10-K 1 a2201357z10-k.htm 10-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Form 10-K

ý Annual Report Pursuant To Section 13 or 15(d)
of The Securities Exchange Act of 1934

For the fiscal year ended September 30, 2010

OR

o Transition Report Pursuant To Section 13 or 15(d)
of The Securities Exchange Act of 1934



LOGO

ACTIVIDENTITY CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  45-0485038
(I.R.S. Employer Identification No.)

6623 Dumbarton Circle, Fremont, CA
(Address of principal executive offices)

 

94555
(Zip Code)

(510) 574-0100
(Registrant's telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange
Common Stock, $0.001 par value per share   NASDAQ Global Market
Preferred Stock Purchase Rights   NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None



          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes o    No o

          Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

          The aggregate market value of Registrant's common stock, $0.001 par value per share, held by non-affiliates of the Registrant on March 31, 2010, the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $135 million based upon the closing sales price of the common stock as reported on the NASDAQ Global Market on such date. Shares of the Registrant's common stock held by officers subject to section 16(b) filing requirements, directors and holders of five percent or more of the outstanding common stock have been excluded from this calculation because such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. As of November 11, 2010, the Registrant had outstanding 47,199,642 shares of common stock.

Documents Incorporated by Reference

          Certain information required by Part III of this Form 10-K, to the extent not set forth herein, is incorporated by reference from the issuer's definitive proxy statement to be filed in connection with its 2011 Annual Meeting of Stockholders.


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ACTIVIDENTITY CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED SEPTEMBER 30, 2010

 
   
  Page
    PART I      
ITEM 1.   BUSINESS     3
ITEM 1A.   RISK FACTORS     12
ITEM 1B.   UNRESOLVED STAFF COMMENTS     22
ITEM 2.   PROPERTIES     22
ITEM 3.   LEGAL PROCEEDINGS     22
ITEM 4.   REMOVED AND RESERVED     24
    PART II      
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     25
ITEM 6.   SELECTED FINANCIAL DATA     27
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     28
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     45
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     46
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     46
ITEM 9A.   CONTROLS AND PROCEDURES     46
ITEM 9B.   OTHER INFORMATION     49
    PART III      
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     49
ITEM 11.   EXECUTIVE COMPENSATION     49
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     49
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     49
ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES     49
    PART IV      
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     50
    SIGNATURES     53

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        The statements contained in this Annual Report on Form 10-K that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, intentions, strategies, expected operating results, and financial condition. Forward-looking statements also include statements regarding events, conditions and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. All forward-looking statements included in this document are based on information available to us on the date hereof, and we disclaim any intent to update any such forward-looking statements. Investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward- looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Risk Factors," and elsewhere in this Annual Report.


PART I

ITEM 1:    BUSINESS

Overview

        ActivIdentity™ Corporation (the "Company" or "ActivIdentity" and also referred to as "we" or "our") is a global leader in strong authentication and credential management, providing solutions to confidently establish a person's identity when interacting digitally. For more than two decades, the Company's experience has been leveraged by security minded organizations in large scale deployments such as the United States Department of Defense, Nissan, and Saudi Aramco. The Company's customers have issued more than 100 million credentials, securing the holder's digital identity. ActivIdentity solutions include a fully integrated platform that enables the organizations to issue, manage and use identity devices and credentials for secure access, secure communications and legally binding digital transactions. In general, ActivIdentity solutions deliver multiple benefits, including increased digital and physical security, protection against online fraud, enhanced business process efficiencies, secure access to digital assets and a pathway to regulatory compliance.

        ActivIdentity, formerly known as ActivCard Corp., was incorporated in the State of Delaware in August 2002 for the purpose of changing the domicile of the publicly listed company in the ActivIdentity group of companies, previously ActivCard S.A., from the Republic of France to the United States. ActivIdentity's Common Stock is publicly traded on The NASDAQ Global Market under the symbol "ACTI."

        ActivIdentity delivers solutions today in three primary markets: Enterprise, Government and Commerce.

        Enterprise Market Solutions:    As a leader in establishing trusted online identities, ActivIdentity's Identity Assurance enterprise access solution (a) gives users universal access with one card or credential; (b) authenticates to a PC, network, application, facility door or copier; (c) digitally signs emails or encrypts data and (d) leverages the same strong credential to access logical and physical systems. The ActivIdentity Strong Authentication enterprise solution for remote access provides security and compliance assurance in an open, standards-based solution. ActivIdentity's solutions make it easy to deploy and support the broadest range of authentication methods such as hardware tokens and software tokens deployed on a variety of devices, including smartphones.

        Government Market Solutions:    ActivIdentity works with over 200 government agencies in the U.S., Europe, Asia, Australia, and beyond to develop and deploy the most trusted identity assurance solutions in the world. These solutions provide governments the ability to trust the identity of the users accessing their agency resources. For example, Personal Identity Verification ("PIV") compliant

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credentials, created and managed by ActivIdentity technology, support secure access to multiple physical and logical assets across agencies and for non-government employees accessing government resources.

        Commerce Market Solutions:    ActivIdentity has substantial experience helping regional and global banks around the world in offering their customers secure and convenient online banking. ActivIdentity provides a solution that is easy to deploy and supports the broadest range of authentication methods, including one-time password tokens, mobile authentication, EMV cards and certificate-based authentication, as well as strong passwords and DeviceID. Our 4TRESS Authentication Server, available as an appliance or as a local installation, is complemented by a proven portfolio of one-time password tokens, smartcards and USB keys, enabling us to offer our customers a complete solution based on open standards that is scalable, secure and simple to implement.

        On December 14, 2009, the Company completed the acquisition of CoreStreet. CoreStreet is a provider of public key infrastructure ("PKI") certification technology, distributed identity credential validation systems, and physical access control products. Their products are used primarily by federal and state agencies in the United States.

        We operate on a fiscal year ending September 30. For convenience in this Annual Report, we refer to the fiscal year ended September 30, 2008 as fiscal 2008, the fiscal year ended September 30, 2009 as fiscal 2009 and the fiscal year ended September 30, 2010 as fiscal 2010.

Recent Developments

        On October 11, 2010, the Company, ASSA ABLOY Inc. ("ASSA ABLOY") and FitAcquisition, Inc., a wholly owned subsidiary of ASSA ABLOY ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company. As a result of the merger, Merger Sub will cease to exist, and the Company will survive as a wholly owned subsidiary of ASSA ABLOY. ASSA ABLOY has indicated its intent after the merger to make the Company part of ASSA ABLOY's HID Global business.

        Upon consummation of the merger, each share of Company Common Stock issued and outstanding immediately prior to the merger (other than (i) shares owned by ASSA ABLOY or Merger Sub, or by any direct or indirect wholly owned subsidiary of ASSA ABLOY or Merger Sub and (ii) shares to which appraisal rights are properly sought) and each share of Company common stock subject to restricted stock unit awards, whether vested or unvested, will be converted into the right to receive $3.25 in cash, without interest. Options to acquire shares of Company common stock outstanding immediately prior to the consummation of the merger, whether vested or unvested, will be converted into the right to receive an amount in cash, without interest, equal to the product of (A) the excess, if any, of $3.25 over the exercise price per share attributable to such option and (B) the total number of shares of Company common stock issuable upon exercise in full of such option.

        The completion of the merger is subject to customary conditions, including without limitation, (i) the approval of the merger by the Company's stockholders, (ii) the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which on November 2, 2010, ActivIdentity was notified that early termination of the applicable waiting periods has been granted, and (iii) receipt of other required foreign antitrust approvals. In addition, ASSA ABLOY's obligation to consummate the merger is subject to the Company having at least $68 million in "Company Available Net Cash" (as defined in the Merger Agreement). The Company distributed a definitive proxy statement related to approval of the Merger Agreement and related matters on November 12, 2010 and has scheduled a Special Meeting of Stockholders to be held December 16, 2010. Pending receipt of stockholder approval, we expect the merger to be completed promptly thereafter.

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        Beginning on October 12, 2010, several putative class action lawsuits were filed purportedly on behalf of ActivIdentity's stockholders in the Superior Court of Alameda County, California, the Delaware Chancery Court, the United States District Court for Northern California and the United States District Court in Delaware. The complaints name ActivIdentity and each member of the ActivIdentity Board as defendants. The lawsuits allege a variety of claims, including that our board members breached fiduciary duties owed to ActivIdentity stockholders by failing to engage in a fair process and failing to maximize stockholder value in approving the Merger. Several of the complaints also allege that ActivIdentity aided and abetted the members of the ActivIdentity Board in the alleged breach of their fiduciary duties. The Plaintiffs seek relief that includes, among other things, an injunction prohibiting the consummation of the Merger, rescission—to the extent the Merger terms have already been implemented, and the payment of plaintiffs' attorneys' fees and costs. On December 9, 2010, ActivIdentity and the defendants in a number of the actions entered into a memorandum of understanding which provides for the settlement and dismissal with prejudice of such actions, subject to customary conditions, including completion of appropriate settlement documentation, consummation of the merger and all necessary court approvals.

Market Trends

        There are a variety of market trends that stimulate demand for strong authentication and credential management solutions:

Compliance

        Compliance can be seen as a new driver for deployment of strong authentication as it enables a pathway to tamper-proof auditing trails to track who did what and when. Regulatory requirements and economic realities are pressuring organizations to secure access to applications and networks. Many industry standards and government regulations now deem static passwords as inadequate and establish guidance that multi-factor authentication should replace single factor authentication. The Sarbanes-Oxley Act ("SOX"), recommendations from the Federal Financial Institutions Examination Council, and the Health Insurance Portability and Accountability Act have led organizations to use stronger forms of authentication to mitigate fraud and protect customer information and patient privacy.

Internal Threat Risk

        While static passwords continue to dominate as the primary mechanism for identity verification, they create numerous issues for users and organizations alike. Static passwords are often created by users to be easily remembered, making them vulnerable to guessing, social engineering, and brute force dictionary attacks. Even static passwords created under a stringent policy are vulnerable because users write them down and display them in open areas. A key security concern with static passwords is the fact that a compromise (via keystroke logger or network sniffer) often goes undetected, introducing unknown risks to the organization. Since the economic downturn, the internal risk for many organizations has increased dramatically:

    According to the 2010 Verizon Data Breach Investigation Report, stolen credentials were the most common way of gaining unauthorized access into organizations in 2009. 38% of network breaches involved stolen passwords and 86% of the records compromised were from attacks involving stolen credentials.

    According to the PriceWaterhouseCoopers 2011 Global State of Information Security Survey, the business impacts from security breaches, from financial loss to compromises to brands and reputations, have increased as much as 233% over the last four years.

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New Supply Chain Paradigm

        The collaboration between companies, other organizations and government agencies is driving requirements to share data across networks and provide access to applications and data behind the firewall. To mitigate risk, many large organizations and government agencies are replacing traditional user names and passwords with digital certificates that enable strong authentication, encryption, and electronic signatures. However, to fully trust the access control and identity assurance services that digital certificates enable, organizations must securely store these digital identities / certificates on authentication devices such as smart cards or smart USB tokens.

Initiatives to Drive Customer Confidence and Loyalty

        As a result of the most recent financial crisis, strong authentication is being leveraged as a tool to enhance customer loyalty, especially in the banking and financial services industry.

Product Lines and Services

        ActivIdentity provides key building blocks for securing IT infrastructures and digital transactions to defend against security threats and identity fraud and at the same time increase an organization's resource utilization, improve productivity, and maximize return on investment.

        ActivIdentity offers five product lines that are the foundation for its solutions:

Strong Authentication

        ActivIdentity Strong Authentication suite of products enables organizations to securely address a variety of end-user access control scenarios, ranging from remote access via virtual private networks ("VPN") and secure access to Web-based applications, to secure access to data and applications on a local network.

        ActivIdentity offers two distinct Strong Authentication platforms for organizations that are seeking to implement a cost-effective, flexible, and scalable solution. ActivIdentity 4TRESS™ AAA Server for Remote Access addresses the security risks associated with a mobile workforce accessing systems and data remotely. ActivIdentity 4TRESS™ Authentication Server offers support for many authentication methods (e.g., user name and password, knowledge based authentication, one-time password ("OTP"), and PKI certificates) and diverse audiences across a variety of service channels, making it the preferred versatile authentication platform for customer facing transactions and enterprise authentication needs.

Credential Management

        ActivIdentity Credential Management products enable organizations to securely deploy and manage smart cards and USB tokens containing a variety of credentials, including PKI certificates, OTPs, static passwords, biometrics, demographic data, and virtually any other application.

        The ActivIdentity ActivID™ Card Management System is a highly scalable, reliable, proven, and extensible solution that enables organizations to securely issue and manage the complete life cycle of digital credentials on devices, as well as securely update applications and credentials on devices after they have been issued to end users.

        Together with its Security Client software, Strong Authentication platform, and Authentication Device offering, ActivIdentity can provide organizations with a complete "Smart Employee ID Solution" that can be leveraged for both physical and logical access control.

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Security Clients

        ActivIdentity Security Clients software integrates and works seamlessly with ActivIdentity Strong Authentication and Credential Management offerings to deliver a comprehensive solution for security and network access.

        The ActivIdentity ActivClient™ secures desktops and networks with strong authentication based on smart cards and PKI. ActivIdentity ActivClient™ supports the U.S. government's most stringent security requirements and standards. Organizations have issued millions of cards to secure network access, encrypt data, sign emails, and log in to Web applications.

        ActivIdentity SecureLogin™ Single Sign-On software provides a simple and secure approach, enabling consistent password management and allowing organizations to provide a single secure sign-on for both local and remote users.

        The ActivIdentity™ Authentication Client provides end users with self services to temporarily enable access to workstations and reset Windows passwords. In addition, it allows management with auditing, diagnostic, and policy configuration support and enables smart card password authentication.

Authentication Devices

        Organizations' strong authentication needs vary widely based on transaction risks, deployment scenarios, and user communities. ActivIdentity offers a broad range of authentication devices that interoperate with its Strong Authentication and Credential Management products. These devices include the ActivIdentity line of OTP Tokens and other third party devices such as Smart Cards, Smart Card Readers, Smart USB Tokens, Display Card Tokens, Soft Tokens and Hardware Security Modules.

Physical Access Products

        The Company provides technology for the convergence of information technology ("IT") and physical security. The Company provides developer kits to physical access control system ("PACS") vendors to enable their products with Federal Information Processing Standards 201 ("FIPS-201") functionality using the F5 Solution and low cost access control with Card-Connected™ technology. This enables PACS manufacturers and their integrators to enable their products to meet government requirements for FIPS-201 compliance. The Card-Connected Technology uses strong cryptography to extend central access control to standalone doors and mobile locks at a fraction of the cost.

Services

        ActivIdentity offers training, implementation, onsite support and ongoing architecture assessment services to guide and support organizations. Professional services are offered to ensure that the deployments of ActivIdentity solutions meet an organization's security, compliance, and vulnerability management needs. Training programs help an organization learn quickly how to configure, administer, and optimize ActivIdentity strong authentication and credential management solutions in its network environment.

Customers

        Our customers include primarily large scale organizations in the technology, government, manufacturing, banking and financial services industries.

        For fiscal 2010, 2009 and 2008, we had one customer that accounted for more than 10% of our total revenue.

        At September 30, 2010, we had one customer's receivable balance that accounted for an aggregate of 12% of total accounts receivable. At September 30, 2009, our two largest customers' receivable

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balances accounted for an aggregate of 30% of total accounts receivable. We extend credit to these customers, and management believes that the receivable balances from these large customers are collectible based on our assessment of their creditworthiness, account aging and past collection experience. However, these customers represent a significant exposure if one or more of them were unable to pay.

Sales, Services, and Marketing

        Our sales and marketing efforts are aimed at building long-term relationships with our customers. We market and sell our products and technologies through our worldwide direct sales force and through a network of partners including SIs, Original Equipment Manufacturers ("OEMs"), Value Added Distributors ("VADs"), and Value Added Resellers ("VARs"). Our direct sales force focuses on the top 2,000 companies worldwide and government agencies, working in concert with our channel sales and business development teams supporting initiatives with our SI, OEM, VAD and VAR partners.

        In addition to sales and service offices in the United States, we conduct sales, marketing, and services out of wholly owned subsidiaries or branches in other countries, including the United Kingdom, France, Germany, Singapore, and Australia. International revenue accounted for approximately 46%, 53%, and 58% of our total revenue in fiscal 2010, 2009, and 2008, respectively. We maintain an export compliance program that is designed to meet the requirements of U.S. export laws and regulations.

        ActivIdentity provides technical support from offices located in the U.S., France, and the United Kingdom. These offices provide third level technical support to end users, integrators, and distribution partners, who, in turn, provide first level and second level support to their end users and customers. We offer certification training programs and have established a worldwide "ActivIdentity Channel Partner Program." The third level support we provide includes email, telephone, and online support services to answer inquiries related to implementation, integration, and operation of our products and technologies. Our standard practice is to provide a one-year warranty on hardware and ninety days on software products.

        We have organized our marketing efforts into three functional groups to support our business strategies as follows:

Solutions Marketing

        The solutions markets team is responsible for synthesizing data from key customers, partners, and industry analysts to assist us in defining next generation solutions/products. Furthermore, the solutions markets team develops all sales and market messaging, positioning, collateral, and selling tools to enable our sales force and channel partners to capitalize on market opportunities and effectively position and sell our products.

Channel Marketing

        Our channel marketing organization defines and implements integrated marketing programs to increase brand and product awareness, as well as capture mindshare and enthusiasm for ActivIdentity solutions with our channel partner sales forces.

Corporate Marketing

        Corporate marketing efforts include public relations, Internet, telemarketing, trade shows, online advertising, email campaigns, channel promotions, associations marketing, and seminars. Our marketing programs target global 2000 companies and government decision makers, information technology managers and service providers using a high value approach addressing business problem solving and return on investment.

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Competition

        We compete in the strong authentication, credential management, security clients and authentication devices markets. We compete with numerous companies in each of these technology categories. The overall number of our competitors may increase and the identity and composition of competitors may change over time.

        The worldwide market for identity management is highly competitive. In each of our product categories, we face competition from established and potential competitors, some of which may have greater financial, research, engineering, manufacturing and marketing resources than we have, such as RSA Security (the Security Division of EMC), VeriSign, SafeNet, IBM, Passlogix, Thales Group, Intercede Group, and Vasco Data Security International. We may also face future competition from new market entrants from other overseas and domestic sources. We expect our competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics. We believe that to remain competitive, we will require significant financial resources to offer a broad range of products, to maintain customer service and support centers worldwide, and to invest in product and process research and development.

        We believe that we compete favorably with respect to the principal factors affecting competition in our product segments, which include system performance, ease of use, reliability, installed base, technical service and support, product functionality, scalability, flexibility, use of open standards, return on investment, and total cost of ownership. We believe that, while price and delivery are important competitive factors, the customers' overriding requirement is for systems that are easily and effectively incorporated into their existing ecosystem and enhance productivity.

Industry Associations

        As a leading innovator in strong authentication and credential management, ActivIdentity is dedicated to driving industry standards. ActivIdentity belongs to a range of trade groups, industry associations and standards organizations to advance interoperability, ensure the highest technical standards, and promote innovative strong authentication and credential management technologies now and in the future.

        As of September 30, 2010, ActivIdentity participated in the following industry associations:

    GlobalPlatform (GP)

    The Smart Card Alliance

    Initiative for Open AuTHentication (OATH)

    Kantara Initiative

    American National Standards Institute (ANSI)

    Transglobal Secure Collaboration Program (TSCP)

    Intellect

Intellectual Property

        Our success is heavily dependent on our ability to create proprietary technology and to protect and enforce our intellectual property rights, as well as our ability to defend against adverse claims of third parties with respect to our technology and intellectual property.

        We rely primarily on a combination of copyrights, trademarks, service marks, trade secrets, patents, restrictions on disclosure, and other methods to protect our intellectual property. We also enter into

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confidentiality and/or invention assignment agreements with our employees, consultants, and current and potential affiliates, customers, and business partners. We also generally control access to and distribution of our software, documentation and other confidential and proprietary information.

        As of September 30, 2010, we had 120 patents issued and applications for 110 pending in the U.S. and abroad, covering a wide range of our technology. From time to time, we acquire license rights under U.S. and foreign patents and other proprietary rights of third parties.

        Patents may not be awarded with respect to these applications and even if such patents are awarded, such patents may not provide us with sufficient protection of our intellectual property.

Research and Development

        We have research and development teams in Fremont, California (United States) and Suresnes (France) that are responsible for the design, development, and release of our products. The research and development function is organized into product management, product architecture, development, quality assurance, and documentation disciplines. When appropriate, we also integrate into our products third party technology that we purchase or license to shorten our time-to-market.

        The focus of our research and development efforts is to bring to market enhanced versions of our existing products, as well as new products, in order to address customer needs while maintaining compliance with government and industry standards. Our research and development expenses were $15.9 million, $15.1 million, and $18.9 million in fiscal 2010, 2009, and 2008, respectively.

Operations

        We have established relationships with hardware manufacturers and assemblers and software reproducers. Additionally, we have outsourcing arrangements for product warehousing and fulfillment services. Our global production and distribution capacity supports our current requirements and can readily be increased by augmenting existing production lines with current suppliers. We maintain ownership of all manufacturing tools, molds and software, supply all critical components, and define all manufacturing processes and quality control processes, thereby granting us the ability to relocate the manufacturing process or sub-license the manufacturing rights to a third party supplier should any unforeseen interruption occur.

        Our hardware products are manufactured by third party vendors based in China and Singapore. Our hardware products are shipped directly to our distribution partners and customers or to company warehouses in Fremont, California (United States), Hong Kong, Singapore, and Suresnes (France) for subsequent distribution. Software products are produced and packaged in Fremont, California (United States) and Suresnes (France).

Segment Information

        We operate in one reportable segment in which we provide management of identity solutions, and accordingly disclose segment information by geographic area only. Information regarding our revenue and property and equipment in the United States and in countries outside the United States is contained in Note—18 Segment Information to our consolidated financial statements included in this report and is incorporated in this section by this reference.

Backlog

        Our backlog for products at any point in time is not significant because products are generally delivered upon receipt of order. We do not believe that our backlog at any particular point in time is indicative of future sales levels. The timing and volume of customer orders are difficult to forecast because our customers typically require prompt delivery of products and a majority of our sales are

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booked and delivered in the same quarter. In addition, sales are generally made pursuant to standard purchase orders that can be rescheduled, reduced or canceled prior to delivery with little or no penalty.

Employees

        As of September 30, 2010 we employed approximately 218 people on a full-time basis, 111 in the United States and 107 elsewhere. Of the total, 15 were in operations and customer support, 96 were in research and development, 70 were in sales and marketing, and 37 were in general and administration.

        Our success is highly dependent on our ability to attract and retain qualified employees. None of our employees are subject to collective bargaining agreements.

Executive Officers

        Our executive officers as of September 30, 2010 and their ages and titles as of that date were as follows:

Name
  Age  
Position
Grant Evans     52   Chief Executive Officer and Chairman
Jacques Kerrest     63   Chief Financial Officer and Chief Operating Officer
John Boyer     34   Senior Vice President, Worldwide Engineering

        Grant Evans has served as our Chief Executive Officer since April 2008 and was elected to the Board in March 2008. Mr. Evans served from January 2003 to March 2007 as the Chief Executive Officer and as a Director of A4Vision, Inc., a developer and manufacturer of machine vision technology for identity security. Prior to this, he served from March 1999 to March 2002 as the Executive Vice President at Identix, a publicly traded developer and manufacturer of identification technology solutions. Mr. Evans was also previously Vice President and General Manager of Identicator Technology and was responsible for leading that company's strategic direction and launching the commercial biometric market. Mr. Evans has served as a member of the board of directors of Bioscrypt and 3VR, a security access and video surveillance control company.

        Jacques Kerrest joined the Company in August 2008 as our Chief Financial Officer and Chief Operating Officer. Prior to joining the Company, from September 2004 until March 2008, Mr. Kerrest served as the Chief Financial Officer of Virgin Media, Inc., a communications company. From June 2003 to August 2004, Mr. Kerrest was the Managing Director and Chief Financial Officer of Equant, N.V., a global enterprise communications infrastructure company. From August 1997 to May 2003, Mr. Kerrest was the Senior Vice President and Chief Financial Officer of Harte-Hanks, Inc., a worldwide direct and targeted marketing company. From August 1995 to July 1997, Mr. Kerrest served as the Chief Financial Officer of Chancellor Broadcasting Company, a radio broadcasting company. From 1993 to July 1995, Mr. Kerrest was the Chief Financial Officer of Positive Communications, Inc., a private telecommunications company. Mr. Kerrest is a member of the board of directors of CKX, Inc., a company engaged in entertainment content management.

        John Boyer joined the Company in October 2001 and has served as our Senior Vice President, Worldwide Engineering since November 2008. Mr. Boyer served from October 2004 to October 2008 as our Director of Architecture and Chief Architect, from January 2003 to September 2004 as our Manager of Product Architecture, and from November 2001 to December 2002 in various engineering management positions. From March 1999 to October 2001, Mr. Boyer held various engineering roles at American Biometric Company, Ltd., a subsidiary of DEW Engineering and Development, Ltd.

Available Information

        Additional information about ActivIdentity is available on our website at www.actividentity.com. We make available free of charge on our website our Annual Report on Form 10-K, our Quarterly

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Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file them with or furnish them to the Securities and Exchange Commission ("SEC"). Information contained on our website is not part of this Annual Report on Form 10-K or our other filings with the SEC. Additionally, these filings may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549, by mailing a request to the United States Securities and Exchange Commission, Office of Investor Education and Advocacy, 100 F Street, NE, Washington, DC 20549-0213, by sending an electronic message to the SEC at publicinfo@sec.gov or by sending a fax to the SEC at 1-202-772-9295. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.

ITEM 1A.    RISK FACTORS

Risk Factors That May Affect Results of Operations and Financial Condition

        Set forth below are certain risks and uncertainties that could affect our business, financial condition, operating results, and/or stock price. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem less significant also may impair our business operations.


Risks Relating to the Pending Merger

         Our business and stock price may be materially and adversely affected if the merger with ASSA ABLOY is not completed.

        On October 11, 2010, we entered into a merger an agreement of merger with ASSA ABLOY and Merger Sub, which provides for the merger of Merger Sub with and into ActivIdentity, with pursuant to which ActivIdentity surviving would survive the merger as a wholly owned subsidiary of ASSA ABLOY. The announcement of the planned merger could have an adverse effect on our revenues in the near term if customers delay, defer, or cancel purchases in response to the announcement. To the extent that the announcement of the merger creates uncertainty among our current or potential customers contemplating purchases of our products or services such that several large customers, or a significant group of small customers, delay purchase decisions pending completion of the planned merger, our results of operations could be materially adversely affected, our quarterly revenues could be substantially below the expectations of market analysts and the market price for our shares of common stock could decline. Furthermore, activities relating to the proposed merger and related uncertainties could cause employees to seek alternative employment and weaken our ability to recruit qualified personnel which could detract from our ability to generate revenue and control costs.

        In addition, completion of the pending merger is subject to certain conditions, including approval by the holders of our common stock of ActivIdentity stockholders. We cannot be certain that these conditions will be met or waived, that the necessary stockholder approval will be obtained or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all. If the merger is not completed, we could be subject to a number of risks that may materially and adversely affect our business and stock price, including:

    the diversion of our management's attention from our day to day business and the unavoidable disruption to our employees and our relationships with customers which, in turn, may detract from our ability to grow revenues and minimize costs and lead to a loss of market position that we might be unable to regain;

    the market price of our shares of common stock may decline to the extent the current market price of those shares reflects a market assumption that the merger will be completed;

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    under certain circumstances we could be required to pay ASSA ABLOY a termination fee of approximately $5.0 million;

    we may experience a negative reaction to any termination of the merger from our customers, employees or affiliates which may adversely impact our future results of operations as a stand-alone entity; and

    the amount of the costs, fees and expenses and charges related to the merger.

         Restrictions on the conduct of our business prior to the completion of the pending merger with ASSA ABLOY may have a negative impact on our operating results.

        We have agreed to certain restrictions on the conduct of our business in connection with the proposed merger with ASSA ABLOY that require us to conduct our business in the ordinary course consistent with past practices, subject to specific limitations. These restrictions may delay or prevent us from undertaking business opportunities that may arise pending completion of the merger.


Risks Relating to Our Business

         We have a history of losses and we may experience losses in the foreseeable future.

        We have not achieved profitability and we may incur losses for the foreseeable future. In fiscal 2010, 2009 and 2008, we incurred losses of approximately $5.7 million, $5.5 million, and $76.5 million, respectively. As of September 30, 2010, our accumulated deficit was $334.3 million, which represents our net losses since inception. Although we had approximately $78.2 million in cash and cash equivalents, and investments as of September 30, 2010, we may not be able to raise additional capital in the event that our current cash and cash equivalents are insufficient.

        We will need to achieve incremental revenue growth and manage our costs to achieve profitability. Even if we do achieve profitability, we may be unable to sustain profitability on a quarterly or annual basis thereafter. It is possible that our revenue will grow at a slower rate than we anticipate or that operating expenses will increase beyond our current run rate. The current global economic slowdown could slow customer orders, as well as anticipated revenue growth, and could further delay our prospects for operating profitability.

         Our cost-reduction initiatives may not result in the anticipated savings or more efficient operations and may harm our long-term viability.

        Over the past several years, we have implemented extensive cost cutting measures and have incurred significant cost-reduction charges as we have attempted to streamline operations, improve efficiency, and reduce costs. We expect that we may undertake further cost-reduction initiatives in the future as we realign our business around areas of strategic focus. Although we believe that it has been and will continue to be necessary to reduce the size and cost of our operations to improve our performance, the reduction in our operations may make it more difficult to develop and market new products and to compete successfully with other companies in our industry. In addition, many of the employees who have been terminated as part of our cost-reduction activities possessed specific knowledge or expertise that may prove to have been important to our operations, and we may be required to rehire them or to hire persons with similar skills in order to develop new products to increase our revenue. These efforts may not result in anticipated cost savings, making it difficult for us to achieve profitability. These cost-reduction initiatives may also preclude us from making complementary acquisitions and/or other potentially significant expenditures that could improve our product offerings, competitiveness or long-term prospects.

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         Our operating results may continue to be adversely affected by the current economic environment, unfavorable market and economic conditions.

        The current global economic environment may continue to have a negative impact on demand for our services, our business and our foreign operations. The economic environment has or may negatively impact, among other things:

    Current and future demand for our products;

    Our customers' continued growth and development of their businesses and our customers' abilities to continue as going concerns;

    The ability of our customers to maintain their business;

    Price competition for our products and services;

    The price of our common stock; or

    Our liquidity.

        In addition, to the extent that the economic environment impacts specific industry and geographic sectors in which many of our customers are concentrated, that may further negatively impact our business. If the economic and market conditions in the U.S. and globally do not improve, or if they further deteriorate, we may experience material adverse impacts on our business, operating results and financial position as a consequence of the above factors or otherwise.

         We derive revenue from only a limited number of products and we do not have a diversified product base.

        Substantially all of our revenue is derived from the sale of our credential management and strong authentication systems and products. We anticipate that substantially all of our future revenue, if any, will also be derived from these products. If for any reason our sale of these products is impeded or if we divest existing product lines as part of our ongoing strategic realignment, and we have not diversified our product offerings, our business and results of operations could be harmed. We have reduced our product offerings as part of our prior restructuring initiatives to focus on our core products and do not expect to diversify our product offerings in the foreseeable future.

         Our customer base is highly concentrated and the loss of any one of these customers or delay in anticipated orders could adversely affect our business.

        Our customers consist primarily of medium to large enterprises, governments, system integrators, resellers, distributors, and OEMs. Historically, we have experienced a concentration of revenue in certain of our channel partners and customers. In fiscal 2010, 2009 and 2008, one customer accounted for more than 10% of our total revenue. Additionally, a substantial portion of our total product revenue is generated from the governmental sector. In fiscal 2010, 2009, and 2008, worldwide government business accounted for approximately 10%, 19%, and 20%, respectively, of total product revenue. Although government spending is currently higher in light of various economic recovery initiatives, diversion of government resources to economic recovery programs and reductions in state and local government spending may harm our business. We expect future revenue variability in this sector due to fluctuations in government ordering patterns and frequent delays associated with larger programs.

        Our operating results would be adversely affected if any of the following events occur:

    The loss of significant customers;

    The failure of our significant customers to pay us due to their financial difficulties or for any other reason;

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    The failure of any of our significant channel partners to renew their contracts upon expiration, or the termination by these partners of their contracts;

    The divestiture of products or product lines, which would cause the loss of related revenue; or

    Delays in orders from governmental agencies.

        We expect to continue to depend upon a small number of large customers for a substantial portion of our revenue, and the occurrence of any of the above events could further extend our reliance on remaining customers.

         Our quarterly gross and net margins are difficult to predict, and if we miss quarterly financial expectations, our stock price could decline.

        Our quarterly revenue, expense levels, and operating results are difficult to predict and fluctuate from quarter to quarter. It is likely that our operating results in some periods will vary from the guidance we have provided, or otherwise not meet investor expectations. If this happens, the market price of our common stock is likely to decline. Fluctuations in our future quarterly operating results may be caused by many factors, including:

    The size and timing of customer orders which are received unevenly and unpredictably throughout a fiscal year and may be subject to seasonality relating to the United States federal government's fiscal year and related spending patterns;

    The mix of products licensed and types of license agreements;

    The effect of generally accepted accounting principles on the timing of revenue recognition; for example, if prices for our products or services vary significantly, we may not maintain vendor specific objective evidence of fair value of undelivered elements which could result in deferring revenue to future periods;

    The timing of customer payments;

    The size and timing of revenue recognized in advance of actual customer billings and customers with installment payment schedules that may result in higher accounts receivable balances;

    Changes in financial markets, which could adversely affect the value of our assets and our liquidity;

    The relative mix of our software and services revenue, as well as the relative mix of product offerings, which could change in connection with strategic realignment initiatives;

    The application of new accounting regulations, which could negatively impact results; and

    Changes in currency exchange rates.

         We have a long and often complicated sales cycle, which can result in significant revenue fluctuations between periods.

        The sales cycle for our products is typically long and subject to a number of significant risks over which we have little control. The typical sales cycle is six to nine months for an enterprise customer and over twelve months for a network service provider or government. As our operating expenses are based on anticipated revenue levels, a small fluctuation in the timing of sales can cause our operating results to vary significantly between periods. If revenue falls significantly below anticipated levels, our business would be negatively impacted.

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        Purchasing decisions for our products and systems may be subject to delay due to many factors that are outside of our control, such as:

    Political and economic uncertainties;

    Time required for a prospective customer to recognize the need for our products;

    Time and complexity for us to assess and determine a prospective customer's IT environment;

    Customer's requirements for customized features and functionalities;

    Turnover of key personnel at existing and prospective customers;

    Customer's internal budgeting process; and

    Customer's internal procedures for the approval of large purchases.

        Furthermore, the implementation process can be subject to delays resulting from issues associated with incorporating new technologies into existing networks, deployment of a new network system or preservation of existing network infrastructure and data migration to the new system. Full deployment of our technology and products for such networks, servers, or other host systems can be scheduled to occur over an extended period and the licensing of systems and products, including client and server software, smart cards, readers, and tokens, and the recognition of maintenance revenue, would also occur over this period. This can negatively impact the results of our operations in the near term, resulting in unanticipated fluctuations between periods.

         The market for some of our products is still developing and if the industry adopts standards or platforms different from our platform, then our competitive position would be negatively affected.

        The market for digital identity products is still emerging and is also experiencing consolidation. The evolution of the market is in a constant state of flux that may result in the development of different network computing platforms and industry standards that are not compatible with our current products or technologies.

        We believe smart cards are an emerging platform for providing digital identity for network applications and for the procurement of services from private enterprise and government agencies. A key element of our business model is premised on the smart card becoming a common access platform for network computing in the future. Further, we have focused on developing our products for certain operating systems related to smart card deployment and use. Should platforms or form factors other than the smart card emerge as a preferred platform or should operating systems other than the specific systems we have focused on emerge as preferred operating systems, our current product offerings could be at a disadvantage. If this were to occur, our future growth and operating results would be negatively affected. Additionally, consolidation within this industry has created a more difficult competitive environment and may result in the broader adoption of competing platforms and systems.

        In addition, the digital identity market has evolving industry-wide standards. While we are actively engaged in discussions with industry peers to define what these standards should be, it is possible that any standards eventually adopted could prove disadvantageous to or incompatible with our business model and product lines. Uncertainty surrounding the Homeland Security Presidential Directive No. 12 ("HSPD 12") may affect sales of our products to government agencies. If our products do not comply with the requirements of HSPD 12, we may not be able to sell to agencies that must comply with this Directive.

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         We rely on strategic relationships with other companies to develop and market our products. If we are unable to enter into additional relationships, or if we lose an existing relationship, our business could be harmed.

        Our success depends on establishing and maintaining strategic relationships with other companies to develop, market, and distribute our technology and products and, in some cases, to incorporate our technology into their products or their technology into our products. Part of our business strategy has been to enter into strategic alliances and other cooperative arrangements with other companies in the industry. We are currently involved in cooperative efforts to incorporate our products into the products of others, to incorporate their technology into our products, to jointly engage in research and development efforts, and to jointly engage in marketing efforts and reseller arrangements. To date, none of these relationships are exclusive, and some of our strategic partners have cooperative relationships with certain of our competitors.

        If we are unable to enter into cooperative arrangements in the future or if we lose any of our current strategic or cooperative relationships, our business could be adversely affected. We do not control the time and resources devoted to such activities by parties with whom we have relationships. In addition, we may not have the resources available to satisfy our commitments, which may adversely affect these relationships. These relationships may not continue, may not be commercially successful, or may require the expenditure of significant financial, personnel, and administrative resources from time to time. Further, certain of our products and services compete with the products and services of our strategic partners, which may adversely affect our relationships with these partners, which could adversely affect our business.

         We may be adversely affected by operating in international markets.

        Our international operations subject us to risks associated with operating in foreign markets, including fluctuations in currency exchange rates that could adversely affect our results of operations and financial condition. International revenue and expenses make up a substantial portion of our business. A severe economic decline in any of our major foreign markets could make it difficult for our customers to pay us on a timely basis. Any such failure to pay, or deferral of payment, could adversely affect our results of operations and financial condition. During fiscal 2010, 2009, and 2008, markets outside of North America accounted for 46%, 53%, and 58%, respectively, of total revenue.

        We face a number of additional risks inherent in doing business in international markets, including:

    Unexpected changes in regulatory requirements;

    Potentially adverse tax consequences;

    Export controls relating to encryption technology;

    Tariffs and other trade barriers;

    Difficulties in staffing and managing international operations;

    Laws that restrict our ability, and make it costly, to reduce our workforce;

    Changing political conditions;

    Exposures to different legal standards; and

    Burden of complying with a variety of laws and legal systems.

        While we present our financial statements in U.S. dollars, a significant portion of our business is conducted outside of the United States, and we incur a significant portion of our expenses in Euros, Australian dollars and British Pounds. Some revenue transactions are denominated in foreign

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currencies as well. Significant fluctuations in exchange rates between the U.S. dollars and foreign currencies may adversely affect our future operating results. Due to fluctuations in foreign currencies we recorded losses of $0.7 million, $0.8 million and $2.0 million in fiscal 2010, 2009 and 2008, respectively on our consolidated statements of operations.

         We rely on certain key employees. If we are not able to build and maintain a strong management team, our ability to manage and expand our business will be impacted. Employee turnover could adversely impact our revenue, costs and productivity.

        We rely on the services of Grant Evans, our Chief Executive Officer, Jacques Kerrest, our Chief Operating Officer and Chief Financial Officer, and John Boyer, our Senior Vice President Worldwide Engineering. Michael Sotnick, our Executive Vice President Worldwide Sales and Field Operations, left the company in July 2010. We may experience further turnover in management in the future and, as a result, we face challenges in effectively managing our operations during these periods of transition. If new key employees and other members of our senior management team cannot work together effectively, or if other members of our senior management team resign, our ability to effectively manage our business may be impacted.

        In part due to our restructuring efforts over the past several years, we have become increasingly dependent on a smaller number of employees. If key employees leave ActivIdentity, we suffer loss of productivity while new employees are hired or promoted into vacant positions. The departure of highly skilled key employees sometimes results in a loss of talent or knowledge that is difficult to replace. There are also costs of recruiting and relocating new employees to fill these positions. For example, the recruiting market for experienced personnel is very competitive, and we may be limited in our ability to attract and retain key operations talent if the need should arise. New employees must learn the ActivIdentity organization, products, and procedures. All of this takes time, reduces productivity and increases cost. The potential adverse impact of employee turnover is greater for situations involving senior positions in the Company, and our turnover rate may be higher if key employees decided to leave on their own accord. If turnover increases, the adverse impact of turnover could materially affect our costs, productivity, or ability to respond quickly to the competitive environment.

         We have recorded significant write downs in recent periods for impairment of acquired intangible assets and goodwill and may have similar write downs in future periods.

        During fiscal 2010, in connection with the CoreStreet acquisition, we recorded $9.4 million of goodwill on our balance sheet representing approximately 8% of our total assets. At September 30, 2009, we had no goodwill on our balance sheet. As of September 30, 2010, we had $9.1 million of other intangible assets on our balance sheet representing approximately 8% of our total assets.

        If the Company's enterprise value at a future date is lower than the enterprise value as of our last impairment evaluation, the evaluation could result in an impairment of goodwill and / or other intangible asset impairment charges if the circumstances indicate that impairment may exist. Also, if our estimates of future undiscounted cash flows to be derived from the use of our other intangible assets drop below the carrying value of such assets, an additional impairment charge may be required.

        We may terminate additional non-core activities in the future or determine that our long-lived assets or acquired intangible assets have been impaired. Any future termination or impairment related charges could have an adverse effect on our financial position and results of operations.

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         While we believe we currently have effective internal control over financial reporting, we may identify a material weakness in our internal control over financial reporting that could cause investors to lose confidence in the reliability of our financial statements and result in a decrease in the value of our securities.

        We will continue to evaluate, upgrade and enhance our internal controls. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions, including those caused by human error, the circumvention of overriding controls, the violation of company policies or practices (whether negligent or willful) or fraud, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. While we believe that we have effective internal control over financial reporting, if we fail to maintain the effectiveness of our internal control including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls or meet our reporting obligations, and there could be a material adverse effect on our stock price and business.

         Implementation of the new FASB rules and the issuance of new laws or other accounting regulations, or reinterpretation of existing laws or regulations, could materially impact our stated results.

        From time to time, the government, courts and financial accounting rule making bodies issue new laws or accounting regulations, or modify or reinterpret existing ones.

        There may be other future changes in FASB rules or in laws, interpretations or regulations that would affect our financial results or the way in which we present them. Additionally, changes in the laws or regulations could have adverse effects on our business that would affect our ability to compete, both nationally and internationally.

         We must comply with European governmental regulations setting environmental standards.

        Our activities in Europe require that we comply with European Union Directives with respect to product quality assurance standards and environmental standards. Directive 2002/95/ec of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, known as the RoHS Directive, became effective on July 1, 2006. If we fail to maintain compliance, we may be restricted from selling our products in the European Union and this could adversely affect our results of operations. European Directive 2002/96/EC on waste, electrical and electronic equipment, known as the WEEE Directive, makes manufacturers of electrical and electronic equipment financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The WEEE Directive became effective on August 13, 2005. We may incur financial responsibility for the collection, recycling, treatment or disposal of products covered under the WEEE Directive. Because the EU member states have not fully implemented the WEEE Directive, the nature and extent of the costs to comply and fees or penalties associated with noncompliance are unknown at this time. Costs to comply with the WEEE Directive and similar future legislation, if applicable, may also include legal and regulatory costs and insurance costs. We may also be required to take additional reserves for costs associated with compliance with these regulations.

         We or our suppliers may be impacted by new regulations related to climate change.

        In addition to the European environmental regulations noted above, we or our suppliers may become subject to new laws enacted with regards to climate change. In the event that new laws are enacted or current laws are modified in countries in which we or our suppliers operate, our flow of product may be impacted and/or the costs of handling the potential waste associated with our products

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may increase dramatically, either of which could result in a significant negative impact on our ability to operate or operate profitably.

         The protection of our intellectual property rights is crucial to our business and, if third parties use our intellectual property without our consent, our business could be damaged.

        Our success is heavily dependent on protecting intellectual property rights in our proprietary technology, which is primarily our software. It is difficult for us to protect and enforce our intellectual property rights for a number of reasons, including:

    Policing unauthorized copying or use of our products is difficult and expensive;

    Software piracy is a persistent problem in the software industry;

    Our patents may not cover the full scope of our product offerings and may be challenged, invalidated or circumvented, or may be enforceable only in certain jurisdictions; and

    Our shrink-wrap licenses may be unenforceable under the laws of certain jurisdictions.

        In addition, the laws of many countries do not protect intellectual property rights to as great an extent as those of the United States and France. We believe that effective protection of intellectual property rights is unavailable or limited in certain foreign countries, creating an increased risk of potential loss of proprietary technology due to piracy and misappropriation.

        We also seek to protect our confidential information and trade secrets through the use of nondisclosure agreements with our employees, contractors, vendors, and partners. However, there is a risk that our trade secrets may be disclosed or published without our authorization, and in these situations it may be difficult or costly for us to enforce our rights and retrieve published trade secrets.

        We sometimes contract with third parties to provide development services to us, and we routinely ask them to sign agreements that require them to assign intellectual property to us that is developed on our behalf. However, there is a risk that they will fail to disclose to us such intellectual property, or that they may have inadequate rights to such intellectual property. This could happen, for example, if they failed to obtain the necessary invention assignment agreements with their own employees.

        We have been involved in litigation to protect our intellectual property rights, and we may become involved in further litigation in the future. This type of litigation is costly and could negatively impact our operating results. See "Item 3 Legal Proceedings."

         Our operating results could suffer if we are subject to intellectual property infringement claims.

        We may face claims of infringement on proprietary rights of others that could subject us to costly litigation and possible restriction on the use of such proprietary rights. There is a risk that potential infringement or invalidity claims may be asserted or prosecuted against us and our products may be found to have infringed the rights of third parties. Such claims are costly to defend and could subject us to substantial litigation costs. If any claims or actions are asserted against us, we may be required to modify our products or may be forced to obtain a license for such intellectual property rights. However, we may not be able to modify our products or obtain a license on commercially reasonable terms, or at all.

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         We may pursue strategic acquisitions and investments that could have an adverse effect on our business if they are unsuccessful.

        As part of our business strategy, we have acquired companies, technologies, product lines and personnel to complement our internally developed products. We expect that we will have a similar business strategy going forward. Acquisitions involve numerous risks, including the following:

    Our acquisitions may not enhance our business strategy;

    We may apply overly optimistic valuation assumptions and models for the acquired businesses, and we may not realize anticipated cost synergies and revenue as quickly as we expected or at all;

    We may not integrate acquired businesses, technologies, products, personnel and operations effectively;

    Management's attention may be diverted from our day to day operations, resulting in disruption of our ongoing business;

    We may not adopt an appropriate business model for integrated businesses, particularly with respect to our "go to market" strategy;

    Customer demand for the acquired company's products may not meet our expectations;

    We may incur higher than anticipated costs for the support and development of acquired products;

    The acquired products may not be compatible with our existing products, making integration of acquired products difficult and costly and potentially delaying the release of other, internally developed products;

    We may have insufficient revenue to offset the increased expenses associated with acquisitions;

    We may not retain key employees, customers, distributors and vendors of the companies we acquire;

    Ineffective internal controls of the acquired company may require remediation as part of the integration process;

    We may be required to assume pre-existing contractual relationships, which may be costly for us to terminate and disruptive for our customers;

    The acquisitions may result in infringement, trade secret, product liability or other litigation: and

    If we are unable to acquire companies that facilitate our strategic objectives, we may not have sufficient time to develop our own products and may not remain competitive.

        As a result, it is possible that the contemplated benefits of these or any future acquisitions may not materialize within the time periods or to the extent anticipated.

         Changes in, or interpretations of, tax rules and regulations may adversely affect our effect tax rates.

        We are a U.S. based multinational organization subject to income taxes in both the United States and various foreign jurisdictions. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorable affected by changes in, or interpretation of, tax rules and regulations in the jurisdictions in which we do business, by lapses of the availability of the U.S. research and development tax credits, or by the valuation of our deferred tax assets and liabilities.

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         We may have exposure to additional tax liabilities as a result of inter-company transfer pricing policies.

        As a multinational organization, we conduct business and are subject to income taxes in both the United States and various foreign jurisdictions. Significant judgment and analysis is required in determining our worldwide income tax provision and related tax liabilities. In the ordinary course of a global business, intercompany transactions and calculations result in a variety of uncertain tax positions. Our intercompany pricing policies are subject to audits in the various foreign tax jurisdictions. Although we believe that our tax estimates are reasonable, there is no assurance that the final determination of tax audits or potential tax disputes will not be different from what is reflected in our historical income tax provisions and accruals.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        We have no unresolved staff comments as of the date of this filing.

ITEM 2.    PROPERTIES

        Our properties consist primarily of leased office facilities for sales, marketing, research and development, and support and administrative personnel. Our corporate headquarters are located in Fremont, California. The table below shows the lease expiration dates (or the applicable cancellation period) and approximate square footage of the facilities that we lease as of September 30, 2010.

Location
  Area
Leased
  Lease Expiration

Fremont, California(1)

    41,000   February 2020

Suresnes, France

    21,000   June 2015

Cambridge, Massachusetts

    11,500   November 2011

Canberra, Australia

    1,200   July 2012

(1)
During fiscal 2010, we entered into an amendment to the lease agreement. The amendment extends the lease term to 10 years from the date of amendment, reduces the office space from 41,000 square feet to 29,000 square feet beginning December 1, 2010, suspends the monthly cash portion of the rent payments for the first eight months of the new term and significantly reduces the annual rent expense. The amendment also provides that we may terminate the lease at any point from the date of amendment, subject to a $1.2 million penalty if terminated within the first 5 years.

        We also lease various other smaller properties primarily for our sales and marketing personnel under leases, which are generally for a period of one year or less. We believe that our properties are in good condition, adequately maintained and suitable for the conduct of our business. Certain of our lease agreements provide options to extend the lease for additional specified periods. For additional information regarding our obligations under leases, see Note 15—Commitments and Contingencies to consolidated financial statements.

ITEM 3.    LEGAL PROCEEDINGS

        From time to time, we are involved in disputes or regulatory inquiries that arise in the ordinary course of business. Any claims or regulatory actions against us, whether valid or not, could be time consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of significant operational resources.

        Beginning on October 12, 2010, several putative class action lawsuits were filed purportedly on behalf of ActivIdentity's stockholders in the Superior Court of Alameda County, California, the Delaware Chancery Court, the United States District Court for Northern California and the United

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States District Court in Delaware. The complaints name ActivIdentity and each member of the ActivIdentity Board as defendants. The lawsuits allege a variety of claims, including that our board members breached fiduciary duties owed to ActivIdentity stockholders by failing to engage in a fair process and failing to maximize stockholder value in approving the Merger. Several of the complaints also allege that ActivIdentity aided and abetted the members of the ActivIdentity Board in the alleged breach of their fiduciary duties. The Plaintiffs seek relief that includes, among other things, an injunction prohibiting the consummation of the Merger, rescission—to the extent the Merger terms have already been implemented, and the payment of plaintiffs' attorneys' fees and costs.

        On December 9, 2010, ActivIdentity and the individual defendants in the following actions entered into a memorandum of understanding: (i) in the Superior Court of Alameda County, California (the "Court"), captioned Vladimir Gusinsky Revocable Trust v. ActivIdentity Corp., et al., RG10541071, Lin v. ActivIdentity Corp., et al., RG10541379, Weisleder v. ActivIdentity Corp., et al., RG10541759, and Gallagher v. Evans, et al., RG10542346 (the "California State Actions"), (ii) in the United States District Court for the Northern District of California captioned Beverley & Lionel Sacks v. ActivIdentity, et al., 10-4705-JCS, and (the "California Federal Action"), and (iii) in Delaware Chancery Court captioned Tomaselli v. ActivIdentity, et al., 5928 (the "Delaware State Action")—collectively referred to herein as "the Actions." The memorandum of understanding provides for the settlement and dismissal with prejudice of the Actions, subject to customary conditions, including completion of appropriate settlement documentation, consummation of the Merger and all necessary court approvals. Although we believe that the Actions are without merit, we have entered into the memorandum of understanding to avoid any risk of materially delaying the Merger and to minimize the expense of defending the actions. The settlement and dismissal with prejudice—if completed and approved by the court—will resolve all of the claims that were or could have been brought by the plaintiffs in the Actions. In connection with the settlement and dismissal with prejudice, defendants agreed to cause to be paid to plaintiffs' counsel an amount up to $475,000 for its fees and expenses in the action, provided plaintiffs obtain court approval for any such amount. As part of the memorandum of understanding, we also agreed to file supplemental disclosures on (i) the background information leading up to the Merger, and (ii) the opinion of our financial advisor. We expect to file these supplemental disclosures on December 10, 2010.

        On October 1, 2008, the Company filed a complaint in the Northern District of California, asserting U.S. Patent No. 6,575,360 against Intercede Group PLC and Intercede Ltd. (collectively, "Intercede"). On January 16, 2009, Intercede filed their answers, including counterclaims seeking declaratory judgment of non-infringement, invalidity, and unenforceability. On February 9, 2009, the Company filed a motion to dismiss Intercede's counterclaims and to strike certain of Intercede's defenses. On March 26, 2009, Intercede filed a First Amended Answer and Counterclaims, amending their previously-asserted defenses and counterclaims, and asserting additional counterclaims for monopolization, attempted monopolization, fraud, and unfair competition. On May 15, 2009, the Company filed a second motion to dismiss Intercede's counterclaims for monopolization, attempted monopolization, fraud and unfair competition. On September 11, 2009, the Court granted in part and denied in part the Company's motion to dismiss. On September 28, 2009, Intercede filed a Second Amended Answer and Counterclaims. On December 22, 2009, Intercede filed a claim in the U.K. High Court of Justice for revocation of Patent EP [UK] 0 981 803 and a declaration of non-infringement. On March 25, 2010, the Company and Intercede entered into a patent license agreement on mutually acceptable terms. This patent license agreement settles the patent infringement case brought by ActivIdentity before the U.S. District Court of Northern California, and a related case brought by Intercede in the United Kingdom High Court. Based on this agreement, all lawsuits over the "360 patents" (ActivIdentity U.S. patent 6,575,360 and ActivIdentity patent EP [UK] 0 981 803) were dismissed, bringing an end to all patent infringement litigation between the two companies.

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        The Company enters into standard indemnification agreements with many of its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third-party to the extent any such claim alleges that an ActivIdentity product infringes a patent, copyright or trademark, or violates any other proprietary rights of that third-party. It is not possible to estimate the maximum potential amount of future payments the Company could be required to make under these indemnification agreements. To date, the Company has not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. No liability for these indemnification agreements was recorded at September 30, 2010 or September 30, 2009.

        As permitted under Delaware law, the Company has agreements indemnifying its executive officers and directors for certain events and occurrences while the officer or director is, or was, serving at the Company's request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable. The Company maintains directors' and officers' liability insurance designed to enable it to recover a portion of any future amounts paid. No liability for these indemnification agreements was recorded at September 30, 2010 or September 30, 2009.

ITEM 4.    REMOVED AND RESERVED

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

        ActivIdentity's common stock trades on the NASDAQ Global Market under the symbol "ACTI".

        The table below sets forth for the periods indicated the high and low closing sale prices of our common stock on the NASDAQ Global Market.

 
  High   Low  

Fiscal 2010:

             
 

Quarter ended September 30, 2010

  $ 2.39   $ 1.77  
 

Quarter ended June 30, 2010

    3.33     1.86  
 

Quarter ended March 31, 2010

    2.96     2.03  
 

Quarter ended December 31, 2009

    2.78     2.01  

Fiscal 2009:

             
 

Quarter ended September 30, 2009

  $ 3.04   $ 2.25  
 

Quarter ended June 30, 2009

    2.77     1.83  
 

Quarter ended March 31, 2009

    2.49     1.50  
 

Quarter ended December 31, 2008

    2.54     1.07  

        As of November 8, 2010, ActivIdentity had 47,183,720 shares of its common stock outstanding, held on record by 170 stockholders. ActivIdentity believes there were 23,573 beneficial owners of its common stock on November 8, 2010.

        We have never declared or paid any cash dividends on shares of our common stock and do not expect to do so in the foreseeable future. Any future decision to pay cash dividends will depend on our growth, profitability, financial condition, and other factors our Board of Directors may deem relevant.

        Information regarding equity compensation plans set forth in Note 2—Stock-Based Compensation to consolidated financial statements, is hereby incorporated by reference into this part II, item 5.

Stock Performance Graph

        We list our common stock on the NASDAQ Global Market. The following graph compares the cumulative total stockholder return on our common stock from September 30, 2005 through September 30, 2010, with the cumulative total return of (i) the NASDAQ Global Market System Composite Index (NASDAQ Composite), (ii) the NASDAQ Computer Index (NASDAQ Computer), and (iii) the NYSE Arca Computer Technology Index (NYSE Arca Technology) over the same periods. This graph assumes an initial investment of $100 and the reinvestment of any dividends. The comparisons in the graph below are based upon historical data and may not be indicative of future performance of our common stock.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among ActivIdentity, the NASDAQ Composite, the NASDAQ Computer, and the NYSE Arca Technology Index

         GRAPHIC


*
$100 invested on September 30, 2005 in stock & index including reinvestment of dividends.
Fiscal Years Ended September 30.

 
  2005   2006   2007   2008   2009   2010  

ActivIdentity Corporation

  $ 100.00   $ 108.55   $ 119.17   $ 52.19   $ 63.97   $ 50.12  

NASDAQ Composite

  $ 100.00   $ 104.96   $ 125.55   $ 97.22   $ 98.64   $ 110.08  

NASDAQ Computer

  $ 100.00   $ 103.89   $ 127.33   $ 95.19   $ 109.00   $ 126.11  

NYSE Arca Technology

  $ 100.00   $ 101.25   $ 119.81   $ 95.84   $ 100.90   $ 117.80  

Acquisition of CoreStreet

        On December 14, 2009, the Company issued the following securities in connection with the acquisition of CoreStreet; (i) approximately 2.2 million shares of the Company's common stock (the "Shares") (of which approximately 1.5 million shares were subject to an escrow to satisfy certain indemnification obligations of the stockholders of CoreStreet), (ii) warrants for 1.0 million shares of the Company's common stock with a per share exercise price of $4.25 expiring December 31, 2011 (the "2011 Warrants") and valued at $0.4 million and (iii) warrants for 1.0 million shares of the Company's common stock with a per share exercise price $5.00 expiring December 31, 2012 and valued at $0.4 million (the "2012 Warrants" and, together with the 2011 Warrants, the "Warrants"). The Shares and Warrants shall be collectively referred to herein as the "Securities." The aggregate offering price of the unregistered securities issued or to be issued in connection with the acquisition of CoreStreet was $5.0 million, or $2.27 per share.

        The Securities were all issued in a private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). The Company is relying on the exemptions provided by Regulation D promulgated under the Securities Act in connection with such issuances based on the representations made by the recipients of the Securities as to their status as accredited investors.

        The Securities and the underlying shares of common stock issuable upon conversion of the Warrants have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. For a

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discussion of CoreStreet's acquisition, see Note—3 Business Combinations to consolidated financial statements.

Stock Repurchase Program

        On February 18, 2010, the Board of Directors authorized a stock repurchase program to purchase up to $10 million or approximately 8% of its outstanding shares of common stock in the open market. On October 11, 2010 the Board of Directors terminated the stock repurchase program. For further information regarding the stock repurchase program, see Note 16—Stock Repurchase Program to consolidated financial statements.

        The following table provides the specified information about the repurchase of shares during fiscal 2010 under the Company's shares repurchase program:

Periods
  Total Number
of Shares
Purchased
  Average
Price
Paid per
Share
  Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
  Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
 

May 12, 2010 - May 31, 2010

    338,100   $ 2.39     338,100   $ 9,190,412  

June 1, 2010 - June 30, 2010

    406,000   $ 2.24     406,000   $ 8,281,312  

July 1, 2010 - July 31, 2010

    100,000   $ 2.00     100,000   $ 8,081,034  

August 1, 2010 - August 31, 2010

    113,693   $ 1.96     113,693   $ 7,857,905  

September 1, 2010 - September 30, 2010

    127,500   $ 2.12     127,500   $ 7,587,123  
                       
 

Total

    1,085,293   $ 2.22     1,085,293   $ 7,587,123  
                       

ITEM 6.    SELECTED FINANCIAL DATA

        The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related Notes thereto appearing elsewhere in this Form 10-K. We have derived the statement of income data for fiscal 2010, 2009 and 2008 and the balance sheet data as of September 30, 2010 and 2009 from the audited consolidated financial statements included elsewhere in this Form 10-K. The statement of operations data for fiscal 2007 and 2006 and the balance sheet data as of September 30, 2008, 2007 and 2006 were derived from the audited consolidated financial statements that are not included in this Form 10-K. The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes to Consolidated Financial Statements.

 
  Fiscal Years Ended
September 30,
 
 
  2010   2009   2008   2007   2006  

Consolidated Statements of Operations Data:

                               

Revenue

  $ 57,706   $ 62,321   $ 59,009   $ 59,553   $ 53,375  

Loss from operations

  $ (9,275 ) $ (7,191 ) $ (56,482 ) $ (18,529 ) $ (27,065 )

Net loss

  $ (5,715 ) $ (5,546 ) $ (76,457 ) $ (9,298 ) $ (22,472 )

Net loss per share:

                               
 

Basic

  $ (0.12 ) $ (0.12 ) $ (1.67 ) $ (0.20 ) $ (0.50 )
 

Diluted

  $ (0.12 ) $ (0.12 ) $ (1.67 ) $ (0.20 ) $ (0.50 )

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  September 30,  
 
  2010   2009   2008   2007   2006  

Consolidated Balance Sheet Data:

                               

Cash, cash equivalents and marketable securities

  $ 76,299   $ 78,724   $ 79,829   $ 121,723   $ 128,047  

Working capital

  $ 72,932   $ 69,895   $ 72,168   $ 115,527   $ 124,155  

Goodwill

  $ 9,416           $ 35,874   $ 35,874  

Total assets

  $ 113,726   $ 114,577   $ 117,601   $ 188,452   $ 200,988  

Minority interest

  $ 312   $ 311   $ 304   $ 354   $ 373  

Total stockholders' equity

  $ 90,150   $ 87,936   $ 89,354   $ 159,443   $ 168,953  

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included in Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements as a result of certain factors, including but not limited to those discussed in Item 1A "Risk Factors" and elsewhere in this Annual Report on Form 10-K. See discussion of forward-looking statements at the beginning of this Annual Report on Form 10-K.

        ActivIdentity™ Corporation (the "Company" or "ActivIdentity" and also referred to as "we" or "our") is a global leader in strong authentication and credential management, providing solutions to confidently establish a person's identity when interacting digitally. For more than two decades, the Company's experience has been leveraged by security minded organizations in large scale deployments such as the U.S. Department of Defense, Cadence Design Systems, Nissan, and Saudi Aramco. The Company's customers have issued more than 100 million credentials, securing the holder's digital identity.

        We operate on a fiscal year ending September 30. For convenience in this Annual Report, we refer to the fiscal year ended September 30, 2008 as fiscal 2008, the fiscal year ended September 30, 2009 as fiscal 2009 and the fiscal year ended September 30, 2010 as fiscal 2010. We also refer to the fiscal year ending September 30, 2011 as fiscal 2011.

    SIGNIFICANT EVENTS

        The following significant events occurred during fiscal 2010:

    On December 14, 2009, we acquired 100% of the capital stock of CoreStreet for total purchase consideration of $20.3 million, which included cash, common stock, and warrants to purchase common stock. The preliminary purchase price allocation can be found in Note 3—Business Combinations to consolidated financial statements. The CoreStreet results of operation have been included in the Company's consolidated financial statements since the date of acquisition on December 14, 2009.

    On February 9, 2010, we entered into an amendment to the lease agreement for our headquarters office building in Fremont, California. The amendment extends the lease term to 10 years from the date of amendment, reduces the office space from 41,000 square feet to 29,000 square feet beginning December 1, 2010, suspends the monthly cash portion of the rent payments for the first eight months of the new term and significantly reduces the annual rent expense. The amendment also provides that we may terminate the lease at any point from the date of amendment, subject to a $1.2 million penalty if terminated within the first 5 years.

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    On February 18, 2010, the Board of Directors approved a stock repurchase program that authorized the repurchase up to $10 million or approximately 8% of the Company's outstanding shares of common stock in the open market from time to time over the subsequent twelve months. Shares of common stock at an aggregate purchase price of $2.4 million were repurchased under the program during the year ended September 30, 2010. For further information regarding the stock repurchase program, see Note 16—Stock Repurchase Program to consolidated financial statements.

    We incurred $1.1 million in legal and related expenses in pursuit of an intellectual property infringement case. The case was settled in March 2010 upon mutual agreement of both parties involved whereby we issued a patent license to the other party on mutually acceptable terms. For further information regarding this case, see Note 15—Commitments and Contingencies to consolidated financial statements.

    During fiscal 2010, we sold or redeemed ARS with a net book value of $10.8 million and received $14.9 million in cash upon settlement that resulted in a gain of $4.1 million.

    We recorded $1.8 million in severance expense, primarily through operating expenses, for fiscal 2010 as we continue to realign our business in accordance with the Company's revised strategic initiatives.

RESULTS OF OPERATIONS

Executive Summary

    Our revenue for fiscal 2010 was $57.7 million, a decrease of $4.6 million, or 7%, compared to revenue of $62.3 million for fiscal 2009.

    Our gross profit remained unchanged for fiscal 2010 at $40.5 million compared to gross profit of $40.3 million for fiscal 2009. Gross margin increased by approximately 6% in fiscal 2010 compared to 2009.

    Our net loss for fiscal 2010 was $5.7 million, an increase of $0.2 million, or 3%, compared to net loss of $5.5 million for fiscal 2009.

Comparison of Fiscal Years ended September 30, 2010, 2009, and 2008

REVENUE

        Total revenue, mix by type, and period-over-period changes are as follows (dollars in thousands):

 
  Fiscal Years Ended
September 30,
  Change from Prior Fiscal Years  
 
  2010   2009   2008   2010 vs. 2009   2009 vs. 2008  

Software

  $ 21,533   $ 23,975   $ 19,589   $ (2,442 )   -10 % $ 4,386     22 %

Hardware

    13,578     15,784     15,078     (2,206 )   -14 %   706     5 %

Service

    22,595     22,562     24,342     33     - %   (1,780 )   -7 %
                                   

Total revenue

  $ 57,706   $ 62,321   $ 59,009   $ (4,615 )   -7 % $ 3,312     6 %
                                   

        We have several revenue streams, each of which is unique in terms of its recurring nature, transactional pricing, and volume characteristics. Our software revenues are driven by orders of significant size that are dependent on the closing of the transactions for revenue recognition purposes and can result in significant variances from period to period. As hardware revenue is generally derived from the sale of software products, the variability in software revenue is the driving factor in the fluctuations of the hardware revenue stream, although timing of hardware revenue may lag the initial

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sale of related software. Maintenance revenue, the most significant component of service revenue, is tied directly to the installed base of customers, which fluctuates with our ability to attract new customers and the level of renewal activity with existing customers. The timing of closure of software transactions is the single most relevant factor for the Company's recorded revenue in any given period.

    Software Revenue

        Our software revenue is comprised of software license revenue and professional services revenue essential to the functionality of our software. Software revenue decreased 10%, or $2.4 million, to $21.5 million in fiscal 2010 from $24.0 million in fiscal 2009. The decrease in software revenue was primarily due to the decline in software revenue in the EMEA region and completion of a customized software project in 2009, partially offset by an increase in revenue from products sales through our acquisition of CoreStreet. For further information regarding the acquisition of CoreStreet, see Note 3—Business Combinations to consolidated financial statements.

        Software revenue increased $4.4 million, or 22%, in fiscal 2009 compared to fiscal 2008. The increase was primarily driven by: (i) software customization, revenue of our ActivClient™ software linked to PIV and PIVi Card rollouts, as well as revenue of our authentication products; and (ii) a change in our licensing arrangement for our Single Sign-On product with a customer resulting in an increase in software revenue and a decrease in service revenue.

    Hardware Revenue

        Hardware revenue is comprised of tokens, readers, smart cards, and related equipment, generally to complement revenue of related software products. Hardware revenue decreased by 14%, or $2.2 million, to $13.6 million in fiscal 2010 from $15.8 million in fiscal 2009. The decrease in hardware revenue was primarily driven by a decrease in our token sales in Asia Pacific and smart card and reader sales in Europe, the Middle East, and Africa ("EMEA") and North America.

        Hardware revenue increased by $0.7 million, or 5%, compared to fiscal 2008 to $15.8 million in fiscal 2009. The increase in revenue was primarily driven by an increase in token revenue to European and Asia Pacific banking customers.

    Service Revenue

        Service revenue is comprised of post-contract customer support and professional services not essential to the functionality of software, including installation, training, and consulting. Service revenue was unchanged at $22.6 million for each of fiscal 2010 and fiscal 2009.

        Service revenue decreased by 7% or $1.8 million from fiscal 2008 to $22.6 million in fiscal 2009. The decrease in revenue was due primarily to a change in our licensing arrangement for our Single Sign-On product with a customer resulting in a decrease in service revenue and an increase in software revenue. Service revenue, not including our licensing arrangement for our Single Sign-On product with a customer, increased by $0.8 million compared to the prior year.

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    Revenue Concentration

        By geography was as follows:

 
  Fiscal Years Ended
September 30,
  Change from Prior Fiscal Years  
 
  2010   2009   2008   2010 vs. 2009   2009 vs. 2008  

North America

  $ 31,232   $ 29,435   $ 24,891   $ 1,797     6 % $ 4,544     18 %

EMEA

    23,664     26,838     29,244     (3,174 )   -12 %   (2,406 )   -8 %

Asia Pacific

    2,810     6,048     4,874     (3,238 )   -54 %   1,174     24 %
                               

Total revenue

  $ 57,706   $ 62,321   $ 59,009   $ (4,615 )   -7 % $ 3,312     6 %
                               

        By geography, as a percentage of total revenue, was as follows:

 
  Fiscal Years Ended
September 30,
 
 
  2010   2009   2008  

North America

    54 %   47 %   42 %

EMEA

    41 %   43 %   50 %

Asia Pacific

    5 %   10 %   8 %
               
 

Total Revenue

    100 %   100 %   100 %
               

        North America revenue is primarily derived from deployments of our smart card-based software products, such as ActivClient™, the ActivIdentity ActivID™ Card Management System and ActivIdentity Secure Login™ Single Sign On to various departments of the U.S. federal government and our enterprise customers. Revenue in North America increased $1.8 million to 54% of total revenue in fiscal 2010 from 47% in fiscal 2009. The increase was primarily driven by our software revenue contributed in part by new software product offerings as a result of our acquisition of CoreStreet. For further information regarding the acquisition of CoreStreet, see Note 3—Business Combinations to consolidated financial statements. Revenue in North America increased $4.5 million to 47% of total revenue in fiscal 2009 compared to 42% of total revenue in fiscal 2008. The increase is due primarily to government and enterprise investments in PIV and PIVi Card rollouts, as well as increased revenue from our authentication products.

        EMEA revenue is primarily derived from European deployments of our strong authentication suite of products, such as ActivIdentity 4TRESS™ AAA Server for Remote Access and ActivIdentity 4TRESS™ Authentication Server and authentication devices to various enterprise and financial customers. Revenue is also derived from deployments of our smart card-based software products to various government and enterprise customers. Revenue in EMEA decreased $3.2 million to 41% of total revenue in fiscal 2010 from 43% in fiscal 2009. The decrease was primarily due to decreased spending by financial services and enterprise customers for our products. Revenue in EMEA decreased $2.4 million to 43% of total revenue in fiscal 2009 compared to 50% of total revenue in fiscal 2008. The decrease was primarily the result of decreased spending by and the consolidation of financial institutions. The loss of a significant customer in EMEA during fiscal 2007 due to consolidation in the banking industry negatively impacted fiscal 2008 EMEAan revenue.

        Asia Pacific revenue is primarily derived from deployments of our strong authentication suite of products, authentication devices, and our smart card-based software products to various government, enterprise and financial customers. Revenue in Asia Pacific decreased $3.2 million to 5% of total revenue in fiscal 2010 from 10% in fiscal 2009. The decrease was driven primarily by a decrease in software customization revenue as a project related to the issuance of smart card driver's licenses was significantly recognized in fiscal 2009 and a decrease in token sales to the Asian banking sector.

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Revenue in Asia Pacific increased by $1.2 million to 10% of total revenue in fiscal 2009 compared to 8% of total revenue in fiscal 2008. The increase was driven primarily by a software customization project related to card management.

COST OF REVENUE

        Total cost of revenue, costs as a percentage of corresponding revenue, and period-over-period changes was as follows (dollars in thousands):

 
  Fiscal Years Ended
September 30,
   
   
   
   
 
 
  2010   2009   2008   2010 vs. 2009   2009 vs. 2008  

Software

  $ 1,229   $ 4,179   $ 963   $ (2,950 )   -71 % $ 3,216     334 %

As a percentage of software revenue

    6 %   17 %   5 %                        

Hardware

    6,887     7,954     9,551     (1,067 )   -13 %   (1,597 )   -17 %

As a percentage of hardware revenue

    51 %   50 %   63 %                        

Service

    8,071     7,677     10,779     394     5 %   (3,102 )   -29 %

As a percentage of service revenue

    36 %   34 %   44 %                        

Amortization of acquired developed technology and patents

    972     2,168     2,380     (1,196 )   -55 %   (212 )   -9 %
                                   

Total cost of revenue

  $ 17,159   $ 21,978   $ 23,673   $ (4,819 )   -22 % $ (1,695 )   -7 %
                                   

    Cost of Software Revenue

        Cost of software revenue includes the cost of professional services associated with customization essential to the functionality of software. Cost of software revenue decreased by $3.0 million, or 71%, to $1.2 million in fiscal 2010 from $4.2 million in fiscal 2009. The decrease in software cost was primarily due to decreasing engineering service costs as a result of a large software customization project for the issuance of smart card driver's licenses that was largely recognized in fiscal 2009.

        The $3.2 million increase in fiscal 2009 in software cost of revenue from fiscal 2008 was primarily driven by increased engineering service costs incurred on a large software customization project for the issuance of smart card driver's licenses. Margins were adversely impacted as these professional services revenue have significantly more direct costs than traditional product software revenue.

    Cost of Hardware Revenue

        Cost of hardware revenue includes costs associated with the manufacturing and shipping of product, logistics, operations, warranty costs and charges related to excess and obsolete inventory. Hardware product margins are influenced by numerous factors including hardware product mix, inventory adjustments, pricing, geographic mix and foreign currency exchange rates. Many of these factors influence, or are interrelated with, other factors. As a result, it is difficult to precisely quantify the impact of each item individually to our hardware margins. The majority of our smart card and reader revenue reflects products manufactured for us by original equipment manufacturers that accordingly have lower margins compared to tokens, which are manufactured for us by contract manufacturers and yield higher gross margins.

        Cost of hardware revenue decreased $1.1, million or 13%, to $6.9 million in fiscal 2010 from $8.0 million in fiscal 2009. The decrease in hardware cost was primarily the result of lower sales volume and lower excess and obsolete inventory charges.

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        The cost of hardware revenue decreased $1.6 million or 17%, to $8.0 million in fiscal 2009 as compared to $9.6 million in fiscal 2008. The decrease in hardware cost resulted primarily from decreases in: (i) salary and related costs from a reduction in headcount made late in fiscal 2008; (ii) freight and inventory costs from improved inventory management; and (iii) cost of raw materials related to the mix of hardware revenue.

    Cost of Service Revenue

        Cost of service revenue consists of personnel costs and expenses incurred in providing post-contract customer support and professional services not essential to software such as installation, training, and consulting. Cost of service revenue increased $0.4 million, or 5%, to $8.1 million in fiscal 2010 from $7.7 million in fiscal 2009. The increase was primarily due to increases in engineering expenses for customer sustaining work associated with maintenance and support, partially offset by lower professional services expenses.

        Cost of service revenue decreased by $3.1 million, or 48%, to $7.7 million in fiscal 2009 as compared to $10.8 million in fiscal 2008, as resources during the current year were reallocated to software customization contracts as well as a decline in service revenue projects.

    Amortization of Developed Technology and Patents

        Amortization of acquired developed technology and patents includes amortization of technology acquired as part of our acquisitions and purchase of certain patents and related intellectual property from third parties. Amortization expense in fiscal 2010, 2009, and 2008 was $1.0 million, $2.2 million and $2.4 million, respectively and consistent with the scheduled amortization of acquired developed technology and patents, as certain items were acquired and others become fully amortized.

OPERATING EXPENSES

        A substantial proportion of our operating expenses are fixed in the short term. Accordingly, a small variation in the timing for recognition of revenue can cause significant variations in operating results across periods.

    Sales and Marketing

        Sales and marketing expenses and period-over-period changes were as follows (dollars in thousands):

 
  Fiscal Years Ended
September 30,
 
 
  2010   2009   2008  

Sales and marketing

  $ 17,516   $ 19,572   $ 25,602  

Percentage change from comparable prior period

    -11 %   -24 %   1 %

As a percentage of total revenue

    30 %   31 %   43 %

Headcount, end of period

    70     69     90  

        Sales and marketing expenses consist primarily of salaries and other payroll expenses, as well as stock-based compensation expense, commissions, travel, depreciation, costs associated with marketing programs, promotions, trade shows, and allocations of facilities and information technology costs.

        Sales and marketing expenses decreased $2.1 million, or 11%, to $17.5 million in fiscal 2010 from $19.6 million in fiscal 2009. The decrease in sales and marketing expenses was primarily due to lower salaries and related benefits, lower severance cost, lower commission resulting from a decline in total revenue, partially offset by an increase in marketing to support sales efforts and brand recognition.

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        Sales and marketing expenses decreased $6.0 million, or 24%, to $19.6 million in fiscal 2009 from $25.6 million in fiscal 2008. The decrease in expense was driven primarily by a 23% reduction in headcount during the year and the related expenses as well as a decrease in spending on marketing programs.

    Research and Development

        Research and development expenses and period-over-period changes were as follows (dollars in thousands):

 
  Fiscal Years Ended September 30,  
 
  2010   2009   2008  

Research and development

  $ 15,892   $ 15,053   $ 18,867  

Percentage change from comparable prior period

    6 %   -20 %   -5 %

As a percentage of total revenue

    28 %   24 %   32 %

Headcount, end of period

    96     97     115  

        Research and development expenses consist primarily of salaries, costs of components used in research, and development activities, travel, depreciation, and allocations of facilities and information technology costs.

        Research and development expenses increased $0.8 million, or 6%, to $15.9 million in fiscal 2010 from $15.1 million in fiscal 2009. The increase in research and development expenses was primarily due to salaries and benefits for engineers that in fiscal 2009 were assigned to a software customization project, and as a result, such costs were recorded in cost of revenue. The remaining increase was due to higher consulting expenses driven by intellectual property consulting and engineering outsourcing, higher office expenses, partially offset by lower salaries and related benefits and lower severance expenses.

        Research and development expenses decreased $3.8 million, or 20%, to $15.1 million in fiscal 2009 from $18.9 million in fiscal 2008. The decrease in expenses was primarily the result of reducing headcount by 16% during the year and the associated expenses as well as outside consulting expenses. Research and development expenses were also reduced in 2009 as costs were classified as cost of software revenue for work related to a software customization project.

    General and Administration

        General and administration expenses and period-over-period changes were as follows (dollars in thousands):

 
  Fiscal Years Ended
September 30,
 
 
  2010   2009   2008  

General and administration

  $ 15,785   $ 12,769   $ 11,380  

Percentage change from comparable prior period

    24 %   12 %   -6 %

As a percentage of total revenue

    27 %   20 %   19 %

Headcount, end of period

    37     39     34  

        General and administrative expenses consist primarily of personnel costs for administration, finance, human resources, and legal, as well as professional fees related to legal, audit and accounting, costs associated with SOX compliance, and an allocation of facilities and information technology costs.

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        General and administration expenses increased $3.0 million, or 24%, to $15.7 million in fiscal 2010 from $12.8 million in fiscal 2009. The increase in general and administrative expenses was primarily due to higher legal and professional service expenses related to intellectual property litigation with Intercede, the acquisition of CoreStreet and pending acquisition of the Company by ASSA ABLOY Inc.

        General and administration expenses increased $1.4 million, or 12%, to $12.8 million in fiscal 2009 from $11.4 million in fiscal 2008 primarily as a result of a change in the manner that executive officer and board of directors' costs were allocated. All amounts were allocated to general and administration instead of other departments during fiscal 2009. Management believes these costs are properly reported as general and administration expenses.

    Restructuring Expenses

        Restructuring expenses consist of severance and other costs associated with the reduction of headcount and facility exit costs. Facility exit costs consist primarily of future minimum lease payments net of estimated sub-lease income, if any on buildings we have vacated. For a discussion of restructuring plans, see Note 11—Restructuring Liability to consolidated financial statements.

        There was an adjustment of $0.4 million made to the restructuring expense during fiscal 2010, as a result of an amendment of a facilities lease agreement and future termination of the sublease for a portion of the office building for which the restructuring reserve was recorded in prior periods.

        There were no adjustments made to the restructuring expense during fiscal 2009.

        There was an adjustment of $70,000 made to the restructuring expense during fiscal 2008.

        Although the Company does not expect to incur significant additional charges related to previous restructurings, future restructuring activity could result in additional charges.

    Amortization of Other Intangible Assets

        Amortization of other intangible assets includes amortization of customer contracts, trademark, and trade name intangibles capitalized in acquisitions.

        Amortization of other intangible assets for fiscal 2010, 2009, and 2008 was $1.0 million, $0.1 million, and $0.2 million, respectively.

        The amortization expense for fiscal 2010 increased $0.9 million compared to fiscal 2009. The increase is primarily due to recently acquired amortizable intangible assets from the acquisition of CoreStreet during the first quarter of fiscal 2010, partially offset by certain items becoming fully amortized. For a discussion of other intangible assets, see Note—8 Other Intangible Assets, net to consolidated financial statements and for a discussion of CoreStreets acquisition, see Note—3 Business Combinations to consolidated financial statements.

    Write-down of Goodwill

        In accordance with the Accounting Standards Codification ("ASC") 350 20 35-1, we test recorded goodwill for impairment at least annually.

        At September 30, 2010, goodwill recorded on our balance sheet was $9.4 million as a result of our acquisition of CoreStreet. We performed our annual review for impairment of goodwill as of September 30, 2010 and concluded that our goodwill balance was not impaired.

        At September 30, 2009 and 2008, there was no (zero) goodwill recorded on our balance sheet. During fiscal 2008, based on indicators of potential impairment, we performed an interim impairment test of goodwill and determined the carrying value of goodwill of $35.9 million was fully impaired. As a

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result, goodwill of $35.9 million was written off as a non-cash charge to the Statement of Operations during fiscal 2008.

INTEREST INCOME

        Interest income and period-over-period changes were as follows (dollars in thousands):

 
  Fiscal Years Ended
September 30,
 
 
  2010   2009   2008  

Interest income

  $ 564   $ 1,710   $ 4,659  

Percentage change from comparable prior period

    -67 %   -63 %   -25 %

As a percentage of total revenue

    1 %   3 %   8 %

        Interest income consists of interest income on the Company's cash, cash equivalents, and investments. Interest income decreased $1.2 million, or 67%, to $0.6 million in fiscal 2010 from $1.7 million in fiscal 2009. The reduction of interest income was due primarily to lower average cash invested and lower average prevailing market interest rates during fiscal 2010 compared to fiscal 2009.

        Interest income decreased $2.9 million, or 63%, to $1.7 million in fiscal 2009 from $4.7 million in fiscal 2008. The decrease in interest income was due to lower average cash invested in fiscal 2009 compared to fiscal 2008 and lower average prevailing market interest rates in fiscal 2009 compared to fiscal 2008.

OTHER INCOME (EXPENSE), NET

        Other income (expense) and period-over-period changes were as follows (dollars in thousands):

 
  Fiscal Years Ended
September 30,
 
 
  2010   2009   2008  

Other income (expense), net

  $ 3,169   $ (508 ) $ (25,190 )

Percentage change from comparable prior period

    -724 %   -98 %   -832 %

As a percentage of total revenue

    5 %   1 %   43 %

        Other income (expense), net, consists of foreign exchange gains and losses, primarily caused by the revaluation of inter-company balances, and other-than-temporary impairment of investments.

        In fiscal 2010, other income (expense) consisted of:

    $4.1 million of realized gain on the sale of long-term investments in auction rate securities.

    ($0.7) million of net foreign exchange losses.

    ($0.3) million of impairment of marketable securities.

        In fiscal 2009, other income (expense) consisted of:

    ($1.2) million of net foreign exchange losses.

    $0.4 million of realized gains on the settlement of foreign invoices.

    $0.3 million of other miscellaneous items.

        In fiscal 2008, other income (expense) consisted of:

    Other-than-temporary impairment of auction rate security holdings of ($21.2) million (for additional discussion, see Note 4—Investments to consolidated financial statements).

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    A ($1.9) million loss associated with the reclassification of accumulated translation adjustment losses on the liquidation of an inactive Australian subsidiary.

    ($2.0) million of net foreign exchange losses.

INCOME TAX PROVISION (BENEFIT)

        The income tax provision (benefit) was $0.2 million, $(0.3) million and $(0.5) million in fiscal 2010, 2009 and 2008, respectively. The fiscal 2010 tax provision consists of tax expense in various foreign jurisdictions of $0.4 million offset by a tax benefit of $(0.2) million related to research and development tax credits generated in France that are refundable within three years if not used to offset income. The fiscal 2009 tax benefit is related to research and development tax credits generated in France that are refundable within three years if not used to offset income. The fiscal 2008 tax benefit consists of tax expense in various foreign jurisdictions of $0.4 million, offset by a tax benefit of $(0.9) million related to research and development tax credits generated in France that are refundable within three years if not used to offset income. Generally, the Company's effective tax rate differs from the statutory rates due to the fact that we have recorded a valuation allowance against the Company's deferred tax assets as we do not consider the generation of taxable income necessary to realize their benefits to be more likely than not.

MINORITY INTEREST

        In February 2003, we completed the change in domicile of the publicly listed company, ActivIdentity Europe S.A. (formerly known as ActivCard S.A) from the Republic of France to the United States by acquiring 94.8% of the outstanding securities of ActivIdentity Europe S.A. In July 2003, we completed a follow-on exchange offer in which we acquired approximately an additional 4.6% of the outstanding securities of ActivIdentity Europe S.A. During fiscal 2006, we purchased an additional 173,736 outstanding securities of ActivIdentity Europe S.A. No additional shares were acquired during fiscal 2010, 2009, and 2008. The non-controlling interest in ActivIdentity Europe S.A. at September 30, 2010, was approximately 0.2%, representing outstanding ordinary shares and ADS of ActivIdentity Europe S.A. that were not exchanged or sold to us as of that date. The change in non-controlling interest was $(1,000), $99,000 and $50,000 in fiscal 2010, 2009, and 2008, respectively.

LIQUIDITY AND CAPITAL RESOURCES

        The following sections discuss the effect of changes in the Company's balance sheet and cash flows and contractual obligations on our liquidity and capital resources.

Balance Sheet and Cash Flows

CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES, AND INVESTMENTS

        The following table summarizes the Company's cash, cash equivalents, marketable securities, long-term investments, and restricted cash (in thousands):

 
  September 30,
2010
  September 30,
2009
  Increase
(Decrease)
 

Cash and cash equivalents

  $ 72,519   $ 75,624   $ (3,105 )

Marketable securities

    3,780     3,100     680  

Long-term investments

        11,752     (11,752 )

Restricted cash

    1,940     1,746     194  
               

  $ 78,239   $ 92,222   $ (13,983 )
               

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        The portfolio of cash, cash equivalents, marketable securities and restricted cash is managed by several financial institutions. Our investments portfolio decreased by $14.0 million, or 15%, to $78.2 million as of September 30, 2010 from $92.2 million as of September 30, 2009 primarily due to $12.8 million of cash paid, net of cash acquired, as consideration for the CoreStreet acquisition. For additional information regarding the details of our investment portfolio, see Note—4 Investments to consolidated financial statements.

        We believe that our cash and cash equivalents, and marketable securities will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of businesses, products, or technologies. A portion of our cash may be used to acquire or invest in complementary businesses, or to acquire products or to obtain the right to use complementary technologies.

        The following table summarizes the Company's cash inflows/outflows by category (dollars in thousands):

 
  Fiscal Years Ended
September 30,
   
   
   
   
 
 
  2010   2009   2008   2010 vs. 2009   2009 vs. 2008  

Net cash provided by (used in) operating activities

  $ (2,571 ) $ 674   $ (8,129 ) $ (3,245 )   -481 % $ 8,803     -108 %

Net cash provided by (used in) investing activities

    1,662     4,332     47,749     (2,670 )   -62 %   (43,417 )   -91 %

Net cash provided by (used in) financing activities

    (2,078 )       25     (2,078 )   nm     (25 )   nm  

nm = not meaningful

    Operating Activities

        Net cash used in operating activities was $2.6 million for fiscal 2010, which resulted from net loss of $5.7 million adjusted for non-cash items, including depreciation and amortization charges of $3.1 million, stock-based compensation of $3.4 million, and unrealized foreign exchange loss of $0.6 million, partially offset by $4.1 million from the gain on sale of investments.

        Net cash provided by operating activities was $0.7 million for fiscal 2009, which resulted from non-cash charges related to depreciation and amortization of $3.6 million, stock-based compensation of $3.1 million, and unrealized foreign exchange loss of $1.6 million, partially offset by a net loss of $5.5 million, and net changes in assets and liabilities of $1.9 million.

        Net cash used in operating activities was $8.1 million for fiscal 2008, which resulted from a net loss of $76.5 million adjusted for non cash items, including goodwill impairment charge of $35.9 million, impairment of investments of $21.2 million, depreciation and amortization of $4.1 million, stock-based compensation of $2.9 million, currency translation loss of $1.9 million, and unrealized foreign exchange loss of $1.8 million, and net changes in assets and liabilities of $0.6 million.

    Investing Activities

        Net cash provided by investing activities was $1.7 million for fiscal 2010 and was primarily due to $15.0 million from sales and maturities of investments and marketable securities, principally the sales and maturities of ARS, partially offset by $12.8 million used to acquire CoreStreet and $0.5 million paid for purchases of property and equipment. For additional information regarding the details of our investment portfolio, see Note—4 Investments to consolidated financial statements. For additional

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information regarding the details of our acquisition of CoreStreet, see Note—3 Business Combinations to consolidated financial statements.

        Net cash provided by investing activities was $4.3 million for fiscal 2009 and was primarily due to $6.5 million from sales and maturities of investments and marketable securities, partially offset by $1.5 million from the reclassification of a deposit to restricted cash and $0.8 million paid for purchases of property and equipment.

        Net cash provided by investing activities was $47.7 million for fiscal 2008 and was primarily due to $85.2 million from sales and maturities of investments and marketable securities, partially offset by $37.2 million in purchases of marketable securities.

    Financing Activities

        Net cash used in financing activities was $2.1 million for fiscal 2010 and was due to repurchases of common stock of $2.4 million, offset partially by proceeds from exercise of employee stock options of $0.3 million. For additional information regarding the stock repurchase program, see Note 16—Stock Repurchase Program to consolidated financial statements.

        There were no cash flows from financing activities for fiscal 2009.

        Net cash provided by financing activities was $25,000 for fiscal 2008 and was due to proceeds from exercise of employee stock options.

ACCOUNTS RECEIVABLE, NET

        The following table summarizes the Company's accounts receivable, net (in thousands):

 
  September 30,
2010
  September 30,
2009
  Increase
(Decrease)
 

Accounts receivable, net

  $ 12,247   $ 13,983   $ (1,736 )

        The $1.7 million decrease in accounts receivable is primarily driven by the timing of an invoice associated with a $2.0 million annual maintenance renewal contract which was not issued until the first quarter of fiscal 2011. A similar invoice for annual maintenance renewal contract was issued in the fourth quarter of fiscal 2009. Days sales outstanding in accounts receivable as of September 30, 2010 and 2009 were 83 days and 75 days respectively. The percentage of outstanding receivables less than 30 days past due was 87% of the outstanding balance as of September 30, 2010 compared to 91% at September 30, 2009.

DEFERRED REVENUE, NET

        The following table summarizes the Company's deferred revenue (in thousands):

 
  September 30,
2010
  September 30,
2009
  Increase
(Decrease)
 
 

Service

  $ 11,123   $ 10,510   $ 613  
 

Product

    693     3,304     (2,611 )
               
   

Total

  $ 11,816   $ 13,814   $ (1,998 )
               

Reported as:

                   
 

Current

  $ 9,520   $ 12,574   $ (3,054 )
 

Noncurrent

    2,296     1,240     1,056  
               
   

Total

  $ 11,816   $ 13,814   $ (1,998 )
               

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        The $2.0 million decrease in deferred revenue at September 30, 2010 compared to September 30, 2009, is due to a decline in deferred product revenue, partially offset by an increase in deferred service revenue.

Contractual Obligations

        The following summarizes our contractual obligations under facility leases which are inclusive of amounts identified as part of our restructuring plans and exclusive of expected sublease income, at September 30, 2010, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

 
  Total   Less than
1 Year
  1 to 3
Years
  3 to 5
Years
  More than
5 years
 

Operating leases

  $ 10,097   $ 1,736   $ 2,755   $ 2,535   $ 3,071  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The above discussion and analysis of the Company's financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). We believe there are accounting policies that are critical to understanding our consolidated financial statements, as these policies affect the reported amounts of revenue and expenses and involve management's judgment regarding significant estimates. We have reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures with our Audit Committee of the Board of Directors. Our critical accounting policies and estimates are described below.

Revenue Recognition

        We recognize revenue in accordance with U.S. GAAP, as set forth in:

    ASC 985-605 (formerly known as and comprised of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue Recognition", as amended by SOP 98-9, "Modification of SOP 97-2", "Software Revenue Recognition, With Respect to Certain Transactions" and EITF 03-05, "Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software)",

    ASC 605-25 (formerly known as Emerging Issues Task Force Issue No. (EITF) 00-21, "Revenue Arrangements with Multiple Deliverables)",

    ASC 605-35 (formerly known as and comprised of Accounting Research Bulletin No. 45 (ARB 45), "Long-Term Construction-Type Contracts", SOP 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts)",

    SEC Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition", and

    Technical Practice Aid (TPA) interpretations of ASC 985-605 (SOP 97-2) issued by the AICPA (TPAs 5100.38 - 5100.76).

        The application of the appropriate accounting principles to revenue is dependent upon the specific transaction and whether the sale includes hardware products, software products, post contract customer support ("PCS"), other professional services, or a combination of some or all of these products and/or services.

        Subject to the additional conditions described below, the Company does not recognize revenue until: (1) persuasive evidence of an arrangement exists; (2) the fee is fixed or determinable; (3) delivery has occurred; and (4) collection of the corresponding receivable is reasonably assured.

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        For multiple element arrangements that contain one or more deliverables for which the functionality is not dependent on the software, the arrangement fee is allocated between the "non-software" and software deliverables in accordance with ASC 605-25 when the following criteria are met:

    The delivered item has stand alone value;

    There is objective and reliable evidence of the fair value of the undelivered elements as demonstrated by vendor specific objective evidence ("VSOE") of fair value or third party evidence; and

    If the arrangement includes a general return right relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor.

        If the above criteria are met, we allocate the arrangement fee to the delivered items using the residual value method. Revenue for the elements whose functionality is not dependent upon the delivered software is recognized in accordance with SAB 104, and revenue for software elements is recognized in accordance with ASC 985-605. If the above criteria are not met, all deliverables are considered a single unit of accounting and revenue is recognized in accordance with ASC 985-605 upon delivery of all elements of the arrangement.

        For multiple element arrangements that contain one or more deliverables for which the functionality is dependent on the software, the arrangement fee is subject to the provisions of ASC 985-605, and is allocated among each element, based on VSOE of fair value of each element if VSOE of each element exists. We determine VSOE of an element based on the price charged when the same element is sold separately. For an element not yet sold separately, VSOE may be established by management having the relevant authority as long as it is probable that the price, once established, will not change before separate introduction of the element in the marketplace. When arrangements contain multiple elements and VSOE exists for all undelivered elements only, we recognize revenue for the delivered elements based on the residual value method. For arrangements containing multiple elements wherein VSOE does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until VSOE exists or all elements have been delivered. Additionally, where VSOE does not exist to allocate the fee to the separate elements and the only undelivered element is PCS, the entire arrangement fee is recognized ratably over the contractual PCS period. For all other transactions not involving software, fair value is determined using the price when sold separately or other methods allowable under ASC 605-25.

        Professional service revenue is recognized separately from the software element when the services are performed and when VSOE exists to allocate the revenue to the various elements in a multi-element arrangement, the services are not essential to the functionality of any other element of the arrangement, and the total price of the contract would vary with the inclusion or exclusion of the services. Revenue under these arrangements is presented as a component of service revenue on the statement of operations.

        PCS contracts are typically priced as a percentage of the product license fee and generally have a one-year term. Services provided to customers under PCS contracts include technical product support and unspecified product upgrades, on a when and if available basis. Revenue from advance payments for PCS contracts are recognized on a straight-line basis over the term of the contract and are classified as service revenue.

        Even though delivery of PCS and services has started, if all of the criteria in ASC 985-605 for revenue recognition have not yet been met, PCS and service revenue recognition may not commence. At the time all the criteria in ASC 985-605 are met, the portion of the deferred amount based on the

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proportion of the service period that has already expired to the total service period is immediately recognized and the residual amount is recognized ratably over the remaining service period.

        Except in arrangements where acceptance is considered perfunctory, where we have provided acceptance rights to certain customers, no products or services revenue is recognized until the earlier of the customer formal acceptance or the expiration of the acceptance period granted to the customer.

        For arrangements that involve some customization, modification or production services that are considered essential to the functionality of the software element, and separate accounting for these services is not permitted, revenue from the license and professional services essential to the functionality of the software is recognized using the percentage-of-completion method in accordance with ASC 605-35. The percentage-of-completion method is applied when we have the ability to make reasonably dependable estimates of the total cost of effort required for completion using the cost of labor hours incurred as the measure of progress towards completion. The progress toward completion is measured based on the date when the essential product functionality has been delivered or the application enters into a production environment or the point at which no significant additional professional service resources are required for the functionality of the software. Estimates are subject to revisions as the contract progresses to completion and these changes are accounted for as changes in accounting estimates when the information becomes known. Revenue under these arrangements is presented as software revenue on the statement of operations. Where VSOE exists for professional services not essential to the functionality of the software, revenue is recorded as service revenue. Forecasted losses on contracts are accrued to cost of revenue in the period in which a forecasted loss is deemed probable and estimable. Amounts billed in excess of revenue recognized are recorded as deferred revenue in the consolidated balance sheets. Unbilled work-in-process is recorded as a receivable in the consolidated balance sheets.

        For single element arrangements, revenue from stand alone product sales is recognized upon shipment (unless shipping terms determine otherwise), net of estimated returns and/or certain estimated future price changes. Our practice is not to ship product to a reseller or distributor unless the reseller or distributor has a history of selling the products or the end-user is known and has been qualified. In certain specific and limited circumstances, we provide product return and price protection rights to certain distributors and resellers. We have established a reasonable basis through historical experience for estimating future returns and price changes. Actual returns and price protection claims have not been material to date.

Loss Contingencies

        We record loss contingencies in accordance with Accounting Standards Codification Topic No. 450 ("ASC 450"). ASC 450 10 5 establishes standards of financial accounting and reporting for loss contingencies. It requires accrual by a charge to operating expenses and disclosure for an estimated loss from a loss contingency if two conditions are met: (a) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and (b) the amount of loss can be reasonably estimated. Accruals for general or unspecified business risks (reserves for general contingencies) are not permitted.

Use of Estimates

        The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. We base our estimates and judgments on historical experience and on various assumptions that we believe are reasonable under current circumstances. Future events,

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however, are subject to change and estimates and judgments routinely require adjustments, actual results could therefore differ from our current estimates. Significant estimates made in the accompanying financial statements are:

    Fair Value of Investments—The Company's investments are recorded at our best estimate of fair market value, with unrealized gains or losses classified as temporary in nature included in other comprehensive income in the consolidated balance sheet. Impairments considered other-than-temporary are recorded in other income. We use a variety of valuation techniques to access the fair value of investments, including quoted prices in active markets and other observable market indicators. If the relevant assumptions, estimates, or methodologies prove incorrect or, if due to additional information received in the future, our conclusions would change, we may be required to change the recorded value of our investments and record additional impairments.

    Allowance for Doubtful Accounts—We provide an allowance for doubtful accounts receivable based on account aging, historical bad debt experience, and ongoing evaluations of customer creditworthiness. Changes in the allowance are included as a component of general and administrative expense in the consolidated statement of operations. If actual collections differ significantly from our estimates, it may result in a decrease or increase in our general and administrative expenses.

    Inventory Valuation—We provide for slow moving and obsolete inventories based on historical experience and forecasts of product demand. A change in the value of the inventory is included as a component of cost of hardware revenue. If sales of inventory on-hand are less than our current projections or if there is a change in technology making certain inventory obsolete, we may be required to record additional charges which may adversely affect our margins and results of operations.

    Long-Lived Assets—As events or circumstances indicate, we perform a review of the valuation of long-lived assets, including property and equipment. We also assess the recoverability of long-lived assets on an interim basis whenever events and circumstances indicate that the carrying value may not be recoverable based on an analysis of estimated expected future undiscounted net cash flows to be generated by the assets over their estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over their estimated useful lives, we record an impairment charge in the amount by which the carrying value of the assets exceeds their fair value. Should conditions prove to be different than management's current assessment, material write downs of long-lived assets may be required, adversely affecting our results of operations.

    Other Intangible Assets—We generally record intangible assets when we acquire companies. The cost of the acquisition is allocated to the assets and liabilities acquired, including identifiable intangible assets based on those assets and liabilities estimated fair values. Certain identifiable intangible assets such as purchased technology, customer lists, trademarks, and trade names are amortized over time. Accordingly, the allocation of the acquisition cost to identifiable intangible assets has a significant impact on our future operating results. The allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. If impairment indicators are identified with respect to other intangible assets, the fair value of other intangible assets is re-assessed using valuation techniques that require significant management judgment. Should conditions prove to be different than our original assessment, material write downs of the fair value of intangible assets may be required. We periodically review the estimated remaining useful lives of our intangible assets. A reduction in the estimate of remaining useful life could result in accelerated

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      amortization or an impairment charge in future periods and may adversely affect our results of operations.

    Goodwill—In accordance with Accounting Standards Codification Topic No. 350 ("ASC 350") "Intangibles—Goodwill and Other", goodwill is not amortized. Instead, goodwill is tested, at least annually, for impairment at a level of reporting referred to as a reporting unit. Accordingly, we periodically assess goodwill for impairment. Goodwill recorded in business combinations may significantly affect our future operating results to the extent impaired, but the magnitude and timing of any such impairment is uncertain. When we conduct our annual evaluation of goodwill during the fourth quarter of our fiscal year, or if impairment indicators are identified in the interim with respect to goodwill, the fair value of goodwill is re-assessed using valuation techniques that require significant management judgment. The key judgments include analysis of future cash flow which management believes to be an important factor in determination of the fair value of the Company's sole reporting unit. This analysis takes into consideration certain revenue growth and operating expense forecasts. Should conditions be different than our last assessment, significant write-downs of goodwill may be required which will adversely affect our results of operations. We conducted our first annual impairment test of goodwill recorded in connection with our acquisition of CoreStreet in December 2009 in the fourth quarter of the fiscal year ended September 30, 2010. The first step (Step 1) in this analysis was to compare the carrying value of the Company's sole reporting unit, which approximates the Company's total stockholders' equity balance, to its fair value based on the market value of the Company's common stock. If the carrying value exceeded the fair value as a result of Step 1, the Company would have needed to complete Step 2 of the impairment test, which requires the Company to estimate the implied fair value of goodwill and compare that implied fair value to the carrying value of goodwill. As of September 30, 2010, the fair value of the Company's common stock exceeded stockholders' equity by approximately 13%. Consequently, Step 2 of the analysis was not deemed necessary and the Company concluded there was no indication of impairment to the carrying value of goodwill as of September 30, 2010.

    Restructuring Expense—We accrue restructuring liabilities associated with vacating facilities that will no longer be used in operations. Recording of costs associated with vacating facilities require us to estimate future sub-lease income. If the actual future lease payments, net of any sub-lease income, differ from our estimates, it may result in an increase or decrease in our restructuring charge, and could adversely affect our results of operations. In fiscal 2010 and fiscal 2008, we recorded adjustments associated with changes in our estimates for future lease payments. There was no such adjustment recorded in fiscal 2009.

    Hardware Sales Warranty Reserve—We accrue expenses associated with potential warranty claims at the time of sale, based on historical experience. The warranty we provide is in excess of warranty coverage provided by our product assembly contractors. Our standard warranty period is ninety days for software products and one year for hardware products. Changes in the warranty reserve are included as a component of cost of hardware revenue. If actual returns under warranty differ significantly from our estimates, it may result in a decrease or increase in our cost of hardware revenue.

    Provision for Income Taxes—The provision for income taxes includes taxes currently payable and changes in deferred tax assets and liabilities. We record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. If we do not generate sufficient taxable income, the realization of deferred tax assets could be impaired resulting in additional income tax expense. As a result, we record a valuation allowance to reduce net deferred tax assets to amounts that are more likely than not to be recognized. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences, net operating

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      loss carry forwards, and research and development tax credits. We have established a valuation allowance to reserve these deferred tax assets due to uncertainty regarding their realization.

    Stock Based Compensation—We estimate the value of employee stock options on the date of grant using the Black-Scholes Merton model. The determination of fair value of share-based payment awards on the date of grant using this option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The expected volatility is based on the historical volatility of our stock price. For awards that carry a market based vesting aspect, the fair value of the award is based on the results of a market simulation model (the simulation model) that evaluates the probability that the requisite market conditions needed for vesting will be achieved. The simulation model uses multiple iterations of simulated daily stock prices of the Company between the grant date and the future vesting date. The inputs to the simulation model include the Company's stock price on the grant date, the historical volatility of the Company's stock price over a period of time corresponding to the vesting period of the unit award as of the grant date, and the risk free interest rate, based on relevant U.S. Treasury Note rates, as of the grant date. Based on whether the requisite market conditions are achieved during the multiple simulations the simulation model produces an expected future value of the stock on the vesting date. This future value is discounted back to the grant date and used as the requisite fair value of the unit award.

RECENT ACCOUNTING PRONOUNCEMENTS

        See Note 1—Nature of Business and Summary of Significant Accounting Policies to the Consolidated Financial Statements contained herein for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of our operations and financial condition.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        We are exposed to market risks, specifically with respect to foreign currency exchange rates, interest rate volatility, and concentration of credit risk, especially on auction rate security investments. We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts.

Exchange Rate Sensitivity

        We are exposed to currency exchange fluctuations as we sell our products and incur expenses globally. We manage the sensitivity of our international revenue by denominating transactions in U.S. Dollars, Euros, Australian Dollars and British Pounds. A natural hedge exists in some local currencies, to a limited extent, as local currency denominated operating expenses offset some of the local currency denominated revenue. Due to fluctuations in foreign currencies we recorded a loss of $0.7 million in fiscal 2010, a loss of $0.8 million in fiscal 2009, and a loss of $2.0 million in fiscal 2008, on our consolidated statements of operations on the revaluation of assets and liabilities and settlement of current period transactions.

        During fiscal 2010, 2009, and 2008, of total revenue, approximately 64%, 65%, and 62%, respectively, were invoiced in U.S. dollars. Although we incur a majority of expenses in U.S. dollars, approximately 37%, 44%, and 50% were denominated in other currencies, primarily in Euros, Australian dollars and British Pounds during fiscal 2010, 2009, and 2008, respectively. Because more

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revenue is U.S. dollars denominated than expenses, a decline in the value of the U.S. Dollar could adversely affect operating results.

Interest Rate Sensitivity

        We are exposed to interest rate risk as a result of our significant cash, cash equivalents and investment holdings. The rate of return that we may be able to obtain on investment securities will depend on market conditions at the time we make these investments and may differ from the rates we have secured in the past.

        At September 30, 2010, we held $72.5 million of cash and cash equivalents, $3.8 million in marketable securities, and $1.9 million in restricted cash, for a total of $78.2 million. Our cash and cash equivalents consist primarily of cash and money market funds. Our marketable securities are primarily comprised of closed-end mutual funds and a student loan agency. Based on our cash, cash equivalents and investments at September 30, 2010, a hypothetical 10% increase or decrease in interest rates would increase or decrease our annual interest income and cash flows by approximately $56,000.

Concentration of Credit Risk

        Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, restricted cash, marketable securities and accounts receivable. The Company maintains cash, cash equivalents, and restricted cash with high credit quality financial institutions, term deposits and ARS consisting of closed-end mutual funds and a student loan agency. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for further discussion.

        The Company believes it has made reasonable judgments in its valuation of marketable securities. However, if the relevant assumptions, estimates, or the related analyses prove incorrect or, if due to additional information received in the future, management's conclusions would change, the Company may be required to change the recorded value of the marketable securities as of September 30, 2010.

        The Company sells the majority of its products and services to a limited number of customers. If the financial conditions or results of operations of any one of the large customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not generally require collateral and maintains reserves for estimated credit losses on customer accounts when considered necessary.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements required by this item are presented in Item 15 and follow the signature page.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the specified time

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periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

        The Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (Disclosure Controls) as of the end of the period covered by this Report required by Exchange Act Rules 13a-15(b) or 15d-15(b). The controls evaluation was conducted under the supervision and with the participation of the Company's management, including the chief executive officer ("CEO") and chief financial officer ("CFO"). Based on this evaluation, the Company's CEO and CFO have concluded that as of the end of the period covered by this report the Company's disclosure controls and procedures were effective at a reasonable assurance level.

Definition of Disclosure Controls

        Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in the Company's reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The Company's Disclosure Controls include components of its internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of the Company's internal control over financial reporting are included within its Disclosure Controls, they are included in the scope of the Company's annual controls evaluation.

Management's Report on Internal Control over Financial Reporting

        The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Company's management, including the CEO and CFO, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company's management concluded that the Company's internal control over financial reporting was effective as of September 30, 2010.

        The effectiveness of the Company's internal control over financial reporting as of September 30, 2010 has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in their report presented in Item 15 and following the signature page.

Limitations on the Effectiveness of Controls

        The Company's management, including the CEO and CFO, does not expect that the Company's Disclosure Controls or internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or

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mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

        No change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth quarter ended September 30, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B.    OTHER INFORMATION

    None


PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT

        The information required by this item will be included under the captions "Election of Directors," in our Proxy Statement, to be filed in connection with our 2011 Annual Meeting of Stockholders, and is incorporated herein by reference. "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement, to be filed in connection with our 2011 Annual Meeting of Stockholders, is also incorporated herein by reference. Information on Executive Officers is included in Item 1 of this report.

        We have adopted a code of ethics for directors, officers (including our principal executive officer, principal financial officer and principal accounting officer or controller), and employees. This code of ethics is available on our website at www.actividentity.com and any waivers from or amendments to the code of ethics, if any, will be posted on our website.

ITEM 11.    EXECUTIVE COMPENSATION

        The information required by this item will be included under the caption "Executive Compensation" in our Proxy Statement, to be filed in connection with our 2011 Annual Meeting of Stockholders, and is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The information required by this item will be included under the captions "Security Ownership by Certain Beneficial Holders and Management" and "Equity Compensation Plan Information" in our Proxy Statement, to be filed in connection with our 2011 Annual Meeting of Stockholders, and is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        The information required by this item will be included under the caption "Certain Relationships and Related Transactions" and "Director Independence" in our Proxy Statement, to be filed in connection with our 2011 Annual Meeting of Stockholders, and is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by this item will be included under the caption "Independent Registered Public Accounting Firm" in our Proxy Statement, to be filed in connection with our 2011 Annual Meeting of Stockholders, and is incorporated herein by reference.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

    (a)
    The following documents are filed as part of this report.

1.     Financial Statements

        The following are included in this Report on Form 10-K:

2.     Financial Statement Schedule

        All financial statement schedules have been omitted because they are either not required, not applicable, or because the information required is included in the consolidated financial statements or the notes thereto.

3.     Exhibits

Exhibit
Number
  Exhibit Description
  2.1(16)   Agreement and Plan of Merger among ActivIdentity Corp., Terrapin Holding Corp., Terrapin Acquisition Corp., CoreStreet Ltd. and John F. Burton
  3.1(1)   Amended and Restated Certificate of Incorporation of ActivIdentity Corporation
  3.2(2)   Amended and Restated Bylaws of ActivIdentity Corporation
  3.3(12)   Certificate of Designations of Series A Junior Participating Cumulative Preferred Stock of ActivIdentity Corporation
  4.1(1)   Specimen common stock certificate (front and reverse)
  4.2(1)   Form of ActivCard Corp. Director Common Stock Warrant
  4.3(3)   Form of ActivCard Corp. Common Stock Warrant
  4.4(12)   Stockholder Rights Agreement, dated as of July 25, 2008 between ActivIdentity Corporation and American Stock Transfer & Trust Company, as Rights Agent
4.4.1(17)   Amendment No. 1 dated October 11, 2010, to the Stockholder Rights Agreement, dated July 25, 2008, between ActivIdentity Corporation and American Stock Transfer & Trust Company LLC
10.1(1)   2002 Stock Option Plan of ActivCard Corp.
10.2(1)   Lease Agreement, as amended, between the John Arrillaga Survivor's Trust and the Richard T. Peery Separate Property Trust, as Landlord, and ActivCard, Inc. dated April 11, 2000
10.3(9)   Facility Lease dated January 22, 2008—Suresnes, France

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Exhibit
Number
  Exhibit Description
10.4+(4)   Agreement between Samsung Semiconductor Europe GmbH and ActivCard S.A. dated June 9, 1996
10.5(1)   SEWP III Subcontract Agreement between Northrop Grumman Computing Systems, Inc. and ActivCard, Inc. effective July 25, 2002
10.6(5)   Agreement for Sale and Purchase of Shares in Aspace Solutions Ltd., dated July 31, 2003
10.7(6)   Stock Purchase Agreement, by and among, Jason Hart, Michael Smith, Equity Partners Two Pty Ltd and Peter Johnson, as Sellers' and ActivCard Corp. dated July 26, 2005
10.8(7)   2004 Equity Incentive Plan of ActivCard Corp.
10.9(8)   Form of Restricted Stock Unit Director Grant Agreement
10.10(3)   Form of Restricted Stock Unit Grant Agreement
10.11(9)   Employment Agreement between Grant Evans and ActivIdentity dated April 23, 2008
10.12(10)   Employment Agreement between Jacques Kerrest and ActivIdentity dated August 1, 2008
10.13(11)   Patent Purchase and Assignment Agreement dated July 6, 2006
10.14(9)   Mutual Release and Waiver Agreement with Former Protocom Stockholders dated July 19, 2007
10.15(13)   Severance Agreement and Release, dated November 1, 2007, by and between ActivIdentity and Jason Hart
10.16(9)   Separation Agreement with Mark Lustig dated April 11, 2008
10.17(9)   Severance Agreement and Release with Thomas Jahn effective April 11, 2008
10.18(9)   Facility Lease—Canberra, Australia
10.19(15)   Employment Agreement between Michael Sotnick and ActivIdentity, effective December 7, 2008
10.20(14)   First Amendment to 2004 Equity Incentive Plan of ActivIdentity Corp.
10.21(14)   ActivIdentity Corp. Non-Employee Directors' Equity Compensation Program
21.1   Subsidiaries of the Registrant
23.1   Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
23.2   Consent of BDO USA LLP (formerly known as BDO Seidman LLP), Independent Registered Public Accounting Firm
24.1   Power of Attorney (contained on signature page)
31.1   Certification of Chief Executive Officer Filed Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer Filed Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer and Chief Financial Officer Filed Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

+
Confidential treatment has been granted with respect to certain portions of this exhibit.

(1)
Incorporated by reference from the Registrant's Registration Statement on Form S-4, filed September 25, 2002 (File No. 333-100067).

(2)
Incorporated by reference from the Registrant's Current Report on Form 8-K, filed September 24, 2007.

(3)
Incorporated by reference from the Registrant's Annual Report on Form 10-KT, filed December 14, 2004.

(4)
Incorporated by reference from ActivCard S.A.'s Registration Statement on Form F-1, filed on March 6, 2000 (File No. 333-11540).

(5)
Incorporated by reference from the Registrant's Annual Report of Form 10-K, filed March 15, 2004.

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(6)
Incorporated by reference from the Registrant's Current Report on Form 8-K, filed July 27, 2005.

(7)
Incorporated by reference from the Registrant's Definitive Proxy Statement on Schedule 14A, filed July 12, 2004.

(8)
Incorporated by reference from the Registrant's Current Report on Form 8-K, filed November 5, 2004.

(9)
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q, filed May 12, 2008.

(10)
Incorporated by reference from the Registrant's Annual Report on Form 8-K, filed August 4, 2008.

(11)
Incorporated by reference from the Registrant's amended Annual Report on Form 10-K/A, filed December 20, 2007.

(12)
Incorporated by reference from the Registrant's Registration Statement on Form 8-A, filed on July 25, 2008.

(13)
Incorporated by reference from the Registrant's Annual Report on Form 10-K, filed December 14, 2007.

(14)
Incorporated by reference from the Registrant's Current Report on Form 8-K, filed November 20, 2008.

(15)
Incorporated by reference from the Registrant's Current Report on Form 8-K, filed December 11, 2008.

(16)
Incorporated by reference from the Registrant's Current Report on Form 8-K, filed December 14, 2009.

(17)
Incorporated by reference from the Registrant's Current Report on Form 8-A/A, filed October 12, 2010.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on the 10th day of December, 2010.

    ACTIVIDENTITY CORPORATION

 

 

By:

 

/s/ GRANT EVANS

Grant Evans
Chief Executive Officer

 

 

ACTIVIDENTITY CORPORATION

 

 

By:

 

/s/ JACQUES KERREST

Jacques Kerrest
Chief Financial Officer

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Grant Evans and Jacques Kerrest, jointly and severally, his attorney-in-fact, each with the power of substitution, for such person in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection herewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name
 
Title
 
Date

 

 

 

 

 
/s/ GRANT EVANS

Grant Evans
  Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)   December 10, 2010

/s/ JACQUES KERREST

Jacques Kerrest

 

Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)

 

December 10, 2010

/s/ BRAD BOSTON

Brad Boston

 

Director

 

December 10, 2010

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Name
 
Title
 
Date

 

 

 

 

 
/s/ ROBERT BRANDEWIE

Robert Brandewie
  Director   December 10, 2010

/s/ JIM FRANKOLA

Jim Frankola

 

Director

 

December 10, 2010

/s/ STEVEN HUMPHREYS

Steven Humphreys

 

Director

 

December 10, 2010

/s/ JAMES OUSLEY

James Ousley

 

Director

 

December 10, 2010

/s/ DAVID B. WRIGHT

David B. Wright

 

Director

 

December 10, 2010

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of ActivIdentity Corporation

        We have audited the accompanying consolidated balance sheet of ActivIdentity Corporation as of September 30, 2010 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ActivIdentity Corporation at September 30, 2010, and the consolidated results of its operations and its cash flows for the year ended September 30, 2010, in conformity with U.S. generally accepted accounting principles.

        As discussed in Note 1 to the consolidated financial statements, ActivIdentity changed the presentation of the non-controlling interest in its consolidated financial statements effective October 1, 2009.

        We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), ActivIdentity Corporation's internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 10, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California
December 10, 2010

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of ActivIdentity Corporation

        We have audited Actividentity Corporation's internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Actividentity Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, Actividentity Corporation maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Actividentity Corporation as of September 30, 2010, and the related consolidated statements of operations, stockholders' equity and cash flows for year then ended of Actividentity Corporation and our report dated December 10, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California
December 10, 2010

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REPORT OF BDO USA LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
ActivIdentity Corporation
Fremont, California

        We have audited the accompanying consolidated balance sheet of ActivIdentity Corporation as of September 30, 2009 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended September 30, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ActivIdentity Corporation at September 30, 2009, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA LLP
(formerly known as BDO Seidman LLP)

San Francisco, California
December 14, 2009

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ACTIVIDENTITY CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 
  September 30,  
 
  2010   2009  

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 72,519   $ 75,624  
 

Marketable securities

    3,780     3,100  
 

Accounts receivable, net

    12,247     13,983  
 

Inventories

    883     701  
 

Prepaid and other current assets

    1,569     556  
 

Restricted cash

    1,940      
           
   

Total current assets

    92,938     93,964  

Restricted cash

        1,746  

Investments

        11,752  

Property and equipment, net

    1,637     2,353  

Intangible assets, net

    9,075     1,842  

Goodwill

    9,416      

Other long-term assets

    660     2,920  
           
   

Total assets

  $ 113,726   $ 114,577  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             
 

Accounts payable

  $ 1,731   $ 1,853  
 

Accrued compensation and related benefits

    4,693     5,507  
 

Accrued restructuring liability

    148     642  
 

Accrued and other current liabilities

    3,914     3,493  
 

Current portion of deferred revenue

    9,520     12,574  
           
   

Total current liabilities

    20,006     24,069  

Long-term portion of deferred revenue

    2,296     1,240  

Accrued restructuring liability

        325  

Deferred rent

    502     114  

Other long-term liabilities

    460     582  
           
   

Total liabilities

    23,264     26,330  
           

Commitments and contingencies (Note 15)

             

Stockholders' equity:

             
 

Preferred stock, $0.001 par value: 10,000,000 shares authorized; none issued and outstanding as of September 30, 2010 and 2009

         
 

Common stock, $0.001 par value: 75,000,000 shares authorized; 47,249,335 and 45,866,110 issued and outstanding as of September 30, 2010 and 2009

    47     46  
 

Additional paid-in capital

    436,167     429,105  
 

Accumulated deficit

    (334,314 )   (328,599 )
 

Accumulated other comprehensive loss

    (11,750 )   (12,616 )
           
   

Total ActivIdentity stockholders' equity

    90,150     87,936  
 

Non-controlling interest

    312     311  
           
   

Total stockholders' equity

    90,462     88,247  
           
   

Total liabilities and stockholders' equity

  $ 113,726   $ 114,577  
           

See accompanying notes to consolidated financial statements.

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ACTIVIDENTITY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 
  Years Ended September 30,  
 
  2010   2009   2008  

Revenue:

                   
 

Software

  $ 21,533   $ 23,975   $ 19,589  
 

Hardware

    13,578     15,784     15,078  
 

Service

    22,595     22,562     24,342  
               
   

Total revenue

    57,706     62,321     59,009  
               

Cost of revenue:

                   
 

Software

    1,229     4,179     963  
 

Hardware

    6,887     7,954     9,551  
 

Service

    8,071     7,677     10,779  
 

Amortization of developed technology and patents

    972     2,168     2,380  
               
   

Total cost of revenue

    17,159     21,978     23,673  
               

Gross profit

    40,547     40,343     35,336  
               

Operating expenses:

                   
 

Sales and marketing

    17,516     19,572     25,602  
 

Research and development

    15,892     15,053     18,867  
 

General and administration

    15,785     12,769     11,380  
 

Restructuring expense (net of recoveries)

    (356 )       (70 )
 

Amortization of other intangible assets

    985     140     165  
 

Write-down of goodwill

            35,874  
               
   

Total operating expenses

    49,822     47,534     91,818  
               

Loss from operations

    (9,275 )   (7,191 )   (56,482 )
               

Other income (expense):

                   
 

Interest income, net

    564     1,710     4,659  
 

Other income (expense), net

    3,169     (508 )   (25,190 )
               
   

Total other income (expense), net

    3,733     1,202     (20,531 )
               

Loss before income taxes and non-controlling interest

    (5,542 )   (5,989 )   (77,013 )

Income tax benefit (provision)

    (172 )   344     506  
               

Net loss

    (5,714 )   (5,645 )   (76,507 )
 

Net income (loss) attributable to non-controlling interest

    1     (99 )   (50 )
               

Net loss attributable to ActivIdentity stockholders

  $ (5,715 ) $ (5,546 ) $ (76,457 )
               

Basic and diluted net loss per share

  $ (0.12 ) $ (0.12 ) $ (1.67 )

Shares used to compute basic and diluted net loss per share

    47,317     45,814     45,770  

See accompanying notes to consolidated financial statements.

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ACTIVIDENTITY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except shares)

 
  Common Shares    
   
  Accumulated
Other
Comprehensive
Loss
   
   
 
 
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Non-
controlling
Interest
  Total
Stockholders'
Equity
 
 
  Shares   Amount  

Balances, September 30, 2007

    45,732,623   $ 46   $ 423,242   $ (246,501 ) $ (17,344 ) $ 354   $ 159,797  

Exercise of options

    6,843         25                 25  

Issuance of restricted stock units net of cancellations

    46,718                          

Stock-based compensation expense

            2,874                 2,874  

Cumulative effect of adoption of ASC 740 10 05 (FIN 48)

                (95 )           (95 )

Components of comprehensive loss:

                                           
 

Net loss

                (76,457 )       (50 )   (76,507 )
 

Unrealized loss on marketable securities, net of reclassifications

                    (130 )       (130 )
 

Foreign currency translation, net of reclassifications

                    3,694         3,694  
                                           
 

Total comprehensive loss

                            (72,943 )
                               

Balances, September 30, 2008

    45,786,184     46     426,141     (323,053 )   (13,780 )   304     89,658  

Issuance of restricted stock units net of cancellations

    79,926                          

Stock-based compensation expense

            3,074                 3,074  

Minority interest adjustment

            (110 )           110      

Components of comprehensive loss:

                                           
 

Net loss

                (5,546 )       (99 )   (5,545 )
 

Unrealized gain on marketable securities, net of reclassifications

                    152         152  
 

Foreign currency translation, net of reclassifications

                    1,012     (4 )   1,008  
                                           
 

Total comprehensive loss

                            (4,485 )
                               

Balances, September 30, 2009

    45,866,110     46     429,105     (328,599 )   (12,616 )   311     88,247  

Exercise of options

    225,956         335                 335  

Issuance of restricted stock units net of cancellations

    26,250                          

Retirement of stock through repurchase

    (1,085,293 )   (1 )   (2,412 )               (2,413 )

Issuance of stock in CoreStreet acquisition

    2,216,312     2     5,708                 5,710  

Stock-based compensation expense

            3,431                 3,431  

Components of comprehensive loss:

                                           
 

Net loss

                (5,715 )       1     (5,714 )
 

Foreign currency translation, net of reclassifications

                    866         866  
                                           
 

Total comprehensive loss

                            (4,848 )
                               

Balances, September 30, 2010

    47,249,335   $ 47   $ 436,167   $ (334,314 ) $ (11,750 ) $ 312   $ 90,462  
                               

See accompanying notes to consolidated financial statements.

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ACTIVIDENTITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 
  Years Ended September 30,  
 
  2010   2009   2008  

Cash flows from operating activities:

                   
 

Net loss

  $ (5,714 ) $ (5,645 ) $ (76,507 )
 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

                   
   

Gain on sale of investments and marketable securities

    (4,121 )        
   

Stock-based compensation

    3,431     3,074     2,874  
   

Depreciation of property and equipment

    1,121     1,243     1,566  
   

Amortization of other intangible assets

    985     140     165  
   

Amortization of developed technology and patents

    972     2,168     2,380  
   

Unrealized foreign exchange loss

    639     1,558     1,782  
   

Impairment of investments

    294         21,209  
   

Loss on disposal of property and equipment

        45     24  
   

Goodwill impairment charge

            35,874  
   

Currency translation loss on liquidation of investments in foreign entity

            1,946  
   

Changes in assets and liabilities, net of assets acquired and liabilities assumed in a business combination:

                   
     

Accounts receivable

    2,434     (1,854 )   2,643  
     

Inventories

    (227 )   1,044     402  
     

Prepaid and other current assets

    1,051     (1,542 )   872  
     

Other assets

    151     2,428     (3,074 )
     

Accounts payable

    (245 )   163     (444 )
     

Accrued compensation and related benefits

    (961 )   (485 )   (838 )
     

Accrued restructuring liability

    (819 )   (611 )   (729 )
     

Accrued and other current liabilities

    621     (2,447 )   2,598  
     

Deferred revenue

    (2,183 )   1,395     (872 )
               
   

Net cash provided by (used in) operating activities

    (2,571 )   674     (8,129 )
               

Cash flows from investing activities:

                   
 

Proceeds from sales and maturities of investments and marketable securities

    14,898     6,525     85,165  
 

Acquisition, net of cash acquired

    (12,769 )        
 

Purchases of property and equipment

    (467 )   (760 )   (307 )
 

Other long-term assets

        25     136  
 

Restricted cash

        (1,458 )    
 

Purchases of marketable securities

            (37,245 )
               
   

Net cash provided by investing activities

    1,662     4,332     47,749  
               

Cash flows from financing activities:

                   
 

Proceeds from exercise of employee stock options

    335         25  
 

Repurchase of stock

    (2,413 )        
               

Net cash provided by (used in) financing activities

    (2,078 )       25  
               

Effects of exchange rate changes on cash and cash equivalents

    (118 )   445     (111 )

Net increase (decrease) in cash and cash equivalents

    (3,105 )   5,451     39,534  

Cash and cash equivalents, beginning of year

    75,624     70,173     30,639  
               

Cash and cash equivalents, end of year

  $ 72,519   $ 75,624   $ 70,173  
               

Supplemental disclosures:

                   
 

Refund received (cash paid) for income taxes, net

  $ 1,140   $ (186 ) $ 11  

Non-cash investing transactions:

                   
 

Fair value of common stock issued in connection with acquisition

  $ 4,995          
 

Fair value of warrants issued in connection with acquisition

  $ 716          

See accompanying notes to consolidated financial statements.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2010, 2009, and 2008

1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business

        ActivIdentity Corporation (the "Company", "ActivIdentity", "we" or "us"), is a global leader in strong authentication and credential management. Our strategy is to provide solutions to confidently establish a person's identity when interacting digitally.

        The Company's strategy leverages its identity assurance platform and credential management system to apply a common approach to registration / enrollment, authentication, authorization, auditing, credential issuance / management, and use of credentials. This approach takes into account that organizations require the assurance of a trusted chain of identity that allows them to conduct their day-to-day business in the digital age with the same level of confidence as face-to-face transactions.

        Though identities may be repeatedly captured, verified, enrolled, used, and tracked by disparate systems with little interaction, the Company's identity assurance platform allows organizations to leverage the relative trust levels of the credentials and use the same security infrastructure across diverse user communities (such as citizens, employees, contractors, partners, suppliers, and customers) and applications (such as driver's license, employee identification badge, remote access token, and supplier procurement access portal).

        ActivIdentity has been a pioneer of the identity assurance market and is a key supporter and driver of standards in this technology area, engaging with global standards bodies such as GlobalPlatform, ISO, and ANSI. The Company's approach to identity assurance embraces a wide variety of authentication devices and authentication methods. Smart cards, soft tokens, hard tokens, USB tokens, or mobile phones can be enrolled, issued a certificate, and managed through their life-cycle via ActivIdentity's identity assurance platform.

        ActivIdentity was incorporated in the State of Delaware in August 2002 for the purpose of changing the domicile of the publicly listed company in the ActivIdentity group of companies, previously ActivCard S.A., from the Republic of France to the United States. ActivCard S.A. was organized as a Société Anonyme, or limited liability corporation, under the laws of the Republic of France. In 2003, ActivIdentity completed registered public exchange offers in which holders of ActivCard S.A. securities exchanged 41,730,958 common shares and American depositary shares (ADS) of ActivCard S.A. for 41,635,741 common shares of ActivIdentity. Following completion of the exchange offers, ActivIdentity held approximately 99.4% of the outstanding securities of ActivCard S.A. During fiscal 2006, the Company purchased additional ActivCard S.A securities and currently holds approximately 99.8% of the outstanding securities of ActivCard S.A. The common shares and ADS of ActivCard S.A. not exchanged or sold have been recorded as a non-controlling interest on the consolidated balance sheets.

        We operate on a fiscal year ending September 30. For convenience in these Notes, we refer to the fiscal year ended September 30, 2008 as fiscal 2008, the fiscal year ended September 30, 2009 as fiscal 2009 and the fiscal year ended September 30, 2010 as fiscal 2010.

Significant Accounting Policies

        Basis of Presentation—The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

        Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ from current estimates. Estimates are used for, but not limited to, the fair value of investments, the provision for doubtful accounts, obsolete and excess inventories, depreciation and amortization, valuation of intangible assets and goodwill, sales warranty reserve, income taxes, restructuring liability, valuation of stock-based compensation, and contingencies.

        Cash, Cash Equivalents, Marketable Securities, and Investments—The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Marketable securities consist of investments acquired with original maturities exceeding three months and are classified as available-for-sale. Marketable securities are reported at market value, based on quoted market prices or the application of valuation models, with unrealized gains or losses included in accumulated other comprehensive income (loss), net of applicable taxes. Long-term investments are reported at fair value, based on the application of valuation models. If the impairment on long-term securities is determined to be other-than-temporary, the unrealized loss is recorded through other income (expense), net. The gain or loss from sale of securities sold is recognized on the specific identification method.

        Allowance for Doubtful Accounts—The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to pay outstanding amounts. The provision is based on factors that include account aging, historical bad debt experience, customer creditworthiness, and other known factors. Account balances are charged off against the allowance only when the Company considers it is probable that a receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers.

        Inventories—Inventories consists of finished goods and components and are valued at the lower of cost (first-in, first-out method) or market.

        Property and Equipment—Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the improvement of up to 10 years.

        Intangible Assets—Intangible assets include the fair value of agreements and contracts, developed technology, and trademarks acquired in business combinations and acquired patents. Finite-lived intangible assets are amortized over one to ten years, which approximates their estimated useful lives. The Company, each reporting period, reviews for indicators of potential impairment to the carrying value of finite-lived intangible assets. During the year ended September 30, 2010, no indicators of impairment.

        Goodwill—In accordance with Accounting Standards Codification Topic No. 350 (ASC 350) "Intangibles—Goodwill and Other", goodwill is not amortized. Instead, goodwill is tested for

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

1. Nature of Business and Summary of Significant Accounting Policies (Continued)


impairment at a level of reporting referred to as a reporting unit. Accordingly, we perform an annual assessment of goodwill, or more frequently if there are indicators of potential impairment. Goodwill recorded in business combinations may significantly affect our future operating results to the extent impaired, but the magnitude and timing of any such impairment is uncertain. When we conduct our annual assessment of goodwill during the fourth quarter of our fiscal year, or if impairment indicators are identified in the interim with respect to goodwill, the fair value of goodwill is re-assessed using valuation techniques that require significant management judgment. The key judgments include analysis of future cash flow which management believes to be an important factor in determination of the fair value of the Company's sole reporting unit. This analysis takes into consideration certain revenue growth and operating expense forecasts. Should conditions be different than our last assessment, significant write-downs of goodwill may be required which will adversely affect our results of operations. The Company conducted its first annual impairment assessment of goodwill, recorded in connection with its acquisition of CoreStreet in December 2009, in the fourth quarter of the fiscal year ending September 30, 2010. The first step (Step 1) in this analysis was to compare the carrying value of the Company's sole reporting unit, which approximates the Company's total stockholders' equity balance, to its fair value based on the market value of the Company's common stock. If the carrying value exceeded the fair value as a result of Step 1, the Company would have had to complete Step 2 of the impairment test, which requires the Company to estimate the implied fair value of goodwill and compare that implied fair value to the carrying value of goodwill. As of September 30, 2010, the fair value of the Company's common stock exceeded stockholders' equity by approximately 13%.

        Long-Lived Assets, Excluding Intangible Assets—The Company accounts for long-lived assets in accordance with the provisions of ASC 360 10 15. The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To determine the amount of impairment, the Company compares the fair value of the asset to its carrying value. If the carrying value of the asset exceeds its fair value, an impairment loss equal to the difference is recognized.

        Restricted Cash—Under the terms of a software development contract with a customer, the Company provide a performance guarantee in the form of a financial security agreement that extends through September 30, 2011.

        Research and Development—Research and development costs are expensed as incurred.

        Sales Warranty Reserve—Expenses associated with potential warranty claims are accrued at the time of sale, based on historical experience. The Company provides for the costs of warranty in excess of warranty coverage provided by product assembly contractors. The Company's standard warranty period is one year for hardware products and ninety days for software products.

        Deferred Revenue—The Company's deferred revenue consists of customer arrangements related to products and services billings in excess of revenue recognized, which the Company is legally entitled to invoice and collect. The revenue from deferred revenue is recognized into earnings when the revenue recognition criteria are met.

        Advertising Costs—The Company expenses all advertising costs as incurred, and the amounts were not material for all periods presented.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

Revenue Recognition

        The Company recognizes revenue in accordance with U.S. GAAP, as set forth in:

    ASC 985-605 (formerly known as and comprised of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue Recognition", as amended by SOP 98-9, "Modification of SOP 97-2", "Software Revenue Recognition, With Respect to Certain Transactions" and EITF 03-05, "Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software)",

    ASC 605-25 (formerly known as Emerging Issues Task Force Issue No. (EITF) 00-21, "Revenue Arrangements with Multiple Deliverables)",

    ASC 605-35 (formerly known as and comprised of Accounting Research Bulletin No. 45 (ARB 45), "Long-Term Construction-Type Contracts", SOP 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts)",

    SEC Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition", and

    Technical Practice Aid (TPA) interpretations of ASC 985-605 (SOP 97-2) issued by the AICPA (TPAs 5100.38 - 5100.76).

        The application of the appropriate accounting principles to revenue is dependent upon the specific transaction and whether the sale includes hardware products, software products, post contract customer support (PCS), other professional services, or a combination of some or all of these products and/or services.

        Subject to the additional conditions described below, the Company does not recognize revenue until: (1) persuasive evidence of an arrangement exists; (2) the fee is fixed or determinable; (3) delivery has occurred; and (4) collection of the corresponding receivable is reasonably assured.

        For multiple element arrangements that contain one or more deliverables for which the functionality is not dependent on the software, the arrangement fee is allocated between the "non-software" and software deliverables in accordance with ASC 605-25 when the following criteria are met:

    The delivered item has stand alone value;

    There is objective and reliable evidence of the fair value of the undelivered elements as demonstrated by vendor specific objective evidence (VSOE) of fair value or third party evidence; and

    If the arrangement includes a general return right relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor.

        If the above criteria are met, the Company allocates the arrangement fee to the delivered items using the residual value method. Revenue for the elements whose functionality is not dependent upon the delivered software is recognized in accordance with SAB 104, and revenue for software elements is recognized in accordance with ASC 985-605. If the above criteria are not met, all deliverables are

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

considered a single unit of accounting and revenue is recognized in accordance with ASC 985-605 upon delivery of all elements of the arrangement.

        For multiple element arrangements that contain one or more deliverables for which the functionality is dependent on the software, the arrangement fee is subject to the provisions of ASC 985-605, and is allocated among each element, based on VSOE of fair value of each element if VSOE of each element exists. The Company determines VSOE of an element based on the price charged when the same element is sold separately. For an element not yet sold separately, VSOE may be established by management having the relevant authority as long as it is probable that the price, once established, will not change before separate introduction of the element in the marketplace. When arrangements contain multiple elements and VSOE exists for all undelivered elements only, the Company recognizes revenue for the delivered elements based on the residual value method. For arrangements containing multiple elements wherein VSOE does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until VSOE exists or all elements have been delivered. Additionally, where VSOE does not exist to allocate the fee to the separate elements and the only undelivered element is PCS, the entire arrangement fee is recognized ratably over the contractual PCS period. For all other transactions not involving software, fair value is determined using the price when sold separately or other methods allowable under ASC 605-25.

        Professional service revenue is recognized separately from the software element when the services are performed and when VSOE exists to allocate the revenue to the various elements in a multi-element arrangement, the services are not essential to the functionality of any other element of the arrangement, and the total price of the contract would vary with the inclusion or exclusion of the services. Revenue under these arrangements is presented as a component of service revenue on the statement of operations.

        PCS contracts are typically priced as a percentage of the product license fee and generally have a one-year term. Services provided to customers under PCS contracts include technical product support and unspecified product upgrades, on a when and if available basis. Revenue from advance payments for PCS contracts are recognized on a straight-line basis over the term of the contract and are classified as service revenue.

        Even though delivery of PCS and services has started, if all of the criteria in ASC 985-605 for revenue recognition have not yet been met, PCS and service revenue recognition may not commence. At the time all the criteria in ASC 985-605 are met, the portion of the deferred amount based on the proportion of the service period that has already expired to the total service period is immediately recognized and the residual amount is recognized ratably over the remaining service period.

        Except in arrangements where acceptance is considered perfunctory, where the Company has provided acceptance rights to certain customers, no products or services revenue is recognized until the earlier of the customer formal acceptance or the expiration of the acceptance period granted to the customer.

        For arrangements that involve some customization, modification or production services that are considered essential to the functionality of the software element, and separate accounting for these services is not permitted, revenue from the license and professional services essential to the functionality of the software is recognized using the percentage-of-completion method in accordance

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

1. Nature of Business and Summary of Significant Accounting Policies (Continued)


with ASC 605-35. The percentage-of-completion method is applied when the Company has the ability to make reasonably dependable estimates of the total cost of effort required for completion using the cost of labor hours incurred as the measure of progress towards completion. The progress toward completion is measured based on the date when the essential product functionality has been delivered or the application enters into a production environment or the point at which no significant additional professional service resources are required for the functionality of the software. Estimates are subject to revisions as the contract progresses to completion and these changes are accounted for as changes in accounting estimates when the information becomes known. Revenue under these arrangements is presented as software revenue on the statement of operations. Where VSOE exists for professional services not essential to the functionality of the software, revenue is recorded as service revenue. Forecasted losses on contracts are accrued to cost of revenue in the period in which a forecasted loss is deemed probable and estimable. Amounts billed in excess of revenue recognized are recorded as deferred revenue in the consolidated balance sheets. Unbilled work-in-process is recorded as a receivable in the consolidated balance sheets.

        For single element arrangements, revenue from stand alone product sales is recognized upon shipment (unless shipping terms determine otherwise), net of estimated returns and/or certain estimated future price changes. The Company's does not ship product to a reseller or distributor unless the reseller or distributor has a history of selling the products or the end-user is known and has been qualified. In certain specific and limited circumstances, the Company provides product return and price protection rights to certain distributors and resellers. The Company has established a reasonable basis through historical experience for estimating future returns and price changes. Actual returns and price protection claims have not been material to date.

        Stock-Based Compensation—ASC 718 30 30 Share-based Payment), requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.

        ASC 718 30 30-1 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest (less estimated forfeitures) is recognized as expense over the requisite service periods in the Company's consolidated statement of operations. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ. Different forfeiture rates are estimated and applied to (1) executives, (2) non-executive employees not located in France, and (3) employees located in France. Cash flows generated from potential tax benefits arising from tax deductions in excess of the compensation cost recognized for options granted are classified as financing cash flows. Due to the Company's loss position, there were no such tax benefits during fiscal 2010, 2009, or 2008.

        The fair value of stock-based awards to employees that do not have a market or performance vesting condition is calculated using the Black-Scholes-Merton option pricing model (the "model"). The model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company's stock options. The model also requires subjective assumptions, including future stock price volatility and expected time to exercise,

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

1. Nature of Business and Summary of Significant Accounting Policies (Continued)


which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate is based on relevant U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of the Company's stock price. These factors could change in the future, which would affect the stock-based compensation expense in future periods.

        For restricted stock and restricted stock unit awards, compensation is based on the intrinsic value of the stock on the actual grant date.

        For awards that carry a market based vesting aspect, the fair value of the award is based on the results of a market simulation model (the simulation model) that evaluates the probability that the requisite market conditions needed for vesting will be achieved. The simulation model uses multiple iterations of simulated daily stock prices of the Company between the grant date and the future vesting date. The inputs to the simulation model include the Company's stock price on the grant date, the historical volatility of the Company's stock price over a period of time corresponding to the vesting period of the unit award as of the grant date, and the risk free interest rate, based on relevant U.S. Treasury note rates, as of the grant date. Based on whether the requisite market conditions are achieved during the multiple simulations, the simulation model produces an expected future value of the stock on the vesting date. This future value is discounted back to the grant date and used as the requisite fair value of the unit award.

        Foreign Currency Transactions—The reporting currency of the Company and its subsidiaries is the U.S. Dollar. The functional currency of all of the subsidiaries is their local currency. Assets and liabilities of the foreign subsidiaries are translated into the U.S. Dollar at exchange rates in effect at the balance sheet date and revenue and expenses are translated at weighted average exchange rates during the period. Translation adjustments arising upon the consolidation of non-U.S. Dollar financial statements are accumulated in stockholders' equity as translation adjustments within other comprehensive income.

        Transactions involving a currency other than the functional currency generate a gain or loss from the fluctuation of the transactional currency relative to the functional currency and are recorded in the statement of operations during the respective period. Due to fluctuations in foreign currencies, the Company recorded a loss of $0.7 million in fiscal 2010, a loss of $0.8 million in fiscal 2009, and a loss of $2.0 million in fiscal 2008, in the consolidated statements of operations from the revaluation of assets and liabilities and the settlement of current period transactions.

        Income Taxes—The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for expected future tax consequences, utilizing enacted tax rates, of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences, net operating loss carry forwards, and research and development tax credits. The Company has provided a valuation allowance for net deferred income tax assets.

        Loss Per Share—Basic and diluted loss per share are computed by dividing net loss by the weighted average number of common shares outstanding. Outstanding stock options, rights and warrants did not

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

1. Nature of Business and Summary of Significant Accounting Policies (Continued)


have any effect on the computation of diluted loss per share in any of the periods presented since they were anti-dilutive.

    Recently Adopted Accounting Standards

        Non-controlling Interest.    ASC 810 10 65-1 was previously issued in December 2007 by the FASB under the title SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51. The standard changes the accounting for non-controlling (minority) interests in consolidated financial statements including the requirements to classify non-controlling interests as a component of consolidated stockholders' equity, and the elimination of "minority interest" accounting in results of operations with earnings attributable to non-controlling interests reported as part of consolidated earnings. Additionally, ASC 810 10 65-1 (SFAS No. 160) revises the accounting for both increases and decreases in a parent's controlling ownership interest. ASC 810 10 65-1 (SFAS No. 160) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company adopted this guidance at the beginning of its fiscal year 2010. Amounts previously presented as minority interest in consolidated subsidiaries is now presented in net income (loss) attributable to non-controlling interest in the statements of operations.

    Recently Released Accounting Pronouncements

        In October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13 (ASU 2009-13), "Revenue Arrangements with Multiple Deliverables" and Accounting Standard Update No. 2009-14 (ASU 2009-14), "Certain Revenue Arrangements That Include Software." These ASUs revise and clarify accounting for arrangements with multiple deliverables, including how to separate deliverables into units of accounting determining the allocation of revenue to the units of accounting and the application of these provisions to tangible products containing software components. There are also expanded disclosures for significant judgments made in the application of these standards, if material. These pronouncements are effective for fiscal years beginning after June 15, 2010 and earlier application is permitted. The Company is currently evaluating the impact of applying this pronouncement to its consolidated financial statements, and intends to implement the pronouncement during the first quarter of fiscal 2011.

        In January 2010, the FASB issued Accounting Standard Update No. 2010-06 (ASU 2010-06), "Improving Disclosures about Fair Value Measurements" to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company implemented provisions of this update related to disclosure of valuation techniques in the second quarter of fiscal 2010 and noted no significant impact in its consolidated financial statements. The Company intends to implement provisions related to additional disclosures in the Level 3 roll forward in the first quarter of fiscal 2012 and does not expect a significant impact on its consolidated financial statements.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

2. Stock-Based Compensation

Equity Compensation Plans

Warrants

        Warrants issued in connection with the CoreStreet acquisition:    In December 2009, the Company issued warrants for 1.0 million shares of the Company's common stock with a per share exercise price of $4.25, expiring December 31, 2011 and valued at $0.4 million, and warrants for 1.0 million shares of the Company's common stock with a per share exercise price of $5.00, expiring December 31, 2012 and valued at $0.4 million in connection with the CoreStreet acquisition. For further information regarding the acquisition of CoreStreet, see Note 3—Business Combinations to consolidated financial statements. These warrants were fully vested upon issuance and remain outstanding as of September 30, 2010.

Stock Option Plans

        The Company has several stockholder approved stock option plans under which it grants or has granted options to purchase shares of its common stock to employees. As of September 30, 2010, the Company continues to grant stock options under the 2004 Equity Incentive Plan ("2004 Plan"). As of September 30, 2010, the Company had 4.5 million shares available for future grants under the Company's 2004 Plan.

        In August 2002, the Company's stockholders approved the 2002 Stock Option Plan ("2002 Plan") and reserved 8.6 million shares for issuance under the plan. Options granted under the 2002 Plan vest over four years and have a maximum term of 10 years. The Board of Directors establishes the exercise price as the closing price quoted on the NASDAQ Global Market on the date of grant. In August 2004, the Company's stockholders approved the 2004 Plan. The 2004 Plan replaces the 2002 Plan with substantially the same terms as the 2002 Plan. The remaining share reserve from the 2002 Plan was transferred to the 2004 Plan. In addition to stock options, the 2004 Plan allows for the grant of restricted stock, restricted stock units, stock appreciation rights, and cash awards. In February 2007, the Company's stockholders approved an amendment to the 2004 Plan, increasing the number of shares reserved for issuance by 4.0 million shares.

        The option plans prohibit residents of France employed by the Company from selling their shares prior to the fourth anniversary from the date of grant.

        In fiscal 2008, the Company issued equity inducement grants as permitted under the NASDAQ Marketplace Rules to certain officers under a plan that had not been presented to the Company's stockholders for approval. Although the options were granted outside of the 2004 Plan, they are governed in all respects by the terms and conditions of that plan as if granted thereunder.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

2. Stock-Based Compensation (Continued)

        Activity under the Company's stock equity plans, including the inducement grants, was as follows:

 
  Number of
Options
  Weighted
Exercise Price
  Weighted
Average
Remaining
Contractual
Life (in years)
  Aggregate
Intrinsic Value
(in thousands)
 

Outstanding at September 30, 2007

    7,226,603   $ 5.75     5.96   $ 3,879  
 

Granted

    6,353,500     2.58              
 

Exercised

    (4,781 )   3.77              
 

Forfeited

    (2,627,222 )   5.67              
                   

Outstanding at September 30, 2008

    10,948,100   $ 3.93     5.95   $ 160  
 

Granted

    1,322,500     1.73              
 

Exercised

                     
 

Forfeited

    (2,233,830 )   4.52              
                   

Outstanding at September 30, 2009

    10,036,770   $ 3.51     5.29   $ 3,255  
 

Granted

    2,212,500     2.35              
 

Exercised

    (225,956 )                
 

Forfeited

    (2,957,867 )   4.19              
                   

Outstanding at September 30, 2010

    9,065,447   $ 3.05     4.77   $ 176  
                   

Exercisable at September 30, 2010

    4,149,787   $ 3.84     4.21   $ 82  

        Stock options outstanding and exercisable as of September 30, 2010 were as follows:

 
  Options Outstanding   Options Exercisable  
Range of Exercise Prices
  Number   Weighted
Average
Remaining
Contractual
Term (in years)
  Weighted
Average
Exercise Price
  Number   Weighted
Average
Exercise Price
 

1.45 - 2.17

    473,076     5.35   $ 1.80     194,704   $ 1.75  

2.18 - 2.95

    6,371,928     5.14     2.37     1,875,892     2.40  

2.96 - 4.45

    876,000     3.56     3.99     853,443     4.00  

4.46 - 6.45

    651,326     3.70     4.73     532,631     4.77  

6.46 - 9.99

    693,117     3.47     7.43     693,117     7.43  
                       

Totals

    9,065,447     4.77   $ 3.05     4,149,787   $ 3.84  
                       

Restricted Stock and Restricted Stock Units

        The Company periodically grants awards of restricted stock, which are issued but subject to vesting requirements, and restricted stock units, which result in the issuance of shares without an exercise price only upon the satisfaction of vesting requirements. Vesting may be time-based, performance-based, or a combination of the two. Compensation expense is generally recorded on a straight-line basis over the vesting period of the award.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

2. Stock-Based Compensation (Continued)

        Activity for restricted stock and restricted stock units for fiscal 2010 was as follows:

Unvested Restricted Stock and Restricted Stock Units
  Number of Shares
(in thousands)
  Weighted Average
Grant-Date Fair
Value
 

Unvested at September 30, 2009

    116,256   $ 2.11  
 

Granted

    523,092     2.16  
 

Vested

    (192,498 )   2.50  
 

Cancelled

         
           

Unvested at September 30, 2010

    446,850   $ 2.00  
           

        Unvested restricted stock units outstanding at September 30, 2010, included units granted as follows:

    During the fiscal 2010, 140,000 restricted stock units valued at a total of $386,400 were granted at no cost to non-employee directors. These restricted stock units were granted subsequent to their election to the board of directors during the Annual Meeting of Stockholders on March 24, 2010 and vest monthly over one year, beginning on March 24, 2010. At September 30, 2010, 70,008 restricted stock units under this grant were unvested.

    On August 25, 2010, the Company granted 358,092 restricted units valued at $695,000 to employees. These shares vest over 4 years from the date of grant. At September 30, 2010, all of the restricted stock units under this grant were unvested.

    On August 25, 2010, the Company granted 25,000 restricted units valued at $48,500 to an outside consultant. These shares vest over 4 months from the date of grant. At September 30, 2010, 18,750 restricted stock units under this grant were unvested.

    Valuation and Expense Information under ASC 718 10 50-2 (SFAS 123(R))

        The weighted average fair value of stock-based compensation to employees is generally based on the single option valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards to employees is generally amortized using the straight-line method over the vesting period of the options. Below are the assumptions used in the calculation of stock-based compensation for employee stock options during fiscal 2010, 2009, and 2008:

 
  Fiscal Years Ended
September 30,
 
  2010   2009   2008

Risk-free interest rate

  2.2%   1.5% - 2.6%   2.4% - 4.2%

Expected life (years)

  4.3   4.2 - 6.1   4.8 - 6.1

Dividend yield

  0.0%   0.0%   0.0%

Weighted average expected volatility

  46.7%   45.0%   41.0%

Weighted average estimated forfeiture rate

  33.1%   30.2%   33.0%

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

2. Stock-Based Compensation (Continued)

        The following table summarizes stock-based compensation expense related to employee stock options, and restricted stock units under ASC 718 10 25-2 for fiscal 2010, 2009, and 2008 which was allocated as follows (in thousands):

 
  Fiscal Years Ended
September 30,
 
 
  2010   2009   2008  

Cost of revenue—hardware

  $ 21   $ 26   $ 44  

Cost of revenue—service

    120     122     189  
               
 

Stock-based compensation expense included in cost of revenue

    141     148     233  
               

Research and development

    614     695     868  

Sales and marketing

    447     591     627  

General and administrative

    2,229     1,640     1,146  
               
 

Stock-based compensation expense included in operating expenses

    3,290     2,926     2,641  
               

Total stock-based compensation expense

  $ 3,431   $ 3,074   $ 2,874  
               

        The weighted average grant-date fair values of options and restricted stock units granted was $0.95, $1.34, and $1.22 during fiscal 2010, 2009, and 2008 respectively. Cash received as a result of options exercised were approximately $0.3 million, none and $25,000 during fiscal 2010, 2009 and 2008, respectively. The total intrinsic value of options exercised and restricted stock units vested was approximately $0.5 million, $0.3 million and $0.2 million, during fiscal 2010, 2009, and 2008, respectively. The total fair value of options, warrants and restricted stock units vested was approximately $2.6 million, $3.7 million, and $2.5 million, during fiscal 2010, 2009, and 2008, respectively. As of September 30, 2010, total unrecognized compensation costs related to unvested stock options and restricted stock was $2.2 million, net, which is expected to be recognized as an expense over a weighted average remaining amortization period of approximately 1.9 years.

3. Business Combinations

        The Company accounts for business combinations using the purchase method of accounting. Consideration includes the cash paid, value of common stock issued and warrants for common stock as measured on the acquisition date, less any cash acquired. The common stock and warrants were issued in a private placement.

        On December 14, 2009, the Company completed the acquisition of CoreStreet for consideration of $18.5 million, net of cash acquired. Consideration consisted of (i) $12.8 million in cash, net of cash acquired, (ii) 2.2 million shares of the Company's common stock (of which approximately 1.5 million shares are subject to an escrow to satisfy certain indemnification obligations of the stockholders of CoreStreet), (iii) warrants for 1.0 million shares of the Company's common stock with a per share exercise price of $4.25 and expiring December 31, 2011 with a fair value of $0.4 million, and (iv) warrants for 1.0 million shares of the Company's common stock with a per share exercise price $5.00 and expiring December 31, 2012 with a fair value of $0.4 million. CoreStreet is a provider of PKI certification technology, distributed identity credential validation systems, and physical access control products. Their products are used primarily by federal and state agencies in the United States.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

3. Business Combinations (Continued)

        The following table represents the purchase price allocation and summarizes the aggregate estimated fair values of the net assets acquired on December 14, 2009 (in thousands):

 
  Purchase Price
Allocation
 

Cash

  $ 1,770  

Other current assets

    965  

Intangibles:

       
 

Customer relationships

    6,620  
 

Developed technology

    2,530  
 

Trade name

    40  

Non-current assets

    16  

Goodwill

    9,416  

Less liabilities assumed

    (1,062 )
       

Total purchase price

  $ 20,295  
       

        The purchase price was allocated to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. The $9.4 million of goodwill was assigned to the Company's single reporting unit and is not expected to be deductible for tax purposes. The acquisition is complementary to and the Company anticipates that it will strengthen its strong authentication and credential management product portfolio. The intangible assets are amortized on a straight line basis in-line with expected cash flows. Customer relationships represent the fair values of the underlying relationships and agreements with CoreStreet's customers. Developed technology represents the fair values of CoreStreet products that have reached technological feasibility and are a part of CoreStreet's product lines. Trade name represents the fair value of brand and name recognition associated with the marketing of CoreStreet's products and services.

        The results of the CoreStreet acquisition are included in the accompanying consolidated financial statements from the date of the acquisition on December 14, 2009.

        Summary of the purchase price consideration (in thousands):

 
  Purchase Price
Consideration
 

Cash paid

  $ 14,540  

Cash payments owed

    17 (1)

Potential cash value for stock

    27 (2)

Warrants for common stock

    716 (3)

Common stock

    4,995 (4)
       

Total purchase price

  $ 20,295  
       

(1)
Cash payments owed and recorded in "Accrued and other current liabilities" at September 30, 2010.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

3. Business Combinations (Continued)

(2)
Potential cash value of common stock and warrants for common stock to former CoreStreet stockholders who indicate that they are not accredited investors.

(3)
Fair value of warrants issued to former CoreStreet stockholders who are accredited investors.

(4)
Fair value of common stock issued to CoreStreet stockholders who are accredited investors. Common stock was valued at the closing price on the date of acquisition, December 14, 2009.

        The information related to revenue and operating income (loss) of CoreStreet included in our consolidated statement of operations from the acquisition date, December 14, 2010, to the year ended September 30, 2010, is not presented. The Company integrated CoreStreets operations with its one operating segment, Digital Identity Solutions, and as a result, the information is not available.

Pro forma results

        The unaudited financial information in the table below summarizes the combined results of operations of ActivIdentity and CoreStreet, on a pro forma basis, as though the companies had been combined as of the beginning of fiscal 2009. The unaudited pro forma financial information for fiscal 2010 and 2009, include the historical results for CoreStreet from October 1, 2008 to December 14, 2009. The pro forma financial information presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2009 (in thousands, except for per share amounts):

 
  Fiscal Years Ended
September 30,
 
 
  2010   2009  
 
  (Unaudited)
 

Revenue

  $ 58,767   $ 69,213  

Net loss attributable to ActivIdentity stockholders

  $ (6,601 ) $ (7,461 )

Basic and diluted net loss per share

  $ (0.14 ) $ (0.16 )

Shares used in computing pro forma basic and diluted net loss per share

    47,317     45,814  

4. Investments

        Marketable securities consist of corporate bonds and notes, commercial paper, certificates of deposit, and various auction rate securities (ARS). All marketable securities are classified as available-for-sale and are recorded at the estimated fair value.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

4. Investments (Continued)

        The following table presents the Company's marketable securities that are measured at the estimated fair value, categorized in accordance with the fair value hierarchy provisions of ASC 820 10 50-2 (SFAS No. 157) (in thousands):

As of September 30, 2010
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total  

Cash and cash equivalents:

                         
 

Short-term:

                         
   

Cash

  $ 3,924   $   $   $ 3,924  
   

Money market funds / U.S. Treasuries

    68,595             68,595  
                   
     

Total cash and cash equivalents

    72,519             72,519  
                   
 

Short-term restricted cash (term deposits)

    1,940             1,940  
                   

Marketable securities:

                         
   

Auction rate securities

            3,780     3,780  
                   
     

Total marketable securities

            3,780     3,780  
                   

Total financial assets under ASC 820 10 50-2 (SFAS No. 157)

  $ 74,459   $   $ 3,780   $ 78,239  
                   

 

As of September 30, 2009
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total  

Cash and cash equivalents:

                         
 

Short-term:

                         
   

Cash

  $ 9,712   $   $   $ 9,712  
   

Money market funds / U.S. Treasuries

    65,912             65,912  
                   
     

Total cash and cash equivalents

    75,624             75,624  
                   
 

Long-term restricted cash (term deposits)

    1,746             1,746  
                   

Marketable securities:

                         
   

Auction rate securities

            3,100     3,100  
                   
     

Total marketable securities

            3,100     3,100  

Long-term investments:

                         
   

Auction rate securities

            11,752     11,752  
                   

Total financial assets under ASC 820 10 50-2 (SFAS No. 157)

  $ 77,370   $   $ 14,852   $ 92,222  
                   

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

4. Investments (Continued)

        Changes in the Company's Level 3 assets for fiscal 2010 were as follows (in thousands):

 
  Level 3  

Aggregate estimated fair value of Level 3 assets at September 30, 2009

  $ 14,852  
 

Total realized and unrealized gain (loss):

       
   

Included in earnings

    3,826  

Settlements

    (14,898 )
       

Aggregate estimated fair value of Level 3 assets at September 30, 2010

  $ 3,780  
       

Marketable Securities

        Marketable securities consist of investments acquired with maturities exceeding three months and for which liquidity issues have not resulted in reclassification of the securities to long-term investments. Marketable securities are classified as available for sale and are reported at the estimated fair value with unrealized gains or losses included in other comprehensive income (loss), net of applicable taxes. Marketable securities are ARS comprised of closed-end mutual funds and a student loan agency. Declines in value on available-for-sale securities judged to be other-than-temporary are recorded in other income (expense), net. None of the short-term marketable securities are deemed impaired as of September 30, 2010. The gain or loss from sales of securities is recognized on the specific identification method. The Company had realized gains of $4.1 million for fiscal 2010. There were no realized gains or loss in fiscal 2009, or 2008.

        During fiscal 2010, based on evidence of liquidity, the Company reclassified $11.8 million of long-term investments to marketable securities and sold or redeemed ARS with a net book value of $10.8 million for $14.9 million which resulted in a gain of $4.1 million. Also, during fiscal 2010, the Company recorded an other-than-temporary impairment of $0.3 million on these ARS. At September 30, 2010, the Company's carrying value of market securities was $3.8 million. Our portfolio of ARS has had a series of liquidity events in the past year. The Company monitors all of its ARS investments and evaluates changes as to impairment factors on a continual basis.

        Marketable securities consisted of the following (in thousands):

 
  September 30, 2010  
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 

Auction rate securities

  $ 3,780           $ 3,780  
                   

 

 
  September 30, 2009  
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 

Auction rate securities

  $ 3,100           $ 3,100  
                   

77


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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

4. Investments (Continued)

        The contractual maturities of short-term, available-for-sale marketable securities as of September 30, 2010 were as follows (in thousands):

 
  Amortized
Cost
  Estimated
Fair
Value
 

Within one year

         

Between one year and three years

         

More than three years

  $ 3,780   $ 3,780  
           

  $ 3,780   $ 3,780  
           

Auction Rate Securities

        The Company held at par $3.8 million and $3.1 million of closed-end mutual fund ARS classified as marketable securities at September 30, 2010 and September 30, 2009 respectively. $0.6 million and $12.3 million of formerly held closed-end mutual fund and taxable municipal ARS investments were called at par during fiscal 2009 and 2008, respectively. Future changes in the market regarding these securities may result in impairment charges and classification to long-term investments.

        During fiscal 2008, the Company reclassified $33.0 million at cost of investments in certain ARS from short-term to long-term investments and recorded an other-than-temporary impairment on these holdings of $21.2 million, resulting in a carrying value of $11.8 million at September 30, 2009 and September 30, 2008. Contractual maturity for these investments range from 2025 to 2052.

        The Company reviews its impairments in accordance ASC 320 10 35-17 (SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities), and related guidance issued by the FASB and SEC in order to determine the classification of the impairment as either "temporary" or "other-than-temporary." A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income (loss) section of stockholders equity in the balance sheet. This type of unrealized loss does not affect net income (loss) for the applicable accounting period. However, an other-than-temporary impairment charge is recorded as a realized loss in the consolidated statement of operations. The differentiating factors between temporary and other-than-temporary impairment are primarily the length of time and the extent to which the market value has been less than cost and the term of the illiquid position. In addition, the financial condition and near-term prospects of the issuer, the composition of any underlying assets in the holdings, and the Company's intent and ability to retain the investment for a period of time that would allow for a liquidity event to take place are also factors taken into consideration in the Company's valuation analysis.

        While the Company has used what it believes to be an appropriate valuation model for these securities and has fully attempted to incorporate all known and significant risk factors into the analysis, the Company makes many estimates and assumptions when assessing the value of these securities. These estimates are also based on market and economic conditions, which are currently in a state of crisis and heightened uncertainty. As a result, there is much independent judgment required in deriving these valuation conclusions.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

4. Investments (Continued)

        The Company believes it has made reasonable judgments in its valuation exercise. However, if the relevant assumptions, estimates, or the related analyses prove incorrect or, if due to additional information received in the future, management's conclusions would change, the Company may be required to change the recorded value of these securities, or other securities that make up the investment portfolio.

5. Accounts Receivable, net and Customer Concentration

        Accounts receivable, net consisted of the following (in thousands):

 
  September 30,  
 
  2010   2009  

Accounts receivable

  $ 12,307   $ 14,244  
 

Less: allowance for doubtful accounts

    (60 )   (261 )
           

Accounts receivable, net

  $ 12,247   $ 13,983  
           

        Accounts receivable from significant customers in excess of 10% of total accounts receivable at September 30, 2010 and 2009, respectively are summarized as follows:

 
  September 30,  
 
  2010   2009  

Customer A

    12 %   *  

Customer B

    *     20 %

Customer C

    *     10 %
           

    12 %   30 %
           

*
Customer accounted for less than 10% of the accounts receivable.

        Management believes that the receivable balances from these large customers are collectible based on the assessment of their creditworthiness, account aging and past collection experiences. However, these customers represent significant exposure if one or more of them were unable to pay.

        Revenue from significant customers representing revenue in excess of 10% of total revenue for the respective periods is summarized below:

 
  Fiscal Years Ended
September 30,
 
 
  2010   2009   2008  

Customer D

    10 %   10 %   13 %
               

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

6. Inventories

        Inventories consisted of the following (in thousands):

 
  September 30,  
 
  2010   2009  

Components

  $ 287   $ 280  

Finished goods

    596     421  
           

Total inventories

  $ 883   $ 701  
           

7. Property and Equipment

        Property and equipment consisted of the following (in thousands):

 
  September 30,  
 
  2010   2009  

Computers and equipment

  $ 2,998   $ 4,887  

Software

    3,358     4,572  

Furniture and fixtures

    2,834     2,249  

Leasehold improvements

    1,480     2,016  
           
 

Property and equipment, at cost

    10,670     13,724  
 

Less: accumulated depreciation

    (9,033 )   (11,371 )
           

Property and equipment, net

  $ 1,637   $ 2,353  
           

8. Intangible Assets, net

        Intangible assets consisted of the following (in thousands):

 
  September 30,
2009
  Additions   Write-off
of Fully
Amortized
Intangibles
  September 30,
2010
 

Gross carrying amount:

                         
 

Developed technology and patents

  $ 15,294   $ 2,570   $ (15,294 ) $ 2,570  
 

Customer relationships

    2,028     6,620     (2,028 )   6,620  
 

Patents

    3,999             3,999  
                   
   

Intangible assets at cost

    21,321     9,190     (17,322 )   13,189  
                   

Accumulated amortization

                         
 

Developed technology and patents

    (15,294 )   (337 )   15,294     (337 )
 

Customer relationships

    (2,028 )   (953 )   2,028     (953 )
 

Patents

    (2,157 )   (667 )       (2,824 )
                   
   

Total accumulated amortization

    (19,479 ) $ (1,957 )   17,322     (4,114 )
                   

Intangible assets, net

  $ 1,842   $ 7,233       $ 9,075  
                   

80


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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

8. Intangible Assets, net (Continued)

        Intangible assets with finite lives are amortized over their estimated useful lives and are reviewed for impairment in accordance with ASC 360 10 35, (formerly known as SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Each reporting period, the Company reviews for indicators of potential impairment to the carrying value of finite-lived intangible assets. During fiscal 2010, no indicators of impairment of intangible assets of $9.1 million were noted.

        The Company, each reporting period, reviews for indicators of potential impairment to the carrying value of finite-lived intangible assets. During fiscal 2010, no indicators of impairment of finite-lived intangible assets were noted.

        During fiscal 2010, in connection with the CoreStreet acquisition, the Company recorded $9.2 million in intangible assets. For additional information regarding the CoreStreet acquisition, see Note—3 Business Combinations to consolidated financial statements.

        Estimated amortization of developed technology and patents and other intangible assets is as follows (in thousands):

Fiscal years ending September 30,
  Acquired Developed
Technology and
Patents
 

2011

  $ 2,170  

2012

    1,882  

2013

    1,254  

2014

    1,022  

2015

    873  

Thereafter

    1,873  
       

  $ 9,075  
       

        Definite lived intangible assets which include developed technology, patents, and customer relationships are amortized over their estimated lives that varies from one to ten years

9. Goodwill

        In accordance with ASC 350 20 35, the Company tests goodwill for impairment at least annually. As of September 30, 2010 and 2009, no impairment of goodwill was recorded.

 
  September 30,  
 
  2010   2009  

Balance, beginning of period

  $   $  
 

Goodwill as a result of acquisition

    9,416      
           

Balance, end of period

  $ 9,416   $  
           

        During fiscal 2010, in connection with the CoreStreet acquisition, the Company recorded $9.4 million of goodwill. For additional information regarding the CoreStreet acquisition, see Note—3 Business Combinations to consolidated financial statements.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

10. Sales Warranty Reserve

        Changes in sales warranty reserve were as follows (in thousands):

 
  September 30,  
 
  2010   2009  

Balance, beginning of period

  $ 48   $ 199  
 

Warranty costs incurred

    (32 )   (51 )
 

Additions related to current period sales (net of adjustments)

    49     (108 )
 

Impact of exchange rates

    (3 )   8  
           

Balance, end of period

  $ 62   $ 48  
           

        The sales warranty reserve is included in accrued and other current liabilities in the consolidated balance sheet.

11. Restructuring Liability

        The following summarizes the restructuring liability activity (in thousands):

 
  2002
Restructuring
 
 
  Facility Exit
Costs
 

Balances, September 30, 2008

  $ 1,578  
 

Cash payments

    (611 )
 

Adjustments to accruals for changes in estimates

     
 

Impact of exchange rates

     
       

Balances, September 30, 2009

  $ 967  
 

Cash payments

    (463 )
 

Adjustments to accruals for changes in estimates

    (356 )
 

Impact of exchange rates

     
       

Balances, September 30, 2010

  $ 148  
 

Less current portion

  $ 148  
       
 

Long-term portion

  $  
       

2002 Restructuring

        In February 2002, the Company commenced a restructuring of its business which resulted in restructuring reserve for excess facilities in its corporate headquarter. The charge for excess facilities was comprised primarily of future minimum lease payments payable over the remaining life of the lease, net of total estimated sublease income. In June 2005, the Company subleased the excess facilities. Cash payments for the remaining liability of $0.1 million at September 30, 2010 for facility exit activities have been made subsequently over the remaining life of the excess facilities which ended on November 30, 2010.

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ACTIVIDENTITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended September 30, 2010, 2009, and 2008

12. Income Taxes

Income Taxes

        Income tax expense (benefit) consisted of the following (in thousands):

 
  Years Ended September 30,  
 
  2010   2009   2008  

Federal:

                   
 

Current

  $ 8   $ (23 ) $ (3 )
 

Deferred

             
               

    8     (23 )   (3 )
               

State:

                   
 

Current

    2     2     4  
 

Deferred

             
               

    2