<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended
September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-26679
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3141918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 First Street
Cambridge, Massachusetts 02144
(Address of principal executive offices)
----------------
(617) 386-1000 (Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
(1) Yes X No (2) Yes No X
------- ------- --------- --------
As of October 20, 1999 there were 31,118,487 shares of the Registrant's common
stock outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1
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ART TECHNOLOGY GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Consolidated Financial Statements (Unaudited) 3
Consolidated balance sheets at September 30, 1999
and December 31, 1998 3
Consolidated statements of operations for the three and
nine months ended September 30, 1999 and 1998 4
Consolidated statements of cash flows for the nine
months ended September 30, 1999 and 1998 5
Notes to unaudited consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 27
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 57,399 $ 4,093
Accounts receivable, net of reserve for doubtful
accounts of $460 and $250 at September 30, 1999 and
December 31, 1998, respectively 4,316 2,318
Unbilled services 478 291
Prepaid expenses and other current assets 2,095 113
--------- --------
Total current assets 64,288 6,815
Property and equipment, net 3,842 842
Other assets 518 109
--------- --------
$ 68,648 $ 7,766
--------- --------
--------- --------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term obligations $ -- $ 347
Accounts payable 2,309 721
Accrued expenses 3,240 1,220
Deferred revenue 5,061 878
--------- --------
Total current liabilities 10,610 3,166
--------- --------
Long-term obligations, less current maturities -- 322
--------- --------
Commitments and contingencies (Note 10)
Redeemable convertible preferred stock -- 8,313
--------- --------
Stockholders' equity (deficit):
Preferred stock, $.01 par value-
Authorized- 10,000,000 shares at September 30, 1999 and no shares
at December 31, 1998 -- --
Issued and outstanding- no shares at September 30, 1999 and
December 31, 1998, respectively -- --
Preferred stock, $.01 par value-
Authorized- No shares at September 30, 1999 and 10,000,000 shares
at December 31, 1998
Series A Convertible Preferred Stock - Designated 1,300,000 shares
Issued and outstanding- No shares at September 30, 1999 and
1,300,000 shares at December 31, 1998 -- 500
Series C Convertible Preferred Stock- Designated- 2,000,000 shares
Issued and outstanding- No shares at September 30, 1999
and 1,456,789 shares at December 31, 1998 -- 2,360
Common stock, $.01 par value-
Authorized- 100,000,000 shares at September 30, 1999 and 25,000,000
shares at December 31, 1998
Issued and outstanding- 31,115,113 shares September 30, 1999 and 9,128,055
shares at December 31, 1998 311 91
Additional paid-in capital 81,043 6,040
Deferred compensation (3,932) (1,692)
Accumulated deficit
Total stockholders' equity (deficit) (19,384) (11,334)
--------- ---------
58,038 (4,035)
--------- ---------
$ 68,648 $ 7,766
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Services $ 3,679 $ 2,213 $ 9,421 $ 5,849
Product license 4,461 1,239 9,372 2,451
---------- --------- --------- ----------
Total revenues 8,140 3,452 18,793 8,300
COST OF REVENUES 2,608 1,175 6,669 3,475
---------- --------- --------- ----------
Gross profit 5,532 2,277 12,124 4,825
---------- --------- --------- ----------
OPERATING EXPENSES:
Research and development 1,710 994 4,233 2,306
Sales and marketing 4,097 1,027 8,134 2,630
General and administrative 1,292 657 3,150 1,543
Amortization of deferred compensation 304 - 823 -
---------- --------- --------- ----------
Total operating expenses 7,403 2,678 16,340 6,479
---------- --------- --------- ----------
Loss from operations (1,871) (401) (4,216) (1,654)
INTEREST INCOME 561 8 682 8
INTEREST EXPENSE (72) (48) (121) (132)
---------- --------- --------- ----------
Net loss (1,382) (441) (3,655) (1,778)
ACCRETION OF DIVIDENDS, DISCOUNTS, SPECIAL
PAYMENTS AND OFFERING COSTS ON
PREFERRED STOCK (3,908) (1,267) (4,395) (1,342)
---------- --------- --------- ----------
Net loss available for common stockholders $ (5,290) $ (1,708) $ (8,050) $ (3,120)
---------- --------- --------- ----------
---------- --------- --------- ----------
NET LOSS PER SHARE (Note 3):
Basic and diluted $ (0.20) $ (0.19) $ (0.53) $ (0.35)
---------- --------- --------- ----------
Basic and diluted weighted average
common shares outstanding 26,454 8,967 15,177 8,941
---------- --------- --------- ----------
Pro forma basic and diluted $ (0.05) $ (0.02) $ (0.14) $ (0.11)
---------- --------- --------- ----------
Pro forma basic and diluted weighted
average common shares outstanding 29,896 18,378 25,707 16,572
---------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
4
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 30, September 30,
1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,655) $ (1,778)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Amortization of deferred compensation 823 -
Noncash interest expense related to issuance of warrants 40 13
Depreciation and amortization 438 245
Changes in current assets and liabilities-
Accounts receivable, net (1,998) (1,777)
Unbilled services (187) 35
Prepaid expenses and other current assets (1,981) (228)
Accounts payable 1,589 (592)
Accrued expenses 2,019 657
Deferred revenue 4,183 1,073
----------- ----------
Net cash provided by (used in) operating activities 1,271 (2,352)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,438) (122)
Decrease in receivable from officer/stockholder - 57
Increase in other assets (409) (58)
----------- ----------
Net cash used in investing activities (3,847) (123)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Series C convertible preferred stock - 400
Net proceeds from initial public offering of common stock 56,177 -
Net proceeds from sale of Series D redeemable convertible preferred stock - 7,152
Proceeds from exercise of stock options 415 23
Proceeds from line of credit - 1,496
Payments on line of credit - (1,800)
Payments on term loan to a bank (320) (125)
Payments on equipment line of credit (200) 73
Payments on capital lease obligations (190) (61)
----------- ----------
Net cash provided by financing activities 55,882 7,158
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 53,306 4,683
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,093 187
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 57,399 $ 4,870
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of preferred stock into common stock $ 13,750 $ -
----------- ----------
----------- ----------
Accretion of dividends, discounts and special payments on
Series B, Series C and Series D convertible preferred stock $ 4,395 $ 191
----------- ----------
----------- ----------
Value ascribed to Series B and Series D redeemable convertible
preferred stock warrants $ - $ 3,828
----------- ----------
----------- ----------
Equipment acquired under capital leases $ - $ 87
----------- ----------
----------- ----------
Original issue discount related to warrants issued to a bank $ - $ 58
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
5
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION
Art Technology Group, Inc. ("ATG" or the "Company") is a Delaware corporation
which was incorporated on December 31, 1991. The Company 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, the Company established
two wholly-owned subsidiaries incorporated in Massachusetts, ATG Securities
Corporation and ATG Global, Inc.
The accompanying condensed consolidated financial statements of the Company
have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and disclosures required by generally accepted accounting
principles. While the Company believes that the disclosures presented are
adequate to make information not misleading, these financial statements
should be read in conjunction with the audited consolidated financial
statements and related notes included in the Company's Registration
Statements on Form S-1, Registration No. 333-78333 and in the Company's
secondary offering filed on October 22, 1999. In the opinion of management,
the accompanying condensed consolidated financial statements and notes herein
are unaudited but, contain all adjustments, consisting only of those of a
normal recurring nature, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows at the dates and for
the periods indicated. The operating results for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results to be
expected for the full year ending December 31, 1999.
2. USE OF ESTIMATES
The preparation of 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.
3. NET LOSS PER SHARE INFORMATION
Basic and diluted net loss per share is 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 recorded a net loss for all periods
presented. Options and warrants to purchase a total of 3,937,221 and
5,535,079 shares of common stock have been excluded from the computation of
diluted weighted average shares outstanding for the periods ended September
30, 1999 and 1998, respectively. Shares of common stock issuable upon the
conversion of outstanding preferred stock and warrants have also been
excluded for all periods presented. In accordance with SEC Staff Accounting
Bulletin No. 98, Earnings Per Share In An Initial Public Offering, the
Company determined that there were no nominal issuances of the Company's
common stock prior to the Company's initial public offering.
ATG's historical capital structure was not indicative of its current
structure due to the conversion of all convertible preferred stock and
redeemable convertible preferred stock into common stock concurrent with the
closing of the Company's initial public offering on July 26, 1999.
Accordingly, pro forma loss per share is presented for the three and nine
months ended September 30, 1999 and 1998 assuming (i) net loss before the
accretion of preferred stock dividends, discounts and offering costs and (ii)
the conversion of all convertible preferred stock and redeemable convertible
preferred stock into common stock using the as-converted method from their
respective dates of issuance.
6
<PAGE>
On July 26, 1999, the Company 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 the Company from the offering were approximately $54,302,000. On
July 30, 1999, the Company issued an additional 168,000 shares of common
stock at the initial public offering price of $12 per share pursuant to the
underwriters' over-allotment option. Net proceeds to the Company from the
exercise of the over-allotment option was approximately $1,875,000.
In connection with the Company's initial public offering on July 26, 1999, all
shares of preferred stock were converted into 15,709,639 shares of common
stock.
4. REVENUE RECOGNITION
The Company recognizes product license revenue from licensing the rights to use
its software to end-users. The Company 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. The Company 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 the
Company's price list, provide the basis for establishing vendor specific
objective evidence of fair value. This provides the basis 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.
The Company recognizes revenue 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 license agreements are recognized upon execution of a license agreement
and delivery of the software, provided that the fee is fixed and 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. The Company enters into reseller arrangements that
typically provide for sublicense fees payable to the Company based upon a
percentage of the Company'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. The Company does not grant its resellers the right to 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 the amounts due from customers are fixed and
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 the Company in advance of billings.
In March 1999, the Company received $5.0 million under an original equipment
manufacturers arrangement with Informix, of which $3.4 million is included in
deferred revenue at 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 prepayment less the greater of
$530,000 per quarter, commencing with the fiscal quarter ended March 31, 1999
and all
7
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uncredited prepaid royalties as of the termination date. The amount
refundable at September 30, 1999 is $3.4 million.
5. CASH AND CASH EQUIVALENTS
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. In accordance with SFAS No. 115,
investments for which the Company has the positive intent and 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>
September 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Cash and cash equivalents-
Cash $ 460 $ 593
Money market accounts 56,939 3,500
------ ------
Total cash and cash equivalents $57,399 $4,093
------ ------
------ ------
</TABLE>
6. 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. The Company has no significant off-balance-sheet concentrations
such as foreign exchange contracts, option contracts or other foreign hedging
arrangements. The Company's accounts receivable credit risk is concentrated
domestically and write-offs have historically been minimal.
For the three and nine months ended September 30, 1999 and 1998, certain
customers accounted for more than 10% of the Company's revenue. No customer
accounted for more than 10% of the Company's revenue in the three months
ended September 1999, and two customers accounted for 11% and 11%,
respectively, of revenue for the nine months ended September 30, 1999. Four
customers accounted for 19%, 14%, 13% and 11%, respectively, of revenues for
the three months ended September 30, 1998 and two customers accounted for 20%
and 11% of revenue for the nine months ended September 30, 1998.
At September 30, 1999, accounts receivable from two customers accounted for
17%, and 12%, respectively, of the total amount due to the Company. At
December 31, 1999, accounts receivable from two customers accounted for
19% and 12% of the total amount due to the Company.
8
<PAGE>
7. DEFERRED COMPENSATION
In connection with certain stock option grants during the year ended December
31, 1998, through May 1999, the Company recorded deferred compensation of
approximately $4.9 million, which represents the aggregate difference between
the exercise price and the fair market value of 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. The Company
recorded compensation expense of $304,000 and $823,000 for the three and nine
months ended September 30, 1999, respectively, related to these options. The
Company did not record compensation expense for the three and nine months
ended September 30, 1998 related to these options.
8. DISCLOSURE ABOUT A SEGMENT OF AN ENTERPRISE
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION in 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. The Company's chief operating
decision-makers, as defined under SFAS No. 131, are the Chief Executive
Officer, 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. As a result, the financial information disclosed herein, represents
all of the material financial information related to the Company's one
operating segment.
9. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME during the
year ended December 31, 1998. The Company does not have any components of
comprehensive income (loss) other than its reported net loss.
10. COMMITMENTS AND CONTINGENCIES
In December 1998, a patent infringement claim was filed against the Company by
BroadVision, Inc. ("BroadVision"), one of the Company's competitors. The case
was filed in the U.S. District Court for the Northern District of California.
BroadVision alleges that the Company is infringing on their patent for a method
of conducting e-commerce. BroadVision is seeking a permanent injunction of the
sale of the Company's Dynamo products in their current forms as well as
unspecified damages. The Company intends to vigorously oppose BroadVision's
allegations and filed a counterclaim against BroadVision in February 1999,
seeking a judgement that the Company is not infringing upon the patent in
question and is, in fact, unenforceable and invalid.
9
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11. SECONDARY PUBLIC OFFERING
On October 22, 1999, the Company filed a secondary offering of 1,425,000
shares of common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The statements contained in this Report on Form 10-Q that are not purely
historical statements are forward looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding our expectations, beliefs, hopes, intentions or strategies regarding
the future. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those indicated in such
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
10
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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 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.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as percentages of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- ------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Services 45% 64% 50% 70%
Product licenses 55% 36% 50% 30%
---- ---- ---- ----
Total revenues 100% 100% 100% 100%
COST OF REVENUES 32% 34% 35% 42%
---- ---- ---- ----
Gross profit 68% 66% 65% 58%
---- ---- ---- ----
OPERATING EXPENSES:
Research and development 21% 29% 23% 28%
Sales and marketing 50% 30% 43% 32%
General and administrative 16% 19% 17% 18%
Amortization of deferred 4% -- 4% --
compensation
---- ---- ---- ----
Total operating expenses 91% 78% 87% 78%
---- ---- ---- ----
LOSS FROM OPERATIONS (23)% (12)% (22)% (20)%
INTEREST INCOME 7% -- 4% --
INTEREST EXPENSE (1)% (1)% (1)% (1)%
---- ---- ---- ----
Net loss (17)% (13)% (19)% (21)%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. Total revenues increased 131% from $3.5 million for the three
months ended September 30, 1998 to $8.1 million for the three months ended
September 30, 1999. 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. No
customers accounted for more than 10% of revenues for the three months ended
September 30, 1999. Four customers accounted for 19%, 14%, 13% and 11%,
respectively, of revenues for the three months ended September 30, 1998. Two
customers accounted for 20% and 12%, respectively, of revenues for the nine
months ended September 30, 1998 and two customers accounted for 11% and 11%,
respectively, of revenues for the nine months ended September 30, 1999.
SERVICES REVENUES. Service revenues increased 68% from $2.2 million for
the three months ended September 30, 1998 to $3.7 million for the three
months ended September 30, 1999. 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. Service revenues from professional
services consulting fees increased from $2.1 million for the three months
ended September 30, 1998 to $2.9 for the three months ended September 30,
1999. Services revenues from professional services consulting fees increased
from $5.3 million for the nine months ended September 30, 1998 to $7.6
million for the nine months ended September 30, 1999. Service revenues from
software maintenance and support agreements increased from $122,000 for the
three months ended September 30, 1998 to $728,000 for the three 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
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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 275% from
$1.2 million for the three months ended September 30, 1998 to $4.5 million
for the three months ended September 30, 1999. 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 agreement with Informix in December 1998 under which we received $5.0
million of prepaid royalties, of which $530,000 and $1.6 million was
recognized as revenues for the three and nine months ended September 30,
1999, respectively. 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
36% for the three months ended September 30, 1998 to 55% for the three months
ended September 30, 1999. 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 117% from $1.2 million for the
three months ended September 30, 1998 to $2.6 million for the three months
ended September 30, 1999. Cost of revenues increased 91% 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. For the three months ended September
30, 1999, approximately 60% of the increase was attributable to an increase
in salaries and related benefits, 19% related to facilities and overhead, 14%
due to travel and the remainder was primarily due to outside services. For
the nine months ended September 30, 1999, approximately 92% 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 service revenues increased from 53%
for the three months ended September 30, 1998 to 71% for the three months
ended September 30, 1999. Cost of revenues as a percentage of service
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 139% from $2.3 million for the
three months ended September 30, 1998 to $5.5 million for the three months
ended September 30, 1999. 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, for the three and nine months ended September
30, 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salary and related costs to support product development.
Research and development expenses increased 70% from $1.0 million for the
three months ended September 30, 1998 to $1.7 million for the three months
ended September 30, 1999. Research and development expenses increased
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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 77% and
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 for the three and nine months ended September 30, 1999,
respectively.
Research and development expenses as a percentage of total revenues were
29% for the three months ended September 30, 1998 and 21% for the three
months ended September 30, 1999. 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 materials and
events. Sales and marketing expenses increased 310% from $1.0 million for the
three months ended September 30, 1998 to $4.1 million for the three months
ended September 30, 1999. 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. Of the increase for the three
months ended September 30, 1999, approximately 39% of the increase was due to
a significant increase in the number of sales and marketing personnel and
related expenses, approximately 35% of the increase was related to new and
increased marketing program expenditures, approximately 10% was due to travel
and entertainment expenses and the remainder was due to new facility
expenses. Of the increase for the nine months ended September 30, 1999,
approximately 47% of the increase was related to new and increased marketing
program expenditures, approximately 35% was due to a significant increase in
the number of sales and marketing personnel and related expenses,
approximately 10% was due to travel and related expenses and the remainder
was due to new facility expenses.
Sales and marketing expenses as a percentage of total revenues were 30%
for the three months ended September 30, 1998 and 50% for the three months
ended September 30, 1999. 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 immediate 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 97% from $660,000 for the three
months ended September 30, 1998 to $1.3 million for the three months ended
September 30, 1999. General and administrative expenses increased 113% from
$1.5 million for the nine months ended September 30, 1998 to $3.2 million for
the nine months ended September 30, 1999. Of the increase in the three months
ended September 30, 1999, approximately 18% of the increase was due to an
increase in personnel and related costs, approximately 30% of the increase
was related to increases in legal and professional fees, and approximately
15% was related to increases in travel and related expenses and the remainder
primarily relates facilities and overhead costs. Of the increase in the nine
month period 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 increased legal and accounting fees. We increased our
general and administrative personnel to build the infrastructure to manage
the growth of the company.
General and administrative expenses as a percentage of total revenues
were 19% for the three months ended September 30, 1998 and 16% for the three
months ended September 30, 1999. General and administrative expenses as a
percentage of total revenues were 17% for the nine months ended September 30,
1998 and 18% 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 appropriate
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 expense of $304,000 and
$823,000, for the three and nine months ended September 30, 1999
respectively. We did not have amortization expense relating to deferred stock
compensation for the three or nine months ended September 30, 1998.
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INTEREST INCOME (EXPENSE). Interest income increased from $8,000 for the
three months ended September 30, 1998 to $561,000 for the three months ended
September 30, 1999. Interest income increased from $8,000 for the nine months
ended September 30, 1998 to $682,000 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 increased from $48,000 for the three months ended September 30, 1998
to $72,000 for the three months ended September 30, 1999. The increase is
primarily due to non-cash interest expense related to the exercise of
warrants issued. Interest expense decreased from $132,000 for the nine months
ended September 30, 1998 to $121,000 for the nine months ended September 30,
1999. The decrease was primarily due to our repayment of outstanding
indebtedness from proceeds received from our initial public offering.
PROVISION FOR INCOME TAXES AND TAX CREDIT CARRYFORWARDS
We incurred losses for the three and nine months ended September 30, 1998 and
1999. Accordingly, there were no provisions for income taxes. 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 and our initial public
offering. The Company completed its initial public offering of 5,168,000
shares of its common stock on July 26, 1999, including 168,000 shares issued
in connection with the exercise of the underwriters' over-allotment on July
30, 1999. These shares were sold to the public at $12 per share, which net of
offering expenses, resulted in net proceeds of $56.2 million. Cash
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provided by operating activities was $1.3 million for the nine months ended
September 30, 1999. 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
current assets. The cash provided by the change in deferred revenue was
primarily the result of receiving $5.0 million under an arrangement with
Informix of which $3.4 million was included in deferred revenue. Informix has
the right to terminate the arrangement and receive a refund as determined
under the agreement. The amount refundable at September 30, 1999 is $3.4
million.
To date, our investing activities have consisted primarily of capital
expenditures. For the nine months ended September 30, 1999 capital
expenditures totaled $3.4 million. Assets acquired consisted primarily of
leasehold improvements and furniture and fixtures related to our new facility
in Cambridge and computer hardware and software for our growing employee
base. We expect that our capital expenditures will increase as our employee
base grows.
Net cash provided by financing activities for the nine months ended September
30, 1999 was $55.9 million. The primary source of cash from financing
activities for the nine months ended September 30, 1999 was the net proceeds
of $56.2 million received from the Company's initial public offering.
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. A portion of the proceeds from the
Company's initial public offering was utilized to repay all existing
indebtedness.
At September 30, 1999, we had $57.4 million in cash, cash equivalents and
marketable securities and $53.7 million in working capital. Management
believes that the net proceeds from the Company's recent initial public
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:
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(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 entry in a disclosed, defined and predetermined
manner;
(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
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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 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK
Our business, operating results or financial condition could be materially
adversely affected by any of the following factors. You should also refer to the
other information set forth in this report, including our financial statements
and the related notes.
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
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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,
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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
20
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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
21
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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
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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
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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
Our executive officers and directors and their affiliates beneficially own
approximately % of our outstanding common stock. As a result, these
stockholders are 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.
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
24
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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 and charges 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 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
25
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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.
PART II. OTHER INFORMATION
Item 1. Legal Proceeding
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
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 judgement that we are not infringing their patent and that
the patent in question is in fact unenforceable and invalid.
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds from Sales of Registered Securities
On July 26, 1999 the Company closed the initial public offering of its
Common Stock. The shares of Common Stock sold in the offering were
registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement")
(Registration No. 333-78333) that was declared effective by the
Securities and Exchange Commission on July 20, 1999. The 5,000,000
shares offered by the Company under the Registration Statement were
sold at a price of $12.00 per share. Hambrecht & Quist LLC, U.S.
Bancorp Piper Jaffray, Inc., Thomas Weisel Partners LLC and Wit Capital
Corporation, the managing underwriters of the offering, also exercised
an overallotment option on July 30, 1999 for 750,000 shares, of which
168,000 were sold by the Company and 582,000 were sold by selling
stockholders. The overallotment shares were sold at a price of $12.00
per share. The aggregate proceeds to the Company from the offering were
$62 million. The Company's total expenses in connection with the
offering were approximately $5.8 million, of which approximately
$4.3 million was for underwriting discounts and commissions to
underwriters and approximately $1.5 million was for other expenses
paid to persons other than directors or officers of the Company or
persons owning more than 10 percent of any class of equity
securities of Art Technology Group. The Company's net proceeds from
the offering were approximately $56.2 million. From the effective
date through September 30, 1999, the Company used approximately
$3.2 million for sales and marketing, approximately $2.4 million for
capital expenditures, approximately $1.2 million for research
development, and approximately $500,000 for the repayment of
indebtedness. As of September 30, 1999, the Company has approximately
$48.9 million of net proceeds remaining, and pending use of these
proceeds, the Company intends to invest such proceeds primarily in
high-quality short-term investments.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On June 18, 1999 the Company's stockholders acting by written consent approved
the following matters: (1) an amendment to the Company's Certificate of
Incorporation effecting a three-for-two split of the Company's common stock and
adjusting the conversion price for the Company's preferred stock; (2) an
increase of the number of shares authorized under the 1996 Stock Option Plan to
4,200,000 shares; (3) the Company's 1999 Outside Director Stock Option Plan and
1999 Employee Stock Purchase Plan; (4) the Company's Amended and Restated
Bylaws; and (5) the Company's Amended and Restated Certificate of
26
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Incorporation to be filed upon the initial public offering of the Company's
common stock. The written consent was given by holders of 21,318,509 shares of
the Company's common stock on an as converted basis.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 31, 1999 ART TECHNOLOGY GROUP, INC.
(Registrant)
By: /s/ Jeet Singh
---------------------------------------
Jeet Singh
President and Chief Executive
Officer
By: /s/ Ann C. Brady
---------------------------------------
Ann C. Brady
Principal Accounting Officer
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 57,399
<SECURITIES> 0
<RECEIVABLES> 4,776
<ALLOWANCES> 460
<INVENTORY> 0
<CURRENT-ASSETS> 64,288
<PP&E> 5,238
<DEPRECIATION> 1,396
<TOTAL-ASSETS> 68,648
<CURRENT-LIABILITIES> 10,610
<BONDS> 0
0
0
<COMMON> 311
<OTHER-SE> 57,727
<TOTAL-LIABILITY-AND-EQUITY> 68,648
<SALES> 0
<TOTAL-REVENUES> 8,140
<CGS> 0
<TOTAL-COSTS> 2,608
<OTHER-EXPENSES> 7,403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> (1,382)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,382)
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<F1>PRO FORMA NET LOSS PER SHARE
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