<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 2000
REGISTRATION STATEMENT NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3141918
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
------------------------
25 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02141
(617) 386-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
JEET SINGH
CHIEF EXECUTIVE OFFICER
ART TECHNOLOGY GROUP, INC.
25 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02141
(617) 386-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID A. WESTENBERG, ESQ. WILLIAM R. KOLB, ESQ.
MARK L. JOHNSON, ESQ. JOHN D. HANCOCK, ESQ.
HALE AND DORR LLP FOLEY, HOAG & ELIOT LLP
60 State Street One Post Office Square
Boston, Massachusetts 02109 Boston, Massachusetts 02109
Telephone: (617) 526-6000 Telephone: (617) 832-1000
Fax: (617) 526-5000 Fax: (617) 832-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2)
<S> <C> <C> <C>
Common stock, $ .01 par value per share... 5,433,750 shares $82.72 $449,479,800
<CAPTION>
AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common stock, $ .01 par value per share... $118,663
</TABLE>
(1) Includes 708,750 shares that the underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933. Based on the average of
high and low sales prices on October 19, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
SHALL DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 26, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
4,725,000 Shares
[LOGO]
Art Technology Group, Inc.
Common Stock
---------
We are selling 4,000,000 shares of common stock and the selling stockholders
are selling 725,000 shares of common stock. We will not receive any of the
proceeds from the shares of common stock sold by the selling stockholders.
Our common stock is listed on The Nasdaq National Market under the symbol
"ARTG." The last reported sale price on October 25, 2000, was $86.625 per share.
The underwriters have an option to purchase from us a maximum of 708,750
additional shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 4.
<TABLE>
<CAPTION>
Underwriting Proceeds to Proceeds to
Price to Discounts and Art Technology Selling
Public Commissions Group Stockholders
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total................................ $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston Goldman, Sachs & Co.
Chase H&Q
U.S. Bancorp Piper Jaffray
The date of this prospectus is , 2000.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUMMARY.................... 1
RISK FACTORS.......................... 4
SPECIAL NOTE REGARDING FORWARD-
LOOKING INFORMATION................. 13
USE OF PROCEEDS....................... 14
PRICE RANGE OF COMMON STOCK........... 14
DIVIDEND POLICY....................... 14
CAPITALIZATION........................ 15
DILUTION.............................. 16
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 18
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
BUSINESS.............................. 29
MANAGEMENT............................ 46
PRINCIPAL AND SELLING STOCKHOLDERS.... 48
UNDERWRITING.......................... 49
NOTICE TO CANADIAN RESIDENTS.......... 52
LEGAL MATTERS......................... 53
EXPERTS............................... 53
WHERE YOU CAN FIND MORE INFORMATION... 54
INFORMATION WE ARE INCORPORATING BY
REFERENCE........................... 54
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO
YOU. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE INVESTING IN OUR COMMON STOCK.
ART TECHNOLOGY GROUP
We offer an integrated suite of Internet customer relationship management
and electronic commerce software applications, as well as related application
development, integration and support services. Our solution enables businesses
to understand, manage and build online customer relationships and to market,
sell and support products and services over the Internet more effectively. Our
Dynamo product suite is designed to provide businesses with the core application
platform and software tools required to develop and deploy personalized,
reliable, large-scale Web sites for conducting electronic commerce across
multiple channels, including Web browsers and wireless devices.
We have licensed our products to over 500 customers. We target Global 2000
companies, as well as leading companies using the Internet as a primary business
channel. A significant majority of our product license revenues in the first six
months of 2000 was derived from traditional "brick-and-mortar" companies. Our
customers include BellSouth, BMG Direct, Eastman Kodak, Hilton Hotels, Informix,
J.Crew, John Hancock Funds, Inc., Network Solutions, Newbridge Networks, Scudder
Kemper Investments, Sony Online Entertainment, Sun Microsystems and
TheStreet.com. We sell our products through our direct sales force, as well as
through arrangements with systems integrators, original equipment manufacturers
and other technology partners. We currently have more than 230 system
integrators and technology partners, including CSC, Deloitte Consulting,
Documentum, E.piphany, Fort Point Partners, Interwoven, PricewaterhouseCoopers
and Sun Microsystems.
Our solution provides a comprehensive application suite and complementary
professional services capabilities. In September 2000, we began shipping the
Dynamo 5 e-Business Platform, our J2EE-compliant integrated application suite
which includes our new Dynamo Scenario Server and a significantly enhanced
Dynamo Commerce Server. Our Dynamo application suite now includes:
- Dynamo Application Server--provides an open and expandable platform for
the development and deployment of high-performance, dynamic applications,
including Internet customer relationship management and e-commerce
applications;
- Dynamo Personalization Server--allows businesses to manage customer
profiling and dynamic content targeting in order to ensure that the right
content reaches the right users at the right time;
- Dynamo Scenario Server--provides a platform for defining, delivering and
analyzing e-business scenarios, which are planned sequences of
interactions with a specific customer or customer segment that enable
businesses to manage long-term customer relationships dynamically across
multiple channels; and
- Dynamo Commerce Server--provides a complete storefront solution for
business-to-consumer and business-to-business e-commerce, enabling
businesses to create personalized shopping and purchasing experiences
within a complete online selling environment.
Our principal executive office is located at 25 First Street, Cambridge,
Massachusetts 02141, and our telephone number is (617) 386-1000. Our Web site is
located at WWW.ATG.COM. The information contained in our Web site is not a part
of this prospectus. We were incorporated in Massachusetts in December 1991 and
reincorporated in Delaware in October 1997.
ATG and DYNAMO are our registered trademarks and ART TECHNOLOGY GROUP,
DYNAMO PERSONALIZATION SERVER, DYNAMO SCENARIO SERVER and the ATG logo are our
trademarks. J2EE, JAVA and
1
<PAGE>
JAVABEANS are trademarks of Sun Microsystems. This prospectus also contains
trademarks and tradenames of other companies.
RECENT DEVELOPMENT
On October 26, 2000, we announced our financial results for the nine months
ended September 30, 2000.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues:
Product license........................... $ 9,372 $ 74,291
Services.................................. 9,421 26,220
-------- --------
Total revenues.......................... $ 18,793 $100,511
======== ========
Net income (loss) available for common
stockholders.............................. $ (8,050) $ 7,271
======== ========
Net income (loss) per share--Basic.......... $ (0.27) $ 0.11
======== ========
</TABLE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Art Technology Group................ 4,000,000 shares
Common stock offered by the selling stockholders............ 725,000 shares
Common stock to be outstanding after this offering.......... 71,799,896 shares
Use of proceeds............................................. Working capital and other general
corporate purposes, including possible
acquisitions
Nasdaq National Market symbol............................... ARTG
</TABLE>
The number of shares of our common stock that will be outstanding after this
offering is based on shares outstanding at October 23, 2000, after giving effect
to the exercise by selling stockholders of options to purchase 112,125 shares of
common stock to be sold in this offering. This number excludes:
- 9,569,130 shares issuable upon the exercise of outstanding options
(including options to purchase 112,125 shares of common stock that will be
exercised by selling stockholders in connection with this offering) at a
weighted-average exercise price of $34.88 per share; and
- 5,848,227 additional shares reserved for issuance under our stock plans.
-------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS:
- REFLECTS OUR TWO-FOR-ONE STOCK SPLIT EFFECTED AS A COMMON STOCK DIVIDEND
IN MARCH 2000; AND
- ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OPTION TO PURCHASE
ADDITIONAL SHARES IN THIS OFFERING.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize the consolidated financial data of our
business. Additional information regarding basic and diluted net income (loss)
per share is provided in note 1(e) to the audited consolidated financial
statements and note 2 to the unaudited interim consolidated condensed financial
statements included elsewhere in this prospectus. The as adjusted balance sheet
data reflect (a) our receipt of net proceeds from the sale of 4,000,000 shares
of common stock offered by us at an assumed public offering price of $86.625,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, and (b) exercises by selling stockholders of
options to purchase 112,125 shares of common stock to be sold in this offering.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues....................................... $ 798 $ 3,902 $ 6,458 $12,137 $32,077 $10,653 $54,201
Gross profit......................................... 204 1,917 3,261 7,087 13,685 6,592 40,739
Loss from operations................................. (430) (1,412) (4,105) (2,740) (15,029) (2,345) (1,639)
Net income (loss).................................... (467) (1,442) (4,228) (2,851) (13,132) (2,273) 2,262
Net income (loss) available for common
stockholders....................................... (469) (1,648) (4,442) (4,445) (17,527) (2,760) 2,262
Net income (loss) per share:
Basic.............................................. $ (0.03) $ (0.09) $ (0.25) $ (0.25) $ (0.45) $ (0.14) $ 0.03
======= ======= ======= ======= ======= ======= =======
Diluted............................................ $ (0.03) $ (0.09) $ (0.25) $ (0.25) $ (0.45) $ (0.14) $ 0.03
======= ======= ======= ======= ======= ======= =======
Weighted average shares outstanding:
Basic.............................................. 16,262 17,698 17,744 17,934 38,777 19,076 66,339
======= ======= ======= ======= ======= ======= =======
Diluted............................................ 16,262 17,698 17,744 17,934 38,777 19,076 72,872
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 72,619 $404,234
Working capital............................................. 134,474 466,089
Total assets................................................ 188,403 520,018
Long-term obligations, less current maturities.............. 3,000 3,000
Total stockholders' equity.................................. 151,692 483,307
</TABLE>
3
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND OTHER INFORMATION INCLUDED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, INCLUDING THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE DECIDING TO INVEST IN SHARES OF
OUR COMMON STOCK. IF ANY OF THE FOLLOWING ACTUALLY OCCURS, OUR BUSINESS,
FINANCIAL CONDITION OR OPERATING RESULTS WOULD LIKELY SUFFER. IN THAT EVENT, THE
MARKET PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART
OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
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.
The second quarter of 2000 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, we
have difficulty predicting our future operating results 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 REVENUES AND OPERATING RESULTS TO FLUCTUATE, AND THE PRICE OF OUR
COMMON STOCK COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF
SECURITIES ANALYSTS.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. If our quarterly results fall below the expectations of
securities analysts, the price of our common stock could fall. A number of
factors are likely to cause variations in our operating results, including:
- demand for our products and services;
- the timing of sales of our products and services;
- the timing of customer orders and product implementations;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, product
development or administration;
- changes in the rapidly evolving market for Internet customer relationship
management solutions;
- the mix of revenues derived from products and services;
- timing of hiring and utilization of services personnel;
- cost overruns related to fixed-price services projects;
- the mix of domestic and international sales; and
- costs related to possible acquisitions of technologies or businesses.
4
<PAGE>
Accordingly, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. The results of one or a series of
quarters should not 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.
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. We
have a long sales cycle because we generally need to educate potential customers
regarding the use and benefits of our products and services. 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. 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 CONTINUE TO DEVELOP.
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 is 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.
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. This level of competition
could reduce our revenues and result in increased losses or reduced profits. 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 compete with Internet application software
vendors such as Blue Martini, BroadVision and Vignette. We also compete with
platform application server products and vendors such as BEA Systems, IBM's
Websphere products, Microsoft, and the Netscape/Sun Microsystems Alliance, 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 that
they can use 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 and the Netscape/Sun Microsystems
Alliance, 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.
5
<PAGE>
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. The number of our
employees increased from 324 on January 1, 2000 to 704 on September 30, 2000.
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.
COMPETITION WITH OUR RESELLER PARTNERS COULD LIMIT OUR SALES OPPORTUNITIES AND
JEOPARDIZE THESE RELATIONSHIPS.
We sell products through resellers and original equipment manufacturers. In
some instances, we target our direct selling efforts toward 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. Proceeds
under this insurance may not cover our losses. 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 may not 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 may not 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.
6
<PAGE>
We may be unable to hire enough qualified individuals in the future, and newly
hired employees may not achieve necessary levels of productivity.
WE COULD INCUR SUBSTANTIAL COSTS PROTECTING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR DEFENDING AGAINST A CLAIM OF INFRINGEMENT.
Our Dynamo 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 sue to enforce our rights, the litigation would be expensive, would divert
management resources and may not prevent other parties from using our
intellectual property without our permission. In February 2000, we settled a
lawsuit filed by BroadVision, which alleged that we were infringing on a patent
for a method of conducting e-commerce. As part of the settlement, we agreed to
pay BroadVision a total of $15.0 million in license fees over a three-year
period.
In addition, we have agreed to indemnify customers against claims that our
products 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; or
- redesign those products or services to avoid infringement.
IF WE FAIL TO ADAPT TO RAPID CHANGES IN THE MARKET FOR INTERNET CUSTOMER
RELATIONSHIP MANAGEMENT SOFTWARE, 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 may not be able to 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 new or enhanced
products could cause us to lose revenue opportunities and customers.
7
<PAGE>
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADDRESS THE CHALLENGES ASSOCIATED WITH
INTERNATIONAL OPERATIONS.
We derived 16% of our total revenues from customers outside the United
States for the six months ended June 30, 2000. We anticipate that revenues from
customers outside the United States will account for an increased portion of our
total revenues for the foreseeable future. Our operations outside the United
States are subject to additional risks, including:
- unexpected changes in regulatory requirements, exchange rates, tariffs and
other barriers;
- longer payment cycles and problems in collecting accounts receivable;
- political and economic instability;
- difficulties in managing system integrators and technology partners;
- difficulties in staffing and managing foreign subsidiary operations;
- differing technology standards;
- difficulties and delays in translating products and product documentation
into foreign languages; and
- potentially adverse tax consequences.
The impact of future exchange rate fluctuations on our operating results
cannot be accurately predicted. We may increase the extent to which we
denominate arrangements with international customers in the currencies of the
countries in which the software or services are provided. From time to time we
may engage in hedges of a significant portion of contracts denominated in
foreign currencies. Any hedging policies implemented by us may not be
successful, and the cost of these hedging techniques may have a significant
negative impact on our operating results.
WE USE THE JAVA PROGRAMMING LANGUAGE TO 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.
We write our software 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. Moreover, our new Dynamo 5 e-Business Platform is
designed to comply with Sun's Java 2 Platform, Enterprise Edition, or J2EE,
standards for developing modular Java programs that can be accessed over a
network. There can be no assurance that these standards will be widely adopted
or that we can continue to comply with J2EE standards established by Sun from
time to time. If Java or J2EE support decreased or we could not continue to use
Java or related Java technologies or to comply with J2EE standards, 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 or to J2EE
standards 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. We began shipping our new application suite, Dynamo 5 e-Business
Platform, in September 2000. 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.
8
<PAGE>
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 from us for
the losses they suffer. Although our license agreements typically contain
provisions designed to limit our exposure to product liability claims, existing
or future laws or unfavorable judicial decisions could negate these limitations.
Even if not successful, a product liability claim brought against us would
likely be time-consuming and costly.
OUR EXISTING STOCKHOLDERS WILL BE ABLE TO INFLUENCE ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL AND COULD DELAY OR PREVENT SOMEONE FROM ACQUIRING OR
MERGING WITH US ON TERMS FAVORED BY A MAJORITY OF OUR INDEPENDENT STOCKHOLDERS.
On completion of this offering, our executive officers and directors will
beneficially own approximately 19.3% of our outstanding common stock. As a
result, these stockholders may be able to influence matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This could delay or prevent someone from
acquiring or merging with us.
WE WILL HAVE BROAD DISCRETION OVER THE USE OF OUR NET PROCEEDS FROM THIS
OFFERING.
Our board of directors and management will have significant flexibility in
applying our net proceeds from this offering. We do not have plans for the use
of our proceeds from this offering other than for working capital and general
corporate purposes. However, we could use some of our proceeds to acquire or
invest in businesses that we believe offer products, services or technologies
that complement ours.
IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT
COULD HURT OUR BUSINESS.
We acquired Petronio Technology Group in May 2000 for consideration of
approximately $1.2 million and The Toronto Technology Group in July 2000 for
consideration of approximately $12.0 million. In the future, we may pursue
additional acquisitions to obtain complementary businesses, products, services
or technologies. An acquisition may not produce the revenues, earnings or
business synergies that we anticipated, and an acquired business, product,
service or technology might not perform as we expected. If we pursue an
acquisition, our management could spend a significant amount of time and effort
in identifying and completing the acquisition. If we complete an acquisition, we
may encounter significant difficulties and incur substantial expenses in
integrating the operations and personnel of the acquired company into our
operations while preserving the goodwill of the acquired company. In particular,
we may lose the services of key employees of the acquired company and we may
make changes in management that impair the acquired company's relationships with
employees and customers.
Any of these outcomes could prevent us from realizing the anticipated
benefits of our acquisitions. To pay for an acquisition, we might use stock or
cash. Alternatively, we might borrow money from a bank or other lender. If we
use our stock, our stockholders would experience dilution of their ownership
interests. If we use cash or debt financing, our financial liquidity would be
reduced. Finally, if we are unable to account for our acquisitions under the
"pooling-of-interests" method of accounting, which may be eliminated, we may be
required to capitalize a significant amount of intangibles, including goodwill,
which may lead to significant amortization charges. In addition, we may incur
significant, one-time write-offs and amortization charges. These amortization
charges and write-offs could decrease our future earnings or increase our future
losses.
9
<PAGE>
RISKS RELATED TO THE INTERNET INDUSTRY
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF E-COMMERCE.
Our success will depend 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 infrastructure may not be
able to support the demands placed on it by increased usage. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased government regulation, could
cause the Internet to lose its viability as a commercial medium. Even if the
required infrastructure, standards, protocols and complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.
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 or could impose burdensome requirements that
render our business unprofitable. 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 THAT COULD RESULT IN LEGISLATION OR
MARKET PERCEPTIONS THAT 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.
10
<PAGE>
Our products use "cookies" to track demographic information and user
preferences. A "cookie" is information keyed to a specific user that is stored
on a computer's hard drive, typically without the user's knowledge. Cookies are
generally removable by the user, although removal could affect the content
available on a particular site. Germany has imposed laws limiting the use of
cookies, and a number of Internet commentators and governmental bodies in the
United States and other countries have urged passage of laws limiting or
abolishing the use of cookies. If such laws are passed or if users begin to
delete or refuse cookies as a common practice, demand for our personalization
products could be reduced.
PROJECTIONS INCLUDED IN THIS PROSPECTUS RELATING TO THE GROWTH OF E-COMMERCE AND
THE INTERNET ARE BASED ON ASSUMPTIONS THAT COULD TURN OUT TO BE INCORRECT AND
ACTUAL RESULTS COULD BE MATERIALLY DIFFERENT FROM THE PROJECTIONS.
This prospectus contains various data and projections related to revenues
generated by electronic commerce and the size of the worldwide Internet commerce
application software market. These data and projections are inherently
imprecise, and investors are cautioned not to place undue reliance on them.
These data and projections have been included in studies prepared by
International Data Corporation, an independent market research firm, and the
projections are based on surveys, financial reports and models used by IDC to
measure license revenues and associated maintenance fees derived from sales to
e-commerce sites. These projections include assumptions regarding business and
home use of the Internet, including assumptions as to growth in the percentage
of Web users making online purchases, increases in the amount of time people
spend using the Web, changing attitudes toward Web usage and purchasing, levels
of business saturation for Web use and increases in the level of software
spending by businesses, as well as various assumptions regarding the rate of
growth of Web use in countries outside the United States. Actual results or
circumstances may be materially different from the projections.
RISKS RELATED TO THE SECURITIES MARKETS
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile. For example, the market price of our
common stock has ranged from $5.13 per share to $126.88 per share since our
initial public offering in July 1999. Fluctuations in market price and volume
are particularly common among securities of Internet and software companies. The
market price of our common stock may fluctuate significantly in response to the
following factors, some of which are beyond our control:
- variations in our quarterly operating results;
- changes in market valuations of Internet and software companies;
- our announcements of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- our failure to complete significant sales;
- additions or departures of our key personnel;
- future sales of our common stock; or
- changes in financial estimates by securities analysts.
11
<PAGE>
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY.
Certain provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable, which could reduce the market price of our common stock.
These provisions include:
- authorizing the issuance of "blank check" preferred stock;
- providing for a classified board of directors with staggered, three-year
terms;
- providing that directors may only be removed for cause by a two-thirds
vote of stockholders;
- limiting the persons who may call special meetings of stockholders
prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us.
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION.
The public offering price is substantially higher than the book value per
share of the outstanding common stock immediately after this offering. At an
assumed public offering price of $86.625 per share, investors in this offering
will incur immediate dilution of approximately $79.91 in the book value per
share of the common stock.
12
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus includes and incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included or incorporated in this prospectus regarding our
strategy, future operations, financial position, future revenues, projected
costs, prospects, plans and objectives of management are forward-looking
statements. The words "anticipates," "believes," "estimates," "expects,"
"intends," "may," "plans," "projects," "will," "would" and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot guarantee
that we actually will achieve the plans, intentions or expectations disclosed in
our forward-looking statements and you should not place undue reliance on our
forward-looking statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the forward-looking
statements we make. We have included important factors in the cautionary
statements included or incorporated in this prospectus, particularly under the
heading "Risk Factors," that we believe could cause actual results or events to
differ materially from the forward-looking statements that we make. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments we may make.
We do not assume any obligation to update any forward-looking statements.
13
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 4,000,000 shares of
common stock we are offering will be approximately $331.2 million (or
approximately $390.0 million if the underwriters' over-allotment option is
exercised in full), at an assumed public offering price of $86.625 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us. We will not receive any of the proceeds from
the sale of shares by the selling stockholders.
We intend to use our net proceeds from this offering for working capital and
other general corporate purposes. We may also use a portion of the net proceeds
for acquisitions of businesses, products and technologies. From time to time we
engage in discussions with potential acquisition candidates. We have no current
plans, commitments or agreements with respect to any acquisitions, however, and
we may not make any acquisitions.
We have not identified specific uses for our net proceeds from this offering
and we will have discretion over their use and investment. Pending use of our
proceeds, we intend to invest these proceeds in short-term, investment grade,
interest-bearing securities.
PRICE RANGE OF COMMON STOCK
Our common stock has traded on The Nasdaq National Market under the symbol
"ARTG" since our initial public offering on July 21, 1999. Prior to that time,
there was no public market for our common stock. The following table sets forth
the high and low reported sale prices of our common stock for the periods
indicated as reported by The Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1999
Third quarter (commencing July 21, 1999)................... $ 19.06 $ 5.13
Fourth quarter............................................. 66.00 17.56
2000
First quarter.............................................. 106.50 43.81
Second quarter............................................. 101.94 28.63
Third quarter.............................................. 126.88 76.00
Fourth quarter (through October 25, 2000).................. 96.50 56.25
</TABLE>
The last reported sales price of our common stock on October 25, 2000 was
$86.625.
DIVIDEND POLICY
We currently intend to retain future earnings, if any, to finance our
growth. We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs, restrictions in financing agreements and plans for expansion.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 on:
- an actual basis; and
- an as adjusted basis to reflect (a) our receipt of proceeds from the sale
of 4,000,000 shares of common stock offered by us in this offering at an
assumed public offering price of $86.625 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by us, and (b) exercises by selling stockholders of
options to purchase 112,125 shares of common stock to be sold in this
offering.
The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes and other financial
information appearing elsewhere or incorporated in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Long-term obligations, less current maturities......... $ 3,000 $ 3,000
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value--
Authorized--10,000,000 shares, actual and as
adjusted Issued and outstanding--none, actual and
as adjusted........................................ -- --
Common stock, $.01 par value--
Authorized--500,000,000 shares authorized, actual
and
as adjusted
Issued and outstanding--66,889,377 shares, actual and
71,001,502 shares, as adjusted..................... 669 710
Additional paid-in-capital........................... 180,642 512,216
Deferred compensation................................ (3,020) (3,020)
Accumulated deficit.................................. (26,599) (26,599)
-------- --------
Total stockholders' equity......................... 151,692 483,307
-------- --------
Total capitalization............................. $154,692 $486,307
======== ========
</TABLE>
The table above excludes as of June 30, 2000:
- 8,926,307 shares issuable upon exercise of outstanding options; and
- 7,279,107 additional shares reserved for issuance under our stock plans.
15
<PAGE>
DILUTION
The net tangible book value of our common stock as of June 30, 2000 was
$145.1 million, or $2.17 per share. After giving effect to (a) our sale of
4,000,000 shares of common stock in this offering at an assumed public offering
price of $86.625 per share and after deducting estimated underwriting discounts
and commissions and estimated offering expenses and (b) exercises by selling
stockholders of options to purchase 112,125 shares of common stock to be sold in
this offering, the as adjusted net tangible book value at June 30, 2000 would
have been $476.7 million, or $6.72 per share.
Net tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding as of June 30, 2000. This offering will result in an
increase in net tangible book value per share of $4.55 to existing stockholders
and dilution in net tangible book value per share of $79.91 to new investors who
purchase shares in this offering. Dilution is determined by subtracting net
tangible book value per share after this offering from the assumed public
offering price of $86.625 per share. The following table illustrates this
dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share..................... $ 86.63
Net tangible book value per share at June 30, 2000........ $ 2.17
Increase per share attributable to new investors.......... 4.55
--------------
As adjusted net tangible book value per share after this
offering.................................................. 6.72
--------------
Dilution per share to new investors......................... $ 79.91
==============
</TABLE>
The above calculations do not take into account the exercise of outstanding
options after June 30, 2000. If the 8,926,307 options outstanding at June 30,
2000 were exercised, there would be further dilution to new investors.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1998 and 1999 and for each of the years ended December 31, 1997, 1998 and 1999
are derived from financial statements audited by Arthur Andersen LLP,
independent public accountants, which are included in this prospectus. The
selected consolidated financial data as of December 31, 1995, 1996 and 1997 and
the years ended December 31, 1996 and 1995 are derived from audited financial
statements not included in this prospectus. The selected consolidated financial
data as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 are
derived from unaudited financial statements that are included in this prospectus
and that, in our opinion, reflect all adjustments, consisting only of normal
recurring adjustments, that are necessary for a fair presentation of our
financial position and results of operations for those periods. Operating
results for the six months ended June 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000.
Additional information regarding basic and diluted net income (loss) per share
is described in note 1(e) to the audited consolidated financial statements and
note 2 to the unaudited interim consolidated condensed financial statements
included elsewhere in this prospectus. The following data should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere or incorporated in this prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product license................................... $ -- $ 53 $ 1,866 $ 4,059 $ 18,590 $ 4,911 $40,058
Services.......................................... 798 3,849 4,592 8,078 13,487 5,742 14,143
------- ------- ------- ------- -------- --------- -------
Total revenues.................................. 798 3,902 6,458 12,137 32,077 10,653 54,201
------- ------- ------- ------- -------- --------- -------
Cost of revenues:
Product license................................... -- -- 64 30 8,160 17 1,573
Services.......................................... 594 1,985 3,133 5,020 10,232 4,044 11,889
------- ------- ------- ------- -------- --------- -------
Total cost of revenues.......................... 594 1,985 3,197 5,050 18,392 4,061 13,462
------- ------- ------- ------- -------- --------- -------
Gross profit.................................... 204 1,917 3,261 7,087 13,685 6,592 40,739
------- ------- ------- ------- -------- --------- -------
Operating expenses:
Research and development.......................... 217 1,117 3,661 3,355 6,343 2,523 7,690
Sales and marketing............................... 133 1,152 2,287 4,074 15,921 4,037 25,391
General and administrative........................ 284 1,060 1,418 2,291 5,323 1,858 8,689
Amortization of deferred compensation............. -- -- -- 107 1,127 519 608
------- ------- ------- ------- -------- --------- -------
Total operating expenses........................ 634 3,329 7,366 9,827 28,714 8,937 42,378
------- ------- ------- ------- -------- --------- -------
Loss from operations................................ (430) (1,412) (4,105) (2,740) (15,029) (2,345) (1,639)
Interest income..................................... -- -- 6 54 2,018 121 4,401
Interest expense.................................... (37) (30) (129) (165) (121) (49) --
------- ------- ------- ------- -------- --------- -------
Income (loss) before provision for income taxes..... (467) (1,442) (4,228) (2,851) (13,132) (2,273) 2,762
Provision for income taxes.......................... -- -- -- -- -- -- (500)
------- ------- ------- ------- -------- --------- -------
Net income (loss)................................... (467) (1,442) (4,228) (2,851) (13,132) (2,273) 2,262
Accretion of dividends, discount and offering costs
on preferred stock................................ (2) (206) (214) (1,594) (4,395) (487) --
------- ------- ------- ------- -------- --------- -------
Net income (loss) available for common
stockholders...................................... $ (469) $(1,648) $(4,442) $(4,445) $(17,527) $ (2,760) $ 2,262
======= ======= ======= ======= ======== ========= =======
Net income (loss) per share:
Basic............................................. $ (0.03) $ (0.09) $ (0.25) $ (0.25) $ (0.45) $ (0.14) $ 0.03
======= ======= ======= ======= ======== ========= =======
Diluted........................................... $ (0.03) $ (0.09) $ (0.25) $ (0.25) $ (0.45) $ (0.14) $ 0.03
======= ======= ======= ======= ======== ========= =======
Weighted average shares outstanding:
Basic............................................. 16,262 17,698 17,744 17,934 38,777 19,076 66,339
======= ======= ======= ======= ======== ========= =======
Diluted........................................... 16,262 17,698 17,744 17,934 38,777 19,076 72,872
======= ======= ======= ======= ======== ========= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 6 $ 2,358 $ 187 $ 4,093 $ 124,711 $ 72,619
Working capital (deficit)..................................... (341) 902 (1,328) 3,650 117,727 134,474
Total assets.................................................. 137 3,038 1,672 7,766 177,735 188,403
Long-term obligations, less current maturities................ -- 24 122 322 4,000 3,000
Redeemable convertible preferred stock........................ -- 3,000 3,153 8,313 -- --
Stockholders' equity (deficit)................................ (211) (1,648) (4,060) (4,034) 146,385 151,692
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS,
UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF
FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We were founded in December 1991. From 1991 through 1995, we devoted our
efforts principally to building, marketing and selling our professional services
capabilities and to research and development activities related to our software
products. Beginning in 1996, we began to focus on selling our software products.
To date, we have enhanced and released several versions of our Dynamo
Application Server product and have completed development of our current product
suite. We began shipping our new application suite, Dynamo 5 e-Business
Platform, in September 2000. 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 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 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. In multiple element arrangements, we
use the residual value method in accordance with SOP 97-2 and SOP 98-9,
MODIFICATION OF SOP 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.
18
<PAGE>
Services revenues have increased primarily due to the expansion of our
service capabilities by hiring additional service personnel and 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 annual
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.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as percentages
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Product license.......................... 29% 33% 58% 46% 74%
Services................................. 71 67 42 54 26
--- --- --- --- ---
Total revenues......................... 100 100 100 100 100
Total cost of revenues..................... 49 42 57 38 25
--- --- --- --- ---
Gross margin............................. 51 58 43 62 75
--- --- --- --- ---
Operating expenses:
Research and development................. 57 27 20 24 14
Sales and marketing...................... 35 34 50 38 47
General and administrative............... 22 19 17 17 16
Amortization of deferred compensation.... -- 1 3 5 1
--- --- --- --- ---
Total operating expenses............... 114 81 90 84 78
--- --- --- --- ---
Loss from operations....................... (63) (23) (47) (22) (3)
Interest income (expense), net............. (2) (1) 6 1 8
--- --- --- --- ---
Income (loss) before provision for income
taxes.................................. (65) (24) (41) (21) 5
Provision for income taxes................. -- -- -- -- 1
--- --- --- --- ---
Net income (loss).......................... (65)% (24)% (41)% (21)% 4%
=== === === === ===
</TABLE>
The following table sets forth, for the periods indicated, the cost of
product license revenues as a percentage of product license revenues and the
cost of services revenues as a percentage of services revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cost of product license revenues.......... 3% 1% 44% --% 4%
Cost of services revenues................. 68 62 76 70 84
</TABLE>
19
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUES
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
increase was primarily attributable to strong market acceptance of our Dynamo
suite of products as we continued 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 $4.9 million for the six months
ended June 30, 1999 to $40.1 million for the six months ended June 30, 2000. The
increase was primarily attributable to the continued rapid growth in our partner
channel and higher institutional sales. We experienced an increase in the number
of license arrangements under which the initial license fee exceeded
$1 million. We anticipate that product license revenues will continue to grow in
absolute dollars, but expect the sequential rate of growth to decrease as
compared to the past several quarters.
SERVICES REVENUES
Services revenues 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 revenues increased 55% from $4.7 million for the six
months ended June 30, 1999 to $7.3 million for the six months ended June 30,
2000. The increase in professional services revenues 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
370% from $1.0 million for the six months ended June 30, 1999 to $4.7 million
for the six months ended June 30, 2000. The increase in software maintenance and
support revenues was the result of continued increases in product revenues that
generated software maintenance and support revenues. In addition we had
increases in software maintenance and support renewals. Training revenues
increased 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 increase in training
revenues was primarily attributable to our extended training program offerings.
In addition, our acquisition of Petronio Technology Group on May 17, 2000
provided us with additional Java, J2EE and XML courseware, as well as
strengthened our training capabilities with the addition of seasoned trainers
and curriculum developers. We believe these capabilities will enhance selling
efforts for product license revenues to end-users, resellers and partners.
COST OF PRODUCT LICENSE REVENUES
Cost of product license revenues increased 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 lawsuit filed by BroadVision in December 1998, which
alleged that we were infringing on a patent 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 the patent and any other patents that may be issued
in the future that are related to the original patent. We agreed to pay
BroadVision a total of $15.0 million in license fees, of which $8.0 million was
paid in February 2000. These licenses fees are being accounted for as cost of
product license revenues. The initial payment of $8.0 million was expensed in
the fourth quarter of 1999, and the remaining $7.0 million is being expensed
ratably over a three-year period that began in the first quarter of 2000. These
fees are to be paid in amounts of $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 product
license revenues also includes cost associated with sustaining the current
release of the Dynamo suite of products.
20
<PAGE>
Cost of product license revenues as a percentage of product revenues
increased 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 product license revenues in excess of the BroadVision license fee.
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 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 increase was attributable to the growth of our resources in
our professional services group. Approximately 51% of the increase was related
to compensation and benefit costs. Additionally, costs increased due to
third-party contract expense and recruiting, hiring and training. We anticipate
these costs will continue to increase.
Cost of services revenues as a percentage of services revenues increased
from 70% for the six months ended June 30, 1999 to 84% for the six months ended
June 30, 2000. We anticipate this trend to continue as a function of achieving
our product/service targets to total revenues.
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 (gross margin), will vary significantly depending
on the level of professional services staffing, their effective utilization
rates and the mix of services performed, including product license technical
support services, and whether these services are performed by us or by
third-party contractors and the level of third-party license fees. In addition,
gross profit may vary significantly depending on the mix of revenues between
services and product licenses.
Gross profit 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
increase in gross profit was 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 mainly to support and maintenance growth
related to higher than expected product revenues over the past few quarters.
RESEARCH AND DEVELOPMENT EXPENSES
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 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 24% for the six months ended June 30, 1999 and 14% for the six
months ended June 30, 2000. These dollar and percentage increases were due
principally to the research and development expenses associated with our 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, in absolute dollars, to increase as we aggressively expand
our research and development hiring efforts subsequent to the Dynamo 5 general
release.
21
<PAGE>
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of salaries, commissions and
other related costs for sales and marketing personnel, travel, public relations
and marketing materials and events.
Sales and marketing expenses increased 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 associated primarily with international sales and
marketing expansion, global hiring and advertising efforts, including our Dynamo
Open user conference. Approximately 39% of the increase for the six months ended
June 30, 2000 was related to compensation and benefit costs, and an additional
38% was related to marketing and promotional expenses.
Sales and marketing expenses as a percentage of total revenues 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
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 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 increase related to increases in
personnel. An additional 21% of the increase related to increased consulting
services for our infrastructure initiatives. The increase also was 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
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 second half of 2000. We expect general and administrative expenses to
fluctuate as a percentage of total revenues, 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 represented 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 those grants. We are amortizing this amount over
the vesting periods of the applicable options.
Amortization of deferred stock compensation expense increased 17% from
$519,000 for the six months ended June 30, 1999 to $608,000 for the six months
ended June 30, 2000. This increase was due to the timing of our recording of
deferred stock compensation.
22
<PAGE>
INTEREST INCOME (EXPENSE)
Interest income 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
increase was the result of our completion of our initial and follow-on public
offerings completed in July and November 1999, from which we received net
proceeds of approximately $153.3 million that was invested primarily in cash,
cash equivalents and marketable securities.
Interest expense decreased from $49,000 for the six months ended June 30,
1999 to zero for the six months ended June 30, 2000. The decrease was due to the
repayment of outstanding indebtedness with the proceeds of our initial public
offering.
PROVISION FOR INCOME TAXES
As a result of achieving profitability in the 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 a loss for the six months ended June 30,
1999, and accordingly we made no provision for income taxes for that period.
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. We expect to utilize our net operating loss
carryforwards in 2000 and, as a result, expect our effective tax rate for 2000
to be approximately 15%. We anticipate that our effective tax rate for 2001 will
be approximately 34%.
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 believe ownership changes have resulted from our past
financings and will result from this offering. We do not believe these ownership
changes will have a material impact on our ability to utilize our net operating
loss and tax credit carryforwards.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
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 and 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.
No individual customer accounted for more than 10% of total revenues in
1999, and we do not expect any customer to account for more than 10% of total
revenues in 2000. In 1998, Sun Microsystems accounted for 17% of total revenues
and John Hancock Funds and Universal Learning Technology each accounted for 10%
of total revenues. In 1997, Sony Online Entertainment accounted for 29% of total
revenues, BMG Direct accounted for 16% of total revenues and R.R. Donnelley
accounted for 11% of total revenues.
23
<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 OEM agreement has an
initial term that ends on December 31, 2000 and will automatically renew for
successive one-year terms unless one of the parties elects not to renew the
agreement. We cannot assure you that revenues generated under this agreement
will remain a significant percentage of our product license revenues in future
periods.
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.
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 in professional services revenues
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 in software maintenance and support revenues 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 revenues for 1999 were $1.1 million. We expect training revenues
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.
COST OF PRODUCT LICENSE REVENUES
Cost of product license revenues increased from $30,000 in 1998 to
$8.2 million in 1999. The increase is attributable to the settlement with
BroadVision, which resulted in $8.0 million of license fees expensed in 1999.
Cost of product 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.
COST OF SERVICES REVENUES
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
24
<PAGE>
of training programs in December 1998. Additionally, costs increased due to
travel, recruiting and facilities costs.
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.
GROSS PROFIT
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 was 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 1999. This decrease was 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 margin 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 margin 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
Research and development expenses increased 89% from $3.4 million in
1998 million to $6.3 million in 1999. Approximately 79% of the increase was 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.
SALES AND MARKETING EXPENSES
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 marketing expenditures.
25
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 132% from $2.3 million in 1998
to $5.3 million in 1999. Approximately 30% of the increase was 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 was due to
increased consulting services and approximately 13% of the increase was due to
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.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation expense increased 953% from
$107,000 in 1998 to $1.1 million in 1999. This was due to the timing of our
recording of deferred stock compensation. 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 was the result of our completion of our initial and follow-on public
offerings completed in July and November 1999, from which we received net
proceeds of approximately $153.3 million that was invested primarily in cash,
cash equivalents and marketable securities. Interest income increased from
$6,000 in 1997 to $54,000 in 1998. The increase reflected 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 reflected 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 1998
in connection with our credit facility.
PROVISION FOR INCOME TAXES
We incurred losses for each of the years ended December 31, 1999, 1998 and
1997. Accordingly, we made no provisions for income taxes for those years.
QUARTERLY RESULTS
The following tables set forth unaudited consolidated statement of
operations data for each quarter of 1999 and the first two quarters of 2000.
This information has been presented on the same basis as the audited financial
statements appearing elsewhere in this prospectus and, in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary to present fairly the unaudited
quarterly results. This information should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
prospectus. The operating results for any quarter are not necessarily indicative
of results for any future period.
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product license................................... $1,806 $ 3,105 $ 4,461 $ 9,218 $16,247 $23,811
Services.......................................... 2,614 3,128 3,679 4,066 5,325 8,818
------ ------- ------- -------- ------- -------
Total revenues.................................. 4,420 6,233 8,140 13,284 21,572 32,629
------ ------- ------- -------- ------- -------
Cost of revenues:
Product license................................... -- 17 6 8,137 708 865
Services.......................................... 1,813 2,231 2,602 3,586 4,992 6,897
------ ------- ------- -------- ------- -------
Total cost of revenues.......................... 1,813 2,248 2,608 11,723 5,700 7,762
------ ------- ------- -------- ------- -------
Gross profit........................................ 2,607 3,985 5,532 1,561 15,872 24,867
------ ------- ------- -------- ------- -------
Operating expenses:
Research and development.......................... 1,131 1,392 1,710 2,110 3,595 4,095
Sales and marketing............................... 1,420 2,617 4,097 7,787 11,052 14,339
General and administrative........................ 743 1,115 1,292 2,173 3,675 5,014
Amortization of deferred stock compensation....... 216 303 304 304 304 304
------ ------- ------- -------- ------- -------
Total operating expenses........................ 3,510 5,427 7,403 12,374 18,626 23,752
------ ------- ------- -------- ------- -------
Income (loss) from operations....................... (903) (1,442) (1,871) (10,813) (2,754) 1,115
Interest income..................................... 50 71 561 1,336 2,147 2,254
Interest expense.................................... (24) (25) (72) -- -- --
------ ------- ------- -------- ------- -------
Net income (loss) before provision for income
taxes............................................. (877) (1,396) (1,382) (9,477) (607) 3,369
Provision for income taxes.......................... -- -- -- -- -- 500
------ ------- ------- -------- ------- -------
Net income (loss)................................... $ (877) $(1,396) $(1,382) $ (9,477) $ (607) $ 2,869
====== ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product license.................................... 41% 50% 55% 69% 75% 73%
Services........................................... 59 50 45 31 25 27
--- --- --- --- --- ---
Total revenues................................... 100 100 100 100 100 100
Total cost of revenues............................... 41 36 32 88 26 24
--- --- --- --- --- ---
Gross margin......................................... 59 64 68 12 74 76
--- --- --- --- --- ---
Operating expenses:
Research and development........................... 25 22 21 16 17 13
Sales and marketing................................ 32 42 50 59 51 44
General and administrative......................... 17 18 16 16 17 15
Amortization of deferred stock compensation........ 5 5 4 2 1 1
--- --- --- --- --- ---
Total operating expenses......................... 79 87 91 93 86 73
--- --- --- --- --- ---
Income (loss) from operations........................ (20) (23) (23) (81) (13) 3
Interest income...................................... 1 1 7 10 10 7
Interest expense..................................... (1) -- (1) -- -- --
--- --- --- --- --- ---
Net income (loss) before provision for income
taxes.............................................. (20) (22) (17) (71) (3) 10
Provision for income taxes........................... -- -- -- -- -- 1
--- --- --- --- --- ---
Net income (loss).................................... (20)% (22)% (17)% (71)% (3)% 9%
=== === === === === ===
</TABLE>
27
<PAGE>
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Most of our expenses are fixed in the
short term, and we may not be able to quickly reduce spending if revenues are
lower than we project. Our ability to forecast accurately our quarterly revenues
is limited due to the long sales cycle of our software products, which makes it
difficult to predict the quarter in which product license revenues will occur,
and the variability of customer demand for professional services. Our operating
results will be materially adversely affected if revenues do not meet
projections.
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. Cash used in operating activities was $2.8 million for
the six months ended June 30, 2000. This represented operating income of
$2.3 million and changes in working capital items consisting primarily of uses
of cash for accounts receivable of $11.0 million and accounts payable of
$5.3 million. Those amounts were offset by sources from accrued expenses of
$8.1 million and deferred revenue of $4.1 million.
Our investing activities in 1999 consisted primarily of capital expenditures
of $5.6 million 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. Our investing activities in the six months ended June 30, 2000
consisted primarily of capital expenditures of $4.9 million and net purchase of
marketable securities of $45.7 million. Assets acquired both in 1999 and in the
six months ended June 30, 2000 consisted principally of computer hardware and
software. In the second quarter of 2000 we acquired Petronio Technology Group
and, pursuant to the acquisition agreement, made an initial cash payment of
$600,000 and may be obligated to make two additional contingent payments of
$300,000 each. In addition, in July 2000 we acquired The Toronto Technology
Group for $12.0 million in cash, options and exchangeable shares of common
stock. Upon the closing of this acquisition we paid $5.2 million in cash. We
expect that our capital expenditures will continue to increase significantly as
our employee base grows. We expect that capital expenditures will total
approximately $12.0 million over the next twelve months.
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%. At
June 30, 2000, we had $190,000 available under the line of credit based upon our
borrowing base and no borrowings were outstanding. 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 currently are in
compliance with all related financial covenants and restrictions.
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. Net cash provided by financing
activities was $937,000 for the six months ended June 30, 2000, principally
representing proceeds from stock option exercises offset in part by payments on
long-term obligations.
At June 30, 2000, we had $142.9 million in cash, cash equivalents and
marketable securities and $134.5 million in working capital. We believe that our
net proceeds from this offering, together with our existing financial resources
and commercial credit facilities, will be sufficient to meet our cash
requirements for at least the next twelve months.
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BUSINESS
OVERVIEW
We offer an integrated suite of Internet customer relationship management
and e-commerce software applications, as well as related application
development, integration and support services. Our solution enables businesses
to understand, manage and build online customer relationships and to market,
sell and support products and services over the Internet more effectively. Our
Dynamo product suite includes an application server that is specifically
designed to enable and support Web applications, as well as e-commerce and
Internet customer management applications. An application server is a software
program that facilitates the development, deployment and management of other
software programs. Our solution is designed to provide businesses with the core
application platform and software tools required to develop and deploy
personalized, reliable, large-scale Web sites for conducting e-commerce across
multiple channels, including Web browsers and wireless devices.
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 $2.6 trillion worth of goods and services
will be sold over the Internet by 2004, which represents a compounded annual
growth rate of 82% for the period between 1999 and 2004.
As the growth and acceptance of online marketing and e-commerce have
increased, the World Wide Web has become a highly competitive business
environment where customers have a large number of easily accessible choices.
For a company to succeed in this environment, its Web site must present content
and provide an overall visitor experience that captures the visitor's interest
and satisfies their informational and transactional needs. To accomplish this,
companies are investing in Internet-based customer relationship management and
e-commerce solutions, such as:
- online marketing and selling systems to target, attract and retain
customers;
- transaction and distribution management systems to reduce the costs of
delivering products and services to customers and distribution partners;
and
- customer support and relationship management systems to better understand
and serve the ongoing needs of their customers.
International Data Corporation estimates that the worldwide Internet
commerce application software market was $1.8 billion in 1999 and projects that
this market will grow to nearly $5.0 billion in 2000 and $23.0 billion in 2004.
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,
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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
efficient means to manage and maximize customer relationships online. In order
to accomplish this, businesses require solutions that incorporate a number of
features:
- EFFECTIVE CONTROL OF E-COMMERCE SYSTEMS AND STRATEGIES. Business managers
responsible for Internet customer relationship management need easy-to-use
tools to give them direct control over their e-commerce systems and
strategies without requiring the time-consuming intervention of
information technology specialists. With the appropriate tools, business
managers can better manage their Internet customer relationships through
improved customer segmentation and delivery of targeted content,
promotions and advertising campaigns, and personalized pricing and account
information.
- INTEGRATION WITH EXISTING INFORMATION SYSTEMS. In order to present the
customer with a unified and personalized e-commerce experience, companies
must address the difficult challenge of integrating Web applications with
their existing content management, customer database, transaction and
customer support systems.
- COMMON PLATFORM UPON WHICH TO BUILD FUTURE APPLICATIONS. Businesses
implementing sophisticated Web-based applications desire an expandable Web
platform to enable them to build new applications and add third-party
functionality to their e-commerce initiatives on a rapid and ongoing
basis.
- SCALABILITY, PERFORMANCE AND RELIABILITY. The increasing significance of
Web-based commerce requires that e-commerce systems be highly scalable in
order to accommodate rapid user growth and increased Web site complexity,
content and functionality. Scalability refers to the ability of a computer
system to handle greater load by adding additional hardware. Further,
companies need high performance and highly reliable systems because if
online systems fail or cause unsatisfactory delays, even for a short
period of time, businesses could miss revenue opportunities and lose
customers.
CURRENT SOLUTIONS
In response to these emerging business requirements, various applications
have been developed that address discrete aspects of the enterprise e-commerce
infrastructure. A number of vendors offer stand-alone solutions for Web content
management, advertising management, transaction processing, e-commerce
storefront development, personalization and recommendation engines, and
application development tools. By implementing a collection of these stand-alone
solutions, companies can attempt to deliver dynamic, personalized content to Web
site visitors and manage their e-commerce efforts. However, these stand-alone
solutions may not provide a satisfactory solution for many businesses:
- LACK OF INTEGRATED FUNCTIONALITY. Disparate stand-alone applications
generally do not easily integrate and communicate with each other, lack a
common user interface and lack a common platform for integrating with
existing information systems. As a result, a collection of stand-alone
applications often does not present the Web visitor with a unified
customer experience and may sacrifice functionality and performance.
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- HIGH COST. It frequently is 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.
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 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 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
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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 Scenario Server and Dynamo
Commerce Server. 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 Scenario Server allows
non-technical business managers to define e-business scenarios, which are
scripted sequences of customer interactions that manage ongoing business
relationships. Dynamo Commerce Server manages and delivers product catalog
content and personalized, scenario-based merchandising programs and provides
transaction processing capabilities for large-scale e-commerce storefronts.
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 our 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.
E-BUSINESS SCENARIO-BASED CUSTOMER INTERACTION. Our products allow
non-technical business managers to define, manage and analyze customer
interactions that take place across both Web and non-Web based communications
channels. For example, a business manager can use a point-and-click visual
interface to create an e-business scenario that reacts to a new customer visit
by offering an incentive to sign up as a registered user. If the user takes
advantage of the offer by registering, the scenario might pause for several
weeks and send a personalized e-mail reminding the user to return. Finally, the
scenario might be configured to trigger a follow-up phone call after several
repeat visits to enable a customer care representative to build a more personal
relationship with a highly qualified customer.
HIGH SCALABILITY, RELIABILITY AND PERFORMANCE. Our Dynamo Application
Server employs a Java-based architecture that is highly scalable. It has a
dynamic load management system which allows applications to be distributed
across multiple server computers. This means that as a Web site becomes more
heavily utilized, additional computing resources can be added to handle the
additional load. The load management system provides redundant fail-over, a
feature that transfers users on a failed server to another server without
interruption. Dynamo Application Server has been designed to meet the
performance requirements of high-capacity, highly personalized e-commerce Web
sites.
OPEN AND EXPANDABLE APPLICATION SERVER ARCHITECTURE. Our Dynamo Application
Server provides customers with an expandable platform that allows them to
rapidly integrate our products with their existing systems and to deploy new
applications, both internally developed and from third parties. The ability to
integrate multiple applications and information systems with our common platform
enables businesses to incorporate organization-wide customer data and support
systems to provide a unified
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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 eight years and Web sites for over five
years. We have two primary service offerings, Dynamo Solutions and Express
Services. Our Dynamo Solutions team provides customized application design,
development and integration services to clients who desire advanced solutions
that are not commercially available. We provide Dynamo 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
- able 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
- designed by business managers to further their overall business strategies
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 HIGH RETURN ON
INVESTMENT BY:
- increasing e-commerce 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
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software applications that we believe are based on advanced technologies. We
were one of the first companies to market a high-performance dynamic Web page
generation engine to both generate and deliver Web pages on a real-time basis,
and shipped our first Java-based Web application server shortly after Sun
Microsystems' first commercial shipment of Java 1.0. In September 2000 we began
shipping Dynamo 5 E-Business Platform, which we believe is the first fully
certified J2EE customer management solution to be commercially available. 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 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 XML, for formatting data and other information, and
WML, for serving content to wireless devices; and
- using our Dynamo 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 continuing to expand
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. We currently have more than 230 system integrators and technology
partners, including CSC, Deloitte Consulting, E.piphany, Fort Point Partners,
PricewaterhouseCoopers and Sun Microsystems. 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 Interwoven, 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;
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- 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; and
- 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 additional Web-enablement, personalization and e-commerce
features. We believe these relationships will provide us the opportunity to
establish our platform in additional markets.
EXPAND MARKET PRESENCE. We intend to increase our domestic and
international 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.
PURSUE STRATEGIC ACQUISITIONS. We intend to pursue acquisitions of, or
investments in, complementary businesses and technologies. In particular, we
will seek to identify opportunities to acquire personnel that will help us to
increase the breadth of our solution, provide us with additional technological
expertise and expand our geographical presence.
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
Scenario Server and Dynamo Commerce Server. 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 Scenario Server, and Dynamo Scenario Server is
required to run Dynamo Commerce Server. We also sell software tools to enable
rapid application development, as well as connector 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.
The diagram below illustrates the overall architecture of our product suite
as well as the interfaces available to our customers and the channels available
to their customers.
The diagram illustrates the Dynamo application suite with horizontal,
layered bars depicting Dynamo Application Server as the foundation; Dynamo
Personalization Server as the second layer; Dynamo Scenario Server as the third
layer; and Dynamo Commerce Server as the top layer. Integrated with each layer
on the left side is the Dynamo Control Center connected to a list of the
multi-user interfaces: business manager, developer, system administrator and
designer. Integrated with each layer on the right side are customer modules
connected to a list of multi-channel personalization: Web browser, e-mail, PDA,
cellular telephone, pager, Web TV and fax.
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The following table briefly describes the products included in our Dynamo 5
e-Business Platform, including list prices and system requirements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION LIST PRICE AND REQUIREMENTS
---------------------------------------------------------------------------------------------
<S> <C> <C>
APPLICATION SUITE
---------------------------------------------------------------------------------------------
Dynamo Application Server An open and expandable Java- $15,000 per CPU.
based platform designed for
the development and deployment
of high-performance, dynamic
Web applications.
---------------------------------------------------------------------------------------------
Dynamo Personalization Server A platform designed to allow $20,000 per CPU; requires
businesses to manage customer Dynamo Application Server.
profiling and dynamic content
targeting. Ensures that the
right content gets to the
right users at the right time.
---------------------------------------------------------------------------------------------
Dynamo Scenario Server A platform for defining, $30,000 per CPU; requires
delivering and analyzing Dynamo Application Server and
e-business scenarios, which Dynamo Personalization Server.
are customized sequences of
targeted interactions that
allow businesses to create
customer relationships across
the entire lifecycle.
---------------------------------------------------------------------------------------------
Dynamo Commerce Server A complete storefront solution $35,000 per CPU; requires
for business-to-consumer and Dynamo Application Server,
business-to-business Dynamo Personalization Server
e-commerce. Enables businesses and Dynamo Scenario Server.
to create personalized
shopping experiences within a
complete, rapidly deployable
online selling environment.
---------------------------------------------------------------------------------------------
TOOLS AND INTEGRATION MODULES
---------------------------------------------------------------------------------------------
Dynamo Control Center An integrated interface to the Single-seat licenses are
administrative, development included with the servers
and business tools in the listed above. $4,000 per seat
Dynamo for additional users.
e-Business Platform.
---------------------------------------------------------------------------------------------
Dynamo Connectors Adaptors that provide direct $10,000 per CPU.
integration with leading
content management systems and
other enterprise applications.
---------------------------------------------------------------------------------------------
</TABLE>
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;
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- 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; and
- efficiently connecting to enterprise systems and third-party applications.
Dynamo Application Server connects to Dynamo Control Center, a Web
application development tool that allows developers and Web designers to build
new applications and integrate third-party technologies.
DYNAMO PERSONALIZATION SERVER. Dynamo Personalization Server coordinates,
manages and centralizes the personalization functions of the Dynamo product
suite. Dynamo Personalization Server enables business managers to segment users
and target content based on new and pre-existing business rules. It adjusts and
personalizes Web content on a real-time basis by combining explicit user data
from existing customer management and marketing databases with implicit
information gathered on Web navigation behavior.
Dynamo Personalization Server performs the following functions:
- PROFILE GATHERING. When a visitor first arrives at a Web site, a profile
is created automatically for that visitor. If the visitor registers or
logs in, the visitor's identity is added to the profile, preserving any
profile information that was gathered up to that point. Dynamo
Personalization Server tracks both explicit user profile data supplied by
the user as well as implicit profile attributes derived from the user's
behavior on the Web site. This information is combined with any existing
information about the visitor from the company's internal databases.
- SEGMENTATION AND CONTENT TARGETING. Dynamo Personalization Server enables
business managers to segment visitors based on their profile data. Using
business rules, content can be personalized and targeted to these groups
of users. These business rules are created using the Dynamo Control
Center.
- CONTENT MANAGEMENT AND INTEGRATION. In addition to using Dynamo
Personalization Server to target content residing on internal file
systems, customers may purchase Dynamo Connectors to integrate Dynamo with
leading content management systems and other enterprise applications. The
Dynamo Connectors 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 SCENARIO SERVER. Dynamo Scenario Server provides a platform for
non-technical business managers to define, manage and analyze e-business
scenarios, which are planned sequences of interactions with a specific customer
or customer segment that enable businesses to manage long-term customer
relationships. E-business scenarios can span a wide variety of customer
interactions across multiple channels including customer acquisition and
retention, product discounts and promotions, cross-sell and up-sell incentives,
product fulfillment, and customer support functions. Dynamo Scenario Server
features include:
- "POINT-AND-CLICK" VISUAL INTERFACE. Dynamo Scenario Server features a
point-and-click visual interface, integrated in the Dynamo Control Center,
which enables non-technical business managers to define and manage
e-business scenarios by manipulating graphical scenario elements. These
elements include people, time, events, conditions and actions. This visual
interface allows the managers to create and manage e-business initiatives
without requiring skilled computer programming personnel.
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- TIGHT INTEGRATION WITH DYNAMO PERSONALIZATION AND COMMERCE SERVERS. Dynamo
Scenario Server is tightly integrated with the Dynamo Personalization
Server and Dynamo Commerce Server products, so that e-business scenarios
can automatically take advantage of information and configurations in
those products. For example, e-business scenarios can be defined to only
apply to customer segments that are identified through the Dynamo
Personalization Server. When used in conjunction with Dynamo Commerce
Server, e-business scenarios automatically present commerce related events
and actions such as purchasing events and shopping cart discounts,
integrated reporting and graphing.
- SCENARIO TEMPLATES. Dynamo Scenario Server allows the creation and use of
Scenario Templates, which are reusable, pre-built e-business scenarios
that omit a small number of parameters. When a Scenario Template is
re-used, the business manager is asked for the omitted parameters and the
scenario is created. Scenario Templates enable business managers to
quickly initiate commonly used scenarios and to simplify the creation of
scenarios for less sophisticated users.
DYNAMO COMMERCE SERVER. Dynamo Commerce Server is a flexible solution
enabling businesses to deploy and manage large-scale, personalized, e-commerce
storefronts. Dynamo Commerce Server delivers product catalog content and
scenario-based, promotional merchandising 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 Server provides administration
features that allow e-commerce storefronts to be operated independently by
various managers throughout an organization. Dynamo Commerce Server features
include:
- COMPLETE E-COMMERCE STOREFRONT SOLUTION. Dynamo Commerce Server 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
Server supports both business-to-business and business-to-consumer
e-commerce.
- ENVIRONMENT FOR PERSONALIZED SELLING. Web sites built on Dynamo Commerce
Server can be designed to deliver targeted merchandising campaigns based
on user profiles gathered through Dynamo Personalization Server and driven
by e-business scenarios defined through Dynamo Scenario Server. Since
Dynamo Commerce Server 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 Server 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
Server 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 Server has an
administrative interface, integrated into the Dynamo Control Center, 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.
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<PAGE>
SERVICES
We provide a variety of consulting, design, application development,
integration and training and support services in conjunction with our products
through our Dynamo Solutions and Express Services offerings.
DYNAMO SOLUTIONS. Dynamo 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 Dynamo Solutions
services are provided to clients with complex requirements that seek advanced
solutions that are not commercially available to extend the capabilities and
features of their systems. As well as being a core component of our business,
Dynamo 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.
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<PAGE>
CUSTOMERS
We have licensed our products to over 500 customers. Our principal target
markets are Global 2000 companies, as published by Forbes, as well as leading
companies using the Internet as a primary business channel. Our customers
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:
<TABLE>
<S> <C>
TECHNOLOGY INTERNATIONAL
Avolent DeutscheBank
Informix Hong Kong Shanghai Bank Corporation
Network Solutions EDUCATION
Newbridge Networks Harvard Business School
Sun Microsystems Ontrack Learning
TechRepublic RETAIL/STOREFRONT
MANUFACTURING BabyCenter
3M BMG Direct
Eastman Kodak brandwise.com
FINANCIAL SERVICES CareSoft
BancTec GetMusic
John Hancock Funds, Inc. J.Crew
KeyBank Peapod
Scudder Kemper Investments sephora.com
TheStreet.com ShopLink.com
TRAVEL, MEDIA AND ENTERTAINMENT Walgreens
AltaVista TELECOMMUNICATIONS
Hilton Hotels BellSouth
Icon MediaLab
MTV/Nickelodeon
Sony Online Entertainment
</TABLE>
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. 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. Our
Dynamo 5 e-Business Platform is fully certified to comply with the J2EE
standards established by Sun Microsystems.
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.
40
<PAGE>
- 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. We expect that
Sun Microsystems' establishment of J2EE standards will make integration
even easier for those enterprise systems that comply with J2EE
specifications.
- 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, Dynamo Scenario Server is built on
top of Dynamo Personalization Server, and Dynamo Commerce Server is built on top
of Dynamo Scenario 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
41
<PAGE>
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 Dynamo 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; J2EE standards for
developing modular Java programs that can be accessed over a network; and Simple
Network Management Protocol, a standard for remotely monitoring the operation of
a system.
SALES AND MARKETING
Our principal target markets are Global 2000 companies and leading companies
using the Internet as a primary business channel. We target these potential
customers through our direct sales force and through arrangements with systems
integrators, Web developers, original equipment manufacturers and other
technology partners. We currently have more than 230 system integrators and
technology partners.
We employ one group of sales professionals who are compensated based on
product sales made directly to end-users, a second group of regional service
account managers who are compensated based on service sales made directly to
end-users and a third group of sales professionals 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 have initiated a strategy to co-market our products with
technology partners, such as Documentum, E.piphany, Interwoven and Sun
Microsystems, and to sell our products through original equipment manufacturers
such as Informix, with which we entered into an agreement in December 1998. We
intend to increase sales of our products by entering into similar relationships
with additional technology partners and original equipment manufacturers.
Our co-marketing relationships are with major systems integrators that serve
the market for information system products and services. The objective of this
co-marketing strategy is to motivate systems integrators to adopt the Dynamo
technology and suite of products on Web-based projects for their clients. We
train and assist our systems integration partners to enable them to deploy,
extend and support our products.
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<PAGE>
Set forth below is a partial list of organizations with which we have
selling and marketing relationships:
<TABLE>
<S> <C>
American Management Systems KPMG
Cambridge Technology Partners marchFIRST
Computer Sciences Corporation Modem Media . Poppe Tyson
Context Integration Organic Online
Deloitte Consulting Phoenix Pop Productions
Fort Point Partners Planet Access Networks
Free Range Media PricewaterhouseCoopers
Icon Medialab Quidnunc Group
iXL Strategic Interactive Group
Javelin Technology Vision Consulting
</TABLE>
As of September 30, 2000, we had sales personnel located at our offices in
Australia, Canada, England, France, Germany, Hong Kong, the Netherlands and
Sweden. During the past year, we have established relationships with new
international partners and have added key international accounts. We intend to
continue our international expansion by working with additional global and local
partners and by creating additional local infrastructure to provide direct
sales, service and marketing. While we will continue to focus our international
sales efforts principally on Europe, we also will seek to expand our presence in
the Asia/Pacific region, including Japan and Singapore.
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 Blue Martini, BroadVision
and Vignette; and
- platform application server products and vendors, such as BEA Systems,
IBM's Websphere products, and Microsoft, among others.
We also compete in the platform application server market with the Netscape/Sun
Alliance iPlanet Application Server product, which is partially controlled by
Sun Microsystems. Sun is 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.
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<PAGE>
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. Our Dynamo 5 e-Business Platform has been
designed to comply with Sun's J2EE standards. Currently, Sun makes its
Java-related technologies available to the public at no charge. However, if Sun
were to decline 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, or (c) rewrite portions of
our software to accommodate the change or no longer use the technology.
EMPLOYEES
As of September 30, 2000, we had a total of 704 employees. Of our employees,
134 were in research and development, 230 in sales and marketing, 245 in
professional services and 95 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
44
<PAGE>
represented by any collective bargaining unit, and we have never experienced a
work stoppage. We believe our relations with our employees are good.
PROPERTIES
Our headquarters are currently located in a leased facility in Cambridge,
Massachusetts, consisting of approximately 60,000 square feet. In August 2000 we
entered into a lease for approximately 30,000 square feet in another facility in
Cambridge, Massachusetts, and in June 2000 we entered into a lease for
approximately 42,000 square feet in Waltham, Massachusetts. We believe these
facilities will meet our needs through the first quarter of 2001. We are seeking
to locate additional space in the greater Boston area. We also lease offices for
sales and support personnel in three additional domestic locations as well as in
eight foreign countries.
LEGAL PROCEEDINGS
We are not currently a party to any material litigation.
45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors, and their respective ages and
positions as of October 15, 2000, are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------------------------------------------------------
<S> <C> <C>
Jeet Singh........................... 37 Chief Executive Officer and Director
Joseph T. Chung...................... 35 Chief Technology Officer, Treasurer and Chairman of the
Board
Paul G. Shorthose.................... 43 President and Chief Operating Officer
Ann C. Brady......................... 37 Chief Financial Officer and Vice President, Finance
William Wittenberg................... 41 Senior Vice President, Product Development
Lauren J. Kelley..................... 41 Senior Vice President, Worldwide Sales
Ian Reid............................. 48 Vice President, Marketing
Scott A. Jones....................... 39 Director
Charles R. Lax(1).................... 41 Director
Thomas N. Matlack(1)(2).............. 35 Director
Phyllis S. Swersky(1)(2)............. 48 Director
Robert F. Walters.................... 51 Director
</TABLE>
------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
JEET SINGH co-founded our company with Joseph Chung in 1991 and is Chief
Executive Officer and a member of our board of directors. Previously, Mr. Singh
held marketing positions with Boston Technology, Inc., a manufacturer of
advanced voice processing computers, Team Technologies, a Washington, D.C.-based
consulting firm specializing in workgroup productivity, and Groupe Bull/Bull
Corporation of America.
JOSEPH T. CHUNG co-founded our company with Mr. Singh in 1991 and is Chief
Technology Officer, Treasurer and Chairman of our board of directors.
Previously, Mr. Chung was the technical director and chief technology designer
of the hyperinstrument group at the MIT Media Lab and held engineering positions
at Apple Computer and Digital Equipment Corporation.
PAUL G. SHORTHOSE has been Chief Operating Officer since June 1999 and
President since February 2000. From July 1998 to June 1999, he was Vice
President of Marketing and Business Development for Context Integration, Inc., a
software-related consulting services company. From August 1997 to July 1998,
Mr. Shorthose served as our Vice President, Worldwide Services. From April 1992
to August 1997, Mr. Shorthose was Vice President/General Manager for the
Northeast U.S. and Canada Professional Services Organization, a software
consulting group of Sybase, Inc.
ANN C. BRADY has been Chief Financial Officer since April 1999 and Vice
President, Finance since January 1998. From May 1997 to January 1998, she was
Director of Finance. From 1992 to May 1997, Ms. Brady was head of Finance and
Accounting for HPR, Inc., a software and consulting services company,
subsequently acquired by McKesson/HBOC.
WILLIAM WITTENBERG has been Senior Vice President, Product Development since
March 1998. From April 1996 to March 1998, he was Vice President, Engineering.
From 1991 to January 1995, Mr. Wittenberg was Director of Product Management and
User Interface Design for Lotus Development Corporation.
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<PAGE>
LAUREN J. KELLEY has been Senior Vice President, Worldwide Sales since
February 2000. From December 1996 to February 2000, she was Vice President,
Sales. From September 1996 to December 1996, she worked as a consultant to the
company on the European market. From July 1995 to December 1996, Ms. Kelley was
a Principal with TechConnect Strategies, Inc., an international business
development firm. From January 1994 to July 1995, Ms. Kelley was General Manager
at Borland International in Paris, France.
IAN REID has been Vice President, Marketing since March 2000. From
November 1998 to March, 2000 he was an independent marketing consultant for
internet industry companies. From May 1996 to October 1998, he was Vice
President, Field and Channel Marketing for Open Market, Inc., an internet
e-commerce company. From 1992 to 1996, Mr. Reid was Vice President, Marketing
for Advanced Visual Systems Inc., a visualization software company.
SCOTT A. JONES has been a member of our board of directors since
November 1997. Since co-founding Escient, Inc., a company focusing on Internet
applications related to entertainment in the home, in July 1996, Mr. Jones has
served as its Chief Executive Officer and Chairman. After co-founding Boston
Technology, Inc. in 1986, Mr. Jones served as its Chairman and Chief Scientist
until 1992. Since 1994, he has also been a principal of Threshold
Technologies, Inc., a consulting firm, and King Air Charters, Inc., an air
charter company. Mr. Jones also serves on the board of HIE, Inc., a software
integration services company.
CHARLES R. LAX has been a member of our board of directors since
December 1997. Since November 1997, Mr. Lax has been General Partner of SOFTBANK
Technology Ventures. From March 1996 to November 1997, he was Vice President at
SOFTBANK Holdings Inc. Mr. Lax also serves on the boards of
1-800-Flowers.com, Inc., Global Sports, Inc., a sports equipment company,
Interliant, Inc., an Internet hosting service company, and Webhire, Inc., a
human resources staffing software company.
THOMAS N. MATLACK has been a member of our board of directors since
November 1997. Since August 1998, he has been a Managing Partner at Megunticook
Management LLC, a private investment fund. From 1992 to February 1997, he held
various positions with the Providence Journal Company, including Chief Financial
Officer from April 1996 to February 1997, Vice President, Finance from
September 1995 to April 1996, and Director, Financial Planning and Analysis from
1992 to September 1995.
PHYLLIS S. SWERSKY has been President of The Meltech Group, a consulting
firm specializing in business advisory services for high-growth potential
businesses, since 1995. She was the President of The Net Collaborative, Inc., an
Internet systems integration company, from 1996 to 1997. She served as President
of Work/Family Directions, Inc., a provider of employee benefits programs, from
1992 through 1995. Prior to 1992 she was Executive Vice President and Chief
Financial Officer of AICorp, Inc., a computer software company. Ms. Swersky also
serves as a director of Investor Financial Services, Inc.
ROBERT F. WALTERS has been Senior Vice President and Chief Information
Officer of the John Hancock Financial Services since 1995. Prior to Hancock,
Mr. Walters held various key positions at Citibank, both domestically and
overseas. Before joining Citibank, Mr. Walters held various senior technology
management positions at Bankers Trust Co. and Marine Midland Bank.
Our board of directors is divided into three classes, with the members of
each class serving for a staggered three-year term. Our board currently consists
of two Class I directors, three Class II directors and two Class III directors.
At each annual meeting of stockholders, a class of directors will be elected for
a three-year term to succeed the directors of the same class whose terms are
then expiring. The term of the Class I directors (Ms. Swersky and Mr. Walters)
expires at the annual meeting of stockholders to be held in 2003. The term of
the Class II directors (Messrs. Jones, Lax and Matlack) expires at the annual
meeting of stockholders to be held in 2001. The term of the Class III directors
(Messrs. Chung and Singh) expires at the annual meeting of stockholders to be
held in 2002.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information about the beneficial ownership of
our common stock on October 17, 2000 by:
- each person or entity who is known by us to own beneficially more than
five percent of our common stock;
- each of our directors and executive officers; and
- all of our directors and executive officers as a group.
Each of the selling stockholders is either a director or an executive officer of
our company.
Each person named in the table has sole voting power and investment power,
or shares such power with his or her spouse, with respect to all shares of
capital stock listed as owned by such person. The address of each person named
in the table is c/o Art Technology Group, Inc., 25 First Street, Cambridge,
Massachusetts 02141. Shares included under "Right to Acquire" consist of shares
purchasable pursuant to options that are vested or will vest within 60 days
after October 17, 2000.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
BEFORE OFFERING
---------------------------------------------- SHARES BENEFICIALLY
NUMBER OF OWNED AFTER OFFERING
RIGHT TO SHARES ---------------------
NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL PERCENT OFFERED TOTAL PERCENT
------------------------ ----------- -------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeet Singh............. 6,484,000 -- 6,484,000 9.6% 200,000 6,284,000 8.8%
Joseph T. Chung........ 6,428,432 -- 6,428,432 9.5 200,000 6,228,432 8.7
Scott A. Jones......... 682,083 15,000 697,083 1.0 100,000 597,083 *
William Wittenberg..... 302,741 207,688 570,429 * 100,000 410,429 *
Lauren J. Kelley....... 41,577 98,336 139,913 * 10,000 129,913 *
Ann C. Brady........... 20,027 94,583 114,610 * 50,000 64,610 *
Paul G. Shorthose...... 2,281 292,500 294,781 * 60,000 234,781 *
Phyllis S. Swersky..... 2,200 10,000 12,200 * -- 12,200 *
Robert F. Walters...... 28 10,000 10,028 * -- 10,028 *
Ian Reid............... -- 27,500 27,500 * -- 27,500 *
Charles R. Lax......... -- 15,000 15,000 * 5,000 10,000 *
Thomas N. Matlack...... -- 5,000 5,000 * -- 5,000 *
All executive officers
and directors as a
group (12 persons)... 13,963,369 775,607 14,738,976 21.5 725,000 14,013,976 19.3
</TABLE>
------------------------
* Less than one percent.
Mr. Singh and Mr. Chung each hold their shares in trusts of which they are
the respective sole trustees with sole vesting and dispositive power.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we and the selling stockholders have agreed
to sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Goldman, Sachs & Co., Chase Securities Inc. and U.S. Bancorp Piper
Jaffray Inc. are acting as representatives, the following respective numbers of
shares of our common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Goldman, Sachs & Co.........................................
Chase Securities Inc........................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total............................................... 4,725,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in this offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 708,750 additional shares from us at the public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of our common stock initially
at the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and Commissions
paid by us............................ $ $ $ $
Expenses payable by us.................. $ $ $ $
Underwriting Discounts and Commissions
paid by selling stockholders.......... $ $ $ $
</TABLE>
The selling stockholders will not pay any expenses of this offering, other than
the underwriting discounts and commissions for the shares they sell and for any
expenses of separate counsel or other advisors they engage.
49
<PAGE>
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act of 1933 relating to, any shares
of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, or publicly disclose the
intention to make any offer, sale, pledge, disposition or filing, without the
prior written consent of Credit Suisse First Boston Corporation for a period of
90 days after the date of this prospectus, except issuances pursuant to the
exercise of stock options outstanding on the date hereof, grants of employee
stock options pursuant to our stock incentive plans in effect on the date
hereof, and issuances of up to an aggregate of shares of common stock in
connection with acquisitions.
Our directors and executive officers, including all of the selling
stockholders, have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any
shares of our common stock, enter into a transaction which would have the same
effect, or enter into any swap, hedge or other arrangement that transfers, in
whole or in part, any of the economic consequences of ownership of our common
stock, whether any of these transactions are to be settled by delivery of our
common stock or other securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge or disposition, or to enter into any
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of
90 days after the date of this prospectus. The foregoing restrictions do not
apply to shares of our common stock that our directors and executive officers
acquire in the open market.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act of 1933, or contribute to payments
that the underwriters may be required to make in that respect.
Our common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "ARTG."
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions,
penalty bids and passive market making in accordance with Regulation M under the
Securities Exchange Act of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the position
can only be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on
50
<PAGE>
the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
- In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations, make
bids for or purchases of the common stock until the time, if any, at which
a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the Web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations.
51
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
shareholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are made. Any resale
of the common stock in Canada must be made under applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made under available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation a
purchaser is representing to us, the selling shareholders and the dealer from
whom the purchase confirmation is received that
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
- the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein and the selling shareholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser pursuant to this offering. The report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed for common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and
52
<PAGE>
about the eligibility of the common stock for investment by the purchaser under
relevant Canadian legislation.
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters in
connection with this offering will be passed upon for the underwriters by Foley,
Hoag & Eliot LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the years in the three-year period ended December 31, 1999, included
and incorporated by reference in this prospectus and elsewhere in the
registration statement, have been audited by Arthur Andersen LLP, independent
public accountants as indicated in their report with respect thereto, and are
included and incorporated by reference herein in reliance upon the authority of
said firm as experts in giving said reports.
53
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other documents with the SEC. You may
read and copy any document we file at the SEC's public reference room at
Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. You should call 1-800-SEC-0330 for more information on the public
reference room. Our SEC filings are also available to you on the SEC's Internet
site at HTTP://WWW.SEC.GOV.
This prospectus is part of a registration statement that we filed with the
SEC. The registration statement contains more information than this prospectus
regarding us and our common stock, including certain exhibits and schedules. You
can obtain a copy of the registration statement from the SEC at the address
listed above or from the SEC's Internet site.
INFORMATION WE ARE INCORPORATING BY REFERENCE
The SEC allows us to "incorporate" into this prospectus information that we
file with the SEC in other documents. This means that we can disclose important
information to you by referring to other documents that contain that
information. The information incorporated by reference is considered to be part
of this prospectus. Information contained in this prospectus and information
that we file with the SEC in the future and incorporate by reference in this
prospectus automatically updates and supersedes previously filed information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, prior to the sale of all the shares covered by this
prospectus.
(1) our Annual Report on Form 10-K for the year ended December 31, 1999;
(2) our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2000
and March 31, 2000;
(3) our Current Reports on Form 8-K dated March 7, 2000 and October 26,
2000;
(4) all of our filings pursuant to the Securities Exchange Act of 1934 after
the date of filing of the initial registration statement and prior to
effectiveness of the registration statement; and
(5) the description of our common stock contained in our Registration
Statement on Form 8-A dated July 12, 1999.
You may request a copy of these documents, which will be provided to you at
no cost, by contacting:
Art Technology Group, Inc.
25 First Street
Cambridge, Massachusetts 02141
Attention: Investor Relations Department
Telephone: (617) 386-1000
54
<PAGE>
ART TECHNOLOGY GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
------------------------------------------------------------
Consolidated Condensed Balance Sheets as of June 30, 2000
and December 31, 1999..................................... F-2
Consolidated Condensed Statements of Operations for the Six
Months Ended
June 30, 2000 and 1999.................................... F-3
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 30, 2000
and 1999.................................................. F-4
Notes to Unaudited Consolidated Condensed Financial
Statements................................................ F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
Report of Independent Public Accountants.................... F-10
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-11
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-12
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1997, 1998 and 1999...... F-13
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998
and 1997.................................................. F-14
Notes to Consolidated Financial Statements.................. F-15
</TABLE>
F-1
<PAGE>
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--500,000,000 shares and 100,000,000 shares at
June 30, 2000 and December 31, 1999, respectively.....
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.
F-2
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
2000 1999
------- -------
<S> <C> <C>
Revenues:
Product license........................................... $40,058 $ 4,911
Services.................................................. 14,143 5,742
------- -------
Total revenues.......................................... 54,201 10,653
Cost of Revenues:
Product license........................................... 1,573 17
Services.................................................. 11,889 4,044
------- -------
Total cost of revenues.................................. 13,462 4,061
------- -------
Gross profit............................................ 40,739 6,592
------- -------
Operating Expenses:
Research and development.................................. 7,690 2,523
Sales and marketing....................................... 25,391 4,037
General and administrative................................ 8,689 1,858
Amortization of deferred compensation..................... 608 519
------- -------
Total operating expenses................................ 42,378 8,937
------- -------
Income (Loss) from Operations............................... (1,639) (2,345)
Interest Income............................................. 4,401 121
Interest Expense............................................ -- (49)
------- -------
Net income (loss) before provision for income taxes..... 2,762 (2,273)
Provision for Income Taxes.................................. 500 --
------- -------
Net income (loss)....................................... 2,262 (2,273)
Accretion of Dividends, Discount and Offering Costs on
Preferred Stock........................................... -- (487)
------- -------
Net income (loss) available for common stockholders..... $ 2,262 $(2,760)
======= =======
Net Income (Loss) Per Share (Note 2):
Basic net income (loss) per share......................... $ 0.03 $ (0.14)
======= =======
Shares used in computing basic net income (loss) per
share................................................... 66,339 19,076
======= =======
Diluted net income (loss) per share....................... $ 0.03 $ (0.14)
======= =======
Shares used in computing diluted net income (loss)
per share............................................... 72,872 19,076
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-3
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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.
F-4
<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 herein. In the opinion of management, the accompanying unaudited
consolidated financial statements 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 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>
SIX MONTHS ENDED
JUNE 30,
-----------------
2000 1999
------- -------
<S> <C> <C>
Net income (loss) available for common stockholders......... $ 2,262 $(2,760)
======= =======
Weighted average common shares outstanding used in computing
basic net income (loss) per share......................... 66,339 19,076
Weighted average common equivalent shares outstanding:
employee common stock options............................. 6,533 --
------- -------
Total weighted average common and common equivalent shares
outstanding used in computing diluted net income (loss)
per share................................................. 72,872 19,076
======= =======
Basic net income (loss) per share........................... $ 0.03 $ (0.14)
======= =======
Diluted net income (loss) per share......................... $ 0.03 $ (0.14)
======= =======
</TABLE>
F-5
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2. NET INCOME (LOSS) PER SHARE INFORMATION (CONTINUED)
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 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 3,332,576 weighted shares of common stock
outstanding for the six months ended June 30, 2000 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, 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, WITH RESPECT TO CERTAIN TRANSACTIONS. 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.
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
F-6
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES (CONTINUED)
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.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ---------------
<S> <C> <C>
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
======= ========
</TABLE>
5. DEFERRED COMPENSATION
In connection with certain stock option grants during the year ended
December 31, 1998 and through May, 1999, the Company recorded deferred
compensation of approximately $4.9 million, which represents the aggregate
difference between the exercise price and the fair market value of common stock
as determined for accounting purposes. The deferred compensation will be
recognized as an expense over the vesting period of the underlying stock
options. The Company recorded compensation expense of $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).
F-7
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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>
SIX MONTHS ENDED
-------------------------
JUNE 30, JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues
United States............................................. $45,673 $10,380
International............................................. 8,528 273
------- -------
Total Revenues.............................................. $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.
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
$1,168,000 of the prepaid license fee during the 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
F-8
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
10. ACQUISITIONS (CONTINUED)
$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 The Toronto Technology
Group (TTG), a privately held 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 price will be allocated to goodwill and
amortized ratably over five years.
F-9
<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)
F-10
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
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, $0.01 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, $0.01 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
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.
F-11
<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.
F-12
<PAGE>
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED 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
--------------------- --------------------- ---------------------- ADDITIONAL
NUMBER OF CARRYING NUMBER OF CARRYING NUMBER OF $0.01 PAR PAID-IN
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL
---------- -------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........ 1,300,000 $ 501 -- $ -- 17,701,500 $177 $ 122
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 1 9
Grant of options to consultants
(Note 6(b))..................... -- -- -- -- -- -- 60
Net loss.......................... -- -- -- -- -- -- --
---------- ----- ---------- ------- ---------- ---- --------
Balance, December 31, 1997........ 1,300,000 501 1,209,875 1,960 17,813,400 178 191
Sale of Series C convertible
preferred stock................. -- -- 246,914 400 -- -- --
Issuance costs related to sale of
Series D redeemable convertible
preferred stock................. -- -- -- -- -- -- --
Accretion of Series B and
Series D redeemable convertible
preferred stock to redemption
value........................... -- -- -- -- -- -- --
Exercise of stock options......... -- -- -- -- 442,710 5 68
Deferred compensation related to
stock option grants............. -- -- -- -- -- -- 1,799
Amortization of deferred
compensation.................... -- -- -- -- -- -- --
Warrants issued in connection with
the sale of Series D redeemable
convertible preferred stock..... -- -- -- -- -- -- 2,775
Issuance of Series B redeemable
convertible preferred stock
warrants........................ -- -- -- -- -- -- 1,053
Grants of options to consultants
(Note 6(b))..................... -- -- -- -- -- -- 4
Issuance of warrants (Note
3(b))........................... -- -- -- -- -- -- 58
Net loss.......................... -- -- -- -- -- -- --
---------- ----- ---------- ------- ---------- ---- --------
Balance, December 31, 1998........ 1,300,000 501 1,456,789 2,360 18,256,110 183 5,948
Accretion of Series B and
Series D redeemable convertible
preferred stock redemption
value........................... -- -- -- -- -- -- --
Exercise of stock options......... -- -- -- -- 1,956,820 20 815
Exercise of warrant............... -- -- -- -- 314,476 3 (3)
Deferred compensation related to
stock option grants............. -- -- -- -- -- -- 3,063
Amortization of deferred
compensation.................... -- -- -- -- -- -- --
Conversion of preferred stock into
common stock.................... (1,300,000) (501) (1,456,789) (2,360) 31,419,278 314 13,436
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 2 1,817
Initial and secondary public
offerings of common stock....... -- -- -- -- 13,361,840 134 153,142
Net loss.......................... -- -- -- -- -- -- --
---------- ----- ---------- ------- ---------- ---- --------
Balance, December 31, 1999........ -- $ -- -- $ -- 65,551,024 $656 $178,218
========== ===== ========== ======= ========== ==== ========
<CAPTION>
STOCKHOLDERS'
DEFERRED ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------- ------------ -------------
<S> <C> <C> <C>
Balance, December 31, 1996........ $ -- $ (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......... -- -- 10
Grant of options to consultants
(Note 6(b))..................... -- -- 60
Net loss.......................... -- (4,228) (4,228)
------- -------- --------
Balance, December 31, 1997........ -- (6,890) (4,060)
Sale of Series C convertible
preferred stock................. -- -- 400
Issuance costs related to sale 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......... -- -- 73
Deferred compensation related to
stock option grants............. (1,799) -- --
Amortization of deferred
compensation.................... 107 -- 107
Warrants issued in connection with
the sale of Series D redeemable
convertible preferred stock..... -- -- 2,775
Issuance of Series B redeemable
convertible preferred stock
warrants........................ -- (1,053) --
Grants of options to consultants
(Note 6(b))..................... -- -- 4
Issuance of warrants (Note
3(b))........................... -- -- 58
Net loss.......................... -- (2,851) (2,851)
------- -------- --------
Balance, December 31, 1998........ (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......... -- -- 835
Exercise of warrant............... -- -- --
Deferred compensation related to
stock option grants............. (3,063) -- --
Amortization of deferred
compensation.................... 1,127 -- 1,127
Conversion of preferred stock into
common stock.................... -- -- 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)............... -- (1,819) --
Initial and secondary public
offerings of common stock....... -- -- 153,276
Net loss.......................... -- (13,132) (13,132)
------- -------- --------
Balance, December 31, 1999........ $(3,628) $(28,861) $146,385
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<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.
F-14
<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 over-allotment 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.
(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,
F-15
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
$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 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
F-16
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
-------- ------
(IN THOUSANDS)
<S> <C> <C>
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 $ --
======== ======
</TABLE>
(g) Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. ATG provides for depreciation and
amortization using the straight-line method and it charges to operations
the amounts estimated to allocate the cost of the assets over their
estimated useful lives.
F-17
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------
ASSET CLASSIFICATION USEFUL LIFE 1999 1998
-------------------- ------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ======
</TABLE>
(h) Research and Development Expenses for Software Products
ATG has evaluated the establishment of technological feasibility of its
products in accordance with SFAS No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. ATG sells
products in a market that is subject to rapid technological change, new
product development and changing customer needs; accordingly, ATG has
concluded that technological feasibility is not established until the
development stage of the product is nearly complete. ATG defines
technological feasibility as the completion of a working model. The time
period during which costs could be capitalized, from the point of
reaching technological feasibility until the time of general product
release, is very short and, consequently, the amounts that could be
capitalized are not material to ATG's financial position or results of
operations. Therefore, ATG has charged all such costs to research and
development in the period incurred.
(i) Income Taxes
ATG accounts for income taxes in accordance with the provisions of SFAS
No. 109, Accounting For Income Taxes. This statement requires ATG to
recognize a current tax asset or liability for current taxes payable or
refundable and to record a deferred tax asset or liability for the
estimated future tax effects of temporary differences and carryforwards
to the extent 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).
(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)).
F-18
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
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>
PERCENTAGE OF TOTAL REVENUES
SIGNIFICANT ------------------------------------------------------------------------------
YEAR ENDED CUSTOMERS A B C D E F
---------- ----------- -------- -------- -------- -------- -------- --------
<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>
PERCENTAGE OF
TOTAL ACCOUNTS
RECEIVABLE
SIGNIFICANT ------------------------------------
AS OF CUSTOMERS A G H
----- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
December 31, 1999................................ 1 -- -- 12%
December 31, 1998................................ 2 19% 12% --
</TABLE>
F-19
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
(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
F-20
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) LONG-TERM OBLIGATIONS (CONTINUED)
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 (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.
F-21
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INCOME TAXES (CONTINUED)
Net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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)
------- -------
$ -- $ --
======= =======
</TABLE>
Due to ATG's history of operating losses, there is uncertainty surrounding
ATG's ability to utilize its net operating loss and tax credit carryforwards.
Accordingly, ATG has provided a full valuation allowance against its otherwise
recognizable deferred tax asset as of December 31, 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
F-22
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) PREFERRED STOCK (CONTINUED)
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>
COMMON
NUMBER OF PRICE PER GROSS 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
Series C November and December 1,456,789 1.62 2,360,000 8,875,136
1997, April 1998
Series D August, September and 2,343,750 3.20 7,500,000 15,600,736
October 1998
</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
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.
F-23
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) PREFERRED STOCK (CONTINUED)
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
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,
F-24
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) PREFERRED STOCK (CONTINUED)
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 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 in connection 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.
F-25
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 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
F-26
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
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 power or value
of our stock are not eligible to participate. During each designated
semiannual offering period, each eligible employee may deduct between 1% to
10% of base pay to purchase common stock of ATG. The purchase price will be
85% of the closing market price of ATG's common stock on either: (1) the
first business day of the offering period or (2) the last business day of
the offering period, whichever is lower.
ATG will account for the Stock Purchase Plan in accordance with APB No. 25
and, accordingly, no compensation cost will be recognized under the Stock
Purchase Plan. ATG will elect the "disclosure only" alternative under SFAS
No. 123.
The following table summarizes 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>
F-27
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
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 WEIGHTED AVERAGE
PRICE NUMBER OF SHARES (YEARS) OUTSTANDING EXERCISE PRICE NUMBER OF 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>
In the years ended December 31, 1998 and 1997, ATG granted 30,000 and
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 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. 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. 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.
F-28
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
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%
Weighted 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>
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>
F-29
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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:
<TABLE>
<CAPTION>
OPERATING
YEARS ENDING DECEMBER 31, LEASES
------------------------- -----------
<S> <C>
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
===========
</TABLE>
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.
(b) Litigation
A patent infringement claim was filed by BroadVision, one of ATG's
competitors, against ATG on December 11, 1998. In February 2000, ATG and
BroadVision reached an amicable settlement to avoid further litigation
expenses and risks to both parties. As part of the settlement, BroadVision
has dropped its claim of infringement, and ATG has dropped its claim of
non-infringement and patent invalidity. ATG did not make any admission of
wrong-doing, liability, violation of law, infringement or validity regarding
the patent in question.
As is customary in patent litigation settlements, ATG, in return for cash
payments, will receive a non-exclusive, worldwide, perpetual, paid-up
license to make, use, and sell products arguably covered by BroadVision's
patent and any other patents that may be issued in the future that are
related to the original patent.
ATG will pay BroadVision $15,000,000 for the license to BroadVision
technology. ATG 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.
F-30
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) ACCRUED EXPENSES
Accrued expenses at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Payroll and related costs................................... $3,066 $ 600
Accrued accounts payable.................................... 817 293
Other....................................................... 845 327
------ ------
$4,728 $1,220
====== ======
</TABLE>
(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>
F-31
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $118,763
National Association of Securities Dealers Inc. Filing
Fee....................................................... 30,500
Nasdaq National Market Inc. Listing Fee..................... 17,500
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees........................... 5,000
Accounting Fees and Expenses................................ 75,000
Legal Fees and Expenses..................................... 150,000
Printing Expenses........................................... 125,000
Miscellaneous............................................... 73,237
--------
Total................................................... $600,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eighth of the registrant's Amended and Restated Certificate of
Incorporation provides that no director of the registrant shall be personally
liable for any monetary damages for any breach of fiduciary duty as a director,
except to the extent that the Delaware General Corporation Law prohibits the
elimination or limitation of liability of directors for breach of fiduciary
duty.
Article Ninth of the registrant's Amended and Restated Certificate of
Incorporation provides that a director or officer of the registrant (a) shall be
indemnified by the registrant against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement incurred in connection with any
litigation or other legal proceeding (other than an action by or in the right of
the registrant) brought against him by virtue of his position as a director or
officer of the registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the registrant brought against him by virtue of his position as a
director or officer of the registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the registrant fails to make an indemnification payment
within 60 days after such
II-1
<PAGE>
payment is claimed by such person, such person is permitted to petition the
court to make an independent determination as to whether such person is entitled
to indemnification. As a condition precedent to the right of indemnification,
the director or officer must give the registrant notice of the action for which
indemnity is sought and the registrant has the right to participate in such
action or assume the defense thereof.
Article Ninth of the registrant's Amended and Restated Certificate of
Incorporation further provides that the indemnification provided therein is not
exclusive, and provides that in the event that the Delaware General Corporation
Law is amended to expand the indemnification permitted to directors or officers
the registrant must indemnify those persons to the fullest extent permitted by
such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and other persons serving at the request of the corporation in
related capacities against amounts paid and expenses incurred in connection with
an action or proceeding to which he is or is threatened to be made a party by
reason of such position, if such person shall have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, in any criminal proceeding, if such person had no
reasonable cause to believe his conduct was unlawful; provided that, in the case
of actions brought by or in the right of the corporation, no indemnification
shall be made with respect to any matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
adjudicating court determines that such indemnification is proper under the
circumstances.
Under Section 7 of the Underwriting Agreement, the underwriters are
obligated, under circumstances, to indemnify directors and officers of the
registrant against liabilities, including liabilities under the Securities Act
of 1933. Reference is made to the form of Underwriting Agreement filed as
Exhibit 1.1 hereto.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
---------------------
<C> <S>
1.1** Form of Underwriting Agreement
4.1* Amended and Restated Certificate of Incorporation of the
registrant
4.2* Amended and Restated By-Laws of the registrant
4.3* Specimen Certificate for Shares of Common Stock of the
registrant
5.1** Opinion of Hale and Dorr LLP
23.1 Consent of Arthur Andersen LLP
23.2** Consent of Hale and Dorr LLP, included in Exhibit 5.1
24.1 Power of Attorney (see page II-4 of this Registration
Statement)
</TABLE>
------------------------
* Incorporated by reference to the registrant's Registration Statement on
Form S-1 (File No. 333-78333).
** To be filed by amendment.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the indemnification provisions described herein, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cambridge, Commonwealth of Massachusetts, as of
October 26, 2000.
<TABLE>
<S> <C> <C>
ART TECHNOLOGY GROUP, INC.
By: /s/ JEET SINGH
-----------------------------------------
Jeet Singh
Chief Executive Officer
</TABLE>
SIGNATURES AND POWER OF ATTORNEY
We, the undersigned officers and directors of Art Technology Group, Inc.,
hereby severally constitute and appoint Joseph T. Chung, Ann C. Brady, Linda
Handman and Mark L. Johnson and each of them singly, our true and lawful
attorneys with full power to any of them, and to each of them singly, to sign
for us and in our names in the capacities indicated below this Registration
Statement, any subsequent registration statement for the same offering filed
pursuant to Rule 462(b) under the Securities Act of 1933 and any and all
pre-effective and post-effective amendments to this Registration Statement and
any such subsequent registration statement, and generally to do all such things
in our name and behalf in our capacities as officers and directors to enable Art
Technology Group, Inc. to comply with the provisions of the Securities Act of
1933 and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to this Registration Statement, and any such
subsequent registration statement, and all amendments to this Registration
Statement and any such subsequent registration statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of October 26, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JEET SINGH
------------------------------------------- Chief Executive Officer and Director
Jeet Singh (PRINCIPAL EXECUTIVE OFFICER)
/s/ ANN C. BRADY Chief Financial Officer and Vice President,
------------------------------------------- Finance (PRINCIPAL FINANCIAL AND ACCOUNTING
Ann C. Brady OFFICER)
/s/ JOSEPH T. CHUNG
------------------------------------------- Chairman of the Board
Joseph T. Chung
/s/ SCOTT A. JONES
------------------------------------------- Director
Scott A. Jones
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
------------------------------------------- Director
Charles R. Lax
------------------------------------------- Director
Thomas N. Matlack
------------------------------------------- Director
Phyllis S. Swersky
/s/ ROBERT F. WALTERS
------------------------------------------- Director
Robert F. Walters
</TABLE>
II-5
