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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
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) (Zip Code)
(617) 386-1000 (Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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: |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any attachment to
this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $5,575,683,156 based on the closing price of the
Common Stock on the NASDAQ National Market on March 24, 2000.
The number of shares outstanding of the registrant's Common Stock as of
March 24, 2000, was 66,329,802.
Documents Incorporated by Reference
Document Description 10-K Part
-------------------- ---------
Portions of the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held May 19, 2000................. III
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ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-K
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
Signatures
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PART I
Item 1 BUSINESS
Overview
We offer an integrated suite of Internet customer relationship management and
e-commerce software applications, as well as related application development,
integration and support services. Our solution enables businesses to understand,
manage and build online customer relationships and to market, sell and support
products and services over the Internet more effectively. Our Dynamo product
suite includes an application server that is specifically designed to enable and
support Web applications, as well as e-commerce and Internet customer management
applications. An application server is a software program that facilitates the
development, deployment and management of other software programs. Our solution
is designed to provide businesses with the core application platform and
software tools required to develop and deploy personalized, reliable,
large-scale Web sites for conducting e-commerce.
Industry Background
Growth of the Internet and Electronic Commerce
The emergence of the Internet as a global medium for interactive communications
and commerce is fundamentally changing the way business is conducted. The
Internet is enabling businesses to attract and retain customers, conduct
e-commerce with those customers, and communicate with employees, suppliers and
strategic partners. The Internet is providing the opportunity for businesses to
establish new revenue streams, create a new distribution channel, reduce costs
and increase customer retention. This opportunity has driven the growth in
online marketing and e-commerce initiatives. International Data Corporation
estimates that more than $1.3 trillion worth of goods and services will be sold
over the Internet by 2003, which represents a compounded annual growth rate of
92% for the period between 1998 and 2003.
As the growth and acceptance of online marketing and e-commerce have increased,
the World Wide Web has become a highly competitive business environment where
customers have a large number of easily accessible choices. For a company to
succeed in this environment, its Web site must present content and provide an
overall visitor experience that captures the visitor's interest and satisfies
their informational and transactional needs. To accomplish this, companies are
investing in Internet-based customer relationship management and e-commerce
solutions, such as:
o online marketing and selling systems to target, attract and retain
customers
o transaction and distribution management systems to reduce the costs
of delivering products and services to customers and distribution
partners
o customer support and relationship management systems to better
understand and serve the ongoing needs of their customers
International Data Corporation estimates that the worldwide Internet commerce
application software market will reach $13.1 billion in 2003.
Emerging E-Commerce Requirements
Many commercial Web sites present only a static collection of non-interactive
content. These sites offer basic content, such as corporate information, product
literature and banner advertisements, which are passively viewed by Web
visitors. While this information is useful, many Web visitors prefer dynamic
content, which is continually updated and enhanced, as well as interactive
content, which responds and changes based on the user's input. Many Web visitors
also prefer Web sites that personalize their experience and present more
relevant content based on their existing relationship with the business, stated
or implied preferences and needs, Web navigation behavior and other factors. To
attract, serve and retain customers online, businesses must engage visitors with
dynamic, relevant and targeted experiences, which often lead to transactional
opportunities.
Businesses are seeking Web-based systems that can be dynamically updated and
integrated, sharing data among Web applications and across their entire
enterprise in order to present users with a personalized, consistent and unified
customer experience. The desired result is a customer-driven Web site that takes
into account the particular customer's profile, Web behavior and relationship
with the company. Customer-driven Web sites can provide businesses with an
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efficient means to manage and maximize customer relationships online. In order
to accomplish this, businesses require solutions that incorporate a number of
features:
o Effective control of e-commerce systems and strategies. Business
managers responsible for Internet customer relationship management
need easy-to-use tools to give them direct control over their
e-commerce systems and strategies without requiring the
time-consuming intervention of information technology specialists.
With the appropriate tools, business managers can better manage
their Internet customer relationships through improved customer
segmentation and delivery of targeted content, promotions and
advertising campaigns, and personalized pricing and account
information.
o Integration with existing information systems. In order to present
the customer with a unified and personalized e-commerce experience,
companies must address the difficult challenge of integrating Web
applications with their existing content management, customer
database, transaction and customer support systems.
o Common platform upon which to build future applications. Businesses
implementing sophisticated Web-based applications desire an
expandable Web platform to enable them to build new applications and
add third-party functionality to their e-commerce initiatives on a
rapid and ongoing basis.
SCALABILITY, PERFORMANCE AND RELIABILITY. The increasing significance of
Web-based commerce requires that e-commerce systems be highly scalable in order
to accommodate rapid user growth and increased Web site complexity, content and
functionality. Scalability refers to the ability of a computer system to handle
greater load by adding additional hardware. Further, companies need high
performance and highly reliable systems because if online systems fail or cause
unsatisfactory delays, even for a short period of time, businesses could miss
revenue opportunities and lose customers.
CURRENT SOLUTIONS
In response to these emerging business requirements, various applications have
been developed that address discrete aspects of the enterprise e-commerce
infrastructure. A number of vendors offer stand-alone solutions for Web content
management, advertising management, transaction processing, e-commerce
storefront development, personalization and recommendation engines, and
application development tools. By implementing a collection of these stand-alone
solutions, companies can attempt to deliver dynamic, personalized content to Web
site visitors and manage their e-commerce efforts. However, these stand-alone
solutions may not provide a satisfactory solution for many businesses:
- LACK OF INTEGRATED FUNCTIONALITY. Disparate stand-alone applications
generally do not easily integrate and communicate with each other, lack a common
user interface and lack a common platform for integrating with existing
information systems. As a result, a collection of stand-alone applications often
does not present the Web visitor with a unified customer experience and may
sacrifice functionality and performance.
- - HIGH COST. It is frequently difficult and expensive for companies to implement
a solution consisting of a collection of disparate stand-alone solutions from
multiple vendors, and these implementations frequently fail to meet
requirements. In addition, businesses often incur higher costs of ownership over
time as it is difficult for them to manage the uncoordinated product upgrade
cycles and new application development efforts of multiple vendors.
Today, businesses increasingly seek an integrated package of applications,
platforms and tools that addresses all aspects of their enterprise e-commerce
infrastructure, rather than just stand-alone solutions. Some software providers
have developed more comprehensive solutions incorporating a number of e-commerce
functions. However, these solutions may be inadequate for a number of reasons:
- LIMITED FUNCTIONALITY. The functionality may be insufficient to serve all
of a company's e-commerce requirements, resulting in the need to buy, build or
adapt additional applications.
- LACK OF A MODULAR, APPLICATION SERVER-BASED ARCHITECTURE. These solutions
are typically not built with separate software modules and lack the
expandability that an application server-based platform provides. This limits
the ability of businesses to customize their implementations, integrate their
solutions with existing applications and extend their e-commerce initiatives by
building future applications or incorporating third-party technology.
- POOR SCALABILITY AND RELIABILITY. Most of today's computer systems are
unable to scale to meet the growing performance demands of large-scale,
e-commerce Web sites. Solutions that do not scale well can be unreliable and
subject to system failures, which may result in frustrated customers, lost
revenue opportunities and potential financial losses.
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To address the limitations of most commercially available solutions, some
companies have built custom Internet customer relationship management solutions
with application development tools. While these solutions can provide the
required functionality and integration, they typically require lengthy
implementation periods and are expensive to build and maintain. In addition,
they require a comprehensive understanding of market segmentation, content
targeting and advertising, as well as extensive technical expertise in Web
application development and systems integration. Most companies, and many
third-party systems integrators and application developers, do not have the
expertise and experience to address all of these requirements.
As a result, businesses are increasingly seeking Web application software
providers offering products and professional services that enable them to
rapidly deploy comprehensive, effective Internet customer relationship
management solutions. Businesses prefer solutions that are modular and flexible
with an open, application server-based architecture. They desire solutions that
are easy to integrate with existing systems and third-party applications and
that enable them to extend their Web infrastructures with new applications and
functionality to meet their continually evolving e-commerce needs. Businesses
also need to leverage their existing business systems, strategies and expertise
to manage their customer relationships effectively. Finally, businesses are
seeking solutions that meet the demanding scalability, reliability and
performance requirements of large-scale Web sites that conduct e-commerce.
OUR SOLUTION
We offer a suite of Web-based Internet customer relationship management and
e-commerce software applications, as well as related application development,
integration and support services. Our solution enables businesses to understand,
manage and build their online customer relationships more effectively and to
market, sell and support their products and services over the Internet. Our
product suite includes Dynamo Application Server, an application server
specifically designed to enable and support Web applications. Dynamo Application
Server is designed to provide businesses with the core application platform and
software tools required to develop and deploy personalized, effective e-commerce
Web sites.
Our product suite also includes Dynamo Personalization Server, Dynamo Commerce
and Dynamo Ad Station. Dynamo Personalization Server is an expandable
personalization platform that enables companies to target specific content and
data to particular customers or visitors on the Web. Dynamo Commerce manages and
delivers product catalog content and user-targeted promotional programs and
provides transaction processing capabilities for large-scale e-commerce
storefronts. Dynamo Ad Station is an online banner advertising delivery
application designed to help businesses more effectively manage advertising
inventories on large-scale Web sites and distributed advertising networks.
Our solution incorporates the following distinguishing characteristics:
AN INTEGRATED AND MODULAR PRODUCT SUITE BASED ON A COMMON PLATFORM. Our product
suite includes a comprehensive range of functionality that allows businesses to
quickly develop and deploy personalized Web-based e-commerce applications. Our
application server-based platform enables our Dynamo applications to share data
and work together more efficiently than would a collection of discrete Web
applications from different vendors using various technologies. An integrated
product suite based on a common platform also ensures that new products and
releases will be compatible with each other as well as with other applications
built on Dynamo Application Server. The modularity of our product suite allows
customers to purchase applications that fit their particular needs and allows
them to quickly expand their implementations as required.
RULES-BASED PERSONALIZATION IMPLEMENTED BY BUSINESS MANAGERS. Our products allow
business managers to apply new and pre-existing business rules to profile and
segment users and dynamically deliver personalized content and data to online
visitors. For example, businesses can present different prices, products and
promotional offers to different visitors or they can deliver customer-specific
information such as account detail and purchase history.
Business managers can review the behavior of visitors and quickly adjust their
business rules to manage their online marketing communications and e-commerce
strategies.
HIGH SCALABILITY, RELIABILITY AND PERFORMANCE. Our Dynamo Application Server
employs a Java-based architecture that is highly scalable. It has a dynamic load
management system which allows applications to be distributed across multiple
server computers. This means that as a Web site becomes more heavily utilized,
additional computing resources can be added to handle the additional load. The
load management system provides redundant fail-over, a feature that transfers
users on a failed server to another server without interruption. Dynamo
Application Server has been designed to meet the performance requirements of
high-capacity, highly personalized e-commerce Web sites.
OPEN AND EXPANDABLE APPLICATION SERVER ARCHITECTURE. Our Dynamo Application
Server provides customers with an expandable platform that allows them to
rapidly integrate our products with their existing systems and
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to deploy new applications, both internally developed and from third parties.
The ability to integrate multiple applications and information systems with our
common platform enables businesses to incorporate organization-wide customer
data and support systems to provide a unified customer experience. In addition,
our open, application server-based platform and the modularity of our product
suite enable systems integrators and technology partners to develop their own
proprietary applications on Dynamo for reuse or resale.
PROFESSIONAL SERVICES CAPABILITIES. We have been designing and deploying
network-based applications for over seven years and Web sites for over four
years. We have two primary service offerings, Innovation Solutions and Express
Services. Our Innovation Solutions team provides customized application design,
development and integration services to clients who desire advanced solutions
that are not commercially available. We provide Innovation Solutions services
for a limited number of projects that we believe will provide us with an
understanding of emerging technical and business needs for our future products.
Our Express Services team provides strategic consulting and integration support
services to customers and systems integrators to facilitate the deployment of
our products. Express Services provides system architecture design, project
management, Web design and technical training and support.
Our solution provides our customers with:
EFFECTIVE, HIGH-PERFORMANCE E-COMMERCE WEB SITES THAT ARE:
- dynamically generated and personalized on a real-time basis
- highly functional with comprehensive e-commerce features
- able to personalize content based on easily modifiable business rules
to increase customer satisfaction and retention
- able to present a unified, customer-centric experience by integrating
various sources of customer data and content and leveraging existing
information systems
THE ABILITY TO ACHIEVE RAPID TIME TO MARKET BY:
- deploying our comprehensive suite of integrated applications
- enabling rapid integration with existing information systems
- taking advantage of our intuitive user interfaces for business managers
and application developers
- utilizing our experienced consulting services professionals
THE ABILITY TO ACHIEVE A COMPETITIVE ADVANTAGE AND A HIGHER RETURN ON INVESTMENT
BY:
- increasing e-commerce and advertising revenues
- improving marketing effectiveness
- reducing marketing, transaction and customer support costs
- increasing customer satisfaction and retention
STRATEGY
Our objective is to be a leading provider of Internet customer relationship
management solutions. To achieve this objective, we have adopted the following
strategies:
MAINTAIN AND EXTEND PRODUCT AND TECHNOLOGY LEADERSHIP. We believe we are a
technology leader in providing Internet customer relationship management
solutions. We offer a comprehensive suite of software applications that we
believe are based on an advanced technologies. We were one of the first
companies to market a high-performance dynamic Web page generation engine to
both generate and deliver Web pages on a real-time basis, and
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shipped our first Java-based Web application server shortly after Sun
Microsystem's first commercial shipment of Java 1.0. We intend to extend our
product and technology leadership by:
- extending Dynamo's personalization capabilities and building new
Internet customer relationship management applications
- continuing to increase the scalability, reliability and performance of
our Dynamo applications
- continuing to develop new adaptor and connector modules to allow our
products to easily integrate with third-party Internet customer
relationship management products, databases and information systems
- providing Dynamo Application Server support for emerging industry
standards, such as Enterprise JavaBeans, for developing business
applications in Java, and XML, for formatting data and other
information
- using our Innovation Solutions services to identify emerging market
needs
GROW AND LEVERAGE PROFESSIONAL SERVICE CAPABILITIES. We have extensive
experience in Web application development and integration services. Through our
Express Services, we provide enabling services to train our systems integrators
and technology partners in the use of our products as well as consulting
services to assist with customer implementations. We plan to create additional
opportunities to increase revenues from product sales by expanding our base of
partners trained in the implementation and application of Dynamo. We intend to
hire additional professional services personnel to increase our services
revenues and to enable and support product license sales through systems
integrators.
CONTINUE TO BUILD DIRECT SALES CAPABILITIES AND LEVERAGE CO-SELLING EFFORTS WITH
SYSTEMS INTEGRATORS AND WEB DEVELOPERS. We sell our products directly to
end-users and through co-selling efforts with systems integrators and Web
developers. Our objective is to establish close relationships directly with our
customers and to motivate systems integrators to implement the Dynamo technology
and product suite on Internet and Web-based projects for their customers. We
intend to expand our sales by hiring additional direct sales personnel,
domestically and internationally, both to sell directly to end-users and to
expand our co-selling efforts. We plan to leverage our current relationships and
develop additional co-selling relationships with leading systems integrators. In
addition, many of our systems integrators are global enterprises, which we
believe provides us with an opportunity to expand our international business.
EXPAND TECHNOLOGY PARTNER AND ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
AS A DISTRIBUTION CHANNEL. We work with technology partners, such as Documentum
and OpenText, to develop modules that enable our software products to operate
with their software products. We also work with original equipment
manufacturers, such as Informix, to enable them to combine our software products
with their products to form a single software application product. Some of our
customers have requirements that can be met by a combination of our products and
those of one or more of our partners. We sell in conjunction with these vendors
in a variety of ways:
- co-marketing with a technology partner to promote the fact that our
products operate together
- co-selling with a partner in an arrangement where sales and service
personnel from both organizations approach a customer in a coordinated
sales process
- selling to reseller partners
- selling to original equipment manufacturers that sell and support the
combined product
Many of our current and potential partners are looking to extend their current
offerings to include Web-enablement, personalization and e-commerce features. We
believe these relationships will provide us the opportunity to establish our
platform in additional markets.
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EXPAND MARKET PRESENCE. Historically we have not spent significant resources on
marketing and awareness programs. We intend to increase our market presence
through a variety of marketing and sales programs designed to generate market
awareness, penetrate target markets and help establish us as the leading
provider of Internet customer relationship management solutions. We plan to
increase spending on advertising, trade shows, seminars, industry events and
direct marketing efforts. We also plan to devote marketing resources to
expanding our channel relationships with systems integrators and technology
partners. We intend to develop and promote the Dynamo brand alongside our
partners' brands in all co-marketing relationships.
PRODUCTS
We offer an integrated suite of Internet customer relationship management
applications. Our core product is Dynamo Application Server, a dynamic Web page
generation engine and application server specifically designed to enable and
support Web applications, that provides businesses with the platform and
software tools to develop and deploy personalized, effective e-commerce Web
sites. Our product suite also includes Dynamo Personalization Server, Dynamo
Commerce and Dynamo Ad Station. Each of the applications in our product suite
can be purchased separately; however, the Dynamo Application Server is required
to run each of our other applications. Dynamo Personalization Server is required
to run Dynamo Commerce and Dynamo Ad Station. We also sell software tools to
enable rapid application development, as well as adaptor modules to integrate
Dynamo products with content management systems. Our product suite is designed
to meet the performance and scalability requirements of large-scale e-commerce
Web sites. All of our products are based on Java and run on Sun Solaris, Windows
NT and IBM AIX operating system platforms.
The diagram below illustrates the overall architecture of our product suite as
well as the various applications, software tools and integration modules that
are included in our product suite.
The diagram below illustrates the Dynamo Relationship Commerce Suite with
horizontal, layered bars depicting Dynamo Application Server at the foundation;
Dynamo Personalization Station, with open content adaptors and open profile
adaptors as the second layer; Dynamo Commerce Application with open fulfillment
adaptors as the third layer; and custom applications as the top layer. The left
side of the bars shows the tools that work with our product suite: system
console, Developer Workbench, Personalization Control Center and retail
administration. The right side of the bars depicts enterprise systems including
customer databases and content management and transaction fulfillment systems.
DYNAMO APPLICATION SERVER. The Dynamo Application Server is designed to provide
businesses with the core application platform and software tools required to
develop, deploy and manage personalized, effective Web sites for conducting
business on the Internet. The Dynamo Application Server provides a common
application platform for:
- dynamically generating Web pages and managing user sessions
- supplying a framework of shared application services to connect and
integrate each of the applications in our product suite
- managing the distribution of applications across multiple computers and
providing an automatic recovery management system to prevent system
failures
- efficiently connecting to enterprise systems and third-party applications
Dynamo Application Server connects to Dynamo Developer's Workbench, a Web
application development tool that allows developers and Web designers to build
new applications and integrate third-party technologies.
DYNAMO PERSONALIZATION SERVER. Dynamo Personalization Server coordinates,
manages and centralizes the personalization functions of the Dynamo product
suite. Dynamo Personalization Server enables business managers to segment users
and target content based on new and pre-existing business rules. It adjusts and
personalizes Web content on a real-time basis by combining explicit user data
from existing customer management and marketing databases with implicit
information gathered on Web navigation behavior.
Dynamo Personalization Server performs the following functions:
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- PROFILE GATHERING. When a visitor first arrives at a Web site, a profile
is created automatically for that visitor. If the visitor registers or logs in,
the visitor's identity is added to the profile, preserving any profile
information that was gathered up to that point. Dynamo Personalization Server
tracks both explicit user profile data supplied by the user as well as implicit
profile attributes derived from the user's behavior on the Web site. This
information is combined with any existing information about the visitor from the
company's internal databases.
- SEGMENTATION AND CONTENT TARGETING. Dynamo Personalization Server enables
business managers to segment visitors based on their profile data. Using
business rules, content can be personalized and targeted to these groups of
users. These business rules are created using the Personalization Control
Center.
- CONTENT MANAGEMENT AND INTEGRATION. In addition to using Dynamo
Personalization Server to target content residing on internal file systems,
customers may purchase Open Content Adaptors to integrate Dynamo with leading
content management systems. The Open Content Adapters provide direct integration
to leading content management systems such as those from Documentum and
OpenText.
- PERSONALIZED MESSAGING. Dynamo Targeted E-mail can be used with the Dynamo
Personalization Server to send personalized messages to selected groups and
individual Web site users.
DYNAMO COMMERCE. Dynamo Commerce is a flexible solution enabling businesses
to deploy and manage large-scale, personalized, e-commerce storefronts. Dynamo
Commerce delivers product catalog content and user-targeted promotional programs
to manage the online shopping experience. It is designed to integrate with
existing customer database, inventory, order processing, payment and fulfillment
systems operated by many large organizations. In addition, Dynamo Commerce
provides administration features that allow e-commerce storefronts to be
operated independently by various managers throughout an organization. Dynamo
Commerce features include:
- COMPLETE E-COMMERCE STOREFRONT SOLUTION. Dynamo Commerce provides a
comprehensive set of e-commerce storefront functions including catalog, shopping
cart, order processing, built-in search capabilities and user registration.
Business managers can customize the layout, look and feel, navigation and
functionality of their storefronts through point and click interfaces and
through customized Web page templates. Dynamo Commerce supports both
business-to-business and business-to-consumer e-commerce.
- ENVIRONMENT FOR PERSONALIZED SELLING. Web sites built on Dynamo Commerce
can be designed to deliver targeted promotions based on user profiles gathered
through Dynamo Personalization Server. Since Dynamo Commerce uses both implicit
and explicit profiles, content can be targeted to both anonymous and recognized
visitors. Reporting functionality allows marketing personnel to gather real-time
feedback on the effectiveness of various targeting and merchandising strategies.
- FLEXIBLE ORDER PROCESSING. Dynamo Commerce provides core order processing
functionality that can be integrated with a wide variety of transaction models
and existing business processes. Through the use of our integration modules,
customers can incorporate business systems into the order processing flow at a
number of stages as products are browsed, selected and purchased.
- CUSTOMIZATION, MAINTAINABILITY AND DAY-TO-DAY MANAGEMENT. Dynamo Commerce
allows business managers, designers and programmers to independently maintain
and manage the various aspects of the Web site relating to their particular
expertise. Dynamo Commerce has an administrative interface so business managers
can control product presentation, pricing and promotions. Designers can directly
customize Web site templates upon which the site is built. The open, modular
architecture makes it easy for programmers to extend and modify functionality.
This separation simplifies deployment and ongoing maintenance.
DYNAMO AD STATION. Dynamo Ad Station allows businesses to increase
advertising revenues by delivering targeted ads to visitors and by more
effectively managing advertising inventory. The data gathered by Dynamo Ad
Station help the business determine how to target campaigns to maximize
effectiveness. Automated inventory management features allow an administrator to
adjust the delivery of advertisements to help meet advertising goals. Dynamo Ad
Station's comprehensive data collection and reporting features facilitate the
monitoring of ad campaign effectiveness.
SERVICES
We provide a variety of consulting, design, application development, integration
and training and support services in conjunction with our products through our
Innovation Solutions and Express Services offerings.
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INNOVATION SOLUTIONS. Innovation Solutions services consist of customized
application design, development and integration services and are ordinarily
provided on a fixed-price basis. We have extensive experience in developing,
designing and deploying large-scale Web applications. Our Innovation Solutions
services are provided to clients with complex requirements that seek advanced
solutions that are not commercially available to extend the capabilities and
features of their systems. As well as being core component of our business,
Innovation Solutions projects provide us with an understanding of emerging
customer requirements and insights for new product developments. We typically
select projects that we believe may provide the technical and functional
foundation for our future products and services.
EXPRESS SERVICES. Express Services consist of high level consulting and
enabling support services such as system architectural design, project
management, Web site design, and technical training and support. Express
Services are ordinarily provided on a time and materials basis. Our Express
Services are provided to assist systems integrators, development partners and
customers to rapidly develop and deploy Dynamo-based applications and systems.
Our objective is to deploy our Express Services quickly and efficiently to
reduce the time and effort required by our partners and customers to
successfully deploy Dynamo applications. Our Express Services are priced on a
per day basis.
CUSTOMER SUPPORT AND MAINTENANCE. We offer four levels of customer support
ranging from our free support program, which is available for 60 days after a
product has been purchased, to our Premier Support Program, which includes
telephone support 24 hours a day, seven days per week, for customers deploying
mission critical applications. Customers are entitled to receive software
updates, maintenance releases and technical support for an annual maintenance
fee of 20% to 30% of the then current list price of the licensed product.
TRAINING. We provide a broad selection of training for customers and
partners, including programming classes covering all of the components of our
product suite. Training is priced on a per day basis. Fees vary for standard
public training classes and on-site private training classes.
CUSTOMERS
Our principal target markets are Fortune 1000 enterprises and new businesses
that plan to use the Internet as their primary business channel. Our customers
are characterized by their strong commitment to Internet customer relationship
management and represent a broad spectrum of enterprises within diverse industry
sectors. The following is a partial list of customers that have purchased
licenses and/or professional services from us:
TECHNOLOGY
Informix
Just In Time Solutions
Newbridge Networks
Sun Microsystems
MANUFACTURING
3M
Eastman Kodak
TRAVEL AND LEISURE
Hilton Hotels
FINANCIAL SERVICES
BancTec
John Hancock Funds, Inc.
KeyBank
Scudder Kemper Investments
MEDIA AND ENTERTAINMENT
Icon MediaLab
MTV/Nickelodeon
Sony Online Entertainment
Women.com
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EDUCATION
Harvard Business School
Ontrack Learning
Universal Learning Technology
INTERNET
AltaVista
BabyCenter
Bigstep.com
GoTo.com
moses.com
Network Solutions
TechRepublic
TheStreet.com
CONSUMER RETAIL
BMG Direct
brandwise.com
CareSoft
GetMusic
J.Crew
living.com
Peapod
sephora.com
ShopLink.com
Walgreens
TELECOMMUNICATIONS
BellSouth
TECHNOLOGY
We believe we are a technology leader in providing Internet customer
relationship management solutions. Our technology leadership has been evidenced
by product awards and recognition by industry commentators. For example, in
December 1998 our Dynamo Application Server earned the 1998 CNET Builder.com
Award as "Best Application Server." We believe our technology enables our
customers to create, deploy and maintain large-scale, personalized e-commerce
Web applications in less time and at a lower cost than existing alternatives. We
believe that our products have the following technological advantages:
JAVA FOUNDATION
Our products are written entirely in Java and support Java programming for
customization and extension, except for a few integration and installation
modules that can be implemented only in conventional programming languages.
We believe that our Java implementation results in the following benefits:
- STRONG COMPONENT MODEL. Java provides a component standard known as
"JavaBeans," which enables developers to segment their code into discrete,
well-defined units which can be assembled in a "building block" fashion to
create new applications. JavaBeans' modularity makes it easier to create
reusable software as well as maintain existing systems.
- PLATFORM NEUTRALITY. Java's portability allows our applications to be run
on virtually any major computer system without modification. This portability
eliminates porting costs normally required to support multiple platforms or to
change platforms, while allowing us to release products on major platforms
simultaneously.
- ENTERPRISE INTEGRATION. We believe that Java's portability and direct
support for distributed applications are helping Java to become the de facto
standard language for enterprise system integration.
<PAGE>
- - FEWER PROGRAMMING ERRORS. Java's automatic memory management reduces memory
corruption errors, which typically represent the most costly and difficult
software "bugs" in conventional compiled languages such as C or C++.
- - ACCELERATED DEVELOPMENT. We believe that the above features, combined with the
broad availability of high-quality Java development tools, result in faster
development time.
MODULAR, STANDARDS-BASED COMPONENT ARCHITECTURE
One of the key features of our product architecture is its high degree of
modularity, achieved by building additional functionality on top of the
JavaBeans component technology. Customizations and extensions built by our
customers or partners using industry standard JavaBean components can be managed
by Dynamo Application Server. Dynamo Application Server enhances the naming,
configuration and lifecycle of each component, allowing components to be added,
extended, duplicated or replaced without recompilation of the rest of the
system. The modularity of our component technology allows our products to be
adapted to meet future business needs. In contrast, producers of non-modular
products must try to anticipate and develop additional functionality at the time
that they market their products.
One of the most powerful uses of our component technology is to integrate our
software with external enterprise systems. We provide reference implementations
of integration components while enabling our customers and partners to easily
replace our reference components with new components that provide the same
function but integrate with their existing systems. We adhere to industry
standards to enable our products to leverage technologies produced by third
parties and to protect the development investments of our partners and
customers.
PERFORMANCE, SCALABILITY AND RELIABILITY
Our products have a layered architecture. Dynamo Personalization Server is built
on top of Dynamo Application Server, and Dynamo Commerce and Ad Station are
built on top of Dynamo Personalization Server. We believe that the integration
of Dynamo Application Server with our other products yields significant
benefits, particularly in performance, scalability and reliability.
Dynamo Application Server uses page compilation technology to enhance the
performance of Web page generation. In most dynamic page generation servers, a
Web page is generated from an HTML template, a Web page that is mostly standard
HTML content with special embedded instructions to generate the dynamic portions
of the page. We utilize this basic page template model, but unlike most other
servers, Dynamo Application Server converts the HTML template into Java source
code and compiles it into executable binary classes. This page compilation
technology improves the speed at which Dynamo Application Server can generate
and serve dynamic Web pages.
Scalability is a term used to describe the ability of an application to handle
greater load when additional hardware is added to a system. Scalability is
particularly important for e-commerce applications where demand can grow
dramatically and unpredictably. Dynamo handles scalability across computers
through a dynamic session-based load management system in which multiple copies
of the application are run on multiple computers. This load distribution scheme
has the advantage of accommodating additional users by adding more computers.
Our load management technology also enables our applications to handle computer
hardware failures automatically and without interrupting the user's experience.
If a computer fails, users are automatically reassigned to another running
computer.
RESEARCH AND DEVELOPMENT
Our research and development group is responsible for product management, core
technology, product architecture, product development, quality assurance,
documentation and third-party software integration. This group also assists with
pre-sale and customer support activities referred from the Express Services
group and quality assurance tasks supporting the Innovation Solutions group.
Since we began focusing on selling software products in 1996, the majority of
our research and development activities have been directed towards creating new
versions of our products which extend and enhance competitive product features,
particularly in the areas of integrating our products with external enterprise
systems, supporting emerging industry standards and creating more powerful user
interfaces to our products. The systems we integrate with include relational
databases, content management systems and credit card payment servers. The
industry standards we support include Java Servlets, a standard for constructing
Web pages using the Java programming language; Enterprise Java Beans, a standard
for developing modular Java programs that can be accessed over a network; and
Simple Network Management Protocol, a standard for remotely monitoring the
operation of a system.
SALES AND MARKETING
<PAGE>
Our principal target markets are Fortune 1000 companies and new businesses that
plan to use the Internet as their primary business channel. Our customers are
characterized by their strong commitment to Internet customer relationship
management. We target these potential customers directly through our sales force
and indirectly through arrangements with systems integrators, Web developers,
original equipment manufacturers and other technology partners.
We employ one group of sales professionals who are compensated based on product
and service sales made directly to end-users and a second group who are
compensated based on sales made through co-selling efforts with our systems
integrator partners. We train and assist systems integrators in promoting,
selling, deploying, extending and supporting our products. The objective of this
strategy is to establish close product relationships directly with our customers
and to motivate systems integrators to adopt the Dynamo technology and suite of
products on Internet and Web-based projects for their clients.
In addition, we recently initiated a strategy to co-market our products with
technology partners, such as Documentum and OpenText, to sell our products
through original equipment manufacturers such as Informix, with which we entered
into an agreement in December 1998. We intend to increase sales of our products
by entering into similar relationships with additional technology partners and
original equipment manufacturers.
Our co-marketing relationships are with major systems integrators that serve the
market for information system products and services. The objective of this
co-marketing strategy is to motivate systems integrators to adopt the Dynamo
technology and suite of products on Web-based projects for their clients. We
train and assist our systems integration partners to enable them to deploy,
extend and support our products.
Set forth below is a partial list of organizations with which we have selling
and marketing relationships:
American Management Systems
Cambridge Technology Partners
Computer Sciences Corporation
Context Integration
Fort Point Partners
Free Range Media
Icon Medialab
iXL
Javelin Technology
KPMG
Modem Media . Poppe Tyson
Organic Online
Phoenix Pop Productions
Planet Access Networks
PricewaterhouseCoopers
Quidnunc Group
Strategic Interactive Group
USWeb/CKS
Vision Consulting
We currently sell our products primarily in the United States. However, we are
expanding our international sales organization. Currently, we are focusing our
international sales efforts primarily in Europe. Many of our systems integrators
and technology partners are global enterprises. We believe this provides us with
an opportunity to expand our international business.
COMPETITION
The market for Internet customer relationship management solutions is intensely
competitive, subject to rapid technological change and significantly affected by
new product introductions and other market activities of industry participants.
We expect competition to persist and intensify in the future. We have three
primary sources of competition:
- in-house development efforts by potential customers or partners
- Internet applications software vendors, such as BroadVision, InterWorld,
Open Market and Vignette
<PAGE>
- platform application server products and vendors, such as BEA Systems,
IBM's Websphere products, Microsoft and Netscape, among others.
We also compete in the platform application server market with the NetDynamics
product of Sun Microsystems, which is also one of our customers and co-marketing
partners.
We believe the primary factors upon which we compete are the functionality and
expandability of our products, the extent to which our products integrate with
other systems, our prices and our ability to provide quality services to assist
our customers and partners. We believe that we have competitive advantages that
differentiate our products and services from those of our competitors. Our
application suite provides improved time-to-market and lower cost of ownership
in comparison to in-house development efforts. We believe the expandability and
scalability of our application server-based platform, as well as our product
features, provide us an advantage over other Internet application software
vendors. We believe the functionality provided by the personalization and
e-commerce components of the Dynamo application suite gives us a competitive
advantage over platform application server vendors.
Despite these advantages, many of our competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do. As a result, they may be able to undertake more extensive
promotional activities, offer more attractive pricing and purchase terms, and
bundle their products in a manner that would put us at a competitive
disadvantage.
Competition could materially and adversely affect our ability to obtain revenues
from license fees from new or existing customers and professional services
revenues from existing customers. Further, competitive pressures could require
us to reduce the price of our software products. In either case, our business,
operating results and financial condition would be materially and adversely
affected.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete depend on our ability to develop and protect
the proprietary aspects of our technology and to operate without infringing on
the proprietary rights of others. We rely on a combination of trademark, trade
secret and copyright law and contractual restrictions to protect our proprietary
technology. These legal protections afford only limited protection for our
technology. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. We license
our software pursuant to signed license, "click through" or "shrink wrap"
agreements, which impose restrictions on the licensee's ability to use the
software, such as prohibiting reverse engineering and limiting the use of
copies. We also seek to avoid disclosure of our intellectual property by
requiring employees and consultants with access to our proprietary information
to execute confidentiality agreements and by restricting access to our source
code. Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments and
enhancements to existing products are more important than legal protections to
establish and maintain a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. Policing unauthorized use of our products is difficult
and while we are unable to determine the extent to which piracy of our software
exists, software piracy can be expected to be a persistent problem. Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect proprietary
rights to as great an extent as the laws of the United States. Any such
resulting litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business, operating
results and financial condition. There can be no assurance that our means of
protecting our proprietary rights will be adequate or that our competitors will
not independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.
In addition, our software is written in the Java programming language developed
by Sun Microsystems and we incorporate Java Runtime Environment, Java Naming and
Directory Interface, Java Servlet Development Kit, Java Foundation Classes,
JavaMail and JavaBeans Activation Framework into our products under licenses
granted to us by Sun. Currently, Sun makes these technologies available to the
public at no charge. However, if Sun declined to continue to allow us to use
these technologies for any reason, we would be required to (a) license the
equivalent technology from another source, (b) rewrite the technology ourselves,
and/or (c) rewrite portions of our software to accommodate the change or no
longer use the technology.
EMPLOYEES
<PAGE>
As of December 31, 1999, we had a total of 324 employees. Of our employees, 91
were in research and development, 85 in sales and marketing, 109 in professional
services and 39 in finance and administration. Our future success will depend in
part on our ability to attract, retain and motivate highly qualified technical
and management personnel, for whom competition is intense. From time to time, we
also employ independent contractors to support our professional services,
product development, sales, marketing and business development organizations.
Our employees are not represented by any collective bargaining unit, and we have
never experienced a work stoppage. We believe our relations with our employees
are good.
Item 2 PROPERTIES
Our headquarters are currently located in a leased facility in Cambridge,
Massachusetts, consisting of approximately 60,000 square feet. Our Cambridge
facility is expected to meet our needs through the middle of 2000, at which time
we intend to expand our facilities by entering into one or more additional
leases. We have also leased offices for sales and support personnel in Chicago,
Illinois, San Francisco, California, Reading, England and Frankfurt, Germany.
See note 7 to our consolidated financial statements.
Item 3 LEGAL PROCEEDINGS
A patent infringement claim was filed by BroadVision, one of our competitors,
against us on December 11, 1998. The case was filed in the U.S. District Court
for the Northern District of California. BroadVision alleges that we are
infringing their patent (U.S. Patent No. 5,710,887) for a method of conducting
e-commerce. BroadVision is seeking a permanent injunction of the sale of our
Dynamo products in their current forms as well as unspecified damages. We intend
to vigorously oppose BroadVision's allegations and on February 4, 1999 we filed
our answer denying BroadVision's complaint and filed a counterclaim against
BroadVision seeking a judgment that we are not infringing their patent and that
the patent in question is in fact unenforceable and invalid.
In February 2000 ATG and BroadVision reached an amicable 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 BraodVision $15,000,000 for the license to BroadVision technology.
ATG will pay $8,000,000 in February 2000 for alleged past use and has expensed
such payment in the fourth quarter of 1999. An additional $7,000,000 is payable
over the next three years and will be recorded as prepaid license fee, which
will be amortized over its estimated life of three years.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock began trading on the Nasdaq National Market under the symbol
"ARTG" on July 21, 1999. Prior to that, there was no established public trading
market for our common stock. The following table sets forth the high and low
prices of our common stock for the periods indicated as quoted on the Nasdaq
National Market.
PERIOD HIGH LOW
Year ending December 31, 1999
Third quarter (commencing July 21, 1999) .......... $ 19.07 $ 5.13
Fourth quarter .................................... $ 64.06 $ 17.57
On March 24, 2000 the last reported sale price on the Nasdaq National Market for
our common stock was $84.06 per share. On March 24, 2000, there were 322
holders of record of our common stock.
We currently intend to retain future earnings, if any, to finance our growth. We
do not anticipate paying cash dividends on our common stock in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs,
restrictions in financing agreements and plans for expansion.
On July 26, 1999 the Company closed its 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. In connection with the Company's initial public offering in July
1999, all shares of preferred stock were converted into 31,419,278 shares of
common stock.
On November 10, 1999 the Company closed its 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 December 31, 1999, the Company
used approximately $11 million for sales and marketing, approximately $4.5
million for capital expenditures, approximately $3.3 million for research
development, and approximately $500,000 for the repayment of indebtedness. As of
December 31, 1999, the Company has approximately $134 million of net proceeds
remaining, and pending use of these proceeds, the Company intends to invest such
proceeds primarily in high-quality short-term investments.
<PAGE>
Item 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following data sets forth selected condensed consolidated financial data for
Art Technology Group. The selected consolidated financial data below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this filing.
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUE:
Product licenses $ 18,590 $ 4,059 $ 1,866 $ 53 $ --
Services 13,487 8,078 4,592 3,849 798
-------- -------- -------- -------- --------
Total revenues 32,077 12,137 6,458 3,902 798
COST OF REVENUES:
Product licenses 8,160 30 64 -- --
Services 10,232 5,020 3,133 1,985 594
-------- -------- -------- -------- --------
Total cost of revenues 18,392 5,050 3,197 1,985 594
-------- -------- -------- -------- --------
Gross profit 13,685 7,087 3,261 1,917 204
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Research and development 6,343 3,355 3,661 1,117 217
Sales and marketing 15,921 4,074 2,287 1,152 133
General and administrative 5,323 2,291 1,418 1,060 284
Amortization of deferred compensation 1,127 107 -- -- --
-------- -------- -------- -------- --------
Total operating expenses 28,714 9,827 7,366 3,329 634
-------- -------- -------- -------- --------
LOSS FROM OPERATIONS (15,029) (2,740) (4,105) (1,412) (430)
INTEREST INCOME 2,018 54 6 -- --
INTEREST EXPENSE (121) (165) (129) (30) (37)
-------- -------- -------- -------- --------
Net loss (13,132) (2,851) (4,228) (1,442) (467)
ACCRETION OF DIVIDENDS,
DISCOUNT AND OFFERING COSTS ON
PREFERRED STOCK (4,395) (1,594) (214) (206) (2)
-------- -------- -------- -------- --------
Net loss available for
common Stockholders $(17,527) $ (4,445) $ (4,442) $ (1,648) $ (469)
======== ======== ======== ======== ========
Basic and diluted net loss per share $ (0.45) $ (0.25) $ (0.25) $ (0.09) $ (0.03)
-------- -------- -------- -------- --------
Basic and diluted weighted average
common shares outstanding 38,777 17,934 17,744 17,698 16,262
-------- -------- -------- -------- --------
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $124,711 $ 4,093 $ 187 $ 2,358 $ 6
Working capital (deficit) 117,727 3,649 (1,328) 902 (341)
Total assets 177,735 7,766 1,672 3,038 137
Long-term obligations, less current portion 4,000 322 122 24 --
Redeemable convertible preferred stock -- 8,313 3,152 3,000 --
Stockholders' equity (deficit) 146,385 (4,034) (4,060) (1,648) (211)
</TABLE>
<PAGE>
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 December 31, 1999, we had an accumulated
deficit of $28.9 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
<PAGE>
future operating results and, therefore, there can be no assurance that we will
achieve or sustain revenue growth or profitability.
Results Of Operations
The following table sets forth statement of operations data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Product licenses 58% 33% 29%
Services 42 67 71
-------- -------- --------
Total revenues 100 100 100
-------- -------- --------
COST OF REVENUES:
Product licenses 25 -- --
Services 32 42 49
-------- -------- --------
Total cost of revenues 57 42 49
-------- -------- --------
Gross profit 43 58 51
-------- -------- --------
OPERATING EXPENSES:
Research and development 20 27 57
Sales and marketing 50 34 35
General and administrative 17 19 22
Amortization of deferred compensation 3 1 --
-------- -------- --------
Total operating expenses 90 81 114
-------- -------- --------
LOSS FROM OPERATIONS (47) (23) (63)
INTEREST INCOME 6 -- --
INTEREST EXPENSE -- (1) (2)
-------- -------- --------
Net loss (41)% (24)% (65)%
======== ======== ========
</TABLE>
REVENUES
Total revenues increased 164% from $12.1 million in 1998 to $32.1 million in
1999. The increase was primarily attributable to growth in the number of
customers and the number of larger deals with customers. In addition, we
expanded our sales force, introduced version 4.0 of our Dynamo product suite in
December 1998 which increased our market presence.
Total revenues increased 88% from $6.5 million in 1997 to $12.1 million in 1998.
This increase was primarily due to the commencement of product shipments in
December 1996 and from growing market acceptance of our Dynamo product suite
following the release of Dynamo 3.0 in December 1997.
We continued to expand our customer base resulting in no individual customer
accounting for more than 10% of total revenues for the year ended December 31,
1999 and we expect this to continue for the calendar year ending December 31,
2000. For the years ended December 31, 1998 and 1997, three customers accounted
for 37% and 56% of total revenues, respectively.
<PAGE>
PRODUCT LICENSE REVENUES
Product license revenues increased 358% from $4.1 million in 1998 to $18.6
million in 1999. This increase was attributable to the growing market acceptance
of our Dynamo product suite following the release of Dynamo 4.0 in December 1998
and an increase in the number of larger deals with customers. Additionally, 11%
of our product license revenues in 1999 were the result of an agreement with an
original equipment manufacturer. The remaining term of the OEM agreement is one
year and which is automatically renewable for successive one year terms unless
one of the parties elects not to renew the agreement. There can be no assurances
that revenues generated under this agreement will remain a significant
percentage of product license revenues prospectively. 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.
Product license revenues increased 118% from $1.9 million in 1997 to $4.1
million in 1998. This increase was due to growing market acceptance of our
Dynamo product suite following the release of Dynamo 3.0 in December 1997.
Product license revenues as a percentage of total revenues for the years ended
December 31, 1999, 1998 and 1997 were 58%, 33% and 29%, respectively. We expect
to continue to trend toward our product license's revenue target of 69% of total
revenues.
SERVICES REVENUES
Services revenues increased 67% from $8.1 million in 1998 to $13.5 million in
1999. Professional services revenue increased 26% in 1999 from $7.7 million in
1998 to $9.7 million in 1999. 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
653% from $372,000 in 1998 to $2.8 million in 1999. This increase was
attributable to an increase in the number of customers and sales of product
licenses. 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. Therefore, we did not record training revenue in
1998. Training revenue for 1999 was $1.1 million. 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.
Service revenues increased 76% from $4.6 million in 1997 to $8.1 million in
1998. Professional service revenues increased 71% from $4.5 million in 1997 to
$7.7 million in 1998. The increase was primarily attributable to an increase in
the number of customers, increased sales of product licenses and increased
billing rates. Software maintenance and support revenues increased 745% from
$44,000 in 1997 to $372,000 in 1998. The increase was attributable to
commencement of product license sales in 1996.
Services revenues as a percentage of total revenues for the years ended December
31, 1999, 1998 and 1997 were 42%, 67% and 71%, respectively. We expect services
revenue to continue to trend toward our target of 31% of total revenues.
COST OF LICENSE REVENUES
Cost of license revenues increased from $30,000 in 1998 to $8.2 million in
1999. In February 2000, we settled a previously disclosed lawsuit filed 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. The settlement was amicably reached to avoid further
litigation expense and risks. As part of the settlement, we, 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. In February 2000, we paid BroadVision $8.0
million for alleged past use and have reflected that amount as cost of
license revenues for the year ended December 31, 1999. Additionally, we will
pay BroadVision $7.0 million in license fees that will be expensed to cost of
license revenues over a three year period beginning in the first quarter of
2000. The cash payments will be $750,000 per quarter for one year commencing
in the first quarter of calendar year 2000 and $500,000 per quarter for two
years commencing in the first quarter of calendar year 2001. Cost of license
revenues also includes royalties to third parties for software embedded in
our Dynamo product suite, as well as documentation and other informational
media associated with our products.
Cost of license revenues decreased 53% from $64,000 in 1997 to $30,000 in 1998.
The decrease was attributable to changes in royalty arrangements with third
parties as a result of strategic changes related to software embedded in our
Dynamo product suite.
<PAGE>
Cost of license revenues as a percentage of total revenues for the year ended
December 31, 1999 was 25% and for the years ended December 31, 1998 and 1997
were immaterial, 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 104% from $5.0 million
in 1998 to $10.2 million in 1999. The increase was attributable to the increase
in resources in our professional services group. Approximately 86% of the
increase was attributable to increased compensation costs for continued
increases in head count. Further, increased costs resulted from establishing a
training organization and the introduction of training programs in December
1998. 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.
Cost of services revenues increased 60% from $3.1 million in 1997 to $5.0
million in 1998. Approximately 73% of the increase was attributable to the
expansion of our professional services organization, consisting primarily of
payroll and related benefits. Further, significant increases resulted from
establishing a software maintenance and support organization as a result of the
commencement of product license sales in 1996.
Cost of services revenues as a percentage of total revenues for the years ended
December 31, 1999, 1998 and 1997 were 32%, 42% and 49%, respectively. We
anticipate this trend to continue as a function of achieving our product/service
targets to total revenues.
<PAGE>
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 the 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 93% from $7.1 million in 1998 to $13.7 million in 1999.
The increase in gross profit was primarily attributable to the significant
growth in revenues which was partly offset by the $8.0 million license fee paid
to BroadVision. Gross profit on services revenues decreased from 38% in 1998 to
24% in 1999. This decrease is primarily the result of the significant increase
in the number of employees in our professional services group that had not
achieved 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.
Additionally, increases in travel and facilities costs translated into decreased
gross profit for services revenues. Gross profit on product license revenue
decreased from 99% in 1998 to 56% in 1997. This decrease is due to the $8.0
million payment to BroadVision which represents license fees for past use.
Gross profit increased 117% from $3.3 million in 1997 to $7.1 million in 1998.
The increase was attributable to increases in both gross profit on services
revenues and gross profit on product license revenues. Gross profit on services
revenues increased from 32% in 1997 to 38% in 1998. The increase resulted from
improved utilization rates of our professional services group. Gross profit on
product license revenues increased from 97% in 1997 to 99% in 1998. This
increase was the result of decreased royalties for software embedded into our
Dynamo product suite.
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 89% from $3.4 in 1998 million to
$6.3 million in 1999. Approximately 79% 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.
Research and development expenses decreased by 8% from $3.7 million in 1997 to
$3.4 million in 1998. Approximately 36% of the decrease was due to the temporary
reallocation of research and development personnel to support the professional
services organization and the remainder of the decrease primarily was due to
overhead and related expenses.
For the years ended December 31, 1999, 1998 and 1997, research and development
expenses as a percentage of total revenues were 20%, 27% and 57%, 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.
<PAGE>
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.
Sales and marketing expenses increased 291% from $4.1 million in 1998 to $15.9
million in 1999. Approximately 44% of the increase was due to a significant
increase in the number of sales and marketing personnel and related expenses and
29% of the increase was related to new and increased marketing program
expenditures.
Sales and marketing expenses increased 78% from $2.3 million in 1997 to $4.1
million in 1998. Approximately 67% of the increase was due to an increase in the
number of sales and marketing personnel and related expenses. The remainder was
primarily related to increases in our marketing expenditures.
For the years ended December 31, 1999, 1998 and 1997, sales and marketing
expenses as a percentage of total revenues were 50%, 34% and 35%, 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 and the rate at which newly-hired sales personnel become
productive and on the level of revenue growth. We expect sales and marketing
expenses, in absolute dollars, will 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 132% from $2.3 million in 1998 to
$5.3 million in 1999. Approximately 30% 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 19% of the increase is due to
increased consulting services and approximately 13% of the increase is due costs
related to hiring and training new personnel.
General and administrative expenses increased 62% from $1.4 million in 1997 to
$2.3 million in 1998. Approximately 50% of the increase was due to the hiring of
additional personnel with the remaining increase due to increases in facilities
costs necessary to support our expanding operations.
For the years ended December 31, 1999, 1998 and 1997, general and administrative
expenses as a percentage of total revenues were 17%, 19% and 22%, respectively.
We expect to significantly invest in infrastructure and personnel to support the
growth of the company resulting in a significant increase in absolute dollars
for general and administrative costs. 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 953% from $107,000
in 1998 to $1.1 million in 1999. This is due to the timing of the Company's
recording of the deferred stock compensation. We expect amortization of deferred
stock compensation not to significantly increase from the expense recorded for
the year ended December 31, 1999. We did not have amortization expense relating
to deferred stock compensation in 1997.
INTEREST INCOME (EXPENSE)
Interest income increased from $54,000 in 1998 to $2.0 million in 1999. The
increase is the result of our completion of our initial and secondary public
offerings 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
<PAGE>
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
acquisitions of businesses, products and technologies.
Interest income increased from $6,000 in 1997 to $54,000 in 1998. The increase
reflects interest earned on higher balances of cash and cash equivalents
resulting from the proceeds from the private sale of equity securities.
Interest expense decreased 27% from $165,000 in 1998 to $121,000 in 1999. The
decrease was primarily due to the repayment of outstanding indebtedness with the
proceeds of our initial public offering.
Interest expense increased 28% from $129,000 in 1997 to $165,000 in 1998. The
increase reflects additional borrowings under various financing arrangements
entered into during 1997 and 1998, as well as a non-cash interest charge related
to warrants issued in connection with our credit facility in 1998.
PROVISION FOR INCOME TAXES, NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
We incurred losses for each of the years ended December 31, 1999, 1998 and 1997.
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 capital leases.
Cash used in operating activities was $2.0 million for 1999. This represents an
operating loss of $13.1 million and changes in working capital items consisting
primarily of cash provided by deferred revenue, accounts payable and accrued
expenses,including the $8.0 million license fee which was paid to BroadVision in
February 2000. The cash provided by the change in deferred revenue was primarily
the result of $5.0 million we received from an original equipment manufacturer,
of which $2.9 million was included in deferred revenue as of December 31, 1999.
Our investing activities consisted primarily of capital expenditures of $5.6
million for 1999 and increases in other assets for facilities deposits and
similar items of $690,000 in addition to the purchase of marketable securities
of $25.5 million. Assets acquired consist principally of computer hardware and
software. We expect that our capital expenditures to continue to significantly
increase as our employee base grows.
Net cash provided by financing activities was $153.4 million for 1999 primarily
resulting from the net proceeds from our initial and secondary public offerings,
which generated $153.3 million.
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 December
31, 1999, 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 December 31, 1999, we had $149.2 million in cash, cash equivalents and
marketable securities and $117.7 million in working capital. Management believes
that the net proceeds from the Company's 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 depend on
the Company's profitability, its ability to manage working capital requirements
and its growth rate. We may seek to raise additional funds through public or
private debt or equity financings, or from other sources for 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.
<PAGE>
Item 7a 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 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, the United Kingdom and
Germany 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 each of the three years ended December 31, 1999. The Company
does not use derivative financial instruments for investment purposes and
only invests in financial investments 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.
<PAGE>
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS
1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 124,711 $ 4,093
Marketable securities 5,137 --
Accounts receivable, net of reserves of approximately $460
and $250 at December 31, 1999 and 1998, respectively 12,539 2,318
Unbilled services 782 291
Prepaid expenses and other current assets 1,908 113
--------- ---------
Total current assets 145,077 6,815
PROPERTY AND EQUIPMENT, NET 5,465 842
LONG-TERM MARKETABLE SECURITIES 19,394 --
OTHER ASSETS 7,799 109
--------- ---------
$ 177,735 $ 7,766
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 3,000 $ 347
Accounts payable 11,285 720
Accrued expenses 4,728 1,220
Deferred revenue 8,337 878
--------- ---------
Total current liabilities 27,350 3,165
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 4,000 322
COMMITMENTS AND CONTINGENCIES (Note 7)
REDEEMABLE CONVERTIBLE PREFERRED STOCK -- 8,313
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $0.01 par value,
Authorized--10,000,000 shares and No shares at
December 31, 1999 and 1998, respectively
Issued and outstanding--no shares at December 31,
1999 and 1998, respectively -- --
Preferred stock, $.01 par value-
Authorized--no shares and 10,000,000 shares at
December 31, 1999 and 1998, respectively
Series A and Series C Convertible Preferred Stock-
Designated--3,300,000 shares
Issued and outstanding--no shares and 2,756,789
shares at December 31,1999 and 1998, respectively -- 2,861
Common stock, $.01 par value
Authorized--100,000,000 shares and 25,000,000 shares
at December 31, 1999 and 1998, respectively
Issued and outstanding--65,551,024 shares and
18,256,110 shares at December 31, 1999 and 1998,
respectively 656 183
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Additional paid-in capital 178,218 5,948
Deferred compensation (3,628) (1,692)
Accumulated deficit (28,861) (11,334)
--------- ---------
Total stockholders' equity (deficit) 146,385 (4,034)
--------- ---------
$ 177,735 $ 7,766
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
--------Year Ended December 31,-------
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Product license $ 18,590 $ 4,059 $ 1,866
Service 13,487 8,078 4,592
-------- -------- --------
Total revenues 32,077 12,137 6,458
COST OF REVENUES:
Product license 8,160 30 64
Service 10,232 5,020 3,133
-------- -------- --------
Total cost of revenues 18,392 5,050 3,197
-------- -------- --------
Gross profit 13,685 7,087 3,261
OPERATING EXPENSES:
Research and development 6,343 3,355 3,661
Sales and marketing 15,921 4,074 2,287
General and administrative 5,323 2,291 1,418
Amortization of deferred compensation 1,127 107 --
-------- -------- --------
Total operating expenses 28,714 9,827 7,366
-------- -------- --------
Loss from operations (15,029) (2,740) (4,105)
INTEREST INCOME 2,018 54 6
INTEREST EXPENSE (121) (165) (129)
-------- -------- --------
Net loss (13,132) (2,851) (4,228)
ACCRETION OF DIVIDENDS, DISCOUNT AND OFFERING
COSTS ON PREFERRED STOCK (4,395) (1,594) (214)
-------- -------- --------
Net loss available for common stockholders $(17,527) $ (4,445) $ (4,442)
======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE (Note 1(e)) $ (0.45) $ (0.25) $ (0.25)
======== ======== ========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 38,777 17,934 17,744
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
ART TECHNOLOGY GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
Series A Convertible Series C Convertible
Preferred Stock Preferred Stock Common Stock
Number of Carrying Number of Carrying Number of
Shares Value Shares Value Shares
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 1,300,000 $ 501 -- $ -- 17,701,500
Sale of Series C convertible preferred stock, net
of issuance costs of $60 -- -- 1,209,875 1,960 --
Accretion of Series B redeemable convertible
preferred stock to redemption value -- -- -- -- --
Exercise of stock options -- -- -- -- 111,900
Grant of options to consultants (Note 6(b)) -- -- -- -- --
Net loss -- -- -- -- --
---------- ----- ---------- ------- ----------
BALANCE, DECEMBER 31, 1997 1,300,000 501 1,209,875 1,960 17,813,400
Sale of Series C convertible preferred stock -- -- 246,914 400 --
Issuance costs related to sales of Series D
redeemable convertible preferred stock -- -- -- -- --
Accretion of Series B and Series D redeemable
convertible preferred stock to redemption value -- -- -- -- --
Exercise of stock options -- -- -- -- 442,710
Deferred compensation related to stock option
grants -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Warrants issued in connection with the sale of
Series D redeemable convertible preferred stock -- -- -- -- --
Issuance of Series B redeemable convertible
preferred stock warrants -- -- -- -- --
Grants of options to consultants (Note 6(b)) -- -- -- -- --
Issuance of warrants (Note 3(b)) -- -- -- -- --
Net loss -- -- -- -- --
---------- ----- ---------- ------- ----------
BALANCE, DECEMBER 31, 1998 1,300,000 501 1,456,789 2,360 18,256,110
Accretion of Series B and Series D redeemable
convertible preferred stock redemption value -- -- -- -- --
Exercise of stock options -- -- -- -- 1,956,820
Exercise of warrant -- -- -- -- 314,476
Deferred compensations related to stock option
grants -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Conversion of preferred stock into common stock (1,300,000) (501) (1,456,789) (2,360) 31,419,278
Common stock issued to the holders of Series C
convertible preferred stock and Series D
redeemable convertible preferred stock in lieu
of special payments (Note 5) -- -- -- -- 242,500
Initial and secondary public offerings of common
stock -- -- -- -- 13,361,840
Net loss -- -- -- -- --
---------- ----- ---------- ------- ----------
BALANCE, DECEMBER 31, 1999 -- $ -- -- $ -- 65,551,024
========== ===== ========== ======= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Additional Stockholders'
$0.01 Par Paid-in Deferred Accumulated Equity
Value Capital Compensation Deficit (Deficit)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $177 $ 122 $ -- $ (2,448) $ (1,648)
Sale of Series C convertible preferred stock, net
of issuance costs of $60 -- -- -- (61) 1,899
Accretion of Series B redeemable convertible
preferred stock to redemption value -- -- -- (153) (153)
Exercise of stock options 1 9 -- -- 10
Grant of options to consultants (Note 6(b)) -- 60 -- -- 60
Net loss -- -- -- (4,228) (4,228)
---- --------- ------- -------- ---------
BALANCE, DECEMBER 31, 1997 178 191 -- (6,890) (4,060)
Sale of Series C convertible preferred stock -- -- -- -- 400
Issuance costs related to sales of Series D
redeemable convertible preferred stock -- -- -- (106) (106)
Accretion of Series B and Series D redeemable
convertible preferred stock to redemption value -- -- -- (434) (434)
Exercise of stock options 5 68 -- -- 73
Deferred compensation related to stock option
grants -- 1,799 (1,799) -- --
Amortization of deferred compensation -- -- 107 -- 107
Warrants issued in connection with the sale of
Series D redeemable convertible preferred stock -- 2,775 -- -- 2,775
Issuance of Series B redeemable convertible
preferred stock warrants -- 1,053 -- (1,053) --
Grants of options to consultants (Note 6(b)) -- 4 -- -- 4
Issuance of warrants (Note 3(b)) -- 58 -- -- 58
Net loss -- -- -- (2,851) (2,851)
---- --------- ------- -------- ---------
BALANCE, DECEMBER 31, 1998 183 5,948 (1,692) (11,334) (4,034)
Accretion of Series B and Series D redeemable
convertible preferred stock redemption value -- -- -- (2,576) (2,576)
Exercise of stock options 20 815 -- -- 835
Exercise of warrant 3 (3) -- -- --
Deferred compensations related to stock option
grants -- 3,063 (3,063) -- --
Amortization of deferred compensation -- -- 1,127 -- 1,127
Conversion of preferred stock into common stock 314 13,436 -- -- 10,889
Common stock issued to the holders of Series C
convertible preferred stock and Series D
redeemable convertible preferred stock in lieu
of special payments (Note 5) 2 1,817 -- (1,819) --
Initial and secondary public offerings of common
stock 134 153,142 -- -- 153,276
Net loss -- -- -- (13,132) (13,132)
---- --------- ------- -------- ---------
BALANCE, DECEMBER 31, 1999 $656 $ 178,218 $(3,628) $(28,861) $ 146,385
==== ========= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
28
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,132) $(2,851) $(4,228)
Adjustments to reconcile net loss to net cash used in operating activities-
Amortization of deferred compensation 1,127 107 --
Noncash interest expense related to issuance of warrants 40 18 --
Compensation expense related to issuance of nonqualified stock options -- 4 60
Depreciation and amortization 836 347 318
Loss on disposal of fixed assets 120 -- --
Changes in assets and liabilities-
Accounts receivable, net (10,221) (1,575) (537)
Unbilled services (491) (93) (198)
Prepaid expenses and other current assets (1,795) (112) --
Accounts payable 10,564 (128) 346
Accrued expenses 3,508 827 44
Deferred revenue 7,459 515 318
--------- ------- -------
Net cash used in operating activities (1,985) (2,941) (3,877)
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (25,532) -- --
Sales of marketable securities 1,001 -- --
Purchases of property and equipment (5,579) (623) (190)
Decrease in receivable from officer/stockholder -- 57 --
Increase in other assets (690) (101) (8)
--------- ------- -------
Net cash used in investing activities (30,800) (667) (198)
--------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Series C convertible preferred stock -- 400 1,899
Net proceeds from sales of Series D redeemable convertible preferred stock -- 7,394 --
Net proceeds from initial and secondary public offerings of common stock 153,276 -- --
Proceeds from exercise of stock options 835 73 10
Proceeds from line of credit -- 1,496 304
Payment on line of credit -- (1,800) (500)
Proceeds from term loan to a bank -- -- 486
Payments on term loan to a bank (319) (167) (250)
Proceeds from equipment line of credit -- 200 --
Payments on equipment line of credit (200) -- --
Payments on capital lease obligations (189) (82) (45)
--------- ------- -------
Net cash provided by financing activities 153,403 7,514 1,904
--------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 120,618 3,906 (2,171)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,093 187 2,358
--------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 124,711 $ 4,093 $ 187
========= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 87 $ 143 $ 129
========= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Accretion of dividends, discounts and special payments on
Series B, Series C, and Series D convertible preferred stock $ 4,395 $ 434 $ 153
========= ======= =======
Value ascribed to Series B and Series D redeemable convertible
preferred stock warrants $ -- $ 3,828 $ --
========= ======= =======
Equipment acquired under capital leases $ -- $ 87 $ 191
========= ======= =======
Original issue discount related to warrants issued to a bank $ -- $ 58 $ --
========= ======= =======
Conversion of preferred stock into common stock $ 13,750 $ -- $ --
========= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
29
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Art Technology Group, Inc. (ATG or the Company) is a Delaware company
which was incorporated on December 31, 1991. ATG offers an integrated
suite of Internet customer relationship management and electronic commerce
software applications, as well as related application development,
integration and support services.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as described below and
elsewhere in the accompanying notes to the consolidated financial
statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of ATG and its wholly owned subsidiaries--ATG Securities
Corporation and ATG Global, Inc. All significant intercompany
balances have been eliminated in consolidation.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(c) Public Offerings of Common Stock
On July 26, 1999, ATG closed its initial public offering of
10,000,000 shares of common stock at a public offering price of $6
per share. The net proceeds to ATG from the offering were
approximately $54,302,000. On July 30, 1999, in connection with the
exercise of the underwriters' over-allotment option, ATG issued an
additional 336,000 shares of common stock at the initial public
offering price of $6 per share. Net proceeds to ATG from the
exercise of the overallotment option were approximately $1,875,000.
In connection with ATG's initial public offering in July 1999, all
shares of preferred stock were converted into 31,419,278 shares of
common stock.
On November 10, 1999, ATG closed its 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 ATG from the offering were approximately $91,428,000. On
November 22, 1999, in connection with the exercise of the
underwriter's over-allotment option, ATG issued an additional
175,840 shares of common stock at the public offering price of
$33.75 per share. Net proceeds to ATG from the exercise of the
over-allotment option were approximately $5,671,000.
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<PAGE>
(d) Revenue Recognition
ATG recognizes product license revenue from licensing the rights to
use its software to end-users. ATG also generates service revenues
from integrating its software with its customers' operating
environments, the sale of maintenance services and the sale of
certain other consulting and development services. ATG generally has
separate agreements with its customers, which govern the terms and
conditions of its software license, consulting and support and
maintenance services. These separate agreements, along with ATG's
price list, provide the basis for establishing vendor-specific
objective evidence of fair value. This allows ATG to appropriately
allocate fair value among the multiple elements in an arrangement,
as well as allocate discounts ratably over all elements in an
arrangement, except for upgrade rights.
ATG recognizes revenue in accordance with Statement of Position
(SOP) No. 97-2, Software Revenue Recognition and SOP 98-4, Deferral
of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition. Revenues from software product license agreements are
recognized upon execution of a license agreement and delivery of the
software, provided that the fee is fixed or determinable and deemed
collectible by management. If conditions for acceptance are required
subsequent to delivery, revenues are recognized upon customer
acceptance if such acceptance is not deemed to be perfunctory.
Revenues from software maintenance agreements are recognized ratably
over the term of the maintenance period, which is typically one
year. ATG enters into reseller arrangements that typically provide
for sublicense fees payable to ATG based upon a percentage of ATG's
list price. Revenues are recognized under reseller agreements as
earned, which is generally ratably over the life of the reseller
agreement, for guaranteed minimum royalties or based upon unit sales
by the resellers. ATG does not grant its resellers the right of
return or price protection. Revenues from professional service
arrangements are recognized on either a time-and-materials or
percentage-of-completion basis as the services are performed,
provided that amounts due from customers are fixed or determinable
and deemed collectible by management. Amounts collected or billed
prior to satisfying the above revenue recognition criteria are
reflected as deferred revenue. Unbilled services represent service
revenues that have been earned by ATG in advance of billings.
The Company received $5,000,000 from Informix in March 1999 under an
original equipment manufacturer agreement, of which $2,900,000 is
included in deferred revenue at December 31, 1999. 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 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. This
litigation has been settled (see Note 7(b)) and, therefore, no
amounts are refundable.
(e) Net Loss per Share
Basic and diluted net loss per common share was determined by
dividing net loss available for common stockholders by the weighted
average common shares outstanding during the period. Basic and
diluted net loss per share are the same, as outstanding common stock
options and warrants have been excluded, since they are
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considered antidilutive since ATG has recorded a net loss for all
periods presented. Options and warrants to purchase a total of
8,348,000, 11,366,000 and 4,280,000 common shares have been excluded
from the computation of diluted weighted average shares outstanding
for the years ended December 31, 1999, 1998 and 1997, respectively.
Shares of common stock issuable upon the conversion of outstanding
convertible preferred stock and warrants have also been excluded
from the date of issuance to the date of conversion (the Company's
initial public offering). In accordance with the SEC Staff
Accounting Bulletin No. 98, Earnings Per Share in an Initial Public
Offering, the Company determined that there were no nominal
issuances of ATG's common stock prior to ATG's initial public
offering.
(f) Cash and Cash Equivalents and Marketable Securities
ATG accounts for investments under Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Under SFAS No. 115, investments for which ATG
has the positive intent and the ability to hold to maturity,
consisting of cash equivalents, are reported at amortized cost,
which approximates fair market value. Cash equivalents are highly
liquid investments with original maturities of less than 90 days.
Marketable securities are investment grade securities with original
maturities of greater than 90 days. At December 31, 1999, all of
ATG's marketable securities were held in commercial paper and
corporate bonds and were classified as held-to-maturity. The average
maturity of ATG's marketable securities is approximately 13.6 months
at December 31, 1999. At December 31, 1999, the difference between
the amortized cost and market value of ATG's marketable securities
was approximately $24,000. At December 31, 1999 and 1998, ATG's
cash, cash equivalents and marketable securities consisted of the
following:
December 31,
1999 1998
(in thousands)
Cash and cash equivalents-
Cash $ 884 $ 593
Money market accounts 123,827 3,500
----------- -----------
Total cash and cash equivalents $ 124,711 $ 4,093
=========== ===========
Marketable securities-
Corporate securities 24,531 --
----------- -----------
Total marketable securities $ 24,531 $ --
=========== ===========
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(g) Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. ATG provides for depreciation and
amortization using the straight-line method and it charges to
operations the amounts estimated to allocate the cost of the assets
over their estimated useful lives.
Property and equipment at December 31, 1999 and 1998 consisted of
the following:
Estimated December 31,
Asset Classification Useful Life 1999 1998
(in thousands)
Computer equipment 3 years $ 3,577 $ 638
Leasehold improvements Life of lease 1,721 25
Furniture and fixtures 7 years 1,321 296
Computer software 3 years 530 284
Equipment under capital leases Life of lease -- 557
--------- ---------
7,149 1,800
Less--Accumulated depreciation
and amortization 1,684 958
--------- ---------
$ 5,465 $ 842
========= =========
(h) Research and Development Expenses for Software Products
ATG has evaluated the establishment of technological feasibility of
its products in accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed. ATG sells products in a market that is subject to rapid
technological change, new product development and changing customer
needs; accordingly, ATG has concluded that technological feasibility
is not established until the development stage of the product is
nearly complete. ATG defines technological feasibility as the
completion of a working model. The time period during which costs
could be capitalized, from the point of reaching technological
feasibility until the time of general product release, is very short
and, consequently, the amounts that could be capitalized are not
material to ATG's financial position or results of operations.
Therefore, ATG has charged all such costs to research and
development in the period incurred.
(i) Income Taxes
ATG accounts for income taxes in accordance with the provisions of
SFAS No. 109, Accounting For Income Taxes. This statement requires
ATG to recognize a current tax asset or liability for current taxes
payable or refundable and to record a deferred tax asset or
liability for the estimated future tax effects of temporary
differences and carryforwards to the extent that they are
realizable. A deferred tax provision or benefit results from the net
change in deferred tax assets and liabilities during the year. A
deferred tax valuation allowance is required if it is more likely
than not that all or a portion of the recorded deferred tax assets
will not be realized (see Note 4).
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(j) Stock-Based Compensation
SFAS No. 123, Accounting for Stock-based Compensation, requires the
measurement of the fair value of stock options or warrants to be
included in the statement of operations or disclosed in the notes to
financial statements. ATG has determined that it will continue to
account for stock-based compensation for employees under the
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and elect the disclosure-only alternative under
SFAS No. 123 (see Note 6(b)).
(k) Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, Reporting Comprehensive Income. ATG does not have any
components of comprehensive income (loss) besides its reported net
loss.
(l) Fair Value of Financial Instruments
Financial instruments consist mainly of cash and cash equivalents,
marketable securities, accounts receivable, accounts payable,
long-term obligations, redeemable convertible preferred stock and
convertible preferred stock. The carrying amounts of these
instruments approximate their fair value.
(m) Concentrations of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, requires disclosure of any
significant off-balance-sheet and credit risk concentrations. ATG
has no significant off-balance-sheet concentrations such as foreign
exchange contracts, option contracts or other foreign hedging
arrangements. ATG's accounts receivable credit risk is concentrated
domestically and write-offs have historically been minimal. ATG
places its cash and cash equivalents in several financial
institutions. ATG has not experienced any material losses to date.
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The following table summarizes the number of customers that
individually comprise greater than 10% of total revenues and their
aggregate percentage of ATG's total revenues, which are derived
substantially from customers in the United States:
<TABLE>
<CAPTION>
Significant
Year Ended Customers A B C D E F
Percentage of Total Revenues
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998 3 17% -- 10% 10% -- --
December 31, 1997 3 -- 29% -- -- 11% 16%
</TABLE>
For the year ended December 31, 1999, no customer accounted
for more than 10% of total revenues.
The following table summarizes the number of customers that
individually comprise greater than 10% of total accounts
receivable and their aggregate percentage of ATG's total
accounts receivable:
<TABLE>
<CAPTION>
Significant
As of Customers A G H
Percentage of Total Accounts Receivable
<S> <C> <C> <C> <C>
December 31, 1999 1 -- -- 12%
December 31, 1998 2 19% 12% --
</TABLE>
(2) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in the fiscal year ended December 31,
1998. SFAS No. 131 establishes standards for reporting information
regarding operating segments in annual financial statements and requires
selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or
decision making group, in making decisions how to allocate resources and
assess performance. ATG's chief operating decision-makers, as defined
under SFAS No. 131, are the Chief Executive Officer, the Chief Operating
Officer and the Chief Financial Officer. To date, the Company has viewed
its operations and manages its business as principally one operating
segment with two product offerings: software licenses and services. ATG
evaluates these product offerings based upon their respective gross
margins. As a result, the financial information disclosed herein
represents all of the material financial information related to ATG's
principal operating segment.
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<PAGE>
(3) LONG-TERM OBLIGATIONS
(a) Line of Credit with a Bank
ATG has a working capital line-of-credit agreement with a bank,
under which ATG may borrow up to the lesser of $5,000,000 or 80% of
eligible accounts receivable, as defined. Borrowings bear interest
at the bank's prime rate (8.5% at December 31, 1999) plus 0.25%. The
working capital line of credit is collateralized by substantially
all assets of ATG and expires in May 2000. The agreement contains
certain covenants, including defined levels of profitability and
certain financial ratios. As of December 31, 1999, ATG was in
compliance with all covenants. As of December 31, 1999, there were
no amounts outstanding under the working capital line of credit and
approximately $3,397,000 was available for borrowing. In addition,
at December 31, 1999, ATG had letters of credit outstanding in the
amount of $1,603,000 (see Note 7(a)).
(b) Term Note Payable to a Bank
ATG entered into a term note payable with a bank under which ATG
could have borrowed up to $500,000 based upon certain conditions, as
defined. Borrowings bore interest at the bank's prime rate (8.5% at
December 31, 1999) plus 1%. During July 1999, in connection with
ATG's initial public offering, all amounts were repaid. In
connection with the term note payable, ATG issued warrants to
purchase 56,296 shares Series C convertible preferred stock to the
bank. One warrant provided for the purchase of 46,296 shares at an
exercise price of $1.62 per share and the other warrant provided for
the purchase of 10,000 shares at an exercise price of $0.01 per
share. These warrants vested immediately and expired five years
after issuance. ATG valued the warrants at $58,000, using the
Black-Scholes option pricing model and the following assumptions:
fair market value of $1.62; risk free interest rate of 4.74%; an
expected volatility factor of 70%; an expected life of four years;
and an expected dividend yield of zero. The warrants were recorded
as a debt discount. For the years ended December 31, 1999 and 1998,
ATG amortized $40,000 and $18,000, respectively. In July 1999, in
connection with ATG's accelerated debt repayment, ATG amortized the
remainder of the debt discount. In connection with ATG's initial
public offering, the warrants were converted into warrants to
purchase 342,970 shares of common stock. In July 1999, the warrants
to purchase 342,970 shares of common stock were exercised through a
cashless exercise resulting in the net issuance of 314,476 shares of
common stock.
(c) Equipment Line of Credit
On July 2, 1998, ATG entered into an equipment line of credit with a
bank. Under the equipment line of credit, ATG could have borrowed up
to $200,000 for capital expenditures. During 1998, ATG borrowed
$199,915, all of which was outstanding as of December 31, 1998.
Borrowings bore interest at the bank's prime rate (8.5% at December
31, 1999) plus 1.25%. In July 1999, in connection with ATG's initial
public offering, ATG repaid all outstanding amounts under the line
of credit.
In April 1999, ATG entered into an additional equipment line of
credit with the same bank. Under the equipment line of credit, ATG
may borrow up to $200,000 for capital expenditure purchases.
Borrowings bear interest at the bank's prime rate
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<PAGE>
(8.5% at December 31, 1999) plus 0.75%. Interest accrues and is
payable monthly. Principal is due in 30 monthly installments
following a six-month interest-only period. As of December 31, 1999,
there were no amounts outstanding under the equipment line of
credit.
(d) Broadvision Settlement
In connection with a settlement of the patent infringement claim by
Broadvision, ATG acquired a perpetual, paid-up license for
Broadvision's patented technology. ATG paid $8,000,000 in February
2000 and will pay the remaining $7,000,000 over the next three years
in quarterly installments of $750,000 in fiscal year 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: $8,000,000 in accounts payable, $4,000,000 in
short-term obligations and $3,000,000 in long-term obligations. (See
Note 7(b)).
(4) INCOME TAXES
No provision for federal or state income taxes has been recorded, as ATG
incurred net operating losses for all periods presented. As of December
31, 1999, ATG had net operating loss carryforwards of approximately
$17,908,000 available to reduce future federal and state income taxes, if
any. ATG also has available federal tax credit carryforwards of
approximately $604,000. If not utilized, these carryforwards expire at
various dates beginning 2011, if not utilized. If substantial changes in
ATG's ownership should occur, as defined by Section 382 of the Internal
Revenue Code (the Code), there could be annual limitations on the amount
of carryforwards that can be realized in future periods. ATG has completed
several financings since its inception and has incurred ownership changes,
as defined under the Code. ATG does not believe that these changes in
ownership will have a material impact on its ability to use its net
operating loss and tax credit carryforwards.
Net deferred tax assets consist of the following:
December 31,
1999 1998
(in thousands)
Net operating loss carryforwards $ 7,163 $ 3,548
Nondeductible expenses and reserves 584 1,647
Tax credits 604 235
---------- -----------
8,351 5,430
Valuation allowance (8,351) (5,430)
----------- -----------
$ -- $ --
========== ===========
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Due to ATG's history of operating losses, there is uncertainty surrounding
ATG's ability to utilize its net operating loss and tax credit
carryforwards. Accordingly, ATG has provided a full valuation allowance
against its otherwise recognizable deferred tax asset as of December 31,
1999 and 1998.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
------------------December 31,--------------
1999 1998 1997
<S> <C> <C> <C>
Income tax provision at federal statutory rate (34.0)% (34.0)% (34.0)%
Increase in tax resulting from state tax
provision, net of federal benefit (6.0) (6.0) (6.0)
Increase in valuation allowance 40.0 40.0 40.0
--------- --------- ---------
Effective tax rate --% --% --%
========= ========= =========
</TABLE>
(5) PREFERRED STOCK
As of December 31, 1998, ATG's Board of Directors had authorized
10,000,000 shares of preferred stock and had designated 1,300,000,
851,064, 2,000,000 and 2,343,750 shares as Series A convertible preferred
stock (Series A Preferred Stock), Series B redeemable convertible
preferred stock (Series B Preferred Stock), Series C convertible preferred
stock (Series C Preferred Stock) and Series D redeemable convertible
preferred stock (Series D Preferred Stock), respectively. On July 26,
1999, in conjunction with ATG's initial public offering, all shares of
preferred stock were converted into common stock. ATG's Series A, Series
B, Series C and Series D Preferred Stock (collectively, Preferred Stock)
were issued and converted into common stock, as follows:
<TABLE>
<CAPTION>
Number of Price per Gross Common Stock
Description Date Shares Share Proceeds Equivalents
<S> <C> <C> <C> <C> <C>
Series A July 1995 1,300,000 $ 1.385 $ 500,500 3,900,000
Series B December 1996 425,532 7.05 3,000,000 3,285,906
November and December 1997, April
Series C 1998 1,456,789 1.62 2,360,000 8,875,136
Series D August, September and October 2,343,750 3.20 7,500,000 15,600,736
</TABLE>
The rights, preferences and privileges of the Preferred Stock were
as follows:
Redemption
The Series B Preferred Stock was subject to mandatory redemption
provisions that required ATG to redeem 25% on December 31, 2001,
increasing by 25% annually thereafter, at $7.05 per share (subject
to certain dilutive effects, as defined), plus any dividends accrued
but unpaid thereon. In addition, the holders of Series D Preferred
Stock could have individually requested redemption of all, but not
less than all, of the shares of Series D Preferred Stock held at any
time after August 18, 2003.
Dividends and Special Payments
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The holders of the Series A, Series B and Series C Preferred Stock
were entitled to receive dividends of $0.1925, $0.3525 and $0.08 per
share per annum (subject to appropriate adjustment, as defined),
payable when and as declared by the Board of Directors. Series B
Preferred Stock and Series C Preferred Stock dividends accrued and
were cumulative from the date of issuance of each share, whether or
not declared.
The holders of the Series D Preferred Stock generally were not
entitled to receive a dividend, except under certain events,
including the payment of dividends on another series of preferred
stock, as defined.
Upon the closing of the initial public offering, the holders of the
Series D Preferred Stock were entitled to receive, in cash, their
pro rata share of an amount equal to $2,411,000 multiplied by 1.33
multiplied by the percentage aggregate ownership expressed as a
decimal of the holders of Series D Preferred Stock of ATG's capital
stock on a fully diluted and as-converted basis at the time of the
relevant event (Series D Special Payment). The Series D Shareholders
were only eligible for the Series D Special Payment if the Series B
Preferred Stock warrants were exercised.
If there were funds left over after the Series D Special Payment,
the holders of the Series C Preferred Stock were entitled to
receive, in cash, their pro rata share of an amount equal to
$2,411,000 plus the Series D Special Payment multiplied by 1.33
multiplied by the percentage aggregate ownership expressed as a
decimal of the holders of Series D Preferred Stock of the Company's
capital stock on a fully diluted and as-converted basis at the time
of the relevant event. If there were not enough funds to satisfy the
entire dividend, then the holders of Series C Preferred Stock were
to share ratably in the remaining funds (Series C Special Payment).
The Series C Shareholders were only eligible for the Series C
Special Payment if the Series B Preferred Stock warrants were
exercised and the Series D Special Payment was made in full.
If there were funds left over after the payment of the initial
Series D and Series C Special Payments, the holders of the Series D
Preferred Stock were entitled to receive, in cash their pro rata
share of an amount equal to the Series C Special Payment multiplied
by 1.33 multiplied by the percentage aggregate ownership expressed
as a decimal of the holders of Series D Preferred Stock of ATG's
capital stock on a fully diluted and as-converted basis at the time
of the relevant event (Second Series D Special Payment). If there
were not enough funds to satisfy the Second Series D Special
Payment, then the holders of Series D Preferred Stock would share
ratably in the remaining funds. The Series D Preferred Stockholders
were only eligible to receive the Second Series D Special Payment if
the Series B Preferred Stock warrants were exercised and the Series
D and Series C Special Payments had occurred.
In conjunction with ATG's initial public offering, the Series D
Special Payment, the Series C Special Payment and the Second Series
D Special Payment were canceled in exchange for the issuance of
242,500 shares of common stock, which was valued at approximately
$1,819,000 and recorded as a dividend.
Liquidation Preference
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<PAGE>
In certain events, including liquidation, dissolution or winding up
of ATG, the holders of Preferred Stock had a preference in
liquidation of $0.3852, $7.05, $1.62 and $3.20 per share (subject to
appropriate adjustment, as defined), plus any dividends accrued but
unpaid thereon.
Voting Rights
Each holder of outstanding shares of Preferred Stock entitled to the
number of votes equal to the number of whole shares of common stock
into which the shares of Series A, Series B, Series C and Series D
Preferred Stock held by such holder were then convertible.
Conversion
Each share of Preferred Stock was convertible at any time at the
option of the holder into three shares, 3.96 shares, six shares and
three shares of common stock, respectively, adjustable for diluting
events, as defined. In addition, if ATG failed to meet certain
operating criteria, including cumulative total revenues, product
revenues and earnings before interest and taxes for the seven
quarters ended December 31, 1999, then the conversion ratio would
have increased for the holders of Series D Preferred Stock.
The conversion ratio for the Series B, Series C and Series D
Preferred Stock was adjusted in conjunction with ATG's initial
public offering to reflect: (1) the cancellation of the Series C and
D special payments, (2) the cancellation of the warrants to purchase
Series B Preferred Stock and common stock discussed below and (3)
the impact of ATG not meeting the criteria specified in the Series D
Preferred Stock agreement. The conversion ratio in effect at the
time of ATG's initial public offering was 7.72, 6.10 and 6.66 shares
of common stock for each share of Series B, Series C and Series D
Preferred Stock, respectively. In July 1999, in connection with
ATG's initial public offering, all shares of preferred stock were
converted into 31,419,278 shares of common stock.
Warrants
In conjunction with the issuance of the Series B Redeemable
Preferred Stock in December 1996, ATG issued to a holder of Series B
Preferred Stock a performance-based warrant to purchase up to
425,532 shares of Series B Preferred Stock at $7.05 per share. The
performance criteria was based upon sales generated by ATG from the
affiliates of the Series B Stockholder. ATG generated negligible
revenues from the affiliates of the Series B Stockholder; therefore,
the warrant was not measured or recorded. As a condition for
obtaining the Series B Stockholder's approval of the terms of the
Series D Preferred Stock financing, the warrant was canceled and ATG
granted to the Series B Preferred Stockholder a new warrant to
purchase 425,532 shares of ATG's Series B Preferred Stock at a
purchase price of $1.385 per share, which was immediately
exercisable and fully vested. The warrant was to expire on the
earlier of: (1) the closing of a public offering of ATG's common
stock, as defined, at a price of at least $10 per share resulting in
gross proceeds to ATG of at least $10,000,000, (2) the closing of a
liquidation, merger, sale of all or substantially all assets of ATG
or other similar event, as defined, or (3) August 18, 2003. ATG has
valued this warrant at $1,053,000, using the Black-Scholes option
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<PAGE>
pricing model and the following assumptions: a fair market value of
$3.20 per share, a risk-free interest rate of 5.0%, an expected
volatility of 70%, an expected life of five years, and an expected
dividend yield of zero. ATG has recorded the value of the warrant in
the accompanying statement of stockholders' equity (deficit) and as
a component of dividends on preferred stock in computing net loss
per share.
In addition, in connection with the issuance of the Series D
Preferred Stock, ATG issued to the holders of Series D Preferred
Stock, warrants to purchase up to 4,292,650 shares of ATG's common
stock at $0.11 per share, adjusted for certain dilutive events, as
defined. The warrants were to vest 5% per quarter beginning on
September 30, 1998 and expire August 18, 2003. ATG valued these
warrants using the Black-Scholes option pricing model and the
following assumptions: a fair market value of $3.20 per share, a
risk free interest rate of 4.74%, an expected volatility of 70%, an
expected life of five years and an expected dividend yield of zero.
ATG allocated the consideration received from the sale of the Series
D preferred stock of $7,500,000 between the Series D preferred stock
and warrants on the basis of the fair value of the individual
component at the date of issuance and determined that the warrants
were valued at $2,775,000. These warrants were recorded as a
discount to the Series D Preferred Stock and were amortized over the
redemption period in computing net loss per share. For the years
ended December 31, 1999 and 1998, ATG amortized $2,491,000 and
$284,000, respectively. The amortization for the year ended
December 31, 1999 included the accelerated amortization in
connection with the conversion of the Series D Preferred Stock with
the initial public offering.
In conjunction with ATG's initial public offering, the warrants to
purchase Series B Preferred Stock and common stock were canceled and
the number of shares of common stock issuable upon conversion of the
Series B and D Preferred Stock were increased to reflect the shares
that would have been received upon exercise of the warrants based
upon the initial public offering price.
(6) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Stock Split and Authorized Shares of Common Stock
On February 28, 2000, ATG's Board of Directors approved a 2-for-1
stock split of ATG's common stock. The split was effective on March
10, 2000. In addition, on May 10, 1999, ATG's Board of Directors
approved a 3-for-2 stock split of ATG's common stock. The stock
split was effective on June 18, 1999. All share and per share
amounts of common stock for all periods have been retroactively
adjusted to reflect the stock split. In addition, upon the closing
of ATG's initial public offering in July 1999, its certificate of
incorporation was amended and restated among other things, to change
its authorized capital stock to 100,000,000 shares of $0.01 par
value common stock and 10,000,000 shares of $0.01 par value
preferred stock.
(b) Stock Plans
1996 Stock Option Plan
In April 1996, the 1996 Stock Option Plan (the 1996 Plan) was
approved by ATG's Board of Directors and stockholders. The purpose
of the 1996 Plan is to reward employees, officers and directors, and
consultants and advisors to ATG who are
41
<PAGE>
expected to contribute to the growth and success of ATG. The 1996
Plan provides for the award of options to purchase shares of ATG's
common stock. Stock options granted under the 1996 Plan may be
either incentive stock options or nonqualified stock options.
The 1996 Plan is administered by the Board of Directors, which has
the authority to designate participants, determine the number and
type of options to be granted, the time at which options are
exercisable, the method of payment and any other terms or conditions
of the options. Options generally vest annually over a two- to
four-year period and expire 10 years from the date of grant.
While the Board determines the prices at which options may be
exercised under the 1996 Plan, the exercise price of an incentive
stock option shall be at least 100% (110% for incentive stock
options granted to a 10% stockholder) of the fair market value of
ATG's common stock on the date of grant. A total of 12,600,000
shares of common stock have been reserved for options to be granted
under the 1996 Plan. As of December 31, 1999, there are 1,798,000
shares available for future grant under the 1996 Plan.
Additionally, in May 1999, ATG granted 150,000 options outside ATG's
stock option plans to an executive of ATG.
1999 Outside Director Stock Option Plan
The 1999 Outside Director Stock Option Plan (Director Plan) was
adopted by ATG's Board of Directors and approved by stockholders in
May 1999. Under the terms of the Director Plan, nonemployee
directors of ATG receive nonqualified options to purchase shares of
common stock. A total of 300,000 shares of common stock have been
reserved under the Director Plan.
Under the terms of the Director Plan, each currently active
nonemployee director received an option to purchase 10,000 shares of
common stock on the effective date of the Company's initial public
offering at the public offering price. Individuals who become
directors after the initial public offering and are not employees of
ATG will receive an option to purchase 10,000 shares of our common
stock on the date of initial election to ATG's Board of Directors.
In addition, each non-employee director will receive an option to
purchase 5,000 shares of common stock on the date of each annual
meeting of stockholders commencing in the year 2000 at an exercise
price per share equal to the closing price of ATG's common stock on
the date of grant. All options granted under the Director Plan will
be fully vested upon grant. As of December 31, 1999, there are
250,000 shares available for future grant under the Director Plan.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan (the Stock Purchase Plan) was
adopted by ATG's Board of Directors and approved by stockholders in
May 1999. The Stock Purchase Plan authorizes the issuance of up to a
total of 1,000,000 shares of ATG's common stock to participating
employees. All ATG's employees, including directors who are
employees, are eligible to participate in the Stock Purchase Plan.
Employees who would immediately after the grant own 5% or more of
the total combined voting
42
<PAGE>
power or value of our stock are not eligible to participate. During
each designated semiannual offering period, each eligible employee
may deduct between 1% to 10% of base pay to purchase common stock of
ATG. The purchase price will be 85% of the closing market price of
ATG's common stock on either: (1) the first business day of the
offering period or (2) the last business day of the offering period,
whichever is lower.
ATG will account for the Stock Purchase Plan in accordance with APB
No. 25 and, accordingly, no compensation cost will be recognized
under the Stock Purchase Plan. ATG will elect the "disclosure only"
alternative under SFAS No. 123.
43
<PAGE>
The following table summarizes ATG's option activity:
<TABLE>
<CAPTION>
Weighted
Average
Number of Shares Exercise Price Exercise Price
(in thousands, except per share information)
<S> <C> <C> <C>
Outstanding, December 31, 1996 2,190 $ .07-.25 $ .09
Granted 2,524 .25 .25
Exercised (112) .07-.25 .10
Canceled (322) .07-.25 .12
--------------- --------------- --------------
Outstanding, December 31, 1997 4,280 .07-.25 .18
Granted 3,272 .25 .25
Exercised (442) .07-.25 .17
Canceled (1,232) .07-.25 .22
--------------- --------------- --------------
Outstanding, December 31, 1998 5,878 .07-.25 .22
Granted 4,960 1.00-52.50 14.52
Exercised (1,957) .07-5.75 .40
Canceled (543) .07-5.75 1.20
--------------- --------------- --------------
Outstanding, December 31, 1999 8,338 $ .07-52.50 $ 8.65
=============== =============== ==============
Exercisable, December 31, 1999 2,200 $ .07-19.03 $ 1.16
=============== =============== ==============
</TABLE>
The following table summarizes information relating to currently
outstanding and exercisable options as of December 31, 1999:
<TABLE>
<CAPTION>
- --------------------------------Outstanding-------------------------------- --------------Exercisable----------
Weighted Average
Remaining Weighted
Range of Exercise Contractual Life Average Number of Weighted Average
Price Number of Shares (Years) Outstanding Exercise Price Shares Exercise Price
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$ .07-$.09 621 6.6 $ .08 533 $ .08
.25 2,990 8.3 .25 1,119 .25
1.00-1.34 779 9.1 1.17 137 1.15
1.67-2.00 148 9.1 1.78 24 1.80
4.00-5.75 2,406 9.5 4.82 372 4.90
13.41-19.03 396 9.7 15.55 15 13.41
52.50 998 10.0 52.50 - --
-------------- -------------- ------------ ------------------
8,338 $ 8.65 2,200 $ 1.16
============== ============== ============ ==================
</TABLE>
44
<PAGE>
In the years ended December 31, 1998 and 1997, ATG granted 30,000
456,000 and nonqualified stock options exercisable at $0.25, which
are fully vested, to consultants as payment for services performed.
ATG recorded expense for the years ended December 31, 1998 and 1997
related to these grants of $4,000 and $60,000, respectively. ATG
valued the 1997 options issued in exchange for services based upon
the fair value of the services received. The services were more
readily measurable, as ATG had entered into similar transactions in
exchange for cash consideration. ATG valued the 1998 options issued
in exchange for services based upon the Black-Scholes option pricing
model and the following assumptions: a fair market value of $0.81;
risk free interest at 4.74%; an expected volatility factor of 70%;
an expected life of four years; and an expected dividend yield of
zero. The options expire 10 years from the date of grant.
In connection with certain stock option grants during the years
ended December 31, 1999 and 1998, ATG recorded deferred compensation
of approximately $3,063,000 and $1,799,000, respectively, which
represents the aggregate difference between the exercise price and
the fair market value of the common stock, as determined for
accounting purposes. The deferred compensation will be recognized as
an expense over the vesting period of the underlying stock options.
ATG recorded compensation expense of $1,127,000 and $107,000 in the
years ended December 31, 1999 and 1998, respectively, related to
these options.
ATG has computed the pro forma disclosures required under SFAS No.
123 for options granted during the years ended December 31, 1999,
1998 and 1997 using the Black-Scholes option pricing model
prescribed by SFAS No. 123, using the following assumptions:
<TABLE>
<CAPTION>
------------Years Ended December 31,---------
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rate 5.29-6.06% 5.00% 7.00%
Expected dividend yield -- -- --
Expected lives 4 years 4 years 4 years
Expected volatility 95% 70% 70%
Weight average fair value of options granted $10.84 $0.07 $0.09
Weighted average remaining contractual life of options
outstanding 8.90 years 8.40 years 9.21 years
</TABLE>
45
<PAGE>
Had compensation expense for ATG's stock option plan been determined
consistent with SFAS No. 123, the pro forma net loss available for
common stockholders and pro forma net loss per share would have been
as follows:
<TABLE>
<CAPTION>
--------Years Ended December 31,--------
1999 1998 1997
(in thousands, except share information)
<S> <C> <C> <C>
Net loss available for common stockholders-
As reported $ (17,527) $ (4,445) $ (4,442)
========== =========== ===========
Pro forma (20,225) (4,755) (4,578)
========== =========== ===========
Basic and diluted net loss per share-
As reported $ (0.45) $ (0.25) $ (0.25)
========== =========== ===========
Pro forma (0.52) (0.27) (0.26)
========== =========== ===========
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
(a) Leases
In March 1999, ATG entered into a new facility lease for its
corporate headquarters that expires in February 2006. Upon occupancy
of the new facility, ATG has issued the lessor a letter of credit in
the amount of $1,500,000 as a security deposit. The approximate
future minimum payments ATG's facility leases and certain equipment
operating leases as of December 31, 1999 are as follows:
Operating
Years Ending December 31, Leases
2000 $ 2,811,000
2001 2,836,000
2002 2,886,000
2003 2,886,000
2004 2,907,000
Thereafter 3,854,000
------------
Total future minimum lease payments $ 18,180,000
============
Rent expense included in the accompanying statements of operations
was approximately $1,752,000, $810,000 and $781,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
46
<PAGE>
(b) Litigation
A patent infringement claim was filed by BroadVision, one of ATG's
competitors, against ATG on December 11, 1998. In February 1999, 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 will pay $8,000,000 in February 2000 for alleged
past use and has expensed such payment in the fourth quarter of
1999. An additional $7,000,000 is payable 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.
(8) EMPLOYEE BENEFIT PLAN
Effective January 1, 1997, ATG adopted the Art Technology Group 401(k)
Plan (the 401(k) Plan). All employees, as defined, are eligible to
participate in the 401(k) Plan. The 401(k) Plan allows eligible employees
to make salary-deferred contributions of up to 15% of their annual
compensation, as defined, subject to certain Internal Revenue Service
limitations. ATG may contribute to the 401(k) Plan at their discretion. No
discretionary employer contributions were made to the Plan for the years
ended December 31, 1999, 1998 or 1997.
(9) ACCRUED EXPENSES
Accrued expenses at December 31, 1999 and 1998 consist of the following:
December 31,
1999 1998
(in thousands)
Payroll and related costs $ 3,066 $ 600
Accrued accounts payable 817 293
Other 845 327
--------- ---------
$ 4,728 $ 1,220
========= =========
47
<PAGE>
(10) VALUATION AND QUALIFYING ACCOUNTS
The following is a rollforward of ATG's allowance for doubtful accounts:
<TABLE>
<CAPTION>
Balance at
Beginning of Balance at End
Period Additions Deductions of Period
<S> <C> <C> <C> <C>
Year Ended December 31, 1999 $ 250 $ 210 $ -- $ 460
=============== =============== =============== ===============
Year Ended December 31, 1998 $ 21 $ 265 $ (36) $ 250
=============== =============== =============== ===============
Year Ended December 31, 1997 $ -- $ 21 $ -- $ 21
=============== =============== =============== ===============
</TABLE>
48
<PAGE>
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
Art Technology Group, Inc.:
We have audited the accompanying consolidated balance sheets of Art Technology
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Art
Technology Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their consolidated operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Boston, Massachusetts
January 24, 2000 (except with
respect to the matters discussed in
Notes 6(a) and 7(b), as to which the
dates are March 10, 2000 and
February 22, 2000)
49
<PAGE>
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11 EXECUTIVE COMPENSATION
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All information required by Items 10, 11, 12 and 13 is incorporated herein by
reference to the Company's definitive proxy statement for its annual meeting of
stockholders to be held on May 19, 2000, filed with the Securities and Exchange
Commission pursuant to Regulation 14A.
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 Financial Statements
The following consolidated financial statements are included in Item 8:
o Consolidated Balance Sheets as of December 31, 1999 and 1998
o Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
o Consolidated Statements of Stockholders' Equity (Deficit)
o Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
o Notes to Consolidated Financial Statements
o Report of Independent Public Accountants
(a) 2 Financial Statement Schedule
The following consolidated financial statement schedule is included in Item
14(d):
o Schedule II - Supplemental Valuation of Qualifying Accounts
Schedules other than listed above have been omitted since the required
information is not present, or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
50
<PAGE>
(a) 3 EXHIBITS
The following exhibit are included in Item 14(c):
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1* Certificate of Incorporation of the Registrant, as currently in effect.
3.2* Certificate of Amendment to Certificate of Incorporation of the Registrant.
3.4* Amended and Restated By-Laws of the Registrant.
10.1* 1996 Stock Option Plan, as amended.
10.2* 1999 Outside Director Stock Option Plan.
10.3* 1999 Employee Stock Purchase Plan.
10.4* Lease between the Registrant and DVPT Limited Partnership, dated March 11, 1999.
10.5* Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated
November 26, 1997, as amended on March 31, 1998 and July 2, 1998.
10.6* Intellectual Property Security Agreement between the Registrant and Silicon Valley
Bank, dated November 26, 1997.
10.7#* OEM Agreement between the Registrant and Informix Software, Inc., dated December
31, 1998.
10.8#* Software License Agreement between the Registrant and Sun Microsystems, Inc., dated
March 27, 1998.
10.9* Registration Rights Agreement, dated August 18, 1998.
10.10* Non-Compete Rights Agreement between the Registrant and Jeet Singh, dated August 18,
1998.
10.11* Non-Compete Agreement between the Registrant and Joseph Chung, dated August 18,
1998.
10.12* Consulting Agreement between the Registrant and Thomas N. Matlack, dated November 12,
1997.
10.13* Fourth Loan Modification Agreement between the Registrant and Silicon Valley Bank,
dated May 12, 1999
19 Annual Report to Stockholders
21 Schedule of Registrant's Subsidiaries
23.1 Consent of Independent Public Accountants
</TABLE>
- ------------------
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File No. 333-78333).
# Confidential materials omitted and filed separately with the
Commission.
(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.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Jeet Singh
--------------
Jeet Singh
Chief Executive Officer (Principal Executive Officer)
Date: March 30, 2000
By: /s/ Ann C. Brady
----------------
Ann C. Brady
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
Date: March 30, 2000
By: /s/ Thomas J. Quinn
-------------------
Thomas J. Quinn
Corporate Controller (Principal Accounting Officer)
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Robert P. Florenza Director March 27, 2000
---------------------- --------------
Robert P. Florenza
/s/ Scott A. Jones Director March 29, 2000
------------------ --------------
Scott A. Jones
/s/ Charles R. Lax Director March 24, 2000
------------------ --------------
Charles R. Lax
/s/ Thomas N. Matlack Director March 24, 2000
--------------------- --------------
Thomas N. Matlack
/s/ Jeffrey T. Newton Director March 29, 2000
--------------------- --------------
Jeffrey T. Newton
52
<PAGE>
EXHIBIT 21
SCHEDULE REGISTRANT'S SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
<S> <C>
ATG Securities Corporation United States
ATG Global, Inc. United States
Art Technology Group B.V. Netherlands
Art Technology Group GmbH Germany
Art Technology Group (Europe) Limited United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 333-78333.
Arthur Andersen LLP
Boston, Massachusetts
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 124,711
<SECURITIES> 5,137
<RECEIVABLES> 12,999
<ALLOWANCES> 460
<INVENTORY> 0
<CURRENT-ASSETS> 145,077
<PP&E> 7,149
<DEPRECIATION> 1,684
<TOTAL-ASSETS> 177,735
<CURRENT-LIABILITIES> 27,350
<BONDS> 4,000
0
0
<COMMON> 656
<OTHER-SE> 145,729
<TOTAL-LIABILITY-AND-EQUITY> 177,735
<SALES> 0
<TOTAL-REVENUES> 32,077
<CGS> 0
<TOTAL-COSTS> 18,392
<OTHER-EXPENSES> 28,714
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> (13,132)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,527)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
