<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-26679
------------------------
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3141918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 FIRST STREET, CAMBRIDGE, 02144
MASSACHUSETTS (Zip Code)
(Address of principal executive
offices)
</TABLE>
(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 Yes /X/ No / /
As of May 9, 2000 there were 66,529,144 shares of the Registrant's common
stock outstanding.
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<PAGE>
ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Signatures
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 93,906 $124,711
Marketable securities..................................... 34,557 5,137
Accounts receivable, net of reserve for doubtful accounts
of $950 and $460, respectively.......................... 17,851 12,539
Unbilled services......................................... 1,420 782
Prepaid expenses and other current assets................. 3,056 1,908
-------- --------
Total current assets.................................. 150,790 145,077
Property and equipment, net................................. 6,598 5,465
Long-term marketable securities............................. 11,495 19,394
Other assets................................................ 7,029 7,799
-------- --------
$175,912 $177,735
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations............... $ 2,750 $ 3,000
Accounts payable.......................................... 6,931 11,285
Accrued expenses.......................................... 7,214 4,728
Deferred revenue.......................................... 8,113 8,337
-------- --------
Total current liabilities............................. 25,008 27,350
-------- --------
Long-term obligations, less current maturities.............. 3,500 4,000
-------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value--
Authorized--10,000,000.................................. -- --
Common stock, $.01 par value--
Authorized--100,000,000
Issued and outstanding--66,368,685 shares and 65,551,024
shares at March 31, 2000 and December 31, 1999,
respectively.......................................... 663 656
Additional paid-in capital................................ 179,533 178,218
Deferred compensation..................................... (3,324) (3,628)
Accumulated deficit....................................... (29,468) (28,861)
-------- --------
Total stockholders' equity............................ 147,404 146,385
-------- --------
$175,912 $177,735
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUE:
Product licenses.......................................... $16,247 $ 1,806
Services.................................................. 5,325 2,614
------- -------
Total revenues........................................ 21,572 4,420
------- -------
COST OF REVENUES:
Product licenses.......................................... 708 --
Services.................................................. 4,992 1,813
------- -------
Total cost of revenues................................ 5,700 1,813
------- -------
Gross profit.......................................... 15,872 2,607
------- -------
OPERATING EXPENSES:
Research and development.................................. 3,595 1,131
Sales and marketing....................................... 11,052 1,420
General and administrative................................ 3,675 743
Amortization of deferred compensation..................... 304 216
------- -------
Total operating expenses.............................. 18,626 3,510
------- -------
LOSS FROM OPERATIONS........................................ (2,754) (903)
INTEREST INCOME............................................. 2,147 50
INTEREST EXPENSE............................................ -- (24)
------- -------
Net loss.............................................. (607) (877)
ACCRETION OF DIVIDENDS,
DISCOUNT AND OFFERING COSTS ON PREFERRED STOCK............ -- (244)
------- -------
Net loss available for common stockholders............ $ (607) $(1,121)
======= =======
Basic and diluted net loss per share (Note 2)............... $ (0.01) $ (0.06)
======= =======
Basic and diluted weighted average common shares
Outstanding............................................... 66,023 18,810
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENT OF CASHFLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (607) $ (877)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Amortization of deferred compensation................... 304 216
Noncash interest expense related to issuance of
warrants.............................................. -- 5
Depreciation and amortization........................... 518 93
Changes in current assets and liabilities-
Accounts receivable, net.............................. (5,312) (160)
Unbilled services..................................... (638) (246)
Prepaid expenses and other current assets............. (1,148) (467)
Accounts payable...................................... (4,354) (122)
Accrued expenses...................................... 2,486 558
Deferred revenue...................................... (224) 4,755
-------- -------
Net cash (used in) provided by operating
activities........................................ (8,975) 3,755
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net................... (21,521) (1,007)
Purchases of property and equipment....................... (1,651) (285)
Decrease in other assets.................................. 770 4
-------- -------
Net cash used in investing activities............... (22,402) (1,288)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options................... 563 168
Proceeds from employee stock purchase plan................ 759 --
Payments on long-term obligations......................... (750) --
Payments on term loan to a bank........................... -- (41)
Payments on equipment line of credit...................... -- (20)
Payments on capital lease obligations..................... -- (38)
-------- -------
Net cash provided by financing activities......... 572 69
-------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (30,805) 2,536
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 124,711 4,093
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 93,906 $ 6,629
======== =======
SUPPLEMENTAL DISCLOSURE OR CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ -- $ 19
======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Accretion of dividend and discount on Series B and Series
D Redeemable convertible preferred stock................ $ -- $ 243
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION
Art Technology Group, Inc. ("ATG" or the "Company") is a Delaware
corporation which was incorporated on December 31, 1991. The Company offers an
integrated suite of Internet customer relationship management and electronic
commerce software applications, as well as related application development,
integration and support services.
The accompanying consolidated financial statements of the Company have been
prepared pursuant to the rules of the Securities and Exchange Commission for
quarterly reports on Form 10-Q and do not include all of the information and
disclosures required by generally accepted accounting principles. While the
Company believes that the disclosures presented are adequate to make information
not misleading, these financial statements should be read in conjunction with
the audited financial statements and related notes included in the Company's
1999 Annual Report and Form 10-K. In the opinion of management, the accompanying
consolidated financial statements and notes herein are unaudited but, contain
all adjustments, consisting only of those of a normal recurring nature,
necessary for a fair presentation of the Company's financial position, results
of operations and cash flows at the dates and for the periods indicated. The
operating results for the three months ended March 31, 2000 are not necessarily
indicative of the results to be expected for the full year ending December 31,
2000.
The accompanying consolidated financial statements include the accounts of
ATG and its wholly owned subsidiaries. All significant intercompany balances
have been eliminated in consolidation.
2. NET LOSS PER SHARE INFORMATION
Basic and diluted net loss per common share was determined by dividing net
loss available for common stockholders by the weighted average common shares
outstanding during the period. Basic and diluted net loss per share are the
same, as outstanding common stock options and warrants have been excluded, since
they are considered antidilutive since ATG has recorded a net loss for all
periods presented. Options and warrants to purchase a total of 8,605,100 and
5,117,494 common shares have been excluded from the computation of diluted
weighted average shares outstanding for the three months ended March 31, 2000
and 1999, respectively.
3. REVENUE RECOGNITION
ATG recognizes product license revenue from licensing the rights to use its
software to end-users. ATG also generates service revenues from integrating its
software with its customers' operating environments, the sale of maintenance
services and the sale of certain other consulting and development services. ATG
generally has separate agreements with its customers, which govern the terms and
conditions of its software license, consulting and support and maintenance
services. These separate agreements, along with ATG's price list, provide the
basis for establishing vendor-specific objective evidence of fair value. This
allows ATG to appropriately allocate fair value among the multiple elements in
an arrangement, as well as allocate discounts ratably over all elements in an
arrangement, except for upgrade rights.
ATG recognizes revenue in accordance with Statement of Position (SOP)
No. 97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-4, DEFERRAL OF THE EFFECTIVE
DATE OF A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenues from
software product license agreements are recognized upon execution of a license
agreement and delivery of the software, provided that the fee is fixed or
determinable and deemed collectible by management. If conditions for acceptance
are required subsequent to delivery, revenues are recognized upon customer
acceptance if such acceptance is not deemed to be perfunctory. Revenues from
software maintenance agreements are recognized ratably over the term of the
maintenance period, which is typically one year. ATG enters into reseller
6
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
arrangements that typically provide for sublicense fees payable to ATG based
upon a percentage of ATG's list price. Revenues are recognized under reseller
agreements as earned, which is generally ratably over the life of the reseller
agreement, for guaranteed minimum royalties or based upon unit sales by the
resellers. ATG does not grant its resellers the right of return or price
protection. Revenues from professional service arrangements are recognized on
either a time-and-materials basis as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed collectible by
management. Amounts collected or billed prior to satisfying the above revenue
recognition criteria are reflected as deferred revenue. Unbilled services
represent service revenues that have been earned by ATG in advance of billings.
The Company received $5,000,000 from Informix in March 1999 under an
original equipment manufacturer agreement, of which $1,523,000 is included in
deferred revenue at March 31, 2000. In the event that Informix was named in a
patent or other intellectual property infringement claim related to the
agreement with BroadVision, Informix had the right to terminate the agreement
and receive a refund of the $5,000,000 less $530,000 per quarter, commencing
with the fiscal quarter ended March 31, 1999, and all uncredited prepaid
royalties as of the termination date. This litigation has been settled (see
Note 8) and, therefore, no amounts are refundable.
7
<PAGE>
4. 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 12.6 month at March 31, 2000. To date, the Company
has not recorded any realized gains or losses.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Cash and cash equivalents-
Cash................................................ $ 1,500 $ 884
Money market accounts............................... 17,263 123,827
Corporate securities................................ 75,143 --
------- --------
Total cash and cash equivalents................. $93,906 $124,711
======= ========
Marketable securities-
Corporate securities................................ $46,052 $ 24,531
======= ========
Total marketable securities..................... $46,052 $ 24,531
======= ========
</TABLE>
5. DEFERRED COMPENSATION
In connection with certain stock option grants during the year ended
December 31, 1998 and through May, 1999, the Company recorded deferred
compensation of approximately $4.9 million, which represents the aggregate
difference between the exercise price and the fair market value of common stock
as determined for accounting purposes. The deferred compensation will be
recognized as an expense over the vesting period of the underlying stock
options. The Company recorded compensation expense of $304,000 and $216,000 for
the three months ended March 31, 2000 and 1999, respectively, related to these
options.
6. LONG-TERM OBLIGATIONS
In connection with a settlement of the patent infringement claim by
BroadVision, Inc. ("BroadVision"), ATG acquired a perpetual, paid-up license for
BroadVision's patented technology. ATG paid $8,750,000 in February 2000 and will
pay the remaining $6,250,000 in quarterly installments of $750,000 for the
remainder of fiscal 2000 and quarterly installments of $500,000 in fiscal years
2001 and 2002. These payments are included in the accompanying consolidated
balance sheet, as follows: $2,750,000 in current maturities of long-term
obligations and $3,500,000 in long-term obligations, less current maturities
(See Note 8).
7. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOMEin 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.
8
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
A patent infringement claim was filed by BroadVision, one of ATG's
competitors, against ATG on December 11, 1998. In February 2000, ATG and
BroadVision reached an amicable settlement to avoid further litigation expenses
and risks to both parties. As part of the settlement, BroadVision has dropped
its claim of infringement, and ATG has dropped its claim of non-infringement and
patent invalidity. ATG did not make any admission of wrong-doing, liability,
violation of law, infringement or validity regarding the patent in question.
As is customary in patent litigation settlements, ATG, in return for cash
payments, will receive a non-exclusive, worldwide, perpetual, paid-up license to
make, use, and sell products arguably covered by BroadVision's patent and any
other patents that may be issued in the future that are related to the original
patent.
ATG will pay BroadVision $15,000,000 for the license to BroadVision
technology. ATG paid $8,000,000 in February 2000 for alleged past use and
expensed such payment in the fourth quarter of 1999. The additional $7,000,000
is payable over the next three years and is recorded as a prepaid license fee,
which will be amortized over its estimated life of three years. In
February 2000, ATG paid the first quarterly installment of $750,000 of the
remaining license fee.
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
Art Technology Group, Inc. was 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 service 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. Generally,
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 as
services are provided.
We recognize revenue in accordance with Statement of Position (SOP)
No. 97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-4, DEFERRAL OF THE EFFECTIVE
DATE OF A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenues from
software product license agreements are recognized upon execution of a
9
<PAGE>
license agreement and delivery of the software, provided that the fee is fixed
or determinable and deemed collectible by management. If conditions for
acceptance are required subsequent to delivery, revenues are recognized upon
customer acceptance if such acceptance is not deemed to be perfunctory. Revenues
from software maintenance agreements are recognized ratably over the term of the
maintenance period, which is typically one year. We enter into reseller
arrangements that typically provide for sublicense fees payable to us based upon
a percentage of our 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. We do not grant our resellers the right of return or price
protection. Revenues from professional service arrangements are recognized on
either a time and materials or percentage-of-completion basis as the services
are performed, provided that amounts due from customers are fixed or
determinable and deemed collectible by management. Amounts collected prior to
satisfying the above revenue recognition criteria are reflected as deferred
revenue. Unbilled services represent service revenues that have been earned by
us in advance of billings.
Services revenues have increased 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 twelve
month software maintenance and support agreements at the time of purchase. We
began selling Dynamo in 1996. We believe that growth of 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.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit, hire and train personnel for our
engineering, sales, 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 as of March 31, 2000, we had an accumulated
deficit of $29.5 million. We anticipate that our operating expenses will
increase substantially in future quarters as we increase sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support and improve
operational and financial systems. 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.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES:
Product licenses....................................... 75% 41%
Services............................................... 25 59
------ ------
Total revenues..................................... 100 100
------ ------
COST OF REVENUES:
Product licenses....................................... 3 --
Services............................................... 23 41
------ ------
Total cost of revenues............................. 26 41
------ ------
Gross profit....................................... 74 59
------ ------
OPERATING EXPENSES:
Research and development............................... 17 25
Sales and marketing.................................... 51 32
General and administrative............................. 17 17
Amortization of deferred compensation.................. 1 5
------ ------
Total operating expenses........................... 86 79
------ ------
LOSS FROM OPERATIONS..................................... (12) (20)
INTEREST INCOME.......................................... 9 1
INTEREST EXPENSE......................................... -- (1)
------ ------
Net loss........................................... (3)% (20)%
====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
REVENUES
Total revenues increased 391% from $4.4 million for the three months ended
March 31, 1999 to $21.6 million for the three months ended March 31, 2000. The
increase was primarily attributable to growth in the number of customers and the
number of larger transactions with customers. In addition, we expanded our sales
force as we continued toward our product and service target.
PRODUCT LICENSE REVENUES
Product license revenues increased 806% from $1.8 million for the three
months ended March 31, 1999 to $16.3 million for the three months ended
March 31, 2000. This increase was primarily attributable to the continued
growing market acceptance of our Dynamo product suite and an increase in the
number of larger transactions with customers. ATG recognized $1.4 million in
revenue for the three months ended March 31, 2000 versus $530,000 for the three
months ended March 31, 1999. The increase in product revenue recognized under
this arrangement is the result of Informix selling more than the minimum
required under the agreement. The Company expects revenues generated under this
agreement to increase in absolute dollars but continue to decrease as a
percentage of total product revenues. We anticipate that product license
revenues will continue to grow in absolute dollars as market acceptance of our
Dynamo suite of products continues to grow and we continue to cultivate
relationships with systems integrators in order to encourage them to support our
products.
11
<PAGE>
Product license revenues as a percentage of total revenues for the three
months ended March 31, 1999 and 2000 were 41% and 75%, respectively. Management
expects to trend toward our product license's revenue target of 69% of total
revenues.
SERVICES REVENUES
Services revenues increased 104% from $2.6 million for the three months
ended March 31, 1999 to $5.3 million for the three months ended March 31, 2000.
Professional services revenue increased 29% for the three months ended
March 31, 2000 from $2.1 million for the three months ended March 31, 1999 to
$2.7 million in 2000. The increase was primarily attributable to the continued
growth of our customer base and an increase in resources in our professional
services group. Software maintenance and support revenues increased 344% from
$360,000 for the three months ended March 31, 1999 to $1.6 million for the three
months ended March 31, 2000. This increase was attributable to the increase in
product revenue that is directly attributable to the software maintenance and
support revenue. The growth rate for software maintenance and support is not
expected to continue at the same levels as has been achieved. Our training
programs were introduced in December 1998. Training program revenue increased
422% from $186,000 for the three months ended March 31, 1999 to $970,000 for the
three months ended March 31, 2000. The increase was primarily attributable to
the Company introduction of training programs in 1998. We expect training
revenue to increase as a percentage of services revenues and anticipate that it
will enhance selling efforts for product license revenues to end-users,
resellers and partners.
Services revenues as a percentage of total revenues for the three months
ended March 31, 1999 and 2000 were 59% and 25%, respectively. We expect services
revenues to trend toward our target of 31% of total revenues.
COST OF LICENSE REVENUES
Cost of license revenues increased to $708,000 for the three months ended
March 31, 2000 from zero for the three months ended March 31, 1999. In
February 2000, we settled a previously disclosed lawsuit brought by
BroadVision, Inc. (BroadVision) in December 1998, which alleged that we were
infringing on their patent (U.S. Patent No. 5,710,887) for a method of
conducting e-commerce. As part of the settlement, we, in return for cash
payments, received a non-exclusive, worldwide, perpetual, paid-up license under
the BroadVision patent and any other patents that may be issued in the future
that are related to the original patent. We will pay BroadVision $7.0 million in
license fees which will be accounted for as cost of license revenues expensed
ratably over a three year period that began in the first quarter of 2000. Cost
of license revenues also includes cost associated with sustaining the current
release of the Dynamo suite of products.
Cost of license revenues as a percentage of license revenues for the three
months ended March 31, 1999 and 2000 and was immaterial for the period and was
5%, respectively. We do not anticipate significant additional cost of license
revenues in excess of the BroadVision license fee to be expensed over the next
three years.
COST OF SERVICES REVENUES
Cost of services revenues includes salary and other related costs for our
professional services and technical support staff, as well as third-party
contractor expenses. Cost of services revenues increased 175% from $1.8 million
for the three months ended March 31, 1999 to $5.0 million for the three months
ended March 31, 2000. The increase was attributable to the increase in resources
in our professional services group. Approximately 125% of the increase was
attributable to increased compensation costs due to increases in our work force.
Additionally, costs increased due to travel, recruiting and facilities costs. We
anticipate these costs to continue to grow in relation to total professional
services employees.
12
<PAGE>
Cost of services revenues as a percentage of services revenues for the three
months ended March 31, 1999 and 2000, were 70% and 94%, respectively. We
anticipate this trend to continue as a function of achieving our product/service
targets to total revenues.
GROSS PROFIT
Gross profit, in absolute dollars and as a percentage of total 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 technical support services, and whether these services
are performed by us or by third-party contractors and the level of third party
license fees. In addition, gross profit may vary significantly depending on the
mix of revenues between services and product licenses. Gross profit consists of
gross profit on services revenues and gross profit on product license revenues.
Gross profit increased 512% from $2.6 million for the three months ended
March 31, 1999 to $15.9 million for the three months ended March 31, 2000. The
increase in gross profit was primarily attributable to the significant growth in
revenues which was partly offset by license fees expensed related to the
BroadVision settlement. Gross profit on services revenues decreased from 31% for
the three months ended March 31, 1999 to 6% for the three months ended
March 31, 2000. This decrease was primarily the result of the significant
increase in the number of employees in our professional services group resulting
in a lower overall achievement of targeted utilization rates. We incur
recruiting and training costs associated with hiring additional professionals
for our services group and generally experience a low initial utilization rate
from those professionals. Increases in travel and facilities costs also
contributed to the decreased gross profit for services revenues. Gross profit on
product license revenue decreased from 100% for the three months ended
March 31, 1999 to 96% for the three months ended March 31, 2000. This decrease
was primarily due to license fees related to the BroadVision settlement.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development group is responsible for product management,
core technology, product architecture, product development, quality assurance,
documentation and third-party software integration. The group also assists with
pre-sale, customer support and quality assurance tasks supporting our
professional services group. Research and development expenses consist primarily
of salary and related costs to support product development. To date, all
software development costs have been expensed as research and development in the
period incurred.
Research and development expenses increased 227% from $1.1 million for the
three months ended March 31, 1999 to $3.6 million for the three months ended
March 31, 2000. Approximately 80% of the increase is due to growth in hiring
engineers into the group and related costs including salaries and related
benefits. The remainder of the increase was primarily due to increased
facilities costs.
For the three months ended March 31, 1999 and 2000, research and development
expenses as a percentage of total revenues were 25% and 17%, respectively. We
anticipate that research and development expenses will fluctuate as a percentage
of total revenues and on the level of revenue growth. 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.
SALES AND MARKETING EXPENSES
Our sales and marketing group is responsible selling directly to end-users
or co-selling through systems integrator partners and co-marketing relationships
with systems integrators that serve the market for information system products
and services. 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.
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Sales and marketing expenses increased 714% from $1.4 million for the three
months ended March 31, 1999 to $11.1 million for the three months ended
March 31, 2000. The significant increase was due to increases in the number of
sales and marketing personnel and related expenses.
For the three months ended March 31, 1999 and 2000, sales and marketing
expenses as a percentage of total revenues were 32% and 51%, respectively. We
anticipate sales and marketing expenses may fluctuate as a percentage of total
revenues from the current percentage depending on the level and timing of
program spending, the rate at which newly-hired sales personnel become
productive and the level of revenue. We expect sales and marketing expenses, in
absolute dollars, increase as we continue to execute our strategy for expansion
of our sales and marketing efforts, both in the United States and
internationally, as we continue to hire and train new sales personnel, open
additional sales offices and increase marketing and promotional spending.
GENERAL AND ADMINISTRATIVE EXPENSES
Our finance and administration group is responsible for operations and
infrastructure of the entire organization. General and administrative expenses
consist primarily of salaries and other related costs for operations and finance
employees and legal and accounting fees.
General and administrative expenses increased 398% from $743,000 for the
three months ended March 31, 1999 to $3.7 million for the three months ended
March 31, 2000. Approximately 23% of the increase is related to the hiring of
additional professionals to manage the growth of the company resulting in
increased salaries and benefits, approximately 26% of the increase is due to
increased consulting services and approximately 9% of the increase is due costs
related to hiring and training new personnel.
For both the three months ended March 31, 1999 and 2000, general and
administrative expenses as a percentage of total revenues were 17%. We plan to
make significant investments in infrastructure and personnel to help support the
planned growth of the company. As a result, we expect a significant increase in
absolute dollars for general and administrative costs for the remainder of the
year. As a percentage of total revenues, we expect general and administrative
expenses to fluctuate depending upon the rate of growth in expenditures and
total revenues.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
In the fourth quarter of 1998 and through May 1999, we recorded total
deferred stock compensation of $4.9 million in connection with stock option
grants. This amount represents the difference between the exercise price of
certain stock option grants and the deemed fair value for accounting purposes of
our common stock at the time of such grants. We are amortizing this amount over
the vesting periods of the applicable options.
Amortization of deferred stock compensation expense increased 41% from
$216,000 for the three months ended March 31, 1999 to $304,000 for the three
months ended March 31, 2000. This is due to the timing of the Company's
recording of the deferred stock compensation.
INTEREST INCOME (EXPENSE)
Interest income increased from $50,000 for the three months ended March 31,
1999 to $2.1 million for the three months ended March 31, 2000. The increase is
the result of our completion of our initial and secondary public offerings
completed in May and November 1999 from which we received net proceeds of
approximately $153.3 million that was invested primarily in cash, cash
equivalents and marketable securities. We anticipate interest income may decline
as we use the net proceeds for working capital and other general corporate
purposes. We may also use a portion of our existing cash resources for possible
acquistions of businesses, products and technologies.
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Interest expense decreased from $24,000 for the three months ended
March 31, 1999 to zero for the three months ended March 31, 2000 as a result of
our repayment of outstanding indebtedness with the proceeds of our initial
public offering.
PROVISION FOR INCOME TAXES, NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
We incurred losses for each of the three months ended March 31, 2000 and
1999. Accordingly, there were no provisions for income taxes. As of
December 31, 1999, we had net operating loss carryforwards of $17.9 million and
research and development tax credit carryforwards of $604,000. 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
Our capital requirements relate primarily to facilities, infrastructure for
new hires and working capital requirements. Historically, we have funded our
cash requirements primarily through the public and private sale of equity
securities, commercial credit facilities and captial leases.
Cash used in operating activities was $9.0 million for the three months
ended March 31, 2000. This represents an operating loss of $607,000 and changes
in working capital items consisting primarily of uses of cash for accounts
receivable and accounts payable of $5.3 million and $4.4 million, respectively.
We paid $8.75 million in license fees to BroadVision in February 2000 under a
settlement reached with BroadVision in connection with a patent infringement
lawsuit.
Our investing activities consisted primarily of capital expenditures of
$1.7 million for three months ended March 31, 2000 and net purchase of
marketable securities of $21.5 million. Assets acquired consist principally of
computer hardware and software. We expect that our capital expenditures to
continue to significantly increase as we continue to hire additional employees.
Management expects total capital expenditures to be approximately $11 million
over the next twelve months.
The Company's financing activities consist primarily of issuance of stock
options and shares issued under the Company's employee stock purchase plan.
We have a revolving line of credit which provides for borrowings of up to
the lesser of $5.0 million or 80% of eligible accounts receivable with Silicon
Valley Bank that bears interest at the bank's prime rate plus 0.25%.
At March 31, 2000, we had $3.4 million available under the line of credit
based upon our borrowing base. The line of credit is secured by all of our
tangible and intangible intellectual and personal property and is subject to
financial covenants and restrictions, including minimum liquidity requirements
and a prohibition on the payment of dividends. We are currently in compliance
with all related financial covenants and restrictions. At March 31, 2000, we had
$140 million in cash, cash equivalents and marketable securities and
$125.8 million in working capital. We believe that the net proceeds from the our
initial and secondary public offerings, 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. Cash requirements for periods
beyond the next twelve months will depend on our profitability, ability to
manage working capital requirements and our growth rate. We may seek to raise
additional funds through public or private debt or equity financings, or from
other sources for
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general corporate purposes or for the acquisitions of businesses, products or
technologies. There can be no assurance that additional funds will be available
at all or that, if available, will be obtainable on terms favorable to us.
Additional financing could also be dilutive.
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 and Form 10-K and Annual Report.
WE EXPECT OUR LOSSES TO CONTINUE AND WE DO NOT BELIEVE WE WILL BE ABLE TO
SUSTAIN OUR CURRENT REVENUE GROWTH RATE
Since inception, we have not been profitable in any fiscal period. We have
incurred substantial costs to develop and enhance our technology and products,
to recruit and train a marketing and sales group, and to establish an
administrative organization. As of March 31, 2000, we had an accumulated deficit
of $29.5 million. We anticipate that our operating expenses will increase as we
continue to develop our technology, increase our sales and marketing activities,
create and expand our distribution channels, expand our services capabilities
and improve our operational and financial systems. Accordingly, we expect to
incur additional losses. Although our revenues have grown significantly in
recent quarters, they have grown from a relatively small base and, as a result,
we do not believe that we will be able to sustain the growth rates we have
achieved in recent quarters. Because we have a limited operating history,
particularly as a company that sells software products, the prediction of future
operating results is difficult and we cannot be certain that our revenues will
grow at a rate that will allow us to achieve profitability. In addition, if we
do achieve profitability, we cannot be certain that we will be able to sustain
or increase profitability on a quarterly or annual basis.
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE AND THE PRICE OF OUR COMMON STOCK
COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF SECURITIES
ANALYSTS
Our revenues and operating results are likely to vary significantly from
quarter to quarter. If our quarterly results fall below the expectations of
securities analysts, the price of our common stock could fall. A number of
factors are likely to cause variations in our operating results, including:
--demand for our products and services
--the timing of sales of our products and services
--the timing of customer orders and product implementations
--unexpected delays in introducing new products and services
-- increased expenses, whether related to sales and marketing, product
development or administration
-- changes in the rapidly evolving market for Internet customer relationship
management solutions
--the mix of revenues derived from products and services
--timing of hiring and utilization of services personnel
--cost overruns related to fixed-price services projects
--the mix of domestic and international sales
--costs related to possible acquisitions of technologies or businesses
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Accordingly, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. 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 LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS
We have a long sales cycle because we generally need to educate potential
customers regarding the use and benefits of our solution. Our sales cycle varies
depending on the size and type of customer contemplating a purchase and whether
we have conducted business with a potential customer in the past. These
potential customers frequently need to obtain approvals from multiple decision
makers prior to making purchase decisions. Our long sales cycle, which can range
from several weeks to several months or more, makes it difficult to predict the
quarter in which sales may occur. Delays in sales could cause significant
variability in our revenues and operating results for any particular period.
THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS NEW AND
RAPIDLY EVOLVING AND WE CANNOT BE CERTAIN THAT A VIABLE MARKET FOR OUR PRODUCTS
WILL EMERGE OR BE SUBSTANTIAL
The market for Internet customer relationship management solutions is new
and rapidly evolving. We expect that we will continue to need intensive
marketing and sales efforts to educate prospective customers and partners about
the uses and benefits of our products and services. Accordingly, we cannot be
certain that a viable market for our products will emerge or be sustainable.
Organizations that have already invested substantial resources in other methods
of conducting business may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing systems. Similarly, individuals
have established patterns of purchasing goods and services and may be reluctant
to make purchases online. These factors could inhibit the growth of electronic
commerce generally and the market's acceptance of our products and services in
particular.
THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS INTENSELY
COMPETITIVE AND WE EXPECT COMPETITION TO INTENSIFY IN THE FUTURE
The market for Internet customer relationship management solutions is
intensely competitive and we expect competition to intensify in the future as
revenues generated from Internet commerce increase. Our primary competition
currently comes from in-house development efforts by potential customers or
partners, as well as from other vendors of Web-based application software. We
currently encounter competition from internet application software vendors such
as BroadVision, InterWorld, Open Market and Vignette. We also compete with
platform application server products and vendors 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
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establish cooperative relationships among themselves or with third parties to
enhance their products and expand their markets. Accordingly, new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. This level of competition could reduce our revenues and result in
increased losses or reduced profits.
COMPETITION WITH OUR RESELLER PARTNERS COULD LIMIT OUR SALES OPPORTUNITIES AND
JEOPARDIZE THESE RELATIONSHIPS
We sell products through agreements with resellers and original equipment
manufacturers. We target markets that are also served by some of these partners.
This competition may limit our ability to sell our products and services
directly in these markets and may jeopardize, or result in the termination of,
these relationships.
OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF EITHER JEET SINGH OR
JOSEPH CHUNG, OUR CO-FOUNDERS, OR IF WE ARE UNABLE TO ATTRACT AND RETAIN OTHER
KEY PERSONNEL
Our success depends largely on the skills, experience and performance of
some key members of our management, particularly our co-founders Jeet Singh and
Joseph Chung. If we lose one or more of our key employees, our business could be
harmed. We have purchased, and are the beneficiaries of, insurance policies on
the lives of Mr. Singh and Mr. Chung, each in the amount of $1,000,000. In
addition, our future success will depend in large part on our ability to
continue attracting and retaining highly skilled personnel. Like other software
companies, we face intense competition for qualified personnel. We cannot be
certain that we will be successful in attracting, assimilating and retaining
qualified personnel in the future.
WE NEED TO EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES IN ORDER TO INCREASE
MARKET AWARENESS OF OUR PRODUCTS AND INCREASE OUR REVENUES
We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenues. We cannot be certain
that we will be successful in these efforts. We have recently expanded our
direct sales force and plan to hire additional sales personnel. Our products and
services require a sophisticated sales effort targeted at the senior management
of our prospective customers. Newly-hired employees will require training and it
will take time for them to achieve full productivity. We cannot be certain that
we will be able to hire enough qualified individuals in the future or that
newly-hired employees will achieve necessary levels of productivity.
WE DEPEND ON OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS
Since our potential customers often rely on third-party systems integrators
to develop, deploy and manage Web sites for conducting commerce on the Internet,
we cultivate relationships with systems integrators in order to encourage them
to support our products. If we do not adequately train a sufficient number of
systems integrators or if systems integrators were to devote their efforts to
integrating or co-selling different products, our revenues could be reduced and
our operating results could be harmed.
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
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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,
consultants, vendors and customers and to control access to our software,
documentation and other proprietary information. Despite these precautions, it
may be possible for someone to copy our software or other proprietary
information without authorization or to develop similar software independently.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We could incur
substantial costs to prosecute or defend any intellectual property litigation.
If we litigated to enforce our rights, it would be expensive, would divert
management resources and may not be adequate to prevent the use of our
intellectual property by third parties.
In addition, we are obligated to indemnify customers against claims that we
infringe the intellectual property rights of third parties. The results of any
intellectual property litigation to which we might become a party may force us
to do one or more of the following:
--cease selling or using products or services that incorporate the
challenged intellectual property
-- obtain a license, which may not be available on reasonable terms, to sell
or use the relevant technology
--redesign those products or services to avoid infringement
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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. Serious defects or errors could
result in lost revenues or a delay in market acceptance.
Since our customers use our products for critical business applications such
as e-commerce, errors, defects or other performance problems could result in
damage to our customers. They could seek significant compensation for losses
from us. Although our license agreements typically contain provisions designed
to limit our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could negate these limitations. Even if not
successful, a product liability claim brought against us would likely be
time-consuming and costly.
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF E-COMMERCE
Our future success depends heavily on the acceptance and wide use of the
Internet for e-commerce. If e-commerce does not continue to grow or grows more
slowly than expected, demand for our products and services will be reduced.
Consumers and businesses may reject the Internet as a viable commercial medium
for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may not be
able to support the demands placed on it by
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. Dollars. However, we have
foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. We currently have operations in Canada, Germany,
the Netherlands, Sweden and the United Kingdom and conduct 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 months ended March 31,
2000. We do 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, on December 11, 1998. The case was filed in the U.S. District Court
for the Northern District of California. BroadVision alleged that we were
infringing its patent (U.S. Patent No. 5,710,887) for a method of conducting e-
commerce. BroadVision sought a permanent injunction of the sale of our Dynamo
product in their current forms as well as unspecified damages. On February 4,
1999, we filed our answer denying the allegations in BroadVision's complaint and
also filed a counterclaim against BroadVision seeking a judgement that we were
not infringing its patent and that the patent in question is in fact
unenforceable and invalid.
In February 2000, we reached a settlement with BroadVision by which, among
other things, it dropped its claim of infringement, and we dropped our claim of
non-infringement and patent invalidity. We did not make any admission of
wrong-doing, liability, violation of law, infringement or validity regarding the
patent in question.
As is customary in patent litigation settlements, in return for past and
future cash payments, we received a non-exclusive, worldwide, perpetual, paid-up
license to make, use, and sell products arguably covered by BroadVision's patent
and any other patents that may be issued in the future that are related to the
original patent. Releases of liability were exchanged and the litigation has now
been dismissed by agreement of the parties and order of the court.
We will pay BroadVision $15,000,000 for the license. We paid $8,000,000 in
February 2000 for alleged past use and was accounted for as cost of license and
expensed such payment in the fourth quarter of 1999. An additional $7,000,000 is
payable in quarterly installments over the next three years and will be recorded
as a prepaid license fee, which will be amortized over its estimated life of
three years.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(D) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES
On July 26, 1999 we closed our initial public offering of 10,000,000 shares
of common stock at a public offering price of $6 per share. The net proceeds to
the Company from the offering were approximately $54,302,000. On July 30, 1999,
in connection with the exercise of the underwriters' over-allotment option, the
Company issued an additional 336,000 shares of common stock at the initial
public offering price of $6 per share. Net proceeds to the Company from the
exercise of the over-allotment option were approximately $1,875,000.
22
<PAGE>
On November 10, 1999 we closed our secondary public offering of 9,000,000
shares of common stock, of which 2,850,000 shares were sold by the Company at a
public offering price of $33.75. The net proceeds to the Company from the
offering were approximately $91,428,000. On November 22, 1999, in connection
with the exercies of the underwriter's over-allotment option, the Company issued
an additional 175,840 shares of common stock at the public offering price of
$33.75 per share. Net proceed to the Company from the exercise of the
over-allotment option were approximately $5,671,000.
From the effective dates of the offerings through March 31, 2000, we used
approximately $22 million for sales and marketing, approximately $6.2 million
for capital expenditures, approximately $6.9 million for research development,
and approximately $500,000 for the repayment of indebtedness. As of March 31,
2000, we had approximately $118 million of net proceeds remaining, and pending
use of these proceeds, we invest the proceeds primarily in high-quality
short-term investments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<S> <C>
27....... Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
The Registrant filed a report on Form 8-K announcing a two-for-one stock
split of its outstanding shares of Common Stock, dated March 7, 2000.
24
<PAGE>
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.
ART TECHNOLOGY GROUP, INC.
(Registrant)
<TABLE>
<S> <C>
By: /s/ JEET SINGH
---------------------------------
Jeet Singh
Chief Executive Officer (Principal Executive Officer)
Date: May 15, 2000
By: /s/ ANN C. BRADY
------------------------------------
Ann C. Brady
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 2000
By: /s/ THOMAS J. QUINN
---------------------------------
Thomas J. Quinn
Corporate Controller (Principal Accounting Officer)
Date: May 15, 2000
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 93,906
<SECURITIES> 34,557
<RECEIVABLES> 18,801
<ALLOWANCES> 950
<INVENTORY> 0
<CURRENT-ASSETS> 150,790
<PP&E> 8,799
<DEPRECIATION> 2,201
<TOTAL-ASSETS> 175,912
<CURRENT-LIABILITIES> 25,008
<BONDS> 3,500
0
0
<COMMON> 663
<OTHER-SE> 146,741
<TOTAL-LIABILITY-AND-EQUITY> 175,912
<SALES> 0
<TOTAL-REVENUES> 21,572
<CGS> 0
<TOTAL-COSTS> 5,700
<OTHER-EXPENSES> 18,626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (607)
<INCOME-TAX> 0
<INCOME-CONTINUING> (607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (607)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
