<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes: [X] No: [ ]
As of August 4, 2000 there were 67,036,452 shares of the Registrant's common
stock outstanding.
<PAGE>
ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
- Consolidated Condensed Balance Sheets at June 30, 2000 and
December 31, 1999
- Consolidated Condensed Statements of Operations for the three and six
months ended June 30, 2000 and 1999
- Consolidated Condensed Statements of Cash Flows for the six months ended
June 30, 2000 and 1999
- Notes to Unaudited Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Signatures
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 72,619 $ 124,711
Marketable securities 66,716 5,137
Accounts receivable, net of reserve for doubtful
accounts of $1,723 and $460, respectively 23,508 12,539
Unbilled services 2,066 782
Prepaid expenses and other current assets 3,276 1,908
--------- ---------
Total current assets 168,185 145,077
Property and equipment, net 9,207 5,465
Long-term marketable securities 3,517 19,394
Other assets 7,494 7,799
--------- ---------
$ 188,403 $ 177,735
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 2,500 $ 3,000
Accounts payable 5,956 11,285
Accrued expenses 12,839 4,728
Deferred revenue 12,416 8,337
--------- ---------
Total current liabilities 33,711 27,350
--------- ---------
Long-term obligations, less current maturities 3,000 4,000
--------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.01 par value-
Authorized- 10,000,000 shares -- --
Issued and outstanding-none
Common stock, $.01 par value-
Authorized- 100,000,000 shares
Issued and outstanding- 66,889,377 shares and
65,551,024 shares at June 30, 2000 and
December 31, 1999, respectively 669 656
Additional paid-in capital 180,642 178,218
Deferred compensation (3,020) (3,628)
Accumulated deficit (26,599) (28,861)
--------- ---------
Total stockholders' equity 151,692 146,385
--------- ---------
$ 188,403 $ 177,735
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements
3
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Product licenses $ 23,811 $ 3,105 $ 40,058 $ 4,911
Services 8,818 3,128 14,143 5,742
-------- -------- -------- --------
Total revenues 32,629 6,233 54,201 10,653
COST OF REVENUES:
Product licenses 865 17 1,573 17
Services 6,897 2,231 11,889 4,044
-------- -------- -------- --------
Total cost of revenues 7,762 2,248 13,462 4,061
-------- -------- -------- --------
Gross profit 24,867 3,985 40,739 6,592
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 4,095 1,392 7,690 2,523
Sales and marketing 14,339 2,617 25,391 4,037
General and administrative 5,014 1,115 8,689 1,858
Amortization of deferred compensation 304 303 608 519
-------- -------- -------- --------
Total operating expenses 23,752 5,427 42,378 8,937
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 1,115 (1,442) (1,639) (2,345)
INTEREST INCOME 2,254 71 4,401 121
INTEREST EXPENSE - (25) - (49)
-------- -------- -------- --------
Net income (loss) before provision for 3,369 (1,396) 2,762 (2,273)
income taxes
PROVISION FOR INCOME TAXES 500 - 500 -
-------- -------- -------- --------
Net income (loss) 2,869 (1,396) 2,262 (2,273)
ACCRETION OF DIVIDENDS, DISCOUNT
AND OFFERING COSTS ON
PREFERRED STOCK - (243) - (487)
-------- -------- -------- --------
Net income (loss) available for common
stockholders $ 2,869 $ (1,639) $ 2,262 $ (2,760)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE (Note 2):
Basic net income (loss) per share $ 0.04 $ (0.08) $ 0.03 $ (0.14)
-------- -------- -------- --------
Shares used in computing basic net
income (loss) per share 66,655 19,344 66,339 19,076
-------- -------- -------- --------
Diluted net income (loss) per share $ 0.04 $ (0.08) $ 0.03 $ (0.14)
-------- -------- -------- --------
Shares used in computing
diluted net income (loss) per share 72,855 19,344 72,872 19,076
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements
4
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,262 $ (2,273)
Adjustments to reconcile net income (loss) to net cash (used in)
Provided by operating activities-
Amortization of deferred compensation 608 519
Noncash interest expense related to issuance of warrants -- 10
Depreciation and amortization 1,121 239
Changes in current assets and liabilities-
Accounts receivable, net (10,969) (966)
Unbilled services (1,284) (482)
Prepaid expenses and other current assets (1,368) (349)
Accounts payable (5,329) 905
Accrued expenses 8,111 621
Deferred revenue 4,079 4,463
--------- ---------
Net cash (used in) provided by operating activities (2,769) 2,687
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net (45,702) (1,001)
Purchases of property and equipment (4,863) (1,040)
Cash paid to acquire Petronio Technology Group, Inc. (600) -
Decrease (increase) in other assets 905 (558)
--------- ---------
Net cash used in investing activities (50,260) (2,599)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,678 260
Proceeds from employee stock purchase plan 759 --
Payments on long-term obligations (1,500) --
Payments on term loan to a bank -- (53)
Payments on equipment line of credit -- (70)
Payments on capital lease obligations -- (61)
--------- ---------
Net cash provided by financing activities 937 76
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (52,092) 164
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 124,711 4,093
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 72,619 $ 4,257
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Accretion of dividends and discounts on Series B and Series D
redeemable convertible preferred stock $ -- $ 487
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements
5
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION
Art Technology Group, Inc. ("ATG" or the "Company") is a Delaware corporation
which was incorporated on December 31, 1991. The Company offers an integrated
suite of Internet customer relationship management and electronic commerce
software applications, as well as related application development, integration
and support services.
The accompanying consolidated condensed financial statements of the Company
have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and disclosures required by generally accepted accounting
principles. While the Company believes that the disclosures presented are
adequate to make information not misleading, these financial statements
should be read in conjunction with the audited financial statements and
related notes included in the Company's 1999 Annual Report and Form 10-K. In
the opinion of management, the accompanying consolidated financial statements
and notes herein are unaudited but, contain all adjustments, consisting only
of those of a normal recurring nature, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows at the
dates and for the periods indicated. The operating results for the three and
six months ended June 30, 2000 are not necessarily indicative of the results
to be expected for the full year ending December 31, 2000.
The accompanying consolidated financial statements include the accounts of ATG
and its wholly owned subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
2. NET INCOME (LOSS) PER SHARE INFORMATION
Net income (loss) per share is computed under Statement of Financial
Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. Basic net income
(loss) per share is computed by dividing net income (loss) available for
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income (loss) per share is
computed by dividing net income (loss) available for common stockholders by
the weighted average number of shares of common stock outstanding, including
potential common shares from the exercise of stock options and warrants using
the treasury stock method, if dilutive. The following table sets forth basic
and diluted income (loss) per share computational data for the periods
presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) available for
common stockholders $ 2,869 $ (1,639) $ 2,262 $ (2,760)
-------- -------- -------- --------
Weighted average common shares
outstanding used in computing
basic net income (loss) per share 66,655 19,344 66,339 19,076
Weighted average common equivalent
shares outstanding:
employee common stock options 6,200 -- 6,533 --
-------- -------- -------- --------
Total weighted average common and
common equivalent shares outstanding
used in computing diluted net
income (loss) per share 72,855 19,344 72,872 19,076
-------- -------- -------- --------
6
<PAGE>
Basic net income (loss) per share $ 0.04 $ (0.08) $ 0.03 $ (0.14)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.04 $ (0.08) $ 0.03 $ (0.14)
======== ======== ======== ========
</TABLE>
Options and warrants to purchase a total of 5,312,035 common shares have been
excluded from the computation of diluted weighted average shares outstanding
for the three and six months ended June 30, 1999, and were excluded from the
calculation of diluted net loss per share as the effect of their inclusion
would have been anti-dilutive.
Options to purchase a total of 3,619,977 and 3,332,576 weighted shares of
common stock outstanding for the three and six months ended June 30, 2000,
respectively, were excluded from the calculation of diluted net income per
share because the exercise prices of those options exceeded the average
market price of common stock during the periods.
3. REVENUE RECOGNITION
ATG recognizes product license revenue from licensing the rights to use its
software to end-users. ATG also generates service revenues from integrating its
software with its customers' operating environments, the sale of maintenance
services and the sale of certain other consulting and development services. ATG
generally has separate agreements with its customers, which govern the terms and
conditions of its software license, consulting and support and maintenance
services. These separate agreements, along with ATG's price list, provide the
basis for establishing vendor-specific objective evidence of fair value. This
allows ATG to appropriately allocate fair value among the multiple elements in
an arrangement, as well as allocate discounts ratably over all elements in an
arrangement, except for upgrade rights.
ATG recognizes revenue in accordance with Statement of Position (SOP) No.
97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-4, DEFERRAL OF THE EFFECTIVE
DATE OF A PROVISION OF SOP 97-2 and SOP 98-9 MODIFICATION OF 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. In multiple element
arrangements, ATG uses the residual value method in accordance with SOP 97-2
and SOP 98-9, MODIFICATION OF 97-2, SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN TRANSACTIONS. 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 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.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. In accordance with SFAS No. 115,
investments for which the Company has the positive intent and ability to hold
to maturity, consisting of cash equivalents and marketable securities, are
reported at amortized cost, which approximates fair market value. Cash
equivalents are highly liquid investments with original maturities of less
than ninety days. Marketable securities are investment-grade securities with
original maturities of greater than ninety days. The average maturity of the
Company's marketable securities is approximately 10.3 months at June 30,
2000. To date, the Company has not recorded any realized gains or losses.
7
<PAGE>
June 30, December 31,
2000 1999
-------- ------------
Cash and cash equivalents-
Cash $ 267 $ 884
Money market accounts 19,530 123,827
Corporate securities 52,822 --
-------- --------
Total cash and cash equivalents $ 72,619 $124,711
-------- --------
Marketable securities-
Corporate securities $ 70,233 $ 24,531
-------- --------
Total marketable securities $ 70,233 $ 24,531
-------- --------
5. DEFERRED COMPENSATION
In connection with certain stock option grants during the year ended December
31, 1998 and through May, 1999, the Company recorded deferred compensation of
approximately $4.9 million, which represents the aggregate difference between
the exercise price and the fair market value of common stock as determined
for accounting purposes. The deferred compensation will be recognized as an
expense over the vesting period of the underlying stock options. The Company
recorded compensation expense of $304,000 and $303,000 for the three months
ended June 30, 2000 and 1999, respectively, and $608,000 and $519,000 for
the six months ended June 30, 2000 and 1999, respectively, related to the
amortization of this deferred compensation.
6. LONG-TERM OBLIGATIONS
In connection with a settlement of the patent infringement claim by
BroadVision, Inc. ("BroadVision"), ATG acquired a perpetual, paid-up license
for BroadVision's patented technology. ATG agreed to pay BroadVision
$15,000,000 for the license to BroadVision technology. To date, ATG has paid
$9,500,000. ATG will pay the remaining $5,500,000 in quarterly installments
of $750,000 for the remainder of fiscal 2000 and quarterly installments of
$500,000 in fiscal years 2001 and 2002. These payments are included in the
accompanying consolidated balance sheet, as follows: $2,500,000 in current
maturities of long-term obligations and $3,000,000 in long-term obligations,
less current maturities (See Note 8).
7. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS NO. 130, REPORTING COMPREHENSIVE INCOME in 1998. The
Company does not have any components of comprehensive income (loss) other
than its reported net income (loss).
8. SEGMENT INFORMATION
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-makers, 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.
The following table summarizes the Company's revenues by geographic location
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
United States $26,458 $6,090 $45,673 $10,380
International 6,171 143 8,528 273
------- ------ ------- -------
Total Revenues $32,629 $6,233 $54,201 $10,653
======= ====== ======= =======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
A patent infringement claim was filed by BroadVision, one of ATG's competitors,
against ATG on December 11, 1998. In February 2000, ATG and BroadVision reached
an amicable settlement to avoid further litigation expenses and risks to both
parties. As part of the settlement, BroadVision has dropped its claim of
infringement, and ATG has dropped its claim of non-infringement and patent
invalidity. ATG did not make any admission of wrong-doing, liability, violation
of law, infringement or validity regarding the patent in question.
8
<PAGE>
As is customary in patent litigation settlements, ATG, in return for cash
payments, received a non-exclusive, worldwide, perpetual, paid-up license to
make, use, and sell products arguably covered by BroadVision's patent and any
other patents that may be issued in the future that are related to the
original patent.
ATG agreed to pay BroadVision $15,000,000 for the license to BroadVision
technology. ATG paid $8,000,000 in February 2000 for alleged past use and
expensed such payment in the fourth quarter of 1999. The additional
$7,000,000 is payable over the next three years and is recorded as a prepaid
license fee, of which the unamortized portion is included in other assets.
This prepaid license fee will be amortized over its estimated life of three
years. To date, ATG has paid $9,500,000 in connection with the settlement and
has amortized $584,000 and $1,168,000 of the prepaid license fee during the
three and six months ended June 30, 2000.
10. ACQUISITIONS
On May 17, 2000, ATG completed the acquisition of Petronio Technology Group,
a Boston based provider of educational training and consulting services. ATG
acquired Petronio Technology Group for $1,200,000 consisting of an initial
payment of $600,000 at the closing and two annual contingent payments of
$300,000 each. The acquisition has been accounted for under the purchase
method of accounting and the results of operations for Petronio Technology
Group have been included in ATG's results beginning of the acquisition date.
ATG recorded $600,000 in goodwill which is being amortized over two years and
the Company is recognizing the contingent payments as compensation expense
ratably over the two year period.
11. SUBSEQUENT EVENT
On July 17, 2000, ATG completed the acquisition of privately held Toronto
Technology Group (TTG), a thirty-person consulting and educational services
company based in Toronto, Canada for approximately $12.0 million in cash,
options and shares of common stock. The acquisition will be accounted for
under the purchase method of accounting. Upon the closing of the transaction,
ATG paid approximately $5.2 million in cash, issued 19,634 employee stock
options and 56,237 restricted shares of common stock subject to a three year
vesting schedule. ATG will record approximately $2.75 million of the purchase
price to the acquired workforce which is being amortized over five years.
Additionally, ATG will record the value of the stock options and common
shares of approximately $7.5 million as compensation expense over
approximately three years. The remainder of the purchase will be allocated to
goodwill and amortized ratably over five years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The statements contained in this Report on Form 10-Q that are not purely
historical statements are forward looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, including statements
regarding our expectations, beliefs, hopes, intentions or strategies
regarding the future. These forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements.
OVERVIEW
Art Technology Group, Inc. was founded in December 1991. From 1991 through 1995,
we devoted our efforts principally to building, marketing and selling our
professional services capabilities and to research and development activities
related to our software products. Beginning in 1996, we began to focus on
selling our software products. To date, we have enhanced and released several
versions of our Dynamo Application Server product and have completed development
of our current product suite. We market and sell our products worldwide through
our direct sales force, systems integrators, technology partners and original
equipment manufacturers.
We derive our revenues from the sale of software product licenses and related
services. Product license revenues are derived from the sale of perpetual
software licenses of our Dynamo products. Our software licenses are priced based
on either the size of the customer implementation or site license terms.
Services revenues are derived from fees for professional services, training and
software maintenance and support. Professional services include software
installation, custom application development and project and technical
consulting. We bill professional service fees either on a time and materials
basis or on a fixed-
9
<PAGE>
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 AND SOP 98-9 MODIFICATION OF 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. In multiple element arrangements, ATG uses the residual value
method in accordance with SOP 97-2 and SOP 98-9 MODIFICATION OF 97-2,
SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. 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.
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS (SAB 101). SAB 101 is to become effective for calendar year end
companies for the quarter ending December 31, 2000. The Company does not
believe application of SAB 101 will have a significant effect on its
financial condition or results of operations.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Product licenses 73% 50% 74% 46%
Services 27 50 26 54
---- ---- ---- ----
Total revenues 100 100 100 100
COST OF REVENUES:
Product licenses 3 - 3 -
Services 21 36 22 38
---- ---- ---- ----
Total cost of revenues 24 36 25 38
---- ---- ---- ----
10
<PAGE>
Gross profit 76 64 75 62
---- ---- ---- ----
OPERATING EXPENSES:
Research and development 13 22 14 24
Sales and marketing 44 42 47 38
General and administrative 15 18 16 17
Amortization of deferred
compensation 1 5 1 5
---- ---- ---- ----
Total operating expenses 73 87 78 84
---- ---- ---- ----
INCOME (LOSS) FROM OPERATIONS 3 (23) (3) (22)
INTEREST INCOME, NET 7 1 8 1
---- ---- ---- ----
Net income (loss) before
provision for income taxes 10 (22) 5 (21)
---- ---- ---- ----
PROVISION FOR INCOME TAXES 1 - 1 -
---- ---- ---- ----
Net income (loss) 9% (22)% 4% (21)%
==== ==== ==== ====
</TABLE>
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUES
Total revenues increased 426% from $6.2 million for the three months ended June
30, 1999 to $32.6 million for the three months ended June 30, 2000. Total
revenues increased 407% from $10.7 million for the six months ended June 30,
1999 to $54.2 million for the six months ended June 30, 2000. The increases were
primarily attributable to strong market acceptance of our Dynamo suite of
products as we continue to cultivate relationships with systems integrators and
train our partner channels in order to encourage them to support our products.
PRODUCT LICENSE REVENUES
Product license revenues increased from $3.1 million for the three months
ended June 30, 1999 to $23.8 million for the three months ended June 30, 2000
and from $4.9 million for the six months ended June 30, 1999 to $40.1 million
for the six months ended June 30, 2000. The increases were primarily
attributable to the continued rapid growth in our partner channel and higher
institutional sales. We experienced a significant increase in the number of
individual license arrangements under which the initial license fee was in
excess of $1.0 million. We anticipate that product license revenues will
continue to grow in absolute dollars, but expect the sequentially rate of
growth to decrease as compared to the past several quarters.
Product license revenues increased as a percentage of total revenues from 50%
for the three months ended June 30, 1999 to 73% for the three months ended
June 30, 2000 and from 46% for the six months ended June 30, 1999 to 74% for
the six months ended June 30, 2000. Management believes these percentages are
consistent with the product license's revenue target of 70% of total revenues.
SERVICES REVENUES
Services revenues increased 184% from $3.1 million for the three months ended
June 30, 1999 to $8.8 million for the three months ended June 30, 2000 and
increased 147% from $5.7 million for the six months ended June 30, 1999 to
$14.1 million for the six months ended June 30, 2000. Professional services
revenue increased 77% from $2.6 million for the three months ended June 30,
1999 to $4.6 million for the three months ended June 30, 2000 and 55% from
$4.7 million for the six months ended June 30, 1999 to $7.3 million
11
<PAGE>
for the six months ended June 30, 2000. The increases were 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 477% from $537,000 for the three months ended June
30, 1999 to $3.1 million for the three months ended June 30, 2000 and 370%
from $1.0 million for the six months ended June 30, 1999 to $4.7 million for
the six months June 30, 2000. The increases are the result of continued
increases in product revenue that generate software maintenance and support
revenue. In addition we had increases in software maintenance and support
renewals. Training revenue increased 515% from $179,000 for the three months
ended June 30, 1999 to $1.1 million for the three months ended June 30, 2000
and 475% from $365,000 for the six months ended June 30, 1999 to $2.1 million
for the six months ended June 30, 2000. The increases are primarily
attributable to the Company's extended training program offerings. In
addition, ATG's acquisition of Petronio Technology Group on May 17, 2000
provides us with additional Java, J2EE and XML courseware, as well as
strengthening ATG's training capabilities with the addition of seasoned
trainers and curriculum developers. We believe that these capabilities will
enhance selling efforts for product license revenues to end-users, resellers
and partners.
Services revenues decreased as a percentage of total revenues from 50% for
the three months ended June 30, 1999 to 27% for the three months ended June
30, 2000 and from 54% for the six months ended June 30, 1999 to 26% for the
six months ended June 30, 2000. Management believes these percentages are
consistent with the services revenues target of 30% of total revenues.
COST OF LICENSE REVENUES
Cost of license revenues increased from $17,000 for the three months ended
June 30, 1999 to $865,000 for the three months ended June 30, 2000 and from
$17,000 for the six months ended June 30, 1999 to $1.6 million for the six
months ended June 30, 2000. 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. As part of the settlement,
we, in return for cash payments, received a non-exclusive, worldwide,
perpetual, paid-up license to make, use and sell products arguably covered by
BroadVision's patent and any other patents that may be issued in the future
that are related to the original patent. We agreed to pay BroadVision $15.0
million in license fees, of which $8.0 million was paid in February 2000,
that is being accounted for as cost of license revenues. The initial payment
of $8.0 million was expensed in the fourth quarter of 1999 and the remaining
$7.0 million will be expensed ratably over a three-year period that began in
the first quarter of 2000. Cost of license revenues also includes cost
associated with sustaining the current release of the Dynamo suite of
products.
Cost of license revenues as a percentage of product revenues increased from
1% for the three months ended June 30, 1999 to 4% for the three months ended
June 30, 2000 and from less than 1% for the six months ended June 30, 1999 to
4% for the six months ended June 30, 2000. We do not anticipate significant
additional cost of license revenues in excess of the BroadVision license fee
to be incurred 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 214% from $2.2
million for the three months ended June 30, 1999 to $6.9 million for the
three months ended June 30, 2000 and increased 198% from $4.0 million for the
six months ended June 30, 1999 to $11.9 million for the six months ended June
30, 2000. The increases were attributable to the growth of our resources in
our professional services group. Approximately 47% and 51% of the increases,
respectively, for the three and six months ended June 30, 2000 were related
to compensation and benefit costs. Additionally, costs increased due to third
party contract expense and recruiting, hiring and training. We anticipate
these costs to continue to grow.
Cost of services revenues as a percentage of services revenues increased from
71% for the three months ended June 30, 1999 to 78% for the three months ended
June 30, 2000 and from 70% for the six months
12
<PAGE>
ended June 30, 1999 to 84% for the six months ended June 30, 2000.
GROSS PROFIT
Gross profit consists of gross profit on services revenues and gross profit
on product license revenues. 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 increased 523% from $4.0 million for the three months ended June
30, 1999 to $24.9 million for the three months ended June 30, 2000 and
increased 517% from $6.6 million for the six months ended June 30, 1999 to
$40.7 million for the six months ended June 30, 2000. The increases in gross
profit were primarily attributable to the growth in product license revenues,
as a percentage of total revenues, which have no significant cost of
revenues. Additionally service margins attained contributed to the increase
in total gross profit due to mainly to support and maintenance growth related
to higher than expected product revenues over the past few quarters.
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 193% from $1.4 million for the
three months ended June 30, 1999 to $4.1 million for the three months ended
June 30, 2000 and increased 208% from $2.5 million for the six months ended
June 30, 1999 to $7.7 million for the six months ended June 30, 2000.
Research and development expenses as a percentage of total revenues were 22%
for the three months ended June 30, 1999 and 13% for the three months ended
June 30, 2000 and 24% and 14% for the six months ended June 30, 1999 and
2000, respectively. These increases in dollar and percentage terms were
largely due to the research and development expenses associated with ATG's
Dynamo 5 E-Business Platform, which was announced in July 2000.
We anticipate that research and development expenses will fluctuate as a
percentage of total revenues based upon the level of revenue growth. We
expect research and development expenses to increase as we aggressively
expand our research and development hiring efforts subsequent to the Dynamo 5
general release anticipated for the third quarter.
SALES AND MARKETING EXPENSES
Our sales and marketing group is responsible for 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 450% from $2.6 million for the three
months ended June 30, 1999 to $14.3 million for the three months ended June
30, 2000 and increased 535% from $4.0 million for the six months ended June
30, 1999 to $25.4 million for the six months ended June 30, 2000. The
increases were primarily associated with international sales and marketing
expansion, global hiring and advertising efforts, including our Dynamo Open
user conference. Approximately 41% and 39% of the increases, respectively,
for the three and six months ended June 30, 2000 were related to compensation
and benefit
13
<PAGE>
costs. Additionally approximately 34% and 38% of the increases,
respectively, for the three and six months ended June 30, 2000 were related to
marketing and promotional expenses.
Sales and marketing expenses as a percentage of total revenues were 42% for
the three months ended June 30, 1999 and 44% for the three months ended June
30, 2000 and were 38% for the six months ended June 30, 1999 and 47% for the
six months ended June 30, 2000. 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 domestically and internationally. We will
continue to hire and train new sales personnel, open additional sales offices
and increase marketing and promotional spending as well as our global
branding initiatives.
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 355% from $1.1 million for the
three months ended June 30, 1999 to $5.0 million for the three months ended
June 30, 2000 and increased 358% from $1.9 million for the six months ended
June 30, 1999 to $8.7 million for the six months ended June 30, 2000.
Approximately 36% of the increases, respectively, for the three and six
months ended June 30, 2000 related to increases in personnel and related
expenses associated with headcount increases. Additionally, approximately 18%
and 21% of the increases, respectively, for the three and six months ended
June 30, 2000 related to increased consulting services for our infrastructure
initiatives. Further increases were the result of recording additional
allowances for doubtful accounts as a result of the significant increases in
revenues.
General and administrative expenses as a percentage of total revenues were 18%
for the three months ended June 30, 1999 and 15% for the three months ended June
30, 2000 and were 17% for the six months ended June 30, 1999 and 16% for the six
months ended June 30, 2000. We plan to continue investing in infrastructure and
personnel to help support the planned growth of the company. As a result, we
expect a significant increase in absolute dollars for general and administrative
costs for the remainder of the year. As a percentage of total revenues, we
expect general and administrative expenses to fluctuate depending upon the rate
of growth in expenditures and total revenues.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
In the fourth quarter of 1998 and through May 1999, we recorded total deferred
stock compensation of $4.9 million in connection with stock option grants. This
amount represents the difference between the exercise price of certain stock
option grants and the deemed fair value for accounting purposes of our common
stock at the time of such grants. We are amortizing this amount over the vesting
periods of the applicable options.
Amortization of deferred stock compensation expense remained consistent for
the three months ended June 30, 1999 as compared to the three months ended
June 30, 2000 and increased 17% from $519,000 for the six months ended June
30, 1999 to $608,000 for the three months ended June 30, 2000. This increase
is due to the timing of the Company's recording of the deferred stock
compensation.
INTEREST INCOME (EXPENSE)
Interest income increased 314% from $71,000 for the three months ended June
30, 1999 to $2.3 million for the three months ended June 30, 2000 and
increased 354% from $121,000 for the six months ended June 30, 1999 to $4.4
million for the six months ended June 30, 2000. The increases are the result
of our completion of our initial and follow on public offerings completed in
July and November 1999 from
14
<PAGE>
which we received net proceeds of approximately $153.3 million that was
invested primarily in cash equivalents and marketable securities. We
anticipate interest income may decline as we use the net proceeds for working
capital and other general corporate purposes. We may also use a portion of our
existing cash resources for possible acquistions of businesses, products and
technologies.
Interest expense decreased from $25,000 for the three months ended June 30, 1999
to zero for the three months ended June 30, 2000 and decreased from $49,000 for
the six months ended June 30, 1999 to zero for the six months ended June 30,
2000. The decreases were due to the repayment of outstanding indebtedness with
the proceeds of our initial public offering.
PROVISION FOR INCOME TAXES, NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
As a result of achieving profitability for the three and six months ended
June 30, 2000, we recorded a provision for income taxes of $500,000, which
represents an effective rate of 15%. We incurred losses for the three and six
months ended June 30, 1999. Accordingly, there were no provisions for income
taxes in 1999. We do expect to utilize our net operating losses for the year
ended December 31, 2000 and, as a result, expect our effective tax rate to be
approximately 15%. Next year we anticipate our effective tax rate to be
approximately 34%. As of December 31, 1999, we had net operating loss
carryforwards of $17.9 million and research and development tax credit
carryforwards of $604,000. The net operating loss and tax credit
carryforwards will expire at various dates beginning 2011, if not utilized.
The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event
of an "ownership change" of a corporation. Our ability to utilize net
operating loss and tax credit carryforwards on an annual basis would be
limited as a result of an "ownership change" as defined by Section 382 of the
Internal Revenue Code. We have completed several financings since inception
and believe that we have incurred ownership changes. We do not believe the
ownership changes will have a material impact on our ability to utilize our
net operating loss and tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES.
Our capital requirements relate primarily to facilities, infrastructure for new
hires and working capital requirements. Historically, we have funded our cash
requirements primarily through the public and private sale of equity securities,
commercial credit facilities and captial leases.
Cash used in operating activities was $2.8 million for the six months ended June
30, 2000. This represents operating income of $2.3 million and changes in
working capital items consisting primarily of uses of cash for accounts
receivable and accounts payable of $11.0 million and $5.3 million, respectively.
Those amounts are offset by sources from accrued expenses and deferred revenue
of $8.1 million and $4.1 million, respectively.
Our investing activities consisted primarily of capital expenditures of $4.9
million for six months ended June 30, 2000 and net purchase of marketable
securities of $45.7 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. Management expects total
capital expenditures to be approximately $12.0 million over the next twelve
months. In the second quarter we acquired Petronio Technology Group. Pursuant
to the agreement we have made an initial cash payment of $600,000, and there
are two additional contingent payments of approximately $300,000 each.
Additionally, in July, 2000 we acquired Toronto Technology Group for
approximately $12.0 million in cash, options, and exchangeable shares of
common stock. Upon the closing of the transaction, ATG paid approximately
$5.2 million in cash.
The Company's financing activities consist primarily the of issuance of
shares upon option exercises and under the Company's employee stock purchase
plan.
We have a revolving line of credit which provides for borrowings of up to the
lesser of $5.5 million or 80% of eligible accounts receivable with Silicon
Valley Bank that bears interest at the bank's prime rate plus 0.25%. There
were no borrowings outstanding under this revolving line of credit at June
30, 2000.
15
<PAGE>
At June 30, 2000, we had $190,000 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 June 30, 2000, we had $142.9 million in cash, cash equivalents and
marketable securities and $134.5 million in working capital. Management
believes that ATG's 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK
Our business, operating results or financial condition could be materially
adversely affected by any of the following factors. You should also refer to the
other information set forth in this report, including our financial statements
and the related notes.
WE DO NOT BELIEVE WE WILL BE ABLE TO SUSTAIN OUR CURRENT REVENUE GROWTH RATE
AND WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO SUSTAIN OR INCREASE
PROFITABILITY ON A QUARTERLY OR ANNUAL BASIS
This was our first profitable quarter since inception. We have incurred
substantial costs to develop and enhance our technology and products, to recruit
and train a marketing and sales group, and to establish an administrative
organization. As of June 30, 2000, we had an accumulated deficit of $26.6
million. We anticipate that our operating expenses will increase as we
continue to develop our technology, increase our sales and marketing
activities, create and expand our distribution channels, expand our services
capabilities and improve our operational and financial systems. Although our
revenues have grown significantly in recent quarters, they have grown from a
relatively small base and, as a result, we do not believe that we will be
able to sustain the growth rates we have achieved in recent quarters. Because
we have a limited operating history, particularly as a company that sells
software products, the prediction of future operating results is difficult
and we cannot be certain that our revenues will grow at a rate that will
allow us to maintain profitability. In addition, we cannot be certain that we
will be able to sustain or increase profitability on a quarterly or annual
basis.
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE AND THE PRICE OF OUR COMMON
STOCK COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF
SECURITIES ANALYSTS
Our revenues and operating results are likely to vary significantly from quarter
to quarter. If our quarterly results fall below the expectations of securities
analysts, the price of our common stock could fall. A number of factors are
likely to cause variations in our operating results, including:
- demand for our products and services
- the timing of sales of our products and services
- the timing of customer orders and product implementations
- unexpected delays in introducing new products and services
- increased expenses, whether related to sales and marketing, product
development or administration
16
<PAGE>
- changes in the rapidly evolving market for Internet customer relationship
management solutions
- the mix of revenues derived from products and services
- timing of hiring and utilization of services personnel
- cost overruns related to fixed-price services projects
- the mix of domestic and international sales
- costs related to possible acquisitions of technologies or businesses
Accordingly, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. The results of one quarter cannot be
relied upon as an indication of our future performance.
We plan to increase our operating expenses to expand our sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support and improve our
operational and financial systems. If our revenues do not increase as quickly as
these expenses, our operating results may suffer and our stock price may
decline.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS
We have a long sales cycle because we generally need to educate potential
customers regarding the use and benefits of our solution. Our sales cycle varies
depending on the size and type of customer contemplating a purchase and whether
we have conducted business with a potential customer in the past. These
potential customers frequently need to obtain approvals from multiple decision
makers prior to making purchase decisions. Our long sales cycle, which can range
from several weeks to several months or more, makes it difficult to predict the
quarter in which sales may occur. Delays in sales could cause significant
variability in our revenues and operating results for any particular period.
THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS NEW
AND RAPIDLY EVOLVING AND WE CANNOT BE CERTAIN THAT A VIABLE MARKET FOR OUR
PRODUCTS WILL EMERGE OR BE SUBSTANTIAL
The market for Internet customer relationship management solutions is new and
rapidly evolving. We expect that we will continue to need intensive marketing
and sales efforts to educate prospective customers and partners about the uses
and benefits of our products and services. Accordingly, we cannot be certain
that a viable market for our products will emerge or be sustainable.
Organizations that have already invested substantial resources in other methods
of conducting business may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing systems. Similarly, individuals
have
17
<PAGE>
established patterns of purchasing goods and services and may be reluctant
to make purchases online. These factors could inhibit the growth of electronic
commerce generally and the market's acceptance of our products and services in
particular.
THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS
INTENSELY COMPETITIVE AND WE EXPECT COMPETITION TO INTENSIFY IN THE FUTURE
The market for Internet customer relationship management solutions is intensely
competitive and we expect competition to intensify in the future as revenues
generated from Internet commerce increase. Our primary competition currently
comes from in-house development efforts by potential customers or partners, as
well as from other vendors of Web-based application software. We currently
encounter competition from internet application software vendors such as
BroadVision, InterWorld, Open Market and Vignette. We also compete with platform
application server products and vendors such as BEA Systems, IBM's Websphere
products, Microsoft, Netscape, and Sun Microsystems' NetDynamics products, among
others. Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do, and may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases they
can leverage to gain market share. These competitors may be able to undertake
more extensive promotional activities, adopt more aggressive pricing policies
and offer more attractive terms to purchasers than we can. Moreover, our current
and potential competitors, such as Microsoft, Netscape and Oracle, may bundle
their products in a manner that may discourage users from purchasing our
products. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products and expand their markets. Accordingly, new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. This level of competition could reduce our revenues and result in
increased losses or reduced profits.
COMPETITION WITH OUR RESELLER PARTNERS COULD LIMIT OUR SALES OPPORTUNITIES
AND JEOPARDIZE THESE RELATIONSHIPS
We sell products through agreements with resellers and original equipment
manufacturers. We target markets that are also served by some of these partners.
This competition may limit our ability to sell our products and services
directly in these markets and may jeopardize, or result in the termination of,
these relationships.
OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF EITHER JEET SINGH OR
JOSEPH CHUNG, OUR CO-FOUNDERS, OR IF WE ARE UNABLE TO ATTRACT AND RETAIN OTHER
KEY PERSONNEL
Our success depends largely on the skills, experience and performance of some
key members of our management, particularly our co-founders Jeet Singh and
Joseph Chung. If we lose one or more of our key employees, our business could be
harmed. We have purchased, and are the beneficiaries of, insurance policies on
the lives of Mr. Singh and Mr. Chung, each in the amount of $1,000,000. In
addition, our future success will depend in large part on our ability to
continue attracting and retaining highly skilled personnel. Like other software
companies, we face intense competition for qualified personnel. We cannot be
certain that we will be successful in attracting, assimilating and retaining
qualified personnel in the future.
WE NEED TO EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES IN ORDER TO
INCREASE MARKET AWARENESS OF OUR PRODUCTS AND INCREASE OUR REVENUES
We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenues. We cannot be certain
that we will be successful in these efforts. We have recently expanded our
direct sales force and plan to hire additional sales personnel. Our products and
services require a sophisticated sales effort targeted at the senior management
of our prospective customers. Newly-hired employees will require training and it
will take time for them to achieve full productivity. We
18
<PAGE>
cannot be certain that we will be able to hire enough qualified individuals
in the future or that newly-hired employees will achieve necessary levels of
productivity.
WE DEPEND ON OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS
Since our potential customers often rely on third-party systems integrators to
develop, deploy and manage Web sites for conducting commerce on the Internet, we
cultivate relationships with systems integrators in order to encourage them to
support our products. If we do not adequately train a sufficient number of
systems integrators or if systems integrators were to devote their efforts to
integrating or co-selling different products, our revenues could be reduced and
our operating results could be harmed.
WE WILL NEED TO IMPLEMENT AND IMPROVE OUR OPERATIONAL SYSTEMS AND HIRE
ADDITIONAL SERVICE PROFESSIONALS ON A TIMELY BASIS IN ORDER TO MANAGE GROWTH
We have expanded our operations rapidly in recent years. We intend to continue
to expand in the foreseeable future to pursue existing and potential market
opportunities and to support our growing customer base. Rapid growth would place
a significant demand on our management and operational resources. In order to
manage growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. We also plan to expand our
professional services capabilities to support increased product license sales.
However, we cannot be certain that we will be able to attract a sufficient
number of highly qualified service personnel. In addition, new service personnel
will require training and it will take time for them to become productive. If we
fail to improve our operational systems or to expand our professional service
capabilities in a timely manner, we could experience customer dissatisfaction,
cost inefficiencies and lost revenue opportunities, which could harm our
operating results.
WE COULD INCUR SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT
Our Innovation Solutions services often involve the development of custom
software applications for specific customers. In some cases, customers retain
ownership or impose restrictions on our ability to use the technologies
developed from these projects. Issues relating to the ownership of software can
be complicated, and disputes could arise that affect our ability to resell or
reuse applications we develop for customers.
We seek to protect the source code for our proprietary software both as a trade
secret and as a copyrighted work. However, because we make the source code
available to some customers, third parties may be more likely to misappropriate
it. Our policy is to enter into confidentiality agreements with our employees,
consultants, vendors and customers and to control access to our software,
documentation and other proprietary information. Despite these precautions, it
may be possible for someone to copy our software or other proprietary
information without authorization or to develop similar software independently.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We could incur
substantial costs to prosecute or defend any intellectual property litigation.
If we litigated to enforce our rights, it would be expensive, would divert
management resources and may not be adequate to prevent the use of our
intellectual property by third parties.
19
<PAGE>
In addition, we are obligated to indemnify customers against claims that we
infringe the intellectual property rights of third parties. The results of any
intellectual property litigation to which we might become a party may force us
to do one or more of the following:
- cease selling or using products or services that incorporate the
challenged intellectual property
- obtain a license, which may not be available on reasonable terms, to sell
or use the relevant technology
- redesign those products or services to avoid infringement
IF WE FAIL TO ADAPT TO RAPID CHANGES IN THE INTERNET CUSTOMER RELATIONSHIP
MANAGEMENT SOFTWARE MARKET, OUR EXISTING PRODUCTS COULD BECOME OBSOLETE
The market for our products is marked by rapid technological change,
frequent new product introductions and Internet-related technology enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. We cannot be certain that we will successfully develop and market new
products or product enhancements that comply with present or emerging Internet
technology standards. New products based on new technologies or new industry
standards could render our existing products obsolete and unmarketable. To
succeed, we will need to enhance our current products and develop new products
on a timely basis to keep pace with developments related to Internet technology
and to satisfy the increasingly sophisticated requirements of customers.
E-commerce technology is complex and new products and product enhancements can
require long development and testing periods. Any delays in developing and
releasing enhanced or new products could cause us to lose revenue opportunities
and customers.
WE RELY ON JAVA AS THE PROGRAMMING LANGUAGE IN WHICH WE DEVELOP OUR PRODUCTS AND
OUR BUSINESS COULD BE HARMED IF JAVA LOSES MARKET ACCEPTANCE OR IF WE ARE NOT
ABLE TO CONTINUE USING JAVA OR JAVA RELATED TECHNOLOGIES
Our software is written in the Java computer programming language developed by
Sun Microsystems. While a number of companies have introduced Web applications
based on Java, Java could fall out of favor and support by Sun Microsystems or
other companies could decline. If Java support decreased or we could not
continue to use Java or related Java technologies, we might have to rewrite the
source code for our entire product line to enable our products to run on other
computer platforms. Also, changes to Java could require us to change our
products. If we were unable to develop or implement appropriate modifications to
our products on a timely basis, we could lose revenue opportunities and our
business could be harmed.
OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN
LOST REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE, OR PRODUCT LIABILITY CLAIMS
WITH SUBSTANTIAL LITIGATION COSTS
Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Despite internal testing and testing by customers, our current and
future products may contain serious defects. Serious defects or errors could
result in lost revenues or a delay in market acceptance.
Since our customers use our products for critical business applications such as
e-commerce, errors, defects or other performance problems could result in damage
to our customers. They could seek significant compensation for losses from us.
Although our license agreements typically contain provisions designed
20
<PAGE>
to limit our exposure to product liability claims, existing or future laws
or unfavorable judicial decisions could negate these limitations. Even if not
successful, a product liability claim brought against us would likely be
time-consuming and costly.
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF E-COMMERCE
Our future success depends heavily on the acceptance and wide use of the
Internet for e-commerce. If e-commerce does not continue to grow or grows more
slowly than expected, demand for our products and services will be reduced.
Consumers and businesses may reject the Internet as a viable commercial medium
for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may not be
able to support the demands placed on it by increased usage. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased government regulation,
standards, protocols and complementary products, services or facilities are
developed, we may incur substantial expenses adapting our solutions to changing
or emerging technologies.
FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR
BUSINESS OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF E-COMMERCE
As e-commerce evolves, federal, state and foreign agencies could adopt
regulations covering issues such as user privacy, content and taxation of
products and services. If enacted, government regulations could limit the market
for our products and services. Although many regulations might not apply to our
business directly, we expect that laws regulating the solicitation, collection
or processing of personal and consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits certain types of
information and content from being transmitted over the Internet. The
prohibition's scope and the liability associated with a violation are currently
unsettled. In addition, although substantial portions of the Communications
Decency Act were held to be unconstitutional, we cannot be certain that similar
legislation will not be enacted and upheld in the future. It is possible that
legislation could expose companies involved in e-commerce to liability, which
could limit the growth of e-commerce generally. Legislation like the
Telecommunications Act and the Communications Decency Act could dampen the
growth in Web usage and decrease its acceptance as a medium of communications
and commerce.
THE INTERNET IS GENERATING PRIVACY CONCERNS WHICH COULD RESULT IN
LEGISLATION OR MARKET PERCEPTIONS WHICH COULD HARM OUR BUSINESS OR RESULT IN
REDUCED SALES OF OUR PRODUCTS, OR BOTH
Businesses use our Dynamo Personalization Server product to develop and maintain
profiles to tailor the content to be provided to Web site visitors. When a
visitor first arrives at a Web site, our software creates a profile for that
visitor. If the visitor registers or logs in, the visitor's identity is added to
the profile, preserving any profile information that was gathered up to that
point. Dynamo Personalization Server tracks both explicit user profile data
supplied by the user as well as implicit profile attributes derived from the
user's behavior on the Web site. Privacy concerns may cause visitors to resist
providing the personal data or avoid Web sites tracking the Web behavioral
information necessary to support this profiling capability. More importantly,
even the perception of security and privacy concerns, whether or not valid, may
indirectly inhibit market acceptance of our products. In addition, legislative
or regulatory requirements may heighten these concerns if businesses must notify
Web site users that the data captured after visiting Web sites may be used to
direct product promotion and advertising to that user. Other countries and
political entities, such as the European Economic Community, have adopted such
legislation or regulatory requirements. The United States may adopt similar
legislation or regulatory requirements. If privacy legislation is enacted or
consumer privacy concerns are not adequately addressed, our business, financial
condition and operating results could be harmed.
21
<PAGE>
Our Dynamo products use "cookies" to track demographic information and user
preferences. A "cookie" is information keyed to a specific user that is stored
on a computer's hard drive, typically without the user's knowledge. Cookies are
generally removable by the user, although removal could affect the content
available on a particular site. Germany has imposed laws limiting the use of
cookies, and a number of Internet commentators and governmental bodies in the
United States and other countries have urged passage of laws limiting or
abolishing the use of cookies. If such laws are passed or if users begin to
delete or refuse cookies as a common practice, demand for our personalization
products could be reduced.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of the Company's operations are based in the U.S. and, accordingly,
the majority of its transactions are denominated in U.S. Dollars. However, the
Company does have foreign-based operations 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, Germany, the Netherlands, Sweden and the United Kingdom and conducts
transactions in the local currency of each location. The impact of fluctuations
in the relative value of other currencies was not material for the three and six
months ended June 30, 2000. The Company does not use derivative financial
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer, and type of instrument.
PART II. OTHER INFORMATION
Item 1. Legal Proceeding
A patent infringement claim was filed by BroadVision, one of our competitors, on
December 11, 1998. The case was filed in the U.S. District Court for the
Northern District of California. BroadVision alleged that were infringing its
patent (U.S. Patent No. 5,710,887) for a method of conducting e-commerce.
BroadVision sought a permanent injunction of the sale of our Dynamo product in
their current forms as well as unspecified damages. On February 4, 1999, we
filed our answer denying the allegations in Broadvision's complaint and also
filed a counterclaim against BroadVision seeking a judgement that we were not
infringing its patent and that the patent in question is in fact unenforceable
and invalid.
In February 2000, we reached a settlement with BroadVistion by which, among
other things, it dropped its claim of infringement, and we dropped our claim of
non-infringement and patent invalidity. We did not make any admission of
wrong-doing, liability, violation of law, infringement or validity regarding the
patent in question.
As is customary in patent litigation settlements, in return for past and future
cash payments, we received a non-exclusive, worldwide, perpetual, paid-up
license to make, use, and sell products arguably covered by BroadVision's patent
and any other patents that may be issued in the future that are related to the
original patent. Releases of liability were exchanged and the litigation has now
been dismissed by agreement of the parties and order of the court.
We agreed to pay BroadVision $15,000,000 for the license. To date ATG has
paid $9,500,000 under the settlement. The remaining $5,500,000 is payable in
installments 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 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds from Sales of Registered Securities
On July 26, 1999 we closed our initial public offering of 10,000,000 shares of
common stock at a public offering price of $6 per share. The net proceeds to the
Company from the offering were approximately
22
<PAGE>
$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.
On November 10, 1999 we closed our secondary public offering of 9,000,000 shares
of common stock, of which 2,850,000 shares were sold by the Company at a public
offering price of $33.75. The net proceeds to the Company from the offering were
approximately $91,428,000. On November 22, 1999, in connection with the exercise
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 proceeds to the Company from the exercise of the over-allotment option were
approximately $5,671,000.
From the effective dates of the offerings through June 30, 2000, the Company
used approximately $36.3 million for sales and marketing, approximately $11.1
million for capital expenditures, approximately $11 million for research
development, and approximately $500,000 for the repayment of indebtedness.
Additionally, approximately $800,000 was used as partial consideration and
professional fees for the acquisition of Toronto Technology Group in 2000. As of
June 30, 2000, the Company has approximately $93.9 million of net proceeds
remaining, and pending use of these proceeds, the Company intends to invest such
proceeds primarily in high-quality short-term investments.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 19, 2000. At the
meeting, Phyllis S. Swersky and Robert F. Walters were elected as Class I
Directors. The vote with respect to each nominee is set forth below:
Total Vote For Total Vote Withheld
Each Director From Each Director
------------- ------------------
Ms. Swersky 57,072,900 21,218
Mr. Walters 57,072,882 21,236
Additional Directors of the Company whose term of office continued after the
meeting are Jeet Singh, Joseph T. Chung, Scott A. Jones, Charles R. Lax and
Thomas N. Matlack.
The stockholders also approved an amendment of the Company's Amended and
Restated Certificate of Incorporation to increase by 400,000,000 shares to
500,000,000 shares, the number of shares of common stock authorized
thereunder, by a vote of 49,155,628 shares for, 7,770,207 shares against and
168,283 shares abstaining.
The stockholders also approved an amendment of the Company's 1996 Stock
Option Plan to increase by 12,600,000 shares to 19,600,000 shares, the number
of shares of common stock authorized for issuance under this Plan, by a vote
of 39,372,603 shares for, 17,262,800 shares against and 458,715 shares
abstaining.
In addition, the stockholder ratified the selection of Arthur Andersen LLP as
the Company's independent auditors by a vote of 48,847,492 shares for,
1,465,654 shares against and 197,361 shares abstaining, with 6,583,611 broker
non-votes.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
(b) Reports on Form 8-K
None.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ART TECHNOLOGY GROUP, INC.
(Registrant)
By: /s/ JEET SINGH
---------------------------
Jeet Singh
Chief Executive Officer (Principal Executive Officer)
Date: AUGUST 11, 2000
By: /s/ ANN C. BRADY
---------------------------
Ann C. Brady
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
Date: AUGUST 11, 2000
By: /s/ THOMAS J. QUINN
---------------------------
Thomas J. Quinn
Corporate Controller (Principal Accounting Officer)
Date: AUGUST 11, 2000
