because experienced personnel in our industry are in high demand and competition for their talents is intense, the Company has relied on its ability to grant stock options as one mechanism for recruiting and retaining this highly skilled talent |
| Accounting regulations that have recently taken effect require the expensing of stock options, which will impair our future ability to provide these incentives without incurring significant compensation costs |
| There can be no assurance that the Company will continue to successfully attract and retain key personnel in the future |
| CHANGES IN, OR INTERPRETATIONS OF, ACCOUNTING RULES AND REGULATIONS COULD RESULT IN UNFAVORABLE ACCOUNTING CHARGES The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America |
| These principles are subject to interpretation by the Securities and Exchange Commission (the “SEC”) and various bodies formed to interpret and create appropriate accounting policies |
| A change in these policies can have a significant effect on the Company’s reported results 19 ______________________________________________________________________ [47]Table of Contents and may even retroactively affect previously reported transactions |
| The Company’s accounting policies that recently have been or may be affected by changes in the accounting rules are as follows: • Software revenue recognition; • Accounting for income taxes; • Accounting for business combinations and related goodwill; and • Accounting for stock issued to employees |
| THE COMPANY’S EARNINGS MAY BE ADVERSELY AFFECTED DUE TO RECENT CHANGES IN THE ACCOUNTING RULES GOVERNING THE RECOGNITION OF STOCK-BASED COMPENSATION EXPENSE The Company currently accounts for the issuance of stock options using the intrinsic value method under APB Opinion Nodtta 25, “Accounting for Stock Issued to Employees,” under which the Company generally does not record compensation expense related to employee stock options in its financial statements |
| However, in accordance with SFAS 123 and SFAS 148, the Company provides additional disclosures of its operating results in the notes to its financial statements as if it had applied the fair value method of accounting |
| Had the Company accounted for its stock-based compensation expense for employees in its results of operations under the fair value method of accounting prescribed by SFAS 123, the compensation charges would have been significantly higher than the intrinsic value method used by the Company, resulting in a reduction of net income of approximately dlra5dtta7 million, dlra8dtta8 million, and dlra21dtta3 million in fiscal years 2005, 2004 and 2003, respectively |
| In December 2004, the FASB issued SFAS Nodtta 123(R), which replaces SFAS 123 and supersedes APB 25 SFAS 123(R) requires compensation costs relating to share-based payment transactions to be recognized in financial statements |
| This statement is effective as of the beginning of the first annual period that began after June 15, 2005 |
| Accordingly, the Company will be required to adopt SFAS 123(R) starting in our first fiscal quarter of 2006 |
| The Company will adopt SFAS 123(R) using the “Modified Prospective Application” method as defined in the document |
| The Company expects the adoption of SFAS 123(R) to have a material adverse impact on its net income or loss and its net income or loss per share by decreasing its income or increasing its losses by the additional amount of such stock option charges |
| The Company is currently in the process of evaluating the extent of such impact and cannot quantify the amount of such impact at this time |
| THE COMPANY MAY BE UNABLE TO SUSTAIN OR INCREASE ITS PROFITABILITY While the Company was profitable in its last two fiscal years, it incurred net losses during fiscal year 2003 and 2002 |
| Its ability to sustain or increase profitability on a quarterly or annual basis will be affected by changes in its business |
| It expects its operating expenses to increase as its business grows, and it anticipates that it will make investments in its business |
| Therefore, the Company’s results of operations will be harmed if its revenues do not increase at a rate equal to or greater than increases in its expenses or are insufficient for it to sustain profitability |
| IF THE COMPANY OVERESTIMATES REVENUES, IT MAY BE UNABLE TO REDUCE ITS EXPENSES TO AVOID OR MINIMIZE A NEGATIVE IMPACT ON ITS RESULTS OF OPERATIONS The Company’s revenues are difficult to forecast and are likely to fluctuate significantly from period to period |
| The Company bases its operating expense budgets on expected revenue trends |
| The Company’s estimates of sales trends may not correlate with actual revenues in a particular quarter or over a longer period of time |
| Variations in the rate and timing of conversion of the Company’s sales prospects into actual licensing revenues could cause it to plan or budget inaccurately and those variations could adversely affect the Company’s financial results |
| In particular, delays, reductions in amount or cancellation of customers’ purchases would adversely affect the overall level and timing of the Company’s revenues and its business, results of operations and financial 20 ______________________________________________________________________ [48]Table of Contents condition could be harmed |
| In addition, many of its expenses, such as office and equipment leases and certain personnel costs, are relatively fixed |
| It may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall |
| Accordingly, any shortfall in revenue may cause significant variation in operating results in any period |
| IF THE COMPANY’S PRODUCTS CONTAIN MATERIAL DEFECTS, ITS REVENUES MAY DECLINE Software products as complex as those offered by the Company often contain errors or defects, particularly when first introduced, when new versions or enhancements are released and when configured to individual customer computing systems |
| The Company currently has known errors and defects in its products |
| Despite testing conducted by the Company, if additional defects and errors are found in current versions, new versions or enhancements of its products after commencement of commercial shipment, this could result in the loss of revenues or a delay in market acceptance |
| The occurrence of any of these events could seriously harm the Company’s business, operating results and financial condition |
| THE COMPANY MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS Although license agreements with our customers typically contain provisions designed to limit the Company’s exposure to potential product liability claims, it is possible that such limitation of liability provisions may not be effective as a result of existing or future laws or unfavorable judicial decisions |
| The sale and support of the Company’s products may entail the risk of such claims, which are likely to be substantial in light of the use of its products in business-critical applications |
| A product liability claim brought against the Company could seriously harm its business, operating results and financial condition |
| THE PROTECTION OF OUR PROPRIETARY RIGHTS MAY BE INADEQUATE The Company has a small number of issued and pending US patents expiring at varying times ranging from 2015 to 2019 |
| The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary technology |
| For example, the Company licenses its software pursuant to shrink- or click-wrap or signed license agreements that impose certain restrictions on licensees’ ability to utilize the software |
| In addition, the Company seeks to avoid disclosure of its intellectual property, including by requiring those persons with access to its proprietary information to execute confidentiality agreements with the Company and by restricting access to its source code |
| The Company takes precautions to protect our software, certain documentation, and other written materials under trade secret and copyright laws, which afford only limited protection |
| Despite the Company’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of its products or to obtain and use information that the Company regards as proprietary |
| Policing unauthorized use of the Company’s products is difficult, and while it is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem |
| In addition, the laws of many countries do not protect the Company’s proprietary rights to as great an extent as do the laws of the United States |
| If the Company’s means of protecting its proprietary rights is not adequate or its competitors independently develop similar technology, the Company’s business could be seriously harmed |
| THE COMPANY’S COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR STOCKHOLDERS The market price of shares of the Company’s common stock has been and is likely to continue to be highly volatile and may be significantly affected by factors such as the following: • Actual or anticipated fluctuations in its operating results; • Changes in the economic and political conditions in the United States and abroad; 21 ______________________________________________________________________ [49]Table of Contents • Terrorist attacks, war or the threat of terrorist attacks and war; • The announcement of mergers or acquisitions by the Company or its competitors; • Developments in ongoing or threatened litigation; • Announcements of technological innovations; • Failure to comply with the requirements of Section 404 of the Sarbanes-Oxley Act; • New products or new contracts announced by it or its competitors; • Developments with respect to copyrights or proprietary rights; • Price and volume fluctuations in the stock market; • Changes in corporate purchasing of Enterprise Reporting Application software; • Adoption of new accounting standards affecting the software industry (including stock option-expensing roles); and • Changes in financial estimates by securities analysts |
| In addition, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against such company |
| If the Company is involved in such litigation, it could result in substantial costs and a diversion of management’s attention and resources and could harm the Company’s business, operating results and financial condition |
| CHANGES IN TAX RATES OR NEGATIVE TAX RULINGS COULD ADVERSELY IMPACT THE COMPANY’S FINANCIAL RESULTS The Company is taxable principally in the United States and certain jurisdictions in Europe and Asia/Pacific |
| All of these jurisdictions have in the past and may in the future make changes to their corporate income tax rates and other income tax laws, which could increase the Company’s future income tax provision |
| While the Company believes that all material income tax liabilities are reflected properly in its balance sheet, it has no assurance that it will prevail in all cases in the event the taxing authorities disagree with its interpretations of the tax law |
| Future levels of research and development spending will impact the Company’s entitlement to related tax credits, which generally lower its effective income tax rate |
| Future effective income tax rates could be adversely affected if earnings are lower than anticipated in jurisdictions where the Company has statutory tax rates lower than in the United States |
| CERTAIN OF THE COMPANY’S CHARTER PROVISIONS AND DELAWARE LAW MAY PREVENT OR DETER A CHANGE IN CONTROL OF ACTUATE The Company’s Certificate of Incorporation, as amended and restated (the “Certificate of Incorporation”), and Bylaws, as amended and restated (“Bylaws”), contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals that a stockholder might consider favorable, including provisions authorizing the issuance of “blank check” preferred stock and eliminating the ability of stockholders to act by written consent |
| In addition, certain provisions of Delaware law and the Company’s stock option plans may also have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals |
| The anti-takeover effect of these provisions may also have an adverse effect on the public trading price of the Company’s common stock |