<PAGE>
Filed pursuant to
Rule 424(b)(4)
Registration No. 333-78333
PROSPECTUS
5,000,000 SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of common stock by Art Technology Group,
Inc. We are selling 5,000,000 shares of common stock.
--------------
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol ARTG.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Initial public offering price........................................ $ 12.00 $ 60,000,000
Underwriting discounts............................................... .84 4,200,000
Proceeds to Art Technology Group, before expenses.................... 11.16 55,800,000
</TABLE>
We and our stockholders listed on pages 58-60 have granted the underwriters
an option for a period of 30 days to purchase up to 750,000 additional shares of
common stock.
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
July 20, 1999
<PAGE>
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary........................................................... 1
Risk Factors................................................................. 4
Use of Proceeds.............................................................. 15
Dividend Policy.............................................................. 15
Capitalization............................................................... 16
Dilution..................................................................... 17
Selected Financial Data...................................................... 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 19
Business..................................................................... 30
Management................................................................... 48
Transactions with Related Parties............................................ 56
Principal and Selling Stockholders........................................... 58
Description of Capital Stock................................................. 61
Shares Eligible for Future Sale.............................................. 64
Underwriting................................................................. 66
Legal Matters................................................................ 68
Experts...................................................................... 68
Where You Can Find More Information.......................................... 68
Index to Financial Statements................................................ F-1
</TABLE>
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DYNAMO is our registered trademark. JAVA is a registered trademark of Sun
Microsystems. This prospectus also contains trademarks and tradenames of other
companies.
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PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS
AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. AS USED IN THIS
PROSPECTUS, THE TERMS "WE," "US," "OUR" AND SIMILAR TERMS REFER TO ART
TECHNOLOGY GROUP, INC. AND NOT TO ITS MANAGEMENT OR STOCKHOLDERS.
ART TECHNOLOGY GROUP
We offer an integrated suite of Internet customer relationship management
and electronic commerce software applications, as well as related application
development, integration and support services. Our solution enables businesses
to understand, manage and build online customer relationships and to market,
sell and support products and services over the Internet more effectively. Our
Dynamo product suite is designed to provide businesses with the core application
platform and software tools required to develop and deploy personalized,
reliable, large-scale Web sites for conducting electronic commerce, also called
e-commerce.
As the growth and acceptance of online marketing and e-commerce have
increased, the Web has become a highly competitive business environment,
resulting in increased investment in Internet commerce applications such as:
- online marketing and selling systems to target, attract and retain
customers
- transaction and distribution management systems to reduce the costs of
delivering products and services to customers and distribution partners
- customer support and relationship management systems to better understand
and serve the needs of customers
International Data Corporation estimates that the market for Internet commerce
software applications was $444 million in 1998 and projects that the market will
grow to $1.7 billion in 1999 and reach $13.1 billion in 2003.
Our solution provides a comprehensive application suite and complementary
professional services capabilities. Our Dynamo application suite includes:
- Dynamo Application Server--an open and expandable platform to enable
Internet customer relationship management and e-commerce applications
- Dynamo Personalization Server--allows businesses to develop, deploy and
manage multiple Web applications that share a common set of business rules
and are personalized based on common user profiles
- Dynamo Commerce--enables the creation of personalized e-commerce
storefronts that can be customized and integrated with existing
information systems
- Dynamo Ad Station--allows businesses to serve targeted advertisements to
Web site visitors and to manage their online advertising inventory more
effectively
We have licensed products to over 100 customers. Our customers include
BabyCenter, BellSouth, BMG Direct, Eastman Kodak, Hilton Hotels, Informix,
J.Crew, John Hancock Funds, Inc., Network Solutions, Newbridge Networks, Scudder
Kemper Investments, Sony Online Entertainment, Sun Microsystems and
TheStreet.com. We target Fortune 1000 companies as well as new businesses using
the Internet as their primary business channel. We sell our products directly
through our sales force and indirectly through arrangements with systems
integrators, original equipment manufacturers and other technology partners.
Our principal executive office is located at 101 Huntington Avenue, Boston,
Massachusetts 02199, and our telephone number is (617) 859-1212. Our Web site is
located at WWW.ATG.COM. The information contained in our Web site is not a part
of this prospectus. We were incorporated in Massachusetts in December 1991 and
reincorporated in Delaware in October 1997.
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THE OFFERING
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<S> <C>
Common stock offered by Art Technology Group.............. 5,000,000 shares
Common stock to be outstanding after this offering........ 30,556,845 shares
Use of proceeds........................................... Repayment of indebtedness,
working capital and other
general corporate purposes,
including possible acquisitions
Proposed Nasdaq National Market symbol.................... ARTG
</TABLE>
The number of shares of our common stock that will be outstanding after this
offering, unless otherwise indicated, is based on the number outstanding on May
31, 1999. It excludes 3,116,610 shares subject to outstanding options at a
weighted-average exercise price of $1.57 per share and 2,307,435 additional
shares available for issuance under our stock plans. It also excludes warrants
to purchase 171,485 shares of common stock at a weighted-average exercise price
of $0.44 per share which will be outstanding upon completion of this offering.
------------------------
Unless otherwise indicated, all information in this prospectus:
- assumes that the underwriters do not exercise their option to purchase
additional shares in this offering
- gives effect to a 3-for-2 stock split effected on June 18, 1999
- gives effect to the conversion of all outstanding preferred stock into
common stock upon completion of this offering
RECENT OPERATING RESULTS
For the three months ended June 30, 1999, we expect that our total revenues
will be $6.2 million, consisting of services revenues of $3.1 million and
product license revenues of $3.1 million. In addition, we expect that our loss
from operations for the same period will be $1.4 million and our net loss for
the same period will be $1.4 million.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following tables summarize the financial data of our business. The pro
forma basic and diluted net loss per share is described in note 1(e) of the
notes to financial statements included elsewhere in this prospectus. The pro
forma balance sheet data give effect to the automatic conversion of all
outstanding shares of preferred stock into common stock upon the closing of this
offering. The pro forma as adjusted column reflects the sale of 5,000,000 shares
of common stock offered by us at the initial public offering price of $12.00
after deducting the underwriting discounts and estimated offering expenses and
giving effect to the application of our estimated net proceeds, including our
repayment of bank debt and capital lease obligations of approximately $610,000
at March 31, 1999.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 753 $ 798 $ 3,902 $ 6,457 $ 12,137 $ 1,901 $ 4,420
Gross profit..................... 235 204 1,917 3,261 7,087 835 2,607
Loss from operations............. (209) (430) (1,412) (4,105) (2,740) (908) (903)
Net loss......................... (234) (467) (1,442) (4,228) (2,850) (949) (877)
Net loss available for common
stockholders................... (234) (469) (1,648) (4,442) (4,444) (986) (1,121)
Basic and diluted net loss per
share.......................... $ (0.03) $ (0.06) $ (0.19) $ (0.50) $ (0.50) $ (0.11) $ (0.12)
Basic and diluted weighted
average common shares
outstanding.................... 7,763,013 8,131,028 8,848,866 8,872,202 8,967,066 8,913,092 9,404,757
Pro forma basic and diluted net
loss per share................. $ (0.16) $ (0.04)
Pro forma basic and diluted
weighted average common shares
outstanding.................... 18,246,484 23,479,379
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............................. $ 7,635 $ 7,635 $ 61,825
Working capital.............................................................. 2,876 2,876 57,410
Total assets................................................................. 12,368 12,368 66,558
Long-term obligations, less current portion.................................. 231 231 --
Redeemable convertible preferred stock....................................... 8,556 -- --
Stockholders' equity (deficit)............................................... (4,771) 3,784 58,549
</TABLE>
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE
FOLLOWING RISKS COULD MATERIALLY HARM OUR BUSINESS AND COULD RESULT IN A
COMPLETE LOSS OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE EXPECT OUR LOSSES TO CONTINUE AND WE DO NOT BELIEVE WE WILL BE ABLE TO
SUSTAIN OUR CURRENT REVENUE GROWTH RATE
Since inception, we have not been profitable in any fiscal period. We have
incurred substantial costs to develop and enhance our technology and products,
to recruit and train a marketing and sales group, and to establish an
administrative organization. As of March 31, 1999, we had an accumulated deficit
of $12.5 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
- 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
- timing of hiring and utilization of 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, 37% of our total revenues in 1998 and
45% of our total revenues in the three months ended March 31, 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, Open Market and Vignette. We also compete with
platform application server products and vendors
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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 hire additional sales personnel. 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
integrating or co-selling different products, our revenues could be reduced and
our operating results could be harmed.
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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
expand our professional services capabilities to support increased product
license sales. 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. In addition, we plan to move to a new
headquarters facility in August 1999, which could be disruptive, time-consuming
and expensive.
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
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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 March 31, 1999 was $4.5 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 50% 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 33% 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 are also in the process of contacting the vendors of software and
hardware that are either included in our products or that are critical to the
operation of our internal systems to evaluate their Year 2000 compliance. Some
of the third-party products that we use, or that are included in our products,
are not Year 2000 compliant, and could cause our internal systems or our
products to experience Year 2000 problems. To address these issues, we plan to
upgrade or replace some third-party products before the end of 1999.
Despite testing by us and by customers, and assurances from developers of
products incorporated into our products, current versions of our products may
contain undetected errors or defects associated with Year 2000 date functions.
Known or unknown errors or defects in our products could result in delay or loss
of revenues, diversion of development resources, damage to our reputation or
increased service and warranty costs, any of which could disrupt our business
and hurt our financial condition and operating results.
Although we are not currently aware of any material operational issues or
costs associated with preparing our internal systems for the Year 2000, we may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in our internal systems. This could harm our
business, financial condition and operating results.
OUR EXISTING STOCKHOLDERS WILL BE ABLE TO CONTROL ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL AND COULD DELAY OR PREVENT SOMEONE FROM ACQUIRING OR
MERGING WITH US ON TERMS FAVORED BY A MAJORITY OF OUR INDEPENDENT STOCKHOLDERS
On completion of this offering, our executive officers and directors and
their affiliates will beneficially own approximately 60% of our outstanding
common stock. As a result, these stockholders will be able to exercise control
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. This could delay
or prevent someone from acquiring or merging with us.
OUR MANAGEMENT WILL HAVE DISCRETION OVER USING THE NET UNALLOCATED PROCEEDS OF
THIS OFFERING
Our board of directors and management will have significant flexibility in
applying the unallocated net proceeds of this offering. Our primary purposes of
this offering are to increase our equity capital and to create a public market
for our common stock. As of the date of this prospectus, we do not have plans
for use of most of the proceeds from this offering other than for working
capital and general corporate purposes. However, we could use some of our
proceeds to acquire or invest in businesses that we believe offer products,
services or technologies that complement ours. See "Use of Proceeds."
OUR CURRENT STOCKHOLDERS WILL DERIVE SUBSTANTIAL BENEFITS FROM THIS OFFERING
Our current stockholders will derive the following benefits from this
offering:
- This offering will create a public market for our common stock and enable
existing stockholders to sell their shares following expiration of the
180-day lock-up agreements they have signed. See
10
<PAGE>
"Risks Related to the Securities Markets--Substantial sales of our common
stock could cause our stock price to decline."
- If the underwriters exercise their over-allotment option, the stockholders
named in the table under "Principal and Selling Stockholders" will sell a
total of 582,000 shares of common stock in this offering. The acquisition
cost of these shares was substantially less than the initial public
offering price. See "Dilution."
- Following this offering, existing stockholders will hold shares with
substantial unrealized appreciation. Based on the initial public offering
price of $12.00 per share, and based on shares outstanding as of March 31,
1999, following this offering existing stockholders will hold shares with
total unrealized appreciation of approximately $291 million. See
"Dilution."
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 Personalization Server tracks both explicit user profile data
supplied by the user as well as implicit
11
<PAGE>
profile attributes derived from the user's behavior on the Web site. Privacy
concerns may cause visitors to resist providing the personal data or avoid Web
sites tracking the Web behavioral information necessary to support this
profiling capability. More importantly, even the perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of our products. In addition, legislative or regulatory requirements may
heighten these concerns if businesses must notify Web site users that the data
captured after visiting Web sites may be used to direct product promotion and
advertising to that user. Other countries and political entities, such as the
European Economic Community, have adopted such legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If privacy legislation is enacted or consumer privacy concerns are
not adequately addressed, our business, financial condition and operating
results could be harmed.
Our Dynamo products use "cookies" to track demographic information and user
preferences. A "cookie" is information keyed to a specific user that is stored
on a computer's hard drive, typically without the user's knowledge. Cookies are
generally removable by the user, although removal could affect the content
available on a particular site. Germany has imposed laws limiting the use of
cookies, and a number of Internet commentators and governmental bodies in the
United States and other countries have urged passage of laws limiting or
abolishing the use of cookies. If such laws are passed or if users begin to
delete or refuse cookies as a common practice, demand for our personalization
products could be reduced.
PROJECTIONS INCLUDED IN THIS PROSPECTUS RELATING TO THE GROWTH OF E-COMMERCE
AND THE INTERNET ARE BASED ON ASSUMPTIONS THAT COULD TURN OUT TO BE INCORRECT
AND ACTUAL RESULTS COULD BE MATERIALLY DIFFERENT FROM THE PROJECTIONS
This prospectus contains various data and projections related to revenues
generated by electronic commerce and the size of the worldwide Internet commerce
application software market. These data and projections have been included in
studies prepared by International Data Corporation, an independent market
research firm, and the projections are based on surveys, financial reports and
models used by IDC to measure license revenues and associated maintenance fees
derived from sales to e-commerce sites. These projections include assumptions
regarding U.S. business and home use of the Internet; growth in the number of
non-personal computer Web access devices; the amount of time people will spend
shopping on the Web; the absence of any catastrophic failure of the Internet;
the continued expansion of regional economies; and the continued improvement of
security on the Internet, as well as consumer confidence. Actual results or
circumstances may be materially different from the projections. This could
reduce our revenues and harm our operating results. These data and projections
are inherently imprecise and investors are cautioned not to place undue reliance
on them.
RISKS RELATED TO THE SECURITIES MARKETS
OUR STOCK PRICE MAY BE VOLATILE
Prior to this offering, investors could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering. We negotiated the initial public offering price
with the representatives of the underwriters based on several factors. This
price may vary from the market price of the common stock after this offering.
Fluctuations in market price and volume are particularly common among securities
of Internet and software companies. The market price of our common stock may
fluctuate significantly in response to the following factors, some of which are
beyond our control:
- variations in quarterly operating results
- changes in market valuations of Internet and software companies
12
<PAGE>
- our announcements of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments
- failure to complete significant sales
- additions or departures of key personnel
- future sales of common stock
- changes in financial estimates by securities analysts
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of the common stock. On completion of
this offering, we will have 30,556,845 shares of common stock outstanding and
3,288,095 shares subject to outstanding options and warrants. The 5,000,000
shares sold in this offering will be freely tradable without restriction or
further registration under the federal securities laws unless purchased by our
"affiliates" as that term is defined in Rule 144. The remaining 25,556,845
shares of common stock outstanding on completion of the offering will be
"restricted securities" as that term is defined in Rule 144. Our directors,
executive officers and other stockholders have executed lock-up agreements that
limit their ability to sell common stock. These stockholders have agreed not to
sell or otherwise dispose of any shares of common stock for a period of 180 days
after the date of this prospectus without the prior written approval of
Hambrecht & Quist LLC. When the lock-up agreements expire, most of the
restricted securities will become eligible for sale.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY
Certain provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable, which could reduce the market price of our common stock.
Such provisions include:
- authorizing the issuance of "blank check" preferred stock
- providing for a classified board of directors with staggered, three-year
terms
- providing that directors may only be removed for cause by a two-thirds
vote of stockholders
- limiting the persons who may call special meetings of stockholders
- prohibiting stockholder action by written consent
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings
Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us.
13
<PAGE>
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION
The initial public offering price is substantially higher than the book
value per share of the outstanding common stock immediately after this offering.
Accordingly, if you purchase common stock in the offering, you will incur
immediate dilution of approximately $10.07 in the book value per share of the
common stock from the price you pay for the common stock.
THE FORWARD-LOOKING STATEMENTS WE MAKE IN THIS PROSPECTUS MIGHT PROVE
INACCURATE. AS A RESULT, OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE
OR ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS.
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or other comparable terminology. These statements
involve known and unknown risks and uncertainties that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus.
We cannot guarantee any future results, levels of activity, performance or
achievements. Moreover, neither we nor anyone else assumes responsibility for
the accuracy and completeness of these statements. We undertake no obligation to
update any of the forward-looking statements after the date of this prospectus.
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 5,000,000 shares of
common stock, after deducting underwriting discounts and estimated offering
expenses, will be approximately $54,800,000. Our estimated net proceeds will be
$56,674,880 if the underwriters exercise their option to purchase additional
shares in this offering.
The principal purposes of this offering are:
- to increase our equity capital
- to create a public market for our common stock and to facilitate our
future access to public equity markets
- to provide increased visibility and credibility in the marketplace
- to provide liquidity to our existing stockholders
- to enhance our ability to use our common stock as a means of attracting
and retaining key employees
- to enhance our ability to use our common stock as consideration for
acquisitions
We intend to use a portion of the net proceeds of this offering for
repayment of bank debt and capital lease obligations. These bank debt and
capital lease obligations totaled approximately $610,000 at March 31, 1999. For
a description of the terms of the bank debt and capital lease obligations, see
note 3 to our financial statements. We will use our remaining net proceeds for
working capital and other general corporate purposes, including expansion of
research and development, sales and marketing and capital expenditure
activities. We have not yet determined our expected use of these proceeds, but
we currently intend to use approximately $8.0 million from the net proceeds to
expand our research and development activities, $17.0 million to expand our
sales and marketing capabilities and $5.0 million for capital expenditures. The
amounts and timing of these expenditures will vary depending on a number of
factors, including the amount of cash generated by our operations, competitive
and technological developments and the rate of growth, if any, of our business.
We may also use a portion of the net proceeds for possible acquisitions of
businesses, products and technologies. From time to time we engage in
discussions with potential acquisition candidates. However, we have no current
plans, commitments or agreements with respect to any acquisitions, and we may
not make any acquisitions.
We have not identified specific uses for a substantial portion of our net
proceeds of this offering, and we will have discretion over their use and
investment. Pending use of the net proceeds, we intend to invest these proceeds
in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We currently intend to retain future earnings, if any, to finance our
growth. We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs, restrictions in financing agreements and plans for expansion. The
terms of our bank debt prohibit us from paying cash dividends without the
consent of the lender.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis
- on a pro forma basis giving effect to the automatic conversion of all
outstanding shares of preferred stock into 15,830,889 shares of common
stock upon the closing of this offering
- on a pro forma as adjusted basis to reflect our receipt from the sale of
5,000,000 shares of common stock in this offering at the initial public
offering price of $12.00 per share after deducting the underwriting
discounts and estimated offering expenses and giving effect to the
application of our estimated net proceeds, including our repayment of bank
debt and capital lease obligations of approximately $610,000 at March 31,
1999
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
Current portion of long-term obligations............................. $ 343 $ 343 $ --
----------- ----------- -----------
----------- ----------- -----------
Long-term obligations, less current portion.......................... $ 231 $ 231 $ --
Series B and D redeemable convertible preferred stock................ 8,556 -- --
Stockholders' equity (deficit):
Series A and C convertible preferred stock, $0.01 par value;
3,300,000 shares authorized, 2,756,789 shares issued and
outstanding, actual: no shares authorized, issued and
outstanding, pro forma and pro forma as adjusted................. 2,861 -- --
Preferred stock, $0.01 par value, no shares authorized, issued or
outstanding; 10,000,000 shares authorized and no shares issued or
outstanding pro forma and pro forma as adjusted.................. -- -- --
Common stock, $0.01 par value; 25,000,000 shares authorized,
9,576,119 shares issued and outstanding, actual; 100,000,000
shares authorized, 25,407,008 shares issued and outstanding, pro
forma: 100,000,000 shares authorized, 30,407,008 shares issued
and outstanding, pro forma as adjusted........................... 96 254 304
Additional paid-in capital......................................... 8,695 24,057 78,807
Deferred compensation.............................................. (3,968) (3,968) (3,968)
Accumulated deficit................................................ (12,455) (16,559) (16,594)
----------- ----------- -----------
Total stockholders' equity (deficit)............................. (4,771) 3,784 58,549
----------- ----------- -----------
Total capitalization......................................... $ 4,016 $ 4,016 $ 58,549
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The number of shares of our common stock that will be outstanding after this
offering is based on the number outstanding on March 31, 1999. It excludes
2,971,169 shares subject to outstanding options at a weighted-average exercise
price of $0.80 per share and 2,602,713 additional shares available for issuance
under our stock plans. It also excludes warrants to purchase 171,485 shares of
common stock at a weighted-average exercise price of $0.44 per share which will
be outstanding upon completion of this offering.
See "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes included in this prospectus.
16
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of March 31,
1999 was $3,784,000, or $0.15 per share, after giving effect to the automatic
conversion of all outstanding shares of preferred stock into 15,830,889 shares
of common stock upon the closing of this offering. After giving effect to the
sale of common stock pursuant to this offering at the initial public offering
price of $12.00 per share, assuming the underwriters' option to purchase
additional shares in this offering is not exercised, and after deducting
underwriting discounts and estimated offering expenses, the adjusted pro forma
net tangible book value at March 31, 1999 would have been $58,549,000 or $1.93
per share.
Pro forma net tangible book value per share before the offering has been
determined by dividing pro forma net tangible book value (total tangible assets
less total liabilities) by the pro forma number of shares of common stock
outstanding as of March 31, 1999. This offering will result in an increase in
pro forma net tangible book value per share of $1.78 to existing stockholders
and dilution in pro forma net tangible book value per share of $10.07 to new
investors who purchase shares in this offering. Dilution is determined by
subtracting pro forma net tangible book value per share from the initial public
offering price of $12.00 per share. The following table illustrates this
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $ 12.00
Pro forma net tangible book value per share at March 31, 1999............ $ 0.15
Increase attributable to sale of common stock in this offering........... 1.78
---------
Pro forma net tangible book value per share after this offering.............. 1.93
---------
Dilution of net tangible book value per share to new investors who purchase
shares in this offering.................................................... $ 10.07
---------
---------
</TABLE>
If the underwriters exercise their option to purchase additional shares in
this offering, the pro forma net tangible book value per share after the
offering would be $1.98 per share, the increase in pro forma net tangible book
value per share to existing stockholders would be $1.83 per share and the
dilution to persons who purchase shares in the offering would be $10.02 per
share.
The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences between the total consideration paid and the average price per
share paid by the existing stockholders and the new investors with respect to
the number of shares of common stock purchased from us based upon the initial
public offering price of $12.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Shares purchased in this offering................... 5,000,000 16% $ 60,000,000 82% $ 12.00
Shares owned by existing stockholders............... 25,407,008 84 13,614,000 18 0.54
------------- ----- ------------- -----
Total......................................... 30,407,008 100% $ 73,614,000 100%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
These tables assume no exercise of stock options or warrants outstanding as
of March 31, 1999. At March 31, 1999, there were 2,971,169 shares of common
stock issuable upon exercise of outstanding stock options at a weighted average
exercise price of $.80 per share. Upon completion of this offering, there will
be outstanding warrants to purchase 171,485 shares of common stock at a
weighted-average exercise price of $0.44 per share. To the extent that
outstanding options or warrants are exercised in the future, there will be
further dilution to new investors.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1997 and 1998
and for each of the years ended December 31, 1996, 1997 and 1998 are derived
from financial statements audited by Arthur Andersen LLP, independent public
accountants, which are included in this prospectus. The selected financial data
as of December 31, 1995 and 1996 and the year ended December 31, 1995 are
derived from audited financial statements not included in this prospectus. The
selected financial data as of December 31, 1994 and for the year ended December
31, 1994 are derived from unaudited financial statements not included in this
prospectus. The selected financial data as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are derived from unaudited financial
statements which are included in this prospectus and which include, in our
opinion, all adjustments, consisting of only normal recurring adjustments, that
are necessary for a fair presentation of our financial position and results of
operations for those periods. Operating results for the three months ended March
31, 1999 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1999. The pro forma basic and diluted net
loss per share is described in note 1(e) of the notes to financial statements
included elsewhere in this prospectus. The pro forma balance sheet data as of
March 31, 1999 reflect the automatic conversion of all the outstanding shares of
preferred stock into 15,830,889 shares of common stock upon the closing of this
offering. The data should be read in conjunction with the financial statements
and related notes included elsewhere in this prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Services.......................................... $ 753 $ 798 $ 3,849 $ 4,591 $ 8,078 $ 1,692 $ 2,614
Product license................................... -- -- 53 1,866 4,059 209 1,806
--------- --------- --------- --------- --------- --------- ----------
Total revenues................................ 753 798 3,902 6,457 12,137 1,901 4,420
Cost of revenues.................................... 518 594 1,985 3,196 5,050 1,066 1,813
--------- --------- --------- --------- --------- --------- ----------
Gross Profit.................................. 235 204 1,917 3,261 7,087 835 2,607
--------- --------- --------- --------- --------- --------- ----------
Operating expenses:
Research and development.......................... 11 217 1,117 3,661 3,355 627 1,131
Sales and marketing............................... 76 133 1,152 2,287 4,074 680 1,420
General and administrative........................ 357 284 1,060 1,418 2,291 436 743
Amortization of deferred compensation............. -- -- -- -- 107 -- 216
--------- --------- --------- --------- --------- --------- ----------
Total operating expenses...................... 444 634 3,329 7,366 9,827 1,743 3,510
--------- --------- --------- --------- --------- --------- ----------
Loss from operations................................ (209) (430) (1,412) (4,105) (2,740) (908) (903)
Interest income..................................... -- -- -- 6 54 -- 50
Interest expense.................................... (25) (37) (30) (129) (164) (41) (24)
--------- --------- --------- --------- --------- --------- ----------
Net loss............................................ (234) (467) (1,442) (4,228) (2,850) (949) (877)
Accretion of discount, dividends and offering costs
on preferred stock................................ -- (2) (206) (214) (1,594) (37) (244)
--------- --------- --------- --------- --------- --------- ----------
Net loss available for common stockholders.......... $ (234) $ (469) $ (1,648) $ (4,442) $ (4,444) $ (986) $ (1,121)
--------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- ----------
Basic and diluted net loss per share................ $ (0.03) $ (0.06) $ (0.19) $ (0.50) $ (0.50) $ (0.11) $ (0.12)
--------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- ----------
Basic and diluted weighted average common shares
outstanding....................................... 7,763,013 8,131,028 8,848,866 8,872,202 8,967,066 8,913,092 9,404,757
--------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- ----------
Pro forma basic and diluted net loss per share...... $ (0.16) $ (0.04)
--------- ----------
--------- ----------
Pro forma basic and diluted weighted average common
shares outstanding................................ 18,246,484 23,479,379
--------- ----------
--------- ----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1999
----------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 ACTUAL
--------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ -- $ 6 $ 2,358 $ 187 $ 4,093 $ 7,635
Working capital (deficit)................................... (349) (341) 902 (1,328) 3,649 2,876
Total assets................................................ 144 137 3,038 1,672 7,766 12,368
Long-term obligations, less current portion................. -- -- 24 122 322 231
Redeemable convertible preferred stock...................... -- -- 3,000 3,153 8,313 8,556
Stockholders' equity (deficit).............................. (240) (211) (1,648) (4,060) (4,034) (4,771)
<CAPTION>
<S> <C>
PRO FORMA
-----------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 7,635
Working capital (deficit)................................... 2,876
Total assets................................................ 12,368
Long-term obligations, less current portion................. 231
Redeemable convertible preferred stock...................... --
Stockholders' equity (deficit).............................. 3,784
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN THE
FORWARD-LOOKING STATEMENTS.
OVERVIEW
We were founded in December 1991. From 1991 through 1995, we devoted our
efforts principally to building, marketing and selling our professional services
capabilities and to research and development activities related to our software
products. Beginning in 1996, we began to focus on selling our software products.
To date, we have enhanced and released several versions of our Dynamo
Application Server product, and have completed development of our current
product suite. We market and sell our products worldwide through our direct
sales force, systems integrators, technology partners and original equipment
manufacturers.
We derive our revenues from the sale of software product licenses and
related services. Product license revenues are derived from the sale of
perpetual software licenses of our Dynamo products. Our software licenses are
priced based on either the size of the customer implementation or site license
terms. Services revenues are derived from fees for professional services,
training, and software maintenance and support. Professional services include
software installation, custom application development and project and technical
consulting. We bill professional services fees either on a time and materials
basis or on a fixed-price schedule. Software maintenance and support
arrangements are priced based on the level of services provided. In general,
customers are entitled to receive software updates, maintenance releases and
technical support for an annual maintenance fee of 20% to 30% of the list price
of the licensed product. Customers that purchase maintenance and support
generally receive all product updates and upgrades of software modules purchased
as well as Web-based and telephone technical support. Training is billed when
services are provided.
We recognize revenues in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION and SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A
PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenues from software
product licenses are recognized upon execution of a license agreement and
delivery of the software, provided that the fee is fixed and determinable and
deemed by management to be collectible. If conditions for acceptance are
required subsequent to delivery, revenues are recognized upon customer
acceptance if such acceptance is not deemed to be perfunctory. Revenues under
reseller arrangements are generally recognized as earned which is generally
ratably over the life of the reseller agreement for guaranteed minimum royalties
or based upon unit sales by the resellers. Revenues for professional services
are recognized on either a time and materials or percentage of completion basis
as the services are performed, provided that amounts due from customers are
fixed and determined and deemed collectible by management. Revenues for software
maintenance and support are recognized ratably over the term of the maintenance
period, which is typically one year. We record cash receipts from customers and
billed amounts due from customers in excess of revenues recognized as deferred
revenues. We record revenues recognized on a contract prior to billing as
unbilled services. The timing and amount of cash receipts from customers can
vary significantly depending on specific contract terms and can therefore have a
significant impact on the amount of deferred revenues and unbilled services in
any given period.
Services revenues have increased each quarter during our history primarily
due to the expansion of our service capabilities by hiring additional service
personnel and to the increase in the number of customers using our Dynamo
products. Sales of Dynamo products often lead to sales of consulting services
and software maintenance and support. To date, substantially all of our Dynamo
customers have entered into 12-month software maintenance and support agreements
at the time of purchase. Because we only began selling Dynamo in 1996, we have a
limited history upon which to evaluate 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
significantly invested, and expect to continue to invest, to expand our services
organization.
19
<PAGE>
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 first quarter of 1999 and, as of March
31, 1999, we had an accumulated deficit of $12.5 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 165 full-time employees at March 31, 1999, up from 144 at December
31, 1998, 98 at December 31, 1997 and 85 at December 31, 1996. 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.
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
YEAR ENDED DECEMBER 31, ENDED MARCH
31,
------------------------------------- -----------
<S> <C> <C> <C> <C>
1996 1997 1998 1998
----- ----- ----- -----
Revenues:
Services............................................................... 99% 71% 67% 89%
Product license........................................................ 1 29 33 11
--- --- --- ---
Total revenues..................................................... 100 100 100 100
Cost of revenues......................................................... 51 49 42 56
--- --- --- ---
Gross profit........................................................... 49 51 58 44
--- --- --- ---
Operating expenses:
Research and development............................................... 29 57 27 33
Sales and marketing.................................................... 29 35 34 36
General and administrative............................................. 27 22 19 23
Amortization of deferred compensation.................................. -- -- 1 --
--- --- --- ---
Total operating expenses........................................... 85 114 81 92
--- --- --- ---
Loss from operations..................................................... (36) (63) (23) (48)
Interest income.......................................................... -- -- -- --
Interest expense......................................................... (1) (2) (1) (2)
--- --- --- ---
Net loss................................................................. (37)% (65)% (24)% (50)%
--- --- --- ---
--- --- --- ---
<CAPTION>
<S> <C>
1999
-----
Revenues:
Services............................................................... 59%
Product license........................................................ 41
---
Total revenues..................................................... 100
Cost of revenues......................................................... 41
---
Gross profit........................................................... 59
---
Operating expenses:
Research and development............................................... 25
Sales and marketing.................................................... 32
General and administrative............................................. 17
Amortization of deferred compensation.................................. 5
---
Total operating expenses........................................... 79
---
Loss from operations..................................................... (20)
Interest income.......................................................... 1
Interest expense......................................................... (1)
---
Net loss................................................................. (20)%
---
---
</TABLE>
20
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUES. Total revenues increased 133% from $1.9 million for the three
months ended March 31, 1998 to $4.4 million for the three months ended March 31,
1999. This increase was attributable to increases in the number of our customers
and average sales per customer, as we expanded our sales force and introduced a
new release of Dynamo in December 1998. Three customers accounted for 45% of
total revenues during the three months ended March 31, 1999 and three customers
accounted for 48% of total revenues during the three months ended March 31,
1998. The following customers accounted for more than 10% of our total revenues
in the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
CUSTOMER 1998 1999
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Sun Microsystems............................................................ 14% 22%
Disney/ABC.................................................................. 19 --
MediaOne.................................................................... 15 --
Informix.................................................................... -- 12
Sony Online Entertainment................................................... -- 11
</TABLE>
SERVICES REVENUES. Services revenues increased 55% from $1.7 million for
the three months ended March 31, 1998 to $2.6 million for the three months ended
March 31, 1999. Services revenues from professional services consulting fees
increased from $1.6 million for the three months ended March 31, 1998 to $2.2
million for the three months ended March 31, 1999. Services revenues from
software maintenance and support agreements increased from $50,000 for the three
months ended March 31, 1998 to $418,000 for the three months ended March 31,
1999. The increase in services revenues was primarily due to an increase in the
number of customers and sales of product licenses.
PRODUCT LICENSE REVENUES. Product license revenues increased from $209,000
for the three months ended March 31, 1998 to $1.8 million for the three months
ended March 31, 1999. This increase was primarily due to growing market
acceptance of our Dynamo product suite following the release of Dynamo 4.0 in
December 1998. In addition, we entered into an original equipment manufacturer
agreement with Informix in December 1998 under which we received $5.0 million of
prepaid royalties, of which $530,000 was recognized as revenues in the three
months ended March 31, 1999. 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. 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
11% for the three months ended March 31, 1998 to 41% for the three months ended
March 31, 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 70% from $1.1 million for the three months ended
March 31, 1998 to $1.8 million for the three months ended March 31, 1999. The
increase was primarily due to the expansion of our services organization,
approximately 83% of which was attributable to an increase in salaries and
related benefits and the remainder of which primarily was due to overhead and
related expenses.
21
<PAGE>
Cost of revenues as a percentage of services revenues increased from 63% for
the three months ended March 31, 1998 to 69% for the three months ended March
31, 1999. This increase reflects the significant increase in the number of
employees in our professional services group in the first quarter of 1999. We
incur recruiting and training expenses when we hire additional employees but
experience low 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 212% from $835,000 for the three
months ended March 31, 1998 to $2.6 million for the three months ended March 31,
1999. The increase in gross profit was primarily due to the increase in product
license revenues as a percentage of total revenues. The gross margin increased
from 44% for the three months ended March 31, 1998 to 59% for the three months
ended March 31, 1999. The gross margin increase was primarily due to the
significant increase in product license revenues, which have no significant cost
of revenues, as a percentage of total revenues in the three months ended March
31, 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 74% from $627,000 for the three
months ended March 31, 1998 to $1.1 million for the three months ended March 31,
1999. Approximately 80% of the increase was due to increases in the number of
engineering personnel and the remainder primarily was due to related recruiting
and facilities costs.
Research and development expenses as a percentage of total revenues were 33%
for the three months ended March 31, 1998 and 25% for the three months ended
March 31, 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 109% from $680,000 for the three
months ended March 31, 1998 to $1.4 million for the three months ended March 31,
1999. Approximately 48% of the increase was due to a significant increase in the
number of sales and marketing personnel and related expenses, approximately 17%
of the increase was related to new and increased marketing program expenditures,
and the remainder of the increase primarily was due to travel and entertainment
expenses.
Sales and marketing expenses as a percentage of total revenues were 36% for
the three months ended March 31, 1998 and 32% for the three months ended March
31, 1999. We believe that sales and marketing expenses, in absolute dollars and
as a percentage of total revenues, 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
22
<PAGE>
facilities-related expenses. General and administrative expenses increased 70%
from $436,000 for the three months ended March 31, 1998 to $743,000 for the
three months ended March 31, 1999. Approximately 55% of the increase related to
increases in legal and professional fees, and approximately 41% of the increase
was due to an increase in personnel and related costs as we increased our
general and administrative personnel to manage the growth of the company.
General and administrative expenses as a percentage of total revenues were
23% for the three months ended March 31, 1998 and 17% for the three months ended
March 31, 1999. We believe general and administrative expenses will increase in
absolute dollars as we expect to hire additional personnel and incur additional
costs to grow our business and assume the responsibilities of a public company.
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.
INTEREST INCOME (EXPENSE). Interest income totaled $50,000 for the three
months ended March 31, 1999. We did not have interest income during the three
months ended March 31, 1998. The interest income for the three months ended
March 31, 1999 was generated from cash and cash equivalents available for
investment from the proceeds of the sale of Series D preferred stock during
August 1998. Interest expense decreased from $41,000 for the three months ended
March 31, 1998 to $24,000 for the three months ended March 31, 1999. The
decrease was primarily due to our repayment of outstanding amounts under our
revolving line of credit during the third quarter of 1998.
PROVISION FOR INCOME TAXES. We incurred losses for the three months ended
March 31, 1998 and 1999. Accordingly, there were no provisions for income taxes.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUES. Total revenues increased 65% from $3.9 million in 1996 to $6.5
million in 1997 and 88% to $12.1 million in 1998. The increase was attributable
to increases in the number of our customers and average sales per customer
primarily due to the commencement of product license sales in 1996 and a new
release of Dynamo in December 1997. We also experienced substantial growth in
services revenues from our expanded customer base. Three customers accounted for
80%, 56% and 37% of total revenues in 1996, 1997 and 1998, respectively. The
following customers accounted for more than 10% of our total revenues in the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
CUSTOMER 1996 1997 1998
- ------------------------------------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Harvard Business School.................................................. 35% --% --%
Sony Online Entertainment................................................ 31 29 --
Sun Microsystems......................................................... -- -- 17
BMG Direct............................................................... -- 16 --
Stream International..................................................... 14 -- --
R.R. Donnelley........................................................... -- 11 --
Universal Learning Technology............................................ -- -- 10
John Hancock Funds, Inc.................................................. -- -- 10
</TABLE>
SERVICES REVENUES. Services revenues increased 19% from $3.8 million in
1996 to $4.6 million in 1997 and 76% to $8.1 million in 1998. Services revenues
from professional consulting service fees increased 18% from $3.8 million in
1996 to $4.5 million in 1997 and 71% to $7.7 million in 1998. Services revenues
from maintenance and support agreements increased from $44,000 in 1997 to
$372,000 in 1998. Revenues from maintenance and support agreements were
immaterial in 1996. The increase in services revenues was primarily due to an
increase in the number of customers, increased sales of product licenses and
increased billing rates.
23
<PAGE>
PRODUCT LICENSE REVENUES. Product license revenues increased from $53,000
in 1996 to $1.9 million in 1997 and 118% to $4.1 million in 1998. The increase
in product license revenues was primarily due to the commencement of product
shipments in December 1996 and from growing market acceptance of our Dynamo
product suite following the release of Dynamo 3.0 in December 1997 and Dynamo
4.0 in December 1998.
COST OF REVENUES. Cost of revenues increased 61% from $2.0 million in 1996
to $3.2 million in 1997 and 58% to $5.1 million in 1998. Approximately 94% of
the increase in 1997 and 73% of the increase in 1998 were due to the expansion
of our professional services organization, consisting primarily of payroll and
related benefits. Additionally, the increase in the number of software product
license customers required increased investment in support and management
personnel. Service costs related to maintenance and support agreements increased
from an immaterial amount in 1996 to $133,000 in 1997 and to $206,000 in 1998.
Product license costs were immaterial in all three years.
Cost of revenues as a percentage of services revenues increased from 52% in
1996 to 70% in 1997 and decreased to 63% in 1998. The increase in 1997 reflected
the significant increase in the number of employees in our professional services
group. The decrease in 1998 resulted from improved utilization of service
personnel.
GROSS PROFIT. Gross profit increased 70% from $1.9 million in 1996 to $3.3
million in 1997 and by 117% to $7.1 million in 1998. The increase in gross
profit was primarily due to the increase in total revenues. The gross margin
increased from 49% in 1996 to 51% in 1997 and to 58% in 1998. The gross margin
increase was primarily due to the significant increase in product license
revenues, which have no significant cost of revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 228% from $1.1 million in 1996 to $3.7 million in 1997 and decreased
8% to $3.4 million in 1998. Approximately 76% of the increase in 1997 was due to
an increase in the number of engineering personnel, with the remainder
attributable to recruiting fees and overhead costs associated with product
development. Approximately 36% of the decrease in 1998 was due to the temporary
reallocation of research and development personnel to support the professional
services organization and the remainder of the decrease primarily was due to
overhead and related expenses.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 99%
from $1.2 million in 1996 to $2.3 million in 1997 and 78% to $4.1 million in
1998. Approximately 87% of the increase in 1997 and 67% of the increase in 1998
were due to an increase in the number of sales and marketing personnel and
related expenses. The remainder in each year primarily related to increases in
our marketing expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 34% from $1.1 million in 1996 to $1.4 million in 1997 and increased
62% to $2.3 million in 1998. Approximately 69% of the increase in 1997 and 50%
of the increase in 1998 were due to the hiring of additional personnel with the
remainder in each year primarily due to the increase in facility expenses
necessary to support our expanding operations.
INTEREST INCOME (EXPENSE). Interest income increased from $6,000 in 1997 to
$54,000 in 1998. We did not have interest income in 1996. The increases reflect
interest earned on higher balances of cash and cash equivalents resulting from
the proceeds from the private sale of equity securities. Interest expense
increased from $30,000 in 1996 to $129,000 in 1997 and to $164,000 in 1998. The
increase reflected additional borrowings under various financing arrangements
entered into during 1997 and 1998, as well as a non-cash interest expense
related to warrants issued in connection with our credit facility in 1998.
PROVISION FOR INCOME TAXES. We incurred losses for the years ended December
31, 1996, 1997 and 1998. Accordingly, there were no provisions for income taxes
in these periods.
24
<PAGE>
QUARTERLY RESULTS
The following tables set forth unaudited statement of operations data for
each quarter of 1998 and the first quarter of 1999. This information has been
presented on the same basis as the audited financial statements appearing
elsewhere in this prospectus and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary to present fairly the unaudited quarterly results. This information
should be read in conjunction with our audited financial statements and related
notes appearing elsewhere in this prospectus. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1998 1999
----------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Services................................................ $ 1,692 $ 1,944 $ 2,213 $ 2,229 $ 2,614
Product license......................................... 209 1,003 1,239 1,608 1,806
----------- --------- --------- --------- -----------
Total revenues...................................... 1,901 2,947 3,452 3,837 4,420
Cost of revenues.......................................... 1,066 1,234 1,175 1,575 1,813
----------- --------- --------- --------- -----------
Gross Profit........................................ 835 1,713 2,277 2,262 2,607
----------- --------- --------- --------- -----------
Operating expenses:
Research and development................................ 627 685 994 1,049 1,131
Sales and marketing..................................... 680 923 1,027 1,444 1,420
General and administrative.............................. 436 450 657 748 743
Amortization of deferred stock compensation............. -- -- -- 107 216
----------- --------- --------- --------- -----------
Total operating expenses............................ 1,743 2,058 2,678 3,348 3,510
----------- --------- --------- --------- -----------
Loss from operations...................................... (908) (345) (401) (1,086) (903)
Interest income........................................... -- -- 8 46 50
Interest expense.......................................... (41) (43) (48) (32) (24)
----------- --------- --------- --------- -----------
Net loss.................................................. $ (949) $ (388) $ (441) $ (1,072) $ (877)
----------- --------- --------- --------- -----------
----------- --------- --------- --------- -----------
<CAPTION>
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
Revenues:
Services................................................ 89% 66% 64% 58% 59%
Product license......................................... 11 34 36 42 41
----------- --------- --------- --------- -----------
Total revenues...................................... 100 100 100 100 100
Cost of revenues.......................................... 56 42 34 41 41
----------- --------- --------- --------- -----------
Gross Profit........................................ 44 58 66 59 59
----------- --------- --------- --------- -----------
Operating expenses:
Research and development................................ 33 23 29 27 25
Sales and marketing..................................... 36 31 30 38 32
General and administrative.............................. 23 16 19 19 17
Amortization of deferred stock compensation............. -- -- -- 3 5
----------- --------- --------- --------- -----------
Total operating expenses............................ 92 70 78 87 79
----------- --------- --------- --------- -----------
Loss from operations...................................... (48) (12) (12) (28) (20)
Interest income........................................... -- -- -- 1 1
Interest expense.......................................... (2) (1) (1) (1) (1)
----------- --------- --------- --------- -----------
Net loss.................................................. (50)% (13)% (13)% (28)% (20 )%
----------- --------- --------- --------- -----------
----------- --------- --------- --------- -----------
</TABLE>
25
<PAGE>
The increase in product license revenues from the three months ended March
31, 1998 to the three months ended June 30, 1998 was primarily due to the
growing market acceptance of our product suite following the release of Dynamo
Application Server 3.0 in December 1997. The decline in gross margins for the
three months ended December 31, 1998 and March 31, 1999 from the three months
ended September 30, 1998 was primarily due to the expansion of our services
organization. Sales and marketing expenses increased each quarter, primarily due
to increases in sales personnel and the achievement of sales quotas resulting in
increased commissions. In particular, sales and marketing expenses increased
significantly during the quarter ended December 31, 1998 due to increases in the
number of sales personnel and the related cost of recruitment.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Most of our expenses are fixed in the
short term, and we may not be able to quickly reduce spending if revenues are
lower than we project. Our ability to forecast accurately our quarterly revenues
is limited due to the long sales cycle of our software products, which makes it
difficult to predict the quarter in which product license revenues will occur,
and the variability of customer demand for professional services. Our operating
results will be materially adversely affected if revenues do not meet
projections.
DEFERRED COMPENSATION
In the fourth quarter of 1998, the first quarter of 1999 and in April and
May 1999, we recorded total deferred stock compensation of $4.8 million in
connection with stock option grants. This amount represents the difference
between the exercise price of stock option grants and the deemed fair value for
accounting purposes of our common stock at the time of such grants. We are
amortizing this amount over the vesting periods of the stock options, which will
result in amortization expense of $1.1 million in 1999 ($216,000 in the three
months ended March 31, 1999), $1.2 million in 2000, $1.2 million in 2001, $1.2
million in 2002 and $100,000 in 2003.
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
As of December 31, 1998, we had net operating loss carryforwards of $8.9
million and research and development tax credit carryforwards of $235,000. The
net operating loss and tax credit carryforwards will expire at various dates,
beginning 2011, if not utilized. The Tax Reform Act of 1986 imposes substantial
restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" of a corporation. Our
ability to utilize net operating loss and tax credit carryforwards on an annual
basis would be limited as a result of an "ownership change" as defined by
Section 382 of the Internal Revenue Code. We have completed several financings
since inception and believe that we have incurred ownership changes. We do not
believe the ownership changes will have a material impact on our ability to
utilize our net operating loss and tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations and met our capital
expenditure requirements through the private sale of equity securities,
resulting in net proceeds of $13.0 million through March 31, 1999, as well as
commercial credit facilities and capital leases totaling $543,000 at March 31,
1999. Cash used in operating activities was $412,000, $3.9 million and $2.9
million in 1996, 1997 and 1998, respectively. In the three months ended March
31, 1999, we generated $3.8 million in cash from operating activities. The $2.9
million of cash used in operating activities for the year ended December 31,
1998 represents a cash operating loss of $2.4 million and changes in working
capital items consisting primarily of increases in accounts receivable,
partially offset by increases in accounts payable and accrued expenses. The $3.8
million of cash generated from operating activities in the three months ended
March 31, 1999 represents a cash operating loss of $563,000 offset primarily by
the
26
<PAGE>
$5.0 million we received from Informix under an original equipment manufacturer
agreement, of which $4.5 million was included in deferred revenues. Informix has
the right to terminate the agreement and receive a refund of the $5.0 million
less the greater of $530,000 per quarter, commencing with the fiscal quarter
ended March 31, 1999, and all uncredited prepaid royalties as of the termination
date, in the event they are named in a patent or other intellectual property
infringement claim which is related to the agreement and brought by Broadvision.
The amount refundable at March 31, 1999 is $4.5 million.
To date, our investing activities have consisted primarily of capital
expenditures totaling $498,000, $190,000, $623,000 and $285,000 in 1996, 1997,
1998 and the three months ended March 31, 1999, respectively. Assets acquired
consisted primarily of computer hardware and software and furniture and fixtures
for our growing employee base. We expect that our capital expenditures will
increase as our employee base grows. At March 31, 1999, we expect capital
expenditures for the following twelve months to be approximately $2.0 million,
which includes $1.0 million of leasehold improvements for our new facility and
$1.0 million for computer equipment, software and furniture and fixtures.
Net cash provided by financing activities in 1996, 1997, 1998 and the three
months ended March 31, 1999 was $3.3 million, $1.9 million, $7.5 million and
$68,000, respectively. The primary source of cash from financing activities was
the sale of preferred stock with net proceeds of $2.8 million, $1.9 million and
$7.8 million in the years ended December 31, 1996, 1997 and 1998, respectively.
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, a $500,000
term loan and a $200,000 equipment line of credit with Silicon Valley Bank that
bear interest at the bank's prime rate plus 0.25%, 1.0% and 1.25%, respectively.
At March 31, 1999, we had $1.9 million available under the line of credit based
upon our borrowing base, $278,000 outstanding under the term loan and $180,000
outstanding under the equipment line of credit. These lines of credit are
secured by all of our tangible and intangible intellectual and personal property
and are subject to financial covenants and restrictions, including minimum
liquidity requirements and a prohibition on the payment of dividends. We are
currently in compliance with all related financial covenants and restrictions.
At March 31, 1999, we had $7.6 million in cash, cash equivalents and
marketable securities and $2.9 million in working capital. We believe that the
net proceeds of this offering, together with our existing financial resources
and commercial credit facilities, will be sufficient to meet our cash
requirements for at least the twelve months following this offering. Thereafter,
we may require additional funds and may seek to raise additional funds through
public or private equity financings or from other sources. There can be no
assurance that additional financing will be available at all or that, if
available, will be obtainable on terms favorable to us. Additional financing
could also be dilutive.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. This could result in failures or
the creation of erroneous results.
We have defined "Year 2000 compliant" as the ability to:
(a) correctly handle date information needed for the December 31, 1999
to January 1, 2000 date change;
(b) function according to the product documentation provided for this
date change, without changes in operation, assuming correct configuration;
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(c) where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined and
predetermined manner;
(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, except for 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 50% 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 33% 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 are seeking assurances from our vendors that licensed software is Year 2000
Compliant, we know that some of the licensed software is not Year 2000
Compliant. To address known problems, we plan to upgrade or replace the impacted
systems by year-end. Despite testing by us and by customers, and assurances from
developers of products incorporated into our products, our products may contain
undetected errors or defects associated with Year 2000 date functions. Known or
unknown errors or defects in our products could result in delay or loss of
revenues, diversion of development resources, damage to our reputation or
increased service and warranty costs, any of which could materially adversely
affect our business, operating results or financial condition. Some commentators
have predicted significant litigation regarding Year 2000 compliance issues, and
we are aware of Year 2000 lawsuits against other software vendors. Because of
the unprecedented nature of Year 2000 litigation, it is uncertain whether or to
what extent we may be affected by it.
Our internal systems include both our information technology, or IT, and
non-IT systems. We have initiated an assessment of our material internal IT
systems, including both software tools we have developed and third-party
software and hardware technology, as well as an assessment of our non-IT
systems. We expect to complete testing of our IT systems in 1999. To the extent
that our internal systems are not Year 2000 Compliant, we plan to upgrade or
replace these systems. Related costs have been immaterial to date and we expect
total future costs to remain below $100,000. To the extent that we are not able
to test the technology provided by third-party vendors, we are seeking
assurances from them that their systems are Year 2000 Compliant. Although we are
not currently aware of any material operational issues or costs associated with
preparing our internal IT and non-IT systems for the Year 2000, we may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in our internal IT and non-IT systems.
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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 have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our critical
operations. The cost of developing and implementing a contingency plan may
itself be material. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
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BUSINESS
OVERVIEW
We offer an integrated suite of Internet customer relationship management
and e-commerce software applications, as well as related application
development, integration and support services. Our solution enables businesses
to understand, manage and build online customer relationships and to market,
sell and support products and services over the Internet more effectively. Our
Dynamo product suite includes an application server that is specifically
designed to enable and support Web applications, as well as e-commerce and
Internet customer management applications. An application server is a software
program that facilitates the development, deployment and management of other
software programs. Our solution is designed to provide businesses with the core
application platform and software tools required to develop and deploy
personalized, reliable, large-scale Web sites for conducting e-commerce.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The emergence of the Internet as a global medium for interactive
communications and commerce is fundamentally changing the way business is
conducted. The Internet is enabling businesses to attract and retain customers,
conduct e-commerce with those customers, and communicate with employees,
suppliers and strategic partners. The Internet is providing the opportunity for
businesses to establish new revenue streams, create a new distribution channel,
reduce costs and increase customer retention. This opportunity has driven the
growth in online marketing and e-commerce initiatives. International Data
Corporation estimates that more than $400 billion worth of goods and services
will be sold over the Internet by 2002, which represents a compounded annual
growth rate of over 100% for the period between 1997 and 2002.
As the growth and acceptance of online marketing and e-commerce have
increased, the World Wide Web has become a highly competitive business
environment where customers have a large number of easily accessible choices.
For a company to succeed in this environment, its Web site must present content
and provide an overall visitor experience that captures the visitor's interest
and satisfies their informational and transactional needs. To accomplish this,
companies are investing in Internet-based customer relationship management and
e-commerce solutions, such as:
- online marketing and selling systems to target, attract and retain
customers
- transaction and distribution management systems to reduce the costs of
delivering products and services to customers and distribution partners
- customer support and relationship management systems to better understand
and serve the ongoing needs of their customers
International Data Corporation estimates that the worldwide Internet commerce
application software market was $444 million in 1998 and projects that the
market will grow to $1.7 billion in 1999 and reach $13.1 billion in 2003.
EMERGING E-COMMERCE REQUIREMENTS
Many commercial Web sites present only a static collection of
non-interactive content. These sites offer basic content, such as corporate
information, product literature and banner advertisements, which are passively
viewed by Web visitors. While this information is useful, many Web visitors
prefer dynamic content, which is continually updated and enhanced, as well as
interactive content, which responds and changes based on the user's input. Many
Web visitors also prefer Web sites that personalize their experience and present
more relevant content based on their existing relationship with the business,
stated or implied preferences and needs, Web navigation behavior and other
factors. To attract, serve
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and retain customers online, businesses must engage visitors with dynamic,
relevant and targeted experiences, which often lead to transactional
opportunities.
Businesses are seeking Web-based systems that can be dynamically updated and
integrated, sharing data among Web applications and across their entire
enterprise in order to present users with a personalized, consistent and unified
customer experience. The desired result is a customer-driven Web site that takes
into account the particular customer's profile, Web behavior and relationship
with the company. Customer-driven Web sites can provide businesses with an
efficient means to manage and maximize customer relationships online. In order
to accomplish this, businesses require solutions that incorporate a number of
features:
- EFFECTIVE CONTROL OF E-COMMERCE SYSTEMS AND STRATEGIES. Business managers
responsible for Internet customer relationship management need easy-to-use
tools to give them direct control over their e-commerce systems and
strategies without requiring the time-consuming intervention of
information technology specialists. With the appropriate tools, business
managers can better manage their Internet customer relationships through
improved customer segmentation and delivery of targeted content,
promotions and advertising campaigns, and personalized pricing and account
information.
- INTEGRATION WITH EXISTING INFORMATION SYSTEMS. In order to present the
customer with a unified and personalized e-commerce experience, companies
must address the difficult challenge of integrating Web applications with
their existing content management, customer database, transaction and
customer support systems.
- COMMON PLATFORM UPON WHICH TO BUILD FUTURE APPLICATIONS. Businesses
implementing sophisticated Web-based applications desire an expandable Web
platform to enable them to build new applications and add third-party
functionality to their e-commerce initiatives on a rapid and ongoing
basis.
- SCALABILITY, PERFORMANCE AND RELIABILITY. The increasing significance of
Web-based commerce requires that e-commerce systems be highly scalable in
order to accommodate rapid user growth and increased Web site complexity,
content and functionality. Scalability refers to the ability of a computer
system to handle greater load by adding additional hardware. Further,
companies need high performance and highly reliable systems because if
online systems fail or cause unsatisfactory delays, even for a short
period of time, businesses could miss revenue opportunities and lose
customers.
CURRENT SOLUTIONS
In response to these emerging business requirements, various applications
have been developed that address discrete aspects of the enterprise e-commerce
infrastructure. A number of vendors offer stand-alone solutions for Web content
management, advertising management, transaction processing, e-commerce
storefront development, personalization and recommendation engines, and
application development tools. By implementing a collection of these stand-alone
solutions, companies can attempt to deliver dynamic, personalized content to Web
site visitors and manage their e-commerce efforts. However, these stand-alone
solutions may not provide a satisfactory solution for many businesses:
- LACK OF INTEGRATED FUNCTIONALITY. Disparate stand-alone applications
generally do not easily integrate and communicate with each other, lack a
common user interface and lack a common platform for integrating with
existing information systems. As a result, a collection of stand-alone
applications often does not present the Web visitor with a unified
customer experience and may sacrifice functionality and performance.
- HIGH COST. It is frequently difficult and expensive for companies to
implement a solution consisting of a collection of disparate stand-alone
solutions from multiple vendors, and these implementations frequently fail
to meet requirements. In addition, businesses often incur higher
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costs of ownership over time as it is difficult for them to manage the
uncoordinated product upgrade cycles and new application development
efforts of multiple vendors.
Today, businesses increasingly seek an integrated package of applications,
platforms and tools that addresses all aspects of their enterprise e-commerce
infrastructure, rather than just stand-alone solutions. Some software providers
have developed more comprehensive solutions incorporating a number of e-commerce
functions. However, these solutions may be inadequate for a number of reasons:
- LIMITED FUNCTIONALITY. The functionality may be insufficient to serve all
of a company's e-commerce requirements, resulting in the need to buy,
build or adapt additional applications.
- LACK OF A MODULAR, APPLICATION SERVER-BASED ARCHITECTURE. These solutions
are typically not built with separate software modules and lack the
expandability that an application server-based platform provides. This
limits the ability of businesses to customize their implementations,
integrate their solutions with existing applications and extend their
e-commerce initiatives by building future applications or incorporating
third-party technology.
- POOR SCALABILITY AND RELIABILITY. Most of today's computer systems are
unable to scale to meet the growing performance demands of large-scale,
e-commerce Web sites. Solutions that do not scale well can be unreliable
and subject to system failures, which may result in frustrated customers,
lost revenue opportunities and potential financial losses.
To address the limitations of most commercially available solutions, some
companies have built custom Internet customer relationship management solutions
with application development tools. While these solutions can provide the
required functionality and integration, they typically require lengthy
implementation periods and are expensive to build and maintain. In addition,
they require a comprehensive understanding of market segmentation, content
targeting and advertising, as well as extensive technical expertise in Web
application development and systems integration. Most companies, and many
third-party systems integrators and application developers, do not have the
expertise and experience to address all of these requirements.
As a result, businesses are increasingly seeking Web application software
providers offering products and professional services that enable them to
rapidly deploy comprehensive, effective Internet customer relationship
management solutions. Businesses prefer solutions that are modular and flexible
with an open, application server-based architecture. They desire solutions that
are easy to integrate with existing systems and third-party applications and
that enable them to extend their Web infrastructures with new applications and
functionality to meet their continually evolving e-commerce needs. Businesses
also need to leverage their existing business systems, strategies and expertise
to manage their customer relationships effectively. Finally, businesses are
seeking solutions that meet the demanding scalability, reliability and
performance requirements of large-scale Web sites that conduct e-commerce.
OUR SOLUTION
We offer a suite of Web-based Internet customer relationship management and
e-commerce software applications, as well as related application development,
integration and support services. Our solution enables businesses to understand,
manage and build their online customer relationships more effectively and to
market, sell and support their products and services over the Internet. Our
product suite includes Dynamo Application Server, an application server
specifically designed to enable and support Web applications. Dynamo Application
Server is designed to provide businesses with the core application platform and
software tools required to develop and deploy personalized, effective e-commerce
Web sites.
Our product suite also includes Dynamo Personalization Server, Dynamo
Commerce and Dynamo Ad Station. Dynamo Personalization Server is an expandable
personalization platform that enables
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companies to target specific content and data to particular customers or
visitors on the Web. Dynamo Commerce manages and delivers product catalog
content and user-targeted promotional programs and provides transaction
processing capabilities for large-scale e-commerce storefronts. Dynamo Ad
Station is an online banner advertising delivery application designed to help
businesses more effectively manage advertising inventories on large-scale Web
sites and distributed advertising networks.
Our solution incorporates the following distinguishing characteristics:
AN INTEGRATED AND MODULAR PRODUCT SUITE BASED ON A COMMON PLATFORM. Our
product suite includes a comprehensive range of functionality that allows
businesses to quickly develop and deploy personalized Web-based e-commerce
applications. Our application server-based platform enables our Dynamo
applications to share data and work together more efficiently than would a
collection of discrete Web applications from different vendors using various
technologies. An integrated product suite based on a common platform also
ensures that new products and releases will be compatible with each other as
well as with other applications built on Dynamo Application Server. The
modularity of our product suite allows customers to purchase applications that
fit their particular needs and allows them to quickly expand their
implementations as required.
RULES-BASED PERSONALIZATION IMPLEMENTED BY BUSINESS MANAGERS. Our products
allow business managers to apply new and pre-existing business rules to profile
and segment users and dynamically deliver personalized content and data to
online visitors. For example, businesses can present different prices, products
and promotional offers to different visitors or they can deliver
customer-specific information such as account detail and purchase history.
Business managers can review the behavior of visitors and quickly adjust their
business rules to manage their online marketing communications and e-commerce
strategies.
HIGH SCALABILITY, RELIABILITY AND PERFORMANCE. Our Dynamo Application
Server employs a Java-based architecture that is highly scalable. It has a
dynamic load management system which allows applications to be distributed
across multiple server computers. This means that as a Web site becomes more
heavily utilized, additional computing resources can be added to handle the
additional load. The load management system provides redundant fail-over, a
feature that transfers users on a failed server to another server without
interruption. Dynamo Application Server has been designed to meet the
performance requirements of high-capacity, highly personalized e-commerce Web
sites.
OPEN AND EXPANDABLE APPLICATION SERVER ARCHITECTURE. Our Dynamo Application
Server provides customers with an expandable platform that allows them to
rapidly integrate our products with their existing systems and to deploy new
applications, both internally developed and from third parties. The ability to
integrate multiple applications and information systems with our common platform
enables businesses to incorporate organization-wide customer data and support
systems to provide a unified customer experience. In addition, our open,
application server-based platform and the modularity of our product suite enable
systems integrators and technology partners to develop their own proprietary
applications on Dynamo for reuse or resale.
PROFESSIONAL SERVICES CAPABILITIES. We have been designing and deploying
network-based applications for over seven years and Web sites for over four
years. We have two primary service offerings, Innovation Solutions and Express
Services. Our Innovation Solutions team provides customized application design,
development and integration services to clients who desire advanced solutions
that are not commercially available. We provide Innovation Solutions services
for a limited number of projects that we believe will provide us with an
understanding of emerging technical and business needs for our future products.
Our Express Services team provides strategic consulting and integration support
services to customers and systems integrators to facilitate the deployment of
our products. Express Services provides system architecture design, project
management, Web design and technical training and support.
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Our solution provides our customers with:
EFFECTIVE, HIGH-PERFORMANCE E-COMMERCE WEB SITES THAT ARE:
- dynamically generated and personalized on a real-time basis
- highly functional with comprehensive e-commerce features
- able to personalize content based on easily modifiable business rules
to increase customer satisfaction and retention
- able to present a unified, customer-centric experience by integrating
various sources of customer data and content and leveraging existing
information systems
THE ABILITY TO ACHIEVE RAPID TIME TO MARKET BY:
- deploying our comprehensive suite of integrated applications
- enabling rapid integration with existing information systems
- taking advantage of our intuitive user interfaces for business managers
and application developers
- utilizing our experienced consulting services professionals
THE ABILITY TO ACHIEVE A COMPETITIVE ADVANTAGE AND A HIGHER RETURN ON
INVESTMENT BY:
- increasing e-commerce and advertising revenues
- improving marketing effectiveness
- reducing marketing, transaction and customer support costs
- increasing customer satisfaction and retention
STRATEGY
Our objective is to be a leading provider of Internet customer relationship
management solutions. To achieve this objective, we have adopted the following
strategies:
MAINTAIN AND EXTEND PRODUCT AND TECHNOLOGY LEADERSHIP. We believe we are a
technology leader in providing Internet customer relationship management
solutions. We offer a comprehensive suite of software applications that we
believe are based on an advanced technologies. We were one of the first
companies to market a high-performance dynamic Web page generation engine to
both generate and deliver Web pages on a real-time basis, and shipped our first
Java-based Web application server shortly after Sun Microsystem's first
commercial shipment of Java 1.0. We intend to extend our product and technology
leadership by:
- extending Dynamo's personalization capabilities and building new
Internet customer relationship management applications
- continuing to increase the scalability, reliability and performance of
our Dynamo applications
- continuing to develop new adaptor and connector modules to allow our
products to easily integrate with third-party Internet customer
relationship management products, databases and information systems
- providing Dynamo Application Server support for emerging industry
standards, such as Enterprise JavaBeans, for developing business
applications in Java, and XML, for formatting data and other
information
- using our Innovation Solutions services to identify emerging market
needs
GROW AND LEVERAGE PROFESSIONAL SERVICE CAPABILITIES. We have extensive
experience in Web application development and integration services. Through our
Express Services, we provide enabling
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services to train our systems integrators and technology partners in the use of
our products as well as consulting services to assist with customer
implementations. We plan to create additional opportunities to increase revenues
from product sales by expanding our base of partners trained in the
implementation and application of Dynamo. We intend to hire additional
professional services personnel to increase our services revenues and to enable
and support product license sales through systems integrators.
CONTINUE TO BUILD DIRECT SALES CAPABILITIES AND LEVERAGE CO-SELLING EFFORTS
WITH SYSTEMS INTEGRATORS AND WEB DEVELOPERS. We sell our products directly to
end-users and through co-selling efforts with systems integrators and Web
developers. Our objective is to establish close relationships directly with our
customers and to motivate systems integrators to implement the Dynamo technology
and product suite on Internet and Web-based projects for their customers. We
intend to expand our sales by hiring additional direct sales personnel,
domestically and internationally, both to sell directly to end-users and to
expand our co-selling efforts. We plan to leverage our current relationships and
develop additional co-selling relationships with leading systems integrators. In
addition, many of our systems integrators are global enterprises, which we
believe provides us with an opportunity to expand our international business.
EXPAND TECHNOLOGY PARTNER AND ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
AS A DISTRIBUTION CHANNEL. We work with technology partners, such as Documentum,
Factpoint and OpenText, to develop modules that enable our software products to
operate with their software products. We also work with original equipment
manufacturers, such as Informix, to enable them to combine our software products
with their products to form a single software application product. Some of our
customers have requirements that can be met by a combination of our products and
those of one or more of our partners. We sell in conjunction with these vendors
in a variety of ways:
- co-marketing with a technology partner to promote the fact that our
products operate together
- co-selling with a partner in an arrangement where sales and service
personnel from both organizations approach a customer in a coordinated
sales process
- selling to reseller partners
- selling to original equipment manufacturers that sell and support the
combined product
Many of our current and potential partners are looking to extend their
current offerings to include Web-enablement, personalization and e-commerce
features. We believe these relationships will provide us the opportunity to
establish our platform in additional markets.
EXPAND MARKET PRESENCE. Historically we have not spent significant
resources on marketing and awareness programs. We intend to increase our market
presence through a variety of marketing and sales programs designed to generate
market awareness, penetrate target markets and help establish us as the leading
provider of Internet customer relationship management solutions. We plan to
increase spending on advertising, trade shows, seminars, industry events and
direct marketing efforts. We also plan to devote marketing resources to
expanding our channel relationships with systems integrators and technology
partners. We intend to develop and promote the Dynamo brand alongside our
partners' brands in all co-marketing relationships.
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PRODUCTS
We offer an integrated suite of Internet customer relationship management
applications. Our core product is Dynamo Application Server, a dynamic Web page
generation engine and application server specifically designed to enable and
support Web applications, that provides businesses with the platform and
software tools to develop and deploy personalized, effective e-commerce Web
sites. Our product suite also includes Dynamo Personalization Server, Dynamo
Commerce and Dynamo Ad Station. Each of the applications in our product suite
can be purchased separately; however, the Dynamo Application Server is required
to run each of our other applications. Dynamo Personalization Server is required
to run Dynamo Commerce and Dynamo Ad Station. We also sell software tools to
enable rapid application development, as well as adaptor modules to integrate
Dynamo products with content management systems. Our product suite is designed
to meet the performance and scalability requirements of large-scale e-commerce
Web sites. All of our products are based on Java and run on Sun Solaris, Windows
NT and IBM AIX operating system platforms.
The diagram below illustrates the overall architecture of our product suite
as well as the various applications, software tools and integration modules that
are included in our product suite.
The diagram below illustrates the Dynamo Relationship Commerce Suite with
horizontal, layered bars depicting Dynamo Application Server at the foundation;
Dynamo Personalization Station, with open content adaptors and open profile
adaptors as the second layer; Dynamo Commerce Application with open fulfillment
adaptors as the third layer; and custom applications as the top layer. The left
side of the bars shows the tools that work with our product suite: system
console, Developer Workbench, Personalization Control Center and retail
administration. The right side of the bars depicts enterprise systems including
customer databases and content management and transaction fulfillment systems.
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The following table briefly describes our products, list prices and system
requirements.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION LIST PRICE AND REQUIREMENTS
<S> <C> <C>
APPLICATION SUITE
Dynamo Application Server An open and expandable $10,000 per CPU
platform to enable Internet
customer relationship
management and e-commerce
applications
Dynamo Personalization Server Allows businesses to develop, $20,000 per CPU; requires
deploy and manage multiple Dynamo Application Server
Web applications that share a
common set of business rules
and are personalized based on
common user profiles
Dynamo Commerce Enables the creation of $20,000 per CPU; requires
personalized e-commerce Dynamo Application Server and
storefronts that can be Dynamo Personalization Server
customized and integrated
with existing information
systems
Dynamo Ad Station Allows businesses to serve $15,000 per server; requires
targeted advertisements to Dynamo Application Server and
Web site visitors and to Dynamo Personalization Server
manage their online
advertising inventory more
effectively
TOOLS & INTEGRATION MODULES
Dynamo Developer's Workbench Allows developers and Web $1,000 per seat
designers to quickly assemble
pre-built Java components
through an intuitive
graphical user interface
Dynamo Personalization Allows business managers to $1,000 per seat
Control Center define and modify
personalization business
rules through an intuitive
graphical user interface
Dynamo Targeted E-mail Enhances customer $4,000 per CPU; requires
relationships through Dynamo Personalization Server
rules-driven targeted e-mail
messaging functionality,
coordinated with Web site
personalization
Open Content Adaptors Provides direct integration $10,000 per CPU; requires
with leading content Dynamo Personalization Server
management systems
</TABLE>
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DYNAMO APPLICATION SERVER. The Dynamo Application Server is designed to
provide businesses with the core application platform and software tools
required to develop, deploy and manage personalized, effective Web sites for
conducting business on the Internet. The Dynamo Application Server provides a
common application platform for:
- dynamically generating Web pages and managing user sessions
- supplying a framework of shared application services to connect and
integrate each of the applications in our product suite
- managing the distribution of applications across multiple computers and
providing an automatic recovery management system to prevent system
failures
- efficiently connecting to enterprise systems and third-party applications
Dynamo Application Server connects to Dynamo Developer's Workbench, a Web
application development tool that allows developers and Web designers to build
new applications and integrate third-party technologies.
DYNAMO PERSONALIZATION SERVER. Dynamo Personalization Server coordinates,
manages and centralizes the personalization functions of the Dynamo product
suite. Dynamo Personalization Server enables business managers to segment users
and target content based on new and pre-existing business rules. It adjusts and
personalizes Web content on a real-time basis by combining explicit user data
from existing customer management and marketing databases with implicit
information gathered on Web navigation behavior.
Dynamo Personalization Server performs the following functions:
- PROFILE GATHERING. When a visitor first arrives at a Web site, a profile
is created automatically for that visitor. If the visitor registers or
logs in, the visitor's identity is added to the profile, preserving any
profile information that was gathered up to that point. Dynamo
Personalization Server tracks both explicit user profile data supplied by
the user as well as implicit profile attributes derived from the user's
behavior on the Web site. This information is combined with any existing
information about the visitor from the company's internal databases.
- SEGMENTATION AND CONTENT TARGETING. Dynamo Personalization Server enables
business managers to segment visitors based on their profile data. Using
business rules, content can be personalized and targeted to these groups
of users. These business rules are created using the Personalization
Control Center.
- CONTENT MANAGEMENT AND INTEGRATION. In addition to using Dynamo
Personalization Server to target content residing on internal file
systems, customers may purchase Open Content Adaptors to integrate Dynamo
with leading content management systems. The Open Content Adapters provide
direct integration to leading content management systems such as those
from Documentum, Factpoint and OpenText.
- PERSONALIZED MESSAGING. Dynamo Targeted E-mail can be used with the Dynamo
Personalization Server to send personalized messages to selected groups
and individual Web site users.
DYNAMO COMMERCE. Dynamo Commerce is a flexible solution enabling businesses
to deploy and manage large-scale, personalized, e-commerce storefronts. Dynamo
Commerce delivers product catalog content and user-targeted promotional programs
to manage the online shopping experience. It is designed to integrate with
existing customer database, inventory, order processing, payment and fulfillment
systems operated by many large organizations. In addition, Dynamo Commerce
provides administration features that allow e-commerce storefronts to be
operated independently by various managers throughout an organization. Dynamo
Commerce features include:
- COMPLETE E-COMMERCE STOREFRONT SOLUTION. Dynamo Commerce provides a
comprehensive set of e-commerce storefront functions including catalog,
shopping cart, order processing, built-in
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search capabilities and user registration. Business managers can customize
the layout, look and feel, navigation and functionality of their
storefronts through point and click interfaces and through customized Web
page templates. Dynamo Commerce supports both business-to-business and
business-to-consumer e-commerce.
- ENVIRONMENT FOR PERSONALIZED SELLING. Web sites built on Dynamo Commerce
can be designed to deliver targeted promotions based on user profiles
gathered through Dynamo Personalization Server. Since Dynamo Commerce uses
both implicit and explicit profiles, content can be targeted to both
anonymous and recognized visitors. Reporting functionality allows
marketing personnel to gather real-time feedback on the effectiveness of
various targeting and merchandising strategies.
- FLEXIBLE ORDER PROCESSING. Dynamo Commerce provides core order processing
functionality that can be integrated with a wide variety of transaction
models and existing business processes. Through the use of our integration
modules, customers can incorporate business systems into the order
processing flow at a number of stages as products are browsed, selected
and purchased.
- CUSTOMIZATION, MAINTAINABILITY AND DAY-TO-DAY MANAGEMENT. Dynamo Commerce
allows business managers, designers and programmers to independently
maintain and manage the various aspects of the Web site relating to their
particular expertise. Dynamo Commerce has an administrative interface so
business managers can control product presentation, pricing and
promotions. Designers can directly customize Web site templates upon which
the site is built. The open, modular architecture makes it easy for
programmers to extend and modify functionality. This separation simplifies
deployment and ongoing maintenance.
DYNAMO AD STATION. Dynamo Ad Station allows businesses to increase
advertising revenues by delivering targeted ads to visitors and by more
effectively managing advertising inventory. The data gathered by Dynamo Ad
Station help the business determine how to target campaigns to maximize
effectiveness. Automated inventory management features allow an administrator to
adjust the delivery of advertisements to help meet advertising goals. Dynamo Ad
Station's comprehensive data collection and reporting features facilitate the
monitoring of ad campaign effectiveness.
SERVICES
We provide a variety of consulting, design, application development,
integration and training and support services in conjunction with our products
through our Innovation Solutions and Express Services offerings.
INNOVATION SOLUTIONS. Innovation Solutions services consist of customized
application design, development and integration services and are ordinarily
provided on a fixed-price basis. We have extensive experience in developing,
designing and deploying large-scale Web applications. Our Innovation Solutions
services are provided to clients with complex requirements that seek advanced
solutions that are not commercially available to extend the capabilities and
features of their systems. As well as being a core component of our business,
Innovation Solutions projects provide us with an understanding of emerging
customer requirements and insights for new product developments. We typically
select projects that we believe may provide the technical and functional
foundation for our future products and services.
EXPRESS SERVICES. Express Services consist of high level consulting and
enabling support services such as system architectural design, project
management, Web site design, and technical training and support. Express
Services are ordinarily provided on a time and materials basis. Our Express
Services are provided to assist systems integrators, development partners and
customers to rapidly develop and deploy Dynamo-based applications and systems.
Our objective is to deploy our Express Services quickly and efficiently to
reduce the time and effort required by our partners and customers to
successfully deploy Dynamo applications. Our Express Services are priced on a
per day basis.
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CUSTOMER SUPPORT AND MAINTENANCE. We offer four levels of customer support
ranging from our free support program, which is available for 60 days after a
product has been purchased, to our Premier Support Program, which includes
telephone support 24 hours a day, seven days per week, for customers deploying
mission critical applications. Customers are entitled to receive software
updates, maintenance releases and technical support for an annual maintenance
fee of 20% to 30% of the then current list price of the licensed product.
TRAINING. We provide a broad selection of training for customers and
partners, including programming classes covering all of the components of our
product suite. Training is priced on a per day basis. Fees vary for standard
public training classes and on-site private training classes.
CUSTOMERS
Our principal target markets are Fortune 1000 enterprises and new businesses
that plan to use the Internet as their primary business channel. Our customers
are characterized by their strong commitment to Internet customer relationship
management and represent a broad spectrum of enterprises within diverse industry
sectors. The following is a partial list of customers that have purchased
licenses and/or professional services from us:
TECHNOLOGY
Informix
Just in Time Solutions
Newbridge Networks
Sun Microsystems
MANUFACTURING
3M
Eastman Kodak
TRAVEL AND LEISURE
Hilton Hotels
FINANCIAL SERVICES
BancTec
John Hancock Funds, Inc.
KeyBank
Scudder Kemper Investments
MEDIA AND ENTERTAINMENT
Icon MediaLab
MTV/Nickelodeon
Sony Online Entertainment
INTERNET
AltaVista
BabyCenter
GoTo.com
Network Solutions
TechRepublic
TheStreet.com
TELECOMMUNICATIONS
BellSouth
CONSUMER RETAIL
BMG Direct
CareSoft
GetMusic
J.Crew
living.com
Peapod
EDUCATION
Harvard Business School
Universal Learning Technology
CASE STUDIES
The following case studies illustrate the issues faced by three
representative customers in deploying Web site applications, and the benefits
derived from utilizing Dynamo applications.
BMG DIRECT
www.bmgmusicservice.com
BMG Direct is the North American music club operated by Bertelsmann AG, the
Germany-based global media enterprise. With over eight million members, BMG
Direct is one of the largest direct marketers in the United States. BMG Direct
has traditionally sold to its music club members via direct mail. In
establishing its online strategy, BMG Direct faced the challenge of building a
state-of-the-art Web site for e-commerce that would leverage its existing
business practices, including a complicated pricing structure, multiple customer
segments and detailed customer information. It wanted to transfer its
customer-interaction functions to the Internet to reduce costs and enhance
customer interactions.
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BMG Direct also wanted a system that could scale as the popularity of its site
grew. Key requirements for the BMG Direct site included integration with
multiple existing systems for customer information, ordering and fulfillment.
The Web site needed to provide an enjoyable and simple process for enrolling in
the club and it needed to provide members with all of the benefits of the
paper-based club, such as the ability to order CDs, cassettes and other
merchandise, respond to featured promotions and access editorial content.
BMG Direct selected Dynamo as its e-commerce, personalization and
application server platform. BMG Direct worked with us and third-party systems
integrators to develop its Web site, which it launched in January 1998. The BMG
Direct Web site provides club members with access to selections from the entire
BMG Direct music club catalog of over 14,000 titles, significantly more than the
400-600 titles available in its catalog-based mailings. Club members also have
access to editorial content from the various BMG music clubs, such as Jazz, Rock
and Classical. Based on their member profiles, users receive personalized
content, highlights, promotional offers, pricing and custom navigation, all
consistent with the rules that govern BMG Direct's traditional business.
BMG Direct has experienced rapid adoption of its online offerings by its
existing paper-based customers and an increase in new memberships. In addition,
the establishment of an extensible personalization and e-commerce platform
allows BMG Direct to create new clubs, present additional personalized
e-commerce offerings and editorial content without requiring major
re-engineering of the system.
NEWBRIDGE NETWORKS
www.newbridge.com
Newbridge Networks is a leading provider of networking products and systems,
with a global network of resellers, distributors and affiliates. In developing
its Web presence to serve these distribution channels as well as current and
potential customers, partners, investors and employees, Newbridge's multiple Web
sites made it difficult to provide a consistent and seamless user experience. In
designing a new Web site, Newbridge's goals were to deliver its online offerings
through a single point of entry, consolidate content into a single physical
repository and provide a consistent "look-and-feel" for visitors. To serve
Newbridge's varied audiences from a single point of entry, content needed to be
targeted dynamically to specific groups of users based on their interests.
We worked with Newbridge to create a multi-tier access model for managing
user profiles that govern entitlement to content and enterprise systems, user
preferences and subscriptions. Newbridge's internal development staff, supported
by our Express Services group, developed the end-user application based on the
Dynamo product suite. Newbridge launched its new Web site in January 1999.
Today, visitors to the Web site can easily acquire information specific to their
areas of interest. Visitors also can register and create a user identity to
browse or be notified via e-mail of detailed information tailored to their needs
or interests. Dynamo's personalization capabilities enable Newbridge to gather
information about its customers and their preferences, analyze this information
and deliver targeted information on a real-time basis.
Newbridge's current platform has enabled it to adapt its Web site to manage
the delivery of information based on easily modifiable business rules, without
the overhead required to support multiple sites. The various services that have
resulted from this include an extranet for Newbridge's channel partners, as well
as an online support area that provides customers with access to product
information libraries and software updates. Users can also search for
information about product compatibility, manufacturing changes and discontinued
products. Newbridge continues to implement additional transactional, support and
customer management features on its Web site, incorporating personalization as a
means to reinforce and enhance relationships with distribution channels, and
customers.
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BABYCENTER, INC.
www.babycenter.com
BabyCenter is a leading Internet publisher and retailer for new and
expectant parents, providing original editorial content, community and online
commerce features. Its Web site currently generates over 15 million page views
and approximately 750,000 visits per month. The BabyCenter e-commerce storefront
offers over 3,000 products. In developing its Web site, BabyCenter faced the
challenge of building and supporting a full-featured and scalable
consumer-oriented Web site that could provide information, advice, products and
community features appropriate to parents at various stages of parenting.
BabyCenter selected the Dynamo suite of products in March 1998 as the
foundation of the internal development of its Web site. Since the launch of its
Web site in May 1998, BabyCenter has extended the site's functionality with
additional areas and features, including the redesigned BabyCenter store
launched in April 1999. Driven by Dynamo, the Web site provides personalized
editorial content, product guides, product recommendations, user ratings and
feedback, bulletin boards and chat rooms, as well as e-commerce transaction
capabilities.
BabyCenter has been able to establish a flexible and scalable Web
application based on Dynamo that delivers personalized content, manages the
electronic storefront and provides the platform for the editorial publishing
system that drives BabyCenter's positioning and strategy. BabyCenter now
generates revenues from e-commerce transactions to augment revenues from
sponsorships and other partnerships. Recently, BabyCenter announced it had
signed a merger agreement with eToys, Inc., a leading online retailer of
children's products.
TECHNOLOGY
We believe we are a technology leader in providing Internet customer
relationship management solutions. Our technology leadership has been evidenced
by product awards and recognition by industry commentators. For example, in
December 1998 our Dynamo Application Server earned the 1998 CNET Builder.com
Award as "Best Application Server." We believe our technology enables our
customers to create, deploy and maintain large-scale, personalized e-commerce
Web applications in less time and at a lower cost than existing alternatives. We
believe that our products have the following technological advantages:
JAVA FOUNDATION
Our products are written entirely in Java and support Java programming for
customization and extension, except for a few integration and installation
modules that can be implemented only in conventional programming languages.
We believe that our Java implementation results in the following benefits:
- STRONG COMPONENT MODEL. Java provides a component standard known as
"JavaBeans," which enables developers to segment their code into discrete,
well-defined units which can be assembled in a "building block" fashion to
create new applications. JavaBeans' modularity makes it easier to create
reusable software as well as maintain existing systems.
- PLATFORM NEUTRALITY. Java's portability allows our applications to be run
on virtually any major computer system without modification. This
portability eliminates porting costs normally required to support multiple
platforms or to change platforms, while allowing us to release products on
major platforms simultaneously.
- ENTERPRISE INTEGRATION. We believe that Java's portability and direct
support for distributed applications are helping Java to become the de
facto standard language for enterprise system integration.
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- FEWER PROGRAMMING ERRORS. Java's automatic memory management reduces
memory corruption errors, which typically represent the most costly and
difficult software "bugs" in conventional compiled languages such as C or
C++.
- ACCELERATED DEVELOPMENT. We believe that the above features, combined with
the broad availability of high-quality Java development tools, result in
faster development time.
MODULAR, STANDARDS-BASED COMPONENT ARCHITECTURE
One of the key features of our product architecture is its high degree of
modularity, achieved by building additional functionality on top of the
JavaBeans component technology. Customizations and extensions built by our
customers or partners using industry standard JavaBean components can be managed
by Dynamo Application Server. Dynamo Application Server enhances the naming,
configuration and lifecycle of each component, allowing components to be added,
extended, duplicated or replaced without recompilation of the rest of the
system. The modularity of our component technology allows our products to be
adapted to meet future business needs. In contrast, producers of non-modular
products must try to anticipate and develop additional functionality at the time
that they market their products.
One of the most powerful uses of our component technology is to integrate
our software with external enterprise systems. We provide reference
implementations of integration components while enabling our customers and
partners to easily replace our reference components with new components that
provide the same function but integrate with their existing systems. We adhere
to industry standards to enable our products to leverage technologies produced
by third parties and to protect the development investments of our partners and
customers.
PERFORMANCE, SCALABILITY AND RELIABILITY
Our products have a layered architecture. Dynamo Personalization Server is
built on top of Dynamo Application Server, and Dynamo Commerce and Ad Station
are built on top of Dynamo Personalization Server. We believe that the
integration of Dynamo Application Server with our other products yields
significant benefits, particularly in performance, scalability and reliability.
Dynamo Application Server uses page compilation technology to enhance the
performance of Web page generation. In most dynamic page generation servers, a
Web page is generated from an HTML template, a Web page that is mostly standard
HTML content with special embedded instructions to generate the dynamic portions
of the page. We utilize this basic page template model, but unlike most other
servers, Dynamo Application Server converts the HTML template into Java source
code and compiles it into executable binary classes. This page compilation
technology improves the speed at which Dynamo Application Server can generate
and serve dynamic Web pages.
Scalability is a term used to describe the ability of an application to
handle greater load when additional hardware is added to a system. Scalability
is particularly important for e-commerce applications where demand can grow
dramatically and unpredictably. Dynamo handles scalability across computers
through a dynamic session-based load management system in which multiple copies
of the application are run on multiple computers. This load distribution scheme
has the advantage of accommodating additional users by adding more computers.
Our load management technology also enables our applications to handle computer
hardware failures automatically and without interrupting the user's experience.
If a computer fails, users are automatically reassigned to another running
computer.
RESEARCH AND DEVELOPMENT
Our research and development group is responsible for product management,
core technology, product architecture, product development, quality assurance,
documentation and third-party software
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integration. This group also assists with pre-sale and customer support
activities referred from the Express Services group and quality assurance tasks
supporting the Innovation Solutions group.
Since we began focusing on selling software products in 1996, the majority
of our research and development activities have been directed towards creating
new versions of our products which extend and enhance competitive product
features, particularly in the areas of integrating our products with external
enterprise systems, supporting emerging industry standards and creating more
powerful user interfaces to our products. The systems we integrate with include
relational databases, content management systems and credit card payment
servers. The industry standards we support include Java Servlets, a standard for
constructing Web pages using the Java programming language; Enterprise Java
Beans, a standard for developing modular Java programs that can be accessed over
a network; and Simple Network Management Protocol, a standard for remotely
monitoring the operation of a system.
SALES AND MARKETING
Our principal target markets are Fortune 1000 companies and new businesses
that plan to use the Internet as their primary business channel. Our customers
are characterized by their strong commitment to Internet customer relationship
management. We target these potential customers directly through our sales force
and indirectly through arrangements with systems integrators, Web developers,
original equipment manufacturers and other technology partners.
We employ one group of sales professionals who are compensated based on
product and service sales made directly to end-users and a second group who are
compensated based on sales made through co-selling efforts with our systems
integrator partners. We train and assist systems integrators in promoting,
selling, deploying, extending and supporting our products. The objective of this
strategy is to establish close product relationships directly with our customers
and to motivate systems integrators to adopt the Dynamo technology and suite of
products on Internet and Web-based projects for their clients.
In addition, we recently initiated a strategy to co-market our products with
technology partners, such as Documentum and Factpoint, and to sell our products
through original equipment manufacturers such as Informix, with which we entered
into an agreement in December 1998. We intend to increase sales of our products
by entering into similar relationships with additional technology partners and
original equipment manufacturers.
Our co-marketing relationships are with major systems integrators that serve
the market for information system products and services. The objective of this
co-marketing strategy is to motivate systems integrators to adopt the Dynamo
technology and suite of products on Web-based projects for their clients. We
train and assist our systems integration partners to enable them to deploy,
extend and support our products.
Set forth below is a partial list of organizations with which we have
selling and marketing relationships:
American Management Systems
Cambridge Technology Partners
Computer Sciences Corporation
Context Integration
Fire Engine Red
Fort Point Partners
Free Range Media
Icon Medialab
iXL
Javelin Technology
Modem Media . Poppe Tyson
Organic Online
Planet Access Networks
Phoenix Pop Productions
Quidnunc Group
Strategic Interactive Group
USWeb/CKS
Vision Consulting
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We currently sell our products primarily in the United States. However, we
are expanding our international sales organization. Currently, we are focusing
our international sales efforts primarily in the United Kingdom and Japan. Many
of our systems integrators and technology partners are global enterprises. We
believe this provides us with an opportunity to expand our international
business.
COMPETITION
The market for Internet customer relationship management solutions is
intensely competitive, subject to rapid technological change and significantly
affected by new product introductions and other market activities of industry
participants. We expect competition to persist and intensify in the future. We
have three primary sources of competition:
- in-house development efforts by potential customers or partners
- Internet applications software vendors, such as BroadVision, InterWorld,
Open Market and Vignette
- platform application server products and vendors, such as BEA Systems,
IBM's Websphere products, Microsoft, Netscape, among others.
We also compete in the platform application server market with the
NetDynamics product of Sun Microsystems, which is also one of our customers and
co-marketing partners.
We believe the primary factors upon which we compete are the functionality
and expandability of our products, the extent to which our products integrate
with other systems, our prices and our ability to provide quality services to
assist our customers and partners. We believe that we have competitive
advantages that differentiate our products and services from those of our
competitors. Our application suite provides improved time-to-market and lower
cost of ownership in comparison to in-house development efforts. We believe the
expandability and scalability of our application server-based platform, as well
as our product features, provide us an advantage over other Internet application
software vendors. We believe the functionality provided by the personalization
and e-commerce components of the Dynamo application suite gives us a competitive
advantage over platform application server vendors.
Despite these advantages, many of our competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do. As a result, they may be able to undertake more extensive
promotional activities, offer more attractive pricing and purchase terms, and
bundle their products in a manner that would put us at a competitive
disadvantage.
Competition could materially and adversely affect our ability to obtain
revenues from license fees from new or existing customers and professional
services revenues from existing customers. Further, competitive pressures could
require us to reduce the price of our software products. In either case, our
business, operating results and financial condition would be materially and
adversely affected.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete depend on our ability to develop and
protect the proprietary aspects of our technology and to operate without
infringing on the proprietary rights of others. We rely on a combination of
trademark, trade secret and copyright law and contractual restrictions to
protect our proprietary technology. These legal protections afford only limited
protection for our technology. We seek to protect our source code for our
software, documentation and other written materials under trade secret and
copyright laws. We license our software pursuant to signed license, "click
through" or "shrink wrap" agreements, which impose restrictions on the
licensee's ability to use the software, such as prohibiting reverse engineering
and limiting the use of copies. We also seek to avoid disclosure of our
intellectual property by requiring employees and consultants with access to our
proprietary
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information to execute confidentiality agreements and by restricting access to
our source code. Due to rapid technological change, we believe that factors such
as the technological and creative skills of our personnel, new product
developments and enhancements to existing products are more important than legal
protections to establish and maintain a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect proprietary
rights to as great an extent as the laws of the United States. Any such
resulting litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business, operating
results and financial condition. There can be no assurance that our means of
protecting our proprietary rights will be adequate or that our competitors will
not independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.
In addition, our software is written in the Java programming language
developed by Sun Microsystems and we incorporate Java Runtime Environment, Java
Naming and Directory Interface, Java Servlet Development Kit, Java Foundation
Classes, JavaMail and JavaBeans Activation Framework into our products under
licenses granted to us by Sun. Currently, Sun makes these technologies available
to the public at no charge. However, if Sun declined to continue to allow us to
use these technologies for any reason, we would be required to (a) license the
equivalent technology from another source, (b) rewrite the technology ourselves,
and/or (c) rewrite portions of our software to accommodate the change or no
longer use the technology.
EMPLOYEES
As of March 31, 1999, we had a total of 165 employees. Of our employees, 49
were in research and development, 25 in sales and marketing, 72 in professional
services and 19 in finance and administration. Our future success will depend in
part on our ability to attract, retain and motivate highly qualified technical
and management personnel, for whom competition is intense. From time to time, we
also employ independent contractors to support our professional services,
product development, sales, marketing and business development organizations.
Our employees are not represented by any collective bargaining unit, and we have
never experienced a work stoppage. We believe our relations with our employees
are good.
PROPERTIES
Our headquarters are currently located in a leased facility in Boston,
Massachusetts, consisting of approximately 30,000 square feet. In March 1999 we
signed a new lease for approximately 60,000 square feet in Cambridge,
Massachusetts. We expect to relocate to this facility in August 1999. The
Cambridge facility is expected to meet our needs through the end of 1999, at
which time we intend to expand our facilities by entering into one or more
additional leases. We have also leased offices for sales and support personnel
in Chicago, Illinois, San Francisco, California and Reading, England. See note 7
to our financial statements.
LEGAL PROCEEDINGS
A patent infringement claim was filed by BroadVision, one of our
competitors, against us on December 11, 1998. The case was filed in the U.S.
District Court for the Northern District of
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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 judgment that
we are not infringing their patent and that the patent in question is in fact
unenforceable and invalid.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers, other key employees and directors, and their
respective ages and positions as of March 31, 1999, are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Jeet Singh(1)........................................ 35 President, Chief Executive Officer and Director
Joseph T. Chung(1)................................... 34 Chief Technology Officer, Treasurer and Chairman of
the Board
Ann C. Brady(1)...................................... 35 Vice President, Finance and Chief Financial Officer
Paul G. Shorthose(1)(2).............................. 41 Chief Operating Officer
William Wittenberg(1)................................ 40 Senior Vice President, Product Development
Patricia J. Morton................................... 42 Vice President, Services
Lauren J. Kelley..................................... 39 Vice President, Sales
Christopher K. Edwards............................... 35 Vice President, Design
Brenda Sullivan...................................... 33 Vice President, Organizational Development
Robert P. Forlenza(3)................................ 43 Director
Scott A. Jones(4).................................... 38 Director
Charles R. Lax(4).................................... 39 Director
Thomas N. Matlack(3)................................. 34 Director
Jeffrey T. Newton.................................... 41 Director
</TABLE>
- ------------------------
(1) Executive officer.
(2) Mr. Shorthose's employment began on June 22, 1999.
(3) Member of the Audit Committee.
(4) Member of the Compensation Committee.
JEET SINGH co-founded the company with Joseph Chung in 1991 and is our
President and Chief Executive Officer and a member of our board of directors.
Previously, Mr. Singh held marketing positions with Boston Technology, Inc., a
manufacturer of advanced voice processing computers, Team Technologies, a
Washington, D.C.-based consulting firm specializing in workgroup productivity,
and Groupe Bull/Bull Corporation of America.
JOSEPH T. CHUNG co-founded the company with Mr. Singh in 1991 and is our
Chief Technology Officer, Treasurer and Chairman of our board of directors.
Previously, Mr. Chung was the technical director and chief technology designer
of the hyperinstrument group at the MIT Media Lab and held engineering positions
at Apple Computer and Digital Equipment Corporation.
ANN C. BRADY has been Chief Financial Officer since April 1999 and Vice
President, Finance since January 1998. From May 1997 to January 1998, she was
Director of Finance. From 1992 to May 1997, Ms. Brady was head of Finance and
Accounting for HPR, Inc., a software and consulting services company,
subsequently acquired by McKesson/HBOC.
PAUL G. SHORTHOSE became Chief Operating Officer on June 22, 1999. From July
1998 to June 1999, he was Vice President of Marketing and Business Development
for Context Integration. From August 1997 to July 1998, Mr. Shorthose served as
our Vice President, Worldwide Services. From April 1992 to August 1997, Mr.
Shorthose was Vice President/General Manager for the Northeast U.S. and Canada
Professional Services Organization of Sybase, Inc.
WILLIAM WITTENBERG has been Senior Vice President, Product Development since
March 1998. From April 1996 to March 1998, he was Vice President, Engineering.
From 1991 to January 1995,
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Mr. Wittenberg was Director of Product Management and User Interface Design for
Lotus Development Corporation.
PATRICIA J. MORTON has been Vice President, Services since August 1998. From
June 1997 to July 1998, Ms. Morton was a Vice President with Syrinx Corporation,
a software and consulting firm. From April 1997 to June 1997, she was Vice
President, Engineering for SourceCraft, an internet software company. From 1990
to March 1997, Ms. Morton was Vice President of Development for CenterLine
Software, Inc., a software development company.
LAUREN J. KELLEY has been Vice President, Sales since December 1996. From
September 1996 to December 1996, she worked as a consultant to the company on
the European market. From July 1995 to December 1996 Ms. Kelly was a sales and
marketing consultant with TechConnect Strategies, Inc., an international
business development firm. From January 1994 to July 1995, Ms. Kelley was
General Manager at Borland International in Paris, France.
CHRISTOPHER K. EDWARDS has been Vice President, Design since April 1999.
From February 1998 to April 1999, he was Senior Design Director and from
February 1995 to February 1998, he was Lead Designer. Prior to joining us, Mr.
Edwards was a graduate student at the Institute of Design, ITT.
BRENDA SULLIVAN has been Vice President, Organizational Development since
March 1998. From March 1997 to March 1998, she was Director of Internal Affairs,
from June 1996 to March 1997, she was Director of Operations; from September
1994 to June 1996, she was Operations Manager; and from September 1993 to
October 1994, she was Office Manager.
ROBERT P. FORLENZA has been a member of our board of directors since August
1998. Since January 1995, he has been Managing Director of Tudor Investment
Corporation. From 1989 to December 1994, he was a Vice President at Carlisle
Capital Corporation. He also serves on the board of PRT Group, Inc., a software
engineering services company.
SCOTT A. JONES has been a member of our board of directors since November
1997. Since co-founding Escient, Inc., a company focusing on Internet
applications related to entertainment in the home, in July 1996, Mr. Jones has
served as its Chief Executive Officer and Chairman. After co-founding Boston
Technology, Inc. in 1986, Mr. Jones served as its Chairman and Chief Scientist
until 1992. Since 1994, he has also been a principal of Threshold Technologies,
Inc., a consulting firm, and King Air Charters, Inc., an air charter company.
Mr. Jones also serves on the board of HIE, Inc., a software integration services
company.
CHARLES R. LAX has been a member of our board of directors since December
1997. Since November 1997, Mr. Lax has been General Partner of SOFTBANK
Technology Ventures. From March 1996 to November 1997, he was Vice President at
SOFTBANK Holdings Inc. Mr. Lax also serves on the board of Interliant, Inc., an
Internet hosting service company.
THOMAS N. MATLACK has been a member of our board of directors since November
1997. Since August 1998, he has been a Managing Partner at Megunticook
Management LLC, a private investment fund. From 1992 to February 1997, he held
various positions with the Providence Journal Company, including Chief Financial
Officer from April 1996 to February 1997, Vice President, Finance from September
1995 to April 1996, and Director, Financial Planning and Analysis from 1992 to
September 1995.
JEFFREY T. NEWTON has been a member of our board of directors since
September 1998. Since June 1997, Mr. Newton has been Managing Director of Gemini
Investors LLC. Since 1992, he has also been President of Concord Partners, LTD,
a business consulting firm.
Our board of directors is divided into three classes, with the members of
each class serving for a staggered three-year term. Our board currently consists
of two Class I directors, three Class II directors and two Class III directors.
At each annual meeting of stockholders, a class of directors will be elected for
a three-year term to succeed the directors of the same class whose terms are
then expiring. The
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<PAGE>
term of the Class I directors (Messrs. Forlenza and Newton) expires at the
annual meeting of stockholders to be held in 2000. The term of the Class II
directors (Messrs. Jones, Lax and Matlack) expires at the annual meeting of
stockholders to be held in 2001. The term of the Class III directors (Messrs.
Chung and Singh) expires at the annual meeting of stockholders to be held in
2002.
Each officer serves at the discretion of our board of directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has a compensation committee, composed of Messrs.
Jones and Lax, which makes recommendations concerning salaries and incentive
compensation for our employees and consultants and administers and grants awards
pursuant to our stock benefit plans, and an audit committee, composed of Messrs.
Forlenza and Matlack, which reviews the results and scope of the audit and other
services provided by our independent public accountants.
DIRECTOR COMPENSATION
All of our directors are reimbursed for expenses incurred to attend board of
directors and committee meetings. In addition, our non-employee directors are
eligible to receive stock options under our 1999 Outside Director Stock Option
Plan.
In November 1997, we entered into a consulting agreement with one of our
directors, Thomas N. Matlack, to provide consulting services in the areas of
strategic planning and financial advice and planning. In exchange for these
services, we issued Mr. Matlack a non-statutory option to purchase a total of
195,000 shares of our common stock at an exercise price of $0.50 per share. This
consulting agreement terminated in November 1998.
Our 1999 Outside Director Stock Option Plan was adopted by our board of
directors in May 1999 and approved by our stockholders in June 1999. Under the
terms of the director plan, directors who are not employees of the company
receive nonstatutory options to purchase shares of our common stock. A total of
150,000 shares of our common stock may be issued upon exercise of options
granted under the plan. Each non-employee director will receive an option to
purchase 5,000 shares of our common stock on the effective date of this offering
at a price per share equivalent to the initial public offering price. In
addition, each non-employee director will receive an option to purchase 2,500
shares of our common stock on the date of each annual meeting of stockholders
commencing with the 2000 annual meeting of stockholders, at an exercise price
per share equal to the closing price of our common stock on the date of grant.
In addition, individuals who become directors after this offering and are not
our employees will receive an option to purchase 5,000 shares of our common
stock on the date of his or her initial election to our board of directors and
an option to purchase 2,500 shares of our common stock on the date of each
annual meeting of stockholders after his or her election. The exercise price per
share of such options will be the closing price per share of our common stock on
the date of grant. All options granted under the director plan will be fully
vested upon grant.
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EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the year ended December 31, 1998 to the following (collectively, the "Named
Executive Officers"):
- our chief executive officer
- our four other executive officers who were serving as executive officers
at December 31, 1998 and whose total salary and bonus for such year
exceeded $100,000
- our current chief operating officer, who served as our Vice President,
Services for a portion of 1998
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SHARES
---------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- ---------------------------------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Jeet Singh............................................................ $ 150,000 $ 3,038(1) --
President and Chief Executive Officer
Joseph T. Chung....................................................... 150,000 --
Chief Technology Officer, Treasurer and Chairman of the Board
Ann C. Brady.......................................................... 125,000 -- 62,250
Vice President, Finance and Chief Financial Officer
William Wittenberg.................................................... 138,846 -- 90,930
Senior Vice President, Product Development
Lauren J. Kelley...................................................... 120,000 149,610(2) 35,400
Vice President, Sales
Paul G. Shorthose(3).................................................. 88,846 60,000(4) --
</TABLE>
- ------------------------
(1) Represents imputed interest on an interest-free loan extended to Mr. Singh.
(2) Includes commission of $46,247 paid in 1999 but earned in 1998.
(3) Mr. Shorthose resigned as our Vice President, Services in August 1998. He
began employment as our Chief Operating Officer on June 22, 1999.
(4) Excludes bonus of $20,000 earned in 1997 and paid in 1998.
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OPTION GRANTS AND EXERCISES DURING 1998
The following table contains information concerning the grant of options to
purchase shares of our common stock to each of the Named Executive Officers
during the fiscal year ended December 31, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES OR BASE TERM (1)
OPTIONS IN FISCAL PRICE EXPIRATION ------------------------
NAME GRANTED YEAR ($/SH)(1) DATE 5% ($) 10% ($)
- -------------------------------------------- ----------- --------------- ------------- ------------ ---------- ------------
Jeet Singh.................................. -- --% $ -- -- $ -- $ --
Joseph T. Chung............................. -- -- -- -- -- --
Ann C. Brady................................ 42,000 2.6 0.50 3/16/2008 799,963 1,286,246
7,500 0.5 0.50 8/26/2008 142,851 229,687
12,000 0.7 0.50 8/26/2008 228,561 367,499
750 0.0 0.50 8/26/2008 14,285 22,969
William Wittenberg.......................... 30,000 1.8 0.50 3/16/2008 571,402 918,747
30,180 1.8 0.50 8/26/2008 574,830 924,260
750 0.0 0.50 8/26/2008 14,285 22,969
30,000 1.8 0.50 12/18/2008 571,402 918,747
Lauren J. Kelley............................ 33,000 2.0 0.50 8/26/2008 628,542 1,010,622
1,650 0.1 0.50 8/26/2008 31,427 50,531
750 0.0 0.50 8/26/2008 14,285 22,969
Paul G. Shorthose........................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. This presentation also assumes that the market value
of a share of common stock on each option grant date equaled $12.00, the
initial public offering price of the shares offered hereby. These numbers
are calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect our estimate of future stock price growth.
Actual gains, if any, on stock options exercises and common stock are
dependent on the timing of such exercise and the future performance of the
common stock.
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FISCAL YEAR-END OPTION VALUES
The following table sets forth information for each of the Named Executive
Officers with respect to the value of options outstanding as of December 31,
1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END ($) (1)
EXERCISE REALIZED -------------------------- ---------------------------
NAME (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- --------- ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jeet Singh............................ -- $ -- -- -- $ -- $ --
Joseph T. Chung....................... -- -- -- -- -- --
Ann C. Brady.......................... 12,750 146,625 28,406 91,595 326,669 1,053,343
William Wittenberg.................... -- -- 186,345 176,385 2,159,843 1,164,375
Lauren J. Kelley...................... -- -- 10,350 41,550 119,025 477,825
Paul G. Shorthose..................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Assumes a per share fair market value equal to $12.00, the initial public
offering price of the shares offered hereby.
BENEFIT PLANS
1996 STOCK OPTION PLAN. Our 1996 Stock Option Plan was adopted by our board
of directors in April 1996 and approved by our stockholders in May 1996. The
1996 plan authorizes the issuance of up to 6,300,000 shares of our common stock.
As of March 31, 1999, options to purchase an aggregate of 2,971,169 shares of
common stock at a weighted average exercise price of $0.80 per share were
outstanding under the 1996 plan. Subsequent to March 31, 1999, we granted
options to purchase an aggregate of 1,196,725 shares of common stock at a
weighted average exercise price of $9.56 per share, including options to
purchase 575,000 shares at an exercise price of $10.00 per share granted to Paul
G. Shorthose and 25,000 shares at an exercise price of $10.00 per share granted
to Ann C. Brady.
The 1996 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and nonstatutory stock
options.
Our officers, employees, directors, consultants and advisors are eligible to
receive awards under the 1996 plan. Under present law, however, incentive stock
options may only be granted to employees. No employee may receive any award for
more than 500,000 shares in any calendar year.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price less than, equal to or greater than the fair market
value of our common stock on the date of grant. Under present law, incentive
stock options and options intended to qualify as performance-based compensation
under Section 162(m) of the Internal Revenue Code may not be granted at an
exercise price less than the fair market value of the common stock on the date
of grant or less than 110% of the fair market value in the case of incentive
stock options granted to optionees holding more than 10% of the voting power of
the company. The 1996 plan permits our board of directors to determine how
optionees may pay the exercise price of their options, including by cash, check
or in connection with a "cashless exercise" through a broker, by surrender to us
of shares of common stock, by delivery to us of a promissory note, or by any
combination of the permitted forms of payment.
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<PAGE>
As of March 31, 1999, approximately 150 persons were eligible to receive
awards under the 1996 plan, including eight executive officers and five
non-employee directors.
Our board of directors administers the 1996 plan. Our board of directors has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the plan and to interpret its provisions. It may
delegate authority under the 1996 plan to one or more committees of the board of
directors. Our board of directors has authorized the compensation committee to
administer the 1996 plan, including the granting of options to our executive
officers. Subject to any applicable limitations contained in the 1996 plan, our
board of directors, our compensation committee or any other committee to whom
our board of directors delegates authority, as the case may be, selects the
recipients of awards and determines:
- the number of shares of common stock covered by options and the dates upon
which such options become exercisable
- the exercise price of options
- the duration of options
In the event of a merger, liquidation or other acquisition event, our board
of directors is authorized to take one or more of the following actions:
- provide that outstanding options be assumed or substituted for by the
acquiror
- provide that all unexercised options terminate immediately prior to the
event unless exercised within a time period specified in written notice to
the option holder
- in the event of a merger in which the holders of common stock would
receive a cash payment for each share surrendered, provide for a cash
payment to each option holder equal to the amount by which the amount paid
to common stock holders exceeds the option's exercise price, multiplied by
the total number of shares for which the option is then exercisable: in
exchange for this payment, the options would be terminated
- provide that any or all outstanding options become fully exercisable
immediately prior to the event
No award may be granted under the 1996 plan after April 2006, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. Our board of directors may at any time amend, suspend or terminate the
1996 plan, except that no award granted after an amendment of the 1996 plan and
for which stockholder approval is required under Section 422 of the Internal
Revenue Code shall become exercisable, realizable or vested, to the extent such
amendment was required to grant such award, unless and until such amendment is
approved by our stockholders.
1999 EMPLOYEE STOCK PURCHASE PLAN. Our 1999 Employee Stock Purchase Plan
was adopted by our board of directors in May 1999 and approved by our
stockholders in June 1999. The purchase plan authorizes the issuance of up to a
total of 500,000 shares of our common stock to participating employees.
All of our employees, including our directors who are employees, and all
employees of any participating subsidiaries, whose customary employment is more
than 20 hours per week and for more than five months in any calendar year, are
eligible to participate in the purchase plan. Employees who would immediately
after the grant own 5% or more of the total combined voting power or value of
our stock or any subsidiary are not eligible to participate. As of March 31,
1999, approximately 150 of our employees would have been eligible to participate
in the purchase plan.
During each designated payroll deduction period, or offering period, each
eligible employee may authorize us to deduct between 1% to 10%, in increments of
1%, of his or her base pay, including sales commissions. We will hold the
deducted money in a non-interest bearing account for each participating
54
<PAGE>
employee. On the last business day of the offering period we will use the amount
in his or her account to buy shares of our common stock for each participating
employee at the following purchase price. The purchase price will be 85% of the
closing market price of our common stock on either (a) the first business day of
the offering period or (b) the last business day of the offering period,
whichever is lower. No employee is allowed to buy shares of common stock worth
more than $25,000, based on the fair market value of the common stock on the
first day of the offering period, in any calendar year under the plan. Each
offering period will last for six months. The first offering will begin on the
day on which trading of our common stock begins on the Nasdaq National Market,
and the closing price of the common stock on the first business day of the first
offering period will equal the initial public offering price.
An employee must be a participant on the last day of an offering period in
order to purchase stock under the plan. An employee's participation in an
offering terminates upon:
- the employee's withdrawl of the balance accumulated in his or her account
- termination of employment
- retirement
- death
- transfer to a subsidiary of the company which does not participate in the
plan
- the subsidiary for which the employee works no longer being a subsidiary
of the company
In the event of the employee's death, the balance in the employee's account will
be refunded to the employee's beneficiary or the executor or administrator of
the employee's estate.
Because participation in the purchase plan is voluntary, we cannot now
determine the number of shares of our common stock to be purchased by any of our
current executive officers, by all of our current executive officers as a group
or by our non-executive employees as a group.
401(K) PLAN. We have adopted an employee savings and retirement plan
qualified under Section 401 of the Internal Revenue Code and covering all of our
employees. Employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) plan. We may make matching or additional contributions
to the 401(k) plan in amounts to be determined annually by our board of
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the compensation committee of our board of directors
are Messrs. Jones and Lax. No executive officer has served as a director or
member of the compensation committee, or other committee serving an equivalent
function, of any other entity whose executive officers served as a director or
member of the compensation committee of our board of directors. However, each of
Messrs. Jones and Lax and/or their affiliates have been parties to transactions
with us. See "Transactions with Related Parties."
55
<PAGE>
TRANSACTIONS WITH RELATED PARTIES
The following describes transactions between us and our officers, directors
and stockholders who prior to this offering owned at least 5% of our outstanding
capital stock.
In July 1995, we sold 1,300,000 shares of series A preferred stock, 650,000
shares to each of Messrs. Madanjeet Singh and B.U. Chung for $0.385 per share.
Upon the closing of this offering, the outstanding shares of series A preferred
stock will convert into 1,950,000 shares of common stock. Mr. Singh is the
father of Jeet Singh, our President and Chief Executive Officer and one of our
directors. Mr. Chung is the father of Joseph T. Chung, our Chief Technology
Officer, Treasurer and Chairman of the Board.
In December 1996, we sold 425,532 shares of series B preferred stock to
SOFTBANK Ventures Inc. for $7.05 per share and issued a performance-based
warrant to SOFTBANK to purchase 425,532 shares of series B preferred stock at an
exercise price of $7.05 per share. In August 1998, as a condition to obtaining
the series B preferred stockholders' approval of the series D preferred stock
financing, the warrant was cancelled and a new warrant issued for 425,532 shares
of Series B preferred stock at an exercise price of $1.385 per share. Upon the
closing of this offering, the outstanding shares of series B preferred stock
will convert into 1,642,953 shares of common stock, and SOFTBANK's warrant will
be cancelled. SOFTBANK owns 6.5% of our capital stock. Charles R. Lax, a member
of our board of directors, is a General Partner of SOFTBANK Technology Ventures,
an affiliate of SOFTBANK Ventures Inc.
In November and December 1997 and April 1998, we sold to private investors
1,456,789 shares of series C preferred stock for $1.62 per share. Scott A.
Jones, a member of our board of directors, purchased 401,235 shares, and Thomas
N. Matlack, another member of our board of directors, purchased 30,864 shares.
Mr. Matlack is also a limited partner of Wyndcrest Partners, Ltd., which
purchased 376,545 shares of series C preferred stock. Mr. Matlack had
approximately a 4% limited partnership interest in the shares purchased by
Wyndcrest. Upon the closing of this offering, the outstanding shares of series C
preferred stock will convert into 4,437,567 shares of common stock.
In August, September and October 1998, we sold to private investors
2,343,750 shares of series D preferred stock for $3.20 per share and warrants to
purchase 2,146,325 shares of common stock at an exercise price of $0.11 per
share. Tudor Private Equity Fund L.P. purchased 1,394,531 shares of series D
preferred stock and warrants to purchase 1,277,064 shares of common stock. The
Raptor Global Fund L.P. and The Raptor Global Fund Ltd. purchased 246,094 shares
of series D preferred stock and warrants to purchase 430,962 shares of common
stock. These related entities own 21.5% of our capital stock. Robert P.
Forlenza, a member of our board of directors, is a Managing Director of Tudor
Investment Corporation, the investment advisor of the Tudor and Raptor entities.
GMN Investors II, L.P. purchased 625,000 shares of series D preferred stock and
a warrant to purchase 1,094,511 shares of common stock. GMN Investors II, L.P.
owns 8.2% of our capital stock. Jeffrey T. Newton, a member of our board of
directors, is Managing Director of Gemini Investors LLC, which controls GMN
Investors II, L.P. Upon the closing of this offering, the outstanding shares of
series D preferred stock will convert into 7,800,369 shares of common stock, and
the warrants issued to the holders of series D preferred stock will be
cancelled.
In 1995, 1996 and 1998 we loaned Jeet Singh a total of $60,755 on an
interest-free basis. This loan was repaid in full in April 1999 with a bonus we
paid him.
Pursuant to a stockholders agreement dated August 18, 1998, Mr. Singh, Mr.
Chung and the holders of our preferred stock agreed to vote their shares to fix
the number of directors at seven. Pursuant to this agreement, the board was to
consist of two directors elected by the holders of series D preferred stock; one
director elected by the holders of series C preferred stock; one director
elected by the holders of series B preferred stock; two directors elected by the
holders of our common stock; and
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<PAGE>
one director elected by the holders of series B preferred stock, series C
preferred stock, series D preferred stock and our common stock. This agreement
terminates upon completion of this offering.
In November 1997, we entered into a consulting agreement with Mr. Matlack.
Mr. Matlack provided consulting services in the areas of strategic planning and
financial advice and planning. In exchange for these services, we issued Mr.
Matlack a non-statutory option to purchase a total of 195,000 shares of our
common stock at an exercise price of $0.50 per share. This consulting agreement
terminated in November 1998.
In June 1998 we borrowed $300,000 from Mr. Jones. This loan did not bear
interest and was repaid in full in July 1998.
All future transactions between us and our officers, directors, principal
stockholders and their affiliates will be approved by a majority of the board of
directors, including a majority of the disinterested directors, and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 31, 1999, and as adjusted to reflect
the sale of the shares of common stock in this offering, by: (a) each person we
know to own beneficially more than 5% of our common stock; (b) each of our
directors; (c) each of the Named Executive Officers; (d) each of the selling
stockholders; and (e) all directors and executive officers as a group. Unless
otherwise indicated, each person named in the table has sole voting power and
investment power, or shares such power with his or her spouse, with respect to
all shares of capital stock listed as owned by such person. The address of each
of our executive officers and directors is c/o Art Technology Group, Inc., 101
Huntington Avenue, Boston, Massachusetts 02199.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission. The
information is not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes any shares as to which
the individual has sole or shared voting power or investment power and any
shares as to which the individual has the right to acquire beneficial ownership
within 60 days after March 31, 1999 through the exercise of any stock option or
other right. The inclusion herein of such shares, however, does not constitute
an admission that the named stockholder is a direct or indirect beneficial owner
of such shares. Percentage of beneficial ownership is based on 25,407,008 shares
of common stock outstanding as of March 31, 1999 and 30,575,008 shares of common
stock outstanding after completion of this offering, assuming exercise of the
over-allotment option in full. Any shares to be sold by selling stockholders
will only be sold pursuant to the underwriters' over-allotment option.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
AFTER OFFERING IF
SHARES BENEFICIALLY NUMBER OF OVER-ALLOTMENT
OWNED PRIOR TO SHARES OFFERED OPTION EXERCISED
OFFERING IN IN FULL
---------------------- OVER-ALLOTMENT ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OPTION NUMBER PERCENT
- --------------------------------------- --------- ----------- --------------- --------- -----------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS, DIRECTORS AND NAMED
EXECUTIVE OFFICERS
Tudor Private Equity Fund L.P.(1)...... 4,641,219 18.3% -- 4,641,219 15.2%
40 Rowes Wharf
Boston, MA 02110
Jeet Singh(2).......................... 3,750,000 14.8 150,000 3,600,000 12.3
Joseph T. Chung(3)..................... 3,750,000 14.8 150,000 3,600,000 12.3
GMN Investors II, L.P.(4).............. 2,080,098 8.2 -- 2,080,098 6.8
20 William Street
Wellesley, MA 02481
SOFTBANK Ventures Inc.(5).............. 1,642,953 6.5 -- 1,642,953 5.4
24-1 Nihonbashi--Hakozakicho
Chu-ku, Tokyo 103
Japan
Robert P. Forlenza(6).................. 5,460,258 21.5 -- 5,460,258 17.9
Jeffrey T. Newton(7)................... 2,080,098 8.2 -- 2,080,098 6.8
Charles R. Lax(8)...................... 1,642,953 6.5 -- 1,642,953 5.4
Scott A. Jones......................... 1,222,201 4.8 40,740 1,181,461 4.0
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
AFTER OFFERING IF
SHARES BENEFICIALLY NUMBER OF OVER-ALLOTMENT
OWNED PRIOR TO SHARES OFFERED OPTION EXERCISED
OFFERING IN IN FULL
---------------------- OVER-ALLOTMENT ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OPTION NUMBER PERCENT
- --------------------------------------- --------- ----------- --------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Thomas N. Matlack(9)................... 337,917 1.3% 30,000 307,917 1.1%
William Wittenberg..................... 257,685 1.0 22,636 235,049 *
Ann C. Brady(10)....................... 59,343 * 12,000 47,343 *
Paul Shorthose(11)..................... -- -- -- -- --
All directors and executive officers as
a group (10 persons)................. 18,560,455 72.6 405,376 18,155,079 60.4
OTHER SELLING STOCKHOLDERS
Madanjeet Singh........................ 975,000 3.8 30,000 945,000 3.2
B.U. Chung............................. 960,100 3.8 30,000 930,100 3.0
Nathan Abramson........................ 343,980 1.4 17,000 326,980 1.1
Trygve Myhren.......................... 282,047 1.1 18,224 263,823 *
Fumiaki Matsumoto...................... 232,373 * 13,000 219,373 *
Andrew Hong............................ 225,000 * 11,250 213,750 *
Robert Mason........................... 182,219 * 10,000 172,219 *
Grace Colby(12)........................ 168,000 * 8,400 159,600 *
Brenda Sullivan........................ 161,498 * 11,000 150,498 *
Jane Thompson.......................... 147,367 * 5,000 142,367 *
Michael Margolis....................... 141,022 * 5,000 136,022 *
Christopher Edwards.................... 125,030 * 3,000 122,030 *
Henry P. Becton Jr. Trust.............. 94,014 * 7,000 87,014 *
Tinsley Galyean........................ 75,000 * 3,750 71,250 *
Ina Sipser(13)......................... 49,278 * 4,000 45,278 *
</TABLE>
- ------------------------
* Less than 1%
(1) Robert P. Forlenza, a member of the board of directors, is Managing Director
of Tudor Investment Corporation, the investment advisor of Tudor Private
Equity Fund L.P.
(2) Excludes 975,000 shares owned by Mr. Madanjeet Singh, Mr. Singh's father.
After March 31, 1999, Jeet Singh's shares were transferred to trusts of
which he is the sole trustee with sole voting and dispositive power.
(3) Excludes 975,000 shares owned by Mr. B.U. Chung, Mr. Chung's father. After
March 31, 1999, Joseph Chung's shares were transferred to trusts of which he
has sole voting and dispositive power.
(4) Jeffrey T. Newton, a member of the board of directors, is Managing Director
of Gemini Investors LLC, which controls GMN Investors II, L.P.
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<PAGE>
(5) Charles R. Lax, a member of the board of directors, is General Partner of
SOFTBANK Technology Ventures, an affiliate of SOFTBANK Ventures Inc.
(6) Mr. Forlenza is a Managing Director of Tudor Investment Corporation, the
investment advisor of Tudor Private Equity Fund L.P., The Raptor Global
Fund, Ltd. and The Raptor Global Fund, L.P. Mr. Forlenza may be deemed to
have beneficial ownership of 4,641,219 shares owned by Tudor Private Equity
Fund, L.P., 614,278 shares owned by The Raptor Global Fund, Ltd., and
204,761 shares owned by The Raptor Global Fund, L.P. Mr. Forlenza disclaims
such beneficial ownership.
(7) Mr. Newton is Managing Director of Gemini Investors LLC and may be deemed to
have beneficial ownership of 2,080,098 shares owned by GMN Investors II,
L.P. Mr. Newton disclaims such beneficial ownership.
(8) Mr. Lax is a Managing Director of SOFTBANK Technology Ventures and may be
deemed to have beneficial ownership of 1,642,953 shares owned by SOFTBANK
Ventures Inc. Mr. Lax disclaims such beneficial ownership.
(9) Includes 48,901 shares attributable to Mr. Matlack's interest in shares
owned by Wyndcrest ATG Holdings, Ltd.
(10) Subsequent to March 31, 1999, Ms. Brady was granted options to purchase
25,000 shares of common stock.
(11) Subsequent to March 31, 1999, Mr. Shorthose was granted options to purchase
575,000 shares of common stock, of which 75,000 was immediately exercisable.
(12) Ms. Colby was an employee of the Company from July 1994 to November 1998,
most recently as Vice President, Design.
(13) Ms. Sipser is our Vice President, Software Operations.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, we will be authorized to issue 100,000,000
shares of common stock, $.01 par value per share, and 10,000,000 shares of
preferred stock, $.01 par value per share. As of May 31, 1999, we had
outstanding:
- 9,725,957 shares of common stock held by 112 stockholders of record
- 5,526,071 shares of preferred stock held by 25 stockholders of record
- options to purchase 3,116,610 shares of common stock
- warrants to purchase 2,146,325 shares of common stock
- warrants to purchase 56,296 shares of series C preferred stock
- warrants to purchase 425,532 shares of series B preferred stock
Upon the closing of this offering, all outstanding shares of preferred stock
will convert into 15,830,888 shares of common stock, the warrants to purchase
common stock and series B preferred stock will be cancelled and the warrants to
purchase series C preferred stock will become warrants to purchase 171,485
shares of common stock. The options will remain outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our board of directors,
subject to any preferential dividend rights of outstanding preferred stock. Upon
our liquidation, dissolution or winding up, the holders of common stock are
entitled to receive proportionately our net assets available after the payment
of all debts and other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. Our outstanding shares of common
stock are, and the shares offered by us in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future.
PREFERRED STOCK
Under the terms of our certificate of incorporation, our board of directors
is authorized to issue shares of preferred stock in one or more series without
stockholder approval. Our board of directors has the discretion to determine the
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or could discourage a third party from acquiring, a
majority of our outstanding voting stock. We have no present plans to issue any
shares of preferred stock.
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<PAGE>
DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the person became an interested stockholder, unless
the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within the prior three years did own, 15% or more of the
corporation's voting stock.
Our certificate of incorporation divides our board of directors into three
classes with staggered three-year terms. In addition, our certificate of
incorporation provides that directors may be removed only for cause by the
affirmative vote of the holders of two-thirds of our shares of capital stock
entitled to vote. Under our certificate of incorporation, any vacancy on our
board of directors, including a vacancy resulting from an enlargement of our
board of directors, may only be filled by vote of a majority of our directors
then in office. The classification of our board of directors and the limitations
on the removal of directors and filling of vacancies could make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, control of the company.
Our certificate of incorporation also provides that any action required or
permitted to be taken by our stockholders at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before such
meeting and may not be taken by written action in lieu of a meeting. Our
certificate of incorporation further provides that special meetings of the
stockholders may only be called by our Chairman of the Board, President or board
of directors. Under our by-laws, in order for any matter to be considered
"properly brought" before a meeting, a stockholder must comply with advance
notice requirements. These provisions could have the effect of delaying until
the next stockholders' meeting stockholder actions which are favored by the
holders of a majority of our outstanding voting securities. These provisions may
also discourage a third party from making a tender offer for our common stock,
because even if it acquired a majority of our outstanding voting securities, the
third party would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders' meeting,
and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our certificate of incorporation and by-laws
require the affirmative vote of the holders of at least 75% of the shares of our
capital stock issued and outstanding and entitled to vote to amend or repeal any
of the provisions described in the prior two paragraphs.
Our certificate of incorporation contains provisions permitted under the
General Corporation Law of Delaware relating to the liability of directors. The
provisions eliminate a director's liability for monetary damages for a breach of
fiduciary duty, except in circumstances involving wrongful acts, such as the
breach of a director's duty of loyalty or acts or omissions that involve
intentional misconduct or a knowing violation of law. Further, our certificate
of incorporation contains provisions to indemnify our directors and officers to
the fullest extent permitted by the General Corporation Law of Delaware. We
believe that these provisions will assist us in attracting and retaining
qualified individuals to serve as directors.
REGISTRATION RIGHTS
After this offering, the holders of approximately 13,596,000 shares of
common stock will be entitled to rights with respect to the registration of such
shares under the Securities Act. Under the terms of the agreement between us and
the holders of such registrable securities, if we propose to
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<PAGE>
register any of our securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, such holders are entitled to notice of such registration and are
entitled to include shares of such common stock therein. Additionally, such
holders are also entitled to demand registration rights pursuant to which they
may require us on up to six occasions to file a registration statement under the
Securities Act at our expense with respect to our shares of common stock, and we
are required to use our best efforts to effect such registration. Further,
holders may require us to file an unlimited number of additional registration
statements on Form S-3 at our expense. All of these registration rights are
subject to conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in such registration and
our right not to effect a requested registration within twelve months following
an offering of our securities, including the offering made hereby. In addition,
the holders of registration rights have agreed not to exercise such rights for
at least 180 days after the offering without the prior written consent of
Hambrecht & Quist LLC. We have also agreed to indemnify the registration rights
holders against, and provide contribution with respect to liabilities relating
to any registration in which any shares of such holders are sold under the
Securities Act.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is BankBoston N.A.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock.
After we complete this offering, based upon the number of shares outstanding at
May 31, 1999, there will be 30,556,845 shares of our common stock outstanding
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options to purchase common stock. Of these outstanding shares,
the 5,000,000 shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, except
that any shares purchased by our "affiliates", as that term is defined in Rule
144 under the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
All of the shares offered under this prospectus will be freely tradable in
the open market. The remaining 25,556,845 shares of common stock are considered
"restricted securities" under Rule 144 of the Securities Act. Generally,
restricted securities that have been owned for a period of at least two years
may be sold immediately after the completion of this offering and restricted
securities that have been owned for at least one year may be sold 90 days after
the completion of this offering.
In general, under Rule 144, stockholders, including our affiliates, who have
beneficially owned restricted securities for at least one year are entitled to
sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of our common stock, or approximately 305,568 shares
immediately after this offering, or the average weekly trading volume in our
common stock during the four calendar weeks preceding the date on which notice
of such sale was filed under Rule 144, provided requirements concerning
availability of public information, manner of sale and notice of sale are
satisfied. In addition, a stockholder that is not one of our affiliates at any
time during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years is entitled to sell the shares
immediately under Rule 144(k) without compliance with the above described
requirements under Rule 144.
Securities issued in reliance on Rule 701, such as shares of our common
stock acquired pursuant to the exercise of options granted under our stock
plans, are also restricted securities and, beginning 90 days after the date of
this prospectus, may be sold by stockholders other than our affiliates subject
only to the manner of sale provisions of Rule 144 and by affiliates under Rule
144 without compliance with its one-year holding period requirement. However, we
intend to register shares issued and issuable under our stock plans on the date
of this prospectus. All of these shares are subject to lock-up agreements,
however, the underwriters have agreed to exempt 500 shares per employee from the
lock-up provisions.
Of our restricted securities, approximately 25,450,000 shares are subject to
lock-up agreements with underwriters. Persons subject to lock-up agreements have
agreed not to sell shares of common stock without the prior permission of the
underwriters for a period of 180 days after the completion of this offering.
Except as noted above, the underwriters currently do not intend to release
anyone from the lock-up agreement. The table below sets forth information
regarding potential sales of restricted securities.
- 9,412 shares may be sold immediately after completion of this offering
pursuant to Rule 144(k)
- approximately 100,000 shares may be sold by our employees under the
lock-up exemptions granted by the underwriters
- the remainder of the restricted shares may be sold, subject to the
requirements of Rule 144, upon the expiration of the lock-up agreements
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<PAGE>
STOCK OPTIONS
Shares of common stock may also be issued and sold upon the exercise of
options. On the effective date of this prospectus, we intend to register an
aggregate of 6,148,552 shares of common stock, issued or issuable under our
stock plans. Shares issued pursuant to our stock plans which have been
registered will be eligible for resale in the public market without
restrictions, subject to Rule 144 limitations applicable to affiliates and the
lock-up agreements noted above, if applicable. Upon the expiration of the
lock-up agreements, approximately 1,462,500 shares may be sold as a result of
the exercise of vested options.
WARRANTS
Upon the closing of this offering, there will be warrants outstanding to
purchase 171,485 shares of common stock at a weighted average exercise price of
$0.44 per share. Any shares purchased pursuant to the "cashless exercise"
feature of the outstanding warrants may be sold approximately 90 days after
completion of this offering, subject to the requirements of Rule 144.
EFFECT OF SALES OF SHARES
Prior to this offering, there has been no public market for our common
stock, and no prediction can be made as to the effect, if any, that market sales
of shares of common stock or the availability of shares for sale will have on
the market price of our common stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of our common stock in the public market
could adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC,
U.S. Bancorp Piper Jaffray Inc., Thomas Weisel Partners LLC and Wit Capital
Corporation, have severally agreed to purchase from us the following respective
number of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC............................................................ 2,060,000
U.S. Bancorp Piper Jaffray Inc................................................... 1,030,000
Thomas Weisel Partners LLC....................................................... 1,030,000
Wit Capital Corporation.......................................................... 120,000
Banc of America Securities LLC................................................... 80,000
Bear Stearns & Co. Inc........................................................... 80,000
PaineWebber Incorporated......................................................... 80,000
Prudential Securities Incorporated............................................... 80,000
Salomon Smith Barney Inc......................................................... 80,000
Charles Schwab & Co., Inc........................................................ 80,000
Adams Harkness & Hill, Inc....................................................... 40,000
Advest, Inc...................................................................... 40,000
Dain Rauscher Wessels............................................................ 40,000
First Union Capital Markets...................................................... 40,000
Moors & Cabot, Inc............................................................... 40,000
Morgan Keegan & Company, Inc..................................................... 40,000
Pacific Crest Securities......................................................... 40,000
----------
Total.......................................................................... 5,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the underwriters
are subject to conditions precedent, including the absence of any material
adverse change in our business and the receipt of certificates, opinions and
letters from us, our counsel and the independent auditors. The nature of the
underwriters' obligation is such that they are committed to purchase all shares
of common stock offered hereby if any of the shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to dealers at such price less a concession not in excess of $.50
per share. The underwriters may allow and such dealers may reallow a concession
not in excess of $.10 per share to other dealers. After the initial public
offering of the shares, the offering price and other selling terms may be
changed by the underwriters. The representatives of the underwriters have
informed us that the underwriters do not intend to confirm discretionary sales
in excess of 5% of the shares of common stock offered by this prospectus.
We and the selling stockholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to purchase
up to 750,000 additional shares of common stock at the initial public offering
price, less the underwriting discount set forth on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares offered hereby.
We and the selling stockholders will be obligated, pursuant to the option, to
sell shares to the underwriters to the extent the option is exercised. The
underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of common stock offered hereby.
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<PAGE>
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect
thereof.
Stockholders, including all of the selling stockholders and all of our
executive officers and directors, who will own in the aggregate 25,450,000
shares of common stock after the offering have agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities exchangeable for or convertible into shares
of common stock owned by them during the 180-day period following the date of
this prospectus. We have agreed that we will not, without the prior written
consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options granted prior to the date hereof and
may grant additional options under our stock option plan, provided that, without
the prior written consent of Hambrecht & Quist LLC, such additional options
shall not be exercisable during such period.
The underwriters have reserved for sale, at the initial public offering
price, shares of common stock for distribution by Wit Capital Corporation to its
customers through the Internet. A prospectus in electronic format is being made
available on a Web site maintained by Wit Capital Corporation. In addition, each
of the dealers purchasing shares from Wit Capital Corporation in this offering
has agreed to make a prospectus in electronic format available on a Web site
maintained by the dealer. Other than the prospectus in electronic format, the
information on Wit Capital Corporation's Web site and any information contained
on any other Web site maintained by Wit Capital Corporation or any dealer
purchasing shares from it is not to be part of this prospectus or the
registration statement of which this prospectus forms a part has not been
approved or endorsed by us or any underwriter in its capacity as underwriter,
and should not be relied upon by investors.
The underwriters also have reserved for sale, at the initial public offering
price, shares of the common stock for some of our directors, officers,
employees, friends and family who have expressed an interest in purchasing
shares in the offering. These persons are expected to purchase, in the
aggregate, not more than 5% of the common stock offered in the offering. The
number of shares available for sale to the general public in the offering will
be reduced to the extent those persons purchase the reserved shares. Any
reserved shares not so purchased will be offered to the general public on the
same basis as other shares offered hereby.
Persons participating in this offering may over-allot or effect transactions
which stabilize, maintain or otherwise affect the market price of the common
stock at levels above those which might otherwise prevail in the open market,
including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
Prior to this offering, there was no public market for the common stock. The
initial public offering price for the common stock was determined by
negotiations among ourselves, the selling stockholders
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<PAGE>
and the representatives. Among the factors considered in determining the initial
public offering price were prevailing market and economic conditions, our
revenues and earnings, market valuations of other companies engaged in
activities similar to ours, estimates of our business potential and prospects,
the present state of our business operations, our management and other factors
deemed relevant.
Thomas Weisel Partners LLC, one of the representatives, was organized and
registered as a broker-dealer in December 1998. Since December 1998, Thomas
Weisel Partners LLC has been named as a lead or co-manager on 43 filed public
offerings of equity securities, of which 25 have been completed, and has acted
as a syndicate manager in an additional 19 public offerings of equity
securities. Thomas Weisel Partners LLC does not have any material relationship
with us or any of our officers, directors or other controlling persons, except
with respect to its contractual relationship with us pursuant to the
underwriting agreement entered into in connection with this offering.
Wit Capital Corporation also will participate in the offering as one of the
representatives. The National Association of Securities Dealers, Inc. approved
the membership of Wit Capital Corporation on September 4, 1997. Since that time,
Wit Capital Corporation has acted as an underwriter, e-manager or selected
dealer in 107 public offerings, including 86 initial public offerings. As an
e-manager for an offering, Wit Capital Corporation had primary responsibility
for distribution of shares through the Internet for that offering. Wit Capital
Corporation does not have any material relationship with us or any of our
officers, directors or other controlling persons, except with respect to its
contractual relationship with us pursuant to the underwriting agreement entered
into in connection with this offering.
LEGAL MATTERS
The validity of the shares of common stock offered by us hereby will be
passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters
will be passed upon for the underwriters by Foley, Hoag & Eliot LLP, Boston,
Massachusetts.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus and the registration statement relating to this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the
stock we are offering by this prospectus. This prospectus does not include all
of the information contained in the registration statement. You should refer to
the registration statement and its exhibits for additional information. Whenever
we make reference in this prospectus to any of our contracts, agreements or
other documents, the references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract, agreement or other document. When we complete this offering, we
will also be required to file annual, quarterly and special reports, proxy
statements and other information with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's Web site at HTTP://WWW.SEC.GOV. You may also read and copy
any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, Suite
1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Our SEC filings are also available at the office of the Nasdaq
National Market. For further information on obtaining copies of our public
filings at the Nasdaq National Market, you should call (212) 656-5060.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................. F-2
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (Unaudited)........................... F-3
Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and the Three Months Ended
March 31, 1998 and 1999 (Unaudited).................................................................... F-4
Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1996, 1997 and 1998 and the
Three Months Ended March 31, 1999 (Unaudited).......................................................... F-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and the Three Months Ended
March 31, 1998 and 1999 (Unaudited).................................................................... F-6
Notes to Financial Statements............................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Art Technology Group, Inc.:
We have audited the accompanying balance sheets of Art Technology Group,
Inc. (a Delaware corporation) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Art Technology Group, Inc.
as of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 4, 1999 (except with respect
to the matter discussed in Note 6(a),
as to which the date is June 18, 1999
F-2
<PAGE>
ART TECHNOLOGY GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999
DECEMBER 31, ------------------------
---------------------- PRO FORMA
1997 1998 ACTUAL (NOTE 1(C))
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 186,829 $4,092,790 $ 6,628,605 $ 6,628,605
Marketable securities............................................ -- -- 1,006,634 1,006,634
Accounts receivable, net of reserves of approximately $21,000,
$250,000 and $260,000 at December 31, 1997 and 1998 and March
31, 1999, respectively......................................... 742,875 2,317,672 2,477,060 2,477,060
Unbilled services................................................ 198,049 290,585 536,911 536,911
Prepaid expenses and other current assets........................ 1,000 113,423 579,977 579,977
---------- ---------- ----------- -----------
Total current assets......................................... 1,128,753 6,814,470 11,229,187 11,229,187
Property and equipment, less accumulated depreciation and
amortization....................................................... 478,049 842,010 1,033,740 1,033,740
Receivable from officer/stockholder................................ 56,957 -- -- --
Other assets....................................................... 8,230 109,391 105,434 105,434
---------- ---------- ----------- -----------
$1,671,989 $7,765,871 $12,368,361 $12,368,361
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit................................................... $ 304,000 $ -- $ -- $ --
Current maturities of long-term obligations...................... 548,373 347,096 343,419 343,419
Accounts payable................................................. 847,826 720,180 597,916 597,916
Accrued expenses................................................. 393,284 1,220,101 1,777,982 1,777,982
Deferred revenue................................................. 363,440 878,341 5,633,387 5,633,387
---------- ---------- ----------- -----------
Total current liabilities.................................... 2,456,923 3,165,718 8,352,704 8,352,704
---------- ---------- ----------- -----------
Long-term obligations, less current maturities..................... 122,175 322,069 231,177 231,177
---------- ---------- ----------- -----------
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock............................. 3,153,288 8,312,554 8,555,948 --
---------- ---------- ----------- -----------
Stockholders' equity (deficit):
Preferred stock, $.01 par value--
Authorized--10,000,000 shares at December 31, 1997 and 1998 and
March 31, 1999, no shares pro forma
Series A Convertible Preferred Stock--
Designated--1,300,000 shares
Issued and outstanding--1,300,000 shares at December 31, 1997
and 1998 and March 31, 1999 and no shares pro forma
(preference in liquidation of $500,500 at March 31,
1999)...................................................... 500,500 500,500 500,500 --
Series C Convertible Preferred Stock--
Designated--2,000,000 shares
Issued and outstanding--1,209,875, 1,456,789 and 1,456,789
shares at December 31, 1997 and 1998 and March 31, 1999,
respectively and no shares pro forma (preference in
liquidation of $2,512,553 at March 31, 1999)............... 1,960,000 2,360,000 2,360,000 --
Common stock, $.01 par value--
Authorized--25,000,000 shares at December 31, 1997 and 1998 and
March 31, 1999 and 100,000,000 shares pro forma
Issued and outstanding--8,906,700, 9,128,055 and 9,576,119
shares at December 31, 1997 and 1998 and March 31, 1999,
respectively and 25,407,008 shares pro forma................. 89,067 91,281 95,762 254,070
Additional paid-in capital....................................... 279,685 6,040,234 8,694,960 24,056,693
Deferred compensation............................................ -- (1,692,301) (3,967,755) (3,967,755)
Accumulated deficit.............................................. (6,889,649) (11,334,184) (12,454,935) (16,558,528)
---------- ---------- ----------- -----------
Total stockholders' equity (deficit)....................... (4,060,397) (4,034,470) (4,771,468) 3,784,480
---------- ---------- ----------- -----------
$1,671,989 $7,765,871 $12,368,361 $12,368,361
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ART TECHNOLOGY GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Services............................ $ 3,849,095 $ 4,591,660 $ 8,078,327 $ 1,691,586 $ 2,614,069
Product license..................... 53,000 1,865,884 4,059,064 209,124 1,805,550
------------- ------------- ------------- ------------- -------------
Total revenues.................. 3,902,095 6,457,544 12,137,391 1,900,710 4,419,619
COST OF REVENUES...................... 1,985,495 3,196,289 5,050,274 1,065,487 1,812,452
------------- ------------- ------------- ------------- -------------
Gross profit.................... 1,916,600 3,261,255 7,087,117 835,223 2,607,167
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Research and development............ 1,117,376 3,661,083 3,355,155 626,865 1,131,429
Sales and marketing................. 1,151,839 2,287,408 4,074,465 680,228 1,420,243
General and administrative.......... 1,059,581 1,418,037 2,291,080 436,348 742,778
Amortization of deferred
compensation...................... -- -- 106,542 -- 215,846
------------- ------------- ------------- ------------- -------------
Total operating expenses........ 3,328,796 7,366,528 9,827,242 1,743,441 3,510,296
------------- ------------- ------------- ------------- -------------
LOSS FROM OPERATIONS.................. (1,412,196) (4,105,273) (2,740,125) (908,218) (903,129)
INTEREST INCOME....................... -- 6,044 53,919 -- 49,830
INTEREST EXPENSE...................... (30,271) (128,770) (164,359) (40,671) (24,058)
------------- ------------- ------------- ------------- -------------
Net loss........................ (1,442,467) (4,227,999) (2,850,565) (948,889) (877,357)
ACCRETION OF DIVIDENDS, DISCOUNT AND
OFFERING COSTS ON PREFERRED STOCK... (205,633) (213,933) (1,593,970) (37,500) (243,394)
------------- ------------- ------------- ------------- -------------
Net loss available for common
stockholders.................. $ (1,648,100) $ (4,441,932) $ (4,444,535) $ (986,389) $ (1,120,751)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
NET LOSS PER SHARE (NOTE 1(e)):
Basic and diluted................... $ (0.19) $ (0.50) $ (0.50) $ (0.11) $ (0.12)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Basic and diluted weighted average
common shares outstanding......... 8,848,866 8,872,202 8,967,066 8,913,092 9,404,757
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
PRO FORMA NET LOSS PER SHARE (NOTE
1(e)):
Pro forma basic and diluted......... $ (0.16) $ (0.04)
------------- -------------
------------- -------------
Pro forma basic and diluted weighted
average shares outstanding........ 18,246,484 23,479,379
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ART TECHNOLOGY GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES C
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ------------------------ ----------------------
NUMBER OF CARRYING NUMBER OF CARRYING NUMBER OF $.01 PAR
SHARES VALUE SHARES VALUE SHARES VALUE
----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.................... 1,300,000 $ 500,500 -- $ -- 8,745,000 $ 87,450
Issuance costs related to sale of Series B
redeemable convertible preferred stock.... -- -- -- -- -- --
Issuance of common stock.................... -- -- -- -- 105,000 1,050
Exercise of stock options................... -- -- -- -- 750 8
Grant of options to consultants (Note
6(b))..................................... -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- ---------
Balance, December 31, 1996.................... 1,300,000 500,500 -- -- 8,850,750 88,508
Sale of Series C convertible preferred
stock, net of issuance costs of $60,645... -- -- 1,209,875 1,960,000 -- --
Accretion of Series B redeemable convertible
preferred stock to redemption value....... -- -- -- -- -- --
Exercise of stock options................... -- -- -- -- 55,950 559
Grant of options to consultants (Note
6(b))..................................... -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- ---------
Balance, December 31, 1997.................... 1,300,000 500,500 1,209,875 1,960,000 8,906,700 89,067
Sale of Series C convertible preferred
stock..................................... -- -- 246,914 400,000 -- --
Issuance costs related to sale of Series D
redeemable convertible preferred stock.... -- -- -- -- -- --
Accretion of Series B and Series D
redeemable convertible preferred stock to
redemption value.......................... -- -- -- -- -- --
Exercise of stock options................... -- -- -- -- 221,355 2,214
Deferred compensation related to stock
option grants............................. -- -- -- -- -- --
Amortization of deferred compensation....... -- -- -- -- -- --
Warrants issued in connection with the sale
of Series D redeemable convertible
preferred stock........................... -- -- -- -- -- --
Issuance of Series B redeemable convertible
preferred stock warrants.................. -- -- -- -- -- --
Grants of options to consultants (Note
6(b))..................................... -- -- -- -- -- --
Issuance of warrants (Note 3(b))............ -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- ---------
Balance, December 31, 1998.................... 1,300,000 500,500 1,456,789 2,360,000 9,128,055 91,281
Deferred compensation related to stock
option grants (unaudited)................. -- -- -- -- -- --
Amortization of deferred compensation
(unaudited)............................... -- -- -- -- -- --
Accretion of Series B and Series D
redeemable convertible preferred stock to
redemption value (unaudited).............. -- -- -- -- -- --
Exercise of stock options (unaudited)....... -- -- -- -- 448,064 4,481
Net loss (unaudited)........................ -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- ---------
Balance, March 31, 1999 (unaudited)........... 1,300,000 500,500 1,456,789 2,360,000 9,576,119 95,762
Conversion of preferred stock into common
stock (unaudited)......................... (1,300,000) (500,500) (1,456,789) (2,360,000) 15,709,639 157,096
Common stock issued to the holders of Series
C convertible preferred stock and Series D
redeemable convertible preferred stock in
lieu of special payments (Note 5)
(unaudited)............................... -- -- -- -- 121,250 1,212
----------- --------- ----------- ----------- ----------- ---------
Pro forma balance, March 31, 1999
(unaudited)................................. -- $ -- -- $ -- 25,407,008 $ 254,070
----------- --------- ----------- ----------- ----------- ---------
----------- --------- ----------- ----------- ----------- ---------
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN DEFERRED ACCUMULATED EQUITY
CAPITAL COMPENSATION DEFICIT (DEFICIT)
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995.................... $ -- $ -- $ (798,707) $ (210,757)
Issuance costs related to sale of Series B
redeemable convertible preferred stock.... -- -- (205,633) (205,633)
Issuance of common stock.................... -- -- (910) 140
Exercise of stock options................... 92 -- -- 100
Grant of options to consultants (Note
6(b))..................................... 210,200 -- -- 210,200
Net loss.................................... -- -- (1,442,467) (1,442,467)
------------ -------------- ------------- -------------
Balance, December 31, 1996.................... 210,292 -- (2,447,717) (1,648,417)
Sale of Series C convertible preferred
stock, net of issuance costs of $60,645... -- -- (60,645) 1,899,355
Accretion of Series B redeemable convertible
preferred stock to redemption value....... -- -- (153,288) (153,288)
Exercise of stock options................... 9,393 -- -- 9,952
Grant of options to consultants (Note
6(b))..................................... 60,000 -- -- 60,000
Net loss.................................... -- -- (4,227,999) (4,227,999)
------------ -------------- ------------- -------------
Balance, December 31, 1997.................... 279,685 -- (6,889,649) (4,060,397)
Sale of Series C convertible preferred
stock..................................... -- -- -- 400,000
Issuance costs related to sale of Series D
redeemable convertible preferred stock.... -- -- (106,459) (106,459)
Accretion of Series B and Series D
redeemable convertible preferred stock to
redemption value.......................... -- -- (434,266) (434,266)
Exercise of stock options................... 71,002 -- -- 73,216
Deferred compensation related to stock
option grants............................. 1,798,843 (1,798,843) -- --
Amortization of deferred compensation....... -- 106,542 -- 106,542
Warrants issued in connection with the sale
of Series D redeemable convertible
preferred stock........................... 2,775,000 -- -- 2,775,000
Issuance of Series B redeemable convertible
preferred stock warrants.................. 1,053,245 -- (1,053,245) --
Grants of options to consultants (Note
6(b))..................................... 4,210 -- -- 4,210
Issuance of warrants (Note 3(b))............ 58,249 -- -- 58,249
Net loss.................................... -- -- (2,850,565) (2,850,565)
------------ -------------- ------------- -------------
Balance, December 31, 1998.................... 6,040,234 (1,692,301) (11,334,184) (4,034,470)
Deferred compensation related to stock
option grants (unaudited)................. 2,491,300 (2,491,300) -- --
Amortization of deferred compensation
(unaudited)............................... -- 215,846 -- 215,846
Accretion of Series B and Series D
redeemable convertible preferred stock to
redemption value (unaudited).............. -- -- (243,394) (243,394)
Exercise of stock options (unaudited)....... 163,426 -- -- 167,907
Net loss (unaudited)........................ -- -- (877,357) (877,357)
------------ -------------- ------------- -------------
Balance, March 31, 1999 (unaudited)........... 8,694,960 (3,967,755) (12,454,935) (4,771,468)
Conversion of preferred stock into common
stock (unaudited)......................... 13,544,192 -- (2,284,840) 8,555,948
Common stock issued to the holders of Series
C convertible preferred stock and Series D
redeemable convertible preferred stock in
lieu of special payments (Note 5)
(unaudited)............................... 1,817,541 -- (1,818,753) --
------------ -------------- ------------- -------------
Pro forma balance, March 31, 1999
(unaudited)................................. $ 24,056,693 $ (3,967,755) $(16,558,528) $ 3,784,480
------------ -------------- ------------- -------------
------------ -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ART TECHNOLOGY GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(1,442,467) $(4,227,999) $(2,850,565) $(948,889) $ (877,357)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities--
Amortization of deferred compensation......... -- -- 106,542 -- 215,846
Noncash interest expense related to issuance
of warrants................................. -- -- 18,060 3,415 4,882
Compensation expense related to issuance of
nonqualified stock options.................. 210,200 60,000 4,210 -- --
Depreciation and amortization................. 227,653 318,288 346,680 76,990 93,500
Changes in current assets and liabilities--
Accounts receivable, net.................... (204,781) (537,271) (1,574,797) (399,808) (159,388)
Unbilled services........................... -- (198,049) (92,536) 109,724 (246,326)
Prepaid expenses and other current assets... (1,000) -- (112,423) (22,532) (466,554)
Accounts payable............................ 442,271 346,005 (127,646) 47,590 (122,264)
Accrued expenses............................ 310,432 44,404 826,817 358,784 557,881
Deferred revenue............................ 46,000 317,440 514,901 309,993 4,755,046
----------- ----------- ----------- --------- -----------
Net cash (used in) provided by operating
activities.............................. (411,692) (3,877,182) (2,940,757) (464,733) 3,755,266
----------- ----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities.............. -- -- -- -- (1,006,634)
Purchases of property and equipment............. (497,512) (189,549) (623,398) -- (285,230)
Proceeds from sale of property and equipment.... -- -- -- 3,720 --
Decrease (increase) in receivable from
officer/stockholder........................... (11,973) 206 56,957 56,957 --
Decrease (increase) in other assets............. -- (8,230) (101,161) (1,494) 3,957
----------- ----------- ----------- --------- -----------
Net cash (used in) provided by investing
activities.............................. (509,485) (197,573) (667,602) 59,183 (1,287,907)
----------- ----------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Series B redeemable
convertible preferred stock................... 2,794,367 -- -- -- --
Net proceeds from sale of Series C convertible
preferred stock............................... -- 1,899,355 400,000 100,000 --
Net proceeds from sale of Series D redeemable
convertible preferred stock................... -- -- 7,393,541 -- --
Proceeds from issuance of common stock.......... 140 -- -- -- --
Proceeds from exercise of stock options......... 100 9,952 73,216 5,134 167,907
Proceeds from line of credit.................... 500,000 304,000 1,496,000 596,000 --
Payments on line of credit...................... -- (500,000) (1,800,000) (400,000) --
Proceeds from term loan to a bank............... 250,000 486,111 -- -- --
Payments on term loan to a bank................. -- (250,000) (166,667) (41,666) (41,667)
Proceeds from equipment line of credit.......... -- -- 199,915 -- --
Payments on equipment line of credit............ -- -- -- -- (19,991)
Payments on capital lease obligations........... (21,709) (45,847) (81,685) (15,932) (37,793)
Payments on note payable to a bank.............. (250,000) -- -- -- --
----------- ----------- ----------- --------- -----------
Net cash provided by financing
activities.............................. 3,272,898 1,903,571 7,514,320 243,536 68,456
----------- ----------- ----------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 2,351,721 (2,171,184) 3,905,961 (162,014) 2,535,815
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... 6,292 2,358,013 186,829 186,829 4,092,790
----------- ----------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 2,358,013 $ 186,829 $ 4,092,790 $ 24,815 $ 6,628,605
----------- ----------- ----------- --------- -----------
----------- ----------- ----------- --------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.......... $ 41,291 $ 128,770 $ 143,299 $ 37,256 $ 19,176
----------- ----------- ----------- --------- -----------
----------- ----------- ----------- --------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Accretion of dividend and discount on Series B
and Series D redeemable convertible preferred
stock......................................... $ -- $ 153,288 $ 434,266 $ 37,500 $ 243,394
----------- ----------- ----------- --------- -----------
----------- ----------- ----------- --------- -----------
Value ascribed to Series B redeemable
convertible preferred stock warrants.......... $ -- $ -- $ 1,053,245 $ -- $ --
----------- ----------- ----------- --------- -----------
----------- ----------- ----------- --------- -----------
Equipment acquired under capital leases......... $ 61,411 $ 190,582 $ 87,243 $ 32,004 $ --
----------- ----------- ----------- --------- -----------
----------- ----------- ----------- --------- -----------
Original issue discount related to warrants
issued to a bank.............................. $ -- $ -- $ 58,249 $ 58,249 $ --
----------- ----------- ----------- --------- -----------
----------- ----------- ----------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Art Technology Group, Inc. (ATG or the Company) is a Delaware Company which
was incorporated on December 31, 1991. ATG offers an integrated suite of
Internet customer relationship management and electronic commerce software
applications, as well as related application development, integration and
support services.
The accompanying financial statements reflect the application of certain
significant accounting policies as described below and elsewhere in the
accompanying notes to financial statements.
(A) 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.
(B) INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of March 31, 1999, and the statements of
operations and cash flows for the three months ended March 31, 1998 and 1999 and
the statement of stockholders' equity (deficit) for the three months ended March
31, 1999 are unaudited, but in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of results for these interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted,
although ATG believes that the disclosures included are adequate to make the
information presented not misleading. The results of operations for the three
months ended March 31, 1999, are not necessarily indicative of the results to be
expected for the entire fiscal year.
(C) UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma balance sheet as of March 31, 1999 reflects the
automatic conversion of all outstanding shares of redeemable convertible
preferred stock and convertible preferred stock into an aggregate of 15,830,889
shares of common stock, which will occur upon the closing of ATG's proposed
initial public offering. This reflects the cancellation of the special payments
to the Series C and D preferred stockholders, the cancellation of the warrant to
purchase 425,532 shares of Series B Preferred Stock, the cancellation of the
warrants to purchase Series D Preferred Stock and the changes to the conversion
ratio of Series B, C and D Preferred Stock all of which will occur upon closing
of the Company's proposed initial public offering (see Note 5).
(D) REVENUE RECOGNITION
ATG recognizes product license revenue from licensing the rights to use its
software to end-users. ATG also generates service revenues from integrating its
software with its customers' operating environments, the sale of maintenance
services and the sale of certain other consulting and
F-7
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
development services. ATG generally has separate agreements with its customers,
which govern the terms and conditions of its software license, consulting and
support and maintenance services. These separate agreements, along with ATG's
price list, provide the basis for establishing vendor specific objective
evidence of fair value. This allows ATG to appropriately allocate fair value
among the multiple elements in an arrangement, as well as, allocate discounts
ratably over all elements in an arrangement, except for upgrade rights.
ATG recognizes revenue in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION and SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A
PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenues from software
product license agreements are recognized upon execution of a license agreement
and delivery of the software, provided that the fee is fixed or determinable and
deemed collectible by management. If conditions for acceptance are required
subsequent to delivery, revenues are recognized upon customer acceptance if such
acceptance is not deemed to be perfunctory. Revenues from software maintenance
agreements are recognized ratably over the term of the maintenance period, which
is typically one year. ATG enters into reseller arrangements that typically
provide for sublicense fees payable to ATG based upon a percentage of ATG's list
price. Revenues are recognized under reseller agreements as earned which is
generally ratably over the life of the reseller agreement for guaranteed minimum
royalties or based upon unit sales by the resellers. ATG does not grant its
resellers the right 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
amounts due from customers are fixed or determinable and deemed collectible by
management. Amounts collected or billed prior to satisfying the above revenue
recognition criteria are reflected as deferred revenue. Unbilled services
represent service revenues that have been earned by ATG in advance of billings.
The Company received $5.0 million from Informix in March 1999 under an
original equipment manufacturer agreement, of which $4.5 million is included in
deferred revenue at March 31, 1999. Informix has the right to terminate the
agreement and receive a refund of the $5.0 million less the greater of $530,000
per quarter, commencing with the fiscal quarter ended March 31, 1999 and all
uncredited prepaid royalties as of the termination date, in the event they are
named in a patent or other intellectual property infringement claim related to
the agreement by Broadvision. The amount refundable at March 31, 1999 is $4.5
million.
(E) NET LOSS PER SHARE
Basic and diluted net loss per common share was determined by dividing net
loss available for common stockholders by the weighted average common shares
outstanding during the period. Basic and diluted net loss per share are the
same, as outstanding common stock options and warrants have been excluded as
they are considered antidilutive as ATG has recorded a net loss for all periods
presented. Options and warrants to purchase a total of 1,095,150, 2,140,182,
5,085,782, 2,450,380 and 5,117,494 common shares have been excluded from the
computation of diluted weighted average shares outstanding for the years ended
December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and
1999, respectively. Shares of common stock issuable upon the conversion of
outstanding convertible preferred stock and warrants have also been excluded for
all periods presented.
F-8
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with the SEC Staff Accounting Bulletin No. 98, EARNINGS PER SHARE
IN AN INITIAL PUBLIC OFFERING, the Company determined that there were no nominal
issuances of ATG's common stock prior to ATG's planned initial public offering.
ATG's historical capital structure is not indicative of its prospective
structure upon the closing of its proposed initial public offering due to the
automatic conversion of all shares of convertible preferred stock and redeemable
convertible preferred stock into common stock concurrent with the closing of
ATG's anticipated initial public offering. Accordingly, pro forma loss per share
is presented for the year ended December 31, 1998 and the three months ended
March 31, 1999 assuming (i) the net loss without the effect of accretion of
preferred stock dividends, discount and offering costs and (ii) the conversion
of all outstanding shares of convertible preferred stock and redeemable
convertible preferred stock into common stock upon ATG's initial public offering
using the as-converted method from their respective dates of issuance.
(F) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
ATG accounts for investments under Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. Under SFAS No. 115, investments for which ATG has the positive
intent and the ability to hold to maturity, consisting of cash equivalents and
marketable securities, are reported at amortized cost, which approximates fair
market value. Cash equivalents are highly liquid investments with original
maturities of less than ninety days. Marketable securities are investment-grade
securities with original maturities of greater than ninety days but less than
one-year. The average maturity of ATG's marketable securities is approximately
four months at March 31, 1999. To date, ATG has not recorded any realized gains
or losses.
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
------------------------ ------------
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents--
Cash................................................ $ 186,829 $ 592,790 $ 693,249
Money market accounts............................... -- 3,500,000 5,935,356
---------- ------------ ------------
Total cash and cash equivalents................. $ 186,829 $ 4,092,790 $ 6,628,605
---------- ------------ ------------
---------- ------------ ------------
Marketable securities--
Corporate securities................................ -- -- 1,006,634
---------- ------------ ------------
Total marketable securities..................... $ -- $ -- $ 1,006,634
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. ATG provides for depreciation and amortization using the
straight-line method and charges to operations amounts estimated to allocate the
cost of the assets over their estimated useful lives.
F-9
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment at December 31, 1997 and 1998 and March 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ESTIMATED -------------------------- ------------
ASSET CLASSIFICATION USEFUL LIFE 1997 1998 1999
- ----------------------------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Computer equipment................. 3 years $ 513,202 $ 637,683 $ 833,873
Equipment under capital leases..... Life of lease 269,794 556,952 542,117
Computer software.................. 3 years 74,967 284,629 346,068
Furniture and fixtures............. 7 years 212,579 295,924 330,000
Leasehold improvements............. Life of lease 18,800 24,795 33,155
------------ ------------ ------------
1,089,342 1,799,983 2,085,213
Less--Accumulated depreciation and
amortization..................... 611,293 957,973 1,051,473
------------ ------------ ------------
$ 478,049 $ 842,010 $ 1,033,740
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(H) RESEARCH AND DEVELOPMENT EXPENSES FOR SOFTWARE PRODUCTS
ATG has evaluated the establishment of technological feasibility of its
products in accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED. ATG sells products in a
market that is subject to rapid technological change, new product development
and changing customer needs; accordingly, ATG has concluded that technological
feasibility is not established until the development stage of the product is
nearly complete. ATG defines technological feasibility as the completion of a
working model. The time period during which costs could be capitalized, from the
point of reaching technological feasibility until the time of general product
release, is very short, and consequently, the amounts that could be capitalized
are not material to ATG's financial position or results of operations.
Therefore, ATG has charged all such costs to research and development in the
period incurred.
(I) INCOME TAXES
ATG accounts for income taxes in accordance with the provisions of SFAS No.
109, ACCOUNTING FOR INCOME TAXES. This statement requires ATG to recognize a
current tax asset or liability for current taxes payable or refundable and to
record a deferred tax asset or liability for the estimated future tax effects of
temporary differences and carryforwards to the extent they are realizable. A
deferred tax provision or benefit results from the net change in deferred tax
assets and liabilities during the year. A deferred tax valuation allowance is
required if it is more likely than not that all or a portion of the recorded
deferred tax assets will not be realized (see Note 4).
F-10
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
measurement of the fair value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to financial statements. ATG
has determined that it will continue to account for stock-based compensation for
employees under the Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and elect the disclosure-only alternative under SFAS
No. 123 (see Note 6(b)).
(K) COMPREHENSIVE INCOME (LOSS)
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. ATG does not have any components of
comprehensive income (loss) besides its reported net loss.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist mainly of cash and cash equivalents, accounts
receivable, receivable from officer/stockholder, accounts payable, long-term
obligations, redeemable convertible preferred stock and convertible preferred
stock. The carrying amounts of these instruments approximate their fair value.
(M) CONCENTRATIONS OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. ATG has no significant off-balance-sheet concentrations such as
foreign exchange contracts, option contracts or other foreign hedging
arrangements. ATG's accounts receivable credit risk is concentrated domestically
and write-offs have historically been minimal.
F-11
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenue and their aggregate percentage of
ATG's total revenues which are derived substantially from customers in the
United States:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
SIGNIFICANT --------------------------------------------------------------------------------------
CUSTOMERS A B C D E F G H
----------------- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended--
December 31, 1996..... 3 -- 31% -- -- -- -- -- 35%
December 31, 1997..... 3 -- 29% -- -- -- 11% 16% --
December 31, 1998..... 3 17% -- -- 10% 10% -- -- --
Three months ended--
March 31, 1998........ 3 14% -- 19% -- -- -- -- --
March 31, 1999........ 3 22% 11% -- -- -- -- -- --
<CAPTION>
I J K
--- --- ---
<S> <C> <C> <C>
Year Ended--
December 31, 1996..... 14% -- --
December 31, 1997..... -- -- --
December 31, 1998..... -- -- --
Three months ended--
March 31, 1998........ -- 15% --
March 31, 1999........ -- -- 12%
</TABLE>
The following table summarizes the number of customers that individually
comprise greater than 10% of total accounts receivable and their aggregate
percentage of ATG's total accounts receivable:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL ACCOUNTS RECEIVABLES
SIGNIFICANT ----------------------------------------------------------------
RECEIVABLES A B C L M N
----------------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
As of--
December 31, 1997..................... 4 13% 26% 18% -- 14% --
December 31, 1998..................... 2 19% -- -- 12% -- --
March 31, 1999........................ 5 17% 12% -- -- -- 12%
<CAPTION>
O P
--- ---
<S> <C> <C>
As of--
December 31, 1997..................... -- --
December 31, 1998..................... -- --
March 31, 1999........................ 11% 13%
</TABLE>
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief operating decision-makers,
as defined under SFAS No. 131, are the Chief Executive Officer and the Chief
Financial Officer. To date, the Company has viewed its operations and manages
its business as principally one operating segment with two product offerings:
software licenses and services. ATG evaluates these product offerings based upon
their respective gross margins. As a result,
F-12
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the financial information disclosed herein, represents all of the material
financial information related to the Company's principal operating segment
(2) RECEIVABLE FROM OFFICER/STOCKHOLDER
ATG had advanced certain amounts to its President and Chief Executive
Officer, which were due upon demand. These amounts were repaid in 1998.
(3) LONG-TERM OBLIGATIONS
(A) LINE-OF-CREDIT WITH A BANK
On November 26, 1997, ATG entered into a working capital line-of-credit
agreement with a bank which was amended in April 1999. Under the working capital
line-of-credit, as amended, ATG may borrow up to the lesser of $5,000,000 or 80%
of eligible accounts receivable, as defined. Borrowings bear interest at the
bank's prime rate (7.75% at December 31, 1998) plus 0.25%. The working capital
line-of-credit is collateralized by substantially all assets of ATG. The
agreement contains certain covenants, including defined levels of profitability
and certain financial ratios. As of December 31, 1998 and March 31, 1999, ATG
was in compliance with all covenants. As of March 31, 1999, there were no
amounts outstanding under the working capital line-of-credit and approximately
$1,900,000 available for borrowing based upon the borrowing base calculation as
of March 31, 1999. In addition, at December 31, 1998 and March 31, 1999, ATG had
letters of credit outstanding in the amount of $102,500, respectively.
(B) TERM NOTE PAYABLE TO A BANK
On November 26, 1997, ATG entered into a term note payable with a bank.
Under the term loan agreement, as amended, ATG may borrow $500,000 based upon
certain conditions, as defined. Borrowings bear interest at the bank's prime
rate (7.75% at December 31, 1998) plus 1%. Principal and accrued interest are
payable in 36 monthly installments beginning in December 1997. The term loan is
collateralized by substantially all assets of ATG. The agreement contains
certain covenants, including defined levels of profitability and certain
financial ratios, as defined. As of December 31, 1998 and March 31, 1999, ATG
was in compliance with all covenants. As of December 31, 1998, $319,444 was
outstanding under the term note. In connection with the term note payable, ATG
issued warrants to purchase 56,296 shares Series C convertible preferred stock
to the bank. One warrant provided for the purchase of 46,296 shares at an
exercise price of $1.62 per share and the other warrant provided for the
purchase of 10,000 shares at an exercise price of $0.01 per share. These
warrants vest immediately and expire five years after issuance. ATG valued the
warrants at $58,249, using the Black-Scholes option pricing model and the
following assumptions: fair market value of $1.62; risk free interest rate of
4.74%; an expected volatility factor of 70%; an expected life of four years; and
an expected dividend yield of zero. The warrants were recorded as a debt
discount and are being amortized as interest expense over the life of the loan.
For the year ended December 31, 1998 and the three months ended March 31, 1998
and 1999, ATG amortized $18,060, $3,415 and $4,882, respectively.
F-13
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(3) LONG-TERM OBLIGATIONS (CONTINUED)
(C) EQUIPMENT LINE-OF-CREDIT
On July 2, 1998, ATG entered into an equipment line-of-credit with a bank.
Under the equipment line of credit, ATG may borrow up to $200,000 for capital
expenditures. During 1998, ATG borrowed $199,915, all of which was outstanding
as of December 31, 1998. Borrowings bear interest at the bank's prime rate
(7.75% at December 31, 1998) plus 1.25%. Principal and interest are payable in
30 monthly installments beginning in January 1999. Under the agreement, ATG is
required to comply with certain covenants, including defined levels of
profitability and certain financial ratios, as defined. As of December 31, 1998
and March 31, 1999, ATG was in compliance with all covenants.
In April 1999, ATG entered into an additional equipment line-of-credit with
the same bank. Under the equipment line of credit, ATG may borrow up to $200,000
for capital expenditure purchases. Borrowings bear interest at the bank's prime
rate (7.75% at December 31, 1998) plus 0.75%. Interest accrues and is payable
monthly. Principal is due in 30 monthly installments following a six month
interest only period.
(D) FUTURE PAYMENTS
ATG has capital lease commitments for certain equipment which expire through
2002. The maturities under ATG's long-term obligations and capital lease
obligations as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
OBLIGATIONS OBLIGATIONS TOTAL
----------- ------------- ----------
<S> <C> <C> <C>
1999.................................................. $ 246,634 $ 123,383 $ 370,017
2000.................................................. 232,742 69,638 302,380
2001.................................................. 39,983 29,773 69,756
2002.................................................. -- 2,052 2,052
----------- ------------- ----------
Total future minimum payments................... 519,359 224,846 744,205
Less--amount representing interest and discount....... 40,189 34,851 75,040
----------- ------------- ----------
Present value of future minimum payments........ 479,170 189,995 669,165
Less--current portion................................. 246,634 100,462 347,096
----------- ------------- ----------
$ 232,536 $ 89,533 $ 322,069
----------- ------------- ----------
----------- ------------- ----------
</TABLE>
(4) INCOME TAXES
No provision for federal or state income taxes has been recorded, as ATG
incurred net operating losses for all periods presented. As of December 31,
1998, ATG had net operating loss carryforwards of approximately $8,870,000
available to reduce future federal and state income taxes, if any. ATG also has
available federal tax credit carryforwards of approximately $235,000. If not
utilized, these carryforwards expire at various dates beginning 2011, if not
utilized. If substantial changes in ATG's ownership should occur, as defined by
Section 382 of the Internal Revenue Code (the Code), there
F-14
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) INCOME TAXES (CONTINUED)
could be annual limitations on the amount of carryforwards which can be realized
in future periods. ATG has completed several financings since its inception and
has incurred ownership changes as defined under the Code. ATG does not believe
that these changes in ownership will have a material impact on its ability to
use its net operating loss and tax credit carryforwards.
Net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1998
------------- -------------
Net operating loss carryforwards................................ $ 2,082,000 $ 3,548,000
Nondeductible expenses and reserves............................. 808,000 1,647,000
Tax credits..................................................... 154,000 235,000
------------- -------------
3,044,000 5,430,000
Valuation allowance............................................. (3,044,000) (5,430,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
Due to ATG's history of operating losses, there is uncertainty surrounding
ATG's ability to utilize its net operating loss and tax credit carryforwards.
Accordingly, ATG has provided a full valuation allowance against its otherwise
recognizable deferred tax asset as of December 31, 1997 and 1998 and March 31,
1999.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision at federal statutory rate..................... (34.0)% (34.0)% (34.0)%
Increase (decrease) in tax resulting from--
State tax provision, net of federal benefit...................... (6.0) (6.0) (6.0)
Increase in valuation allowance.................................. 40.0 40.0 40.0
--------- --------- ---------
Effective tax rate................................................. --% --% --%
--------- --------- ---------
</TABLE>
(5) PREFERRED STOCK
ATG's Board of Directors has authorized 10,000,000 shares of preferred stock
and has designated 1,300,000, 851,064, 2,000,000 and 2,343,750 shares as Series
A convertible preferred stock (Series A Preferred Stock), Series B redeemable
convertible preferred stock (Series B Preferred Stock), Series C convertible
preferred stock (Series C Preferred Stock) and Series D redeemable convertible
preferred
F-15
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) PREFERRED STOCK (CONTINUED)
stock (Series D Preferred Stock), respectively. ATG's Series A, Series B, Series
C and Series D Preferred Stock were issued as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER COMMON STOCK
DESCRIPTION DATE SHARES SHARE GROSS PROCEEDS EQUIVALENTS
- ----------------------- -------------------------------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Series A Preferred
Stock July 1995 1,300,000 $ 0.385 $ 500,500 1,950,000
Series B Preferred
Stock December 1996 425,532 7.05 3,000,000 1,642,953
Series C Preferred November and December 1997,
Stock April 1998 1,456,789 1.62 2,360,000 4,437,568
Series D Preferred August, September and October
Stock 1998 2,343,750 3.20 7,500,000 7,800,368
</TABLE>
The rights, preferences and privileges of Series A, Series B, Series C and
Series D Preferred Stock are as follows:
REDEMPTION
The Series B Preferred Stock is subject to mandatory redemption provisions
that require ATG to redeem 25%, on December 31, 2001 increasing by 25% annually
thereafter, at $7.05 per share (subject to certain dilutive effects, as
defined), plus any dividends accrued but unpaid thereon. Such redemption is
subject to available funds, net income and certain other restrictions. In
addition, so long as there are any shares of Series D Preferred Stock
outstanding and not redeemed, the holders of Series B Preferred Stock shall not
be entitled to redemption.
The holders of shares of Series D Preferred Stock may individually request
redemption of all, but not less than all, of the shares of Series D Preferred
Stock held at any time after August 18, 2003. The redemption value of the Series
D Preferred Stock shall be the greater of (1) the liquidation value of the
Series D Preferred Stock plus any accrued and unpaid dividends or (2) the then
current fair market value per share.
DIVIDENDS AND SPECIAL PAYMENTS
The holders of the Series A, Series B and Series C Preferred Stock are
entitled to receive dividends of $0.1925, $0.3525 and $0.08 per share per annum
(subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting such shares),
payable when and as declared by the Board of Directors. Series B Preferred Stock
and Series C Preferred Stock dividends shall accrue and shall be cumulative from
the date of issuance of each share, whether or not declared. As of December 31,
1998, ATG has not declared any dividends. Cumulative undeclared dividends on
Series B Preferred Stock are approximately $303,000 and $340,500, respectively,
at December 31, 1998 and March 31, 1999, respectively. Cumulative undeclared
dividends on Series C Preferred Stock are approximately $123,417 and $152,553 at
December 31, 1999 and March 31, 1999, respectively. The right to receive
dividends on Series A Preferred Stock shall be noncumulative. ATG shall not
declare or pay any distributions on shares of common stock until the holders of
the Preferred Stock have received a distribution at the rate specified above.
F-16
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) PREFERRED STOCK (CONTINUED)
The holders of the Series D Preferred Stock, generally are not entitled to
receive a dividend, except under certain events, including the payment of
dividends on another series of preferred stock, as defined.
In the event of a public offering of ATG's common stock, as defined, a
consolidation or a merger of ATG with or into any other persons or entities
(unless ATG is the surviving entity), sale of all or substantially all of the
assets of ATG, or a sale or other disposition of more than 50% of the voting
capital of ATG or other similar transaction, the holders of the Series D
Preferred Stock shall be entitled to receive in cash, their pro rata share,
based on the number of shares outstanding of Series D Preferred Stock held by
each, of an amount equal to $2,411,000 multiplied by 1.33 multiplied by the
percentage aggregate ownership expressed as a decimal of the holders of Series D
Preferred Stock of ATG's capital stock on a fully-diluted and as converted basis
at the time of the relevant event (Series D Special Payment). If there are not
enough funds to satisfy the entire dividend, then the holders of Series D
Preferred Stock shall share ratably in the remaining funds. The Series D Special
Payment only takes place, however, if the warrants issued in connection with the
issuance of Series B Preferred Stock have been exercised.
If there are funds left over after the Series D Special Payment, the holders
of the Series C Preferred Stock shall be entitled to receive in cash, their pro
rata share, based on the number of shares outstanding of Series C Preferred
Stock held by each, of an amount equal to $2,411,000 plus the Series D Special
Payment multiplied by 1.33 multiplied by the percentage aggregate ownership
expressed as a decimal of the holders of Series D Preferred Stock of the
Company's capital stock on a fully diluted and as converted basis at the time of
the relevant event. If there are not enough funds to satisfy the entire
dividend, then the holders of Series C Preferred Stock shall share ratably in
the remaining funds (Series C Special Payment). The Series C Special Payment
only takes place, however, if the warrants issued in connection with the
issuance of Series B Preferred Stock have been exercised and the Series D
Special Payment has been made in full.
If there are funds left over after the payment of the initial Series D and
Series C Special Payments, the holders of the Series D Preferred Stock shall be
entitled to receive in cash, their pro rata share, based on the number of shares
outstanding of Series D Preferred Stock held by each, an amount equal to the
Series C Special Payment multiplied by 1.33 multiplied by the percentage
aggregate ownership expressed as a decimal of the holders of Series D Preferred
Stock of ATG's capital stock on a fully-diluted and as converted basis at the
time of the relevant event (Second Series D Special Payment). If there are not
enough funds to satisfy the Second Series D Special Payment, then the holders of
Series D Preferred Stock shall share ratably in the remaining funds. The Second
Series D Special Payment only takes place, however, if the warrants issued in
connection with the Series B Preferred Stock have been exercised and the Series
D and Series C Special Payments have occurred.
In conjunction with the Company's proposed initial public offering, the
Series D Special Payment, the Series C Special Payment and the Second Series D
Special Payment will be canceled in exchange for the issuance of 121,250 shares
of common stock.
F-17
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) PREFERRED STOCK (CONTINUED)
LIQUIDATION PREFERENCE
In certain events, including liquidation, dissolution or winding up of ATG,
the holders of Series A, Series B, Series C and Series D Preferred Stock have a
preference in liquidation of $0.3852, $7.05, $1.62 and $3.20 per share (subject
to appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), plus any
dividends accrued but unpaid thereon.
After such funds are paid on the Series D Preferred Stock, the holders
Series D Preferred Stock shall be entitled to receive the Series D Special
Payment, as defined. This payment shall be followed by the Series C Special
Payment, as defined, which is then followed by the Second Series D Special
Payment, as defined. If after these payments, there are any excess funds of the
Company, the holders of Series A, Series B and Series C Preferred Stock shall be
paid in accordance with their agreements. Then, if any further funds left over,
the common stockholders and holders of Series D Preferred Stock shall share in
these funds on a pro rata basis.
VOTING RIGHTS
Each holder of outstanding shares of Series A, Series B, Series C and Series
D Preferred Stock shall be entitled to the number of votes equal to the number
of whole shares of common stock, into which the shares of Series A, Series B,
Series C and Series D Preferred Stock held by such holder are then convertible.
CONVERSION
Each share of Series A, Series B, Series C and Series D Preferred Stock is
convertible at any time at the option of the holder into 1.5 shares, 1.98
shares, 3 shares and 1.5 shares of common stock, respectively, adjustable for
diluting events, as defined. In addition, if ATG fails to meet certain operating
criteria, including the following cumulative total revenues, product revenues
and earnings before interest and taxes for the seven quarters ended December 31,
1999, then the conversion ratio shall increase for the holders of Series D
Preferred Stock. The holders of Series A, Series B, Series C and Series D
Preferred Stock are required to convert all of their shares into common stock at
the then effective conversion rate upon the closing of a public offering of
ATG's common stock at a price of at least $8 per share, respectively, and which
will result in gross proceeds of at least $20,000,000, for the holders of
Preferred Stock, respectively.
The conversion ratio for the Series B, Series C and Series D Preferred Stock
will be adjusted in conjunction with ATG's proposed initial public offering to
reflect (1) the cancellation of the Series C and D special payments, (2) the
cancellation of the warrants to purchase Series B Preferred Stock and common
stock discussed below and (3) the impact of ATG not meeting the criteria
specified in the Series D Preferred Stock agreement. The conversion ratio to be
effected at the time of ATG's proposed initial public offering is 3.86, 3.05 and
3.33 shares of common stock for each share of Series B, C and D Preferred Stock,
respectively.
F-18
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) PREFERRED STOCK (CONTINUED)
WARRANTS
In conjunction with the issuance of the Series B Redeemable Preferred Stock
in December 1996, ATG issued to a holder of Series B Preferred Stock a
performance-based warrant to purchase up to 425,532 shares of Series B Preferred
Stock at $7.05 per share. The performance criteria was based upon sales
generated by ATG from the affiliates of the Series B Stockholder. The Company
generated negligible revenues from the affiliates of the Series B stockholder,
therefore; the warrant was not measured or recorded. As a condition for
obtaining the Series B Stockholder's approval of the terms of the Series D
Preferred Stock financing, the warrant was canceled and ATG granted to the
Series B Preferred Stockholder, a new warrant to purchase 425,532 shares of
ATG's Series B Preferred Stock at a purchase price of $1.385 per share, which
was immediately exercisable and fully vested. The warrant expires on the earlier
of (1) the closing of a public offering of ATG's common stock, as defined, at a
price of at least $10 per share resulting in gross proceeds to ATG of at least
$10 million, (2) the closing of a liquidation, merger, sale of all or
substantially all assets of ATG or other similar event, as defined, or (3)
August 18, 2003. If a public offering occurs prior to August 18, 2003, the
warrant can be exercised coincident with the public offering, in which case the
warrant shares shall consist of shares of common stock of ATG based on the rate
at which the Series B Preferred Stock is converted into common stock. ATG has
valued this warrant at $1,053,245, using the Black-Scholes option pricing model
and the following assumptions: a fair market value of $3.20 per share, a risk
free interest rate of 5.0%, an expected volatility of 70%, an expected life of
five years, and an expected dividend yield of zero. ATG has recorded the value
of the warrant in the accompanying statement of stockholders' equity (deficit)
and as a component of dividends on preferred stock in computing net loss per
share.
In addition, in connection with the issuance of the Series D Preferred
Stock, ATG issued to the holders of Series D Preferred Stock, warrants to
purchase up to 2,146,325 shares of ATG's common stock at $0.11 per share,
adjusted for certain dilutive events, as defined. The warrants vest 5% per
quarter beginning on September 30, 1998 and expire August 18, 2003. The warrants
cannot be exercised for a period of five years, except under certain events, as
defined. In addition, the number of shares exercisable upon exercise can be
adjusted for certain events, as defined. ATG valued these warrants using the
Black-Scholes option pricing model and the following assumptions: a fair market
value of $3.20 per share, a risk free interest rate of 4.74%, an expected
volatility of 70%, an expected life of five years, and an expected dividend
yield of zero. ATG allocated the consideration received from the sale of the
Series D preferred stock of $7,500,000 between the Series D preferred stock and
warrants on the basis of the fair value of the individual component at the date
of issuance and determined that the warrants were valued at $2,775,000. These
warrants were recorded as a discount to the Series D Preferred Stock and are
being amortized over the redemption period in computing net loss per share. For
the year ended December 31, 1998 and the three months ended March 31, 1999, ATG
amortized $284,266 and $205,894, respectively.
F-19
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) PREFERRED STOCK (CONTINUED)
In conjunction with ATG's proposed initial public offering, the warrants to
purchase Series B Preferred Stock and common stock will be canceled and the
number of shares of common stock issuable upon conversion of the Series B and D
Preferred Stock will be increased to reflect the shares which would have been
received upon exercise of the warrants based upon the proposed initial public
offering price.
The following is a rollforward of the Series B and Series D Preferred Stock:
<TABLE>
<CAPTION>
SERIES B REDEEMABLE SERIES D REDEEMABLE
------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
------------------------- ------------------------ TOTAL
NUMBER OF REDEMPTION NUMBER OF REDEMPTION REDEMPTION
SHARES VALUE SHARES VALUE VALUE
----------- ------------ ---------- ------------ -------------
Balance, December 31, 1995................... -- $ -- $ $
Issuance of Series B Preferred Stock....... 425,532 3,000,000 -- -- 3,000,000
----------- ------------ ---------- ------------ -------------
Balance, December 31, 1996................... 425,532 3,000,000 -- -- 3,000,000
Accretion of Series B Preferred Stock to
redemption value......................... -- 153,288 -- -- 153,288
----------- ------------ ---------- ------------ -------------
Balance, December 31, 1997................... 425,532 3,153,288 -- -- 3,153,288
Issuance of Series D Preferred Stock....... -- -- 2,343,750 4,725,000 4,725,000
Accretion of Series B and Series D
Preferred Stock to redemption value...... -- 150,000 -- 284,266 434,266
----------- ------------ ---------- ------------ -------------
Balance, December 31, 1998................... 425,532 3,303,288 2,343,750 5,009,266 8,312,554
Accretion of Series B and Series D
Preferred Stock to redemption value...... -- 37,500 -- 205,894 243,394
----------- ------------ ---------- ------------ -------------
Balance, March 31, 1999...................... 425,532 $ 3,340,788 2,343,750 $ 5,215,160 $ 8,555,948
----------- ------------ ---------- ------------ -------------
----------- ------------ ---------- ------------ -------------
</TABLE>
(6) STOCKHOLDER'S EQUITY (DEFICIT)
(A) RECAPITALIZATION
On May 10, 1999, ATG's Board of Directors approved a 3-for-2 stock split of
ATG's common stock. The stock split was effective on June 18, 1999. All share
and per share amounts of common stock for all periods have been retroactively
adjusted to reflect the stock split. Upon the closing of ATG's proposed initial
public offering, its certificate of incorporation will be amended and restated
to, among other things, change its authorized capital stock to 100,000,000
shares of $0.01 par value common stock and 10,000,000 shares of $0.01 par value
preferred stock.
F-20
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) STOCKHOLDER'S EQUITY (DEFICIT) (CONTINUED)
(B) STOCK PLANS
1996 STOCK OPTION PLAN
In April 1996, the 1996 Stock Option Plan (the 1996 Plan) was approved by
ATG's Board of Directors and stockholders. The purpose of the 1996 Plan is to
reward employees, officers and directors, and consultants and advisors to ATG
who are expected to contribute to the growth and success of ATG. The 1996 Plan
provides for the award of options to purchase shares of ATG's common stock.
Stock options granted under the 1996 Plan may be either incentive stock options
or nonqualified stock options.
The 1996 Plan is administered by the Board of Directors, which has the
authority to designate participants, determine the number and type of options to
be granted, the time at which options are exercisable, the method of payment and
any other terms or conditions of the options. Options generally vest annually
over a two- to four-year period and expire 10 years from the date of grant.
While the Board determines the prices at which options may be exercised
under the 1996 Plan, the exercise price of an incentive stock option shall be at
least 100% (110% for incentive stock options granted to a 10% stockholder) of
the fair market value of ATG's common stock on the date of grant. A total of
6,300,000 shares of common stock have been reserved for options to be granted
under the 1996 Plan. As of December 31, 1998 and March 31, 1999, there are
3,082,488 and 2,602,713 shares, respectively, available for future grant.
1999 OUTSIDE DIRECTOR STOCK OPTION PLAN
The 1999 Outside Director Stock Option Plan (Director Plan) was adopted by
ATG's Board of Directors and approved by stockholders in May 1999. Under the
terms of the Director Plan, directors who are not employees of ATG receive
nonqualified options to purchase shares of common stock. A total of 150,000
shares of common stock have been reserved under the Director Plan.
Under the terms of the Director Plan, each currently active non-employee
director will receive an option to purchase 5,000 shares of common stock on the
effective date of the proposed initial public offering at the initial public
offering price. Individuals who become directors after this offering and are not
employees of ATG will receive an option to purchase 5,000 shares of our common
stock on the date of initial election to ATG's Board of Directors. In addition,
each non-employee director will receive an option to purchase 2,500 shares of
common stock on the date of each annual meeting of stockholders commencing in
the year 2000 at an exercise price per share equal to the closing price of ATG's
common stock on the date of grant. All options granted under the Director Plan
will be fully vested upon grant. Options granted to directors will be accounted
for in accordance with SFAS No. 123 based upon the guidance provided in the
exposure draft dated March 31, 1999 for the proposed interpretation, Accounting
for Certain Stock Transactions Involving Stock Compensation, of APB No. 25. The
fair value of directors' grants will be measured and included in the
accompanying statements of operations.
F-21
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) STOCKHOLDER'S EQUITY (DEFICIT) (CONTINUED)
1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan (the Stock Purchase Plan) was adopted
by ATG's Board of Directors and approved by stockholders in May 1999. The Stock
Purchase Plan authorizes the issuance of up to a total of 500,000 shares of
ATG's common stock to participating employees. All ATG's employees, including
directors who are employees, are eligible to participate in the Stock Purchase
Plan. Employees who would immediately after the grant own 5% or more of the
total combined voting power or value of our stock are not eligible to
participate. During each designated semiannual offering period, each eligible
employee may deduct between 1% to 10% of base pay to purchase common stock of
ATG. The purchase price will be 85% of the closing market price of ATG's common
stock on either (1) the first business day of the offering period or (2) the
last business day of the offering period, whichever is lower.
ATG will account for the Stock Purchase Plan in accordance with APB No. 25
and accordingly, no compensation cost will be recognized under the Stock
Purchase Plan. ATG will elect the "disclosure only" alternative under SFAS No.
123.
The following table summarizes option activity under the 1996 Plan:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE EXERCISE PRICE
----------- --------------- -----------------
<S> <C> <C> <C>
Outstanding, December 31, 1995......................... -- $ -- $ --
Granted.............................................. 1,101,150 .13 - .50 .23
Exercised............................................ (750) .13 .13
Canceled............................................. (5,250) .13 .13
----------- --------------- -----
Outstanding, December 31, 1996......................... 1,095,150 .13 - .50 .17
Granted.............................................. 1,261,500 .50 .50
Exercised............................................ (55,950) .13 - .50 .19
Canceled............................................. (160,518) .13 - .50 .23
----------- --------------- -----
Outstanding, December 31, 1997......................... 2,140,182 .13 - .50 .36
Granted.............................................. 1,636,154 .50 .50
Exercised............................................ (221,355) .13 - .50 .33
Canceled............................................. (615,524) .13 - .50 .44
----------- --------------- -----
Outstanding, December 31, 1998......................... 2,939,457 .13 - .50 .43
Granted.............................................. 515,925 2.00 - 4.00 2.58
Exercised............................................ (448,063) .13 - .50 .37
Canceled............................................. (36,150) .50 - 2.67 1.39
----------- --------------- -----
Outstanding, March 31, 1999............................ 2,971,169 $ .13 - $4.00 $ .80
----------- --------------- -----
----------- --------------- -----
Exercisable, March 31, 1999............................ 1,025,613 $ .13 - $2.00 $ .43
----------- --------------- -----
----------- --------------- -----
</TABLE>
In April 1999 and May 1999, the Company granted options for the purchase of
261,600 and 48,375 shares of common stock at exercise prices of $8.00 and $10.00
per share, respectively.
F-22
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) STOCKHOLDER'S EQUITY (DEFICIT) (CONTINUED)
The following table summarizes information relating to currently outstanding
and exercisable options as of March 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
REMAINING -----------------------------
CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES NUMBER SHARES (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------ -------------- ------------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$ .13 - $ .17................. 429,341 7.1 $ .15 316,175 $ .15
.50....................... 2,040,903 8.4 .50 686,938 .50
2.00 - 2.67................. 399,150 9.9 2.33 22,500 2.00
3.33 - 4.00................. 101,775 10.0 3.52 -- --
-------------- ----------
2,971,169 1,025,613
-------------- ----------
-------------- ----------
</TABLE>
In the years ended December 31, 1996, 1997 and 1998, ATG granted 142,500,
228,000 and 15,000 nonqualified stock options exercisable at $0.13, $0.50 and
$0.50 per share, respectively, which are fully vested, to consultants as payment
for services performed. ATG recorded expense for the years ended December 31,
1996, 1997 and 1998 related to these grants of $210,200, $60,000 and $4,210,
respectively. ATG valued the 1996 and 1997 options issued in exchange for
services based upon the fair value of the services received. The services were
more readily measurable as ATG had entered into similar transactions in exchange
for cash consideration. ATG valued the 1998 options issued in exchange for
services based upon the Black-Scholes option pricing model and the following
assumptions: a fair market value of $1.62; risk free interest at 4.74%; an
expected volatility factor of 70%; an expected life of four years; and an
expected dividend yield of zero. The options expire ten years from the date of
grant.
In connection with certain stock option grants during the year ended
December 31, 1998 and the three months ended March 31, 1999, ATG recorded
deferred compensation of $1,798,843 and $2,491,300, respectively, which
represents the aggregate difference between the exercise price and the fair
market value of the common stock as determined for accounting purposes. The
deferred compensation will be recognized as an expense over the vesting period
of the underlying stock options. ATG recorded compensation expense of $106,542
and $215,846 in the year ended December 31, 1998 and the three months ended
March 31, 1999, respectively, related to these options. In addition, the Company
will record additional deferred compensation of approximately $569,000 related
to the options granted in April and May 1999 which will be recognized as an
expense over the vesting period of the options.
ATG has computed the pro forma disclosures required under SFAS No. 123 for
options granted during the years ended December 31, 1996, 1997 and 1998 and
during the three months ended
F-23
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) STOCKHOLDER'S EQUITY (DEFICIT) (CONTINUED)
March 31, 1998 and 1999 using the Black-Scholes option pricing model prescribed
by SFAS No. 123, using the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1996 1997 1998 1998 1999
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Risk-free interest rate........................... 7.00% 7.00% 5.00% % %
Expected dividend yield........................... -- -- -- -- --
Expected lives.................................... 4 years 4 years 4 years 4 years 4 years
Expected volatility............................... 70% 70% 70% 70% 70%
Weighted average fair value of options granted.... $ .13 $ .18 $ .14 $ .42 $ 2.18
Weighted average remaining contractual life of
options outstanding............................. 9.54 years 9.21 years 8.4 years 6.9 years 8.5 years
</TABLE>
Had compensation expense for ATG's stock option plan been determined
consistent with SFAS No. 123, the pro forma net loss available for common
stockholders and pro forma net loss per share would have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net loss available for common
stockholders--
As reported......................... $ (1,648,100) $ (4,441,932) $ (4,444,535) $ (986,389) $ (1,120,751)
Pro forma........................... (1,684,305) (4,578,226) (4,745,661) (1,038,728) (1,281,227)
Basic and diluted net loss per share--
As reported......................... $ (0.19) $ (0.50) $ (0.50) $ (0.11) $ (0.12)
Pro forma........................... (0.19) (0.52) (0.53) (0.12) (0.14)
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
(A) LEASES
In March 1999, ATG entered into a new facility lease for its corporate
headquarters which expires in February 2006. Upon occupancy of the new facility,
ATG is required to issue the lessor a letter of credit in the amount of
$2,500,000 as a security deposit. The approximate future minimum payments
F-24
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
under this new facility lease, existing facility leases and certain equipment
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, OPERATING LEASES
- --------------------------------------------------------------------- -----------------------
<S> <C>
1999........................................................... $ 1,833,000
2000........................................................... 2,913,000
2001........................................................... 2,208,000
2002........................................................... 2,251,000
2003........................................................... 2,250,000
Thereafter..................................................... 5,935,000
------------
Total future minimum lease payments.......................... $ 17,390,000
------------
------------
</TABLE>
Rent expense included in the accompanying statements of operations was
approximately $265,000, $781,000 and $810,000 for the years ended December 31,
1996, 1997 and 1998 and $178,000 and $294,000 for three months ended March 31,
1998 and 1999, respectively.
(B) LITIGATION
LEGAL PROCEEDINGS
A patent infringement claim was filed by BroadVision, one of ATG's
competitors, against ATG on December 11, 1998. The case was filed in the U.S.
District Court for the Northern District of California. BroadVision alleges that
ATG is infringing on their patent for a method of conducting e-commerce.
BroadVision is seeking a permanent injunction of the sale of ATG's Dynamo
products in their current forms as well as unspecified damages. ATG intends to
vigorously oppose BroadVision's allegations and has filed a counterclaim against
BroadVision on February 4, 1999 seeking a judgment that ATG is not infringing
their patent and that the patent in question is in fact unenforceable and
invalid.
(8) EMPLOYEE BENEFIT PLAN
Effective January 1, 1997, ATG adopted the Art Technology Group 401(k) Plan
(the 401(k) Plan). All employees, as defined, are eligible to participate in the
401(k) Plan. The 401(k) Plan allows eligible employees to make salary-deferred
contributions of up to 15% of their annual compensation, as defined, subject to
certain Internal Revenue Service limitations. ATG may contribute to the 401(k)
Plan at its discretion. No discretionary employer contributions were made to the
Plan for the years ended December 31, 1997 and 1998 or the three months ended
March 31, 1998 and 1999.
F-25
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1998 and March 31, 1999 consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Payroll and related costs............................. $ 212,959 $ 600,467 $ 788,858
Accrued accounts payable.............................. 124,849 292,540 501,064
Other................................................. 55,476 327,094 488,060
---------- ------------ ------------
$ 393,284 $ 1,220,101 $ 1,777,982
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
(10) VALUATION AND QUALIFYING ACCOUNTS
The following is a rollforward of ATG's allowance for doubtful accounts:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
PERIOD ADDITIONS DEDUCTIONS PERIOD
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year Ended
December 31, 1996........................ $ -- $ -- $ -- $ --
------------ ---------- ----------- ----------
------------ ---------- ----------- ----------
Year Ended
December 31, 1997........................ $ -- $ 21,305 $ -- $ 21,305
------------ ---------- ----------- ----------
------------ ---------- ----------- ----------
Year Ended
December 31, 1998........................ $ 21,305 $ 265,287 $ (36,592) $ 250,000
------------ ---------- ----------- ----------
------------ ---------- ----------- ----------
Three months ended
March 31, 1999........................... $ 250,000 $ 10,000 $ -- $ 260,000
------------ ---------- ----------- ----------
------------ ---------- ----------- ----------
</TABLE>
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
-------------
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
--------------
July 20, 1999
--------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF OUR COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL AUGUST 16, 1999, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
