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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended
June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-26679
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3141918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 First Street
Cambridge, Massachusetts 02144
(Address of principal executive offices)
----------------
(617) 386-1000 (Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
(1) Yes X No (2) Yes No X
------- ------- --------- --------
As of August 19, 1999 there were 31,496,073 shares of the Registrant's common
stock outstanding.
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- -------------------------------------------------------------------------------
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ART TECHNOLOGY GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements (Unaudited) 3
Balance sheets at June 30, 1999, pro forma June 30,1999
and December 31, 1998 3
Statements of operations for the three and six months
ended June 30, 1999 and 1998 4
Statements of cash flows for the six months ended
June 30, 1999 and 1998 5
Notes to unaudited financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 27
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ART TECHNOLOGY GROUP, INC.
BALANCE SHEETS
(In thousands, except share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
June 30,
June 30, 1999 December 31,
1999 (Note 4) 1998
--------- --------- --------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,257 $ 60,407 $ 4,093
Marketable securities 1,001 1,001 -
Accounts receivable, net of reserve for doubtful
accounts of $460, $460 and $260, respectively 3,284 3,284 2,318
Unbilled services 773 773 291
Prepaid expenses and other current assets 462 462 113
--------- --------- --------
Total current assets 9,777 65,927 6,815
Property and equipment, net 1,643 1,643 842
Other assets 667 667 109
--------- --------- --------
$ 12,087 $ 68,237 $ 7,766
--------- --------- --------
--------- --------- --------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 344 $ - $ 347
Accounts payable 1,626 1,626 721
Accrued expenses 1,841 1,841 1,220
Deferred revenue 5,341 5,341 878
--------- --------- --------
Total current liabilities 9,152 8,808 3,166
--------- --------- --------
Long-term obligations, less current maturities 151 - 322
--------- --------- --------
Commitments and contingencies (Note 12)
Redeemable convertible preferred stock 8,799 - 8,313
--------- --------- --------
Stockholders' equity (deficit):
Preferred stock, $.01 par value-
Authorized- 10,000,000 shares at June 30, 1999, no
shares pro forma and 10,000,000 shares at December 31, 1998
Series A Convertible Preferred Stock - Designated 1,300,000 shares
Issued and outstanding- 1,300,000 shares at June 30, 1999, no shares
pro forma June 30, 1999 and 1,300,000 shares at December 31, 1998 500 - 500
Series C Convertible Preferred Stock- Designated- 2,000,000 shares Issued
and outstanding- 1,456,789 shares at June 30, 1999, no shares
pro forma June 30, 1999 and 1,456,789 shares at December 31, 1998 2,360 - 2,360
Common stock, $.01 par value-
Authorized- 25,000,000 shares at June 30, 1999, 100,000,000 shares pro
Forma June 30, 1999 and 25,000,000 shares at
December 31, 1998
Issued and outstanding- 9,768,332 shares at June 30, 1999, 30,767,221 shares
Pro forma June 30, 1999 and 9,128,055 shares at December 31, 1998 98 308 91
Additional paid-in capital 9,357 81,379 6,040
Deferred compensation (4,236) (4,236) (1,692)
Accumulated deficit
Total stockholders' equity (deficit) (14,094) (18,022) (11,334)
--------- --------- --------
(6,015) 59,429 (4,035)
--------- --------- --------
$ 12,087 $ 68,237 $ 7,766
--------- --------- --------
--------- --------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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ART TECHNOLOGY GROUP, INC.
STATEMENT OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Services $ 3,128 $ 1,944 $ 5,742 $ 3,636
Product licenses 3,105 1,003 4,911 1,212
---------- --------- --------- ----------
Total revenues 6,233 2,947 10,653 4,848
COST OF REVENUES 2,248 1,234 4,061 2,300
---------- --------- --------- ----------
Gross profit 3,985 1,713 6,592 2,548
---------- --------- --------- ----------
OPERATING EXPENSES:
Research and development 1,392 685 2,523 1,312
Sales and marketing 2,617 923 4,037 1,603
General and administrative 1,115 450 1,858 886
Amortization of deferred compensation 303 - 519 -
---------- --------- --------- ----------
Total operating expenses 5,427 2,058 8,937 3,801
---------- --------- --------- ----------
LOSS FROM OPERATIONS (1,442) (345) (2,345) (1,253)
INTEREST INCOME 71 - 121 -
INTEREST EXPENSE (25) (43) (49) (84)
---------- --------- --------- ----------
Net loss (1,396) (388) (2,273) (1,337)
ACCRETION OF DIVIDENDS, DISCOUNT
AND OFFERING COSTS ON
PREFERRED STOCK (243) (37) (487) (75)
---------- --------- --------- ----------
Net loss available for common stockholders $ (1,639) $ (425) $ (2,760) $ (1,412)
---------- --------- --------- ----------
---------- --------- --------- ----------
NET LOSS PER SHARE (Note 3):
Basic and diluted $ (0.17) $ (0.05) $ (0.29) $ (0.16)
---------- --------- --------- ----------
Shares used in computing basic and diluted net
loss per share 9,672 8,943 9,538 8,928
---------- --------- --------- ----------
PRO FORMA NET LOSS PER SHARE (Note 3):
Pro forma basic and diluted
assuming conversion of convertible
preferred stock $ (0.06) $ (0.02) $ (0.10) $ (0.09)
---------- --------- --------- ----------
Shares used in computing pro forma basic and
diluted net loss per share 23,747 15,975 23,614 15,656
---------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
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ART TECHNOLOGY GROUP, INC.
STATEMENT OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
June 30, June 30,
1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,273) $ (1,337)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Amortization of deferred compensation 519 -
Noncash interest expense related to issuance of warrants 10 8
Depreciation and amortization 239 159
Changes in current assets and liabilities-
Accounts receivable, net (966) (831)
Unbilled services (482) (42)
Prepaid expenses and other current assets (349) (18)
Accounts payable 905 43
Accrued expenses 621 494
Deferred revenue 4,463 573
----------- ----------
Net cash provided by (used in) operating activities 2,687 (951)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (1,001) -
Purchases of property and equipment (1,040) (5)
Proceeds from sale of property and equipment - 4
Decrease in receivable from officer/stockholder - 57
Increase in other assets (558) (1)
----------- ----------
Net cash (used in) provided by investing activities (2,599) 55
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 260 10
Payments on term loan to a bank (53) (83)
Payments on equipment line of credit (70) -
Payments on capital lease obligations (61) (40)
Net proceeds from sale of Series C convertible preferred stock - 400
Proceeds from line of credit - 596
Payments on line of credit - (400)
Proceeds from note payable - 300
----------- ----------
Net cash provided by financing activities 76 783
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 164 (113)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,093 187
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,257 $ 74
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Accretion of dividend and discount on Series B and Series D
redeemable convertible preferred stock $ 487 $ 75
----------- ----------
Equipment acquired under capital lease $ - $ 31
----------- ----------
Original issue discount related to warrants issued to a bank $ - $ 58
----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
5
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ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION
Art Technology Group, Inc. (the "Company") is a Delaware corporation which was
incorporated on December 31, 1991. The Company offers an integrated suite of
Internet customer relationship management and electronic commerce software
applications, as well as related application development, integration and
support services.
On July 6, 1999, the Company established two wholly-owned subsidiaries
incorporated in Massachusetts, ATG Securities Corporation and ATG Global, Inc.
The accompanying condensed financial statements of the Company have been
prepared pursuant to the rules of the Securities and Exchange Commission for
quarterly reports on Form 10-Q and do not include all of the information and
disclosures required by generally accepted accounting principles. While the
Company believes that the disclosures presented are adequate to make information
not misleading, these financial statements should be read in conjunction with
the audited financial statements and related notes included in the Company's
Registration Statement on Form S-1, Registration No. 333-78333. In the opinion
of management, the accompanying condensed financial statements and notes herein
are unaudited but, contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. The operating results for the three and six months ended June 30,
1999 are not necessarily indicative of the results to be expected for the full
year ending December 31, 1999.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. NET LOSS PER SHARE INFORMATION
Basic and diluted net loss per share is determined by dividing net loss
available for common stockholders by the weighted average common shares
outstanding during the period. Basic and diluted net loss per share are the
same, outstanding common stock options and warrants have been excluded as they
are considered antidilutive as the Company recorded a net loss for all periods
presented. Options and warrants to purchase a total of 5,312,035 and 3,383,430
shares of common stock have been excluded from the computation of diluted
weighted average shares outstanding for the periods ended June 30, 1999 and
1998, respectively. Shares of common stock issuable upon the conversion of
outstanding preferred stock and warrants have also been excluded for all periods
presented. In accordance with SEC Staff Accounting Bulletin No. 98, EARNINGS PER
SHARE IN AN INITIAL PUBLIC OFFERING, the Company determined that there were no
nominal issuances of the Company's common stock prior to the Company's initial
public offering.
The Company's historical capital structure is not indicative of its prospective
structure due to the conversion of all convertible preferred stock and
redeemable convertible preferred stock into 15,830,889 shares of common stock
which occurred upon the closing of the Company's initial public offering on July
26, 1999. Unaudited pro forma net loss per share is determined by dividing net
loss, without the effect of accretion of preferred stock dividends, discount and
offering costs by the weighted average number of shares of common stock and
potential common stock outstanding during the period, assuming the conversion of
all convertible preferred stock and the redeemable convertible preferred stock
common stock using the as-converted method from their respective dates of
issuance.
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4. INITIAL PUBLIC OFFERING
On July 26, 1999, the Company closed its initial public offering of 5,000,000
shares of common stock at a public offering price of $12 per share. The net
proceeds to the Company from the offering were approximately $54,800,000. On
July 30, 1999, the Company issued an additional 168,000 shares of common stock
at the initial public offering price of $12 per share pursuant to the
underwriters' over-allotment option. Net proceeds to the Company from the
over-allotment offering were approximately $1,875,000.
5. UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma balance sheet as of June 30, 1999 reflects (i) 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 occurred upon the closing of the Company's initial
public offering (ii) the receipt of the net proceeds of approximately
$56,675,000 from the Company's initial public offering including the exercise of
the underwriters' over-allotment option and (iii) the repayment of all bank debt
and capital lease obligations. This reflects the cancellation of special
payments to Series C and Series D preferred stockholders, the cancellation of
warrants to purchase 425,532 shares of Series B Preferred Stock, the
cancellation of warrants to purchase common stock and the changes to the
conversion ratio of Series B, C and D Preferred Stock.
6. REVENUE RECOGNITION
The Company recognizes product license revenue from licensing the rights to use
its software to end-users. The Company also generates service revenues from
integrating its software with its customers' operating environments, the sale of
maintenance services and the sale of certain other consulting and development
services. The Company generally has separate agreements with its customers,
which govern the terms and conditions of its software license, consulting and
support and maintenance services. These separate agreements, along with the
Company's price list, provide the basis for establishing vendor specific
objective evidence of fair value. This provides the basis to appropriately
allocate fair value among the multiple elements in an arrangement, as well as,
allocate discounts ratably over all elements in an arrangement, except for
upgrade rights.
The Company recognizes revenue in accordance with Statement of Position ("SOP")
97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE
OF A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenues from software
product license agreements are recognized upon execution of a license agreement
and delivery of the software, provided that the fee is fixed and determinable
and deemed collectible by management. If conditions for acceptance are required
subsequent to delivery, revenues are recognized upon customer acceptance if such
acceptance is not deemed to be perfunctory. Revenues from software maintenance
agreements are recognized ratably over the term of the maintenance period, which
is typically one year. The Company enters into reseller arrangements that
typically provide for sublicense fees payable to the Company based upon a
percentage of the Company's list price. Revenues are recognized under reseller
agreements as earned which is generally ratably over the life of the reseller
agreement for guaranteed minimum royalties or based upon unit sales by the
resellers. The Company does not grant its resellers the right to return or price
protection. Revenues from professional service arrangements are recognized on
either a time and materials or percentage-of-completion basis as the services
are performed, provided that the amounts due from customers are fixed and
determinable and deemed collectible by management. Amounts collected or billed
prior to satisfying the above revenue recognition criteria are reflected as
deferred revenue. Unbilled services represent service revenues that have been
earned by the Company in advance of billings.
In March 1999, the Company received $5.0 million under an original equipment
manufacturers arrangement with Informix, of which $3.9 million is included in
deferred revenue at June 30, 1999. Informix has the right to terminate the
agreement and receive a refund of the $5.0 million prepayment less the greater
of $530,000 per quarter, commencing with the fiscal quarter ended March 31, 1999
and all
7
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uncredited prepaid royalties as of the termination date, in the event
they are named in a patent or other intellectual property infringement claim
related to the agreement by BroadVision, Inc. The amount refundable at June 30,
1999 is $3.9 million.
7. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company accounts for investments in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES. In accordance with SFAS No. 115, investments for
which the Company has the positive intent and ability to hold to maturity,
consisting of cash equivalents 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. The average maturity of the Company's marketable
securities is approximately one month at June 30, 1999. To date, the Company has
not recorded any realized gains or losses.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Cash and cash equivalents-
Cash $1,243 $ 593
Money market accounts 3,014 3,500
------ ------
Total cash and cash equivalents $4,257 $4,093
------ ------
Marketable securities-
Corporate securities $1,001 $ --
------ ------
Total marketable securities $1,001 $ --
------ ------
</TABLE>
8. CONCENTRATIONS OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentrations
such as foreign exchange contracts, option contracts or other foreign hedging
arrangements. The Company's accounts receivable credit risk is concentrated
domestically and write-offs have historically been minimal.
For the three and six months ended June 30, 1999 and 1998, certain customers
accounted for more than 10% of the Company's revenue. Two customers accounted
for 12% and 10%, respectively, of revenue for the three months ended June 30,
1999 and one customer accounted for 12% of revenue for the six months ended June
30, 1999. Three customers accounted for 16%, 14% and 10%, respectively, of
revenues for the three months ended June 30, 1998 and three customers accounted
for 16%, 11% and 10%, respectively, of revenue for the six months ended June 30,
1998.
At June 30, 1999, accounts receivable from three customers accounted for 13%,
12% and 12%, respectively, of the total amount due to the Company. At June 30,
1998, accounts receivable from one customer accounted for 17% of the total
amount due to the Company.
8
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9. STOCK PLAN AND DEFERRED COMPENSATION
In the second quarter of 1999, the Company granted options for the purchase of
998,375 shares of common stock at exercise prices of $8.00 to $10.00 per share.
In connection with certain stock option grants during the year ended December
31, 1998 and the six months ended June 30, 1999, the Company recorded deferred
compensation of approximately $1.8 million and $3.1 million, respectively, which
represents the aggregate difference between the exercise price and the fair
market value of common stock as determined for accounting purposes. The deferred
compensation will be recognized as an expense over the vesting period of the
underlying stock options. The Company recorded compensation expense of $303,000
and $519,000 for the three and six months ended June 30, 1999, respectively,
related to these options. The Company did not record compensation expense for
the three and six months ended June 30, 1998 related to these options.
10. DISCLOSURE ABOUT A SEGMENT OF AN ENTERPRISE
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION in 1998. SFAS No. 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions how to allocate resources and assess performance. The Company's
chief operating decision-makers, as defined under SFAS No. 131, are the Chief
Executive Officer and the Chief Financial Officer. To date, the Company has
viewed its operations and manages its business as principally one operating
segment with two product offerings: software licenses and services. As a result,
the financial information disclosed herein, represents all of the material
financial information related to the Company's one operating segment.
11. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME in 1998. SFAS
No. 130 requires that a full set of general purpose financial statements be
expanded to include the reporting of "comprehensive income". Comprehensive
income is comprised of two components, net income and other comprehensive
income. The Company does not have any components of comprehensive income (loss)
other than its reported net loss.
12. COMMITMENTS AND CONTINGENCIES
In December 1998, a patent infringement claim was filed against the Company by
BroadVision, Inc. ("BroadVision"), one of the Company's competitors. The case
was filed in the U.S. District Court for the Northern District of California.
BroadVision alleges that the Company is infringing on their patent for a method
of conducting e-commerce. BroadVision is seeking a permanent injunction of the
sale of the Company's Dynamo products in their current forms as well as
unspecified damages. The Company intends to vigorously oppose BroadVision's
allegations and filed a counterclaim against BroadVision in February 1999,
seeking a judgement that the Company is not infringing upon the patent in
question and is, in fact, unenforceable and invalid.
9
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13. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement establishes new standards for the recognition of gains and losses on
derivative instruments and provides guidance as to whether a derivative may be
accounted for as a hedging instrument. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company currently
does not utilize derivative instruments or engage in hedging activities and,
therefore, the adoption of SFAS No. 133 is not expected to have a material
impact on the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The statements contained in this Report on Form 10-Q that are not purely
historical statements are forward looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding our expectations, beliefs, hopes, intentions or strategies regarding
the future. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those indicated in such
forward-looking statements.
OVERVIEW
We were founded in December 1991. From 1991 through 1995, we devoted our efforts
principally to building, marketing and selling our professional services
capabilities and to research and development activities related to our software
products. Beginning in 1996, we began to focus on selling our software products.
To date, we have enhanced and released several versions of our Dynamo
Application Server product, and have completed development of our current
product suite. We market and sell our products worldwide through our direct
sales force, systems integrators, technology partners and original equipment
manufacturers.
We derive our revenues from the sale of software product licenses and related
services. Product license revenues are derived from the sale of perpetual
software licenses of our Dynamo products. Our software licenses are priced based
on either the size of the customer implementation or site license terms.
Services revenues are derived from fees for professional services, training, and
software maintenance and support. Professional services include software
installation, custom application development and project and technical
consulting. We bill professional services fees either on a time and materials
basis or on a fixed-price schedule. Software maintenance and support
arrangements are priced based on the level of services provided. In general,
customers are entitled to receive software updates, maintenance releases and
technical support for an annual maintenance fee of 20% to 30% of the list price
of the licensed product. Customers that purchase maintenance and support
generally receive all product updates and upgrades of software modules purchased
as well as Web-based and telephone technical support. Training is billed when
services are provided.
We recognize revenues in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION and SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A
PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenues from software
product licenses are recognized upon execution of a license agreement and
delivery of the software, provided that the fee is fixed and determinable and
deemed by management to be collectible. If conditions for acceptance are
required subsequent to delivery, revenues are recognized upon customer
acceptance if such acceptance is not deemed to be perfunctory. Revenues under
reseller arrangements are generally recognized as earned which is generally
ratably over the life of the reseller agreement for guaranteed minimum royalties
or based upon unit sales by the resellers. Revenues for professional services
are recognized on either a time and materials or percentage of completion basis
as the services are performed, provided that amounts due from customers are
fixed and determinable and deemed collectible by management. Revenues for
software maintenance and support are recognized ratably over the term of the
maintenance period, which is typically one year. We record cash receipts from
customers and billed amounts due from customers in excess of revenues recognized
as deferred revenues. We record revenues recognized on a contract prior to
billing as unbilled services. The timing and amount of cash receipts from
customers can vary significantly depending on specific contract
10
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terms and can therefore have a significant impact on the amount of deferred
revenues and unbilled services in any given period.
Services revenues have increased each quarter during our history primarily due
to the expansion of our service capabilities by hiring additional service
personnel and to the increase in the number of customers using our Dynamo
products. Sales of Dynamo products often lead to sales of consulting services
and software maintenance and support. To date, substantially all of our Dynamo
customers have entered into 12-month software maintenance and support agreements
at the time of purchase. Because we only began selling Dynamo in 1996, we have a
limited history upon which to evaluate whether Dynamo customers will renew their
maintenance and support agreements from year to year. We believe that growth in
our product license sales depends on our ability to provide customers with
support, training, consulting and implementation services and to educate systems
integrators and resellers on how to use and install our products. We have
invested significantly, and expect to continue to invest in expanding our
services organization.
Until 1996, we were focused primarily on our professional services business.
Since 1996, sales of software licenses and related software and maintenance
services have represented an increasing percentage of our total revenues. We
anticipate that software product licenses and software maintenance revenues will
continue to increase as a percentage of total revenues. As software product
licenses have nearly no costs associated with them, this trend may contribute to
higher gross margins. Gross margins will also be affected by the mix of services
provided and the utilization of our services personnel. As a result, our gross
margins could vary significantly from quarter to quarter.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit, hire and train personnel for our
engineering, sales and marketing and professional services departments, and to
establish an administrative organization. These costs have exceeded the revenues
generated by our products and services. As a result, we have incurred net losses
in each year since inception and for the six months ended June 30, 1999. As of
June 30, 1999, we had an accumulated deficit of $14.1 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 207 full-time employees at June 30, 1999, up from 105 at June 30, 1998.
This rapid growth places a significant demand on our management and operational
resources. In order to manage growth effectively, we must implement and improve
our operational systems, procedures and controls on a timely basis. We expect
that future expansion will continue to challenge our ability to hire, train,
motivate and manage our employees. Competition is intense for highly qualified
technical, sales and marketing and management personnel.
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RESULTS OF OPERATIONS
The following table sets forth statement of operations data as percentages of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- ------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Services 50% 66% 54% 75%
Product licenses 50% 34% 46% 25%
---- ---- ---- ----
Total revenues 100% 100% 100% 100%
COST OF REVENUES 36% 42% 38% 47%
---- ---- ---- ----
Gross profit 64% 58% 62% 53%
---- ---- ---- ----
OPERATING EXPENSES:
Research and development 22% 23% 24% 27%
Sales and marketing 42% 31% 38% 33%
General and administrative 18% 16% 17% 19%
Amortization of deferred 5% -- 5% --
compensation
---- ---- ---- ----
Total operating expenses 87% 70% 84% 79%
---- ---- ---- ----
LOSS FROM OPERATIONS (23)% (12)% (22)% (26)%
INTEREST INCOME 1% -- 1% --
INTEREST EXPENSE -- (1)% -- (2)%
---- ---- ---- ----
Net loss (22)% (13)% (21)% (28)%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
REVENUES
Total revenues increased 112% from $2.9 million for the three months ended June
30, 1998 to $6.2 million for the three months ended June 30, 1999. Total
revenues increased 120% from $4.8 million for the six months ended June 30, 1998
to $10.7 million for the six months ended June 30, 1999. The increases were
attributable to growth in the number of customers and average sale per customer,
as we expanded our sales force and introduced a new release of our Dynamo
product in December 1998.
For the three and six months ended June 30, 1999 and 1998, certain customers
accounted for more than 10% of the Company's revenue. Two customers accounted
for 12% and 10%, respectively, of revenue for the three months ended June 30,
1999 and one customer accounted for 12% of revenue for the six months ended June
30, 1999. Three customers accounted for 16%, 14% and 10%, respectively, of
revenues for the three months ended June 30, 1998 and three customers accounted
for 16%, 11% and 10%, respectively, of revenue for the six months ended June 30,
1998.
SERVICES REVENUES
Services revenues increased 61% from $1.9 million for the three months ended
June 30, 1998 to $3.1 million for the three months ended June 30, 1999 and
increased 58% from $3.6 million for the six months ended June 30, 1998 to $5.7
million for the six month period ended June 30, 1999. Services revenues from
professional services consulting fees increased from $1.9 million for the three
months ended June 30, 1998 to $2.6 million for the three months ended June 30,
1999. Services revenues from software maintenance and support agreements
increased from $37,000 for the three months ended June 30, 1998 to $537,000 for
the three months ended June 30, 1999. Services revenues from professional
services consulting fees increased from $3.5 million for the six months ended
June 30, 1998 to $4.7 million for the six months ended June 30, 1999. Services
revenues from software maintenance and support agreements increased
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from $87,000 for the six months ended June 30, 1998 to $956,000 for the six
months ended June 30, 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 $1.0 million for the three months ended
June 30, 1998 to $3.1 million for the three months ended June 30, 1999 and from
$1.2 million for the six months ended June 30, 1998 to $4.9 million for the six
months ended June 30, 1999. These increases were 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 and $1.1 million was recognized as revenues
for the three and six months ended June 30, 1999, respectively. 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 34%
for the three months ended June 30, 1998 to 50% for the three months ended June
30, 1999 and from 25% for the six months ended June 30, 1998 to 46% for the six
months ended June 30, 1999. These increases were 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 82% from $1.2 million for the three months ended June 30, 1998 to $2.2
million for the three months ended June 30, 1999 and increased 77% from $2.3
million for the six months ended June 30, 1998 to $4.1 million for the six
months ended June 30, 1999. For the three and six months ended June 30, 1999,
increases were primarily due to the expansion of our services organization.
Approximately 77% and 79% of the increases were attributable to an increase in
salaries and related benefits for the three and six months ended June 30, 1999,
respectively, and the remainder of the increases were due to overhead and
related expenses.
Cost of revenues as a percentage of services revenues increased from 63% for the
three months ended June 30, 1998 to 72% for the three months ended June 30, 1999
and increased from 63% for the six months ended June 30, 1998 to 71% for the six
months ended June 30, 1999. These increases resulted primarily from 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 and generally experience lower utilization of newly-hired
services personnel.
Cost of revenues, in absolute dollars and as a percentage of services revenues,
will vary significantly depending on the level of professional services
staffing, their effective utilization rates and the mix of services performed,
including product license support services, and whether these services are
performed by us or by third-party contractors. In addition, cost of revenues
will increase if any product license related cost of revenues materialize. Cost
of revenues as a percentage of total revenues may vary significantly depending
on the mix of revenues between product licenses and services.
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GROSS PROFIT
Gross profit increased 133% from $1.7 for the three months ended June 30, 1998
to $4.0 million for the three months ended June 30, 1999 and increased 159% from
$2.5 million for the six months ended June 30, 1998 to $6.6 million for the six
months ended June 30, 1999. The increases in gross profit were primarily due to
the increase in product license revenues as a percentage of total revenues. The
gross profit increased from 58% for the three months ended June 30, 1998 to 64%
for the three months ended June 30, 1999 and increased from 53% for the six
months ended June 30, 1998 to 62% for the six months ended June 30, 1999. The
gross profit increase was primarily due to the significant increase in product
license revenues, as a percentage of total revenues, which have no significant
cost of revenues.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salary and related costs
to support product development. Research and development expenses increased 103%
from $685,000 for the three months ended June 30, 1998 to $1.4 million for the
three months ended June 30, 1999 and increased 92% from $1.3 million for the six
months ended June 30, 1998 to $2.5 million for the six months ended June 30,
1999. The increases were primarily due to increases in the number of engineering
personnel. Approximately 69% and 67% of the increases were due to increases in
engineering salaries for the three and six months ended June 30, 1999,
respectively, and the remainder of the increases were primarily due to related
recruiting and facilities costs.
Research and development expenses as a percentage of total revenues were 23% for
the three months ended June 30, 1998 and 22% for the three months ended June 30,
1999 and 27% and 24% for the six months ended June 30, 1998 and 1999,
respectively. 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 184%
from $923,000 for the three months ended June 30, 1998 to $2.6 million for the
three months ended June 30, 1999 and increased 152% from $1.6 million for the
six months ended June 30, 1998 to $4.0 million for the six months ended June 30,
1999. For the three and six months ended June 30, 1999, approximately 51% and
36% of the increases were related to new and increased marketing program
expenditures, approximately 23% and 27% were due to a significant increase in
the number of sales and marketing personnel and related expenses and the
remainder of the increases were primarily due to travel and entertainment
expenses.
Sales and marketing expenses as a percentage of total revenues were 31% for the
three months ended June 30, 1998 and 42% for the three months ended June 30,
1999 and were 33% for the six months ended June 30, 1998 and 38% for the six
months ended June 30, 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 facilities-related expenses. General and administrative expenses increased
148% from $450,000 for the three months ended June 30, 1998 to $1.1 million for
the
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<PAGE>
three months ended June 30, 1999 and increased 110% from $886,000 for the
six months ended June 30, 1998 to $1.9 million for the six months ended June 30,
1999. For the three and six months ended June 30, 1999, approximately 32% and
41%, respectively, of the increases related to increases in legal and
professional fees, and approximately 40% and 38%, respectively, of the increases
were 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 16%
for the three months ended June 30, 1998 and 18% for the three months ended June
30, 1999 and were 19% for the six months ended June 30, 1998 and 17% for the six
months ended June 30, 1999. We believe general and administrative expenses will
increase in absolute dollars as we expect to hire additional personnel and incur
additional costs associated with the management of a public company and to grow
our business. We also expect to incur increased legal expenses for the duration
of the BroadVision litigation, as well as increased facilities costs as we
expand our employee base.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
In the fourth quarter of 1998, 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 certain stock option grants and the deemed fair
value for accounting purposes of our common stock at the time of such grants. We
are amortizing this amount over the vesting periods of the applicable options,
resulting in amortization expense of $303,000 for the three months ended June
30, 1999 and $519,000 for the six months ended June 30, 1999. We did not have
amortization expense relating to deferred stock compensation for the three and
six months ended June 30, 1998.
INTEREST INCOME (EXPENSE)
Interest income totaled $71,000 for the three months ended June 30, 1999 and
$121,000 for the six months ended June 30, 1999. We did not have interest income
during the three and six months ended June 30, 1998. The interest income for the
three and six months ended June 30, 1999 was generated from cash and cash
equivalents available for investment from the receipt of $5.0 million under an
arrangement with an original equipment manufacturer as well as from the proceeds
of the sale of Series D preferred stock during August 1998. Interest expense
decreased from $43,000 for the three months ended June 30, 1998 to $25,000 for
the three months ended June 30, 1999 and decreased from $84,000 for the six
months ended June 30, 1998 to $49,000 for the six months ended June 30, 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 AND TAX CREDIT CARRYFORWARDS
We incurred losses for the three and six months ended June 30, 1998 and 1999.
Accordingly, there were no provisions for income taxes. As of December 31, 1998,
we had net operating loss carryforwards of $8.9 million and research and
development tax credit carryforwards of $235,000. The net operating loss and tax
credit carryforwards will expire at various dates beginning 2011, if not
utilized. The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" of a corporation. Our ability to utilize net operating
loss and tax credit carryforwards on an annual basis would be limited as a
result of an "ownership change" as defined by Section 382 of the Internal
Revenue Code. We have completed several financings since inception and believe
that we have incurred ownership changes. We do not believe the ownership changes
will have a material impact on our ability to utilize our net operating loss and
tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES.
Since our inception, we have funded our operations and met our capital
expenditure requirements through the private sale of equity securities,
commercial credit facilities and capital leases and our initial public offering
which was completed in July 1999, from which we received net proceeds of $56.7
million. Cash
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<PAGE>
provided by operating activities was $2.7 million for the six
months ended June 30, 1999. This represents a cash operating loss of $2.3
million and changes in working capital items consisting primarily of cash
provided by deferred revenue, accounts payable and accrued expenses offset by
increases in accounts receivable, unbilled services and prepaid expenses and
other current assets. The cash provided by the change in deferred revenue was
primarily the result of receiving $5.0 million under an arrangement with an
original equipment manufacturer of which $3.9 million was included in deferred
revenue. The original equipment manufacturer has the right to terminate the
arrangement and receive a refund as determined under the agreement. The amount
refundable at June 30, 1999 is $3.9 million.
To date, our investing activities have consisted primarily of capital
expenditures. For the six months ended June 30, 1999 capital expenditures
totaled $1.0 million. 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.
Net cash provided by financing activities for the six months ended June 30, 1999
and 1998 was $76,000 and $783,000, respectively. The primary source of cash from
financing activities for the six months ended June 30, 1999 was the exercise of
stock options with net proceeds of $260,000. The primary source of cash from
financing activities for the six months ended June 30, 1998 was the sale of
preferred stock with net proceeds of $400,000 and proceeds from a note payable
of $300,000.
The Company completed its initial public offering of 5,168,000 shares of its
common stock on July 26, 1999, including 168,000 shares issued in connection
with the exercise of the underwriters' over-allotment on July 30, 1999. These
shares were sold to the public at $12 per share, which net of offering expenses,
resulted in net proceeds of $56.7 million.
We have a revolving line of credit which provides for borrowings of up to the
lesser of $5.0 million and 80% of eligible accounts receivable, 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
June 30, 1999, we had $1.9 million available under the line of credit based upon
our borrowing base, $236,000 outstanding under the term loan and $160,000
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. A
portion of the proceeds from the Company's initial public offering was utilized
to repay all existing indebtedness.
At June 30, 1999, we had $5.3 million in cash, cash equivalents and marketable
securities and $625,000 in working capital. At July 31, 1999, we had $60.9
million in cash, cash equivalents and marketable securities and $57.8 million in
working capital. Management believes that the net proceeds from the Company's
recent initial public offering, together with the existing financial resources
and commercial credit facilities, will be sufficient to meet our cash
requirements for at least the next twelve months. Thereafter, we may require
additional funds and may seek to raise additional funds through public or
private equity financings or from other sources. There can be no assurance that
additional financing will be available at all or that, if available, will be
obtainable on terms favorable to us. Additional financing could also be
dilutive.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" refers generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. This could result in failures or
the creation of erroneous results.
We have defined "Year 2000 compliant" as the ability to:
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(a) correctly handle date information needed for the December 31, 1999
to January 1, 2000 date change;
(b) function according to the product documentation provided for this
date change, without changes in operation, assuming correct configuration;
(c) where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to entry in a disclosed, defined and predetermined
manner;
(d) if the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways that are
unambiguous as to century; and
(e) recognize year 2000 as a leap year.
We have conducted a Year 2000 readiness review for the current versions of our
products. The review includes assessment, validation testing and, where
necessary, remediation, upgrading and replacement of these product versions, as
well as contingency planning. We continue to respond to customer questions about
prior versions of our products on a case-by-case basis.
We have largely completed all phases of our plan, 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, previous versions 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 66% of our installed base, and we plan to offer remedial
software patches to customers. We have not tested our commercial products on all
platforms or all versions of operating systems that we currently support nor
have we tested versions of our commercially available products introduced prior
to December 1997. These earlier versions, which represent approximately 20% of
our installed Dynamo product base, may not be Year 2000 compliant.
We have not separately tested software obtained from third parties (licensed
software, shareware and freeware) that is incorporated into our products. We
have sought assurances from our vendors that licensed software is Year 2000
Compliant, we know that some of the licensed software is not Year 2000
Compliant. To address known problems, we have upgraded or replaced substantially
all of the impacted systems. 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 concluded 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. To the
extent that our internal systems are not Year 2000 Compliant, we are currently
upgrading or replacing 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 have
sought assurances from them that their systems are Year 2000 Compliant. Although
we are not currently aware of any material operational issues or costs
associated with preparing our internal IT
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and non-IT systems for the Year 2000, we may experience material unanticipated
problems and costs caused by undetected errors or defects in the technology
used in our internal IT and non-IT systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current and potential customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce or
eliminate budgets that current or potential customers could otherwise have for
purchases of our products and services. As a result, our business, results of
operations or financial condition could be harmed.
We have funded our Year 2000 plan from available cash and have not separately
accounted for these costs in the past. To date, these costs have not been
material. We will incur additional costs related to the Year 2000 plan for
personnel to manage the project, outside contractor assistance, technical
support for our products, product engineering and customer satisfaction. We are
already aware that some of our internal systems are not Year 2000 compliant and
require upgrading before the end of the year. We may experience material
problems and costs with Year 2000 compliance that could adversely affect our
business, results of operations and financial condition.
We 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK
Our business, operating results or financial condition could be materially
adversely affected by any of the following factors. You should also refer to the
other information set forth in this report, including our financial statements
and the related notes.
WE EXPECT OUR LOSSES TO CONTINUE AND WE DO NOT BELIEVE WE WILL BE ABLE TO
SUSTAIN OUR CURRENT REVENUE GROWTH RATE
Since inception, we have not been profitable in any fiscal period. We have
incurred substantial costs to develop and enhance our technology and products,
to recruit and train a marketing and sales group, and to establish an
administrative organization. As of June 30, 1999, we had an accumulated deficit
of $14.1 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:
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- 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
Accordingly, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. The results of one quarter cannot be
relied upon 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
25% and 26% of our total revenues for the three and six months ended June 30,
1999, respectively. 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.
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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 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.
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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.
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.
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,
21
<PAGE>
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
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 June 30, 1999 was $3.9 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
22
<PAGE>
- 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 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
23
<PAGE>
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 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 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
24
<PAGE>
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, 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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The majority of the Company's operations are based in the U.S. and, accordingly,
the majority of its transactions are denominated in U.S. Dollars. However, the
Company does have foreign-based operations
25
<PAGE>
where transactions are denominated in foreign currencies and are subject to
market risk with respect to fluctuations in the relative value of currencies.
Currently, the Company has operations in Canada and the United Kingdom and
conducts transactions in the local currency of each location. The impact of
fluctuations in the relative value of other currencies was not material for the
three or six months ended June 30, 1999. The Company does not use derivative
financial instruments that meet high credit quality standards, as specified in
the Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer, and type of instrument.
PART II. OTHER INFORMATION
Item 1. Legal Proceeding
A patent infringement claim was filed by BroadVision, one of our competitors,
against us on December 11, 1998. The case was filed in the U.S. District Court
for the Northern District of California. BroadVision alleges that we are
infringing their patent (U.S. Patent No. 5,710,887) for a method of conducting
e-commerce. BroadVision is seeking a permanent injunction of the sale of our
Dynamo products in their current forms as well as unspecified damages. We intend
to vigorously oppose BroadVision's allegations and on February 4, 1999 we filed
our answer denying BroadVision's complaint and filed a counterclaim against
BroadVision seeking a judgement that we are not infringing their patent and that
the patent in question is in fact unenforceable and invalid.
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds from Sales of Registered Securities
On July 26, 1999 the Company closed the initial public offering of its
Common Stock. The shares of Common Stock sold in the offering were
registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement")
(Registration No. 333-78333) that was declared effective by the
Securities and Exchange Commission on July 20, 1999. The 5,000,000
shares offered by the Company under the Registration Statement were
sold at a price of $12.00 per share. Hambrecht & Quist LLC, U.S.
Bancorp Piper Jaffray, Inc., Thomas Weisel Partners LLC and Wit Capital
Corporation, the managing underwriters of the offering, also exercised
an overallotment option on July 30, 1999 for 750,000 shares, of which
168,000 were sold by the Company and 582,000 were sold by selling
stockholders. The overallotment shares were sold at a price of $12.00
per share. The aggregate proceeds to the Company from the offering were
$62,016,000. In connection with the offering the Company paid an
aggregate of $4,341,000 in underwriting discounts and commissions to
the underwriters. In addition, the expenses incurred in connection with
the offering were approximately $1,000,000 including $430,000 legal
costs, $225,000 accounting costs, $200,000 printing costs, $108,000
registration, filing and related costs, and other costs of $37,000.
After deducting the underwriting discounts and commissions and the
offering expenses described above, the Company received net proceeds
from the offering of approximately $56,675,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On June 18, 1999 the Company's stockholders acting by written consent approved
the following matters: (1) an amendment to the Company's Certificate of
Incorporation effecting a three-for-two split of the Company's common stock and
adjusting the conversion price for the Company's preferred stock; (2) an
increase of the number of shares authorized under the 1996 Stock Option Plan to
4,200,000 shares; (3) the Company's 1999 Outside Director Stock Option Plan and
1999 Employee Stock Purchase Plan; (4) the Company's Amended and Restated
Bylaws; and (5) the Company's Amended and Restated Certificate of
26
<PAGE>
Incorporation to be filed upon the initial public offering of the Company's
common stock. The written consent was given by holders of 21,318,509 shares of
the Company's common stock on an as converted basis.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 31, 1999 ART TECHNOLOGY GROUP, INC.
(Registrant)
By: /s/ Jeet Singh
---------------------------------------
Jeet Singh
President and Chief Executive
Officer
By: /s/ Ann C. Brady
---------------------------------------
Ann C. Brady
Principal Accounting Officer
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,257
<SECURITIES> 1,001
<RECEIVABLES> 3,744
<ALLOWANCES> 460
<INVENTORY> 0
<CURRENT-ASSETS> 9,777
<PP&E> 2,840
<DEPRECIATION> 1,197
<TOTAL-ASSETS> 12,087
<CURRENT-LIABILITIES> 9,152
<BONDS> 0
8,799
2,860
<COMMON> 98
<OTHER-SE> (8,973)
<TOTAL-LIABILITY-AND-EQUITY> 12,087
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<TOTAL-REVENUES> 10,653
<CGS> 0
<TOTAL-COSTS> 4,061
<OTHER-EXPENSES> 8,937
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> (2,273)
<INCOME-TAX> 0
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<NET-INCOME> (2,273)
<EPS-BASIC> (0.10)<F1>
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