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ACTUATE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[August 07, 2014]

ACTUATE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) 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, the consolidated financial statements and notes thereto and the related 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, 2013 as filed with the Securities and Exchange Commission on March 7, 2014.



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 Part II, Item 1A-Risk Factors of this Form 10-Q, Part I, Item 1A-Risk Factors in our Annual Report for the year ended December 31, 2013 and in other filings made by the Company with the Securities and Exchange Commission.

Overview Actuate Software Corporation was incorporated in November 1993 in the State of California and reincorporated in the State of Delaware in July 1998 as Actuate Corporation ("We", "Actuate" or the "Company"). Actuate enabled solutions help its enterprise customers maximize revenue, cut costs, create more effective customer communications, streamline operations and create competitive advantage.


Applications built using Actuate's products have delivered personalized analytics and insights to more than 200 million people. More than 3.5 million developers have downloaded open source BIRT, the open source Eclipse interactive development environment (IDE)-based project founded and co-led by Actuate. Many of these BIRT developers use commercial, value-added products from Actuate to enhance and deploy BIRT-based applications to deliver personalized analytics and insights to customers, partners and employees.

Enterprises use Actuate products to create customer-facing, Big Data analytics and customer communications management (CCM) applications with intuitive and visually-engaging experiences that provide unique insights from multiple data sources, delivered securely across high volume of users and devices with proven scalability to millions of users. Developers use BIRT and BIRT iHub™, Actuate's commercial deployment platform for BIRT-based applications, to develop and deploy high scale applications that deliver information personalized for each user to enrich the brand experience and gain competitive advantage. BIRT iHub further ensures organizations can gain effective insights from Big Data and take advantage of mobile touch devices. Actuate's BIRT Analytics™ delivers self-service predictive analytics to enhance customer engagement from Big Data.

BIRT Content Services™ empowers ECM architects to easily transform, personalize and archive high volume content. Actuate's goal is to ensure that its customers can seamlessly incorporate information and business analysis into their day-to-day activities and decision-making, enabling organizations to explore new avenues for improving the bottom line. Actuate's principal executive offices are located at the BayCenter Campus at 951 Mariners Island Boulevard, in San Mateo, California. Actuate's telephone number is 650-645-3000. Actuate maintains Web sites at www.actuate.com, www.developer.actuate.com, www.birtondemand.com, www.quiterian.com and www.legodo.com. The information posted on our Web sites is not incorporated into this Form 10-Q.

We began shipping our first product in January 1996. We sell software products through two primary means: (i) directly to end-user customers through our direct sales force and (ii) through indirect channel partners such as OEMs, resellers and system integrators. OEMs generally integrate our products with their applications and either provide hosting services or resell them with their products. Our other indirect channel partners resell our software products to end-user customers. Our total revenues are derived from license fees for software products and fees for services relating to such products, including software maintenance and support, professional services and training.

Our business model and longer-term financial results are not immune to a sustained economic downturn. While the global economy appears to be improving, the future direction and relative strength of the global economy continues to be uncertain and makes it difficult for us to forecast operating results and to make decisions about future investments. During challenging and uncertain economic times and in tight credit markets, many customers delay or reduce technology purchases. Contract negotiations may become more protracted or difficult if customers institute additional internal approvals for technology purchases or require more negotiation of contract terms and conditions. Such economic conditions could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable or delayed payments, slower adoption of new technologies, increased price competition and reductions in the rate at which our customers renew their maintenance agreements and procure consulting services.

24-------------------------------------------------------------------------------- Table of Contents We continue to transition from our legacy e.Reports/iServer product suite to our new BIRT iHub product offerings. As a consequence we are experiencing a decrease in license revenues generated by our e.Report/iServer products. We expect this decrease to be mitigated by increases in license revenue generated by our successor BIRT iHub offerings over time. During this transition we may experience delays in adoption of our BIRT iHub offerings by our customers which can adversely impact our license revenues. During the first six months of 2014, we experienced a significant reduction in our license revenues, partially driven by a sharp decline in license sales in excess of $1 million. In the mean-time, BIRT iHub is expected to soon become the dominant contributor to license and maintenance revenues.

Factors that may affect our operating results include the possibility of a prolonged period of limited economic growth or possible economic decline in and adverse effects of the ongoing sovereign debt crisis in Europe, including its expected negative impact on European economic growth versus the rest of the world; disruptions to the credit and financial markets in Europe, the U.S., and elsewhere; contractions or limited growth in corporate spending; and adverse economic conditions that may be specific to information technology and the software industry.

We continue to monitor market conditions and may make adjustments to our business in order to reduce the adverse impact that changes to the economic environment could have on our business.

In the past Actuate has principally priced and sold its products on a perpetual model. However, the Company is actively transitioning its primary pricing model to a subscription model. We are seeing a shift in customer's purchasing behavior for enterprise software. This shift appears to favor a subscription model.

Generally speaking, these subscription licenses will be recognized ratably over the subscription service period. The subscription model provides more flexibility for our customers to use our software and we believe is in line with current market trends. We believe subscription-based license should provide an easier adoption of commercial software for open source BIRT users and provide our customers with timely access to Actuate's latest product releases. We are currently transitioning to the subscription model and expect this transition to be substantially complete by 2017.

On July 10, 2014, we announced the launch of BIRT iHub F-Type, which allows free access to the features and power of the commercial BIRT iHub enterprise-grade deployment platform, with metered output capacity. We believe BIRT iHub F-Type will be a key contributor to Actuate's subscription business.

We expect to continue to explore both organic and strategic growth opportunities. In particular, we may acquire companies or technologies that can contribute to the strategic, operational and financial performance of our business. On January 31, 2014, we completed the acquisition of legodo ag, a privately held software company based in Karlsruhe, Germany whose mission is to develop software for easy and rapid generation of personalized customer correspondence via any modern communication channel, including social media.

Legodo products will significantly expand the Accessible Customer Communications Management solution offered by our Content Services Group (formerly Xenos).

For the remainder of fiscal year 2014, we expect three additional trends to continue that would have a significant impact on the results of our operations.

We currently believe that corporate IT budgets will grow only modestly if at all for the remainder of fiscal year 2014, particularly among financial services companies. Secondly, corporations are reluctant to buy software from new vendors and we continue to witness corporations consolidating their Business Analytics, Big Data, Performance Management and Customer Communications Management software purchases among fewer suppliers. Finally, we expect to experience vigorous competition in the market. Several of our competitors have released products that are marketed to be directly competitive with our offerings. We will continue to encounter customers choosing to develop information applications using programming languages such as Java. Actuate faces competition from large and well-established vendors including Microsoft, SAP, Oracle and IBM. The existence of these competitors may require additional sales and marketing efforts to differentiate our products, which could result in extended sales cycles.

For the remainder of fiscal year 2014, we will continue to pursue our strategic initiatives to improve revenue growth driven by BIRT, BIRT iHub, BIRT Customer Communications Management and BIRT Analytics. These initiatives are as follows: • Investing in BIRT-We are continuing to make a significant investment in BIRT. BIRT has become widely adopted by developers and continues to drive demand for our BIRT-based commercially available products in the BIRT iHub platform. The BIRT project is a core, long-term initiative.

25 -------------------------------------------------------------------------------- Table of Contents • Selling to IT Management-We are re-focusing our sales efforts on selling our products to IT managers who we believe generally recognize the technical advantages of our products. We hope this initiative will result in increased license revenue in the short term.

• Selling to Line-of-Business Management-We are creating Business Analytics applications and software solutions to market to line-of-business managers. These offerings are in the areas of customer analytics and operational analytics. We hope these initiatives will result in increased license revenue over the medium-to-long term.

• Selling to Global 9000 Corporations in the Financial Services Sector-We continue to focus on selling our products to Global 9000 financial services companies in an effort to increase our substantive market share in this sector. We believe that once the issues with IT spending in Financial Services are resolved, the industry will once again lead in the adoption of information applications both inside and outside the firewall.

• Increasing subscription-based business both on premise and in the cloud.

• Continuing to build out and deliver on the roadmap of applying BIRT to additional data sources including hard to reach print stream data by investing in the development of BIRT based Content services offerings.

• Continuing to build out and deliver on the roadmap of Customer Communications Management capabilities by integrating Content Services offerings including those from legodo into BIRT iHub.

• Continuing to build out and deliver on the roadmap of BIRT Analytics capabilities by integrating Quiterian offerings into the BIRT iHub.

We have a limited ability to forecast future revenues and expenses, thus the prediction of future operating results is difficult. In addition, historical growth rates in our revenues and earnings should not be considered indicative of future revenue or earnings growth rates or operating results. There can be no assurance that any of our business strategies will be successful or that we will be able to achieve and maintain profitability on a quarterly or annual basis. It is possible that in some future quarter our operating results will be below the expectations of public market analysts and investors, and in such event the price of our common stock could decline.

Critical Accounting Policies, Judgments and Estimates The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that can have a significant impact on the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates, assumptions and judgments on historical experience, future expectations, and various other factors that we believe to be reasonable under the circumstances.

Actual results may differ from these estimates under different assumptions or conditions. On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. We believe that the estimates, assumptions and judgments involved in revenue recognition, allowances for doubtful accounts, stock-based compensation, accounting for income taxes, restructuring, allocation of purchase price of acquisitions, and the impairment of goodwill, have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting policies.

For further information about our significant accounting policies, see the discussion under Item 7 to the annual consolidated financial statements as of and for the year ended December 31, 2013, as filed with the SEC on Form 10-K on March 7, 2014.

Three Months Ended June 30, (in thousands except per share data) 2014 2013 $ Change % Change Financial Summary Total revenues $ 26,513 $ 34,902 $ (8,389 ) (24 )% Total operating expenses 29,046 32,672 (3,626 ) (11 )% (Loss) income from operations (2,533 ) 2,230 (4,763 ) (214 )% Operating margins (10 )% 6 % Net (loss) income $ (2,332 ) $ 1,313 $ (3,645 ) (278 )% 26 -------------------------------------------------------------------------------- Table of Contents Three Months Ended June 30, (in thousands except per share data) 2014 2013 $ Change % Change Diluted net (loss) income per share $ (0.05 ) $ 0.03 $ (0.08 ) Shares used in diluted per share calculation 46,692 50,471 Financial Performance Summary for the quarter ended June 30, 2014 compared to June 30, 2013: • Significant decrease in license revenues across all product groups and all geographies partially driven by a decrease in transactions greater than $1 million, • Improving maintenance revenues from our BIRT business. Higher professional services revenues in EMEA due primarily to our acquisition of legodo that was completed at the end of January 2014.

• Continued momentum toward subscription-based transactions.

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

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Revenues: License fees 28 % 46 % 27 % 45 % Services 72 54 73 55 Total revenues 100 100 100 100 Costs and expenses: Cost of license fees 2 2 2 2 Cost of services 15 13 15 14 Sales and marketing 44 41 45 40 Research and development 23 18 26 18 General and administrative 24 18 24 17 Amortization of other purchased intangibles 1 1 1 1 Restructuring charges 1 1 1 1 Total costs and expenses 110 94 114 93 (Loss) Income from operations (10 ) 6 (14 ) 7 Interest income and other income/(expense), net 1 - 1 - (Loss) Income before income taxes (9 ) 6 (13 ) 7 Provision for (benefit from) income taxes - 2 (2 ) 1 Net (loss) income (9 )% 4 % (11 )% 6 % 27 -------------------------------------------------------------------------------- Table of Contents Revenues Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % Revenues License fees $ 7,335 $ 16,155 $ (8,820 ) (55 )% $ 13,553 $ 31,635 $ (18,082 ) (57 )% Services 19,178 18,747 431 2 % 37,046 38,185 (1,139 ) (3 )% Total Revenues $ 26,513 $ 34,902 $ (8,389 ) (24 )% $ 50,599 $ 69,820 $ (19,221 ) (28 )% % of Revenue License fees 28 % 46 % 27 % 45 % Services 72 % 54 % 73 % 55 % Total Revenues 100 % 100 % 100 % 100 % License fees. The decrease in license revenues for the second quarter of fiscal 2014 over the same period in the prior year was due primarily to a significant decrease in license sales in North America and EMEA. This decrease was driven by a sharp reduction in the volume of transactions with a license component in excess of $1 million. In the second quarter of 2013, we closed three transactions with a license component in excess of $1 million, while no such transactions were completed during the second quarter of 2014. We believe that this reflects the change in customer's purchasing behavior for enterprise software which appears to favor a subscription-based model. Subscriptions generally carry a higher lifetime value due to their recurring nature but possess a lower initial dollar value. Based on this shift and our recent improvements in subscription bookings, we have accelerated our adoption of a subscription based licensing model for our products. These subscription-based transactions are recognized to revenue in equal monthly installments over the term of the subscription agreement, which generally span between one to three years. We are currently transitioning to the subscription model and expect this transition to be substantially complete by 2017. As a result, we expect to derive an increasing portion of our future revenues from subscriptions for our products. We continue to experience a decrease in bookings associated with our legacy e.Report business, as we transition to newer BIRT based products along with a decrease in our BIRT iHub OEM transactions. Compliance related transactions which typically carry a significant license component also decreased during the quarter. Foreign currency exchange attributed to international license revenues was minimal during the second quarters of fiscal 2014 and fiscal 2013.

These negative trends in license revenues experienced during the quarter were partially offset by an increase in our subscription-based business in the second quarter of 2014 marked by a third consecutive quarter of over $1 million in subscription bookings. We are also seeing a shift in customer's purchasing behavior for enterprise software which appears to favor a subscription-based model. Based on this shift and our recent improvements in subscription bookings, we have accelerated our adoption of a subscription based licensing model for our products. We are currently transitioning to the subscription model and expect this transition to be substantially complete by 2017. As a result, we expect to derive an increasing portion of our future revenues from subscriptions for our products. The subscription model provides more flexibility for our customers to use our software and we believe is in line with current market trends. We believe subscription-based license should provide an easier adoption of commercial software for open source BIRT users and provide our customers with timely access to Actuate's latest product releases.

For the first half of 2014, license revenues decreased 57% or approximately $18.1 million compared to the first half of 2013. This decrease was driven by a 73% or approximately $9.2 million decrease in our legacy e.Report business, as we transition to newer BIRT based products along with a decrease in our BIRT iHub OEM transactions and our Content Service Group license revenues due to the transition of our business from iServer to iHub, the transition to a subscription model, and lower compliance related transactions, which typically carry a significant license component.

Fluctuations in foreign currency exchange rates positively impacted our license revenues by approximately $130,000 for the first half of fiscal 2014.

28-------------------------------------------------------------------------------- Table of Contents The following table represents our license revenues by region (in thousands): Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % License Revenues North America $ 5,350 $ 12,160 $ (6,810 ) (56 )% $ 9,573 $ 24,900 $ (15,327 ) (62 )% Europe Middle East, and Africa (EMEA) 1,331 3,545 (2,214 ) (62 )% 3,052 5,912 (2,860 ) (48 )% Asia Pacific and others 654 450 204 45 % 928 823 105 13 % Total $ 7,335 $ 16,155 $ (8,820 ) (55 )% $ 13,553 $ 31,635 $ (18,082 ) (57 )% % of total revenue 28 % 46 % 27 % 45 % Services. Services revenues are comprised of maintenance and support, professional services, and training. The 2% increase in services revenues was driven primarily by higher legodo related maintenance and professional services revenues in EMEA. Although our baseline maintenance renewals continue to strengthen, overall maintenance revenue declined from the previous year because second quarter of 2013 was positively impacted by transactions with customers that were not in full compliance with the provisions of their respective licensing agreements with Actuate. These transactions which typically include back maintenance, did not recur to the same degree in the second quarter of 2014. In addition, the cumulative impact effect of prior maintenance declines continues to depress the maintenance renewal revenues. Our maintenance renewal decline rate improved from 17% in the second quarter of 2013 to 9% in the second quarter of 2014.

It is important to note that we are transitioning from our legacy e.Reports product suite to our new BIRT based product offering. As our legacy products age, we have experienced higher than normal decline rates which may continue for the foreseeable future. In the meantime, BIRT is expected to become the dominant contributor to license and maintenance revenues. As this transition progresses, we have begun to see our maintenance renewal decline rate improve significantly which should result in stronger maintenance growth rates in the future.

The decrease in maintenance revenues were partially offset by higher subscription and hosting revenues in North America and EMEA.

For the first half of fiscal year 2014, the underlying reasons for the changes in the various components of our services revenues were similar to those experienced during the quarter as noted above. Fluctuations in foreign currency exchange rates positively impacted our services revenues by approximately $340,000 for the first half of fiscal 2014.

The following table represents our total services revenues by region (in thousands): Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % Services Revenues North America $ 14,461 $ 14,571 $ (110 ) (1 )% $ 27,632 $ 29,652 $ (2,020 ) (7 )% EMEA 3,896 3,275 621 19 % 7,722 6,681 1,041 16 % Asia Pacific and others 821 901 (80 ) (9 )% 1,692 1,852 (160 ) (9 )% Total Services $ 19,178 $ 18,747 $ 431 2 % $ 37,046 $ 38,185 $ (1,139 ) (3 )% % of total revenue 72 % 54 % 73 % 55 % By region, North America accounted for approximately 75% of the total services revenues in the second quarter of fiscal 2014 while EMEA and Asia Pacific accounted for 21% and 4% of the total services revenues, respectively. For the same period last year, North America accounted for approximately 78% of the total services revenues while the EMEA and Asia Pacific regions accounted for 17% and 5% of the total services revenues, respectively. The increase in international services revenues for the first half of 2014 was mostly due to service revenues from our acquisition of legodo that was completed at the end of January 3014. Fluctuations in foreign currency exchange rates positively impacted our services revenues by approximately $190,000 for the second quarter of fiscal 2014.

29 -------------------------------------------------------------------------------- Table of Contents Costs and Expenses Cost of license fees Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % Cost of license fees $ 512 $ 551 $ (39 ) (7 )% $ 996 $ 1,124 $ (128 ) (11 )% % of license revenue 7 % 3 % 7 % 4 % Cost of license fees consists primarily of product packaging, documentation, production costs and the amortization of purchased technology. The decrease in cost of license fees for the second quarter and the first half of 2014, compared to the corresponding period was due to lower compensation cost due to a reduced average headcount as well as lower documentation and production cost during the second quarter and the first half of 2014 compared to the second quarter and the first half of 2013. These reductions in cost were partially offset by increased amortization of purchased technologies associated with the legodo acquisition, which we completed in January 31, 2014. We expect our cost of license fees, as a percentage of revenues from license fees, to remain between 6% and 8% of revenues from license fees for the remainder of fiscal 2014.

Cost of services Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % Cost of services $ 3,869 $ 4,431 $ (562 ) (13 )% $ 7,436 $ 9,414 $ (1,978 ) (21 )% % of services revenue 20 % 24 % 20 % 25 % Cost of services consists primarily of personnel and related costs, share-based compensation, 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. The decrease in cost of services for the second quarter of 2014, compared to the same period last year was driven by lower employee compensation cost. Average headcount of support and consulting personnel was lower by approximately 24% or 24 employees in the second quarter of 2014 compared to the second quarter of 2013 as we continue to reduce costs and align to market conditions. This reduction was partially offset by the increased compensation associated with the addition of 6 employees in Europe from our acquisition of legodo. Currently we expect our cost of services expenses as a percentage of total services revenues to be in the range of 19% to 20% of total services revenues for the remainder of fiscal 2014.

For the six months ended June 30, 2014, the underlying reasons for the changes in the various components of our cost of services were similar to those experienced during the quarter as noted above. Currently we expect our cost of services expenses as a percentage of total services revenues to be in the range of 24% to 25% of total services revenues for the remainder of fiscal 2014.

Sales and marketing Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % Sales and marketing $ 11,538 $ 14,316 $ (2,778 ) (19 )% $ 22,901 $ 28,090 $ (5,189 ) (18 )% % of total revenue 44 % 41 % 45 % 40 % 30 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses consist primarily of salaries, commissions, share-based compensation and bonuses earned by sales and marketing personnel, promotional expenses, travel, entertainment and facility costs. Our overall sales and marketing expense decreased in the second quarter of 2014 compared to the corresponding period in the prior year due to approximately $1.7 million decrease in commissions, bonuses and sales-related travel as we experienced a 55% reduction in global license sales in the second quarter of 2014 compared to the second quarter of 2013. We also experienced a decrease in employee salaries, benefits, and related costs of approximately $670,000 as our average sales and marketing headcount decreased by 12%, or 27 employees compared to the second quarter of 2013. These reductions in headcount were primarily in marketing and due to a reduction-in-force that we implemented in the second half of 2013 to better align our cost structure with market demand for our products. The headcount reductions as well as lower lead-generation and public relation campaigns accounted for approximately $460,000 of the second quarter 2014 decrease in marketing expense compared to the corresponding period in the prior year. Partially offsetting these decreases was an increase in expense driven by the acquisition of legodo, which resulted in the addition of 6 employees in Europe.

For the six months ended June 30, 2014, the underlying reasons for the changes in the various components of our sales and marketing expense were similar to those experienced during the quarter as noted above. We currently expect our sales and marketing expenses to increase as a percentage of total revenue from the current levels as we anticipate higher sales capacity for the remainder of fiscal 2014.

Research and development Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s %Research and development $ 6,218 $ 6,382 $ (164 ) (3 )% $ 13,279 $ 12,942 $ 337 3 % % of total revenue 23 % 18 % 26 % 18 % Research and development costs consist primarily of personnel and related costs, including share-based compensation, associated with the development of new products, enhancement of existing products, quality assurance and testing. The overall decrease in research and development expense compared to the corresponding period in the prior year was due primarily to the closure of our Shanghai, China product development facility that was effective January 31, 2014 and resulted in the termination of approximately 50 employees. As a result, in the second quarter of 2014, we did not incur research and development expenses associated with the Shanghai facility. This decrease was partially offset by higher employee compensation and related costs associated with our January 31, 2014 acquisition of legodo, which resulted in the addition of 15 research and development employees.

For the six months ended June 30, 2014, the overall increase in research and development expenses was driven primarily by the severance and termination payments associated with the China closure which were classified as on-going benefits arrangements and were thereby charged to research and development as employee compensation expense in the first quarter of 2014. Additionally, in the first half of 2014 we experienced higher employee compensation and related costs from our acquisition of legodo. These increases were partially offset by lower employee compensation and related expenses as our core research and development headcount decreased by an average of 8% or 11 employees during the first half of 2014 compared to the first half of 2013. We expect our research and development expenses as a percentage of total revenues to be in the range of 20% to 25% of total revenues for the remainder of fiscal 2014.

General and administrative Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s %General and administrative $ 6,344 $ 6,168 $ 176 3 % $ 12,037 $ 12,048 $ (11 ) - % % of total revenue 24 % 18 % 24 % 17 % General and administrative expenses consist primarily of personnel costs, share-based compensation costs and related costs for finance, human resources, information systems and general management, as well as legal, bad debt and accounting 31 -------------------------------------------------------------------------------- Table of Contents expenses. The increase in general and administrative expenses in the second quarter of 2014 compared to the corresponding period in the prior year was due primarily to higher legal fees related to contract compliance matters pursued during the quarter. These increases were offset by lower bonus and share-based compensation expenses.

For the six months ended June 30, 2014, the decrease in general and administrative expenses in absolute dollars compared to the corresponding period was not significant. We expect our general and administrative expenses as a percentage of total revenues to be in the range of 20% to 25% for the remainder of fiscal 2014.

Amortization of other purchased intangibles Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % Amortization of other purchased intangibles $ 364 $ 301 $ 63 21 % $ 707 $ 564 $ 143 25 % % of total revenue 1 % 1 % 1 % 1 % The increase in amortization expense during the second quarter and six months of 2014 compared to the corresponding periods in the prior year was due to the amortization of legodo intangibles which we started amortizing effective February 2014. We continue to amortize the intangible assets purchased through the acquisitions of legodo, Quiterian and Xenos on a straight-line basis over their estimated useful lives of seven years. For the remainder of fiscal 2014, we expect amortization expense related to purchased intangible assets to remain within the same levels for the remainder of fiscal 2014.

Restructuring charges Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % Restructuring $ 201 $ 523 $ (322 ) (62 )% $ 307 $ 591 $ (284 ) (48 )% % of total revenue 1 % 1 % 1 % 1 % The restructuring charges incurred during the second quarter and the first six months of 2014 were partially related to the closure of our Shanghai, China operation, which was effective January 31, 2014 as well as updates to our estimates of sublease income related to our idle facility in Toronto Canada.

The restructuring charges incurred during the second quarter and the first six months of 2013 were primarily related to the restructuring of our Performance Management Group in North America during the second quarter of 2013 which included employee severance and benefits charges as well as an idle facility write-off.

Historically, restructuring charges have included costs associated with reductions in workforce, exits of idle facilities and disposals of fixed assets.

These restructuring charges were based on actual and estimated costs incurred including estimates of sublease income on portions of our idle facilities that we periodically update based on market conditions and in accordance with our restructuring plans. These estimates were impacted by the rules governing the termination of employees, especially those in foreign countries.

32-------------------------------------------------------------------------------- Table of Contents Interest income and other income/(expense), net Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % Interest income and other income (expense), net $ 40 $ (290 ) $ 330 114 % $ 95 $ 180 $ (85 ) (47 )% Foreign exchange gain 361 307 54 18 % 220 137 83 61 % Total interest income and other income (expense), net 401 17 384 2,259 % 315 317 (2 ) (1 )% Interest expense $ (15 ) $ (60 ) $ 45 (75 )% $ (28 ) $ (120 ) $ 92 (77 )% Interest income and other income/(expense), net increased during the second quarter of 2014 as a result of currency exchange gains related to favorable revaluation of net monetary balances in Europe and North America as the European currencies stabilized against the Swiss Franc and the U.S. Dollar strengthened against the Canadian Dollar.

For the six months ended June 30, 2014, the underlying reasons for the changes in the various components of interest income and other income/(expense), net were similar to those experienced during the quarter as noted above.

Provision for (Benefit from) income taxes Three Months Ended Six Months Ended (In thousands) (In thousands) June 30, June 30, Variance Variance Variance Variance 2014 2013 $'s % 2014 2013 $'s % Provision for (benefit from) income taxes $ 185 $ 874 $ (689 ) (79 )% $ (1,075 ) $ 912 $ (1,987 ) (218 )% Effective tax rate (9 )% 40 % 16 % 17 % For the three months ended June 30, 2014, we recorded an income tax provision of approximately $185,000, as compared to an income tax provision of approximately $874,000 for the same period last year. The decrease in the income tax provision for the second quarter of fiscal 2014 as compared to the second quarter of fiscal 2013 is mainly due to losses recorded for the quarter. During the second quarter of fiscal 2014 we recorded a valuation allowance of approximately $171,000 against our Singapore subsidiary's deferred tax assets due to continued losses in the jurisdiction. This one-time discrete tax charge resulted in increased income tax expense for the second quarter of fiscal 2014. The effective rate for the three months ended June 30, 2014 was lower due to Company's projected losses in the U.S. and foreign jurisdictions for fiscal 2014 as compared to projected earnings for the same period of fiscal 2013.

For the six months ended June 30, 2014, we recorded an income tax benefit of approximately $1.1 million as compared to an income tax provision of approximately $912,000 for the same period last year. The decrease in the income tax provision for the six months of fiscal 2014 as compared to the six months of fiscal 2013 is mainly due to losses sustained in fiscal 2014 as compared to profits during the same period in fiscal 2013. The effective rate for the six months ended June 30, 2014 was lower due to benefitting of projected worldwide losses through the second quarter of fiscal 2014. Also the first quarter 2013 tax provision was reduced due to a tax benefit from the extension of the federal research credit in the first quarter of 2013 and additional changes in the tax law that was not allowed in 2012 because the new tax law was not signed until January 2013. The federal research credit has again expired and is currently unavailable for calendar 2014 and as such, the Company is not benefiting any federal research credits in its estimated annual effective tax rate for 2014.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. The Company does not believe it is reasonably possible that its reserve for uncertain tax positions would materially change in the next 12 months.

Liquidity and Capital Resources Our sources of cash, cash equivalents and short-term investments are funds generated from our business operations and funds that may be drawn down under our credit facility. The following sections discuss changes in our balance sheet and cash flows, and other commitments on our liquidity and capital resources during the first six months of 2014. This data should be read in conjunction with the Consolidated Statements of Cash Flows.

33-------------------------------------------------------------------------------- Table of Contents As of As of June 30, June 30, % 2014 2013 $ Change Change (dollars in thousands) Cash, cash equivalents and short-term investments $ 59,423 $ 73,993 $ (14,570 ) (20 )% Working capital $ 34,178 $ 53,679 $ (19,501 ) (36 )% Note payable $ 268 $ 830 $ (562 ) (68 )% Stockholders' equity and non-controlling interest $ 114,257 $ 126,562 $ (12,305 ) (10 )% We hold our cash, cash equivalents and investments primarily in the United States, Switzerland, and Singapore. As of June 30, 2014, approximately $19.8 million of the total of $59.4 million of cash, cash equivalents and short term investments was held by our foreign subsidiaries. Currently, the foreign cash is not available to fund the U.S. operations. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans or cash requirements do not demonstrate a need to repatriate them to fund our U.S. operations.

Cash flows from operating activities: Net cash used in operating activities was $17,000 resulting from net loss of $5.7 million, adjusted for $5.9 million in non-cash charges and $249,000 net change in operating assets and liabilities.

The non-cash charges included depreciation and amortization, stock-based compensation, and tax benefits related to stock benefit plans and other non-cash adjustments. Net change in operating assets and liabilities included a decrease in accounts receivables, accrued compensation and other liabilities primarily associated with payments of year-end bonuses and commissions, payments of income and sales tax, payment of annual 401(k) Plan match for fiscal 2013, and payments of accrued audit and legal fees. Days sales outstanding ("DSO") which is calculated based on revenue for the most recent quarter and accounts receivable as of the balance sheet date remained relatively flat due to decreases in our revenue and accounts receivable balance. DSO decreased by 13 days from 69 days at June 30, 2013 to 56 days at June 30, 2014. This decrease in the DSO is primarily attributed to lower accounts receivable balance which resulted from strong collections and decreased billings at the end of second quarter 2014. Our cash flows were also negatively impacted by the decrease in deferred revenue balance during the first half of 2014. We continue to closely monitor the credit quality and payment history of our existing and new customers to better identify and minimize, in advance, the risk of our customers' potential inability to make required payments.

Our primary source of operating cash flows is the collection of accounts receivable from our customers, including maintenance which is typically billed annually in advance. Our overall maintenance revenues comprised 66% of our total revenues in the first six months of fiscal 2014 and we believe that future proceeds from maintenance renewals will be one of our primary sources of operating cash flows. Our operating cash flows are also impacted by the timing of payments to our vendors for accounts payable and other liabilities. We generally pay our vendors and service providers in accordance with the invoice terms and conditions. The timing of cash payments in future periods will be impacted by the terms of accounts payable arrangements.

Cash flows from investing activities: The changes in cash flows from investing activities primarily relate to the timing of purchases, maturities and sales of our investments in marketable securities. We also use cash to invest in capital and other assets to support our growth. Cash provided by investing activities for the six months ended June 30, 2014 was approximately $4.3 million compared with cash used of $4.3 million for the same period in fiscal 2013. The increase in cash provided in the first six months of this year was mainly due to the timing of purchases and maturities of marketable securities, partially offset by cash used in the acquisition of legodo ag, which totaled $3.9 million, net of acquired cash.

Cash flows from financing activities: Cash used in financing activities was $16.1 million for the six months ended June 30, 2014 compared to $5.4 million used during the same period in fiscal 2013. This increase in cash outflows was driven by debt related payments totaling approximately $4.8 million during the first quarter of 2014. Approximately $4.3 million of the total debt payment was made in the first quarter of 2014 related to the legodo acquisition. The legodo debt was assumed by Actuate at the time of acquisition and was paid in full immediately following the completion of the acquisition. We also repaid one of the two loans which we inherited from our acquisition of Quiterian totaling approximately $0.5 million. The loans were previously executed to finance the development of the Quiterian software. Payments related to share buybacks increased by approximately $3 million as a result of additional buybacks in the second quarter of 2014, partially offset by lower proceeds from exercise of employee stock options and associated tax benefits during the first six months of 2014 compared with the first six months of 2013.

34-------------------------------------------------------------------------------- Table of Contents We believe that our current cash balances, funds available under our credit facility, and cash generated from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. Thereafter, if cash generated from operations is insufficient to satisfy our liquidity requirements, we may find it necessary to sell additional equity, or obtain additional credit facilities. The sale of additional equity could result in additional dilution to our current stockholders. A portion of our cash may be used to acquire or invest in complementary businesses or complementary products or to obtain the right to use complementary technologies.

Contractual Obligations and Commercial Commitments General The Company is engaged in certain legal actions arising in the ordinary course of business. Although there can be no assurance as to the outcome of such litigation, the Company believes it has adequate legal defenses and it believes that neither the ultimate outcome of any of these actions nor ongoing litigation costs will not have a material effect on the Company's consolidated financial position or results of operations.

Revolving credit line During the second quarter of 2013, following a comparative evaluation of its credit facility, the Company decided to change to another vendor to service its borrowing needs. As a result, the Company terminated its existing credit agreement with Wells Fargo Capital Finance ("WFCF") and on June 30, 2013 entered into a new revolving credit agreement with U.S. Bank National Association ("US Bank") through and until June 29, 2017. The Company intends to use the proceeds from the Credit Agreement for working capital, acquisitions, issuance of commercial and standby letters of credit, stock repurchases, capital expenditures and other general corporate purposes.

The new Credit Agreement with US Bank allows for cash borrowings and the issuance of letters of credit under a secured revolving credit facility up to a maximum of $50 million. Interest accrues based on, at the Company's election, (i) LIBOR plus an applicable spread based on the Company's consolidated total cash flow leverage ratio or (ii) the greater of: (a) the Federal Funds Effective Rate plus one half of one percent, (b) one month LIBOR plus one percent, and (c) U.S. Bank's prime rate, in each case plus an applicable spread based on the Company's consolidated total cash flow leverage ratio. The Company is required to make interest payments on a monthly basis.

Following the termination of its agreement with WFCF, the Company wrote-off all remaining unamortized costs related to the old credit facility totaling approximately $188,000 in the second quarter of 2013. Costs related to the new credit facility with US Bank were not significant.

As of June 30, 2014, there was no balance owed on the credit facility and the balance available under the revolving credit facility was $50 million.

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In thousands): Amortization of debt issuance costs $ 5 $ 20 $ 10 $ 40 Unused line fees - 37 - 75 $ 5 $ 57 $ 10 $ 115 The Credit Agreement with US Bank contains covenants, which, among other things, impose certain limitations with respect to lines of business, mergers, investments and acquisitions, additional indebtedness, distributions, guarantees, liens and encumbrances. The Company is also required to maintain the two financial covenants listed below: • Consolidated total cash flow leverage ratio not to exceed 2.50 to 1.00, and • A fixed charge coverage ratio of not less than 1.75 to 1.00.

The indebtedness under the Credit Agreement is secured by (i) substantially all of the personal property (whether tangible or intangible) of Actuate Corporation and Actuate International Holding Company (as guarantor) as well as the proceeds generated by that property and (ii) by a pledge of all of its stock and a portion of the stock of certain of its subsidiaries.

35-------------------------------------------------------------------------------- Table of Contents Notes payable Associated with the acquisition of Quiterian on October 16, 2012, the Company inherited two loan agreements that were previously executed to finance the development of the Quiterian software. The loans were offered by the Spanish government subsidy programs and are restricted for use on development of the software. One of the loans is interest free and has a principal balance of approximately $0.5 million. This loan was repaid in March of 2014. The other loan is a variable rate loan with an average rate of approximately 5% and a principal balance of approximately $0.4 million. This loan is scheduled for repayment on a quarterly basis starting June 2014 and ending December 2016 and is classified as notes payable on the Company's Condensed Consolidated Balance Sheet at June 30, 2014.

Operating Lease Commitments On November 28, 2011, the Company entered into a ten year lease agreement with a third party for approximately 58,000 square feet of office space in the BayCenter Campus in San Mateo, California. This lease is operating in nature and commenced on June 1, 2012 and will end on May 31, 2022. In addition, the lease provides for four months of free rent (rent holiday) and approximately $2.6 million in landlord incentives to be applied towards construction of improvements. At June 30, 2014, the deferred rent liability balance related to the new lease totaled approximately $3.3 million and this balance declines through May 2022 when contractual cash payments exceed the straight-line lease expense. Of this total deferred rent liability balance, approximately $260,000 was classified as short term and $3.1 million was classified as other long term liabilities on the Company's Condensed Consolidated Balance Sheet at June 30, 2014. Actuate is using the BayCenter Campus as its corporate headquarters.

Upon the execution of the new lease, Actuate delivered to the new landlord two letters of credit totaling $225,300. These letters of credit guarantee Actuate's contractual obligations related to the BayCenter Campus in San Mateo, California.

In fiscal 2012, the Company entered into a new lease agreement for one of its sales locations in Europe. Upon the execution of the new lease, Actuate delivered to the new landlord a letter of credit for approximately $88,000 in order to guarantee its contractual obligations related to this lease.

Actuate leases smaller office facilities in various locations in the United States and abroad. All facilities are leased under operating leases. Total rent expense for the second quarter and first six months of fiscal 2014 was approximately $1.1 million and $2.2 million, respectively, compared with rent expense of approximately $1.1 million in second quarter and $2.2 million in the first six months of fiscal 2013. In addition, the Company incurred facility related charges of approximately $157,000 and $360,000 in the second quarter and the first six months of fiscal 2014, respectively. During the same period last year, the Company incurred approximately $144,000 and $313,000 of facilities related charges in the second quarter and the first six months of fiscal 2013, respectively.

The following table summarizes the Company's contractual obligations as of June 30, 2014 (in thousands): Less than 1 - 3 3 - 5 Total 1 year years years Thereafter Obligations: Operating leases (1) $ 29,492 $ 4,161 $ 7,292 $ 6,834 $ 11,205 Interest and loan obligations (2) 463 222 241 - - Obligations for uncertain tax positions (3) 2,386 - 2,386 - - Total $ 32,341 $ 4,383 $ 9,919 $ 6,834 $ 11,205 (1) The Company's future contractual obligations include minimum lease payments under operating leases at June 30, 2014.

(2) Estimated interest and principal due on the notes payable funded by the Spanish government for the development of Quiterian software.

(3) Represents the tax liability associated with unrecognized tax benefits estimated to be payable between 1 to 3 years. In addition, as of June 30, 2014, our unrecognized tax benefits included $2 million which is netted against deferred tax assets. At this time, we are unable to make a reasonably reliable estimate of the timing of payments related to the amounts netted against deferred tax assets, if any, in individual years due to uncertainties in the timing or outcomes of either actual or anticipated tax audits. As a result, these amounts are not included in the table above. See discussion on the authoritative guidance issued by the FASB on obligations for uncertain tax positions in Note 12 of our Notes to these Consolidated Financial Statements of our Form 10-K for fiscal year 2013 filed with the SEC on March 7, 2014.

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