<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 04-3141918
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
25 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02141
(617) 386-1000
(Address, including zip code, telephone number, including area code, of
registrant's principal executive offices)
JEET SINGH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ART TECHNOLOGY GROUP, INC.
25 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02141
(617) 386-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID A. WESTENBERG, ESQ. MARK L. JOHNSON, ESQ.
HALE AND DORR LLP RICHARD G. COSTELLO, ESQ.
60 State Street FOLEY, HOAG & ELIOT LLP
Boston, Massachusetts 02109 One Post Office Square
Telephone: (617) 526-6000 Boston, Massachusetts 02109
Telecopy: (617) 526-5000 Telephone: (617) 832-1000
Telecopy: (617) 832-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on the Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share........ 5,175,000 $39.19 $202,808,250 $56,381
</TABLE>
(1) Includes 675,000 shares which the underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933. Based on the
average of high and low sales prices on October 18, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed.
Underwriters may not confirm sales of these securities until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus is not an offer to sell these securities and it is not
soliciting offers to buy these securities in any state where the offer or sale
is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 22, 1999
PROSPECTUS
4,500,000 SHARES
[LOGO]
COMMON STOCK
Art Technology Group, Inc. is selling 1,425,000 shares of common stock. Our
stockholders listed on pages 58-60 are selling a total of 3,075,000 shares. We
will not receive any proceeds from the sale of shares by the selling
stockholders. Our common stock is traded on the Nasdaq National Market under the
symbol "ARTG." On October 21, 1999, the last reported sales price for the common
stock on the Nasdaq National Market was $67 7/16 per share.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts......................................
Proceeds to Art Technology Group, before expenses...........
Proceeds to selling stockholders............................
</TABLE>
We and the selling stockholders have granted the underwriters an option for
a period of 30 days to purchase up to 675,000 additional shares of common stock.
--------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
-------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
THOMAS WEISEL PARTNERS LLC
DAIN RAUSCHER WESSELS
a division of Dain Rauscher
Incorporated
, 1999
<PAGE>
The inside cover diagram folds out.
The outside page shows our name and the Dynamo product logo: a large
capital letter D. The page folds out to a diagram entitled "Dynamo
Architecture for Internet Customer Relationship Management." The diagram
depicts the relationship of our products to other products and interfaces
such as enterprise systems, including content management, sales management,
transaction fulfillment and customer service, depicted at the bottom of the
diagram. Arrows show how data gets from these systems to front end systems
such as marketing, sales, transactions and support, depicted at the top of
the diagram.
The middle of the diagram shows our products in layers.
To the left of the diagram, business needs are listed: "Develop effective
e-commerce Web sites that provide users with a unified customer experience."
Arrows point from this sentence to the front end systems and our Dynamo
products. "Allow business managers to target content to selected groups of
users or market segments." An arrow points from this sentence to our Dynamo
Personalization Server. "Build new applications and functionality on an open
and expandable platform." An arrow points from this sentence to our Dynamo
Application Server. "Integrate Web applications with systems including
content management, sales and marketing, transaction fulfillment and customer
support." An arrow points from this sentence to our content adapters. At the
bottom is the sentence, "Art Technology Group's Dynamo is an integrated suite
of software applications that allows businesses to develop and deploy high
performance Web sites for conducting e-commerce."
The right side of the diagram describes our partners: "Web Developers
provide customers with professional services including strategy, design, and
custom application development based on our Dynamo application suite." An
arrow points from this sentence to the front end systems and our Dynamo
products. "Systems Integrators provide customers with professional services
to enable them to integrate our Dynamo products with existing information
systems." An arrow points from this sentence to Dynamo products and open
adapters. "Original Equipment Manufacturers and Technology Partners co-market
or resell our Dynamo products or embed Dynamo into their products for sale to
their existing clients and new markets." An arrow points from this sentence
to the enterprise systems.
The bottom of each page has three customer Web site screen shots.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Price Range of Our Common Stock............................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 19
Business.................................................... 31
Management.................................................. 49
Transactions with Related Parties........................... 56
Principal and Selling Stockholders.......................... 58
Description of Capital Stock................................ 61
Underwriting................................................ 64
Legal Matters............................................... 65
Experts..................................................... 65
Where You Can Find More Information......................... 66
Index to Financial Statements F-1
</TABLE>
--------------
DYNAMO is our registered trademark. JAVA is a registered trademark of Sun
Microsystems. This prospectus also contains trademarks and tradenames of other
companies.
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS
AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. AS USED IN THIS
PROSPECTUS, THE TERMS "WE," "US," "OUR" AND SIMILAR TERMS REFER TO ART
TECHNOLOGY GROUP, INC. AND NOT TO ITS MANAGEMENT OR STOCKHOLDERS.
ART TECHNOLOGY GROUP
We offer an integrated suite of Internet customer relationship management
and electronic commerce software applications, as well as related application
development, integration and support services. Our solution enables businesses
to understand, manage and build online customer relationships and to market,
sell and support products and services over the Internet more effectively. Our
Dynamo product suite is designed to provide businesses with the core application
platform and software tools required to develop and deploy personalized,
reliable, large-scale Web sites for conducting electronic commerce, also called
e-commerce.
As the growth and acceptance of online marketing and e-commerce have
increased, the Web has become a highly competitive business environment,
resulting in increased investment in Internet commerce applications such as:
- online marketing and selling systems to target, attract and retain
customers
- transaction and distribution management systems to reduce the costs of
delivering products and services to customers and distribution partners
- customer support and relationship management systems to better understand
and serve the needs of customers
International Data Corporation estimates that the market for Internet commerce
software applications was $444 million in 1998 and projects that the market will
grow to $1.7 billion in 1999 and reach $13.1 billion in 2003.
Our solution provides a comprehensive application suite and complementary
professional services capabilities. Our Dynamo application suite includes:
- Dynamo Application Server--an open and expandable platform to enable
Internet customer relationship management and e-commerce applications
- Dynamo Personalization Server--allows businesses to develop, deploy and
manage multiple Web applications that share a common set of business rules
and are personalized based on common user profiles
- Dynamo Commerce--enables the creation of personalized e-commerce
storefronts that can be customized and integrated with existing
information systems
- Dynamo Ad Station--allows businesses to serve targeted advertisements to
Web site visitors and to manage their online advertising inventory more
effectively
We have licensed products to over 100 customers. Our customers include
BabyCenter, BellSouth, BMG Direct, Eastman Kodak, Hilton Hotels, Informix,
J.Crew, John Hancock Funds, Inc., Network Solutions, Newbridge Networks, Scudder
Kemper Investments, Sony Online Entertainment, Sun Microsystems, TheStreet.com
and Women.com. We target Fortune 1000 companies as well as new businesses using
the Internet as their primary business channel. We sell our products directly
through our sales force and indirectly through arrangements with systems
integrators, original equipment manufacturers and other technology partners.
Our principal executive office is located at 25 First Street, Cambridge,
Massachusetts 02141, and our telephone number is (617) 386-1000. Our Web site is
located at WWW.ATG.COM. The information contained in our Web site is not a part
of this prospectus. We were incorporated in Massachusetts in December 1991 and
reincorporated in Delaware in October 1997.
1
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Art Technology Group.............. 1,425,000 shares
Common stock offered by the selling stockholders.......... 3,075,000 shares
Common stock to be outstanding after this offering........ 32,542,737 shares
Use of proceeds........................................... Working capital and other general
corporate purposes, including possible
acquisitions
Nasdaq National Market symbol............................. ARTG
</TABLE>
The number of shares of our common stock that will be outstanding after this
offering, unless otherwise indicated, is based on the number outstanding on
October 15, 1999. It excludes 4,009,947 shares subject to outstanding options at
a weighted-average exercise price of $5.09 per share. There are 1,402,767
additional shares available for issuance under our stock plans.
------------------------
Unless otherwise indicated, all information in this prospectus assumes that
the underwriters do not exercise their option to purchase additional shares in
this offering.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following tables summarize the consolidated financial data of our
business. The pro forma basic and diluted net loss per share is described in
note 1(f) of the notes to consolidated financial statements included elsewhere
in this prospectus. The as adjusted column reflects the sale of 1,425,000 shares
of common stock offered by us at an assumed public offering price of $67.44
after deducting the estimated underwriting discounts and estimated offering
expenses.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues...................... $ 753 $ 798 $ 3,902 $ 6,457 $ 12,137 $ 8,300 $ 18,793
Gross profit.................. 235 204 1,917 3,261 7,087 4,825 12,124
Loss from operations.......... (209) (430) (1,412) (4,105) (2,740) (1,654) (4,216)
Net loss...................... (234) (467) (1,442) (4,228) (2,850) (1,778) (3,655)
Net loss available for common
stockholders................ (234) (469) (1,648) (4,442) (4,444) (3,120) (8,050)
Basic and diluted net loss per
share....................... $ (0.03) $ (0.06) $ (0.19) $ (0.50) $ (0.50) $ (0.35) $ (0.53)
Basic and diluted weighted
average common shares
outstanding................. 7,763,013 8,131,028 8,848,866 8,872,202 8,967,066 8,941,046 15,176,953
Pro forma basic and diluted
net loss per share.......... $ (0.16) $ (0.14)
Pro forma basic and diluted
weighted average common
shares outstanding.......... 18,246,484 25,707,287
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $57,399 $147,716
Working capital........................................... 53,677 143,994
Total assets.............................................. 68,648 158,964
Stockholders' equity (deficit)............................ 58,038 148,354
</TABLE>
3
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE
FOLLOWING RISKS COULD MATERIALLY HARM OUR BUSINESS AND COULD RESULT IN A
COMPLETE LOSS OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE EXPECT OUR LOSSES TO CONTINUE AND WE DO NOT BELIEVE WE WILL BE ABLE TO
SUSTAIN OUR CURRENT REVENUE GROWTH RATE
Since inception, we have not been profitable in any fiscal period. We have
incurred substantial costs to develop and enhance our technology and products,
to recruit and train a marketing and sales group, and to establish an
administrative organization. As of September 30, 1999, we had an accumulated
deficit of $19.4 million. We anticipate that our operating expenses will
increase substantially in the foreseeable future as we continue to develop our
technology, increase our sales and marketing activities, create and expand our
distribution channels, expand our services capabilities and improve our
operational and financial systems. Accordingly, we expect to incur additional
losses. Although our revenues have grown significantly in recent quarters, they
have grown from a relatively small base and, as a result, we do not believe that
we will be able to sustain the growth rates we have achieved in recent quarters.
Because we have a limited operating history, particularly as a company that
sells software products, the prediction of future operating results is difficult
and we cannot be certain that our revenues will grow at a rate that will allow
us to achieve profitability. In addition, if we do achieve profitability, we
cannot be certain that we will be able to sustain or increase profitability on a
quarterly or annual basis.
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE AND THE PRICE OF OUR COMMON STOCK
COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF SECURITIES
ANALYSTS
Our revenues and operating results are likely to vary significantly from
quarter to quarter. If our quarterly results fall below the expectations of
securities analysts, the price of our common stock could fall. A number of
factors are likely to cause variations in our operating results, including:
- demand for our products and services
- the timing of sales of our products and services
- the timing of customer orders and product implementations
- the timing of hiring new personnel, particularly in services and sales and
marketing
- unexpected delays in introducing new products and services
- increased expenses, whether related to sales and marketing, product
development or administration
- changes in the rapidly evolving market for Internet customer relationship
management solutions
- the mix of revenues derived from products and services
- the utilization of our services personnel
- cost overruns related to fixed-price services projects
- the mix of domestic and international sales
- costs related to possible acquisitions of technologies or businesses
4
<PAGE>
Accordingly, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. You should not rely on the results of
one quarter as an indication of our future performance.
We plan to increase our operating expenses to expand our sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support and improve our
operational and financial systems. If our revenues do not increase as quickly as
these expenses, our operating results may suffer and our stock price may
decline.
OUR QUARTERLY RESULTS OFTEN DEPEND ON A SMALL NUMBER OF LARGE, NONRECURRING
ORDERS AND OUR REVENUES AND OPERATING RESULTS COULD BE LOWER THAN EXPECTED IF
WE ARE UNABLE TO COMPLETE ONE OR MORE SUBSTANTIAL SALES IN ANY GIVEN QUARTER
We derive a significant portion of our revenues in each quarter from a small
number of relatively large, nonrecurring orders. Our operating results could
suffer if we were unable to complete one or more substantial sales in any future
period. Our three largest customers accounted for 80% of our total revenues in
1996, 56% of our total revenues in 1997, and 37% of our total revenues in 1998.
Two customers accounted for 22% of our total revenues in the nine months ended
September 30, 1999. The customers which provide the greatest revenues typically
change from year to year. We derive only a small percentage of our revenues from
repeat business, and must always search for new sales opportunities.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS
We have a long sales cycle because we generally need to educate potential
customers regarding the use and benefits of our solution. Our sales cycle varies
depending on the size and type of customer contemplating a purchase and whether
we have conducted business with a potential customer in the past. These
potential customers frequently need to obtain approvals from multiple decision
makers prior to making purchase decisions. Our long sales cycle, which can range
from several weeks to several months or more, makes it difficult to predict the
quarter in which sales may occur. Delays in sales could cause significant
variability in our revenues and operating results for any particular period.
THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS NEW AND
RAPIDLY EVOLVING AND WE CANNOT BE CERTAIN THAT A VIABLE MARKET FOR OUR
PRODUCTS WILL EMERGE OR BE SUBSTANTIAL
The market for Internet customer relationship management solutions is new
and rapidly evolving. We expect that we will continue to need intensive
marketing and sales efforts to educate prospective customers and partners about
the uses and benefits of our products and services. Accordingly, we cannot be
certain that a viable market for our products will emerge or be sustainable.
Organizations that have already invested substantial resources in other methods
of conducting business may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing systems. Similarly, individuals
have established patterns of purchasing goods and services and may be reluctant
to make purchases online. These factors could inhibit the growth of electronic
commerce generally and the market's acceptance of our products and services in
particular.
THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS
INTENSELY COMPETITIVE AND WE EXPECT COMPETITION TO INTENSIFY IN THE FUTURE
The market for Internet customer relationship management solutions is
intensely competitive and we expect competition to intensify in the future as
revenues generated from Internet commerce increase. Our primary competition
currently comes from in-house development efforts by potential customers or
partners, as well as from other vendors of Web-based application software. We
currently encounter competition from Internet application software vendors such
as BroadVision, InterWorld,
5
<PAGE>
Open Market and Vignette. We also compete with platform application server
products and vendors such as BEA Systems, IBM's Websphere products, Microsoft,
Netscape, and Sun Microsystems' NetDynamics products, among others. Many of our
competitors have longer operating histories and significantly greater financial,
technical, marketing and other resources than we do, and may be able to respond
more quickly to new or changing opportunities, technologies and customer
requirements. Also, many current and potential competitors have greater name
recognition and more extensive customer bases they can leverage to gain market
share. These competitors may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies and offer more attractive
terms to purchasers than we can. Moreover, our current and potential
competitors, such as Microsoft, Netscape and Oracle, may bundle their products
in a manner that may discourage users from purchasing our products. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to enhance their products
and expand their markets. Accordingly, new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. This level
of competition could reduce our revenues and result in increased losses or
reduced profits.
COMPETITION WITH OUR RESELLER PARTNERS COULD LIMIT OUR SALES OPPORTUNITIES AND
JEOPARDIZE THESE RELATIONSHIPS
We sell products through agreements with resellers and original equipment
manufacturers. We target markets that are also served by some of these partners.
This competition may limit our ability to sell our products and services
directly in these markets and may jeopardize, or result in the termination of,
these relationships.
OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF EITHER JEET SINGH OR
JOSEPH CHUNG, OUR CO-FOUNDERS, OR IF WE ARE UNABLE TO ATTRACT AND RETAIN OTHER
KEY PERSONNEL
Our success depends largely on the skills, experience and performance of
some key members of our management, particularly our co-founders Jeet Singh and
Joseph Chung. If we lose one or more of our key employees, our business could be
harmed. We have purchased, and are the beneficiaries of, insurance policies on
the lives of Mr. Singh and Mr. Chung, each in the amount of $1,000,000. In
addition, our future success will depend in large part on our ability to
continue attracting and retaining highly skilled personnel. Like other software
companies, we face intense competition for qualified personnel. We cannot be
certain that we will be successful in attracting, assimilating and retaining
qualified personnel in the future.
WE NEED TO EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES IN ORDER TO INCREASE
MARKET AWARENESS OF OUR PRODUCTS AND INCREASE OUR REVENUES
We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenues. We cannot be certain
that we will be successful in these efforts. We have recently expanded our
direct sales force and plan to aggressively recruit additional sales personnel
for the foreseeable future. Our products and services require a sophisticated
sales effort targeted at the senior management of our prospective customers.
Newly-hired employees will require training and it will take time for them to
achieve full productivity. We cannot be certain that we will be able to hire
enough qualified individuals in the future or that newly-hired employees will
achieve necessary levels of productivity.
WE DEPEND ON OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS
Since our potential customers often rely on third-party systems integrators
to develop, deploy and manage Web sites for conducting commerce on the Internet,
we cultivate relationships with systems integrators in order to encourage them
to support our products. If we do not adequately train a sufficient number of
systems integrators or if systems integrators were to devote their efforts to
6
<PAGE>
integrating or co-selling different products, our revenues could be reduced and
our operating results could be harmed.
WE WILL NEED TO IMPLEMENT AND IMPROVE OUR OPERATIONAL SYSTEMS AND HIRE
ADDITIONAL SERVICE PROFESSIONALS ON A TIMELY BASIS IN ORDER TO MANAGE GROWTH
We have expanded our operations rapidly in recent years. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities and to support our growing customer base. Rapid growth
would place a significant demand on our management and operational resources. In
order to manage growth effectively, we must implement and improve our
operational systems, procedures and controls on a timely basis. We also plan to
continue to add professional services personnel for the foreseeable future.
However, we cannot be certain that we will be able to attract a sufficient
number of highly qualified service personnel. In addition, new service personnel
will require training and it will take time for them to become productive. If we
fail to improve our operational systems or to expand our professional service
capabilities in a timely manner, we could experience customer dissatisfaction,
cost inefficiencies and lost revenue opportunities, which could harm our
operating results.
WE MAY LOSE MONEY ON FIXED-PRICE CONTRACTS
A majority of our revenues from Innovation Solutions services are derived
from fixed-price contracts. We work with complex technologies in compressed time
frames and it can be difficult to judge the time and resources necessary to
complete a project. If we miscalculate the resources or time we need to complete
work under fixed-price contracts, our operating results could be materially
harmed.
WE COULD INCUR SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT
Our Innovation Solutions services often involve the development of custom
software applications for specific customers. In some cases, customers retain
ownership or impose restrictions on our ability to use the technologies
developed from these projects. Issues relating to the ownership of software can
be complicated, and disputes could arise that affect our ability to resell or
reuse applications we develop for customers.
We seek to protect the source code for our proprietary software both as a
trade secret and as a copyrighted work. However, because we make the source code
available to some customers, third parties may be more likely to misappropriate
it. Our policy is to enter into confidentiality agreements with our employees,
consultants, vendors and customers and to control access to our software,
documentation and other proprietary information. Despite these precautions, it
may be possible for someone to copy our software or other proprietary
information without authorization or to develop similar software independently.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We could incur
substantial costs to prosecute or defend any intellectual property litigation.
If we litigated to enforce our rights, it would be expensive, would divert
management resources and may not be adequate to prevent the use of our
intellectual property by third parties.
In addition, we are obligated to indemnify customers against claims that we
infringe the intellectual property rights of third parties. The results of any
intellectual property litigation to which we might become a party may force us
to do one or more of the following:
- cease selling or using products or services that incorporate the
challenged intellectual property
- obtain a license, which may not be available on reasonable terms, to sell
or use the relevant technology
- redesign those products or services to avoid infringement
7
<PAGE>
BROADVISION HAS CLAIMED THAT WE INFRINGE ITS INTELLECTUAL PROPERTY
On December 11, 1998, BroadVision, one of our competitors, filed a complaint
against us in the United States District Court for the Northern District of
California, alleging infringement by us of a patent held by BroadVision (U.S.
Patent No. 5,710,887). BroadVision alleges that our infringement relates to
methods for conducting e-commerce. BroadVision is seeking a permanent injunction
of the sale of our Dynamo products in their current forms as well as unspecified
damages. On February 4, 1999, we filed our answer denying BroadVision's
complaint and a counterclaim against BroadVision seeking a judgment that we are
not infringing BroadVision's patent and that its patent is unenforceable and
invalid.
After BroadVision brought its claim against us, we entered into an original
equipment manufacturer agreement with Informix under which we received $5.0
million of prepaid royalties. The agreement with Informix provides Informix with
the right to terminate the agreement in the event that BroadVision brings a
claim against Informix for patent or other intellectual property infringement of
BroadVision's products by our products or products or services offered under the
terms of the agreement. If BroadVision were to bring such a suit against
Informix and Informix were to terminate the agreement, we would be required to
refund the amount of the prepaid royalty less the greater of $530,000 per
quarter, commencing with the fiscal quarter ended March 31, 1999, and all
uncredited prepaid royalties as of the termination date. The amount refundable
at September 30, 1999 was $3.4 million.
Litigation is subject to inherent uncertainties. In addition, cases like
this generally involve issues of law that are evolving, presenting further
uncertainty. Our defense of this litigation, regardless of the merits of the
complaint, has been, and will likely continue to be, time-consuming and a
diversion for our personnel. A failure to prevail in this litigation could
result in:
- our paying monetary damages
- the issuance of a preliminary or permanent injunction requiring us to stop
selling our Dynamo products in their current form
- our having to redesign Dynamo, which could be costly and time-consuming
and could substantially delay Dynamo shipments, assuming that a redesign
is feasible
- our having to reimburse BroadVision for some or all of its attorneys' fees
- our having to obtain from BroadVision a license to its patent, which
license might not be made available to us on reasonable terms,
particularly because BroadVision is a competitor
- our having to reimburse our customers for any expenses and losses they
incur due to the alleged infringement
Any of these results would seriously harm our business, financial condition
and operating results. Furthermore, we expect to continue to incur substantial
costs in defending against this litigation and these costs could increase
significantly if our dispute goes to trial. It is possible that these costs
could substantially exceed our expectations in future periods.
IF WE FAIL TO ADAPT TO RAPID CHANGES IN THE INTERNET CUSTOMER RELATIONSHIP
MANAGEMENT SOFTWARE MARKET, OUR EXISTING PRODUCTS COULD BECOME OBSOLETE
The market for our products is marked by rapid technological change,
frequent new product introductions and Internet-related technology enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. We cannot be certain that we will successfully develop and market new
products or product enhancements that comply with present or emerging Internet
technology standards. New products based on new technologies or new industry
standards
8
<PAGE>
could render our existing products obsolete and unmarketable. To succeed, we
will need to enhance our current products and develop new products on a timely
basis to keep pace with developments related to Internet technology and to
satisfy the increasingly sophisticated requirements of customers. E-commerce
technology is complex and new products and product enhancements can require long
development and testing periods. Any delays in developing and releasing enhanced
or new products could cause us to lose revenue opportunities and customers.
WE RELY ON JAVA AS THE PROGRAMMING LANGUAGE IN WHICH WE DEVELOP OUR PRODUCTS
AND OUR BUSINESS COULD BE HARMED IF JAVA LOSES MARKET ACCEPTANCE OR IF WE ARE
NOT ABLE TO CONTINUE USING JAVA OR JAVA RELATED TECHNOLOGIES
Our software is written in the Java computer programming language developed
by Sun Microsystems. While a number of companies have introduced Web
applications based on Java, Java could fall out of favor and support by Sun
Microsystems or other companies could decline. If Java support decreased or we
could not continue to use Java or related Java technologies, we might have to
rewrite the source code for our entire product line to enable our products to
run on other computer platforms. Also, changes to Java could require us to
change our products. If we were unable to develop or implement appropriate
modifications to our products on a timely basis, we could lose revenue
opportunities and our business could be harmed.
OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE, OR PRODUCT LIABILITY CLAIMS
WITH SUBSTANTIAL LITIGATION COSTS
Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Despite internal testing and testing by customers, our current and
future products may contain serious defects, including Year 2000 errors. Serious
defects or errors could result in lost revenues or a delay in market acceptance.
Since our customers use our products for critical business applications such
as e-commerce, errors, defects or other performance problems could result in
damage to our customers. They could seek significant compensation for losses
from us. Although our license agreements typically contain provisions designed
to limit our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could negate these limitations. Even if not
successful, a product liability claim brought against us would likely be
time-consuming and costly.
WE MAY BE ADVERSELY IMPACTED BY THE YEAR 2000 ISSUE AND OTHER INFORMATION
TECHNOLOGY ISSUES
The "Year 2000 Issue" refers generally to the problems that software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that are not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results. We are subject to potential Year 2000 problems
affecting our products, our internal systems and the systems of our suppliers
and customers, any of which could disrupt our business and hurt our operating
results.
We have tested the current versions of our commercially available products,
and we are working with our customers who have purchased customized software to
test their product installations. The commercially available products we have
tested are Year 2000 compliant, either alone or after installation of software
patches that we offer on our Web site when configured and used in accordance
with the related documentation, so long as the underlying operating system of
the host machine and any other software used with or in the host machine or our
products are also Year 2000 compliant. In June 1999, we completed testing of the
versions of our commercial products first released in December 1997 and all
subsequent maintenance releases, which represent approximately 80% of our
installed base, and we plan to offer remedial software patches to customers.
However, we have not tested our
9
<PAGE>
products on all platforms or all versions of operating systems that we currently
support, nor have we tested versions of our commercially available products
introduced prior to December 1997. These earlier versions, which represent
approximately 20% of our installed Dynamo product base, may not be Year 2000
compliant. If we fail to provide patches necessary to make earlier versions of
Dynamo products Year 2000 compliant, we may be subject to claims against us. To
the extent that unidentified Year 2000 problems exist in versions of our
products introduced prior to December 1997, we may be subject to claims against
us from customers still using those products. Claims against us by customers
alleging that our products are not Year 2000 compliant could harm our business,
financial condition and operating results.
We have contacted the vendors of software and hardware that are either
included in our products or that are critical to the operation of our internal
systems to evaluate their Year 2000 compliance. Some of the third-party products
that we use, or that are included in our products, are not Year 2000 compliant,
and could cause our internal systems or our products to experience Year 2000
problems. To address these issues, we plan to upgrade or replace some
third-party products before the end of 1999.
Despite testing by us and by customers, and assurances from developers of
products incorporated into our products, current versions of our products may
contain undetected errors or defects associated with Year 2000 date functions.
Known or unknown errors or defects in our products could result in delay or loss
of revenues, diversion of development resources, damage to our reputation or
increased service and warranty costs, any of which could disrupt our business
and hurt our financial condition and operating results.
Although we are not currently aware of any material operational issues or
costs associated with preparing our internal systems for the Year 2000, we may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in our internal systems. This could harm our
business, financial condition and operating results.
OUR EXISTING STOCKHOLDERS WILL BE ABLE TO CONTROL ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL AND COULD DELAY OR PREVENT SOMEONE FROM ACQUIRING OR
MERGING WITH US ON TERMS FAVORED BY A MAJORITY OF OUR INDEPENDENT STOCKHOLDERS
On completion of this offering, our executive officers and directors and
their affiliates will beneficially own approximately 54% of our outstanding
common stock. As a result, these stockholders will be able to exercise control
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. This could delay
or prevent someone from acquiring or merging with us.
OUR MANAGEMENT WILL HAVE DISCRETION OVER USING OUR NET PROCEEDS FROM THIS
OFFERING
Our board of directors and management will have significant flexibility in
applying our net proceeds from this offering. As of the date of this prospectus,
we do not have plans for the use of our proceeds from this offering other than
for working capital and general corporate purposes. However, we could use some
of our proceeds to acquire or invest in businesses that we believe offer
products, services or technologies that complement ours. See "Use of Proceeds."
IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT
COULD HURT OUR BUSINESS
In the future, we may pursue acquisitions to obtain complementary
businesses, products, services or technologies. An acquisition may not produce
the revenues, earnings or business synergies that we anticipated, and an
acquired business, product, service or technology might not perform as we
expected. If we pursue an acquisition, our management could spend a significant
amount of time and effort in identifying and completing the acquisition. If we
complete an acquisition, we may encounter significant difficulties and incur
substantial expenses in integrating the operations and personnel of the acquired
10
<PAGE>
company into our operations while preserving the goodwill of the acquired
company. In particular, we may lose the services of key employees of the
acquired company and we may make changes in management that impair the acquired
company's relationships with employees and customers.
Any of the above risks could prevent us from realizing the anticipated
benefits of our acquisitions. To pay for an acquisition, we might use stock or
cash. Alternatively, we might borrow money from a bank or other lender. If we
use our stock, our stockholders would experience dilution of their ownership
interests. If we use cash or debt financing, our financial liquidity would be
reduced. Finally, if we are unable to account for our acquisitions under the
"pooling of interests" method of accounting which is scheduled to be eliminated
effective January 1, 2001, we may be required to capitalize a significant amount
of intangibles, including goodwill, which may lead to significant amounts of
amortization charges. In addition, we may incur significant, one-time write-offs
and amortization charges. These amortization charges and write-offs could
decrease our future earnings or increase our future losses.
RISKS RELATED TO THE INTERNET INDUSTRY
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF E-COMMERCE
Our future success depends heavily on the acceptance and wide use of the
Internet for e-commerce. If e-commerce does not continue to grow or grows more
slowly than expected, demand for our products and services will be reduced.
Consumers and businesses may reject the Internet as a viable commercial medium
for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may not be
able to support the demands placed on it by increased usage. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased government regulation, could
cause the Internet to lose its viability as a commercial medium. Even if the
required infrastructure, standards, protocols and complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.
FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS
OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF E-COMMERCE
As e-commerce evolves, federal, state and foreign agencies could adopt
regulations covering issues such as user privacy, content and taxation of
products and services. If enacted, government regulations could limit the market
for our products and services. Although many regulations might not apply to our
business directly, we expect that laws regulating the solicitation, collection
or processing of personal and consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits certain types of
information and content from being transmitted over the Internet. The
prohibition's scope and the liability associated with a violation are currently
unsettled. In addition, although substantial portions of the Communications
Decency Act were held to be unconstitutional, we cannot be certain that similar
legislation will not be enacted and upheld in the future. It is possible that
legislation could expose companies involved in e-commerce to liability, which
could limit the growth of e-commerce generally. Legislation like the
Telecommunications Act and the Communications Decency Act could dampen the
growth in Web usage and decrease its acceptance as a medium of communications
and commerce.
THE INTERNET IS GENERATING PRIVACY CONCERNS WHICH COULD RESULT IN LEGISLATION
OR MARKET PERCEPTIONS WHICH COULD HARM OUR BUSINESS OR RESULT IN REDUCED SALES
OF OUR PRODUCTS, OR BOTH
Businesses use our Dynamo Personalization Server product to develop and
maintain profiles to tailor the content to be provided to Web site visitors.
When a visitor first arrives at a Web site, our
11
<PAGE>
software creates a profile for that visitor. If the visitor registers or logs
in, the visitor's identity is added to the profile, preserving any profile
information that was gathered up to that point. Dynamo Personalization Server
tracks both explicit user profile data supplied by the user as well as implicit
profile attributes derived from the user's behavior on the Web site. Privacy
concerns may cause visitors to resist providing the personal data or avoid Web
sites tracking the Web behavioral information necessary to support this
profiling capability. More importantly, even the perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of our products. In addition, legislative or regulatory requirements may
heighten these concerns if businesses must notify Web site users that the data
captured after visiting Web sites may be used to direct product promotion and
advertising to that user. Other countries and political entities, such as the
European Economic Community, have adopted such legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If privacy legislation is enacted or consumer privacy concerns are
not adequately addressed, our business, financial condition and operating
results could be harmed.
Our Dynamo products use "cookies" to track demographic information and user
preferences. A "cookie" is information keyed to a specific user that is stored
on a computer's hard drive, typically without the user's knowledge. Cookies are
generally removable by the user, although removal could affect the content
available on a particular site. Germany has imposed laws limiting the use of
cookies, and a number of Internet commentators and governmental bodies in the
United States and other countries have urged passage of laws limiting or
abolishing the use of cookies. If such laws are passed or if users begin to
delete or refuse cookies as a common practice, demand for our personalization
products could be reduced.
PROJECTIONS INCLUDED IN THIS PROSPECTUS RELATING TO THE GROWTH OF E-COMMERCE
AND THE INTERNET ARE BASED ON ASSUMPTIONS THAT COULD TURN OUT TO BE INCORRECT
AND ACTUAL RESULTS COULD BE MATERIALLY DIFFERENT FROM THE PROJECTIONS
This prospectus contains various data and projections related to revenues
generated by electronic commerce and the size of the worldwide Internet commerce
application software market. These data and projections have been included in
studies prepared by International Data Corporation, an independent market
research firm, and the projections are based on surveys, financial reports and
models used by IDC to measure license revenues and associated maintenance fees
derived from sales to e-commerce sites. These projections include assumptions
regarding U.S. business and home use of the Internet; growth in the number of
non-personal computer Web access devices; the amount of time people will spend
shopping on the Web; the absence of any catastrophic failure of the Internet;
the continued expansion of regional economies; and the continued improvement of
security on the Internet, as well as consumer confidence. Actual results or
circumstances may be materially different from the projections. This could
reduce our revenues and harm our operating results. These data and projections
are inherently imprecise and investors are cautioned not to place undue reliance
on them.
RISKS RELATED TO THE SECURITIES MARKETS
OUR STOCK PRICE MAY BE VOLATILE
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile. Fluctuations in market price and
volume are particularly common among securities of Internet and software
companies. The market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
- variations in quarterly operating results
- changes in market valuations of Internet and software companies
12
<PAGE>
- our announcements of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments
- failure to complete significant sales
- additions or departures of key personnel
- future sales of common stock
- changes in financial estimates by securities analysts
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of the common stock. On completion of
this offering, we will have 32,542,737 shares of common stock outstanding and
4,009,947 shares subject to outstanding options. The 5,750,000 shares sold in
our initial public offering in July 1999 are, and the shares sold in this
offering will be, freely tradable without restriction or further registration
under the federal securities laws unless purchased by our "affiliates" as that
term is defined in Rule 144. The remaining shares of common stock outstanding on
completion of the offering will be "restricted securities" as that term is
defined in Rule 144. Our directors and executive officers and the selling
stockholders have executed lock-up agreements that limit their ability to sell
common stock. These stockholders have agreed not to sell or otherwise dispose of
any shares of common stock for a period of 90 days after the date of this
prospectus without the prior written approval of Hambrecht & Quist LLC. When the
lock-up agreements expire, most of the restricted securities will become
eligible for sale.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY
Certain provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable, which could reduce the market price of our common stock.
Such provisions include:
- authorizing the issuance of "blank check" preferred stock
- providing for a classified board of directors with staggered, three-year
terms
- providing that directors may only be removed for cause by a two-thirds
vote of stockholders
- limiting the persons who may call special meetings of stockholders
- prohibiting stockholder action by written consent
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings
Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us.
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<PAGE>
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION
The public offering price is substantially higher than the book value per
share of the outstanding common stock immediately after this offering.
Accordingly, if you purchase common stock in the offering, you will incur
immediate dilution of approximately $62.88 in the book value per share of the
common stock from the price you pay for the common stock.
THE FORWARD-LOOKING STATEMENTS WE MAKE IN THIS PROSPECTUS MIGHT PROVE
INACCURATE. AS A RESULT, OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE
OR ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS.
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or other comparable terminology. These statements
involve known and unknown risks and uncertainties that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus.
We cannot guarantee any future results, levels of activity, performance or
achievements. Moreover, neither we nor anyone else assumes responsibility for
the accuracy and completeness of these statements. We undertake no obligation to
update any of the forward-looking statements after the date of this prospectus.
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 1,425,000 shares of
common stock, after deducting estimated underwriting discounts and estimated
offering expenses, will be approximately $90.3 million. Our estimated net
proceeds will be $95.9 million if the underwriters fully exercise their
over-allotment option. These estimates assume a public offering price of $67.44
per share. We will not receive any proceeds from the sales of common stock by
the selling stockholders.
We intend to use our net proceeds of this offering for working capital and
other general corporate purposes. We may also use a portion of the net proceeds
for possible acquisitions of businesses, products and technologies. From time to
time we engage in discussions with potential acquisition candidates. However, we
have no current plans, commitments or agreements with respect to any
acquisitions, and we may not make any acquisitions.
We have not identified specific uses for our net proceeds of this offering,
and we will have discretion over their use and investment. Pending use of our
proceeds, we intend to invest these proceeds in short-term, investment grade,
interest-bearing securities.
DIVIDEND POLICY
We currently intend to retain future earnings, if any, to finance our
growth. We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs, restrictions in financing agreements and plans for expansion.
PRICE RANGE OF OUR COMMON STOCK
Our common stock began trading on the Nasdaq National Market under the
symbol "ARTG" on July 21, 1999. Prior to that, there was no established public
trading market for our common stock. The following table sets forth the high and
low prices of our common stock for the periods indicated as quoted on the Nasdaq
National Market.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ------ ------ ------
<S> <C> <C>
Year ending December 31, 1999
Third quarter (commencing July 21, 1999).................. $38.13 $10.25
Fourth quarter (through October 21, 1999)................. $68.50 $35.13
</TABLE>
On October 21, 1999 the last reported sale price on the Nasdaq National
Market for our common stock was $67.44 per share. On October 20, 1999, there
were 243 holders of record of our common stock.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis
- on an as adjusted basis to reflect our receipt from our sale of 1,425,000
shares of common stock in this offering at an assumed public offering
price of $67.44 per share after deducting the estimated underwriting
discounts and estimated offering expenses
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------
AS
ACTUAL ADJUSTED
------------ -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized and no shares issued or outstanding actual
and as adjusted......................................... $ -- --
Common stock, $0.01 par value, 100,000,000 shares
authorized: 31,115,113 shares issued and outstanding
actual and 32,540,113 shares issued and outstanding as
adjusted................................................ 311 325
Additional paid-in capital................................ 81,043 171,345
Deferred compensation..................................... (3,932) (3,932)
Accumulated deficit....................................... (19,384) (19,384)
-------- --------
Total stockholders' equity.............................. 58,038 148,354
-------- --------
Total capitalization................................ $ 58,038 $148,354
======== ========
</TABLE>
See "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes included in this prospectus.
16
<PAGE>
DILUTION
The net tangible book value of our common stock as of September 30, 1999 was
$58,038,000, or $1.87 per share. After giving effect to the sale of common stock
pursuant to this offering at an assumed public offering price of $67.44 per
share, assuming the underwriters' option to purchase additional shares in this
offering is not exercised, and after deducting estimated underwriting discounts
and estimated offering expenses, the as adjusted net tangible book value at
September 30, 1999 would have been $148,354,000, or $4.56 per share.
Net tangible book value per share before the offering has been determined by
dividing net tangible book value (total tangible assets less total liabilities)
by the number of shares of common stock outstanding as of September 30, 1999.
This offering will result in an increase in net tangible book value per share of
$2.69 to existing stockholders and dilution in net tangible book value per share
of $62.88 to new investors who purchase shares in this offering. Dilution is
determined by subtracting net tangible book value per share after this offering
from the assumed public offering price of $67.44 per share.
The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $67.44
Net tangible book value per share at September 30,
1999.................................................. $ 1.87
Increase attributable to sale of common stock in this
offering.............................................. 2.69
------
Net tangible book value per share after this offering....... 4.56
------
Dilution of net tangible book value per share to new
investors who purchase shares in this offering............ $62.88
======
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1997 and 1998 and for each of the years ended December 31, 1996, 1997 and 1998
are derived from financial statements audited by Arthur Andersen LLP,
independent public accountants, which are included in this prospectus. The
selected consolidated financial data as of December 31, 1995 and 1996 and the
year ended December 31, 1995 are derived from audited financial statements not
included in this prospectus. The selected consolidated financial data as of
December 31, 1994 and for the year ended December 31, 1994 are derived from
unaudited financial statements not included in this prospectus. The selected
consolidated financial data as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 are derived from unaudited financial
statements which are included in this prospectus and which include, in our
opinion, all adjustments, consisting of only normal recurring adjustments, that
are necessary for a fair presentation of our financial position and results of
operations for those periods. Operating results for the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1999. The pro forma basic and
diluted net loss per share is described in note 1(f) to the consolidated
financial statements included elsewhere in this prospectus. The data should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere in this prospectus and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
Services........................... $ 753 $ 798 $ 3,849 $ 4,591 $ 8,078 $ 5,849 $ 9,421
Product license.................... -- -- 53 1,866 4,059 2,451 9,372
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total revenues................. 753 798 3,902 6,457 12,137 8,300 18,793
Cost of revenues..................... 518 594 1,985 3,196 5,050 3,475 6,669
---------- ---------- ---------- ---------- ---------- ----------- -----------
Gross Profit................... 235 204 1,917 3,261 7,087 4,825 12,124
---------- ---------- ---------- ---------- ---------- ----------- -----------
Operating expenses:
Research and development........... 11 217 1,117 3,661 3,355 2,306 4,234
Sales and marketing................ 76 133 1,152 2,287 4,074 2,630 8,134
General and administrative......... 357 284 1,060 1,418 2,291 1,543 3,149
Amortization of deferred
compensation..................... -- -- -- -- 107 -- 823
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total operating expenses....... 444 634 3,329 7,366 9,827 6,479 16,340
---------- ---------- ---------- ---------- ---------- ----------- -----------
Loss from operations................. (209) (430) (1,412) (4,105) (2,740) (1,654) (4,216)
Interest income...................... -- -- -- 6 54 8 681
Interest expense..................... (25) (37) (30) (129) (164) (132) (120)
---------- ---------- ---------- ---------- ---------- ----------- -----------
Net loss............................. (234) (467) (1,442) (4,228) (2,850) (1,778) (3,655)
Accretion of discount, dividends and
offering costs on preferred
stock.............................. -- (2) (206) (214) (1,594) (1,342) (4,395)
---------- ---------- ---------- ---------- ---------- ----------- -----------
Net loss available for common
stockholders....................... $ (234) $ (469) $ (1,648) $ (4,442) $ (4,444) $ (3,120) $ (8,050)
========== ========== ========== ========== ========== =========== ===========
Basic and diluted net loss per
share.............................. $ (0.03) $ (0.06) $ (0.19) $ (0.50) $ (0.50) $ (0.35) $ (0.53)
========== ========== ========== ========== ========== =========== ===========
Basic and diluted weighted average
common shares outstanding.......... 7,763,013 8,131,028 8,848,866 8,872,202 8,967,066 8,941,046 15,176,953
========== ========== ========== ========== ========== =========== ===========
Pro forma basic and diluted net loss
per share.......................... $ (0.16) $ (0.14)
========== ===========
Pro forma basic and diluted weighted
average common shares
outstanding........................ 18,246,484 25,707,287
========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- --------------
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ -- $ 6 $ 2,358 $ 187 $ 4,093 $57,399
Working capital (deficit)............................... (349) (341) 902 (1,328) 3,649 53,677
Total assets............................................ 144 137 3,038 1,672 7,766 68,648
Long-term obligations, less current portion............. -- -- 24 122 322 --
Redeemable convertible preferred stock.................. -- -- 3,000 3,153 8,313 --
Stockholders' equity (deficit).......................... (240) (211) (1,648) (4,060) (4,034) 58,038
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN THE
FORWARD-LOOKING STATEMENTS.
OVERVIEW
We were founded in December 1991. From 1991 through 1995, we devoted our
efforts principally to building, marketing and selling our professional services
capabilities and to research and development activities related to our software
products. Beginning in 1996, we began to focus on selling our software products.
To date, we have enhanced and released several versions of our Dynamo
Application Server product, and have completed development of our current
product suite. We market and sell our products worldwide through our direct
sales force, systems integrators, technology partners and original equipment
manufacturers.
We derive our revenues from the sale of software product licenses and
related services. Product license revenues are derived from the sale of
perpetual software licenses of our Dynamo products. Our software licenses are
priced based on either the size of the customer implementation or site license
terms. Services revenues are derived from fees for professional services,
training, and software maintenance and support. Professional services include
software installation, custom application development and project and technical
consulting. We bill professional services fees either on a time and materials
basis or on a fixed-price schedule. Software maintenance and support
arrangements are priced based on the level of services provided. In general,
customers are entitled to receive software updates, maintenance releases and
technical support for an annual maintenance fee of 20% to 30% of the list price
of the licensed product. Customers that purchase maintenance and support
generally receive all product updates and upgrades of software modules purchased
as well as Web-based and telephone technical support. Training is billed when
services are provided.
We recognize revenues in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION and SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A
PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenues from software
product licenses are recognized upon execution of a license agreement and
delivery of the software, provided that the fee is fixed and determinable and
deemed by management to be collectible. If conditions for acceptance are
required subsequent to delivery, revenues are recognized upon customer
acceptance if such acceptance is not deemed to be perfunctory. Revenues under
reseller arrangements are generally recognized as earned which is generally
ratably over the life of the reseller agreement for guaranteed minimum royalties
or based upon unit sales by the resellers. Revenues for professional services
are recognized on either a time and materials or percentage of completion basis
as the services are performed, provided that amounts due from customers are
fixed and determinable and deemed collectible by management. Revenues for
software maintenance and support are recognized ratably over the term of the
maintenance period, which is typically one year. We record cash receipts from
customers and billed amounts due from customers in excess of revenues recognized
as deferred revenues. We record revenues recognized on a contract prior to
billing as unbilled services. The timing and amount of cash receipts from
customers can vary significantly depending on specific contract terms and can
therefore have a significant impact on the amount of deferred revenues and
unbilled services in any given period.
Services revenues have increased each quarter during our history primarily
due to the expansion of our service capabilities by hiring additional service
personnel and to the increase in the number of customers using our Dynamo
products. Sales of Dynamo products often lead to sales of consulting services
and software maintenance and support. To date, substantially all of our Dynamo
customers have entered into 12-month software maintenance and support agreements
at the time of purchase. Because we only began selling Dynamo in 1996, we have a
limited history upon which to evaluate
19
<PAGE>
whether Dynamo customers will renew their maintenance and support agreements
from year to year. We believe that growth in our product license sales depends
on our ability to provide customers with support, training, consulting and
implementation services and to educate systems integrators and resellers on how
to use and install our products. We have invested significantly, and expect to
continue to invest, in expanding our services organization.
Until 1996, we were focused primarily on our professional services business.
Since 1996, sales of software licenses and related software and maintenance
services have represented an increasing percentage of our total revenues. We
anticipate that software product licenses and software maintenance revenues will
continue to increase as a percentage of total revenues. As software product
licenses have nearly no costs associated with them, this trend may contribute to
higher gross margins. Gross margins will also be affected by the mix of services
provided and the utilization of our services personnel. As a result, our gross
margins could vary significantly from quarter to quarter.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit, hire and train personnel for our
engineering, sales and marketing and professional services departments, and to
establish an administrative organization. These costs have exceeded the revenues
generated by our products and services. As a result, we have incurred net losses
in each year since inception and for the nine months ended September 30, 1999.
As of September 30, 1999, we had an accumulated deficit of $19.4 million. We
anticipate that our operating expenses will increase substantially in future
quarters as we increase sales and marketing operations, develop new distribution
channels, fund greater levels of research and development, broaden professional
services and support, and improve operational and financial systems.
Accordingly, we expect to incur additional losses for the foreseeable future. In
addition, our limited operating history makes it difficult for us to predict
future operating results and, therefore, there can be no assurance that we will
achieve or sustain revenue growth or profitability.
We had 245 full-time employees at September 30, 1999, up from 119 at
September 30, 1998. This rapid growth places a significant demand on our
management and operational resources. In order to manage growth effectively, we
must implement and improve our operational systems, procedures and controls on a
timely basis. We expect that future expansion will continue to challenge our
ability to hire, train, motivate and manage our employees. Competition is
intense for highly qualified technical, sales and marketing and management
personnel.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as percentages
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Services.................................................. 99% 71% 67% 70% 50%
Product licenses.......................................... 1 29 33 30 50
--- --- --- --- ---
Total revenues........................................ 100 100 100 100 100
Cost of revenues............................................ 51 49 42 42 35
--- --- --- --- ---
Gross profit.............................................. 49 51 58 58 65
--- --- --- --- ---
Operating expenses:
Research and development.................................. 29 57 27 28 23
Sales and marketing....................................... 29 35 34 32 43
General and administrative................................ 27 22 19 18 17
Amortization of deferred compensation..................... -- -- 1 -- 4
--- --- --- --- ---
Total operating expenses.............................. 85 114 81 78 87
--- --- --- --- ---
Loss from operations........................................ (36) (63) (23) (20) (22)
Interest income............................................. -- -- -- -- 4
Interest expense............................................ (1) (2) (1) (1) (1)
--- --- --- --- ---
Net loss.................................................... (37)% (65)% (24)% (21)% (19)%
=== === === === ===
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. Total revenues increased 127% from $8.3 million for the nine
months ended September 30, 1998 to $18.8 million for the nine months ended
September 30, 1999. The increase was attributable to growth in the number of
customers and average sales per customer, as we expanded our sales force and
introduced a new release of our Dynamo product in December 1998. Two customers
accounted for 22% and 32% of total revenues during the nine months ended
September 30, 1999 and 1998, respectively.
The following customers accounted for more than 10% of our total revenues in
the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1999
-------- --------
<S> <C> <C>
Sun Microsystems............................................ 20% 11%
Informix.................................................... -- 11
Universal Learning Technologies............................. 12 --
</TABLE>
SERVICES REVENUES. Services revenues increased 62% from $5.8 million for
the nine months ended September 30, 1998 to $9.4 million for the nine months
ended September 30, 1999. Services revenues from professional services
consulting fees increased from $5.6 million for the nine months ended
September 30, 1998 to $7.7 million for the nine months ended September 30, 1999.
Services revenues from software maintenance and support agreements increased
from $208,000 for the nine months ended September 30, 1998 to $1.7 million for
the nine months ended September 30, 1999. The increase
21
<PAGE>
in services revenues was primarily due to an increase in the number of customers
and sales of product licenses.
PRODUCT LICENSE REVENUES. Product license revenues increased from
$2.5 million for the nine months ended September 30, 1998 to $9.4 million for
the nine months ended September 30, 1999. This increase was primarily due to
growing market acceptance of our Dynamo product suite following the release of
Dynamo 4.0 in December 1998. In addition, we entered into an original equipment
manufacturer agreement with Informix in December 1998 under which we received
$5.0 million of prepaid royalties, of which $1.6 million was recognized as
revenues for the nine months ended September 30, 1999. In the event Informix is
named in a patent or other intellectual property infringement claim related to
the agreement with BroadVision, Informix has the right to terminate the
agreement and receive a refund of the $5.0 million less the greater of $530,000
per quarter, commencing with the fiscal quarter ended March 31, 1999, and all
uncredited prepaid royalties as of the termination date. The amount refundable
at September 30, 1999 was $3.4 million. The initial term of our agreement with
Informix is two years and it is automatically renewed for successive one year
terms unless one of the parties elects not to renew the agreement. In addition,
if we are acquired by a competitor of Informix, Informix could require that the
agreement remain in effect for up to one renewal period.
Product license revenues increased as a percentage of total revenues from
30% for the nine months ended September 30, 1998 to 50% for the nine months
ended September 30, 1999. This increase was a result of our ongoing strategy to
increase product license revenues as a percentage of total revenues.
COST OF REVENUES. Cost of revenues includes salary and other related costs
for our professional services and support staff, as well as third-party
contractor expenses. Cost of revenues also includes product license costs which
include royalties to third parties for software embedded in our Dynamo product
suite, as well as documentation and other informational media associated with
our products. To date, these product license costs have not been significant.
Cost of revenues increased 81% from $3.5 million for the nine months ended
September 30, 1998 to $6.7 million for the nine months ended September 30, 1999.
The increase was primarily due to the expansion of our services organization.
Approximately 88% of the increase was attributable to an increase in salaries
and related benefits and the remainder was primarily due to an increase in
travel and related expenses.
Cost of revenues as a percentage of services revenues increased from 59% for
the nine months ended September 30, 1998 to 71% for the nine months ended
September 30, 1999. This increase resulted primarily from a significant increase
in the number of employees in our professional services group in the first three
quarters of 1999. We incur recruiting and training expenses when we hire
additional employees and generally experience lower utilization of newly-hired
services personnel.
Cost of revenues, in absolute dollars and as a percentage of services
revenues, will vary significantly depending on the level of professional
services staffing, their effective utilization rates and the mix of services
performed, including product license support services, and whether these
services are performed by us or by third-party contractors. In addition, cost of
revenues will increase if any product license related cost of revenues
materialize. Cost of revenues as a percentage of total revenues may vary
significantly depending on the mix of revenues between product licenses and
services.
GROSS PROFIT. Gross profit increased 152% from $4.8 million for the nine
months ended September 30, 1998 to $12.1 million for the nine months ended
September 30, 1999. The increase in gross profit was primarily due to the
significant increase in product license revenues, which have no significant cost
of revenues, as a percentage of total revenues for the nine months ended
September 30, 1999.
22
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salary and related costs to support product development.
Research and development expenses increased 83% from $2.3 million for the nine
months ended September 30, 1998 to $4.2 million for the nine months ended
September 30, 1999. Approximately 78% of the increase was due to increases in
engineering salaries, and the remainder of the increase was primarily due to
related recruiting and facilities costs.
Research and development expenses as a percentage of total revenues were 28%
for the nine months ended September 30, 1998 and 23% for the nine months ended
September 30, 1999. We believe that continued investment in research and
development is critical to attaining our strategic objectives, and, as a result,
we expect research and development expenses to increase significantly in
absolute dollars in future periods. To date, all software development costs have
been expensed in the period incurred.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of salaries, commissions and other related costs for sales and
marketing personnel, travel, public relations and marketing programs and events.
Sales and marketing expenses increased 212% from $2.6 million for the nine
months ended September 30, 1998 to $8.1 million for the nine months ended
September 30, 1999. Approximately 47% of the increase was related to new and
increased marketing program expenditures, approximately 35% of the increase was
due to a significant increase in the number of sales and marketing personnel and
related expenses, approximately 10% of the increase was due to travel and
entertainment expenses and the remainder of the increase was due to new facility
expenses.
Sales and marketing expenses as a percentage of total revenues were 32% for
the nine months ended September 30, 1998 and 43% for the nine months ended
September 30, 1999. We believe that sales and marketing expenses in absolute
dollars will increase in future periods as we expect to continue to expand our
sales and marketing efforts. In particular, we expect to hire and train new
sales personnel, increase marketing and promotional spending and open additional
sales offices both in the United States and abroad. We also anticipate that
sales and marketing expenses may fluctuate as a percentage of total revenues
from period to period depending on the level and timing of such expenditures and
the rate at which newly-hired sales personnel become productive.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and other related costs for operations and finance
employees, legal and accounting fees and facilities-related expenses. General
and administrative expenses increased 107% from $1.5 million for the nine months
ended September 30, 1998 to $3.2 million for the nine months ended
September 30, 1999. Approximately 39% of the increase was due to an increase in
personnel and related costs and approximately 11% of the increase related to
increases in legal and accounting fees. We increased our general and
administrative personnel to build the infrastructure to support the growth of
the company.
General and administrative expenses as a percentage of total revenues were
18% for the nine months ended September 30, 1998 and 17% for the nine months
ended September 30, 1999. We believe general and administrative expenses will
increase in absolute dollars as we expect to hire additional personnel and incur
additional costs to build the infrastructure to support the growth of our
business. We also expect to incur increased legal expenses for the duration of
the BroadVision litigation, as well as increased facilities costs as we expand
our employee base.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. In the fourth quarter of 1998
through May 1999, we recorded total deferred stock compensation of $4.9 million
in connection with stock option grants. This amount represents the difference
between the exercise price of certain stock option grants and the deemed fair
value for accounting purposes of our common stock at the time of such grants. We
are amortizing this amount over the vesting periods of the applicable options,
resulting in amortization
23
<PAGE>
expense of $823,000 for the nine months ended September 30, 1999. We did not
have amortization expense relating to deferred stock compensation for the nine
months ended September 30, 1998.
INTEREST INCOME (EXPENSE). Interest income increased from $8,000 for the
nine months ended September 30, 1998 to $681,000 for the nine months ended
September 30, 1999. Interest income for the nine months ended September 30, 1999
was generated from cash and cash equivalents available for investment primarily
from the receipt of $56.2 million from our initial public offering. Interest
expense decreased from $132,000 for the nine months ended September 30, 1998 to
$120,000 for the nine months ended September 30, 1999. The decrease was
primarily due to our repayment of outstanding indebtedness with proceeds of our
initial public offering.
PROVISION FOR INCOME TAXES AND TAX CREDIT CARRYFORWARDS. We incurred losses
for the nine months ended September 30, 1998 and 1999. Accordingly, there were
no provisions for income taxes.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUES. Total revenues increased 65% from $3.9 million in 1996 to
$6.5 million in 1997 and 88% to $12.1 million in 1998. The increase was
attributable to increases in the number of our customers and average sales per
customer primarily due to the commencement of product license sales in 1996 and
a new release of Dynamo in December 1997. We also experienced substantial growth
in services revenues from our expanded customer base. Three customers accounted
for 80%, 56% and 37% of total revenues in 1996, 1997 and 1998, respectively. The
following customers accounted for more than 10% of our total revenues in the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
CUSTOMER 1996 1997 1998
- -------- -------- -------- --------
<S> <C> <C> <C>
Harvard Business School.................................... 35% --% --%
Sony Online Entertainment.................................. 31 29 --
Sun Microsystems........................................... -- -- 17
BMG Direct................................................. -- 16 --
Stream International....................................... 14 -- --
R.R. Donnelley............................................. -- 11 --
Universal Learning Technology.............................. -- -- 10
John Hancock Funds, Inc.................................... -- -- 10
</TABLE>
SERVICES REVENUES. Services revenues increased 19% from $3.8 million in
1996 to $4.6 million in 1997 and 76% to $8.1 million in 1998. Services revenues
from professional consulting service fees increased 18% from $3.8 million in
1996 to $4.5 million in 1997 and 71% to $7.7 million in 1998. Services revenues
from maintenance and support agreements increased from $44,000 in 1997 to
$372,000 in 1998. Revenues from maintenance and support agreements were
immaterial in 1996. The increase in services revenues was primarily due to an
increase in the number of customers, increased sales of product licenses and
increased billing rates.
PRODUCT LICENSE REVENUES. Product license revenues increased from $53,000
in 1996 to $1.9 million in 1997 and 118% to $4.1 million in 1998. The increase
in product license revenues was primarily due to the commencement of product
shipments in December 1996 and from growing market acceptance of our Dynamo
product suite following the release of Dynamo 3.0 in December 1997 and Dynamo
4.0 in December 1998.
COST OF REVENUES. Cost of revenues increased 61% from $2.0 million in 1996
to $3.2 million in 1997 and 58% to $5.1 million in 1998. Approximately 94% of
the increase in 1997 and 73% of the increase in 1998 were due to the expansion
of our professional services organization, consisting primarily of payroll and
related benefits. Additionally, the increase in the number of software product
24
<PAGE>
license customers required increased investment in support and management
personnel. Service costs related to maintenance and support agreements increased
from an immaterial amount in 1996 to $133,000 in 1997 and to $206,000 in 1998.
Product license costs were immaterial in all three years.
Cost of revenues as a percentage of services revenues increased from 52% in
1996 to 70% in 1997 and decreased to 63% in 1998. The increase in 1997 reflected
the significant increase in the number of employees in our professional services
group. The decrease in 1998 resulted from improved utilization of service
personnel.
GROSS PROFIT. Gross profit increased 70% from $1.9 million in 1996 to
$3.3 million in 1997 and by 117% to $7.1 million in 1998. The increase in gross
profit was primarily due to the increase in total revenues. The gross margin
increased from 49% in 1996 to 51% in 1997 and to 58% in 1998. The gross margin
increase was primarily due to the significant increase in product license
revenues, which have no significant cost of revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 228% from $1.1 million in 1996 to $3.7 million in 1997 and decreased
8% to $3.4 million in 1998. Approximately 76% of the increase in 1997 was due to
an increase in the number of engineering personnel, with the remainder
attributable to recruiting fees and overhead costs associated with product
development. Approximately 36% of the decrease in 1998 was due to the temporary
reallocation of research and development personnel to support the professional
services organization and the remainder of the decrease primarily was due to
overhead and related expenses.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 99%
from $1.2 million in 1996 to $2.3 million in 1997 and 78% to $4.1 million in
1998. Approximately 87% of the increase in 1997 and 67% of the increase in 1998
were due to an increase in the number of sales and marketing personnel and
related expenses. The remainder in each year primarily related to increases in
our marketing expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 34% from $1.1 million in 1996 to $1.4 million in 1997 and increased
62% to $2.3 million in 1998. Approximately 69% of the increase in 1997 and 50%
of the increase in 1998 were due to the hiring of additional personnel with the
remainder in each year primarily due to the increase in facility expenses
necessary to support our expanding operations.
INTEREST INCOME (EXPENSE). Interest income increased from $6,000 in 1997 to
$54,000 in 1998. We did not have interest income in 1996. The increases reflect
interest earned on higher balances of cash and cash equivalents resulting from
the proceeds from the private sale of equity securities. Interest expense
increased from $30,000 in 1996 to $129,000 in 1997 and to $164,000 in 1998. The
increase reflected additional borrowings under various financing arrangements
entered into during 1997 and 1998, as well as a non-cash interest expense
related to warrants issued in connection with our credit facility in 1998.
PROVISION FOR INCOME TAXES. We incurred losses for the years ended
December 31, 1996, 1997 and 1998. Accordingly, there were no provisions for
income taxes in these periods.
25
<PAGE>
QUARTERLY RESULTS
The following tables set forth unaudited statement of operations data for
each quarter of 1998 and the three first quarters of 1999. This information has
been presented on the same basis as the audited financial statements appearing
elsewhere in this prospectus and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary to present fairly the unaudited quarterly results. This information
should be read in conjunction with our audited financial statements and related
notes appearing elsewhere in this prospectus. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
---------- --------- ---------- --------- ---------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services........................ $ 1,692 $ 1,944 $ 2,213 $ 2,229 $ 2,614 $ 3,128 $ 3,679
Product license................. 209 1,003 1,239 1,608 1,806 3,105 4,461
------- ------- ------- ------- ------- -------- --------
Total revenues.............. 1,901 2,947 3,452 3,837 4,420 6,233 8,140
Cost of revenues.................. 1,066 1,234 1,175 1,575 1,813 2,248 2,608
------- ------- ------- ------- ------- -------- --------
Gross Profit................ 835 1,713 2,277 2,262 2,607 3,985 5,532
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and development........ 627 685 994 1,049 1,131 1,392 1,710
Sales and marketing............. 680 923 1,027 1,444 1,420 2,617 4,097
General and administrative...... 436 450 657 748 743 1,115 1,292
Amortization of deferred stock
compensation.................. -- -- -- 107 216 303 304
------- ------- ------- ------- ------- -------- --------
Total operating expenses.... 1,743 2,058 2,678 3,348 3,510 5,427 7,403
------- ------- ------- ------- ------- -------- --------
Loss from operations.............. (908) (345) (401) (1,086) (903) (1,442) (1,871)
Interest income................... -- -- 8 46 50 71 561
Interest expense.................. (41) (43) (48) (32) (24) (25) (72)
------- ------- ------- ------- ------- -------- --------
Net loss.......................... $ (949) $ (388) $ (441) $(1,072) $ (877) $ (1,396) $ (1,382)
======= ======= ======= ======= ======= ======== ========
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
----------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Services........................ 89% 66% 64% 58% 59% 50% 45%
Product license................. 11 34 36 42 41 50 55
------- ------- ------- ------- ------- -------- --------
Total revenues.............. 100 100 100 100 100 100 100
Cost of revenues.................. 56 42 34 41 41 36 32
------- ------- ------- ------- ------- -------- --------
Gross Profit................ 44 58 66 59 59 64 68
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and development........ 33 23 29 27 25 22 21
Sales and marketing............. 36 31 30 38 32 42 50
General and administrative...... 23 16 19 19 17 18 16
Amortization of deferred stock
compensation.................. -- -- -- 3 5 5 4
------- ------- ------- ------- ------- -------- --------
Total operating expenses.... 92 70 78 87 79 87 91
------- ------- ------- ------- ------- -------- --------
Loss from operations.............. (48) (12) (12) (28) (20) (23) (23)
Interest income................... -- -- -- 1 1 1 7
Interest expense.................. (2) (1) (1) (1) (1) -- (1)
------- ------- ------- ------- ------- -------- --------
Net loss.......................... (50)% (13)% (13)% (28)% (20)% (22)% (17)%
======= ======= ======= ======= ======= ======== ========
</TABLE>
The increase in product license revenues from the three months ended
March 31, 1998 to the three months ended September 30, 1999 was primarily due to
the growing market acceptance of our product suite following the release of
Dynamo Application Server 3.0 in December 1997 and Dynamo
26
<PAGE>
Application Server 4.0 in December 1998. The decline in gross margins for the
three months ended December 31, 1998 and March 31, 1999 from the three months
ended September 30, 1998 was primarily due to the expansion of our services
organization. Sales and marketing expenses increased each quarter, primarily due
to increases in sales personnel and the achievement of sales quotas resulting in
increased commissions. In particular, sales and marketing expenses increased
significantly during the quarter ended September 30, 1999 due to increased
headcount and an extensive marketing campaign.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Most of our expenses are fixed in the
short term, and we may not be able to quickly reduce spending if revenues are
lower than we project. Our ability to forecast accurately our quarterly revenues
is limited due to the long sales cycle of our software products, which makes it
difficult to predict the quarter in which product license revenues will occur,
and the variability of customer demand for professional services. Our operating
results will be materially adversely affected if revenues do not meet
projections.
DEFERRED COMPENSATION
In the fourth quarter of 1998 through May 1999, we recorded total deferred
stock compensation of $4.9 million in connection with stock option grants. This
amount represents the difference between the exercise price of stock option
grants and the deemed fair value for accounting purposes of our common stock at
the time of such grants. We are amortizing this amount over the vesting periods
of the stock options, which will result in amortization expense of $1.1 million
in 1999, $1.2 million in 2000, $1.2 million in 2001, $1.2 million in 2002 and
$100,000 in 2003.
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
As of December 31, 1998, we had net operating loss carryforwards of
$8.9 million and research and development tax credit carryforwards of $235,000.
The net operating loss and tax credit carryforwards will expire at various dates
beginning 2011, if not utilized. The Tax Reform Act of 1986 imposes substantial
restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" of a corporation. Our
ability to utilize net operating loss and tax credit carryforwards on an annual
basis would be limited as a result of an "ownership change" as defined by
Section 382 of the Internal Revenue Code. We have completed several financings
since inception and believe that we have incurred ownership changes. We do not
believe the ownership changes will have a material impact on our ability to
utilize our net operating loss and tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations and met our capital
expenditure requirements through the private sale of equity securities,
commercial credit facilities and capital leases, resulting in net proceeds of
$13.0 million, and from our initial public offering. We completed our initial
public offering of 5,168,000 shares of our common stock on July 26, 1999,
including 168,000 shares issued in connection with the exercise of the
underwriters' over-allotment option on July 30, 1999. These shares were sold to
the public at $12.00 per share, which net of offering expenses, resulted in net
proceeds of $56.2 million.
Cash used in operating activities was $412,000, $3.9 million and
$2.9 million in 1996, 1997, and 1998, respectively. In the nine months ended
September 30, 1999, we generated $1.3 million in cash from operating activities.
This represents a cash operating loss of $2.4 million and changes in working
capital items consisting primarily of cash provided by deferred revenue,
accounts payable and accrued expenses offset by increases in accounts
receivable, unbilled services and prepaid expenses and other
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current assets. The cash provided by the change in deferred revenue was
primarily the result of $5.0 million we received from Informix, of which
$3.4 million was included in deferred revenue as of September 30, 1999. In the
event Informix is named in a patent or other intellectual property infringement
claim related to the agreement with BroadVision, Informix has the right to
terminate the agreement and receive a refund of the $5.0 million less the
greater of $530,000 per quarter, commencing with the fiscal quarter ended
March 31, 1999, and all uncredited prepaid royalties as of the termination date.
The amount refundable at September 30, 1999 is $3.4 million.
To date, our investing activities have consisted primarily of capital
expenditures totaling $498,000, $190,000, $285,000 and $3.4 million for 1996,
1997, 1998 and the nine months ended September 30, 1999, respectively. Assets
acquired consisted primarily of leasehold improvements for our new facility, as
well as computer hardware, software and furniture and fixtures for our new
facility and growing employee base. We expect that our capital expenditures will
increase as our employee base grows.
Net cash provided by financing activities for 1996, 1997, 1998 and the nine
months ended September 30, 1999 was $3.3 million, $1.9 million, $7.5 million and
$55.9 million, respectively. The primary source of cash from financing
activities for 1996, 1997 and 1998 was our sales of preferred stock and for the
nine months ended September 30, 1999 was our initial public offering, which
generated net proceeds of $56.2 million.
We have a revolving line of credit which provides for borrowings of up to
the lesser of $5.0 million and 80% of eligible accounts receivable and a
$200,000 equipment line of credit with Silicon Valley Bank that bear interest at
the bank's prime rate plus 0.25% and 0.75%, respectively. At September 30, 1999,
we had $1.5 million available under the line of credit based upon our borrowing
base and $200,000 available under the equipment line of credit. These lines of
credit are secured by all of our tangible and intangible intellectual and
personal property and are subject to financial covenants and restrictions,
including minimum liquidity requirements and a prohibition on the payment of
dividends. We are currently in compliance with all related financial covenants
and restrictions.
At September 30, 1999, we had $57.4 million in cash and cash equivalents and
$53.7 million in working capital. Management believes that the net proceeds from
our recent initial public offering and this offering, together with the existing
financial resources and commercial credit facilities, will be sufficient to meet
our cash requirements for at least the next twelve months. Thereafter, we may
require additional funds and may seek to raise additional funds through public
or private equity financings or from other sources. There can be no assurance
that additional financing will be available at all or that, if available, will
be obtainable on terms favorable to us. Additional financing could also be
dilutive.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. This could result in failures or
the creation of erroneous results.
We have defined "Year 2000 compliant" as the ability to:
(a) correctly handle date information needed for the December 31, 1999
to January 1, 2000 date change;
(b) function according to the product documentation provided for this
date change, without changes in operation, assuming correct configuration;
(c) where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined and
predetermined manner;
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(d) if the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways that are
unambiguous as to century; and
(e) recognize year 2000 as a leap year.
We have conducted a Year 2000 readiness review for the current versions of
our products. The review includes assessment, validation testing and, where
necessary, remediation, upgrading and replacement of these product versions, as
well as contingency planning. We continue to respond to customer questions about
prior versions of our products on a case-by-case basis.
We have largely completed all phases of our plan, and continue contingency
planning, with respect to the current versions of our commercially available
products. The current versions of each of these products are Year 2000 compliant
when configured and used in accordance with the related documentation, so long
as the underlying operating system of the host machine and any other software
used with or in the host machine or our products are also Year 2000 compliant.
However, the current versions of some of our commercial products may require
patches in order to function optimally after December 31, 1999. We require all
users of these affected products to install these patches.
In June 1999, we completed testing of the versions of our commercial
products first released in December 1997 and all subsequent maintenance
releases, which represent approximately 80% of our installed base, and we plan
to offer remedial software patches to customers. We have not tested our
commercial products on all platforms or all versions of operating systems that
we currently support nor have we tested versions of our commercially available
products introduced prior to December 1997. These earlier versions, which
represent approximately 20% of our installed Dynamo product base, may not be
Year 2000 compliant.
We have not separately tested software obtained from third parties (licensed
software, shareware and freeware) that is incorporated into our products. While
we have sought assurances from our vendors that licensed software is Year 2000
compliant, we know that some of the licensed software is not Year 2000
compliant. To address known problems, we plan to upgrade or replace the impacted
systems by year-end. Despite testing by us and by customers, and assurances from
developers of products incorporated into our products, our products may contain
undetected errors or defects associated with Year 2000 date functions. Known or
unknown errors or defects in our products could result in delay or loss of
revenues, diversion of development resources, damage to our reputation or
increased service and warranty costs, any of which could materially adversely
affect our business, operating results or financial condition. Some commentators
have predicted significant litigation regarding Year 2000 compliance issues, and
we are aware of Year 2000 lawsuits against other software vendors. Because of
the unprecedented nature of Year 2000 litigation, it is uncertain whether or to
what extent we may be affected by it.
Our internal systems include both our information technology, or IT, and
non-IT systems. We have initiated an assessment of our material internal IT
systems, including both software tools we have developed and third-party
software and hardware technology, as well as an assessment of our non-IT
systems. We expect to complete testing of our IT systems in 1999. To the extent
that our internal systems are not Year 2000 compliant, we plan to upgrade or
replace these systems. Related costs have been immaterial to date and we expect
total future costs to remain below $100,000. To the extent that we are not able
to test the technology provided by third-party vendors, we are seeking
assurances from them that their systems are Year 2000 compliant. Although we are
not currently aware of any material operational issues or costs associated with
preparing our internal IT and non-IT systems for the Year 2000, we may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in our internal IT and non-IT systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current and potential customers may incur
significant expenses to achieve Year 2000
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compliance. If our customers are not Year 2000 compliant, they may experience
material costs to remedy problems, or they may face litigation costs. In either
case, Year 2000 issues could reduce or eliminate budgets that current or
potential customers could otherwise have for purchases of our products and
services. As a result, our business, results of operations or financial
condition could be harmed.
We have funded our Year 2000 plan from available cash and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We will incur additional costs related to the Year 2000 plan for
personnel to manage the project, outside contractor assistance, technical
support for our products, product engineering and customer satisfaction. We are
already aware that some of our internal systems are not Year 2000 compliant and
require upgrading before the end of the year. We may experience material
problems and costs with Year 2000 compliance that could adversely affect our
business, results of operations and financial condition.
We continue to develop a contingency plan to address situations that may
result if we are unable to achieve Year 2000 readiness of our critical
operations. The cost of developing and implementing a contingency plan may
itself be material. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
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BUSINESS
OVERVIEW
We offer an integrated suite of Internet customer relationship management
and e-commerce software applications, as well as related application
development, integration and support services. Our solution enables businesses
to understand, manage and build online customer relationships and to market,
sell and support products and services over the Internet more effectively. Our
Dynamo product suite includes an application server that is specifically
designed to enable and support Web applications, as well as e-commerce and
Internet customer management applications. An application server is a software
program that facilitates the development, deployment and management of other
software programs. Our solution is designed to provide businesses with the core
application platform and software tools required to develop and deploy
personalized, reliable, large-scale Web sites for conducting e-commerce.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The emergence of the Internet as a global medium for interactive
communications and commerce is fundamentally changing the way business is
conducted. The Internet is enabling businesses to attract and retain customers,
conduct e-commerce with those customers, and communicate with employees,
suppliers and strategic partners. The Internet is providing the opportunity for
businesses to establish new revenue streams, create a new distribution channel,
reduce costs and increase customer retention. This opportunity has driven the
growth in online marketing and e-commerce initiatives. International Data
Corporation estimates that more than $1.3 trillion worth of goods and services
will be sold over the Internet by 2003, which represents a compounded annual
growth rate of 92% for the period between 1998 and 2003.
As the growth and acceptance of online marketing and e-commerce have
increased, the World Wide Web has become a highly competitive business
environment where customers have a large number of easily accessible choices.
For a company to succeed in this environment, its Web site must present content
and provide an overall visitor experience that captures the visitor's interest
and satisfies their informational and transactional needs. To accomplish this,
companies are investing in Internet-based customer relationship management and
e-commerce solutions, such as:
- online marketing and selling systems to target, attract and retain
customers
- transaction and distribution management systems to reduce the costs of
delivering products and services to customers and distribution partners
- customer support and relationship management systems to better understand
and serve the ongoing needs of their customers
International Data Corporation estimates that the worldwide Internet commerce
application software market was $444 million in 1998 and projects that the
market will grow to $1.7 billion in 1999 and reach $13.1 billion in 2003.
EMERGING E-COMMERCE REQUIREMENTS
Many commercial Web sites present only a static collection of
non-interactive content. These sites offer basic content, such as corporate
information, product literature and banner advertisements, which are passively
viewed by Web visitors. While this information is useful, many Web visitors
prefer dynamic content, which is continually updated and enhanced, as well as
interactive content, which responds and changes based on the user's input. Many
Web visitors also prefer Web sites that personalize their experience and present
more relevant content based on their existing relationship with the business,
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stated or implied preferences and needs, Web navigation behavior and other
factors. To attract, serve and retain customers online, businesses must engage
visitors with dynamic, relevant and targeted experiences, which often lead to
transactional opportunities.
Businesses are seeking Web-based systems that can be dynamically updated and
integrated, sharing data among Web applications and across their entire
enterprise in order to present users with a personalized, consistent and unified
customer experience. The desired result is a customer-driven Web site that takes
into account the particular customer's profile, Web behavior and relationship
with the company. Customer-driven Web sites can provide businesses with an
efficient means to manage and maximize customer relationships online. In order
to accomplish this, businesses require solutions that incorporate a number of
features:
- EFFECTIVE CONTROL OF E-COMMERCE SYSTEMS AND STRATEGIES. Business managers
responsible for Internet customer relationship management need easy-to-use
tools to give them direct control over their e-commerce systems and
strategies without requiring the time-consuming intervention of
information technology specialists. With the appropriate tools, business
managers can better manage their Internet customer relationships through
improved customer segmentation and delivery of targeted content,
promotions and advertising campaigns, and personalized pricing and account
information.
- INTEGRATION WITH EXISTING INFORMATION SYSTEMS. In order to present the
customer with a unified and personalized e-commerce experience, companies
must address the difficult challenge of integrating Web applications with
their existing content management, customer database, transaction and
customer support systems.
- COMMON PLATFORM UPON WHICH TO BUILD FUTURE APPLICATIONS. Businesses
implementing sophisticated Web-based applications desire an expandable Web
platform to enable them to build new applications and add third-party
functionality to their e-commerce initiatives on a rapid and ongoing
basis.
- SCALABILITY, PERFORMANCE AND RELIABILITY. The increasing significance of
Web-based commerce requires that e-commerce systems be highly scalable in
order to accommodate rapid user growth and increased Web site complexity,
content and functionality. Scalability refers to the ability of a computer
system to handle greater load by adding additional hardware. Further,
companies need high performance and highly reliable systems because if
online systems fail or cause unsatisfactory delays, even for a short
period of time, businesses could miss revenue opportunities and lose
customers.
CURRENT SOLUTIONS
In response to these emerging business requirements, various applications
have been developed that address discrete aspects of the enterprise e-commerce
infrastructure. A number of vendors offer stand-alone solutions for Web content
management, advertising management, transaction processing, e-commerce
storefront development, personalization and recommendation engines, and
application development tools. By implementing a collection of these stand-alone
solutions, companies can attempt to deliver dynamic, personalized content to Web
site visitors and manage their e-commerce efforts. However, these stand-alone
solutions may not provide a satisfactory solution for many businesses:
- LACK OF INTEGRATED FUNCTIONALITY. Disparate stand-alone applications
generally do not easily integrate and communicate with each other, lack a
common user interface and lack a common platform for integrating with
existing information systems. As a result, a collection of stand-alone
applications often does not present the Web visitor with a unified
customer experience and may sacrifice functionality and performance.
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- HIGH COST. It is frequently difficult and expensive for companies to
implement a solution consisting of a collection of disparate stand-alone
solutions from multiple vendors, and these implementations frequently fail
to meet requirements. In addition, businesses often incur higher costs of
ownership over time as it is difficult for them to manage the
uncoordinated product upgrade cycles and new application development
efforts of multiple vendors.
Today, businesses increasingly seek an integrated package of applications,
platforms and tools that addresses all aspects of their enterprise e-commerce
infrastructure, rather than just stand-alone solutions. Some software providers
have developed more comprehensive solutions incorporating a number of e-commerce
functions. However, these solutions may be inadequate for a number of reasons:
- LIMITED FUNCTIONALITY. The functionality may be insufficient to serve all
of a company's e-commerce requirements, resulting in the need to buy,
build or adapt additional applications.
- LACK OF A MODULAR, APPLICATION SERVER-BASED ARCHITECTURE. These solutions
are typically not built with separate software modules and lack the
expandability that an application server-based platform provides. This
limits the ability of businesses to customize their implementations,
integrate their solutions with existing applications and extend their
e-commerce initiatives by building future applications or incorporating
third-party technology.
- POOR SCALABILITY AND RELIABILITY. Most of today's computer systems are
unable to scale to meet the growing performance demands of large-scale,
e-commerce Web sites. Solutions that do not scale well can be unreliable
and subject to system failures, which may result in frustrated customers,
lost revenue opportunities and potential financial losses.
To address the limitations of most commercially available solutions, some
companies have built custom Internet customer relationship management solutions
with application development tools. While these solutions can provide the
required functionality and integration, they typically require lengthy
implementation periods and are expensive to build and maintain. In addition,
they require a comprehensive understanding of market segmentation, content
targeting and advertising, as well as extensive technical expertise in Web
application development and systems integration. Most companies, and many
third-party systems integrators and application developers, do not have the
expertise and experience to address all of these requirements.
As a result, businesses are increasingly seeking Web application software
providers offering products and professional services that enable them to
rapidly deploy comprehensive, effective Internet customer relationship
management solutions. Businesses prefer solutions that are modular and flexible
with an open, application server-based architecture. They desire solutions that
are easy to integrate with existing systems and third-party applications and
that enable them to extend their Web infrastructures with new applications and
functionality to meet their continually evolving e-commerce needs. Businesses
also need to leverage their existing business systems, strategies and expertise
to manage their customer relationships effectively. Finally, businesses are
seeking solutions that meet the demanding scalability, reliability and
performance requirements of large-scale Web sites that conduct e-commerce.
OUR SOLUTION
We offer a suite of Web-based Internet customer relationship management and
e-commerce software applications, as well as related application development,
integration and support services. Our solution enables businesses to understand,
manage and build their online customer relationships more effectively and to
market, sell and support their products and services over the Internet. Our
product suite includes Dynamo Application Server, an application server
specifically designed to enable and support Web applications. Dynamo Application
Server is designed to provide businesses with the core
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application platform and software tools required to develop and deploy
personalized, effective e-commerce Web sites.
Our product suite also includes Dynamo Personalization Server, Dynamo
Commerce and Dynamo Ad Station. Dynamo Personalization Server is an expandable
personalization platform that enables companies to target specific content and
data to particular customers or visitors on the Web. Dynamo Commerce manages and
delivers product catalog content and user-targeted promotional programs and
provides transaction processing capabilities for large-scale e-commerce
storefronts. Dynamo Ad Station is an online banner advertising delivery
application designed to help businesses more effectively manage advertising
inventories on large-scale Web sites and distributed advertising networks.
Our solution incorporates the following distinguishing characteristics:
AN INTEGRATED AND MODULAR PRODUCT SUITE BASED ON A COMMON PLATFORM. Our
product suite includes a comprehensive range of functionality that allows
businesses to quickly develop and deploy personalized Web-based e-commerce
applications. Our application server-based platform enables our Dynamo
applications to share data and work together more efficiently than would a
collection of discrete Web applications from different vendors using various
technologies. An integrated product suite based on a common platform also
ensures that new products and releases will be compatible with each other as
well as with other applications built on Dynamo Application Server. The
modularity of our product suite allows customers to purchase applications that
fit their particular needs and allows them to quickly expand their
implementations as required.
RULES-BASED PERSONALIZATION IMPLEMENTED BY BUSINESS MANAGERS. Our products
allow business managers to apply new and pre-existing business rules to profile
and segment users and dynamically deliver personalized content and data to
online visitors. For example, businesses can present different prices, products
and promotional offers to different visitors or they can deliver
customer-specific information such as account detail and purchase history.
Business managers can review the behavior of visitors and quickly adjust their
business rules to manage their online marketing communications and e-commerce
strategies.
HIGH SCALABILITY, RELIABILITY AND PERFORMANCE. Our Dynamo Application
Server employs a Java-based architecture that is highly scalable. It has a
dynamic load management system which allows applications to be distributed
across multiple server computers. This means that as a Web site becomes more
heavily utilized, additional computing resources can be added to handle the
additional load. The load management system provides redundant fail-over, a
feature that transfers users on a failed server to another server without
interruption. Dynamo Application Server has been designed to meet the
performance requirements of high-capacity, highly personalized e-commerce Web
sites.
OPEN AND EXPANDABLE APPLICATION SERVER ARCHITECTURE. Our Dynamo Application
Server provides customers with an expandable platform that allows them to
rapidly integrate our products with their existing systems and to deploy new
applications, both internally developed and from third parties. The ability to
integrate multiple applications and information systems with our common platform
enables businesses to incorporate organization-wide customer data and support
systems to provide a unified customer experience. In addition, our open,
application server-based platform and the modularity of our product suite enable
systems integrators and technology partners to develop their own proprietary
applications on Dynamo for reuse or resale.
PROFESSIONAL SERVICES CAPABILITIES. We have been designing and deploying
network-based applications for over seven years and Web sites for over four
years. We have two primary service offerings, Innovation Solutions and Express
Services. Our Innovation Solutions team provides customized application design,
development and integration services to clients who desire advanced solutions
that are not commercially available. We provide Innovation Solutions services
for a limited number of projects that we believe will provide us with an
understanding of emerging technical and
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business needs for our future products. Our Express Services team provides
strategic consulting and integration support services to customers and systems
integrators to facilitate the deployment of our products. Express Services
provides system architecture design, project management, Web design and
technical training and support.
Our solution provides our customers with:
EFFECTIVE, HIGH-PERFORMANCE E-COMMERCE WEB SITES THAT ARE:
- dynamically generated and personalized on a real-time basis
- highly functional with comprehensive e-commerce features
- able to personalize content based on easily modifiable business rules
to increase customer satisfaction and retention
- able to present a unified, customer-centric experience by integrating
various sources of customer data and content and leveraging existing
information systems
THE ABILITY TO ACHIEVE RAPID TIME TO MARKET BY:
- deploying our comprehensive suite of integrated applications
- enabling rapid integration with existing information systems
- taking advantage of our intuitive user interfaces for business managers
and application developers
- utilizing our experienced consulting services professionals
THE ABILITY TO ACHIEVE A COMPETITIVE ADVANTAGE AND A HIGHER RETURN ON
INVESTMENT BY:
- increasing e-commerce and advertising revenues
- improving marketing effectiveness
- reducing marketing, transaction and customer support costs
- increasing customer satisfaction and retention
STRATEGY
Our objective is to be a leading provider of Internet customer relationship
management solutions. To achieve this objective, we have adopted the following
strategies:
MAINTAIN AND EXTEND PRODUCT AND TECHNOLOGY LEADERSHIP. We believe we are a
technology leader in providing Internet customer relationship management
solutions. We offer a comprehensive suite of software applications that we
believe are based on an advanced technologies. We were one of the first
companies to market a high-performance dynamic Web page generation engine to
both generate and deliver Web pages on a real-time basis, and shipped our first
Java-based Web application server shortly after Sun Microsystem's first
commercial shipment of Java 1.0. We intend to extend our product and technology
leadership by:
- extending Dynamo's personalization capabilities and building new
Internet customer relationship management applications
- continuing to increase the scalability, reliability and performance of
our Dynamo applications
- continuing to develop new adaptor and connector modules to allow our
products to easily integrate with third-party Internet customer
relationship management products, databases and information systems
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- providing Dynamo Application Server support for emerging industry
standards, such as Enterprise JavaBeans, for developing business
applications in Java, and XML, for formatting data and other
information
- using our Innovation Solutions services to identify emerging market
needs
GROW AND LEVERAGE PROFESSIONAL SERVICE CAPABILITIES. We have extensive
experience in Web application development and integration services. Through our
Express Services, we provide enabling services to train our systems integrators
and technology partners in the use of our products as well as consulting
services to assist with customer implementations. We plan to create additional
opportunities to increase revenues from product sales by expanding our base of
partners trained in the implementation and application of Dynamo. We intend to
hire additional professional services personnel to increase our services
revenues and to enable and support product license sales through systems
integrators.
CONTINUE TO BUILD DIRECT SALES CAPABILITIES AND LEVERAGE CO-SELLING EFFORTS
WITH SYSTEMS INTEGRATORS AND WEB DEVELOPERS. We sell our products directly to
end-users and through co-selling efforts with systems integrators and Web
developers. Our objective is to establish close relationships directly with our
customers and to motivate systems integrators to implement the Dynamo technology
and product suite on Internet and Web-based projects for their customers. We
intend to expand our sales by hiring additional direct sales personnel,
domestically and internationally, both to sell directly to end-users and to
expand our co-selling efforts. We plan to leverage our current relationships and
develop additional co-selling relationships with leading systems integrators. In
addition, many of our systems integrators are global enterprises, which we
believe provides us with an opportunity to expand our international business.
EXPAND TECHNOLOGY PARTNER AND ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
AS A DISTRIBUTION CHANNEL. We work with technology partners, such as Documentum
and OpenText, to develop modules that enable our software products to operate
with their software products. We also work with original equipment
manufacturers, such as Informix, to enable them to combine our software products
with their products to form a single software application product. Some of our
customers have requirements that can be met by a combination of our products and
those of one or more of our partners. We sell in conjunction with these vendors
in a variety of ways:
- co-marketing with a technology partner to promote the fact that our
products operate together
- co-selling with a partner in an arrangement where sales and service
personnel from both organizations approach a customer in a coordinated
sales process
- selling to reseller partners
- selling to original equipment manufacturers that sell and support the
combined product
Many of our current and potential partners are looking to extend their
current offerings to include Web-enablement, personalization and e-commerce
features. We believe these relationships will provide us the opportunity to
establish our platform in additional markets.
EXPAND MARKET PRESENCE. Historically we have not spent significant
resources on marketing and awareness programs. We intend to increase our market
presence through a variety of marketing and sales programs designed to generate
market awareness, penetrate target markets and help establish us as the leading
provider of Internet customer relationship management solutions. We plan to
increase spending on advertising, trade shows, seminars, industry events and
direct marketing efforts. We also plan to devote marketing resources to
expanding our channel relationships with systems integrators and technology
partners. We intend to develop and promote the Dynamo brand alongside our
partners' brands in all co-marketing relationships.
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PRODUCTS
We offer an integrated suite of Internet customer relationship management
applications. Our core product is Dynamo Application Server, a dynamic Web page
generation engine and application server specifically designed to enable and
support Web applications, that provides businesses with the platform and
software tools to develop and deploy personalized, effective e-commerce Web
sites. Our product suite also includes Dynamo Personalization Server, Dynamo
Commerce and Dynamo Ad Station. Each of the applications in our product suite
can be purchased separately; however, the Dynamo Application Server is required
to run each of our other applications. Dynamo Personalization Server is required
to run Dynamo Commerce and Dynamo Ad Station. We also sell software tools to
enable rapid application development, as well as adaptor modules to integrate
Dynamo products with content management systems. Our product suite is designed
to meet the performance and scalability requirements of large-scale e-commerce
Web sites. All of our products are based on Java and run on Sun Solaris, Windows
NT and IBM AIX operating system platforms.
The diagram below illustrates the overall architecture of our product suite
as well as the various applications, software tools and integration modules that
are included in our product suite.
The diagram below illustrates the Dynamo Relationship Commerce Suite with
horizontal, layered bars depicting Dynamo Application Server at the foundation;
Dynamo Personalization Station, with open content adaptors and open profile
adaptors as the second layer; Dynamo Commerce Application with open fulfillment
adaptors as the third layer; and custom applications as the top layer. The left
side of the bars shows the tools that work with our product suite: system
console, Developer Workbench, Personalization Control Center and retail
administration. The right side of the bars depicts enterprise systems including
customer databases and content management and transaction fulfillment systems.
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The following table briefly describes our products, list prices and system
requirements.
<TABLE>
<CAPTION>
<S> <C> <C>
PRODUCT DESCRIPTION LIST PRICE AND REQUIREMENTS
APPLICATION SUITE
Dynamo Application Server An open and expandable $10,000 per CPU
platform to enable Internet
customer relationship
management and e-commerce
applications
Dynamo Personalization Server Allows businesses to develop, $20,000 per CPU; requires
deploy and manage multiple Dynamo Application Server
Web applications that share a
common set of business rules
and are personalized based on
common user profiles
Dynamo Commerce Enables the creation of $20,000 per CPU; requires
personalized e-commerce Dynamo Application Server and
storefronts that can be Dynamo Personalization Server
customized and integrated
with existing information
systems
Dynamo Ad Station Allows businesses to serve $15,000 per server; requires
targeted advertisements to Dynamo Application Server and
Web site visitors and to Dynamo Personalization Server
manage their online
advertising inventory more
effectively
TOOLS & INTEGRATION MODULES
Dynamo Developer's Workbench Allows developers and Web $1,000 per seat
designers to quickly assemble
pre-built Java components
through an intuitive
graphical user interface
Dynamo Personalization Allows business managers to $1,000 per seat
Control Center define and modify
personalization business
rules through an intuitive
graphical user interface
Dynamo Targeted E-mail Enhances customer $4,000 per CPU; requires
relationships through Dynamo Personalization Server
rules-driven targeted e-mail
messaging functionality,
coordinated with Web site
personalization
Open Content Adaptors Provides direct integration $10,000 per CPU; requires
with leading content Dynamo Personalization Server
management systems
</TABLE>
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DYNAMO APPLICATION SERVER. The Dynamo Application Server is designed to
provide businesses with the core application platform and software tools
required to develop, deploy and manage personalized, effective Web sites for
conducting business on the Internet. The Dynamo Application Server provides a
common application platform for:
- dynamically generating Web pages and managing user sessions
- supplying a framework of shared application services to connect and
integrate each of the applications in our product suite
- managing the distribution of applications across multiple computers and
providing an automatic recovery management system to prevent system
failures
- efficiently connecting to enterprise systems and third-party applications
Dynamo Application Server connects to Dynamo Developer's Workbench, a Web
application development tool that allows developers and Web designers to build
new applications and integrate third-party technologies.
DYNAMO PERSONALIZATION SERVER. Dynamo Personalization Server coordinates,
manages and centralizes the personalization functions of the Dynamo product
suite. Dynamo Personalization Server enables business managers to segment users
and target content based on new and pre-existing business rules. It adjusts and
personalizes Web content on a real-time basis by combining explicit user data
from existing customer management and marketing databases with implicit
information gathered on Web navigation behavior.
Dynamo Personalization Server performs the following functions:
- PROFILE GATHERING. When a visitor first arrives at a Web site, a profile
is created automatically for that visitor. If the visitor registers or
logs in, the visitor's identity is added to the profile, preserving any
profile information that was gathered up to that point. Dynamo
Personalization Server tracks both explicit user profile data supplied by
the user as well as implicit profile attributes derived from the user's
behavior on the Web site. This information is combined with any existing
information about the visitor from the company's internal databases.
- SEGMENTATION AND CONTENT TARGETING. Dynamo Personalization Server enables
business managers to segment visitors based on their profile data. Using
business rules, content can be personalized and targeted to these groups
of users. These business rules are created using the Personalization
Control Center.
- CONTENT MANAGEMENT AND INTEGRATION. In addition to using Dynamo
Personalization Server to target content residing on internal file
systems, customers may purchase Open Content Adaptors to integrate Dynamo
with leading content management systems. The Open Content Adapters provide
direct integration to leading content management systems such as those
from Documentum and OpenText.
- PERSONALIZED MESSAGING. Dynamo Targeted E-mail can be used with the Dynamo
Personalization Server to send personalized messages to selected groups
and individual Web site users.
DYNAMO COMMERCE. Dynamo Commerce is a flexible solution enabling businesses
to deploy and manage large-scale, personalized, e-commerce storefronts. Dynamo
Commerce delivers product catalog content and user-targeted promotional programs
to manage the online shopping experience. It is designed to integrate with
existing customer database, inventory, order processing, payment and fulfillment
systems operated by many large organizations. In addition, Dynamo Commerce
provides administration features that allow e-commerce storefronts to be
operated independently by various managers throughout an organization. Dynamo
Commerce features include:
- COMPLETE E-COMMERCE STOREFRONT SOLUTION. Dynamo Commerce provides a
comprehensive set of e-commerce storefront functions including catalog,
shopping cart, order processing, built-in search capabilities and user
registration. Business managers can customize the layout, look and
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feel, navigation and functionality of their storefronts through point and
click interfaces and through customized Web page templates. Dynamo
Commerce supports both business-to-business and business-to-consumer
e-commerce.
- ENVIRONMENT FOR PERSONALIZED SELLING. Web sites built on Dynamo Commerce
can be designed to deliver targeted promotions based on user profiles
gathered through Dynamo Personalization Server. Since Dynamo Commerce uses
both implicit and explicit profiles, content can be targeted to both
anonymous and recognized visitors. Reporting functionality allows
marketing personnel to gather real-time feedback on the effectiveness of
various targeting and merchandising strategies.
- FLEXIBLE ORDER PROCESSING. Dynamo Commerce provides core order processing
functionality that can be integrated with a wide variety of transaction
models and existing business processes. Through the use of our integration
modules, customers can incorporate business systems into the order
processing flow at a number of stages as products are browsed, selected
and purchased.
- CUSTOMIZATION, MAINTAINABILITY AND DAY-TO-DAY MANAGEMENT. Dynamo Commerce
allows business managers, designers and programmers to independently
maintain and manage the various aspects of the Web site relating to their
particular expertise. Dynamo Commerce has an administrative interface so
business managers can control product presentation, pricing and
promotions. Designers can directly customize Web site templates upon which
the site is built. The open, modular architecture makes it easy for
programmers to extend and modify functionality. This separation simplifies
deployment and ongoing maintenance.
DYNAMO AD STATION. Dynamo Ad Station allows businesses to increase
advertising revenues by delivering targeted ads to visitors and by more
effectively managing advertising inventory. The data gathered by Dynamo Ad
Station help the business determine how to target campaigns to maximize
effectiveness. Automated inventory management features allow an administrator to
adjust the delivery of advertisements to help meet advertising goals. Dynamo Ad
Station's comprehensive data collection and reporting features facilitate the
monitoring of ad campaign effectiveness.
SERVICES
We provide a variety of consulting, design, application development,
integration and training and support services in conjunction with our products
through our Innovation Solutions and Express Services offerings.
INNOVATION SOLUTIONS. Innovation Solutions services consist of customized
application design, development and integration services and are ordinarily
provided on a fixed-price basis. We have extensive experience in developing,
designing and deploying large-scale Web applications. Our Innovation Solutions
services are provided to clients with complex requirements that seek advanced
solutions that are not commercially available to extend the capabilities and
features of their systems. As well as being a core component of our business,
Innovation Solutions projects provide us with an understanding of emerging
customer requirements and insights for new product developments. We typically
select projects that we believe may provide the technical and functional
foundation for our future products and services.
EXPRESS SERVICES. Express Services consist of high level consulting and
enabling support services such as system architectural design, project
management, Web site design, and technical training and support. Express
Services are ordinarily provided on a time and materials basis. Our Express
Services are provided to assist systems integrators, development partners and
customers to rapidly develop and deploy Dynamo-based applications and systems.
Our objective is to deploy our Express Services quickly and efficiently to
reduce the time and effort required by our partners and customers to
successfully deploy Dynamo applications. Our Express Services are priced on a
per day basis.
CUSTOMER SUPPORT AND MAINTENANCE. We offer four levels of customer support
ranging from our free support program, which is available for 60 days after a
product has been purchased, to our
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Premier Support Program, which includes telephone support 24 hours a day, seven
days per week, for customers deploying mission critical applications. Customers
are entitled to receive software updates, maintenance releases and technical
support for an annual maintenance fee of 20% to 30% of the then current list
price of the licensed product.
TRAINING. We provide a broad selection of training for customers and
partners, including programming classes covering all of the components of our
product suite. Training is priced on a per day basis. Fees vary for standard
public training classes and on-site private training classes.
CUSTOMERS
Our principal target markets are Fortune 1000 enterprises and new businesses
that plan to use the Internet as their primary business channel. Our customers
are characterized by their strong commitment to Internet customer relationship
management and represent a broad spectrum of enterprises within diverse industry
sectors. The following is a partial list of customers that have purchased
licenses and/or professional services from us:
TECHNOLOGY
Informix
Just in Time Solutions
Newbridge Networks
Sun Microsystems
MANUFACTURING
3M
Eastman Kodak
TRAVEL AND LEISURE
Hilton Hotels
FINANCIAL SERVICES
BancTec
John Hancock Funds, Inc.
KeyBank
Scudder Kemper Investments
MEDIA AND ENTERTAINMENT
Icon MediaLab
MTV/Nickelodeon
Sony Online Entertainment
Women.com
TELECOMMUNICATIONS
BellSouth
INTERNET
AltaVista
BabyCenter
Bigstep.com
GoTo.com
moses.com
Network Solutions
TechRepublic
TheStreet.com
CONSUMER RETAIL
BMG Direct
brandwise.com
CareSoft
GetMusic
J.Crew
living.com
Peapod
sephora.com
ShopLink.com
Walgreens
EDUCATION
Harvard Business School
Ontrack Learning
Universal Learning Technology
CASE STUDIES
The following case studies illustrate the issues faced by three
representative customers in deploying Web site applications, and the benefits
derived from utilizing Dynamo applications.
BMG DIRECT
www.bmgmusicservice.com
BMG Direct is the North American music club operated by Bertelsmann AG, the
Germany-based global media enterprise. With over eight million members, BMG
Direct is one of the largest direct marketers in the United States. BMG Direct
has traditionally sold to its music club members via direct mail. In
establishing its online strategy, BMG Direct faced the challenge of building a
state-of-the-art Web site for e-commerce that would leverage its existing
business practices, including a complicated pricing structure, multiple customer
segments and detailed customer information. It wanted to transfer
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its customer-interaction functions to the Internet to reduce costs and enhance
customer interactions. BMG Direct also wanted a system that could scale as the
popularity of its site grew. Key requirements for the BMG Direct site included
integration with multiple existing systems for customer information, ordering
and fulfillment. The Web site needed to provide an enjoyable and simple process
for enrolling in the club and it needed to provide members with all of the
benefits of the paper-based club, such as the ability to order CDs, cassettes
and other merchandise, respond to featured promotions and access editorial
content.
BMG Direct selected Dynamo as its e-commerce, personalization and
application server platform. BMG Direct worked with us and third-party systems
integrators to develop its Web site, which it launched in January 1998. The BMG
Direct Web site provides club members with access to selections from the entire
BMG Direct music club catalog of over 14,000 titles, significantly more than the
400-600 titles available in its catalog-based mailings. Club members also have
access to editorial content from the various BMG music clubs, such as Jazz, Rock
and Classical. Based on their member profiles, users receive personalized
content, highlights, promotional offers, pricing and custom navigation, all
consistent with the rules that govern BMG Direct's traditional business.
BMG Direct has experienced rapid adoption of its online offerings by its
existing paper-based customers and an increase in new memberships. In addition,
the establishment of an extensible personalization and e-commerce platform
allows BMG Direct to create new clubs, present additional personalized
e-commerce offerings and editorial content without requiring major
re-engineering of the system.
NEWBRIDGE NETWORKS
www.newbridge.com
Newbridge Networks is a leading provider of networking products and systems,
with a global network of resellers, distributors and affiliates. In developing
its Web presence to serve these distribution channels as well as current and
potential customers, partners, investors and employees, Newbridge's multiple Web
sites made it difficult to provide a consistent and seamless user experience. In
designing a new Web site, Newbridge's goals were to deliver its online offerings
through a single point of entry, consolidate content into a single physical
repository and provide a consistent "look-and-feel" for visitors. To serve
Newbridge's varied audiences from a single point of entry, content needed to be
targeted dynamically to specific groups of users based on their interests.
We worked with Newbridge to create a multi-tier access model for managing
user profiles that govern entitlement to content and enterprise systems, user
preferences and subscriptions. Newbridge's internal development staff, supported
by our Express Services group, developed the end-user application based on the
Dynamo product suite. Newbridge launched its new Web site in January 1999.
Today, visitors to the Web site can easily acquire information specific to their
areas of interest. Visitors also can register and create a user identity to
browse or be notified via e-mail of detailed information tailored to their needs
or interests. Dynamo's personalization capabilities enable Newbridge to gather
information about its customers and their preferences, analyze this information
and deliver targeted information on a real-time basis.
Newbridge's current platform has enabled it to adapt its Web site to manage
the delivery of information based on easily modifiable business rules, without
the overhead required to support multiple sites. The various services that have
resulted from this include an extranet for Newbridge's channel partners, as well
as an online support area that provides customers with access to product
information libraries and software updates. Users can also search for
information about product compatibility, manufacturing changes and discontinued
products. Newbridge continues to implement additional transactional, support and
customer management features on its Web site, incorporating personalization as a
means to reinforce and enhance relationships with distribution channels, and
customers.
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BABYCENTER, INC.
www.babycenter.com
BabyCenter is a leading Internet publisher and retailer for new and
expectant parents, providing original editorial content, community and online
commerce features. Its Web site currently generates over 15 million page views
and approximately 750,000 visits per month. The BabyCenter e-commerce storefront
offers over 3,000 products. In developing its Web site, BabyCenter faced the
challenge of building and supporting a full-featured and scalable
consumer-oriented Web site that could provide information, advice, products and
community features appropriate to parents at various stages of parenting.
BabyCenter selected the Dynamo suite of products in March 1998 as the
foundation of the internal development of its Web site. Since the launch of its
Web site in May 1998, BabyCenter has extended the site's functionality with
additional areas and features, including the redesigned BabyCenter store
launched in April 1999. Driven by Dynamo, the Web site provides personalized
editorial content, product guides, product recommendations, user ratings and
feedback, bulletin boards and chat rooms, as well as e-commerce transaction
capabilities.
BabyCenter has been able to establish a flexible and scalable Web
application based on Dynamo that delivers personalized content, manages the
electronic storefront and provides the platform for the editorial publishing
system that drives BabyCenter's positioning and strategy. BabyCenter now
generates revenues from e-commerce transactions to augment revenues from
sponsorships and other partnerships. Recently, BabyCenter announced it had
signed a merger agreement with eToys, Inc., a leading online retailer of
children's products.
TECHNOLOGY
We believe we are a technology leader in providing Internet customer
relationship management solutions. Our technology leadership has been evidenced
by product awards and recognition by industry commentators. For example, in
December 1998 our Dynamo Application Server earned the 1998 CNET Builder.com
Award as "Best Application Server." We believe our technology enables our
customers to create, deploy and maintain large-scale, personalized e-commerce
Web applications in less time and at a lower cost than existing alternatives. We
believe that our products have the following technological advantages:
JAVA FOUNDATION
Our products are written entirely in Java and support Java programming for
customization and extension, except for a few integration and installation
modules that can be implemented only in conventional programming languages.
We believe that our Java implementation results in the following benefits:
- STRONG COMPONENT MODEL. Java provides a component standard known as
"JavaBeans," which enables developers to segment their code into discrete,
well-defined units which can be assembled in a "building block" fashion to
create new applications. JavaBeans' modularity makes it easier to create
reusable software as well as maintain existing systems.
- PLATFORM NEUTRALITY. Java's portability allows our applications to be run
on virtually any major computer system without modification. This
portability eliminates porting costs normally required to support multiple
platforms or to change platforms, while allowing us to release products on
major platforms simultaneously.
- ENTERPRISE INTEGRATION. We believe that Java's portability and direct
support for distributed applications are helping Java to become the de
facto standard language for enterprise system integration.
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- FEWER PROGRAMMING ERRORS. Java's automatic memory management reduces
memory corruption errors, which typically represent the most costly and
difficult software "bugs" in conventional compiled languages such as C or
C++.
- ACCELERATED DEVELOPMENT. We believe that the above features, combined with
the broad availability of high-quality Java development tools, result in
faster development time.
MODULAR, STANDARDS-BASED COMPONENT ARCHITECTURE
One of the key features of our product architecture is its high degree of
modularity, achieved by building additional functionality on top of the
JavaBeans component technology. Customizations and extensions built by our
customers or partners using industry standard JavaBean components can be managed
by Dynamo Application Server. Dynamo Application Server enhances the naming,
configuration and lifecycle of each component, allowing components to be added,
extended, duplicated or replaced without recompilation of the rest of the
system. The modularity of our component technology allows our products to be
adapted to meet future business needs. In contrast, producers of non-modular
products must try to anticipate and develop additional functionality at the time
that they market their products.
One of the most powerful uses of our component technology is to integrate
our software with external enterprise systems. We provide reference
implementations of integration components while enabling our customers and
partners to easily replace our reference components with new components that
provide the same function but integrate with their existing systems. We adhere
to industry standards to enable our products to leverage technologies produced
by third parties and to protect the development investments of our partners and
customers.
PERFORMANCE, SCALABILITY AND RELIABILITY
Our products have a layered architecture. Dynamo Personalization Server is
built on top of Dynamo Application Server, and Dynamo Commerce and Ad Station
are built on top of Dynamo Personalization Server. We believe that the
integration of Dynamo Application Server with our other products yields
significant benefits, particularly in performance, scalability and reliability.
Dynamo Application Server uses page compilation technology to enhance the
performance of Web page generation. In most dynamic page generation servers, a
Web page is generated from an HTML template, a Web page that is mostly standard
HTML content with special embedded instructions to generate the dynamic portions
of the page. We utilize this basic page template model, but unlike most other
servers, Dynamo Application Server converts the HTML template into Java source
code and compiles it into executable binary classes. This page compilation
technology improves the speed at which Dynamo Application Server can generate
and serve dynamic Web pages.
Scalability is a term used to describe the ability of an application to
handle greater load when additional hardware is added to a system. Scalability
is particularly important for e-commerce applications where demand can grow
dramatically and unpredictably. Dynamo handles scalability across computers
through a dynamic session-based load management system in which multiple copies
of the application are run on multiple computers. This load distribution scheme
has the advantage of accommodating additional users by adding more computers.
Our load management technology also enables our applications to handle computer
hardware failures automatically and without interrupting the user's experience.
If a computer fails, users are automatically reassigned to another running
computer.
RESEARCH AND DEVELOPMENT
Our research and development group is responsible for product management,
core technology, product architecture, product development, quality assurance,
documentation and third-party software
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integration. This group also assists with pre-sale and customer support
activities referred from the Express Services group and quality assurance tasks
supporting the Innovation Solutions group.
Since we began focusing on selling software products in 1996, the majority
of our research and development activities have been directed towards creating
new versions of our products which extend and enhance competitive product
features, particularly in the areas of integrating our products with external
enterprise systems, supporting emerging industry standards and creating more
powerful user interfaces to our products. The systems we integrate with include
relational databases, content management systems and credit card payment
servers. The industry standards we support include Java Servlets, a standard for
constructing Web pages using the Java programming language; Enterprise Java
Beans, a standard for developing modular Java programs that can be accessed over
a network; and Simple Network Management Protocol, a standard for remotely
monitoring the operation of a system.
SALES AND MARKETING
Our principal target markets are Fortune 1000 companies and new businesses
that plan to use the Internet as their primary business channel. Our customers
are characterized by their strong commitment to Internet customer relationship
management. We target these potential customers directly through our sales force
and indirectly through arrangements with systems integrators, Web developers,
original equipment manufacturers and other technology partners.
We employ one group of sales professionals who are compensated based on
product and service sales made directly to end-users and a second group who are
compensated based on sales made through co-selling efforts with our systems
integrator partners. We train and assist systems integrators in promoting,
selling, deploying, extending and supporting our products. The objective of this
strategy is to establish close product relationships directly with our customers
and to motivate systems integrators to adopt the Dynamo technology and suite of
products on Internet and Web-based projects for their clients.
In addition, we recently initiated a strategy to co-market our products with
technology partners, such as Documentum and OpenText, to sell our products
through original equipment manufacturers such as Informix, with which we entered
into an agreement in December 1998. We intend to increase sales of our products
by entering into similar relationships with additional technology partners and
original equipment manufacturers.
Our co-marketing relationships are with major systems integrators that serve
the market for information system products and services. The objective of this
co-marketing strategy is to motivate systems integrators to adopt the Dynamo
technology and suite of products on Web-based projects for their clients. We
train and assist our systems integration partners to enable them to deploy,
extend and support our products.
Set forth below is a partial list of organizations with which we have
selling and marketing relationships:
American Management Systems
Cambridge Technology Partners
Computer Sciences Corporation
Context Integration
Fort Point Partners
Free Range Media
Icon Medialab
iXL
Javelin Technology
KPMG
Modem Media . Poppe Tyson
Organic Online
Phoenix Pop Productions
Planet Access Networks
PricewaterhouseCoopers
Quidnunc Group
Strategic Interactive Group
USWeb/CKS
Vision Consulting
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We currently sell our products primarily in the United States. However, we
are expanding our international sales organization. Currently, we are focusing
our international sales efforts primarily in the United Kingdom and Japan. Many
of our systems integrators and technology partners are global enterprises. We
believe this provides us with an opportunity to expand our international
business.
COMPETITION
The market for Internet customer relationship management solutions is
intensely competitive, subject to rapid technological change and significantly
affected by new product introductions and other market activities of industry
participants. We expect competition to persist and intensify in the future. We
have three primary sources of competition:
- in-house development efforts by potential customers or partners
- Internet applications software vendors, such as BroadVision, InterWorld,
Open Market and Vignette
- platform application server products and vendors, such as BEA Systems,
IBM's Websphere products, Microsoft and Netscape, among others.
We also compete in the platform application server market with the
NetDynamics product of Sun Microsystems, which is also one of our customers and
co-marketing partners.
We believe the primary factors upon which we compete are the functionality
and expandability of our products, the extent to which our products integrate
with other systems, our prices and our ability to provide quality services to
assist our customers and partners. We believe that we have competitive
advantages that differentiate our products and services from those of our
competitors. Our application suite provides improved time-to-market and lower
cost of ownership in comparison to in-house development efforts. We believe the
expandability and scalability of our application server-based platform, as well
as our product features, provide us an advantage over other Internet application
software vendors. We believe the functionality provided by the personalization
and e-commerce components of the Dynamo application suite gives us a competitive
advantage over platform application server vendors.
Despite these advantages, many of our competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do. As a result, they may be able to undertake more extensive
promotional activities, offer more attractive pricing and purchase terms, and
bundle their products in a manner that would put us at a competitive
disadvantage.
Competition could materially and adversely affect our ability to obtain
revenues from license fees from new or existing customers and professional
services revenues from existing customers. Further, competitive pressures could
require us to reduce the price of our software products. In either case, our
business, operating results and financial condition would be materially and
adversely affected.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete depend on our ability to develop and
protect the proprietary aspects of our technology and to operate without
infringing on the proprietary rights of others. We rely on a combination of
trademark, trade secret and copyright law and contractual restrictions to
protect our proprietary technology. These legal protections afford only limited
protection for our technology. We seek to protect our source code for our
software, documentation and other written materials under trade secret and
copyright laws. We license our software pursuant to signed license, "click
through" or "shrink wrap" agreements, which impose restrictions on the
licensee's ability to use the software, such as prohibiting reverse engineering
and limiting the use of copies. We also seek to avoid disclosure of our
intellectual property by requiring employees and consultants with access to our
proprietary
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information to execute confidentiality agreements and by restricting access to
our source code. Due to rapid technological change, we believe that factors such
as the technological and creative skills of our personnel, new product
developments and enhancements to existing products are more important than legal
protections to establish and maintain a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect proprietary
rights to as great an extent as the laws of the United States. Any such
resulting litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business, operating
results and financial condition. There can be no assurance that our means of
protecting our proprietary rights will be adequate or that our competitors will
not independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.
In addition, our software is written in the Java programming language
developed by Sun Microsystems and we incorporate Java Runtime Environment, Java
Naming and Directory Interface, Java Servlet Development Kit, Java Foundation
Classes, JavaMail and JavaBeans Activation Framework into our products under
licenses granted to us by Sun. Currently, Sun makes these technologies available
to the public at no charge. However, if Sun declined to continue to allow us to
use these technologies for any reason, we would be required to (a) license the
equivalent technology from another source, (b) rewrite the technology ourselves,
and/or (c) rewrite portions of our software to accommodate the change or no
longer use the technology.
EMPLOYEES
As of September 30, 1999, we had a total of 245 employees. Of our employees,
65 were in research and development, 60 in sales and marketing, 92 in
professional services and 28 in finance and administration. Our future success
will depend in part on our ability to attract, retain and motivate highly
qualified technical and management personnel, for whom competition is intense.
From time to time, we also employ independent contractors to support our
professional services, product development, sales, marketing and business
development organizations. Our employees are not represented by any collective
bargaining unit, and we have never experienced a work stoppage. We believe our
relations with our employees are good.
PROPERTIES
Our headquarters are currently located in a leased facility in Cambridge,
Massachusetts, consisting of approximately 60,000 square feet. Our Cambridge
facility is expected to meet our needs through the beginning of 2000, at which
time we intend to expand our facilities by entering into one or more additional
leases. We have also leased offices for sales and support personnel in Chicago,
Illinois, San Francisco, California and Reading, England. See note 8 to our
consolidated financial statements.
LEGAL PROCEEDINGS
A patent infringement claim was filed by BroadVision, one of our
competitors, against us on December 11, 1998. The case was filed in the U.S.
District Court for the Northern District of California. BroadVision alleges that
we are infringing their patent (U.S. Patent No. 5,710,887) for a method of
conducting e-commerce. BroadVision is seeking a permanent injunction of the sale
of our
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Dynamo products in their current forms as well as unspecified damages. We intend
to vigorously oppose BroadVision's allegations and on February 4, 1999 we filed
our answer denying BroadVision's complaint and filed a counterclaim against
BroadVision seeking a judgment that we are not infringing their patent and that
the patent in question is in fact unenforceable and invalid.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors, and their respective ages and
positions as of September 30, 1999, are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Jeet Singh................................ 36 President, Chief Executive Officer and
Director
Joseph T. Chung........................... 34 Chief Technology Officer, Treasurer and
Chairman of the Board
Ann C. Brady.............................. 36 Vice President, Finance and Chief
Financial Officer
Paul G. Shorthose......................... 42 Chief Operating Officer
William Wittenberg........................ 40 Senior Vice President, Product Development
Robert P. Forlenza(1)..................... 43 Director
Scott A. Jones(2)......................... 38 Director
Charles R. Lax(2)......................... 40 Director
Thomas N. Matlack(1)(2)................... 34 Director
Jeffrey T. Newton......................... 41 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
JEET SINGH co-founded the company with Joseph Chung in 1991 and is our
President and Chief Executive Officer and a member of our board of directors.
Previously, Mr. Singh held marketing positions with Boston Technology, Inc., a
manufacturer of advanced voice processing computers, Team Technologies, a
Washington, D.C.-based consulting firm specializing in workgroup productivity,
and Groupe Bull/Bull Corporation of America.
JOSEPH T. CHUNG co-founded the company with Mr. Singh in 1991 and is our
Chief Technology Officer, Treasurer and Chairman of our board of directors.
Previously, Mr. Chung was the technical director and chief technology designer
of the hyperinstrument group at the MIT Media Lab and held engineering positions
at Apple Computer and Digital Equipment Corporation.
ANN C. BRADY has been Chief Financial Officer since April 1999 and Vice
President, Finance since January 1998. From May 1997 to January 1998, she was
Director of Finance. From 1992 to May 1997, Ms. Brady was head of Finance and
Accounting for HPR, Inc., a software and consulting services company,
subsequently acquired by McKesson/HBOC.
PAUL G. SHORTHOSE has been Chief Operating Officer since June 1999. From
July 1998 to June 1999, he was Vice President of Marketing and Business
Development for Context Integration. From August 1997 to July 1998,
Mr. Shorthose served as our Vice President, Worldwide Services. From April 1992
to August 1997, Mr. Shorthose was Vice President/General Manager for the
Northeast U.S. and Canada Professional Services Organization of Sybase, Inc.
WILLIAM WITTENBERG has been Senior Vice President, Product Development since
March 1998. From April 1996 to March 1998, he was Vice President, Engineering.
From 1991 to January 1995, Mr. Wittenberg was Director of Product Management and
User Interface Design for Lotus Development Corporation.
ROBERT P. FORLENZA has been a member of our board of directors since
August 1998. Since January 1995, he has been Managing Director of Tudor
Investment Corporation. From 1989 to December 1994, he was a Vice President at
Carlisle Capital Corporation. He also serves on the board of PRT Group, Inc., a
software engineering services company.
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SCOTT A. JONES has been a member of our board of directors since
November 1997. Since co-founding Escient, Inc., a company focusing on Internet
applications related to entertainment in the home, in July 1996, Mr. Jones has
served as its Chief Executive Officer and Chairman. After co-founding Boston
Technology, Inc. in 1986, Mr. Jones served as its Chairman and Chief Scientist
until 1992. Since 1994, he has also been a principal of Threshold Technologies,
Inc., a consulting firm, and King Air Charters, Inc., an air charter company.
Mr. Jones also serves on the board of HIE, Inc., a software integration services
company.
CHARLES R. LAX has been a member of our board of directors since
December 1997. Since November 1997, Mr. Lax has been General Partner of SOFTBANK
Technology Ventures. From March 1996 to November 1997, he was Vice President at
SOFTBANK Holdings Inc. Mr. Lax also serves on the board of Interliant, Inc., an
Internet hosting service company.
THOMAS N. MATLACK has been a member of our board of directors since
November 1997. Since August 1998, he has been a Managing Partner at Megunticook
Management LLC, a private investment fund. From 1992 to February 1997, he held
various positions with the Providence Journal Company, including Chief Financial
Officer from April 1996 to February 1997, Vice President, Finance from
September 1995 to April 1996, and Director, Financial Planning and Analysis from
1992 to September 1995.
JEFFREY T. NEWTON has been a member of our board of directors since
September 1998. Since June 1997, Mr. Newton has been Managing Director of Gemini
Investors LLC. Since 1992, he has also been President of Concord
Partners, Ltd., a business consulting firm.
Our board of directors is divided into three classes, with the members of
each class serving for a staggered three-year term. Our board currently consists
of two Class I directors, three Class II directors and two Class III directors.
At each annual meeting of stockholders, a class of directors will be elected for
a three-year term to succeed the directors of the same class whose terms are
then expiring. The term of the Class I directors (Messrs. Forlenza and Newton)
expires at the annual meeting of stockholders to be held in 2000. The term of
the Class II directors (Messrs. Jones, Lax and Matlack) expires at the annual
meeting of stockholders to be held in 2001. The term of the Class III directors
(Messrs. Chung and Singh) expires at the annual meeting of stockholders to be
held in 2002.
Each officer serves at the discretion of our board of directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has a compensation committee, composed of
Messrs. Jones and Lax, which makes recommendations concerning salaries and
incentive compensation for our employees and consultants and administers and
grants awards pursuant to our stock benefit plans, and an audit committee,
composed of Messrs. Forlenza and Matlack, which reviews the results and scope of
the audit and other services provided by our independent public accountants.
DIRECTOR COMPENSATION
All of our directors are reimbursed for expenses incurred to attend board of
directors and committee meetings. In addition, our non-employee directors are
eligible to receive stock options under our 1999 Outside Director Stock Option
Plan.
In November 1997, we entered into a consulting agreement with one of our
directors, Thomas N. Matlack, to provide consulting services in the areas of
strategic planning and financial advice and planning. In exchange for these
services, we issued Mr. Matlack a non-statutory option to purchase a total of
195,000 shares of our common stock at an exercise price of $0.50 per share. This
consulting agreement terminated in November 1998.
50
<PAGE>
Our 1999 Outside Director Stock Option Plan was adopted by our board of
directors in May 1999 and approved by our stockholders in June 1999. Under the
terms of the director plan, directors who are not employees of the company
receive nonstatutory options to purchase shares of our common stock. A total of
150,000 shares of our common stock may be issued upon exercise of options
granted under the plan. Each non-employee director received an option to
purchase 5,000 shares of our common stock on the effective date of our initial
public offering (July 20, 1999) at a price per share equivalent to the initial
public offering price ($12.00 per share). In addition, each non-employee
director will receive an option to purchase 2,500 shares of our common stock on
the date of each annual meeting of stockholders commencing with the 2000 annual
meeting of stockholders, at an exercise price per share equal to the closing
price of our common stock on the date of grant. In addition, individuals who
become directors and are not our employees will receive an option to purchase
5,000 shares of our common stock on the date of his or her initial election to
our board of directors and an option to purchase 2,500 shares of our common
stock on the date of each annual meeting of stockholders after his or her
election. The exercise price per share of such options will be the closing price
per share of our common stock on the date of grant. All options granted under
the director plan are fully vested upon grant.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the year ended December 31, 1998 to the following (collectively, the "Named
Executive Officers"):
- our chief executive officer
- our four other executive officers who were serving as executive officers
at December 31, 1998 and whose total salary and bonus for such year
exceeded $100,000
- our current chief operating officer, who served as our Vice President,
Services for a portion of 1998
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SHARES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- --------------------------- -------- -------- ------------
<S> <C> <C> <C>
Jeet Singh.............................................. $150,000 $ 3,038(1) --
President and Chief Executive Officer
Joseph T. Chung......................................... 150,000 --
Chief Technology Officer, Treasurer and Chairman of
the Board
Ann C. Brady............................................ 125,000 -- 62,250
Vice President, Finance and Chief Financial Officer
William Wittenberg...................................... 138,846 -- 90,930
Senior Vice President, Product Development
Lauren J. Kelley........................................ 120,000 149,610(2) 35,400
Vice President, Sales
Paul G. Shorthose(3).................................... 88,846 60,000(4) --
</TABLE>
- ------------------------
(1) Represents imputed interest on an interest-free loan extended to Mr. Singh.
(2) Includes commission of $46,247 paid in 1999 but earned in 1998.
(3) Mr. Shorthose resigned as our Vice President, Services in August 1998. He
began employment as our Chief Operating Officer in June 1999.
(4) Excludes bonus of $20,000 earned in 1997 and paid in 1998.
51
<PAGE>
OPTION GRANTS AND EXERCISES DURING 1998
The following table contains information concerning the grant of options to
purchase shares of our common stock to each of the Named Executive Officers
during the fiscal year ended December 31, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES OR BASE TERM (1)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED YEAR ($/SH)(1) DATE 5% ($) 10% ($)
- ---- ---------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jeet Singh.......................... -- --% $ -- -- $ -- $ --
Joseph T. Chung..................... -- -- -- -- -- --
Ann C. Brady........................ 42,000 2.6 0.50 3/16/2008 799,963 1,286,246
7,500 0.5 0.50 8/26/2008 142,851 229,687
12,000 0.7 0.50 8/26/2008 228,561 367,499
750 0.0 0.50 8/26/2008 14,285 22,969
William Wittenberg.................. 30,000 1.8 0.50 3/16/2008 571,402 918,747
30,180 1.8 0.50 8/26/2008 574,830 924,260
750 0.0 0.50 8/26/2008 14,285 22,969
30,000 1.8 0.50 12/18/2008 571,402 918,747
Lauren J. Kelley.................... 33,000 2.0 0.50 8/26/2008 628,542 1,010,622
1,650 0.1 0.50 8/26/2008 31,427 50,531
750 0.0 0.50 8/26/2008 14,285 22,969
Paul G. Shorthose................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. This presentation also assumes that the market value
of a share of common stock on each option grant date equaled $12.00, the
price at which shares were sold in our initial public offering in July 1999.
These numbers are calculated based on rules promulgated by the Securities
and Exchange Commission and do not reflect our estimate of future stock
price growth. Actual gains, if any, on stock options exercises and common
stock are dependent on the timing of such exercise and the future
performance of the common stock.
52
<PAGE>
FISCAL YEAR-END OPTION VALUES
The following table sets forth information for each of the Named Executive
Officers with respect to the value of options outstanding as of December 31,
1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END ($) (1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeet Singh.................... -- $ -- -- -- $ -- $ --
Joseph T. Chung............... -- -- -- -- -- --
Ann C. Brady.................. 12,750 146,625 28,406 91,595 326,669 1,053,343
William Wittenberg............ -- -- 186,345 176,385 2,159,843 1,164,375
Lauren J. Kelley.............. -- -- 10,350 41,550 119,025 477,825
Paul G. Shorthose............. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Assumes a per share fair market value equal to $12.00, the price at which
shares were sold in our initial public offering in July 1999.
During 1999, we have granted options to the following executive officers:
Ann C. Brady, 145,000 shares at a weighted average exercise price of $7.24 per
share; William Wittenberg, 90,000 shares at a weighted average exercise price of
$2.00 per share; and Paul G. Shorthose, 575,000 shares at a weighted average
exercise price of $10.00 per share.
BENEFIT PLANS
1996 STOCK OPTION PLAN. Our 1996 Stock Option Plan was adopted by our board
of directors in April 1996 and approved by our stockholders in May 1996. The
1996 plan authorizes the issuance of up to 6,300,000 shares of our common stock.
As of September 30, 1999, options to purchase an aggregate of 3,937,221 shares
of common stock at a weighted average exercise price of $4.46 per share were
outstanding under the 1996 plan.
The 1996 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and nonstatutory stock
options.
Our officers, employees, directors, consultants and advisors are eligible to
receive awards under the 1996 plan. Under present law, however, incentive stock
options may only be granted to employees. No employee may receive any award for
more than 500,000 shares in any calendar year.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price less than, equal to or greater than the fair market
value of our common stock on the date of grant. Under present law, incentive
stock options and options intended to qualify as performance-based compensation
under Section 162(m) of the Internal Revenue Code may not be granted at an
exercise price less than the fair market value of the common stock on the date
of grant or less than 110% of the fair market value in the case of incentive
stock options granted to optionees holding more than 10% of the voting power of
the company. The 1996 plan permits our board of directors to determine how
optionees may pay the exercise price of their options, including by cash, check
or in connection with a "cashless exercise" through a broker, by surrender to us
of shares of common stock, by delivery to us of a promissory note, or by any
combination of the permitted forms of payment.
53
<PAGE>
As of September 30, 1999, approximately 250 persons were eligible to receive
awards under the 1996 plan, including five executive officers and five
non-employee directors.
Our board of directors administers the 1996 plan. Our board of directors has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the plan and to interpret its provisions. It may
delegate authority under the 1996 plan to one or more committees of the board of
directors. Our board of directors has authorized the compensation committee to
administer the 1996 plan, including the granting of options to our executive
officers. Subject to any applicable limitations contained in the 1996 plan, our
board of directors, our compensation committee or any other committee to whom
our board of directors delegates authority, as the case may be, selects the
recipients of awards and determines:
- the number of shares of common stock covered by options and the dates upon
which such options become exercisable
- the exercise price of options
- the duration of options
In the event of a merger, liquidation or other acquisition event, our board
of directors is authorized to take one or more of the following actions:
- provide that outstanding options be assumed or substituted for by the
acquiror
- provide that all unexercised options terminate immediately prior to the
event unless exercised within a time period specified in written notice to
the option holder
- in the event of a merger in which the holders of common stock would
receive a cash payment for each share surrendered, provide for a cash
payment to each option holder equal to the amount by which the amount paid
to common stock holders exceeds the option's exercise price, multiplied by
the total number of shares for which the option is then exercisable: in
exchange for this payment, the options would be terminated
- provide that any or all outstanding options become fully exercisable
immediately prior to the event
No award may be granted under the 1996 plan after April 2006, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. Our board of directors may at any time amend, suspend or terminate the
1996 plan, except that no award granted after an amendment of the 1996 plan and
for which stockholder approval is required under Section 422 of the Internal
Revenue Code shall become exercisable, realizable or vested, to the extent such
amendment was required to grant such award, unless and until such amendment is
approved by our stockholders.
1999 EMPLOYEE STOCK PURCHASE PLAN. Our 1999 Employee Stock Purchase Plan
was adopted by our board of directors in May 1999 and approved by our
stockholders in June 1999. The purchase plan authorizes the issuance of up to a
total of 500,000 shares of our common stock to participating employees.
All of our employees, including our directors who are employees, and all
employees of any participating subsidiaries, whose customary employment is more
than 20 hours per week and for more than five months in any calendar year, are
eligible to participate in the purchase plan. Employees who would immediately
after the grant own 5% or more of the total combined voting power or value of
our stock or any subsidiary are not eligible to participate. As of
September 30, 1999, 243 of our employees were eligible to participate in the
purchase plan.
During each designated payroll deduction period, or offering period, each
eligible employee may authorize us to deduct between 1% to 10%, in increments of
1%, of his or her base pay, including sales commissions. We will hold the
deducted money in a non-interest bearing account for each participating
54
<PAGE>
employee. On the last business day of the offering period we will use the amount
in his or her account to buy shares of our common stock for each participating
employee at the following purchase price. With the exception of the first
offering period, the purchase price will be 85% of the closing market price of
our common stock on either (a) the first business day of the offering period or
(b) the last business day of the offering period, whichever is lower. No
employee is allowed to buy shares of common stock worth more than $25,000, based
on the fair market value of the common stock on the first day of the offering
period, in any calendar year under the plan. Each offering period will last for
six months. The first offering period began on the day on which trading of our
common stock began on the Nasdaq National Market (July 21, 1999), and the market
price of the common stock on the first business day of the first offering period
equalled the initial public offering price ($12.00 per share).
An employee must be a participant on the last day of an offering period in
order to purchase stock under the plan. An employee's participation in an
offering terminates upon:
- the employee's withdrawl of the balance accumulated in his or her account
- termination of employment
- retirement
- death
- transfer to a subsidiary of the company which does not participate in the
plan
- the subsidiary for which the employee works no longer being a subsidiary
of the company
In the event of the employee's death, the balance in the employee's account will
be refunded to the employee's beneficiary or the executor or administrator of
the employee's estate.
Because participation in the purchase plan is voluntary, we cannot now
determine the number of shares of our common stock to be purchased by any of our
current executive officers, by all of our current executive officers as a group
or by our non-executive employees as a group.
401(K) PLAN. We have adopted an employee savings and retirement plan
qualified under Section 401 of the Internal Revenue Code and covering all of our
employees. Employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) plan. We may make matching or additional contributions
to the 401(k) plan in amounts to be determined annually by our board of
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the compensation committee of our board of directors
are Messrs. Jones and Lax. No executive officer has served as a director or
member of the compensation committee, or other committee serving an equivalent
function, of any other entity whose executive officers served as a director or
member of the compensation committee of our board of directors. However, each of
Messrs. Jones and Lax and/or their affiliates have been parties to transactions
with us. See "Transactions with Related Parties."
55
<PAGE>
TRANSACTIONS WITH RELATED PARTIES
The following describes transactions between us and our officers, directors
and stockholders who prior to this offering owned at least 5% of our outstanding
capital stock.
In July 1995, we sold 1,300,000 shares of series A preferred stock, 650,000
shares to each of Messrs. Madanjeet Singh and B.U. Chung for $0.385 per share.
Upon the closing of our initial public offering in July 1999, the outstanding
shares of series A preferred stock converted into 1,950,000 shares of common
stock. Mr. Singh is the father of Jeet Singh, our President and Chief Executive
Officer and one of our directors. Mr. Chung is the father of Joseph T. Chung,
our Chief Technology Officer, Treasurer and Chairman of the Board.
In December 1996, we sold 425,532 shares of series B preferred stock to
SOFTBANK Ventures Inc. for $7.05 per share and issued a performance-based
warrant to SOFTBANK to purchase 425,532 shares of series B preferred stock at an
exercise price of $7.05 per share. In August 1998, as a condition to obtaining
the series B preferred stockholders' approval of the series D preferred stock
financing, the warrant was cancelled and a new warrant issued for 425,532 shares
of Series B preferred stock at an exercise price of $1.385 per share. Upon the
closing of our initial public offering in July 1999, the outstanding shares of
series B preferred stock converted into 1,642,953 shares of common stock, and
SOFTBANK's warrant was cancelled. SOFTBANK owns 5.3% of our capital stock.
Charles R. Lax, a member of our board of directors, is a General Partner of
SOFTBANK Technology Ventures, an affiliate of SOFTBANK Ventures Inc.
In November and December 1997 and April 1998, we sold to private investors
1,456,789 shares of series C preferred stock for $1.62 per share. Scott A.
Jones, a member of our board of directors, purchased 401,235 shares, and Thomas
N. Matlack, another member of our board of directors, purchased 30,864 shares.
Upon the closing of our initial public offering in July 1999, the outstanding
shares of series C preferred stock converted into 4,437,567 shares of common
stock.
In August, September and October 1998, we sold to private investors
2,343,750 shares of series D preferred stock for $3.20 per share and warrants to
purchase 2,146,325 shares of common stock at an exercise price of $0.11 per
share. Tudor Private Equity Fund L.P. purchased 1,394,531 shares of series D
preferred stock and warrants to purchase 1,277,064 shares of common stock. The
Raptor Global Fund L.P. and The Raptor Global Fund Ltd. purchased 246,094 shares
of series D preferred stock and warrants to purchase 430,962 shares of common
stock. These related entities own 17.6% of our capital stock. Robert P.
Forlenza, a member of our board of directors, is a Managing Director of Tudor
Investment Corporation, the investment advisor of the Tudor and Raptor entities.
GMN Investors II, L.P. purchased 625,000 shares of series D preferred stock and
a warrant to purchase 1,094,511 shares of common stock. GMN Investors II, L.P.
owns 6.7% of our capital stock. Jeffrey T. Newton, a member of our board of
directors, is Managing Director of Gemini Investors LLC, which controls GMN
Investors II, L.P. Upon the closing of our initial public offering in July 1999,
the outstanding shares of series D preferred stock converted into 7,800,369
shares of common stock, and the warrants issued to the holders of series D
preferred stock were cancelled.
In 1995, 1996 and 1998 we loaned Jeet Singh a total of $60,755 on an
interest-free basis. This loan was repaid in full in April 1999 with a bonus we
paid him.
Pursuant to a stockholders agreement dated August 18, 1998, Mr. Singh,
Mr. Chung and the holders of our preferred stock agreed to vote their shares to
fix the number of directors at seven. Pursuant to this agreement, the board was
to consist of two directors elected by the holders of series D preferred stock;
one director elected by the holders of series C preferred stock; one director
elected by the holders of series B preferred stock; two directors elected by the
holders of our common stock; and one director elected by the holders of series B
preferred stock, series C preferred stock, series D
56
<PAGE>
preferred stock and our common stock. This agreement terminated upon completion
of our initial public offering in July 1999.
In November 1997, we entered into a consulting agreement with Mr. Matlack.
Mr. Matlack provided consulting services in the areas of strategic planning and
financial advice and planning. In exchange for these services, we issued
Mr. Matlack a non-statutory option to purchase a total of 195,000 shares of our
common stock at an exercise price of $0.50 per share. This consulting agreement
terminated in November 1998.
In June 1998 we borrowed $300,000 from Mr. Jones. This loan did not bear
interest and was repaid in full in July 1998.
All future transactions between us and our officers, directors, principal
stockholders and their affiliates will be approved by a majority of the board of
directors, including a majority of the disinterested directors, and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
57
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 30, 1999, and as adjusted to
reflect the sale of the shares of common stock in this offering, by: (a) each
person we know to own beneficially more than 5% of our common stock; (b) each of
our directors; (c) each of the Named Executive Officers; (d) each of the selling
stockholders; and (e) all directors and executive officers as a group. Unless
otherwise indicated, each person named in the table has sole voting power and
investment power, or shares such power with his or her spouse, with respect to
all shares of capital stock listed as owned by such person. The address of each
of our executive officers and directors is c/o Art Technology Group, Inc., 25
First Street, Cambridge, Massachusetts 02141.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission. The
information is not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes any shares as to which
the individual has sole or shared voting power or investment power and any
shares as to which the individual has the right to acquire beneficial ownership
within 60 days after September 30, 1999 through the exercise of any stock option
or other right. The inclusion herein of such shares, however, does not
constitute an admission that the named stockholder is a direct or indirect
beneficial owner of such shares. Percentage of beneficial ownership is based on
31,115,113 shares of common stock outstanding as of September 30, 1999 and
32,628,033 shares of common stock outstanding after completion of this offering,
assuming full exercise of the over-allotment option.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER OFFERING
SHARES BENEFICIALLY IF OVER-ALLOTMENT
OWNED PRIOR TO NUMBER OF OPTION EXERCISED
OFFERING NUMBER OF SHARES OFFERED IN IN FULL
--------------------- SHARES OVER-ALLOTMENT ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED OPTION NUMBER PERCENT
- ------------------------ ---------- -------- --------- ----------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS, DIRECTORS AND
NAMED EXECUTIVE OFFICERS
Tudor Private Equity Fund 5,460,258 17.6% 1,092,052 -- 4,368,206 13.4%
L.P.(1) ........................
40 Rowes Wharf
Boston, MA 02110
Jeet Singh(2)..................... 3,592,000 11.5 -- 200,000 3,392,000 10.4
Joseph T. Chung(3)................ 3,584,800 11.5 -- 200,000 3,384,800 10.4
GMN Investors II, L.P.(4)......... 2,080,098 6.7 416,020 -- 1,664,078 5.1
20 William Street
Wellesley, MA 02481
SOFTBANK Ventures Inc.(5) ........ 1,642,953 5.3 328,590 -- 1,314,363 4.0
24-1 Nihonbashi-Hakozakicho
Chu-ku, Tokyo 103
Japan
Robert P. Forlenza(6)............. 5,465,258 17.6 -- -- 4,373,206 13.4
Jeffrey T. Newton(7).............. 2,085,098 6.7 -- -- 1,664,078 5.1
Charles R. Lax(8)................. 1,647,953 5.3 -- -- 1,319,363 4.0
Scott A. Jones.................... 1,186,461 3.8 236,292 -- 950,169 2.9
Thomas N. Matlack................. 312,917 1.0 62,584 -- 250,333 *
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER OFFERING
SHARES BENEFICIALLY IF OVER-ALLOTMENT
OWNED PRIOR TO NUMBER OF OPTION EXERCISED
OFFERING NUMBER OF SHARES OFFERED IN IN FULL
--------------------- SHARES OVER-ALLOTMENT ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED OPTION NUMBER PERCENT
- ------------------------ ---------- -------- --------- ----------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
William Wittenberg................ 283,844 * -- 32,000 251,844 *
Ann C. Brady...................... 80,966 * -- 15,000 65,966 *
Paul Shorthose.................... 106,249 * -- 20,000 86,249 *
All directors and executive 18,345,546 58.3 298,876 467,000 17,579,670 53.7
officers as a group (10
persons)........................
OTHER SELLING STOCKHOLDERS
Madanjeet Singh................... 945,000 3.0 185,136 -- 759,864 2.3
B.U. Chung........................ 930,100 3.0 186,020 -- 744,080 2.3
The Hamblett Long Range 470,083 1.5 94,017 -- 376,066 1.2
Partnership.....................
Henry P. Becton Jr., Trust........ 87,014 * 17,402 -- 69,612 *
Jon P. Goodman.................... 103,418 * 20,683 -- 82,735 *
Bradley Lubin..................... 75,211 * 13,000 -- 62,211 *
Osprey Venture Capital Limited 141,022 * 28,204 -- 112,818 *
Partnership.....................
The Clifford Family Limited 188,029 * 37,605 -- 150,424 *
Partnership.....................
Trygve Myhren..................... 263,823 * 52,765 -- 211,058 *
Jane Thompson..................... 142,367 * 28,473 -- 113,894 *
Michael Margolis.................. 136,022 * 27,204 -- 108,818 *
Pratap Talwar..................... 47,007 * 3,500 -- 43,507 *
Hasenain Panju.................... 141,022 * 28,204 -- 112,818 *
New Media Investors, L.L.C........ 234,012 * 46,802 -- 187,210 *
Edward Takacs..................... 134,000 * 13,000 -- 121,000 *
Nathan Abramson................... 305,948 * -- 27,980 277,968 *
Fumiaki Matsumoto................. 226,041 * -- 23,000 203,041 *
Robert Mason...................... 178,137 * -- 18,000 160,137 *
Grace Colby....................... 159,600 * -- 14,600 145,000 *
Brenda Sullivan................... 166,292 * -- 10,000 156,292 *
Christopher Edwards............... 124,358 * -- 10,000 114,358 *
Tinsley Galyean................... 71,250 * 7,000 64,250 *
Ina Sipser........................ 53,539 * -- 5,500 48,039 *
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER OFFERING
SHARES BENEFICIALLY IF OVER-ALLOTMENT
OWNED PRIOR TO NUMBER OF OPTION EXERCISED
OFFERING NUMBER OF SHARES OFFERED IN IN FULL
--------------------- SHARES OVER-ALLOTMENT ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED OPTION NUMBER PERCENT
- ------------------------ ---------- -------- --------- ----------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Lauren Kelley..................... 37,648 * -- 4,000 33,648 *
Other selling stockholders as a 306,699 * 157,447 -- 149,252 *
group (9).......................
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 614,285 shares owned by The Raptor Global Fund Ltd., of which
122,857 shares are being sold in this offering, and 204,764 shares owned by
The Raptor Global Fund, L.P., of which 40,952 shares are being sold in this
offering. Robert P. Forlenza, a member of the board of directors, is
Managing Director of Tudor Investment Corporation, the investment advisor of
Tudor Private Equity Fund L.P., Raptor Global Fund Ltd. and Raptor Global
Fund, L.P.
(2) Mr. Singh's shares are held in trusts of which he is the sole trustee with
sole voting and dispositive power. Excludes 945,000 shares owned by Mr.
Madanjeet Singh, Mr. Singh's father.
(3) Mr. Chung's shares are held in trusts of which he is the sole trustee with
sole voting and dispositive power. Excludes 930,100 shares owned by Mr. B.U.
Chung, Mr. Chung's father.
(4) Jeffrey T. Newton, a member of the board of directors, is Managing Director
of Gemini Investors LLC, which controls GMN Investors II, L.P.
(5) Charles R. Lax, a member of the board of directors, is General Partner of
SOFTBANK Technology Ventures, an affiliate of SOFTBANK Ventures, Inc.
(6) Mr. Forlenza is Managing Director of Tudor Investment Corporation, the
investment advisor of Tudor Private Equity Fund L.P., The Raptor Global
Fund, Ltd. and The Raptor Global Fund, L.P. Mr. Forlenza may be deemed to
have beneficial ownership of 4,641,219 shares owned by Tudor Private Equity
Fund, L.P., 614,278 shares owned by The Raptor Global Fund, Ltd., and
204,761 shares owned by The Raptor Global Fund, L.P. Mr. Forlenza disclaims
such beneficial ownership.
(7) Mr. Newton is Managing Director of Gemini Investors LLC and may be deemed to
have beneficial ownership of 2,080,098 shares owned by GMN Investors II,
L.P. Mr. Newton disclaims such beneficial ownership.
(8) Mr. Lax is a Managing Director of SOFTBANK Technology Ventures and may be
deemed to have beneficial ownership of 1,642,953 shares owned by SOFTBANK
Ventures Inc. Mr. Lax disclaims such beneficial ownership.
(9) Consists of 11 selling stockholders who beneficially own in the aggregate
less than 1% of the common stock outstanding prior to this offering.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 100,000,000 shares of common stock, $.01 par
value per share, and 10,000,000 shares of preferred stock, $.01 par value per
share. As of September 30, 1999, we had outstanding:
- 31,115,113 shares of common stock held by 237 stockholders of record; and
- options to purchase 3,937,221 shares of common stock.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our board of directors,
subject to any preferential dividend rights of outstanding preferred stock. Upon
our liquidation, dissolution or winding up, the holders of common stock are
entitled to receive proportionately our net assets available after the payment
of all debts and other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. Our outstanding shares of common
stock are, and the shares offered by us in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future.
PREFERRED STOCK
Under the terms of our certificate of incorporation, our board of directors
is authorized to issue shares of preferred stock in one or more series without
stockholder approval. Our board of directors has the discretion to determine the
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or could discourage a third party from acquiring, a
majority of our outstanding voting stock. We have no present plans to issue any
shares of preferred stock.
DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the person became an interested stockholder, unless
the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within the prior three years did own, 15% or more of the
corporation's voting stock.
Our certificate of incorporation divides our board of directors into three
classes with staggered three-year terms. In addition, our certificate of
incorporation provides that directors may be removed only for cause by the
affirmative vote of the holders of two-thirds of our shares of capital stock
entitled
61
<PAGE>
to vote. Under our certificate of incorporation, any vacancy on our board of
directors, including a vacancy resulting from an enlargement of our board of
directors, may only be filled by vote of a majority of our directors then in
office. The classification of our board of directors and the limitations on the
removal of directors and filling of vacancies could make it more difficult for a
third party to acquire, or discourage a third party from acquiring, control of
the company.
Our certificate of incorporation also provides that any action required or
permitted to be taken by our stockholders at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before such
meeting and may not be taken by written action in lieu of a meeting. Our
certificate of incorporation further provides that special meetings of the
stockholders may only be called by our Chairman of the Board, President or board
of directors. Under our by-laws, in order for any matter to be considered
"properly brought" before a meeting, a stockholder must comply with advance
notice requirements. These provisions could have the effect of delaying until
the next stockholders' meeting stockholder actions which are favored by the
holders of a majority of our outstanding voting securities. These provisions may
also discourage a third party from making a tender offer for our common stock,
because even if it acquired a majority of our outstanding voting securities, the
third party would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders' meeting,
and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our certificate of incorporation and by-laws
require the affirmative vote of the holders of at least 75% of the shares of our
capital stock issued and outstanding and entitled to vote to amend or repeal any
of the provisions described in the prior two paragraphs.
Our certificate of incorporation contains provisions permitted under the
General Corporation Law of Delaware relating to the liability of directors. The
provisions eliminate a director's liability for monetary damages for a breach of
fiduciary duty, except in circumstances involving wrongful acts, such as the
breach of a director's duty of loyalty or acts or omissions that involve
intentional misconduct or a knowing violation of law. Further, our certificate
of incorporation contains provisions to indemnify our directors and officers to
the fullest extent permitted by the General Corporation Law of Delaware. We
believe that these provisions will assist us in attracting and retaining
qualified individuals to serve as directors.
REGISTRATION RIGHTS
After this offering, the holders of approximately 10,903,000 shares of
common stock will be entitled to rights with respect to the registration of such
shares under the Securities Act. Under the terms of the agreement between us and
the holders of such registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such common stock therein. Additionally, such holders are also entitled to
demand registration rights pursuant to which they may require us on up to six
occasions to file a registration statement under the Securities Act at our
expense with respect to our shares of common stock, and we are required to use
our best efforts to effect such registration. Further, holders may require us to
file an unlimited number of additional registration statements on Form S-3 at
our expense. All of these registration rights are subject to conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration and our right not to effect a
requested registration within twelve months following an offering of our
securities, including the offering made hereby. In addition, the holders of
registration rights have agreed not to exercise such rights for at least
90 days after this offering without the prior written consent of Hambrecht &
Quist LLC. We have also agreed to indemnify the registration rights
62
<PAGE>
holders against, and provide contribution with respect to liabilities relating
to any registration in which any shares of such holders are sold under the
Securities Act.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is BankBoston N.A.
63
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC,
U.S. Bancorp Piper Jaffray Inc., Thomas Weisel Partners LLC and Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated, have severally agreed to
purchase from us and the selling stockholders the following numbers of shares of
common stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
U.S. Bancorp Piper Jaffray Inc..............................
Thomas Weisel Partners LLC..................................
Dain Rauscher Wessels.......................................
---------
Total..................................................... 4,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions that we and the selling stockholders must satisfy,
including the receipt of certificates, opinions and letters from us, our counsel
and our independent auditors. The underwriters are committed to purchase all
shares of common stock offered in this prospectus if any shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and to dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may reallow a
concession not in excess of $ per share to other dealers. After the public
offering of the shares, the underwriters may change the offering price and other
selling terms.
We and 14 selling stockholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to purchase
up to 675,000 additional shares of common stock at the public offering price,
less the underwriting discount set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, each underwriter will
have a firm commitment to purchase a number of shares that approximately
reflects the same percentage of total shares the underwriter purchased in the
above table. We and those selling stockholders will be obligated to sell shares
to the underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of common stock offered in this prospectus.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect
thereof.
All of the selling stockholders and all of our executive officers and
directors, who will own in the aggregate 19,881,756 shares of common stock after
this offering, assuming the full exercise of the underwriters' over-allotment
option, have agreed that they will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common
stock, options or warrants to acquire shares of common stock or securities
exchangeable for or convertible into shares of
64
<PAGE>
common stock owned by them during the 90-day period following the date of this
prospectus. We have agreed that we will not, without the prior written consent
of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of
common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 90-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options granted prior to the date of this
prospectus and may grant additional options under our stock option plan,
provided that, without the prior written consent of Hambrecht & Quist LLC, any
additional options shall not be exercisable during the 90-day period.
In general, the rules of the Securities and Exchange Commission will
prohibit the underwriters from making a market in our common stock during the
"cooling off" period immediately preceding the commencement of sales in the
offering. The Commission has, however, adopted exemptions from these rules that
permit passive market making under certain conditions. These rules permit an
underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not connected
with the offering and that its net purchases on any one trading day not exceed
prescribed limits. Pursuant to these exemptions, certain underwriters, selling
group members, if any, or their respective affiliates intend to engage in
passive market making in our common stock during the cooling off period.
Persons participating in this offering may over-allot or effect transactions
that stabilize, maintain or otherwise affect the market price of the common
stock at levels above those that might otherwise prevail in the open market,
including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
Stabilizing, if commenced, may be discontinued at any time.
Thomas Weisel Partners LLC, one of the representatives, was organized and
registered as a broker-dealer in December 1998. Since December 1998, Thomas
Weisel Partners LLC has been named as a lead or co-manager on 76 filed public
offerings of equity securities, of which 53 have been completed, and has acted
as a syndicate manager in an additional 38 public offerings of equity
securities. Thomas Weisel Partners LLC does not have any material relationship
with us or any of our officers, directors or other controlling persons, except
with respect to its contractual relationship with us and the selling
stockholders pursuant to the underwriting agreement entered into in connection
with this offering.
LEGAL MATTERS
The validity of the shares of common stock offered by us hereby will be
passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters
will be passed upon for the underwriters by Foley, Hoag & Eliot LLP, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus and the registration statement relating to this prospectus have
been audited by Arthur Andersen LLP, independent public accountants,
65
<PAGE>
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the
stock we are offering by this prospectus. This prospectus does not include all
of the information contained in the registration statement. You should refer to
the registration statement and its exhibits for additional information. Whenever
we make reference in this prospectus to any of our contracts, agreements or
other documents, the references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract, agreement or other document. We are also required to file
annual, quarterly and special reports, proxy statements and other information
with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's Web site at HTTP://WWW.SEC.GOV. You may also read and copy
any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, Suite
1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities.
66
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999 (Unaudited)........................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (Unaudited)................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1996, 1997 and 1998 and
the Nine Months Ended September 30, 1999 (Unaudited)...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (Unaudited)................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Art Technology Group, Inc.:
We have audited the accompanying consolidated balance sheets of Art
Technology Group, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 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 Art
Technology Group, Inc. and subsidiaries as of December 31, 1997 and 1998, and
the results of its consolidated operations and its consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 4, 1999 (except with respect to the
matter discussed in Note 7(a), as to which
the date is June 18, 1999)
F-2
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1997 1998 1999
---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 186,829 $ 4,092,790 $57,399,128
Accounts receivable, net of reserves of approximately
$21,000, $250,000 and $460,000 at December 31, 1997 and
1998 and September 30, 1999, respectively............... 742,875 2,317,672 4,315,705
Unbilled services......................................... 198,049 290,585 477,689
Prepaid expenses and other current assets................. 1,000 113,423 2,094,737
---------- ----------- -----------
Total current assets................................ 1,128,753 6,814,470 64,287,259
Property and equipment, less accumulated depreciation and
amortization.............................................. 478,049 842,010 3,842,326
Receivable from officer/stockholder......................... 56,957 -- --
Other assets................................................ 8,230 109,391 518,251
---------- ----------- -----------
$1,671,989 $ 7,765,871 $68,647,836
========== =========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Line of credit............................................ $ 304,000 $ -- $ --
Current maturities of long-term obligations............... 548,373 347,096 --
Accounts payable.......................................... 847,826 720,180 2,309,291
Accrued expenses.......................................... 393,284 1,220,101 3,239,731
Deferred revenue.......................................... 363,440 878,341 5,060,975
---------- ----------- -----------
Total current liabilities........................... 2,456,923 3,165,718 10,609,997
---------- ----------- -----------
Long-Term Obligations, less current maturities.............. 122,175 322,069 --
Commitments and Contingencies (Note 8)
Redeemable Convertible Preferred Stock...................... 3,153,288 8,312,554 --
Stockholders' Equity (Deficit):
Preferred Stock, $0.01 par value,
Authorized--no shares at December 31, 1997 and 1998 and
10,000,000 shares at September 30, 1999
Issued and outstanding--no shares at December 31, 1997
and 1998 and September 30, 1999....................... -- -- --
Preferred stock, $.01 par value--
Authorized--10,000,000 shares at December 31, 1997 and
1998 and no shares at September 30, 1999
Series A Convertible Preferred Stock--
Designated--1,300,000 shares
Issued and outstanding--1,300,000 shares at December
31, 1997 and 1998 and no shares at September 30,
1999.................................................. 500,500 500,500 --
Series C Convertible Preferred Stock--
Designated--2,000,000 shares
Issued and outstanding--1,209,875 and 1,456,789 shares
at December 31, 1997 and 1998, respectively, and no
shares at September 30, 1999.......................... 1,960,000 2,360,000 --
Common stock, $.01 par value--
Authorized--25,000,000 shares at December 31, 1997 and
1998 and 100,000,000 shares at September 30, 1999
Issued and outstanding--8,906,700, 9,128,055 and
31,115,113 shares at December 31, 1997 and 1998 and
September 30, 1999, respectively...................... 89,067 91,281 311,151
Additional paid-in capital................................ 279,685 6,040,234 81,043,234
Deferred compensation..................................... -- (1,692,301) (3,932,180)
Accumulated deficit....................................... (6,889,649) (11,334,184) (19,384,366)
---------- ----------- -----------
Total stockholders' equity (deficit).................. (4,060,397) (4,034,470) 58,037,839
---------- ----------- -----------
$1,671,989 $ 7,765,871 $68,647,836
========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Services..................... $ 3,849,095 $ 4,591,660 $ 8,078,327 $ 5,848,395 $ 9,421,305
Product license.............. 53,000 1,865,884 4,059,064 2,451,064 9,371,615
----------- ----------- ----------- ----------- -----------
Total revenues......... 3,902,095 6,457,544 12,137,391 8,299,459 18,792,920
Cost of Revenues............... 1,985,495 3,196,289 5,050,274 3,473,863 6,669,053
----------- ----------- ----------- ----------- -----------
Gross profit........... 1,916,600 3,261,255 7,087,117 4,825,596 12,123,867
----------- ----------- ----------- ----------- -----------
Operating Expenses:
Research and development..... 1,117,376 3,661,083 3,355,155 2,305,827 4,233,512
Sales and marketing.......... 1,151,839 2,287,408 4,074,465 2,630,870 8,134,060
General and administrative... 1,059,581 1,418,037 2,291,080 1,543,452 3,149,405
Amortization of deferred
compensation............... -- -- 106,542 -- 822,996
----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 3,328,796 7,366,528 9,827,242 6,480,149 16,339,973
----------- ----------- ----------- ----------- -----------
Loss from operations... (1,412,196) (4,105,273) (2,740,125) (1,654,553) (4,216,106)
Interest Income................ -- 6,044 53,919 7,928 681,407
Interest Expense............... (30,271) (128,770) (164,359) (131,268) (120,282)
----------- ----------- ----------- ----------- -----------
Net loss............... (1,442,467) (4,227,999) (2,850,565) (1,777,893) (3,654,981)
Accretion of Dividends,
Discount and Offering Costs
on Preferred Stock........... (205,633) (213,933) (1,593,970) (1,342,362) (4,395,201)
----------- ----------- ----------- ----------- -----------
Net loss available for
common stockholders.. $(1,648,100) $(4,441,932) $(4,444,535) $(3,120,255) $(8,050,182)
=========== =========== =========== =========== ===========
Net Loss Per Share (Note 1(f)):
Basic and diluted............ $ (0.19) $ (0.50) $ (0.50) $ (0.35) $ (0.53)
=========== =========== =========== =========== ===========
Basic and diluted weighted
average common shares
outstanding................ 8,848,866 8,872,202 8,967,066 8,941,046 15,176,953
=========== =========== =========== =========== ===========
Pro forma basic and
diluted.................... $ (0.16) $ (0.14)
=========== ===========
Pro forma basic and diluted
weighted average common
shares outstanding......... 18,246,484 25,707,287
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
ART TECHNOLOGY GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------- ----------------------- --------------------- ADDITIONAL
NUMBER OF CARRYING NUMBER OF CARRYING NUMBER OF $.01 PAR PAID-IN
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL
---------- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995......... 1,300,000 $ 500,500 -- $ -- 8,745,000 $ 87,450 $ --
Issuance costs related to sale of
Series B redeemable convertible
preferred stock................ -- -- -- -- -- -- --
Issuance of common stock......... -- -- -- -- 105,000 1,050 --
Exercise of stock options........ -- -- -- -- 750 8 92
Grant of options to consultants
(Note 7(b)).................... -- -- -- -- -- -- 210,200
Net loss......................... -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- -----------
Balance, December 31, 1996......... 1,300,000 500,500 -- -- 8,850,750 88,508 210,292
Sale of Series C convertible
preferred stock, net of
issuance costs of $60,645...... -- -- 1,209,875 1,960,000 -- -- --
Accretion of Series B redeemable
convertible preferred stock to
redemption value............... -- -- -- -- -- -- --
Exercise of stock options........ -- -- -- -- 55,950 559 9,393
Grant of options to consultants
(Note 7(b)).................... -- -- -- -- -- -- 60,000
Net loss......................... -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- -----------
Balance, December 31, 1997......... 1,300,000 500,500 1,209,875 1,960,000 8,906,700 89,067 279,685
Sale of Series C convertible
preferred stock................ -- -- 246,914 400,000 -- -- --
Issuance costs related to sale of
Series D redeemable convertible
preferred stock................ -- -- -- -- -- -- --
Accretion of Series B and Series
D redeemable convertible
preferred stock to redemption
value.......................... -- -- -- -- -- -- --
Exercise of stock options........ -- -- -- -- 221,355 2,214 71,002
Deferred compensation related to
stock option grants............ -- -- -- -- -- -- 1,798,843
Amortization of deferred
compensation................... -- -- -- -- -- -- --
Warrants issued in connection
with the sale of Series D
redeemable convertible
preferred stock................ -- -- -- -- -- -- 2,775,000
Issuance of Series B redeemable
convertible preferred stock
warrants....................... -- -- -- -- -- -- 1,053,245
Grants of options to consultants
(Note 7(b)).................... -- -- -- -- -- -- 4,210
Issuance of warrants (Note
4(b)).......................... -- -- -- -- -- -- 58,249
Net loss......................... -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- -----------
Balance, December 31, 1998......... 1,300,000 500,500 1,456,789 2,360,000 9,128,055 91,281 6,040,234
Accretion of Series B and Series
D redeemable convertible
preferred stock to redemption
value (unaudited).............. -- -- -- -- -- -- --
Exercise of stock options
(unaudited).................... -- -- -- -- 830,931 8,310 406,811
Exercise of warrant
(unaudited).................... -- -- -- -- 157,238 1,572 (1,572)
Deferred compensation related to
stock option grants
(unaudited).................... -- -- -- -- -- -- 3,062,875
Amortization of deferred
compensation (unaudited)....... -- -- -- -- -- -- --
Conversion of preferred stock
into common stock
(unaudited).................... (1,300,000) (500,500) (1,456,789) (2,360,000) 15,709,639 157,096 13,592,406
Common stock issued to the
holders of Series C convertible
preferred stock and Series D
redeemable convertible
preferred stock in lieu of
special payments (Note 6)
(unaudited).................... -- -- -- -- 121,250 1,212 1,817,541
Initial public offering of common
stock (unaudited).............. -- -- -- -- 5,168,000 51,680 56,124,939
Net loss (unaudited)............. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- -----------
Balance, September 30, 1999
(unaudited)...................... -- $ -- -- $ -- 31,115,113 $311,151 $81,043,234
========== ========== ========== ========== ========== ======== ===========
<CAPTION>
STOCKHOLDERS'
DEFERRED ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------- ------------ -------------
<S> <C> <C> <C>
Balance, December 31, 1995......... $ -- $ (798,707) $ (210,757)
Issuance costs related to sale of
Series B redeemable convertible
preferred stock................ -- (205,633) (205,633)
Issuance of common stock......... -- (910) 140
Exercise of stock options........ -- -- 100
Grant of options to consultants
(Note 7(b)).................... -- -- 210,200
Net loss......................... -- (1,442,467) (1,442,467)
----------- ------------ -----------
Balance, December 31, 1996......... -- (2,447,717) (1,648,417)
Sale of Series C convertible
preferred stock, net of
issuance costs of $60,645...... -- (60,645) 1,899,355
Accretion of Series B redeemable
convertible preferred stock to
redemption value............... -- (153,288) (153,288)
Exercise of stock options........ -- -- 9,952
Grant of options to consultants
(Note 7(b)).................... -- -- 60,000
Net loss......................... -- (4,227,999) (4,227,999)
----------- ------------ -----------
Balance, December 31, 1997......... -- (6,889,649) (4,060,397)
Sale of Series C convertible
preferred stock................ -- -- 400,000
Issuance costs related to sale of
Series D redeemable convertible
preferred stock................ -- (106,459) (106,459)
Accretion of Series B and Series
D redeemable convertible
preferred stock to redemption
value.......................... -- (434,266) (434,266)
Exercise of stock options........ -- -- 73,216
Deferred compensation related to
stock option grants............ (1,798,843) -- --
Amortization of deferred
compensation................... 106,542 -- 106,542
Warrants issued in connection
with the sale of Series D
redeemable convertible
preferred stock................ -- -- 2,775,000
Issuance of Series B redeemable
convertible preferred stock
warrants....................... -- (1,053,245) --
Grants of options to consultants
(Note 7(b)).................... -- -- 4,210
Issuance of warrants (Note
4(b)).......................... -- -- 58,249
Net loss......................... -- (2,850,565) (2,850,565)
----------- ------------ -----------
Balance, December 31, 1998......... (1,692,301) (11,334,184) (4,034,470)
Accretion of Series B and Series
D redeemable convertible
preferred stock to redemption
value (unaudited).............. -- (2,576,448) (2,576,448)
Exercise of stock options
(unaudited).................... -- -- 415,121
Exercise of warrant
(unaudited).................... -- -- --
Deferred compensation related to
stock option grants
(unaudited).................... (3,062,875) -- --
Amortization of deferred
compensation (unaudited)....... 822,996 -- 822,996
Conversion of preferred stock
into common stock
(unaudited).................... -- -- 10,889,002
Common stock issued to the
holders of Series C convertible
preferred stock and Series D
redeemable convertible
preferred stock in lieu of
special payments (Note 6)
(unaudited).................... -- (1,818,753) --
Initial public offering of common
stock (unaudited).............. -- -- 56,176,619
Net loss (unaudited)............. -- (3,654,981) (3,654,981)
----------- ------------ -----------
Balance, September 30, 1999
(unaudited)...................... $(3,932,180) $(19,384,366) $58,037,839
=========== ============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................ $(1,442,467) $(4,227,999) $(2,850,565) $(1,777,893) $(3,654,981)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities--
Amortization of deferred compensation................. -- -- 106,542 -- 822,996
Noncash interest expense related to issuance of
warrants............................................ -- -- 18,060 13,179 40,189
Compensation expense related to issuance of
nonqualified stock options.......................... 210,200 60,000 4,210 -- --
Depreciation and amortization......................... 227,653 318,288 346,680 244,680 437,835
Changes in current assets and liabilities--
Accounts receivable, net............................ (204,781) (537,271) (1,574,797) (1,777,461) (1,998,033)
Unbilled services................................... -- (198,049) (92,536) 35,108 (187,104)
Prepaid expenses and other current assets........... (1,000) -- (112,423) (228,002) (1,981,314)
Accounts payable.................................... 442,271 346,005 (127,646) (591,822) 1,589,111
Accrued expenses.................................... 310,432 44,404 826,817 657,129 2,019,630
Deferred revenue.................................... 46,000 317,440 514,901 1,073,073 4,182,634
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities...................................... (411,692) (3,877,182) (2,940,757) (2,352,009) 1,270,963
----------- ----------- ----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment..................... (497,512) (189,549) (623,398) (122,126) (3,438,151)
Decrease (increase) in receivable from
officer/stockholder................................... (11,973) 206 56,957 56,957 --
Increase in other assets................................ -- (8,230) (101,161) (58,204) (408,860)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities............. (509,485) (197,573) (667,602) (123,373) (3,847,011)
----------- ----------- ----------- ----------- -----------
Cash Flows from Financing Activities:
Net proceeds from sale of Series B redeemable
convertible preferred stock........................... 2,794,367 -- -- -- --
Net proceeds from sale of Series C convertible preferred
stock................................................. -- 1,899,355 400,000 400,000 --
Net proceeds from sale of Series D redeemable
convertible preferred stock........................... -- -- 7,393,541 7,151,724 --
Net proceeds from initial public offering of common
stock................................................. -- -- -- -- 56,176,619
Proceeds from issuance of common stock.................. 140 -- -- -- --
Proceeds from exercise of stock options................. 100 9,952 73,216 23,424 415,121
Proceeds from line of credit............................ 500,000 304,000 1,496,000 1,496,000 --
Payments on line of credit.............................. -- (500,000) (1,800,000) (1,800,000) --
Proceeds from term loan to a bank....................... 250,000 486,111 -- -- --
Payments on term loan to a bank......................... -- (250,000) (166,667) (125,000) (319,444)
Proceeds from equipment line of credit.................. -- -- 199,915 73,256 --
Payments on equipment line of credit.................... -- -- -- -- (199,915)
Payments on capital lease obligations................... (21,709) (45,847) (81,685) (61,154) (189,995)
Payments on note payable to a bank...................... (250,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities......... 3,272,898 1,903,571 7,514,320 7,158,250 55,882,386
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 2,351,721 (2,171,184) 3,905,961 4,682,868 53,306,338
Cash and Cash Equivalents, beginning of period............ 6,292 2,358,013 186,829 186,829 4,092,790
----------- ----------- ----------- ----------- -----------
Cash and Cash Equivalents, end of period.................. $ 2,358,013 $ 186,829 $ 4,092,790 $ 4,869,697 $57,399,128
=========== =========== =========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest................ $ 41,291 $ 128,770 $ 143,299 $ 131,268 $ 80,093
=========== =========== =========== =========== ===========
Supplemental Disclosure of Noncash Investing and Financing
Activities:
Accretion of dividends, discounts and special payments
on Series B, Series C and Series D convertible
preferred stock....................................... $ -- $ 153,288 $ 434,266 $ 190,872 $ 4,395,201
=========== =========== =========== =========== ===========
Value ascribed to Series B and Series D redeemable
convertible preferred stock warrants.................. $ -- $ -- $ 3,828,245 $ 3,828,245 $ --
=========== =========== =========== =========== ===========
Equipment acquired under capital leases................. $ 61,411 $ 190,582 $ 87,243 $ 87,243 $ --
=========== =========== =========== =========== ===========
Original issue discount related to warrants issued to a
bank.................................................. $ -- $ -- $ 58,249 $ 58,249 $ --
=========== =========== =========== =========== ===========
Conversion of preferred stock into common stock......... $ -- $ -- $ -- $ -- $13,749,502
=========== =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Art Technology Group, Inc. (ATG or the Company) is a Delaware Company which
was incorporated on December 31, 1991. ATG offers an integrated suite of
Internet customer relationship management and electronic commerce software
applications, as well as related application development, integration and
support services. On July 6, 1999, ATG established two wholly owned
subsidiaries, ATG Securities Corporation and ATG Global, Inc.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere in
the accompanying notes to the consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ATG and its wholly owned subsidiaries. All significant intercompany balances
have been eliminated in consolidation.
(B) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of September 30, 1999, the
consolidated statements of operations and cash flows for the nine months ended
September 30, 1998 and 1999, and the consolidated statement of stockholders'
equity (deficit) for the nine months ended September 30, 1999 are unaudited, but
in the opinion of management, include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of results for these
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted, although ATG believes that the
disclosures included are adequate to make the information presented not
misleading. The results of operations for the nine months ended September 30,
1999, are not necessarily indicative of the results to be expected for the
entire fiscal year.
(D) INITIAL PUBLIC OFFERING
On July 26, 1999, ATG closed its initial public offering of 5,000,000 shares
of common stock at a public offering price of $12 per share. The net proceeds to
ATG from the offering were approximately $54,302,000. On July 30, 1999, in
connection with the exercise of the underwriters' over-allotment option, ATG
issued an additional 168,000 shares of common stock at the initial public
offering price of $12 per share. Net proceeds to ATG from the exercise of the
overallotment option was approximately $1,875,000.
In connection with ATG's initial public offering in July 1999, all shares of
preferred stock were converted into 15,709,639 shares of common stock.
F-7
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) REVENUE RECOGNITION
ATG recognizes product license revenue from licensing the rights to use its
software to end-users. ATG also generates service revenues from integrating its
software with its customers' operating environments, the sale of maintenance
services and the sale of certain other consulting and development services. ATG
generally has separate agreements with its customers, which govern the terms and
conditions of its software license, consulting and support and maintenance
services. These separate agreements, along with ATG's price list, provide the
basis for establishing vendor specific objective evidence of fair value. This
allows ATG to appropriately allocate fair value among the multiple elements in
an arrangement, as well as, allocate discounts ratably over all elements in an
arrangement, except for upgrade rights.
ATG recognizes revenue in accordance with Statement of Position (SOP) No.
97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE
OF A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenues from software
product license agreements are recognized upon execution of a license agreement
and delivery of the software, provided that the fee is fixed or determinable and
deemed collectible by management. If conditions for acceptance are required
subsequent to delivery, revenues are recognized upon customer acceptance if such
acceptance is not deemed to be perfunctory. Revenues from software maintenance
agreements are recognized ratably over the term of the maintenance period, which
is typically one year. ATG enters into reseller arrangements that typically
provide for sublicense fees payable to ATG based upon a percentage of ATG's list
price. Revenues are recognized under reseller agreements as earned which is
generally ratably over the life of the reseller agreement for guaranteed minimum
royalties or based upon unit sales by the resellers. ATG does not grant its
resellers the right of return or price protection. Revenues from professional
service arrangements are recognized on either a time and materials or
percentage-of-completion basis as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed collectible by
management. Amounts collected or billed prior to satisfying the above revenue
recognition criteria are reflected as deferred revenue. Unbilled services
represent service revenues that have been earned by ATG in advance of billings.
The Company received $5.0 million from Informix in March 1999 under an
original equipment manufacturer agreement, of which $3.4 million is included in
deferred revenue at September 30, 1999. Informix has the right to terminate the
agreement and receive a refund of the $5.0 million less the greater of $530,000
per quarter, commencing with the fiscal quarter ended March 31, 1999, and all
uncredited prepaid royalties as of the termination date, in the event Informix
is named in a patent or other intellectual property infringement claim related
to the agreement by BroadVision. The amount refundable at September 30, 1999 is
$3.4 million.
(F) NET LOSS PER SHARE
Basic and diluted net loss per common share was determined by dividing net
loss available for common stockholders by the weighted average common shares
outstanding during the period. Basic and diluted net loss per share are the
same, as outstanding common stock options and warrants have been excluded as
they are considered antidilutive as ATG has recorded a net loss for all periods
presented. Options and warrants to purchase a total of 1,095,150, 2,140,182,
5,682,799, 5,535,079 and 3,949,221 common shares have been excluded from the
computation of diluted weighted average shares
F-8
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
outstanding for the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1998 and 1999, respectively. Shares of common stock
issuable upon the conversion of outstanding convertible preferred stock and
warrants have also been excluded from the date of issuance to the date of
conversion (the Company's initial public offering). In accordance with the SEC
Staff Accounting Bulletin No. 98, EARNINGS PER SHARE IN AN INITIAL PUBLIC
OFFERING, the Company determined that there were no nominal issuances of ATG's
common stock prior to ATG's initial public offering.
ATG's historical capital structure was not indicative of its current
structure due to the automatic conversion of all shares of convertible preferred
stock and redeemable convertible preferred stock into common stock concurrent
with the closing of ATG's initial public offering. Accordingly, pro forma net
loss per share is presented for the year ended December 31, 1998 and the nine
months ended September 30, 1999 assuming (i) the net loss before the accretion
of preferred stock dividends, discount and offering costs and (ii) the
conversion of all outstanding shares of convertible preferred stock and
redeemable convertible preferred stock into common stock using the as-converted
method from their respective dates of issuance.
(G) CASH AND CASH EQUIVALENTS
ATG accounts for investments under Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. Under SFAS No. 115, investments for which ATG has the positive
intent and the ability to hold to maturity, consisting of cash equivalents, are
reported at amortized cost, which approximates fair market value. Cash
equivalents are highly liquid investments with original maturities of less than
ninety days.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
1997 1998 1999
-------- ---------- -------------
<S> <C> <C> <C>
Cash and cash equivalents--
Cash.................................................... $186,829 $ 592,790 $ 460,370
Money market accounts................................... -- 3,500,000 56,938,758
-------- ---------- -----------
Total cash and cash equivalents................... $186,829 $4,092,790 $57,399,128
======== ========== ===========
</TABLE>
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. ATG provides for depreciation and amortization using the
straight-line method and charges to operations amounts estimated to allocate the
cost of the assets over their estimated useful lives.
F-9
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment at December 31, 1997 and 1998 and September 30, 1999
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ----------------------- SEPTEMBER 30,
ASSET CLASSIFICATION USEFUL LIFE 1997 1998 1999
- -------------------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Computer equipment............................ 3 years $ 513,202 $ 637,683 $1,875,635
Equipment under capital leases................ 3 years 269,794 556,952 544,245
Computer software............................. 3 years 74,967 284,629 385,898
Furniture and fixtures........................ 7 years 212,579 295,924 1,116,512
Leasehold improvements........................ Life of
lease 18,800 24,795 1,315,844
---------- ---------- ----------
1,089,342 1,799,983 5,238,134
Less--Accumulated depreciation and
amortization 611,293 957,973 1,395,808
---------- ---------- ----------
$ 478,049 $ 842,010 $3,842,326
========== ========== ==========
</TABLE>
(I) RESEARCH AND DEVELOPMENT EXPENSES FOR SOFTWARE PRODUCTS
ATG has evaluated the establishment of technological feasibility of its
products in accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED. ATG sells products in a
market that is subject to rapid technological change, new product development
and changing customer needs; accordingly, ATG has concluded that technological
feasibility is not established until the development stage of the product is
nearly complete. ATG defines technological feasibility as the completion of a
working model. The time period during which costs could be capitalized, from the
point of reaching technological feasibility until the time of general product
release, is very short, and consequently, the amounts that could be capitalized
are not material to ATG's financial position or results of operations.
Therefore, ATG has charged all such costs to research and development in the
period incurred.
(J) INCOME TAXES
ATG accounts for income taxes in accordance with the provisions of SFAS
No. 109, ACCOUNTING FOR INCOME TAXES. This statement requires ATG to recognize a
current tax asset or liability for current taxes payable or refundable and to
record a deferred tax asset or liability for the estimated future tax effects of
temporary differences and carryforwards to the extent they are realizable. A
deferred tax provision or benefit results from the net change in deferred tax
assets and liabilities during the year. A deferred tax valuation allowance is
required if it is more likely than not that all or a portion of the recorded
deferred tax assets will not be realized (see Note 5).
(K) STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
measurement of the fair value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to financial statements. ATG
has determined that it will continue to account for stock-based compensation for
employees under the Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
F-10
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK ISSUED TO EMPLOYEES, and elect the disclosure-only alternative under SFAS
No. 123 (see Note 7(b)).
(L) COMPREHENSIVE INCOME (LOSS)
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. ATG does not have any components of
comprehensive income (loss) besides its reported net loss.
(M) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist mainly of cash and cash equivalents, accounts
receivable, receivable from officer/stockholder, accounts payable, long-term
obligations, redeemable convertible preferred stock and convertible preferred
stock. The carrying amounts of these instruments approximate their fair value.
(N) CONCENTRATIONS OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. ATG has no significant off-balance-sheet concentrations such as
foreign exchange contracts, option contracts or other foreign hedging
arrangements. ATG's accounts receivable credit risk is concentrated domestically
and write-offs have historically been minimal. ATG places its cash and cash
equivalents in several financial institutions. ATG has not experienced any
material losses to date.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenue and their aggregate percentage of
ATG's total revenues which are derived substantially from customers in the
United States:
<TABLE>
<CAPTION>
SIGNIFICANT
CUSTOMERS A B C D E F
----------- -------- -------- -------- -------- -------- --------
PERCENTAGE OF TOTAL REVENUES
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended--
December 31, 1996....................... 3 -- 31% -- -- -- --
December 31, 1997....................... 3 -- 29% -- -- -- 11%
December 31, 1998....................... 3 17% -- 10% -- 10% --
Nine months ended--
September 30, 1998...................... 2 20% -- 12% -- -- --
September 30, 1999...................... 2 11% -- -- 11% -- --
<CAPTION>
G H I
-------- -------- --------
PERCENTAGE OF TOTAL REVENUES
<S> <C> <C> <C>
Year Ended--
December 31, 1996....................... -- 35% 14%
December 31, 1997....................... 16% -- --
December 31, 1998....................... -- -- --
Nine months ended--
September 30, 1998...................... -- -- --
September 30, 1999...................... -- -- --
</TABLE>
F-11
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes the number of customers that individually
comprise greater than 10% of total accounts receivable and their aggregate
percentage of ATG's total accounts receivable:
<TABLE>
<CAPTION>
SIGNIFICANT
RECEIVABLES A B J K L M
----------- -------- -------- -------- -------- -------- --------
PERCENTAGE OF TOTAL
ACCOUNTS RECEIVABLES
<S> <C> <C> <C> <C> <C> <C> <C>
As of--
December 31, 1997............................... 4 13% 26% 18% -- 14% --
December 31, 1998............................... 2 19% -- -- 12% -- --
September 30, 1999.............................. 2 17% -- -- -- -- 12%
</TABLE>
(2) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. ATG's chief operating decision-makers, as
defined under SFAS No. 131, are the Chief Executive Officer, the Chief Operating
Officer and the Chief Financial Officer. To date, the Company has viewed its
operations and manages its business as principally one operating segment with
two product offerings: software licenses and services. ATG evaluates these
product offerings based upon their respective gross margins. As a result, the
financial information disclosed herein, represents all of the material financial
information related to ATG's principal operating segment
(3) RECEIVABLE FROM OFFICER/STOCKHOLDER
ATG had advanced certain amounts to its President and Chief Executive
Officer, which were due upon demand. These amounts were repaid in 1998.
(4) LONG-TERM OBLIGATIONS
(A) LINE OF CREDIT WITH A BANK
ATG has a working capital line-of-credit agreement with a bank under which
ATG may borrow up to the lesser of $5,000,000 or 80% of eligible accounts
receivable, as defined. Borrowings bear interest at the bank's prime rate (7.75%
at December 31, 1998) plus 0.25%. The working capital line of credit is
collateralized by substantially all assets of ATG. The agreement contains
certain covenants, including defined levels of profitability and certain
financial ratios. As of December 31, 1998 and September 30, 1999, ATG was in
compliance with all covenants. As of September 30, 1999, there were no amounts
outstanding under the working capital line of credit and approximately
$1,527,000 was available for
F-12
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) LONG-TERM OBLIGATIONS (CONTINUED)
borrowing. In addition, at December 31, 1998 and September 30, 1999, ATG had
letters of credit outstanding in the amount of $102,500 and $1,603,000,
respectively (see note 8(a)).
(B) TERM NOTE PAYABLE TO A BANK
ATG entered into a term note payable with a bank under which ATG could have
borrowed up to $500,000 based upon certain conditions, as defined. Borrowings
bore interest at the bank's prime rate (7.75% at December 31, 1998) plus 1%.
During July 1999, in connection with ATG's initial public offering, all amounts
were repaid. In connection with the term note payable, ATG issued warrants to
purchase 56,296 shares Series C convertible preferred stock to the bank. One
warrant provided for the purchase of 46,296 shares at an exercise price of $1.62
per share and the other warrant provided for the purchase of 10,000 shares at an
exercise price of $0.01 per share. These warrants vested immediately and expire
five years after issuance. ATG valued the warrants at $58,249, using the Black-
Scholes option pricing model and the following assumptions: fair market value of
$1.62; risk free interest rate of 4.74%; an expected volatility factor of 70%;
an expected life of four years; and an expected dividend yield of zero. The
warrants were recorded as a debt discount. For the year ended December 31, 1998
and the nine months ended September 30, 1998 and 1999, ATG amortized $18,060,
$13,179 and $40,189, respectively. In July 1999, in connection with ATG's
accelerated debt repayment, ATG amortized the remainder of the debt discount. In
connection with ATG's initial public offering, the warrants were converted into
warrants to purchase 171,485 shares of common stock. In July 1999, the warrants
to purchase 171,485 shares of common stock were exercised through a cashless
exercise resulting in the net issuance of 157,238 shares of common stock.
(C) EQUIPMENT LINE OF CREDIT
On July 2, 1998, ATG entered into an equipment line of credit with a bank.
Under the equipment line of credit, ATG could have borrowed up to $200,000 for
capital expenditures. During 1998, ATG borrowed $199,915, all of which was
outstanding as of December 31, 1998. Borrowings bore interest at the bank's
prime rate (7.75% at December 31, 1998) plus 1.25%. In July 1999, ATG repaid all
outstanding amounts under the line of credit.
In April 1999, ATG entered into an additional equipment line of credit with
the same bank. Under the equipment line of credit, ATG may borrow up to $200,000
for capital expenditure purchases. Borrowings bear interest at the bank's prime
rate (7.75% at December 31, 1998) plus 0.75%. Interest accrues and is payable
monthly. Principal is due in 30 monthly installments following a six month
interest only period. As of September 30, 1999, there were no amounts
outstanding under the equipment line of credit.
(5) INCOME TAXES
No provision for federal or state income taxes has been recorded, as ATG
incurred net operating losses for all periods presented. As of December 31,
1998, ATG had net operating loss carryforwards of approximately $8,870,000
available to reduce future federal and state income taxes, if any. ATG also has
available federal tax credit carryforwards of approximately $235,000. If not
utilized, these carryforwards expire at various dates beginning 2011, if not
utilized. If substantial changes in ATG's ownership should occur, as defined by
Section 382 of the Internal Revenue Code (the Code), there
F-13
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) INCOME TAXES (CONTINUED)
could be annual limitations on the amount of carryforwards which can be realized
in future periods. ATG has completed several financings since its inception and
has incurred ownership changes as defined under the Code. ATG does not believe
that these changes in ownership will have a material impact on its ability to
use its net operating loss and tax credit carryforwards.
Net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards............................ $2,082,000 $3,548,000
Nondeductible expenses and reserves......................... 808,000 1,647,000
Tax credits................................................. 154,000 235,000
---------- ----------
3,044,000 5,430,000
Valuation allowance......................................... (3,044,000) (5,430,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
Due to ATG's history of operating losses, there is uncertainty surrounding
ATG's ability to utilize its net operating loss and tax credit carryforwards.
Accordingly, ATG has provided a full valuation allowance against its otherwise
recognizable deferred tax asset as of December 31, 1997 and 1998.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Income tax provision at federal statutory rate.............. (34.0)% (34.0)% (34.0)%
Increase (decrease) in tax resulting from--
State tax provision, net of federal benefit................. (6.0) (6.0) (6.0)
Increase in valuation allowance............................. 40.0 40.0 40.0
----- ----- -----
Effective tax rate.......................................... --% --% --%
===== ===== =====
</TABLE>
(6) PREFERRED STOCK
As of December 31, 1998, ATG's Board of Directors had authorized 10,000,000
shares of preferred stock and has designated 1,300,000, 851,064, 2,000,000 and
2,343,750 shares as Series A convertible preferred stock (Series A Preferred
Stock), Series B redeemable convertible preferred stock (Series B Preferred
Stock), Series C convertible preferred stock (Series C Preferred Stock) and
Series D redeemable convertible preferred stock (Series D Preferred Stock),
respectively. On July 26, 1999, in conjunction with ATG's initial public
offering, all shares of preferred stock were converted into common stock. As of
September 30, 1999, there were no outstanding shares of preferred stock. ATG's
F-14
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) PREFERRED STOCK (CONTINUED)
Series A, Series B, Series C and Series D Preferred Stock were issued and
converted into common stock as follows:
<TABLE>
<CAPTION>
NUMBER COMMON
OF PRICE PER GROSS STOCK
DESCRIPTION DATE SHARES SHARE PROCEEDS EQUIVALENTS
- ----------- ---------------------------------------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Series A July 1995 1,300,000 $0.385 $ 500,500 1,950,000
Series B December 1996 425,532 7.05 3,000,000 1,642,953
Series C November and December 1997, April 1998 1,456,789 1.62 2,360,000 4,437,568
Series D August, September and October 1998 2,343,750 3.20 7,500,000 7,800,368
</TABLE>
The rights, preferences and privileges of Series A, Series B, Series C and
Series D Preferred Stock were as follows:
REDEMPTION
The Series B Preferred Stock was subject to mandatory redemption provisions
that required ATG to redeem 25%, on December 31, 2001 increasing by 25% annually
thereafter, at $7.05 per share (subject to certain dilutive effects, as
defined), plus any dividends accrued but unpaid thereon.
DIVIDENDS AND SPECIAL PAYMENTS
The holders of the Series A, Series B and Series C Preferred Stock were
entitled to receive dividends of $0.1925, $0.3525 and $0.08 per share per annum
(subject to appropriate adjustment, as defined), payable when and as declared by
the Board of Directors. Series B Preferred Stock and Series C Preferred Stock
dividends accrued and were cumulative from the date of issuance of each share,
whether or not declared. As of September 30, 1999, ATG had not declared any
dividends.
The holders of the Series D Preferred Stock, generally were not entitled to
receive a dividend, except under certain events, including the payment of
dividends on another series of preferred stock, as defined.
Upon the closing of the initial public offering, the holders of the
Series D Preferred Stock were entitled to receive in cash, their pro rata share
of an amount equal to $2,411,000 multiplied by 1.33 multiplied by the percentage
aggregate ownership expressed as a decimal of the holders of Series D Preferred
Stock of ATG's capital stock on a fully-diluted and as converted basis at the
time of the relevant event (Series D Special Payment). The Series D Shareholders
were only eligible for the Series D Special Payment if the Series B Preferred
Stock warrants were exercised.
If there were funds left over after the Series D Special Payment, the
holders of the Series C Preferred Stock were entitled to receive in cash, their
pro rata share, of an amount equal to $2,411,000 plus the Series D Special
Payment multiplied by 1.33 multiplied by the percentage aggregate ownership
expressed as a decimal of the holders of Series D Preferred Stock of the
Company's capital stock on a fully diluted and as converted basis at the time of
the relevant event. If there were not enough funds to satisfy the entire
dividend, then the holders of Series C Preferred Stock were to share ratably in
the remaining funds (Series C Special Payment). The Series C Shareholders were
only eligible for the Special Payment if the Series B Preferred Stock warrants
were exercised and the Series D Special Payment was made in full.
F-15
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) PREFERRED STOCK (CONTINUED)
If there were funds left over after the payment of the initial Series D and
Series C Special Payments, the holders of the Series D Preferred Stock were
entitled to receive in cash, their pro rata share, an amount equal to the
Series C Special Payment multiplied by 1.33 multiplied by the percentage
aggregate ownership expressed as a decimal of the holders of Series D Preferred
Stock of ATG's capital stock on a fully-diluted and as converted basis at the
time of the relevant event (Second Series D Special Payment). If there were not
enough funds to satisfy the Second Series D Special Payment, then the holders of
Series D Preferred Stock would share ratably in the remaining funds. The Series
D Preferred Stockholders were only eligible to receive the Second Series D
Special Payment if the Series B Preferred Stock warrants were exercised and the
Series D and Series C Special Payments had occurred.
In conjunction with ATG's initial public offering, the Series D Special
Payment, the Series C Special Payment and the Second Series D Special Payment
were canceled in exchange for the issuance of 121,250 shares of common stock
which was valued at approximately $1,819,000 and recorded as a dividend.
LIQUIDATION PREFERENCE
In certain events, including liquidation, dissolution or winding up of ATG,
the holders of Series A, Series B, Series C and Series D Preferred Stock had a
preference in liquidation of $0.3852, $7.05, $1.62 and $3.20 per share (subject
to appropriate adjustment, as defined), plus any dividends accrued but unpaid
thereon.
VOTING RIGHTS
Each holder of outstanding shares of Series A, Series B, Series C and
Series D Preferred Stock was entitled to the number of votes equal to the number
of whole shares of common stock, into which the shares of Series A, Series B,
Series C and Series D Preferred Stock held by such holder are then convertible.
CONVERSION
Each share of Series A, Series B, Series C and Series D Preferred Stock was
convertible at any time at the option of the holder into 1.5 shares, 1.98
shares, 3 shares and 1.5 shares of common stock, respectively, adjustable for
diluting events, as defined. In addition, if ATG failed to meet certain
operating criteria, including cumulative total revenues, product revenues and
earnings before interest and taxes for the seven quarters ended December 31,
1999, then the conversion ratio would have increased for the holders of
Series D Preferred Stock.
The conversion ratio for the Series B, Series C and Series D Preferred Stock
was adjusted in conjunction with ATG's initial public offering to reflect
(1) the cancellation of the Series C and D special payments, (2) the
cancellation of the warrants to purchase Series B Preferred Stock and common
stock discussed below and (3) the impact of ATG not meeting the criteria
specified in the Series D Preferred Stock agreement. The conversion ratio in
effect at the time of ATG's initial public offering was 3.86, 3.05 and 3.33
shares of common stock for each share of Series B, C and D Preferred
F-16
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) PREFERRED STOCK (CONTINUED)
Stock, respectively. In July 1999, in connection with ATG's initial public
offering, all shares of prefered stock were converted into 15,709,639 shares of
common stock.
WARRANTS
In conjunction with the issuance of the Series B Redeemable Preferred Stock
in December 1996, ATG issued to a holder of Series B Preferred Stock a
performance-based warrant to purchase up to 425,532 shares of Series B Preferred
Stock at $7.05 per share. The performance criteria was based upon sales
generated by ATG from the affiliates of the Series B Stockholder. ATG generated
negligible revenues from the affiliates of the Series B stockholder, therefore,
the warrant was not measured or recorded. As a condition for obtaining the
Series B Stockholder's approval of the terms of the Series D Preferred Stock
financing, the warrant was canceled and ATG granted to the Series B Preferred
Stockholder, a new warrant to purchase 425,532 shares of ATG's Series B
Preferred Stock at a purchase price of $1.385 per share, which was immediately
exercisable and fully vested. The warrant was to expire on the earlier of
(1) the closing of a public offering of ATG's common stock, as defined, at a
price of at least $10 per share resulting in gross proceeds to ATG of at least
$10 million, (2) the closing of a liquidation, merger, sale of all or
substantially all assets of ATG or other similar event, as defined, or
(3) August 18, 2003. ATG has valued this warrant at $1,053,245, using the
Black-Scholes option pricing model and the following assumptions: a fair market
value of $3.20 per share, a risk free interest rate of 5.0%, an expected
volatility of 70%, an expected life of five years, and an expected dividend
yield of zero. ATG has recorded the value of the warrant in the accompanying
statement of stockholders' equity (deficit) and as a component of dividends on
preferred stock in computing net loss per share.
In addition, in connection with the issuance of the Series D Preferred
Stock, ATG issued to the holders of Series D Preferred Stock, warrants to
purchase up to 2,146,325 shares of ATG's common stock at $0.11 per share,
adjusted for certain dilutive events, as defined. The warrants were to vest 5%
per quarter beginning on September 30, 1998 and expire August 18, 2003. ATG
valued these warrants using the Black-Scholes option pricing model and the
following assumptions: a fair market value of $3.20 per share, a risk free
interest rate of 4.74%, an expected volatility of 70%, an expected life of five
years, and an expected dividend yield of zero. ATG allocated the consideration
received from the sale of the Series D preferred stock of $7,500,000 between the
Series D preferred stock and warrants on the basis of the fair value of the
individual component at the date of issuance and determined that the warrants
were valued at $2,775,000. These warrants were recorded as a discount to the
Series D Preferred Stock and were amortized over the redemption period in
computing net loss per share. For the year ended December 31, 1998 and the nine
months ended September 30, 1999, ATG amortized $284,266 and $2,490,734,
respectively. The amortization for the nine months ended September 30, 1999
included the accelerated amortization in connection with the conversion of the
Series D Preferred Stock in connection with the initial public offering.
In conjunction with ATG's initial public offering, the warrants to purchase
Series B Preferred Stock and common stock were canceled and the number of shares
of common stock issuable upon conversion of the Series B and D Preferred Stock
were increased to reflect the shares which would have been received upon
exercise of the warrants based upon the initial public offering price.
F-17
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) STOCKHOLDER'S EQUITY (DEFICIT)
(A) RECAPITALIZATION
On May 10, 1999, ATG's Board of Directors approved a 3-for-2 stock split of
ATG's common stock. The stock split was effective on June 18, 1999. All share
and per share amounts of common stock for all periods have been retroactively
adjusted to reflect the stock split. In addition, upon the closing of ATG's
initial public offering in July 1999, its certificate of incorporation was
amended and restated to, among other things, change its authorized capital stock
to 100,000,000 shares of $0.01 par value common stock and 10,000,000 shares of
$0.01 par value preferred stock.
(B) STOCK PLANS
1996 STOCK OPTION PLAN
In April 1996, the 1996 Stock Option Plan (the 1996 Plan) was approved by
ATG's Board of Directors and stockholders. The purpose of the 1996 Plan is to
reward employees, officers and directors, and consultants and advisors to ATG
who are expected to contribute to the growth and success of ATG. The 1996 Plan
provides for the award of options to purchase shares of ATG's common stock.
Stock options granted under the 1996 Plan may be either incentive stock options
or nonqualified stock options.
The 1996 Plan is administered by the Board of Directors, which has the
authority to designate participants, determine the number and type of options to
be granted, the time at which options are exercisable, the method of payment and
any other terms or conditions of the options. Options generally vest annually
over a two- to four-year period and expire 10 years from the date of grant.
While the Board determines the prices at which options may be exercised
under the 1996 Plan, the exercise price of an incentive stock option shall be at
least 100% (110% for incentive stock options granted to a 10% stockholder) of
the fair market value of ATG's common stock on the date of grant. A total of
6,300,000 shares of common stock have been reserved for options to be granted
under the 1996 Plan. As of December 31, 1998 and September 30, 1999, there are
3,082,488 and 1,478,117 shares, respectively, available for future grant.
1999 OUTSIDE DIRECTOR STOCK OPTION PLAN
The 1999 Outside Director Stock Option Plan (Director Plan) was adopted by
ATG's Board of Directors and approved by stockholders in May 1999. Under the
terms of the Director Plan, directors who are not employees of ATG receive
nonqualified options to purchase shares of common stock. A total of 150,000
shares of common stock have been reserved under the Director Plan.
Under the terms of the Director Plan, each currently active non-employee
director received an option to purchase 5,000 shares of common stock on the
effective date of the Company's initial public offering at the public offering
price. Individuals who become directors after the initial public offering and
are not employees of ATG will receive an option to purchase 5,000 shares of our
common stock on the date of initial election to ATG's Board of Directors. In
addition, each non-employee director will receive an option to purchase 2,500
shares of common stock on the date of each annual meeting of stockholders
commencing in the year 2000 at an exercise price per share equal to the closing
price of
F-18
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) STOCKHOLDER'S EQUITY (DEFICIT) (CONTINUED)
ATG's common stock on the date of grant. All options granted under the Director
Plan will be fully vested upon grant.
1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan (the Stock Purchase Plan) was adopted
by ATG's Board of Directors and approved by stockholders in May 1999. The Stock
Purchase Plan authorizes the issuance of up to a total of 500,000 shares of
ATG's common stock to participating employees. All ATG's employees, including
directors who are employees, are eligible to participate in the Stock Purchase
Plan. Employees who would immediately after the grant own 5% or more of the
total combined voting power or value of our stock are not eligible to
participate. During each designated semiannual offering period, each eligible
employee may deduct between 1% to 10% of base pay to purchase common stock of
ATG. The purchase price will be 85% of the closing market price of ATG's common
stock on either (1) the first business day of the offering period or (2) the
last business day of the offering period, whichever is lower.
ATG will account for the Stock Purchase Plan in accordance with APB No. 25
and accordingly, no compensation cost will be recognized under the Stock
Purchase Plan. ATG will elect the "disclosure only" alternative under SFAS
No. 123.
Additionally, in May 1999, ATG granted 75,000 options outside ATG's stock
option plans to an executive of ATG.
F-19
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) STOCKHOLDER'S EQUITY (DEFICIT) (CONTINUED)
The following table summarizes option activity under the Stock Option Plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE EXERCISE
OF SHARES PRICE PRICE
--------- ------------------ --------
<S> <C> <C> <C>
Outstanding, December 31, 1995............................. -- $ -- $ --
Granted.................................................. 1,101,150 .13--.50 .23
Exercised................................................ (750) .13 .13
Canceled................................................. (5,250) .13 .13
--------- ------------------ -----
Outstanding, December 31, 1996............................. 1,095,150 .13--.50 .17
Granted.................................................. 1,261,500 .50 .50
Exercised................................................ (55,950) .13--.50 .19
Canceled................................................. (160,518) .13--.50 .23
--------- ------------------ -----
Outstanding, December 31, 1997............................. 2,140,182 .13--.50 .36
Granted.................................................. 1,636,154 .50 .50
Exercised................................................ (221,355) .13--.50 .33
Canceled................................................. (615,524) .13--.50 .44
--------- ------------------ -----
Outstanding, December 31, 1998............................. 2,939,457 .13--.50 .43
Granted.................................................. 1,905,418 2.00--26.81 8.82
Exercised................................................ (830,931) .13--8.00 .51
Canceled................................................. (76,723) .17--10.00 1.02
--------- ------------------ -----
Outstanding, September 30, 1999............................ 3,937,221 $ .13--26.81 $4.46
========= ================== =====
Exercisable, September 30, 1999............................ 1,019,684 $ .13--12.00 $1.96
========= ================== =====
</TABLE>
The following table summarizes information relating to currently outstanding
and exercisable options as of September 30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
REMAINING -----------------------------------
CONTRACTUAL LIFE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES NUMBER OF SHARES (YEARS) EXERCISE PRICE NUMBER OF SHARES EXERCISE PRICE
- ------------------------ ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ .13--.17............ 356,217 6.8 $ 0.15 292,701 $ .15
.50.................... 1,707,213 8.6 0.50 507,711 .50
2.00--2.67............. 397,366 9.4 2.33 55,862 2.25
3.33--4.00............. 99,975 9.5 3.52 10,915 3.55
8.00--12.00............ 1,254,100 9.7 9.66 152,495 10.05
26.81.................. 122,350 10.0 26.81 -- --
- ----------------------- --------- ---- ------ --------- ------
$ .13--26.81........... 3,937,221 8.9 $ 4.46 1,019,684 $ 1.96
======================= ========= ==== ====== ========= ======
</TABLE>
In the years ended December 31, 1996, 1997 and 1998, ATG granted 142,500,
228,000 and 15,000 nonqualified stock options exercisable at $0.13, $0.50 and
$0.50 per share, respectively, which are fully
F-20
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) STOCKHOLDER'S EQUITY (DEFICIT) (CONTINUED)
vested, to consultants as payment for services performed. ATG recorded expense
for the years ended December 31, 1996, 1997 and 1998 related to these grants of
$210,200, $60,000 and $4,210, respectively. ATG valued the 1996 and 1997 options
issued in exchange for services based upon the fair value of the services
received. The services were more readily measurable as ATG had entered into
similar transactions in exchange for cash consideration. ATG valued the 1998
options issued in exchange for services based upon the Black-Scholes option
pricing model and the following assumptions: a fair market value of $1.62; risk
free interest at 4.74%; an expected volatility factor of 70%; an expected life
of four years; and an expected dividend yield of zero. The options expire ten
years from the date of grant.
In connection with certain stock option grants during the year ended
December 31, 1998 and the nine months ended September 30, 1999, ATG recorded
deferred compensation of approximately $1,799,000 and $3,063,000, respectively,
which represents the aggregate difference between the exercise price and the
fair market value of the common stock as determined for accounting purposes. The
deferred compensation will be recognized as an expense over the vesting period
of the underlying stock options. ATG recorded compensation expense of $106,542
and $822,996 in the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively, related to these options.
ATG has computed the pro forma disclosures required under SFAS No. 123 for
options granted during the years ended December 31, 1996, 1997 and 1998 using
the Black-Scholes option pricing model prescribed by SFAS No. 123, using the
following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
---------- ---------- ---------
<S> <C> <C> <C>
Risk-free interest rate..................................... 7.00% 7.00% 5.00%
Expected dividend yield..................................... -- -- --
Expected lives.............................................. 4 years 4 years 4 years
Expected volatility......................................... 70% 70% 70%
Weighted average fair value of options granted.............. $.13 $.18 $.14
Weighted average remaining contractual life of options 8.40
outstanding............................................... 9.54 years 9.21 years years
</TABLE>
Had compensation expense for ATG's stock option plan been determined
consistent with SFAS No. 123, the pro forma net loss available for common
stockholders and pro forma net loss per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss available for common stockholders--
As reported.......................................... $(1,648,100) $(4,441,932) $(4,444,535)
Pro forma............................................ (1,684,305) (4,578,226) (4,745,661)
Basic and diluted net loss per share--
As reported.......................................... $ (0.19) $ (0.50) $ (0.50)
Pro forma............................................ (0.19) (0.52) (0.53)
</TABLE>
F-21
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) COMMITMENTS AND CONTINGENCIES
(A) LEASES
In March 1999, ATG entered into a new facility lease for its corporate
headquarters which expires in February 2006. Upon occupancy of the new facility,
ATG has issued the lessor a letter of credit in the amount of $1,500,000 as a
security deposit. The approximate future minimum payments under this new
facility lease, existing facility leases and certain equipment operating leases
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
Years ending December 31,--
1999...................................................... $ 1,833,000
2000...................................................... 2,913,000
2001...................................................... 2,208,000
2002...................................................... 2,251,000
2003...................................................... 2,250,000
Thereafter................................................ 5,935,000
-----------
Total future minimum lease payments................. $17,390,000
===========
</TABLE>
Rent expense included in the accompanying statements of operations was
approximately $265,000, $781,000 and $810,000 for the years ended December 31,
1996, 1997 and 1998 and $588,000 and $1,197,000 for the nine months ended
September 30, 1998 and 1999, respectively.
(B) LITIGATION
A patent infringement claim was filed by BroadVision, one of ATG's
competitors, against ATG on December 11, 1998. The case was filed in the U.S.
District Court for the Northern District of California. BroadVision alleges that
ATG is infringing on their patent for a method of conducting e-commerce.
BroadVision is seeking a permanent injunction of the sale of ATG's Dynamo
products in their current forms as well as unspecified damages. ATG intends to
vigorously oppose BroadVision's allegations and has filed a counterclaim against
BroadVision on February 4, 1999 seeking a judgment that ATG is not infringing
their patent and that the patent in question is in fact unenforceable and
invalid.
(9) EMPLOYEE BENEFIT PLAN
Effective January 1, 1997, ATG adopted the Art Technology Group 401(k) Plan
(the 401(k) Plan). All employees, as defined, are eligible to participate in the
401(k) Plan. The 401(k) Plan allows eligible employees to make salary-deferred
contributions of up to 15% of their annual compensation, as defined, subject to
certain Internal Revenue Service limitations. ATG may contribute to the 401(k)
Plan at its discretion. No discretionary employer contributions were made to the
Plan for the years ended December 31, 1997 and 1998 or the nine months ended
September 30, 1998 and 1999.
F-22
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1998 and September 30, 1999
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1997 1998 1999
-------- ---------- -------------
<S> <C> <C> <C>
Payroll and related costs................................. $212,959 $ 600,467 $1,878,863
Accrued accounts payable.................................. 124,849 292,540 1,167,961
Other..................................................... 55,476 327,094 192,907
-------- ---------- ----------
$393,284 $1,220,101 $3,239,731
======== ========== ==========
</TABLE>
(11) VALUATION AND QUALIFYING ACCOUNTS
The following is a rollforward of ATG's allowance for doubtful accounts:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
PERIOD ADDITIONS DEDUCTIONS PERIOD
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996...................... $ -- $ -- $ -- $ --
======== ======== ======== ========
Year Ended December 31, 1997...................... $ -- $ 21,305 $ -- $ 21,305
======== ======== ======== ========
Year Ended December 31, 1998...................... $ 21,305 $265,287 $(36,592) $250,000
======== ======== ======== ========
Nine months ended September 30, 1999.............. $250,000 $210,000 $ -- $460,000
======== ======== ======== ========
</TABLE>
F-23
<PAGE>
The inside back cover shows a diagram of our product distribution
channels. Arrows from the Dynamo suite of products point to system
integrators and Web developers, OEM and technology partners and direct sales
force. Arrows from these channels point down to customers. Arrows depicting
our services point back up from these channels to the Dynamo suite of
products. Text to the right of the diagram reads: ""ATG uses its Innovation
and Express Services to provide market and technology insight to drive new
product development. ATG has three primary distribution channels: direct
sales, systems integrators and Web Developers and sales associated with OEMs
and technology partners.
The bottom of this page has three customer Web site screen shots.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,500,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
-------------
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
THOMAS WEISEL PARTNERS LLC
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
--------------
, 1999
--------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF OUR COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 56,381
NASD filing fee............................................. 20,781
Nasdaq National Market listing fee.......................... 17,500
Blue Sky fees and expenses.................................. 5,000
Transfer Agent and Registrar fees........................... 5,000
Accounting fees and expenses................................ 75,000
Legal fees and expenses..................................... 150,000
Printing and mailing expenses............................... 95,000
Miscellaneous............................................... 75,338
--------
Total................................................... $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eighth of the Registrant's Amended and Restated Certificate of
Incorporation provides that no director of the Registrant shall be personally
liable for any monetary damages for any breach of fiduciary duty as a director,
except to the extent that the Delaware General Corporation Law prohibits the
elimination or limitation of liability of directors for breach of fiduciary
duty.
Article Ninth of the Registrant's Amended and Restated Certificate of
Incorporation provides that a director or officer of the Registrant (a) shall be
indemnified by the Registrant against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement incurred in connection with any
litigation or other legal proceeding (other than an action by or in the right of
the Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
II-1
<PAGE>
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article Ninth of the Registrant's Amended and Restated Certificate of
Incorporation further provides that the indemnification provided therein is not
exclusive, and provides that in the event that the Delaware General Corporation
Law is amended to expand the indemnification permitted to directors or officers
the Registrant must indemnify those persons to the fullest extent permitted by
such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and other persons serving at the request of the corporation in
related capacities against amounts paid and expenses incurred in connection with
an action or proceeding to which he is or is threatened to be made a party by
reason of such position, if such person shall have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, in any criminal proceeding, if such person had no
reasonable cause to believe his conduct was unlawful; provided that, in the case
of actions brought by or in the right of the corporation, no indemnification
shall be made with respect to any matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
adjudicating court determines that such indemnification is proper under the
circumstances.
Under Section 7 of the Underwriting Agreement, the underwriters are
obligated, under circumstances, to indemnify directors and officers of the
Registrant against liabilities, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1
hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three fiscal years preceding the filing of this registration
statement, the company has issued the following securities that were not
registered under the Securities Act:
(a) Issuances of Capital Stock
In December 1996, we issued 425,532 shares of Series B Preferred Stock to
SOFTBANK Ventures Inc. for an aggregate purchase price of $3,000,000 and a
warrant to purchase 425,532 shares of Series B Preferred Stock at a purchase
price of $7.05 per share. In August 1998, as a condition to obtaining the
Series B preferred stockholders' approval of the Series D preferred stock
financing, the warrant was cancelled and a new warrant issued for 425,532 shares
of Series B preferred stock at an exercise price of $1.385 per share.
In November 1997, we issued a warrant to Silicon Valley Bank to acquire
46,296 shares of Series C Preferred Stock at an exercise price of $1.62 per
share. In March 1998, we issued another warrant to Silicon Valley Bank to
acquire 10,000 shares of Series C Preferred Stock at an exercise price of $0.01
per share.
In November and December 1997 and April 1998, we issued an aggregate of
1,456,789 shares of Series C Preferred Stock to fourteen private investors for
$1.62 per share.
In August, September and October 1998, we issued an aggregate of 2,343,750
shares of Series D Preferred Stock to six private investors for $3.20 per share.
II-2
<PAGE>
In connection with the sale of Series D Preferred Stock, the investors were
also issued warrants which vest over five years to purchase shares of common
stock at an exercise price of $0.11 per share.
(b) Grants and Exercises of Stock Options
As of September 30, 1999, there were outstanding options to purchase an
aggregate of 3,937,221 shares of common stock under the 1996 Stock Option Plan,
at a weighted average exercise price of $4.46 per share. From April 1996 to
September 30, 1999, the registrant issued 1,108,996 shares of common stock for
an aggregate purchase price of $498,389 pursuant to exercise of options.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 under
the Securities Act. All foregoing securities are deemed restricted securities
for the purpose of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<S> <C>
1 Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Amended and Restated By-Laws of the Registrant.
4* Specimen certificate for shares of Common Stock, $.01 par
value per share, of the Registrant.
5 Opinion of Hale and Dorr LLP.
10.1* 1996 Stock Option Plan, as amended.
10.2* 1999 Outside Director Stock Option Plan.
10.3* 1999 Employee Stock Purchase Plan.
10.4* Lease between the Registrant and DVPT Limited Partnership,
dated March 11, 1999.
10.5* Loan and Security Agreement between the Registrant and
Silicon Valley Bank, dated November 26, 1997, as amended on
March 31, 1998 and July 2, 1998.
10.6* Intellectual Property Security Agreement between the
Registrant and Silcon Valley Bank, dated November 26, 1997.
10.7+* OEM Agreement, as amended, between the Registrant and
Informix Software, Inc., dated December 31, 1998.
10.8+* Software License Agreement between the Registrant and Sun
Microsystems, Inc., dated March 27, 1998.
10.9* Registration Rights Agreement, dated August 18, 1998.
10.10* Non-Compete Agreement between the Registrant and Jeet Singh,
dated August 18, 1998.
10.11* Non-Compete Agreement between the Registrant and Joseph
Chung, dated August 18, 1998.
10.12* Consulting Agreement between the Registrant and Thomas N.
Matlack, dated November 12, 1997.
10.13* Fourth Loan Modification Agreement between the Registrant
and Silicon Valley Bank, dated May 12, 1999.
23.1 Independent Auditor's Consent.
23.2 Consent of Hale and Dorr LLP (included in Exhibit 5).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<S> <C>
24 Power of Attorney (included on page II-5).
</TABLE>
- ------------------------
* Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-78333).
+ Confidential materials omitted and filed separately with the Commission.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Amended and Restated
Certificate of Incorporation of the Registrant and the laws of the State of
Delaware, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Boston, Massachusetts,
on this 22nd day of October 1999.
<TABLE>
<S> <C> <C>
ART TECHNOLOGY GROUP, INC.
BY: /S/ JEET SINGH
----------------------------------------------
Jeet Singh
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Art Technology Group, Inc.,
hereby severally constitute and appoint Jeet Singh, Ann C. Brady, Linda Handman
and David A. Westenberg, and each of them singly, our true and lawful attorneys
with full power to them, and each of them singly, to sign for us and in our
names in the capacities indicated below, the Registration Statement on Form S-1
filed herewith and any and all pre-effective and post-effective amendments to
said Registration Statement, and any subsequent Registration Statement for the
same offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable Art Technology Group, Inc. to comply with the provisions of
the Securities Act of 1933, as amended, and all requirements of the Securities
and Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorneys, or any of them, to said Registration
Statement and any and all amendments thereto or to any subsequent Registration
Statement for the same offering which may be filed under Rule 462(b).
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President and Chief Executive October 22, 1999
/s/ JEET SINGH Officer (Principal Executive
------------------------------------------ Officer)
Jeet Singh
Chief Technology Officer and October 22, 1999
/s/ JOSEPH T. CHUNG Chairman of the Board
------------------------------------------
Joseph T. Chung
Vice President, Finance and Chief October 22, 1999
/s/ ANN C. BRADY Financial Officer (Principal
------------------------------------------ Financial and Accounting
Ann C. Brady Officer)
Director October 22, 1999
/s/ ROBERT P. FORLENZA
------------------------------------------
Robert P. Forlenza
Director October 22, 1999
/s/ SCOTT A. JONES
------------------------------------------
Scott A. Jones
Director October 22, 1999
/s/ JEFFREY T. NEWTON
------------------------------------------
Jeffrey T. Newton
Director October 22, 1999
/s/ THOMAS N. MATLACK
------------------------------------------
Thomas N. Matlack
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<S> <C>
1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant, as currently
in effect.
3.2* Certificate of Amendment to Certificate of Incorporation of
the Registrant.
3.3* Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed on or immediately subsequent to
the date of the closing of the Offering contemplated by this
Registration Statement.
3.4* Amended and Restated By-Laws of the Registrant.
4* Specimen certificate for shares of Common Stock, $.01 par
value per share, of the Registrant.
5 Opinion of Hale and Dorr LLP.
10.1* 1996 Stock Option Plan, as amended.
10.2* 1999 Outside Director Stock Option Plan.
10.3* 1999 Employee Stock Purchase Plan.
10.4* Lease between the Registrant and DVPT Limited Partnership,
dated March 11, 1999.
10.5* Loan and Security Agreement between the Registrant and
Silicon Valley Bank, dated November 26, 1997, as amended on
March 31, 1998 and July 2, 1998.
10.6* Intellectual Property Security Agreement between the
Registrant and Silcon Valley Bank, dated November 26, 1997.
10.7+* OEM Agreement between the Registrant and Informix Software,
Inc., dated December 31, 1998.
10.8+* Software License Agreement between the Registrant and Sun
Microsystems, Inc., dated March 27, 1998.
10.9* Registration Rights Agreement, dated August 18, 1998.
10.10* Non-Compete Agreement between the Registrant and Jeet Singh,
dated August 18, 1998.
10.11* Non-Compete Agreement between the Registrant and Joseph
Chung, dated August 18, 1998.
10.12* Consulting Agreement between the Registrant and Thomas N.
Matlack, dated November 12, 1997.
10.13* Fourth Loan Modification Agreement between the Registrant
and Silicon Valley Bank, dated May 12, 1999.
23.1 Independent Auditor's Consent.
23.2 Consent of Hale and Dorr LLP (included in Exhibit 5).
24 Power of Attorney (included on page II-5).
</TABLE>
- ------------------------
* Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-78333).
+ Confidential materials omitted and filed separately with the Commission.
<PAGE>
ART TECHNOLOGY GROUP, INC.
4,500,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
, 1999
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
THOMAS WEISEL PARTNERS LLC
DAIN RAUSCHER WESSELS, A DIVISION OF DAIN RAUSCHER INCORPORATED
As Representatives of the several Underwriters
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, California 94104
Ladies and Gentlemen:
Art Technology Group, Inc., a Delaware corporation (herein called the
Company), proposes to issue and sell 1,425,000 shares of its authorized but
unissued Common Stock, $.01 par value (herein called Common Stock), and the
stockholders of the Company named in Schedule II hereto (herein collectively
called the Selling Stockholders) propose to sell an aggregate of 3,075,000
shares of Common Stock (said 4,500,000 shares of Common Stock being herein
called the Underwritten Stock). The Company and certain of the Selling
Stockholders propose to grant to the Underwriters (as hereinafter defined) an
option to purchase up to 675,000 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Stockholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and
warrant that you have been authorized by each of the other Underwriters to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333- ), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act), of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used
- --------
(1) Plus an option to purchase from the Company and the Selling Stockholders up
to 675,000 additional shares to cover over-allotments.
<PAGE>
in this Agreement shall mean the prospectus relating to the Stock first filed
with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing
is required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus included in such registration statement prior to the time
it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS.
(a) Each of the Company and the Selling Stockholders identified by an
asterisk in Schedule II hereto (herein collectively the Affiliated Selling
Stockholders) hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary, except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries
taken as a whole (herein called a Material Adverse Effect). All of the
issued and outstanding capital stock of each of the subsidiaries of the
Company has been duly authorized and validly issued, is fully paid and
nonassessable, and is owned by the Company free and clear of all liens,
encumbrances and security interests. No options, warrants or other rights
to purchase, agreements or other obligations to issue, or other rights to
convert any obligations into shares of capital stock or ownership interests
in such subsidiaries is outstanding.
(ii) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has entered into
any material transaction not referred to in the Registration Statement and
the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder. On the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading. On the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing, none of the representations and warranties
in this subparagraph (iii) shall apply to statements in, or omissions from,
the Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(iv) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or Prospectus relating to the
proposed offering of the Stock and has not instituted or threatened
instituting proceedings for that purpose.
2
<PAGE>
(v) The Stock is duly and validly authorized, is (or, in the case of
shares of the Stock to be sold by the Company, will be, when issued and
sold to the Underwriters as provided herein) duly and validly issued, fully
paid and nonassessable. The information set forth under the caption
"Capitalization" in the Prospectus is true and correct in all material
respects, and the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus. No further
approval or authority of the stockholders or the Board of Directors of the
Company will be required for the issuance and sale of the Stock by the
Company as contemplated herein or, to the knowledge of the Company, for the
transfer and sale of the Stock to be sold by the Selling Stockholders. The
shares of capital stock of the Company outstanding prior to the issuance of
the Underwritten Stock and the Option Stock, if any, have been duly
authorized and are validly issued, fully paid and nonassessable. No
preemptive rights of, or rights of refusal in favor of, stockholders exist
with respect to the Stock, or the issue and sale thereof, pursuant to the
Certificate of Incorporation or Bylaws of the Company and, to the knowledge
of the Company, there are no contractual preemptive rights that have not
been waived, rights of first refusal or rights of co-sale which exist with
respect to the Stock being sold by the Selling Stockholders. Neither the
filing of the Registration Statement nor the offering or sale of the Stock
as contemplated by this Agreement gives rise to any rights, other than
those which have been waived or satisfied, for or relating to the
registration of any shares of Common Stock. Except as described in the
Prospectus, there are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement
filed by the Company under the Securities Act. Except as described in the
Prospectus, there are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities or commitments of sale entitling any
person to purchase or otherwise to acquire from the Company any shares of
the capital stock of, or other ownership interest in, the Company.
(vi) The Stock has been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance.
(vii) The financial statements of the Company, together with the
related notes and schedules as set forth in the Registration Statement,
present fairly in all material respects the financial position and the
results of operations of the Company at the indicated dates and for the
indicated periods. Such financial statements and related notes and
schedules have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
and all adjustments necessary for a fair presentation of results for such
periods have been made. The summary and selected financial data contained
in the Registration Statement present fairly the information shown therein
and have been compiled on a basis consistent with the financial statements
presented therein and the books and records of the Company. The Company had
no subsidiaries as of March 31, 1999.
(viii) Arthur Andersen LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement,
are independent public accountants as required by the Securities Act and
the rules and regulations of the Commission thereunder.
(ix) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that: (a) transactions are
executed in accordance with management's general or specific
authorizations; and (b) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability.
(x) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company, any of its
subsidiaries or any of their respective officers or properties before any
court, government agency or body, or otherwise, that (a) reasonably would
be expected to have a Material Adverse Effect, (b) reasonably would be
expected to prevent consummation of the transactions contemplated hereby or
(c) is required to be disclosed in the Registration Statement and not
otherwise disclosed. There are no contracts or documents of the Company or
any of its subsidiaries that are required to be described in the Prospectus
that have not been fairly and accurately described in all material respects
in the Prospectus. There are no contracts or documents of the Company or
any of its subsidiaries that are required to be filed as exhibits to the
Registration Statement that have not been so filed. The contracts described
in the Prospectus are in full force and effect on the
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date hereof, and neither the Company nor, to the Company's knowledge, any
other party is in material breach of or default under any of such
contracts.
(xi) The Company and each of its subsidiaries have filed all tax
returns required to be filed and have paid or is contesting in good faith
all taxes shown thereon as due. All tax liabilities (including those being
contested in good faith) for the periods covered by the financial
statements of the Company that are included in the Registration Statement
have been adequately provided for in such financial statements.
(xii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated has been obtained or made and is in full force and
effect, except for any additional steps as may be necessary (a) for the
Underwriters to obtain the approval of the National Association of
Securities Dealers, Inc. (herein called the NASD) or (b) to qualify the
Stock for public offering by the Underwriters under state securities or
blue sky laws.
(xiii) Neither the Company nor any of its subsidiaries is, and with the
giving of notice or lapse of time or both will be, in violation of or in
default under its charter or bylaws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a
party or by which it, or any of its properties, is bound and which default
would have a Material Adverse Effect. The execution and performance of this
Agreement and the consummation of the transactions herein contemplated,
including, but not limited to, the issuance and sale of Stock by the
Company and the Selling Stockholders, do not and will not: (a) conflict
with, or result in a breach or violation of, any of the terms or provisions
of, or constitute, either by itself or upon notice or the passage of time
or both, a default under, any agreement, lease, contract, indenture or
other instrument or obligation to which the Company or any of its
subsidiaries is a party or by which the Company, any of its subsidiaries or
any of its properties is bound or may be affected, except where such
breach, violation or default would not have a Material Adverse Effect, (b)
violate any of the provisions of the Certificate of Incorporation or Bylaws
of the Company in effect as of the Closing Date and any later date upon
which the Option Stock is purchased, (c) to the knowledge of the Company,
violate any statute, law, regulation, ordinance or court decree applicable
to the Company or any of its subsidiaries or of any regulatory,
administrative or governmental body or agency having jurisdiction over the
Company, any of its subsidiaries or any of their respective properties or
assets, or (d) result in the creation or imposition of any lien, charge or
encumbrance upon any assets or properties of the Company or any of its
subsidiaries.
(xiv) The Company and each of its subsidiaries are operating in
compliance with all statutes, laws, regulations, ordinances and court
decrees applicable to its respective business and operations, except where
any such non-compliance would not have a Material Adverse Effect. Neither
the Company nor any of its subsidiaries has violated any law or regulation
relating to the protection of human health and safety, the environment, or
hazardous or toxic substances or wastes, pollutants or contaminants, or
relating to discrimination in the hiring, promotion or pay of, or to the
wages and hours of, employees, except for such violations as in the
aggregate would not result in a Material Adverse Effect.
(xv) The Company and its subsidiaries own or possess adequate rights to
use all inventions, designs, computer programs, computer code,
communications protocols, security devices, trade secrets, know-how,
trademarks, service marks, trade names, copyright works or other
information (herein collectively called Intellectual Property) that are
necessary to conduct their businesses as described in the Registration
Statement and the Prospectus. Except as described in the Prospectus,
neither the Company nor any of its subsidiaries has received any notice of,
and has no knowledge of, any infringement of or conflict with any rights of
the Company by others, or any rights of others by the Company, with respect
to any Intellectual Property, that singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a
Material Adverse Effect. To the Company's knowledge, none of the
Intellectual Property licensed to or by the Company or any of its
subsidiaries is unenforceable or invalid. Except as described in the
Prospectus, the Company is not aware of the granting of any patent rights
to third parties or the filing of any patent applications by third parties
or any other rights of third parties to any Intellectual Property owned by
the Company or any of its subsidiaries.
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(xvi) Except as described in the Prospectus: (a) all of the products of
the Company and its subsidiaries (including products currently under
development) will record, store, process, calculate and present calendar
dates falling on and after (and if applicable, spans of time including)
January 1, 2000, and will calculate any information dependent on or
relating to such dates in the same manner, and with the same functionality,
data integrity and performance, as the products record, store, process,
calculate and present calendar dates on or before December 31, 1999, or
calculate any information dependent on or relating to such dates (herein
collectively called Year 2000 Compliant); (b) all of the products of the
Company and its subsidiaries (1) will lose no functionality with respect to
the introduction of records containing dates falling on or after January 1,
2000 and (2) will be interoperable with other products used and distributed
by the Company and its subsidiaries that may deliver records to products of
the Company and its subsidiaries or receive records from products of the
Company and its subsidiaries, or interact with the products of the Company
and its subsidiaries, including back-up and archived data; and (c) all of
the internal computer and technology products and systems of the Company
and its subsidiaries are Year 2000 Compliant.
(xvii) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by applicable laws and except as the
enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally, or by general equitable principles.
(xviii) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Stock.
(b) Each of the Selling Stockholders hereby represents and warrants as
follows:
(i) Such Selling Stockholder has good and marketable title to all the
shares of the Stock to be sold by such Selling Stockholder hereunder, free
and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same
hereunder, subject, in the case of each Selling Stockholder, to the rights
of the Company, as Custodian (herein called the Custodian), and that upon
the delivery of and payment for such shares of the Stock hereunder, the
several Underwriters will receive good and marketable title thereto, free
and clear of all liens, encumbrances, equities, security interests and
claims whatsoever.
(ii) Certificates in negotiable form for the shares of the Stock to be
sold by such Selling Stockholder have been placed in custody under a
Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Stockholder specifically agrees that the shares of the Stock
represented by the certificates so held in custody for such Selling
Stockholder are subject to the interests of the several Underwriters and
the Company, that the arrangements made by such Selling Stockholder for
such custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Stockholder shall not be terminated by any act of such Selling
Stockholder or by operation of law, whether by the death or incapacity of
such Selling Stockholder (or, in the case of a Selling Stockholder that is
not an individual, the dissolution or liquidation of such Selling
Stockholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Stockholder has reviewed the Registration Statement
and Prospectus and, although such Selling Stockholder has not independently
verified the accuracy or completeness of all the information contained
therein, nothing has come to the attention of such Selling Stockholder that
would lead such Selling Stockholder to believe that on the Effective Date,
the Registration Statement contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on
the Effective Date the Prospectus contained and, on the Closing Date and
any later date on
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which Stock is to be purchased, contains any untrue statement of a material
fact or omitted or omits to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
1,425,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Stockholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth opposite its name in Schedule II, and
each of the Underwriters agrees to purchase from the Company and the Selling
Stockholders the respective aggregate number of shares of Underwritten Stock set
forth opposite its name in Schedule I. The price at which such shares of
Underwritten Stock shall be sold by the Company and the Selling Stockholders and
purchased by the several Underwriters shall be $ per share. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of each
Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company or the Selling Stockholders shall immediately give
notice thereof to you, and the non-defaulting Underwriters shall have the right
within 24 hours after the receipt by you of such notice to purchase, or procure
one or more other Underwriters to purchase, in such proportions as may be agreed
upon between you and such purchasing Underwriter or Underwriters and upon the
terms herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
PROVIDED, HOWEVER, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock that all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock that the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Stockholders shall have the right, within 24 hours next
succeeding the 24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to you for purchase of such shares and
portion on the terms herein set forth. In any such case, either you or the
Company and the Selling Stockholders shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
said Section 5 in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be made. If
neither the non-defaulting Underwriters nor the Company and the Selling
Stockholders shall make arrangements within the 24-hour periods stated above for
the purchase of all the shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
or the Selling Stockholders to any non-defaulting Underwriter and without any
liability on the part of any non-defaulting Underwriter to the Company or the
Selling Stockholders. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
and the Selling Stockholders grant an option to the several Underwriters to
purchase, severally and not jointly, up to 675,000 shares in the aggregate of
the Option Stock from the Company and the Selling Stockholders at the same price
per share as the Underwriters shall pay for the Underwritten Stock. Said option
may be exercised only to cover over-allotments in the sale of the Underwritten
Stock by the Underwriters and may be exercised in whole or in part at any time
(but not more than once) on or before the thirtieth day after the date of this
Agreement upon written or telegraphic notice by you to the Company setting forth
the aggregate number of shares of Option Stock as to which the several
Underwriters are exercising the option. Delivery of certificates for the shares
of Option Stock, and payment therefor, shall be made as provided in Section 5
hereof. The number of shares of
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Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
In the event fewer than all of the shares of Option Stock are to be purchased,
shares shall be purchased (i) first, from each Selling Stockholder the number of
shares of Option Stock (as adjusted by you in such manner as you deem advisable
to avoid fractional shares) that bears the same proportion to the total number
of shares of Option Stock to be purchased as the number of shares of Option
Stock set forth opposite the name of such Selling Stockholder in Schedule II
hereto bears to the total number of shares of Option Stock that may be sold by
the Selling Stockholders, and (ii) then, from the Company.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover page
and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 10 A.M., Eastern Daylight Savings time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts
02109, at 10 A.M., Eastern Daylight Savings time, on the fourth business day
after the date of this Agreement, or at such time on such other day, not later
than seven full business days after such fourth business day, as shall be agreed
upon in writing by the Company, the Selling Stockholders and you. The date and
hour of such delivery and payment (which may be postponed as provided in Section
3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised after
10 A.M., Eastern Daylight Savings time, on the date two business days preceding
the Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02109, at 10 A.M., Eastern Daylight Savings time,
on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order, and payment for the Stock purchased from the Selling
Stockholders shall be made to the Custodian, for the account of the Selling
Stockholders, in each case by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock or by electronic delivery through the facilities of
the Depository Trust Company to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. If certificates for the
Stock are to be delivered to you, they shall be registered in such name or names
and shall be in such denominations as you may request at least one business day
before the Closing Date, in the case of Underwritten Stock, and at least one
business day prior to the purchase thereof, in the case of the Option Stock.
Such certificates will be made available to the Underwriters for inspection,
checking and packaging at the offices of Lewco Securities Corporation, 2
Broadway, New York, New York 10004 on the business day prior to the Closing Date
or, in the case of the Option Stock, by 3 P.M., Eastern Daylight Savings time,
on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Stockholders for shares to be purchased by any Underwriter whose
check shall not have been received by you on the Closing Date or any later date
on which Option Stock is purchased for the
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account of such Underwriter. Any such payment by you shall not relieve such
Underwriter from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. Each of
the Company and the Selling Stockholders respectively covenants and agrees as
follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at
the time of effectiveness of the Registration Statement in reliance on Rule
430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Securities Act
or the rules and regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, (ii) the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement, (iii) the
institution or notice of intended institution of any action or proceeding
for that purpose, (iv) the receipt by the Company of any notification with
respect to the suspension of the qualification of the Stock for sale in any
jurisdiction, or (v) the receipt by it of notice of the initiation or
threatening of any proceeding for such purpose. The Company and the Selling
Stockholders will make every reasonable effort to prevent the issuance of
such a stop order and, if such an order shall at any time be issued, to
obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of
each post-effective amendment, if any, to the Registration Statement
(together with, in each case, all exhibits thereto unless previously
furnished to you) and will also deliver to you, for distribution to the
Underwriters, a sufficient number of additional conformed copies of each of
the foregoing (but without exhibits) so that one copy of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to
you and send to the several Underwriters, at such office or offices as you
may designate, as many copies of the Prospectus as you may reasonably
request, and (iii) thereafter from time to time during the period in which
a prospectus is required by law to be delivered by an Underwriter or
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of
any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement
or amend the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser of the Stock, the Company will forthwith prepare and file with
the Commission a supplement to the Prospectus or an amended prospectus so
that the Prospectus as so supplemented or amended will not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading. If, after the initial public offering of the
Stock by the Underwriters and during such period, the Underwriters shall
propose to vary the terms of offering thereof by reason of changes in
general market conditions or otherwise, you will advise the Company in
writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the
Stock may be sold by the several Underwriters to use the Prospectus, as
from time to time amended or supplemented, in connection with the sale of
the Stock in accordance with the applicable provisions of the Securities
Act and the applicable rules and regulations thereunder for such period.
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(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period
in which a prospectus is required by law to be delivered by an Underwriter
or dealer, in keeping such qualifications in good standing under said
securities or blue sky laws; PROVIDED, HOWEVER, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to
continue such qualifications in effect for so long a period as you may
reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to
stockholders of the Company and of all information, documents and reports
filed with the Commission.
(h) Not later than the forty-fifth day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date,
the Company will make generally available to its stockholders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule
158 thereunder.
(i) The Company and the Selling Stockholders jointly and severally
agree to pay all costs and expenses incident to the performance of their
obligations under this Agreement, including all costs and expenses incident
to (i) the preparation, printing and filing with the Commission and the
NASD of the Registration Statement, any Preliminary Prospectus and the
Prospectus, (ii) the furnishing to the Underwriters of copies of any
Preliminary Prospectus and of the several documents required by paragraph
(c) of this Section 6 to be so furnished, (iii) the printing of this
Agreement and related documents delivered to the Underwriters, (iv) the
preparation, printing and filing of all supplements and amendments to the
Prospectus referred to in paragraph (d) of this Section 6, (v) the
furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees. The
Selling Stockholders will pay any transfer taxes incident to the transfer
to the Underwriters of the shares the Stock being sold by the Selling
Stockholders.
(j) The Company and the Selling Stockholders jointly and severally
agree to reimburse you, for the account of the several Underwriters, for
blue sky fees and related disbursements (including counsel fees and
disbursements and cost of printing memoranda for the Underwriters) paid by
or for the account of the Underwriters or their counsel in qualifying the
Stock under state securities or blue sky laws and in the review of the
offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and
costs that the Company and the Selling Stockholders hereby agree to pay and
shall not affect any agreement that the Company and the Selling
Stockholders may make, or may have made, for the sharing of any such
expenses and costs.
(l) The Company and each of the Selling Stockholders hereby agree that,
without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company or such Selling Stockholder, as the case may be,
will not, for a period of 90 days following the date of the Prospectus,
directly or indirectly, (i) sell, offer, contract to sell, make any short
sale, pledge, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any
rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Stock to be sold to the Underwriters
pursuant to this Agreement,
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(B) options to purchase Common Stock granted under the stock option plans
of the Company as described in the Prospectus (herein called the Option
Plans), (C) shares of Common Stock issued by the Company upon the exercise
of options granted under the Option Plans, and (D) shares of Common Stock
issued by the Company upon the exercise of warrants outstanding as of the
date hereof, as described in the Prospectus.
(m) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not
and will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of
1940, as amended, and the rules and regulations thereunder.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Stockholders jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Securities Exchange Act of
1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Stockholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case to the extent the same arises out of or is based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that (1) the indemnity agreements of the Company and the Selling Stockholders
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto, (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof, and (3) each Selling
Stockholder (other than the Affiliated Selling Stockholders) shall only be
liable under this paragraph with respect to (A) information pertaining to such
Selling Stockholder furnished by or on behalf of such Selling Stockholder
expressly for use in any Preliminary Prospectus or the Registration Statement or
the Prospectus or any such amendment thereof or supplement thereto or (B) facts
that would constitute a breach of any representation or warranty of such Selling
Stockholder set forth in Section 2(b) hereof. The indemnity agreements of the
Company and the Selling Stockholders contained in this paragraph (a) and the
representations and warranties of the Company and the Selling Stockholders
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other
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Underwriter within the meaning of Section 15 of the Securities Act, and the
Selling Stockholders from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or the common law
or otherwise and to reimburse each of them for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b) of
this Section 7 agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such paragraphs, it will promptly give
written notice (herein called the Notice) of such service or notification to the
party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such paragraphs shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or proceeding to
which the Notice would have related and was prejudiced by the failure to give
the Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (herein called the Notice of Defense) to the indemnified party, to assume
(alone or in conjunction with any other indemnifying party or parties) the
entire defense of such action, suit, investigation, inquiry or proceeding, in
which event such defense shall be conducted, at the expense of the indemnifying
party or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; PROVIDED, HOWEVER,
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. If,
within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 7 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred
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by the indemnified party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable or
insufficient to hold harmless an indemnified party under paragraph (a) or (b) of
this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the Stock received by the Company and the Selling Stockholders
and the total underwriting discount received by the Underwriters, as set forth
in the table on the cover page of the Prospectus, bear to the aggregate public
offering price of the Stock. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by each indemnifying party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) No indemnifying party will, without the prior written consent of each
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such indemnified
party or any person who controls such indemnified party within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding) unless such settlement, compromise or
consent includes an unconditional release of such indemnified party and each
such controlling person from all liability arising out of such claim, action,
suit or proceeding.
(f) The liability of each Selling Stockholder under such Selling
Stockholder's representations and warranties contained in Section 2 hereof and
under the indemnity and reimbursement agreements contained in the provisions of
this Section 7 and Section 11 hereof shall be limited to an amount equal to the
initial public offering price of the Stock sold by such Selling Stockholder to
the Underwriters. The Company and the Selling Stockholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
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8. TERMINATION. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company and the Selling
Stockholders if after the date of this Agreement trading in the Common Stock
shall have been suspended, or if there shall have occurred (a) the engagement in
hostilities or an escalation of major hostilities by the United States or the
declaration of war or a national emergency by the United States on or after the
date hereof, (b) any outbreak of hostilities or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, calamity, crisis or change in economic or political conditions
in the financial markets of the United States would, in the Underwriters'
reasonable judgment, make the offering or delivery of the Stock impracticable,
(c) suspension of trading in securities generally or a material adverse decline
in value of securities generally on the New York Stock Exchange, the American
Stock Exchange, or The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (d) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority that in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company and its subsidiaries, taken as a
whole, (e) declaration of a banking moratorium by either federal or New York
State authorities or (f) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Stockholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Stockholders; PROVIDED, HOWEVER, that in the event of any
such termination the Company and the Selling Stockholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Stockholders under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Stockholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and
the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except as
to the financial statements contained therein), shall have been approved at
or prior to the Closing Date by Foley, Hoag & Eliot LLP, counsel for the
Underwriters.
(c) You shall have received from Hale and Dorr LLP, counsel for the
Company, an opinion, addressed to the Underwriters and dated the Closing
Date and any later date on which Option Stock is purchased, covering the
matters set forth in paragraphs (i) through (xi) of Annex A hereto. In
addition, if Option Stock is to be purchased on the Closing Date or such
later date, you shall have received from Hale and Dorr LLP and/or such
other counsel as are reasonably acceptable to you an additional opinion or
opinions, addressed to the Underwriters and dated such date, covering the
matters set forth in paragraphs (xii) through (xiv) of Annex A hereto.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not
misleading, (ii) since the Effective Date, no event has occurred which
should have been set forth in a supplement or amendment to the Prospectus
which has not been set forth in such a supplement or amendment, (iii) since
the respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change
in or affecting the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, and,
since such dates, except in the ordinary course
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of business, neither the Company nor any of its subsidiaries has entered
into any material transaction not referred to in the Registration Statement
in the form in which it originally became effective and the Prospectus
contained therein, (iv) neither the Company nor any of its subsidiaries has
any material contingent obligations that are not disclosed in the
Registration Statement and the Prospectus, (v) there are not any pending or
known threatened legal proceedings to which the Company or any of its
subsidiaries is a party or of which property of the Company or any of its
subsidiaries is the subject that are material and that are not disclosed in
the Registration Statement and the Prospectus, (vi) there are not any
franchises, contracts, leases or other documents that are required to be
filed as exhibits to the Registration Statement that have not been filed as
required, (vii) the representations and warranties of the Company herein
are true and correct in all material respects as of the Closing Date or any
later date on which Option Stock is to be purchased, as the case may be,
and (viii) there has not been any material change in the market for
securities in general or in political, financial or economic conditions
from those reasonably foreseeable as to render it impracticable in your
reasonable judgment to make a public offering of the Stock, or a material
adverse change in market levels for securities in general (or those of
companies in particular) or financial or economic conditions which render
it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and Chief
Executive Officer, the Chief Technology Officer and Chairman of the Board,
and the Vice President, Finance and Chief Financial Officer of the Company,
stating that the respective signers of said certificate have carefully
examined the Registration Statement in the form in which it originally
became effective and the Prospectus contained therein and any supplements
or amendments thereto, and that the statements included in clauses (i)
through (vii) of paragraph (d) of this Section 9 are true and correct.
(f) You shall have received from Arthur Andersen LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any
later date on which Option Stock is purchased, confirming that they are
independent public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published rules and
regulations thereunder and based upon the procedures described in their
letter delivered to you concurrently with the execution of this Agreement
(herein called the Original Letter), but carried out to a date not more
than three business days prior to the Closing Date or such later date on
which Option Stock is purchased (i) confirming, to the extent true, that
the statements and conclusions set forth in the Original Letter are
accurate as of the Closing Date or such later date, as the case may be, and
(ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to reflect
any changes in the facts described in the Original Letter since the date of
the Original Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any change,
or any development involving a prospective change, in or affecting the
business or properties of the Company that, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock
or the purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly approved for quotation on the Nasdaq National
Market, subject to official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, Selling Stockholders and beneficial holders of more
than five percent of the outstanding Common Stock agreements, in form
reasonably satisfactory to Hambrecht & Quist LLC, stating that without the
prior written consent of Hambrecht & Quist LLC, such person or entity will
not, for a period of 90 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of
any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences or ownership of Common
Stock, whether any
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such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Foley, Hoag & Eliot LLP, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Stockholders. Any such termination shall be without
liability of the Company or the Selling Stockholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Stockholders; PROVIDED, HOWEVER, that (i) in the event of such termination, the
Company and the Selling Stockholders agree to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Stockholders under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company or the Selling
Stockholders to perform any agreement herein, to fulfill any of the conditions
herein, or to comply with any provision hereof other than by reason of a default
by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including reasonable fees
and disbursements of counsel) that shall have been incurred by them in
connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
STOCKHOLDERS. The obligation of the Company and the Selling Stockholders to
deliver the Stock shall be subject to the conditions that (a) the Registration
Statement shall have become effective and (b) no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Stockholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Stockholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Stockholders; PROVIDED, HOWEVER, that in the event of any such termination the
Company and the Selling Stockholders jointly and severally agree to indemnify
and hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Stockholders under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Stockholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Stockholders hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; PROVIDED, HOWEVER, that (a) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them, (b) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due, and (c) no Selling Stockholder shall have any obligation under this
Section 11 for matters with respect to which such Selling Stockholder has no
indemnification obligation under Section 7.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to
the benefit of the Company, the Selling Stockholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Stockholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
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13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office,, Attention: President and Chief
Executive Officer; and if to the Selling Stockholders, shall be mailed,
telegraphed or delivered to the Selling Stockholders in care of Jeet Singh at
Art Technology Group, Inc., 101 Huntington Avenue, Boston, Massachusetts 02199.
All notices given by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Stockholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
PROVIDED, HOWEVER, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraph (l) of Section 6 hereof shall be of no further
force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
Please sign and return to the Company and to the Selling Stockholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Stockholders and the several Underwriters in accordance with its terms.
Very truly yours,
ART TECHNOLOGY GROUP, INC.
By _____________________________________________
Jeet Singh
President and Chief Executive Officer
SELLING STOCKHOLDERS named on Schedule II:
By _____________________________________________
Jeet Singh
Attorney-in-Fact
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
THOMAS WEISEL PARTNERS LLC
DAIN RAUSCHER WESSELS,
A DIVISION OF DAIN RAUSCHER INCORPORATED
As Representatives of the several Underwriters
By: Hambrecht & Quist LLC
By _____________________________________
Managing Director
Acting on behalf of the several Underwriters, including themselves, named in
Schedule I hereto.
16
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
- ------------ ---------
<S> <C>
Hambrecht & Quist LLC .......................................
U.S. Bancorp Piper Jaffray Inc. .............................
Thomas Weisel Partners LLC ..................................
Dain Rauscher Wessels .......................................
---------
Total ....................................................... 4,500,000
=========
</TABLE>
<PAGE>
SCHEDULE II
SELLERS OF OPTION STOCK
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAMES TO BE SOLD
- ----- ----------
<S> <C>
Art Technology Group, Inc. .............................. 87,920
Selling Stockholders:
-------
Total ................................................... 675,000
=======
</TABLE>
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION(S) OF
COUNSEL FOR THE COMPANY AND THE SELLING STOCKHOLDERS
(i) Each of the Company and its subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign corporation
and in good standing in each state specified in such opinion, and has full
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement, all the issued and
outstanding capital stock of each of the subsidiaries of the Company has been
duly authorized and validly issued and is fully paid and nonassessable, and is
owned by the Company free and clear of all liens, encumbrances and security
interests, and to the best of such counsel's knowledge, no options, warrants or
other rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in such subsidiaries are outstanding;
(ii)the authorized capital stock of the Company consists of 10,000,000
shares of Preferred Stock, $.01 par value, of which no shares are outstanding,
and 100,000,000 shares of Common Stock, $.01 par value, of which there are
outstanding shares (including the Underwritten Stock plus
the number of shares of Option Stock issued on the date hereof); proper
corporate proceedings have been taken validly to authorize such authorized
capital stock; all of the outstanding shares of such capital stock (including
the Underwritten Stock and the shares of Option Stock issued, if any) have been
duly and validly issued and are fully paid and nonassessable; any Option Stock
purchased after the Closing Date, when issued and delivered to and paid for by
the Underwriters as provided in the Underwriting Agreement, will have been duly
and validly issued and be fully paid and nonassessable; and no preemptive rights
of, or rights of refusal in favor of, stockholders exist with respect to the
Stock, or the issue and sale thereof, pursuant to the Certificate of
Incorporation or Bylaws of the Company and, to the knowledge of such counsel,
there are no contractual preemptive rights that have not been waived, rights of
first refusal or rights of co-sale which exist with respect to the Option Stock
being sold by the Selling Stockholders;
(iii) the Registration Statement has become effective under the Securities
Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) the information required to be set forth in the Registration Statement
in answer to Items 9, 10 (insofar as it relates to such counsel) and 11(c) of
Form S-1 is, to the knowledge of such counsel, accurately and adequately set
forth therein in all material respects or no response is required with respect
to such Items, and the description of the Company's stock option plans, the
options granted and which may be granted thereunder, and its employee stock
purchase plan in the Prospectus accurately and fairly presents the information
required to be shown with respect to said plans and options to the extent
required by the Securities Act and the rules and regulations of the Commission
thereunder;
(vi)the statements in the Registration Statement and the Prospectus under
the captions "Risk Factors--Broadvision has claimed that we infringe its
intellectual property" and "Business--Legal Proceedings," to the knowledge of
such counsel, are accurate summaries of the matters therein set forth;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, that in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
A-1
<PAGE>
(ix) the issue and sale by the Company of the shares of Stock sold by the
Company as contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of, the Certificate of Incorporation or Bylaws of the Company
or any agreement or instrument known to such counsel to which the Company is a
party or any applicable law or regulation, or so far as is known to such
counsel, any order, writ, injunction or decree, of any jurisdiction, court or
governmental instrumentality;
(x) to the knowledge of such counsel, all holders of securities of the
Company having rights to the registration of shares of Common Stock, or other
securities, because of the filing of the Registration Statement by the Company
have waived such rights or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the Registration
Statement;
(xi) the Stock has been duly approved for quotation on the Nasdaq National
Market, subject to official notice of issuance;
(xii) the Underwriting Agreement has been duly executed and delivered by or
on behalf of the Selling Stockholders and the Custody Agreement between the
Selling Stockholders and the Company, as Custodian, and the Power of Attorney
referred to in such Custody Agreement have been duly executed and delivered by
the several Selling Stockholders;
(xiii) good and marketable title to the shares of Stock sold by the Selling
Stockholders under the Underwriting Agreement, free and clear of all liens,
encumbrances, equities, security interests and claims, has been transferred to
the Underwriters who have severally purchased such shares of the Stock under the
Underwriting Agreement, assuming for the purpose of this opinion that the
Underwriters purchased the same in good faith without notice of any adverse
claims; and
(xiv) based insofar as factual matters with respect to Stock to be sold by
the Selling Stockholders are concerned solely upon certificates of the Selling
Stockholders, the accuracy of which such counsel have no reason to question, no
consent, approval, authorization or order of any court or governmental agency or
body is required for the consummation of the transactions contemplated in the
Underwriting Agreement, except such as have been obtained under the Securities
Act and such as may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Stock by the Underwriters.
----------------------------
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or of the General Corporate Laws of the
State of Delaware or the laws of the Commonwealth of Massachusetts, upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
In addition to the matters set forth above, counsel rendering the foregoing
opinion shall also include a statement to the effect that nothing has come to
the attention of such counsel that leads them to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial data contained therein, as to which such counsel need not express any
opinion or belief) at the Effective Date contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, that the Prospectus
(except as to the financial statements and schedules and other financial data
contained therein, as to which such counsel need not express any opinion or
belief) as of its date or at the Closing Date (or any later date on which Option
Stock is purchased), contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
A-2
<PAGE>
Exhibit 5
October 22, 1999
Art Technology Group, Inc.
25 First Street
Cambridge, MA 02141
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Securities Act"), for the registration of an
aggregate of 5,175,000 shares of Common Stock, $0.01 par value per share (the
"Shares"), of Art Technology Group, Inc., a Delaware corporation (the
"Company"), of which (i) up to 1,512,920 Shares (including 87,920 Shares
issuable upon exercise of an over-allotment option granted by the Company
(the "Over-Allotment")) will be issued and sold by the Company and (ii) the
remaining 3,662,080 Shares will be sold by certain stockholders of the
Company (the "Selling Stockholders") (including 587,080 shares issuable upon
exercise of the Over-Allotment).
The Shares are to be sold by the Company and the Selling Stockholders
pursuant to an underwriting agreement (the "Underwriting Agreement") to be
entered into by and among the Company, the Selling Stockholders and Hambrecht
& Quist, U.S. Bancorp Piper Jaffray, Thomas Weisel Partners LLC and Dain
Rauscher Wessels, as representatives of the several underwriters named in the
Underwriting Agreement, the form of which has been filed as Exhibit 1 to the
Registration Statement.
We are acting as counsel for the Company in connection with the sale
by the Company and the Selling Stockholders of the Shares. We have examined
signed copies of the Registration Statement as filed with the Commission. We
have also examined and relied upon the Underwriting Agreement, minutes of
meetings of the stockholders and the Board of Directors of the Company as
provided to us by the Company, stock record books of the Company as provided
to us by the Company, the Certificate of Incorporation and By-Laws of the
Company, each as restated and/or amended to date, and such other documents as
we have deemed necessary for purposes of rendering the opinions hereinafter
set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents
submitted to us as copies, the authenticity of the originals of such latter
documents and the legal competence of all signatories to such documents.
Our opinion in clause (ii) below, insofar as it relates to the Selling
Stockholders' shares being fully paid, is based solely on a certificate of
the Chief Financial Officer of the Company.
<PAGE>
Art Technology Group, Inc.
October 22, 1999
Page 2
We assume that the appropriate action will be taken, prior to the
offer and sale of the Shares in accordance with the Underwriting Agreement,
to register and qualify the Shares for sale under all applicable state
securities or "blue sky" laws.
We express no opinion herein as to the laws of any state or
jurisdiction other than the state laws of the Commonwealth of Massachusetts,
the Delaware General Corporation Law statute and the federal laws of the
United States of America. To the extent that any other laws govern the
matters as to which we are opining herein, we have assumed that such laws are
identical to the state laws of the Commonwealth of Massachusetts, and we are
expressing no opinion herein as to whether such assumption is reasonable or
correct.
Based upon and subject to the foregoing, we are of the opinion that
(i) the Shares to be issued and sold by the Company have been duly authorized
for issuance and, when such Shares are issued and paid for in accordance with
the terms and conditions of the Underwriting Agreement, such Shares will be
validly issued, fully paid and nonassessable and (ii) the Shares to be sold
by the Selling Stockholders have been duly authorized and are validly issued,
fully paid and nonassessable.
It is understood that this opinion is to be used only in connection
with the offer and sale of the Shares while the Registration Statement is in
effect.
Please note that we are opining only as to the matters expressly set
forth herein, and no opinion should be inferred as to any other matters. This
opinion is based upon currently existing statutes, rules, regulations and
judicial decisions, and we disclaim any obligation to advise you of any
change in any of these sources of law or subsequent legal or factual
developments which might affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement in accordance with the requirements
of Item 601(b)(5) of Regulation S-K under the Securities Act and to the use
of our name therein and in the related Prospectus under the caption "Legal
Matters." In giving such consent, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 4, 1999 (except with respect to the matter discussed in Note 7(a)
as to which the date is June 18,1999) (and to all references to our Firm)
included in or made a part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 22, 1999
