e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-26679
Art Technology Group,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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04-3141918
(I.R.S. Employer
Identification No.)
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One Main Street
Cambridge, Massachusetts
(Address of principal
executive offices)
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02142
(Zip
Code)
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(617) 386-1000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value with Associated Preferred
Stock Purchase Rights
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The Nasdaq Stock Market, LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As June 30, 2009 (the last business day of the
registrants most recently completed second fiscal
quarter), the aggregate market value of voting stock held by
non-affiliates of the registrant was $478,760,765.
As of January 27, 2010, the number of shares of the
registrants common stock outstanding was 127,458,139.
Documents
Incorporated by Reference
Portions of the registrants definitive proxy statement for
its 2010 annual meeting of stockholders are incorporated by
reference in Items 10, 11, 12, 13 and 14 of Part III.
ART
TECHNOLOGY GROUP, INC.
INDEX TO
FORM 10-K
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Page
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PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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8
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Item 1B.
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Unresolved Staff Comments
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15
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Item 2.
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Properties
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16
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Item 3.
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Legal Proceedings
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16
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Item 4.
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Submission of Matters to a Vote of Security Holders
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17
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PART II
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Item 5.
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Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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17
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Item 6.
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Selected Consolidated Financial Data
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19
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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21
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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39
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Item 8.
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Consolidated Financial Statements and Supplementary Data
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40
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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67
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Item 9A.
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Controls and Procedures
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67
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Item 9B.
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Other Information
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69
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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69
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Item 11.
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Executive Compensation
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69
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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69
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Item 13.
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Certain Relationships and Related Transactions and Director
Independence
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69
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Item 14.
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Principal Accountant Fees and Services
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69
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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70
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SIGNATURES
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Signatures
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72
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References in this Report to we, us,
our and ATG refer to Art Technology
Group, Inc. and its subsidiaries. ATG and Art Technology Group
are our registered trademarks. This Report also includes
trademarks and trade names of other companies.
i
PART I
Some of the information contained in this Report consists of
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Use of words
such as believes, expects,
anticipates, intends, plans,
estimates, should, likely or
similar expressions indicate a forward-looking statement. These
statements are subject to risks and uncertainties and are based
on the beliefs and assumptions of our management based on
information currently available to our management. Important
factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited
to, those set forth below under the heading Risk
Factors. We assume no obligation to update any
forward-looking statements.
Our
Business
We develop and market a comprehensive suite of
e-commerce
software products that businesses can employ to increase their
online revenues and profitability. Companies can use our
products and related services to power their
e-commerce
websites, attract prospects, convert sales, increase order sizes
and encourage return customers. Our solutions are designed to
enable a business to provide a scalable, reliable and
sophisticated
e-commerce
website that can create a satisfied, loyal and profitable online
customer base.
We seek to differentiate our product suite by offering solutions
that enable businesses to provide richer, more personalized and
more compelling online shopping experiences. We provide
merchandisers and marketers more control over the online
channel, and enable customer service agents to provide consumers
more consistent, personalized and relevant assistance. Our
solutions deliver better consistency and relevancy by capturing
and maintaining information about consumers personal
preferences, online activity and transaction history and then
using this information to deliver more personalized and
contextualized content.
ATG Commerce is a comprehensive, scalable
e-commerce
platform and set of
e-commerce
applications that we deliver through perpetual software
licenses, software as a service, or SaaS, or on a managed
services basis. Our optimization services interoperate with any
e-commerce
platform and include
Click-to-Call,
Click-to-Chat,
Call Tracking and ATG Recommendations services. We deliver these
optimization services on a SaaS basis.
We market our products and services principally to Global
2000 companies and other businesses in the retail,
telecommunications, media and entertainment, distribution, and
consumer goods manufacturing industries. As of January 31,
2010, we had approximately 1,200 clients, including AT&T,
Best Buy, Conde Nast, CVS, DirecTV, Intuit, JC Penney, Lego,
Sprint, Tesco, Vodafone and Williams-Sonoma.
We sell our products primarily through our direct sales
organization. A significant portion of our product revenue is
generated from co-selling with, or is otherwise influenced by,
our ATG partners, which consist of selected solution and
technology providers around the world. ATG Partners include
global systems integrators such as Accenture, Acquity Group,
Capgemini, CGI, Deloitte Consulting, Infosys and Sapient, as
well as regional systems integrators and interactive agencies
such as Aaxis Group, Empathy Lab, LBi Group, Professional
Access, Razorfish and Resource Interactive.
Industry
Trends
The
e-commerce
market continues to develop rapidly as businesses seek better
solutions to improve and enhance the online customer experience.
Many companies struggle to manage their
e-commerce
presence and risk losing existing and prospective customers due
to poor performance and limited functionality of their websites.
Several trends are driving the growing use and complexity of
e-commerce:
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Increasing number of transactions. The
increased availability of broadband technologies and the
maturation of web security solutions have resulted in more
businesses and consumers using the web to conduct commerce and
interact with each other.
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Changing online environment. The widespread
availability of broadband technologies has facilitated the
emergence of increasingly sophisticated web technologies such as
rich media, advanced user interfaces and
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collaboration capabilities. As information has become more
readily accessible online, consumers have begun to participate
in more web sessions and spend more time browsing.
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Changing consumer trends. As consumers become
increasingly familiar with the Internet and the quality of web
applications continues to improve, consumers increasingly expect
a rich, responsive and personalized
e-commerce
experience. In order for businesses to remain competitive, they
must be able to dynamically update and personalize their product
offerings to address emerging consumer trends and rising
consumer expectations.
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Proliferation of channels. With the growth in
broadband availability and Internet-enabled access devices,
consumers can access information and conduct
e-commerce
through an increasing number of channels. Consumers expect a
consistent, high-quality and relevant experience across all of a
companys channels, including websites, call centers,
kiosks, social networks, and mobile devices.
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Integration of systems and business
processes. Businesses web presence has
evolved from static standalone websites to dynamic, interactive
hubs for customer marketing, transactions communications and
services. Businesses require a robust, scalable
e-commerce
solution that can integrate with other enterprise solutions such
as enterprise resource planning, customer relationship
management, call center, supply chain management, and business
intelligence.
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Many businesses today continue to rely upon
e-commerce
systems that have been developed internally and are unable to
address and manage the requirements of the increasingly complex
e-commerce
market. Businesses need a scalable and multi-channel
e-commerce
platform to optimize the online customer experience and to drive
growth in revenue and customer satisfaction.
Our
Solution and Strategy
We focus exclusively on providing
e-commerce
solutions and are constantly adapting our products to meet
changing
e-commerce
needs. Our comprehensive suite of
e-commerce
software products can be integrated with a wide variety of other
enterprise systems while providing robust, flexible, and
scalable multi-channel capabilities, including call center user
interface, through our optimization services. Our solutions
provide customer analytics, targeting and segmentation
functionality that can be personalized to help businesses
attract new prospects, convert website visitors into buyers,
increase order sizes, and retain website visitors as loyal,
profitable, and long-term customers. We offer ATG Commerce
customers the ability to choose between perpetual on-premise
software licenses, managed service delivery models, and
SaaS-based solutions. Our optimization services are delivered
exclusively on a SaaS basis.
Our objective is to be the industry leader in helping companies
do more business on the Internet. We intend to achieve this
objective by continued execution of the following key components
of our strategy:
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Continue to provide market-leading
functionality. ATG Commerce is a market-leading
e-commerce
solution capable of supporting more than 100,000 orders received
by a business per day. Our products provide merchandisers and
marketers with the power and analytics to define offers and
cross-selling opportunities, to follow up on abandoned shopping
carts, to perform multivariate split tests, and to create
multi-channel, multi-stage web and
e-mail
campaigns that match a companys selling strategy with
information about a visitors browsing behavior, purchase
and interaction history, preferences, and profile. We intend to
continue to invest in research and development to further
enhance the functionality and quality of our solutions and to
meet the changing requirements of the
e-commerce
market.
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Expand and deepen client relationships by:
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Continuing to target additional markets and segments for ATG
Commerce. We continue to attract new clients for
ATG Commerce not only in our traditional retail market but also
in the telecommunications, media and entertainment,
distribution, and consumer goods manufacturing industries. We
will seek to further penetrate those markets including selling
to many companies in those markets that continue to rely upon
internally developed systems and therefore increasingly will be
unable to address the rapidly developing demands of the
e-commerce
market.
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Offering ATG Optimization Services independent of
e-commerce
platform. Our optimization services can be
delivered to a company that runs a website using any
e-commerce
platform or that operates a custom-built website, regardless of
the companys industry. We will seek to broaden our client
base by offering these services to companies that have not
licensed ATG Commerce. We also will seek to deepen our existing
relationships by cross-selling these services to existing ATG
Commerce clients.
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Offering ATG Commerce OnDemand to enterprises and selected
mid-market companies. We believe Global
2000 companies and other enterprises increasingly may seek
to take advantage of a managed services delivery model for their
e-commerce
applications. We intend to market ATG Commerce OnDemand, our
hosted solution, to enterprises and selected mid-market
companies that do not wish to expend resources on running
e-commerce
applications in-house.
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Leverage and expand our distribution and service
capabilities. We have established and actively
support a global organization of ATG partners consisting of
systems integrators, interactive agencies, and other solutions
and technology providers. ATG partners co-sell or otherwise
influence sales that generate a significant portion of our
product revenue. We will continue to seek opportunities to
further expand our base of ATG partners, both in North America
and internationally, in order to further extend our sales
capabilities, implementation capacity, and overall reach of our
e-commerce
solution.
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Pursue strategic acquisitions. We will seek to
identify and pursue acquisitions of businesses, technologies,
and products that will expand the functionality of our existing
products, provide access to new clients or markets, or otherwise
complement our existing products and services.
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Our
Products and Services
ATG
Commerce
ATG Commerce is a comprehensive, scalable
e-commerce
platform and application suite designed to enable our clients to
attract visitors, convert them to buyers, deliver customer
service, and analyze the results. The flexible, component-based
architecture of ATG Commerce enables our clients to personalize
the online buying experience for their customers so that
customers can more easily find desired products, comparison
shop, register for gifts, pre-order products, redeem coupons,
and execute other useful features. ATG Commerces
functionality includes catalogs, product management, shopping
carts, checkout, pricing management, merchandising, promotions,
inventory management, and
business-to-business
order management.
Our products allow companies to present a single view of
themselves to their customers through our repository
integration. This integration technology is designed to allow
companies to easily access and utilize data in the enterprise
regardless of the data storage format or location. By enabling
these capabilities in a cost-effective manner, we believe our
products can help companies protect their brands and improve
customer shopping experiences, all of which positively impact
customer satisfaction and loyalty.
ATG Adaptive Scenario Engine is the platform component of
ATG Commerce. It provides the enabling technology and core
functionality to allow our clients to develop and manage robust,
adaptable, scalable, and personalized
e-commerce
applications across channels and through the complete customer
lifecycle. The ATG platform is designed to allow our clients to
easily integrate these applications across their marketing and
merchandising,
e-commerce,
and customer care organizations.
The applications that comprise ATG Commerce are as follows:
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ATG Merchandising enables our clients merchandising
professionals to directly manage their online storefronts,
including catalogs, products, search facets, promotions,
pricing, coupons, and special offers, to help quickly connect
shoppers with the items most likely to interest them.
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ATG Commerce Search is a dynamic, integrated search
solution that incorporates natural language technology into our
clients online storefronts. ATG Commerce Search is
designed to enable shoppers to navigate our clients
e-commerce
sites quickly and efficiently to find merchandise they want and
discover new items, as well as make purchases directly from the
search results page.
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ATG Content Administration is a comprehensive web content
management solution that supports personalized websites
throughout the entire content process, including creation,
version tracking, preview, editing, revision, approval, and site
deployment.
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ATG Outreach is an
e-marketing
solution that leverages customer information gained through web
interactions, preferences, and behaviors to enable our clients
to create relevant, personalized outbound marketing and service
campaigns.
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ATG Self-Service offers consumers access to personalized
answers to questions and helps the customer answer his or her
questions without telephoning for help. ATG Self-Service
combines an answer repository with multi-lingual natural
language search and navigation capabilities. The application
also offers comprehensive business reporting that helps clients
better understand their customers needs and preferences.
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ATG Commerce Service Center provides complete
e-commerce
support for call center agents to create and manage orders in a
unified browser based application for the web and call-center
environments.
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ATG Knowledge is a knowledge management solution that
call center agents who provide customers with assisted service
can use to find the answers to customer inquiries and resolve
problems. ATG Knowledge enables our clients agents to
fulfill a wide range of customer needs by unifying customer
management, knowledge management, and incident management into a
single solution.
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ATG Campaign Optimizer assists marketing professionals in
defining comparative tests of different offers, promotions, and
product representations through a multivariate split testing
solution. The product puts those tests into production,
specifying the segments of website visitors to be tested, and
finally writes reports on the test results. ATG Campaign
Optimizer is designed to allow non-technical marketing
professionals to create and execute comparative tests that can
be used to increase the effectiveness of online marketing
activities without the need for expert programming or
infrastructure modifications.
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ATG Customer Intelligence is an integrated set of data
mart and reporting capabilities that monitor and analyze
commerce and customer care performance. It is designed to
combine key data from the ATG product suite, such as purchases,
searches, escalations, and click-throughs, with behavioral data
from web traffic analysis and demographic data, such as age,
gender, and geography.
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ATG Commerce OnDemand delivers the full range of ATG
Commerce applications as a managed application hosting or as a
SaaS service. By licensing ATG Commerce OnDemand, clients can
choose to pay a monthly subscription fee rather than expending
resources to run
e-commerce
applications in-house. We host ATG Commerce OnDemand inside a
managed data center and provide all additional software,
hardware, network, and full technical operational and support
services. These services include the provisioning, management,
and monitoring of the application infrastructure including
bandwidth, network, security, servers, operating systems,
enabling software, and ATG applications. We support ATG Commerce
OnDemand clients on a 24/7 basis and provide problem resolution
services, application change management services, and service
level agreements related to application availability.
ATG Commerce OnDemand managed services delivery model can
provide several advantages to clients. These include:
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leveraging our experience to accelerate growth of the
clients online business and allowing the client to focus
on its core competencies;
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shifting the clients technology risks to us;
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shortening the time to market, as compared to development,
deployment, and maintenance of an in-house application; and
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avoiding upfront and ongoing expenditures required to purchase
and maintain software and hardware.
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ATG
Optimization Services
ATG Optimization Services are offered on a SaaS basis and are
hosted on our servers. These services are platform neutral, so a
client can benefit from optimization services whether it elects
to run its online environment on an ATG-powered
e-commerce
platform, a third-party
e-commerce
platform, or a custom built website.
Click-to-Call
is designed to allow online prospects and customers to
transition seamlessly within the context of their online session
into immediate telephone or PC-based voice contact with
businesses. Website visitors,
e-mail
recipients, or viewers of a banner ad simply click a
Click-to-Call
button and select
PC-to-phone
or
phone-to-phone
to connect in real-time with our clients sales or customer
service agents.
Click-to-Chat
allows online prospects and customers to initiate a text
chat session online with our clients sales or customer
service agents by simply clicking a
Click-to-Chat
button, which may be displayed on specific web pages or appear
dynamically based on the customers
on-line
browsing behavior, initiating a real-time text chat interaction.
Chat agents can see chatters live web context, co-browse
the website, access customer information from CRM systems, and
escalate chats to Click-to-Call when necessary.
Call Tracking is designed to allow our clients to
accurately track every inbound telephone response to their print
and online promotional campaigns.
ATG Recommendations is an automated personalized
recommendation engine used to optimize
e-commerce
experiences by automatically presenting each website visitor
with relevant product recommendations and information. This
next-generation technology has been shown to increase the number
of visitors, to increase purchase rates for visitors, and to
increase the value of transactions from buyers who click on
recommendations.
Services
We offer support and maintenance, professional, and education
services to our clients.
Support and Maintenance. For an annual support
and maintenance fee, clients are entitled to receive software
upgrades and updates, maintenance releases, online documentation
including bug reports, and unlimited technical support.
Professional Services. Our Professional
Services include four primary service offerings:
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OnDemand Offerings. By leveraging our
experience with the pre-built OnDemand offerings, our
Professional Services organization assists our clients with
their implementations.
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Full-lifecycle Solutions. The full-lifecycle
approach includes working with our clients end users and
technical staff to define project requirements, solution design,
implementation, usability testing, staging and deployment.
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Custom Solutions. Our Professional Services
organization manages specific areas of our clients
projects, such as designing a solution to meet a clients
requirements, implementing scenarios, or integrating our
solutions with a third-party application.
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Structured Enablement. Depending on a
clients project goals and the expertise of the
clients team, ATG will assign the appropriate personnel to
work onsite as advisors to aid the clients personnel in
areas such as reviewing completed work or advising on a
particular project area.
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Education Services. Our education programs
train clients and partners on our applications. The curriculum
can be delivered to developers, technical managers, business
managers, and system administrators. We also offer an online
learning program to supplement instructor-led training. We offer
certification programs to developers.
Acquisition
of InstantService.com, Inc.
On January 8, 2010, we acquired privately held
InstantService.com, Inc., which we refer to as InstantService,
for a purchase price of approximately $17.0 million. The
results of InstantService will be included in our results from
the date of the acquisition. The purchase of InstantService
augments our optimization service offerings with additional
click-to-chat
functionality and adds an
e-mail
management solution. At the date of the acquisition,
InstantService had more than 300 customers.
5
Our
Markets and Clients
We market our products and services primarily to Global
2000 companies and other businesses that have large numbers
of online users and utilize the Internet as an important
business channel. We target companies across five key
verticals retail, telecommunications, media and
entertainment, distribution, and consumer goods manufacturing
industries. More recently, we have begun to target selected
companies in the financial services, insurance, and travel and
leisure industries, particularly with respect to our
Optimization solutions.
As of January 31, 2010, we had approximately 1,200 clients,
including American Eagle Outfitters, AT&T, Best Buy,
Chicos, Conde Nast, Continental Airlines, CVS, DirecTV,
Finish Line, France Telecom, Games Workshop, HSBC, Intuit, JC
Penney, Lego, LexisNexis, Lexmark, Littlewoods, Musicians
Friend, Neiman Marcus, Orange, Philips, Proctor &
Gamble, Scotts, Sephora, Sprint, Talbots, Tesco, The Body Shop,
Thomas Cook,
T-Mobile,
Tommy Hilfiger, Urban Outfitters, Vodafone and Williams-Sonoma.
Research
and Development
Our research and development group is responsible for core
technology, product architecture, product development, quality
assurance, program management, documentation, sustaining
engineering, and third-party software integration. This group
also assists with pre-sale, customer support activities, and
quality assurance tasks supporting the service and sales
organizations. Our research and development organization
consists of approximately 170 employees in the
United States and United Kingdom. Certain of our employees
are dedicated to our ATG Commerce product, while others are
dedicated to our Optimization Services products. We also work
extensively with off-shore partners for additional research and
development support.
Sales and
Marketing
We market and sell our products and services primarily through
our direct sales force, which is partially compensated based on
product and services sales made to our clients, directly or
through business partners. We also sell products and services
through channel partners, including system integrators and other
technology partners. The majority of our revenue is from direct
sales. Our sales organization includes indirect and channel
sales representatives, system engineers, business development
personnel, and account managers. Our direct sales team is
organized in two teams to address each of our product lines: ATG
Commerce sales and ATG Optimization Services sales.
To support our sales efforts and promote ATG, we conduct
comprehensive marketing programs. These programs include
industry and partner events, market research, public relations
activities, seminars, webinars, advertisements, direct mailings,
and the development of our website. Our marketing organization
supports the sales process and helps identify potential sales
and other opportunities. They prepare product research, product
planning, manage press coverage, and other public relations.
Strategic
Alliances
We have established strategic alliances with system integrators,
technology partners and resellers to augment our direct sales
activities. We provide our systems integrators, technology
partners and resellers with sales and technical training in
order to encourage them to create demand for our products and
services and to extend our presence globally and regionally. In
addition, we encourage our channel partners to enroll in our
accreditation and certification programs. Our ATG Certified
Professional Program is a training program for developers to
learn more about our products and services. Since
January 1, 2007, we have trained more than 2,000 technology
professionals in our strategic partners organizations.
Proprietary
Rights and Licensing
Our success and ability to compete depends 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 patent, trademark, trade
secret, and copyright law and contractual restrictions to
protect our proprietary technology. At December 31, 2009,
we had 18 issued United States patents, 17 pending United States
patents, and numerous foreign issued and pending patents. In
addition, we have several trademarks that are registered or
pending registration in the United States or abroad. We
seek to protect the source code for our software, documentation,
and
6
other written materials under trade secret and copyright laws.
These legal protections afford only limited protection for our
technology, however.
We license our software pursuant to signed master license
agreements, as well as click through or shrink
wrap agreements, which impose restrictions on the
licensees 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.
Employees
As of December 31, 2009, we had a total of
545 employees. Our employees are not represented by any
collective bargaining unit, and we have never experienced a work
stoppage. We believe our relations with our employees are good.
Competition
The market for online sales, marketing and customer service
software is intensely competitive, subject to rapid
technological change, and significantly affected by new product
introductions and other market activities. We expect competition
to persist and intensify in the future. We currently have the
following primary sources of competition:
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in-house development efforts by potential clients or partners;
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e-commerce
application vendors, such as IBM and Microsoft;
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e-commerce
business process outsourcers, such as Digital River and GSI
Commerce;
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providers of hosted managed service offerings, such as Accenture
and EDS;
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providers of hosted on-demand subscription services, such as
Demandware, MarketLive and Venda;
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vendors of marketing and customer-service application, including
natural language, self-service and traditional customer
relationship management application vendors; and
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optimization service vendors, such as Avail Intelligence,
Baynote and LivePerson.
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Although a number of our current and potential competitors have
greater financial, marketing and technical resources than we do,
we believe that we are able to compete favorably with companies
in our industry by providing products and services that are
richer, offer a more flexible set of capabilities and features
and are more reliable and scalable.
Corporate
Background
We are a Delaware corporation originally formed in 1991. Our
corporate headquarters are located at One Main Street,
Cambridge, Massachusetts 02142. We have domestic offices in
Chicago, Corvallis (Oregon), Reston (Virginia),
San Francisco, Seattle, and Washington, D.C. and
international offices in Canada, France, Germany, the
Netherlands, Northern Ireland, and the United Kingdom. Our
website address is www.atg.com and we make available
through this site, free of charge, our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and Amendments to those reports, filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after such
reports are electronically filed with, or furnished to, the
Securities and Exchange Commission, or the SEC. These reports
may be accessed through our websites investor information
page. We also make our code of ethics and certain other
governance documents and policies available through this site.
7
The following are certain of the important factors that could
cause our actual operating results to differ materially from
those indicated or suggested by forward-looking statements made
in this Annual Report on
Form 10-K
or presented elsewhere by management from time to time.
The
global recession and related credit crisis may continue to
adversely affect our business and results of
operations.
The U.S. and other global economies have recently
experienced a recession that has affected all sectors of the
economy, resulting in declines in economic growth and consumer
confidence, increases in unemployment rates and uncertainty
about economic stability. Global credit and financial markets
have also experienced extreme disruptions, including diminished
liquidity and credit availability and rapid fluctuations in
market valuations. Our business has been affected by these
conditions, and there is no certainty that economic conditions
will not deteriorate further. These uncertainties affect
businesses such as ours in a number of ways, making it difficult
to accurately forecast and plan our future business activities.
Weak economic conditions may lead consumers and businesses to
continue to postpone spending, which may cause our clients to
decrease or delay their purchases of our products and services.
In addition, the inability of clients to obtain credit could
negatively affect our revenues and our ability to collect
receivables. Financial difficulties experienced by our strategic
partners could result in a reduction in the revenues we derive
from license sales originated by them or detract from the
quality or timeliness of the consulting, implementation or other
professional services they provide to our clients, which could
adversely affect our reputation and relationships with our
clients. If the current uncertain economic conditions continue
or further deteriorate, we could be required to record charges
relating to restructuring costs or the impairment of assets, and
our business and results of operations could be materially
adversely affected. These trends could have a material adverse
impact on our business, our ability to achieve targeted results
of operations, and our financial condition, among other things.
We
expect our revenues and operating results to continue to
fluctuate for the foreseeable future. If our quarterly or annual
results are lower than the expectations of securities analysts,
then the price of our common stock is likely to
fall.
Our revenues and operating results have varied from quarter to
quarter in the past and will probably continue to vary
significantly from quarter to quarter in the foreseeable future.
A number of factors are likely to cause variations in our
operating results, including:
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fluctuating economic conditions, particularly as they affect our
clients willingness to implement new
e-commerce
solutions and their ability to pay for our products and services;
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the timing of recognition of revenue from our products and
services, which is affected by the mix of product license
revenue and services provided;
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the timing of client orders, especially larger transactions, and
product implementations;
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our ability to cultivate and maintain strategic alliances;
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delays in introducing new products and services;
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price discounting and concessions that we may offer in response
to competitive conditions;
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changes in the mix of revenues derived from higher and
lower-margin products and services;
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timing of hiring and utilization of personnel;
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cost overruns related to fixed-price services projects;
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the mix of domestic and international sales;
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variation in our actual costs from our cost estimates related to
long term hosting contracts;
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increased expenses, whether related to sales and marketing,
product development, or administration; and
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costs related to possible acquisitions of technologies or
businesses.
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8
In any given quarter, we often depend on several relatively
large license transactions to meet expected revenues for that
quarter. If we expect to complete a large sale to a specific
client in a particular quarter and the sale is not completed in
that quarter, then we are not likely to be able to generate
revenue from alternate sources in time to compensate for the
shortfall. In addition, as is the case with many software
companies, a significant number of our sales transactions are
concentrated near the end of each fiscal quarter. If we are
unable to close or recognize revenues on even a relatively small
number of license deals at quarter-end, then we may not be able
to meet expected revenues for that quarter. Because of this
concentration of sales at quarter end, clients may seek to
obtain higher price discounts than we might otherwise provide by
waiting until quarter-end to complete their transactions with
us. Additionally, we believe that there is significant
uncertainty in our future profits due to the growing breadth of
our product mix which may result in an accounting treatment that
requires us to defer the recognition of revenue in amounts
greater than we are currently projecting.
We may
not be able to sustain or increase our revenue or profitability
on a quarterly or annual basis.
We operate in a rapidly evolving industry which makes it more
difficult to predict our future operating results, and current
macro-economic conditions compound this difficulty. We cannot be
certain that our revenues will grow or our expenses will
decrease at rates that will allow us to achieve profitability on
a quarterly or annual basis. Additionally, we expect to
recognize an increasing portion of our revenue ratably over a
period of time rather than at the time invoiced. This may vary
from quarter to quarter and may have an adverse effect on our
revenue and net income, which could result in a decline in the
price of our common stock.
Our
lengthy sales cycle makes it difficult to predict our quarterly
results and causes variability in our operating
results.
We have a long sales cycle, often several months or quarters,
because our clients often need to make large expenditures and
invest substantial resources in order to take advantage of our
products and services and also because we generally need to
educate potential clients about the use and benefits of our
products and services. This long sales cycle makes it difficult
to predict the quarter in which sales may occur. We may incur
significant sales and marketing expenses in anticipation of
selling our products, and if we do not achieve the level of
revenues we expected, our operating results will suffer and our
stock price may decline. Further, our potential clients
frequently need to obtain approvals from multiple decision
makers before making purchase decisions. Delays in sales could
cause significant variability in our revenues and operating
results for any particular period.
If the
market for
e-commerce
does not continue to grow, then demand for our products and
services may decrease.
Our success depends heavily on the continued use of the Internet
for
e-commerce.
Many companies continue to rely primarily or exclusively on
traditional means of commerce and may be reluctant to change
their patterns of commerce. For our clients and potential
clients to be willing to invest in our electronic commerce and
online marketing, sales, and service applications, the Internet
must continue to be accepted and widely used for commerce and
communication. If Internet commerce does not grow or grows more
slowly than expected, then our future revenues and profits may
not meet our expectations or those of analysts.
If we
fail to adapt to rapid changes in the market for online business
applications, then our products and services could become
obsolete.
The market for our products is constantly and rapidly evolving,
as we and our competitors introduce new and enhanced products,
retire older ones, and react to changes in Internet-related
technology and client demands, coalescence of product
differentiators, product commoditization and evolving industry
standards. We may not be able to develop or acquire new products
or product enhancements that comply with present or emerging
Internet technology standards or differentiate our products
based on functionality and performance. In addition, we may not
be able to establish or maintain strategic alliances with
operating system and infrastructure vendors that will permit
migration or upgrade opportunities for our current user base.
New products based on new technologies or new industry standards
could render our existing products obsolete and unmarketable.
9
To succeed, we need to enhance our current products and develop
new products on a timely basis to keep pace with market needs,
satisfy the increasingly sophisticated requirements of clients,
and leverage strategic alliances with third parties in the
e-commerce
field who have complementary or competing products.
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 clients.
We
face intense competition in the market for
e-commerce
applications and services, and we expect competition to
intensify in the future. If we fail to remain competitive then
our revenues may decline, which could adversely affect our
future operating results and our ability to grow our
business.
A number of competitive factors could cause us to lose potential
sales or to sell our products and services at lower prices or at
reduced margins, including, among others:
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Potential clients or partners may choose to develop
e-commerce
applications in-house, rather than paying for our products or
services.
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Some of our current and potential competitors have greater
financial, marketing and technical resources than we do,
allowing them to leverage a larger installed client base and
distribution network, adopt more aggressive pricing policies and
offer more attractive sales terms, adapt more quickly to new
technologies and changes in client requirements, and devote
greater resources to the promotion and sale of their products
and services than we can.
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Our suite of service products competes against various
vendors software tools designed to address a specific
element or elements of the complete set of eService processes,
including
e-mail
management, support, knowledge management, and web-based
customer self-service and assisted service.
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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, and consolidation in our industry is likely to
intensify. Accordingly, new competitors or alliances among
competitors may emerge and rapidly acquire significant market
share.
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Some of our current and potential competitors, especially our
larger competitors like IBM that offer broad suites of computer
and software applications, may offer free or low-cost
e-commerce
applications and functionality bundled with their own computer
and software products. Potential clients may not see the need to
buy our products and services separately when they can use the
bundled applications and functionality in our competitors
product suites for little or no additional cost.
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If the
market for ATG Commerce OnDemand or ATG Optimization Services
does not develop or develops more slowly than we expect, then
our business could be negatively affected.
Our ATG Commerce OnDemand managed application hosting services
and ATG Optimization Services offerings are at an early stage of
development, and we may not achieve or sustain demand for these
offerings. Our success in this effort will depend in part on the
price, performance, and availability of our products and
services in comparison with competing products and services and
on the willingness of companies to increase their use of hosting
applications. While we will continue to market and sell
traditional licenses for our software solutions, we believe that
the widespread market acceptance of our hosting solutions and
ATG Optimization Services is important to the success of our
business because of the growth opportunities that they present.
We may
incur significant unanticipated costs and our profitability may
suffer if we do not accurately estimate the costs of fixed-price
Professional Services engagements.
From time to time, our Professional Services projects are based
on fixed-price contracts, rather than contracts in which payment
to us is determined on a time and materials, or other basis. Our
failure to estimate accurately the resources and schedule
required for a project, or our failure to complete our
contractual obligations in a manner consistent with the project
plan upon which our fixed-price contract was based, could
adversely affect our overall profitability and could have a
material adverse effect on our business, financial condition and
results of operations.
10
We are entering into more contracts for large projects that
magnify this risk. We have been required to commit unanticipated
additional resources to complete projects in the past, which has
occasionally resulted in losses on those contracts. We will
likely experience similar situations in the future. In addition,
we may establish the price for some projects at an early stage
of the project engagement, which could result in a fixed price
that is too low. Therefore, any changes from our original
estimates could adversely affect our business, financial
condition and results of operations.
If our
clients experience interruptions, delays, or failures in our
managed application hosting service or SaaS services, we could
incur significant costs and lose revenue
opportunities.
ATG Commerce OnDemand, which is delivered as a managed
application hosting service, and our Optimization services,
which are delivered on a SaaS basis, are still at a relatively
early stage of development. Any equipment failures, mechanical
errors, spikes in usage volume, or failure to follow system
protocols and procedures could cause our systems to fail or
malfunction, resulting in interruptions in our clients
service to their customers. Any such interruptions or delays in
our hosting or SaaS services, whether as a result of third-party
error, our own error, natural disasters, or accidental or
willful security breaches, could harm our relationships with
clients and our reputation. This in turn could reduce our
revenue, subject us to liability, cause us to issue credits or
pay penalties, or cause our clients to decide not to renew their
agreements with us, any of which could adversely affect our
business, financial condition, and results of operations.
We
depend heavily on key employees in a competitive labor
market.
Our success depends on our ability to attract, motivate, and
retain skilled personnel, especially in the areas of management,
finance, sales, marketing, and research and development, and we
compete with other companies for a small pool of highly
qualified employees. Members of our management team have left us
from time to time for a variety of reasons, and there may be
additional departures in the future. These historical and
potential future changes in personnel may be disruptive to our
operations or affect our ability to maintain effective internal
controls over financial reporting. In addition, equity
incentives such as stock options constitute an important part of
our total compensation program for employees, and as a result of
declines in our stock price a substantial number of our
outstanding stock options are out of the money. Continued
volatility or lack of positive performance of our stock price
may adversely affect our ability to retain our employees or hire
replacements.
We
could incur substantial costs defending against a claim of
infringement or protecting our intellectual property from
infringement.
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. Companies providing Internet-related products and
services are increasingly bringing and becoming subject to suits
alleging infringement of proprietary rights, particularly patent
rights. We could incur substantial costs in prosecuting or
defending any intellectual property litigation. If we sue to
enforce our rights or are sued by a third party that claims that
our technology infringes its rights, the litigation could be
expensive and could divert our management resources. We have
been subject to claims and litigation alleging that we have
infringed United States patents owned by third parties. We may
also acquire companies that are subject to pending claims of
infringement. For example, InstantService.com, Inc., or
InstantService which we acquired on January 8, 2010, is a
defendant in a patent infringement action brought by LivePerson,
Inc. in May 2009. We may be required to incur substantial costs
in defending any such infringement litigation in the future,
which could have a material adverse effect on our operating
results and financial condition.
In addition, we have agreed to indemnify clients against claims
that our products infringe the intellectual property rights of
third parties. From time to time, our clients have been subject
to third party patent claims and we have agreed to indemnify
these clients to the extent the claims related to our products.
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:
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cease selling or using products or services that incorporate the
challenged intellectual property;
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obtain a license, which may not be available on reasonable
terms, to sell or use the relevant technology; or
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redesign those products or services to avoid infringement.
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11
We seek to protect the source code for our proprietary software
under a combination of patent, copyright and trade secrets law.
However, because we make the source code available to some
clients, third parties may be more likely to misappropriate it.
Our policy is to enter into confidentiality agreements with our
employees, consultants, vendors and clients 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.
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, we expect software piracy 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.
If we fail to meaningfully protect our intellectual property,
then our business, operating results and financial condition
could be materially harmed.
Finally, our professional services may involve the development
of custom software applications for specific clients. In some
cases, clients 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 clients.
If we
fail to maintain our existing client base, then our ability to
generate revenues will be harmed.
Historically, we have derived a significant portion of our
revenues from existing clients that purchase our support and
maintenance services and license enhanced versions of our
products. If we are unable to continue to obtain significant
revenues from our existing client base, then our ability to grow
our business would be harmed, and our competitors could achieve
greater market share. The current trend toward
e-commerce
replatforming may increase this risk. When existing clients
re-evaluate their
e-commerce
platforms and solutions, they may elect to replace our
e-commerce
solutions with those of other vendors. If they do, these
clients, as well as other prospective clients who choose
e-commerce
solutions other than ours in connection with their
replatforming, are likely to commit substantial expenditures and
investments of time and resources to the implementation of the
e-commerce
solution included in their new chosen platforms, reducing the
probability that we will be able to penetrate those accounts in
the near future.
If we
fail to address the challenges associated with our international
operations, then revenues from our products and services may
decline, and the costs of providing our products or services may
increase.
As of December 31, 2009, we had offices in Canada, France,
Germany, the Netherlands, Northern Ireland, and the United
Kingdom. We derived 31% of our total revenues in 2009, 29% of
our total revenues in 2008, and 32% of our total revenues in
2007 from clients outside the United States. Our operations
outside the United States are subject to additional risks,
including:
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changes in exchange rates that may increase volatility of
foreign based revenue;
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changes in regulatory requirements, tariffs, and other barriers;
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longer payment cycles and problems in collecting accounts
receivable in Western Europe and Asia;
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difficulties in managing systems integrators and technology
partners;
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difficulties in staffing and managing foreign subsidiary
operations;
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differing technology standards;
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difficulties and delays in translating products and product
documentation into foreign languages for countries in which
English is not the primary language;
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reduced protection for intellectual property rights in some of
the countries in which we operate or plan to operate;
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difficulties related to entering into legal contracts under
local laws and in foreign languages;
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potentially adverse tax consequences; and
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political and economic instability.
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We may
need financing in the future, and any additional financing may
result in restrictions on our operations or substantial dilution
to our stockholders.
We may need to raise funds in the future, for example, to
develop new technologies, expand our business, respond to
competitive pressures, acquire complementary businesses, or
respond to unanticipated situations. We may try to raise
additional funds through public or private financings, strategic
relationships, or other arrangements. Our ability to obtain debt
or equity funding will depend on a number of factors, including
market conditions, our operating performance, and investor
interest. Additional funding may not be available to us on
acceptable terms or at all. If adequate funds are not available,
we may be required to reduce expenditures, including curtailing
our growth strategies, foregoing acquisitions, or reducing our
product development efforts. If we succeed in raising additional
funds through the issuance of equity or convertible securities,
then the issuance could result in substantial dilution to
existing stockholders. If we raise additional funds through the
issuance of debt securities or preferred stock, these new
securities would have rights, preferences, and privileges senior
to those of the holders of our common stock. The terms of these
securities, as well as any borrowings under our credit
agreement, could impose restrictions on our operations.
We
have acquired and intend to acquire other companies or
technologies, which could divert our managements
attention, result in additional dilution to our stockholders and
otherwise disrupt our operations and harm our operating
results.
On January 8, 2010 we acquired InstantService, a
Seattle-based provider of
click-to-chat
solutions and
e-mail
management for approximately $17.0 million. We intend to
acquire or invest in additional businesses, products, or
technologies that we believe could complement or expand our
application suite, enhance our technical capabilities, or
otherwise offer growth opportunities. We have no current
agreements or commitments with respect to a material transaction
at the present time. However, in the ordinary course of business
we may engage in discussions at any time relating to possible
acquisitions and investments, including acquisitions that, if
consummated, could have a material impact on our business,
results of operations and financial condition. The pursuit of
potential acquisitions may divert the attention of management
and cause us to incur various expenses in identifying,
investigating and pursuing suitable acquisitions, whether or not
they are consummated.
We may not be able to integrate the acquired personnel,
operations, and technologies of InstantService or other
businesses we may acquire successfully, or effectively manage
the combined business following the acquisition. We also may not
achieve the anticipated benefits from the acquired business due
to a number of factors, including:
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unanticipated costs or liabilities associated with the
acquisition;
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incurrence of acquisition-related costs, which would be
recognized as expense under Financial Accounting Standards
Board, or FASB, Accounting Standards Codification, or ASC,
805-10,
Business Combinations;
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diversion of managements attention from other business
concerns;
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harm to our existing business relationships with business
partners and clients as a result of the acquisition;
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the potential loss of key employees;
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use of resources that are needed in other parts of our
business; and
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use of substantial portions of our available cash to consummate
the acquisition.
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In addition, a significant portion of the purchase price of
companies we acquire may be allocated to acquired goodwill and
other intangible assets, which must be assessed for impairment
at least annually. In the future, if our acquisitions do not
yield expected returns, we may be required to take charges to
our operating results based on this impairment assessment
process, which could harm our results of operations.
Acquisitions could also result in dilutive issuances of equity
securities or the incurrence of debt, which could adversely
affect our operating results. In addition, if an acquired
business fails to meet our expectations, our operating results,
business and financial condition may suffer.
13
If
systems integrators or value added resellers reduce their
support and implementation of our products, then our revenues
may fail to meet expectations and our operating results would
suffer.
Since our potential clients often rely on third-party systems
integrators to develop, deploy, and manage websites for
conducting commerce on the Internet, we cultivate relationships
with systems integrators to encourage them to support our
products. We do not, however, generally have written agreements
with our systems integrators, and they are not required to
implement solutions that include our products or to maintain
minimum sales levels of our products. Our revenues would be
reduced if we fail to train a sufficient number of systems
integrators adequately or if systems integrators devote their
efforts to integrating or co-selling products of other
companies. Any such reduction in revenue would not be
accompanied by a significant offset in our expenses. As a
result, our operating results would suffer, and the price of our
common stock would probably fall.
If our
software products contain serious errors or defects, then we may
lose revenues and market acceptance and may incur costs to
defend or settle product liability claims.
Complex software products such as ours often contain errors or
defects, particularly when first introduced or when new versions
or enhancements are released. Despite internal testing and
testing by our clients, our current and future products may
contain serious defects, which could result in lost revenues or
a delay in market acceptance.
Since our clients use our products for critical business
applications such as
e-commerce,
errors, defects or other performance problems could result in
damage to our clients. 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 and could
seriously damage our reputation in the marketplace, making it
harder for us to sell our products.
Government
or industry regulations could directly restrict our business or
indirectly affect our business by limiting the growth of
e-commerce.
As
e-commerce
evolves, federal, state and foreign agencies have adopted and
could in the future adopt regulations covering issues such as
user privacy, content, and taxation of products and services.
Government regulations could limit the market for our products
and services or 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 prohibitions 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 has generated privacy concerns that could result in
legislation or market perceptions that could result in reduced
sales of our products and harm our business.
Businesses use our ATG Adaptive Scenario Engine product to
develop and maintain profiles to tailor the content to be
provided to website visitors. When a visitor first arrives at a
website, our software creates a profile for that visitor. If the
visitor registers or logs in, the visitors identity is
added to the profile, preserving any profile information that
was gathered up to that point. ATG Adaptive Scenario Engine
product tracks both explicit user profile data supplied by the
user as well as implicit profile attributes derived from the
users behavior on the website. Privacy concerns may cause
visitors to resist providing the personal data or to avoid
websites that track the web behavioral information necessary to
support our 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 website users that the
data captured after visiting websites 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
14
regulatory requirements, and the United States may follow suit.
Privacy legislation and consumer privacy concerns could make it
harder for us to sell our products and services, resulting in
reduced revenues.
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
computers hard drive, typically without the users
knowledge. The user can generally remove the cookies, 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, then demand for our personalization products could be
reduced.
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 charter and by-laws may discourage,
delay, or prevent a merger or acquisition that some of our
stockholders 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 and prohibiting stockholder action by written
consent;
|
|
|
|
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; and
|
|
|
|
authorizing anti-takeover provisions.
|
In addition, we adopted a shareholder rights plan in 2001. The
existence of our shareholder rights plan, as well as certain
provisions of Delaware law, may further discourage, delay, or
prevent someone from acquiring or merging with us.
Continued
compliance with regulatory and accounting requirements will be
challenging and will require significant
resources.
We are spending a significant amount of management time and
external resources to comply with changing laws, regulations,
and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC
rules and regulations, and Nasdaq Global Market rules. In
particular, Section 404 of the Sarbanes-Oxley Act of 2002
requires managements annual review and evaluation of
internal control over financial reporting. The process of
documenting and testing internal control over financial
reporting has required that we hire additional personnel and
outside services and has resulted in higher accounting and legal
expenses. While we invested significant time and money in our
effort to evaluate and test our internal control over financial
reporting, a material weakness was identified in our internal
control over financial reporting in 2006. Although the material
weakness was remediated in 2007, there are inherent limitations
to the effectiveness of any system of internal controls and
procedures, including cost limitations, the possibility of human
error, judgments and assumptions regarding the likelihood of
future events, and the circumvention or overriding of the
controls and procedures. Accordingly, even effective controls
and procedures can provide only reasonable assurance of
achieving their control objectives.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
15
Our headquarters are located in approximately 59,000 square
feet of leased office space in Cambridge, Massachusetts. In
addition, we have facilities in Reston, Virginia (approximately
10,000 square feet); Seattle, Washington (approximately
17,000 square feet); Washington, D.C. (approximately
7,000 square feet); Chicago, Illinois (approximately
7,000 square feet); San Francisco, California
(approximately 3,000 square feet), and Corvallis, Oregon
(approximately 3,000 square feet). Our European
headquarters are located in Reading, United Kingdom
(approximately 4,000 square feet). We also maintain offices
in Northern Ireland (approximately 12,000 square feet) and
France (approximately 1,000 square feet). All of our
facilities are leased. At December 31, 2009 we were in the
process of negotiating additional leased square footage for our
Belfast and Seattle locations. We believe our facilities are
sufficient to meet our needs for the foreseeable future and, if
needed, additional space will be available at a reasonable cost.
|
|
Item 3.
|
Legal
Proceedings
|
As previously disclosed, in December 2001, a purported class
action complaint was filed against our wholly owned subsidiary
Primus Knowledge Solutions, Inc., two former officers of Primus
and the underwriters of Primus 1999 initial public
offering. The complaints are similar and allege violations of
the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, primarily based on the allegation that the
underwriters received undisclosed compensation in connection
with Primus initial public offering. The litigation has
been coordinated in the United States District Court for the
Southern District of New York with claims against approximately
300 other companies that had initial public offerings during the
same general time period. The parties have reached a global
settlement of the litigation under which insurance will pay the
full amount of the settlement share allocated to Primus, and
Primus bears no financial liability. In October 2009, the Court
issued an order granting final approval of the settlement.
Certain objectors are appealing the final order. While we cannot
predict the outcome of the litigation, we do not expect any
material adverse impact to our business, or the results of our
operations, from this matter.
On or about May 15, 2009, LivePerson, Inc.
(LivePerson) commenced an action in the United
States District Court for the Southern District of New York
against InstantService.com, Inc. (InstantService), a
company that we acquired on January 8, 2010. In the action,
LivePerson alleges that InstantService infringes two United
States patents held by LivePerson and seeks injunctive relief,
damages and attorneys fees. Additionally, LivePerson seeks
a declaratory judgment that a United States patent held by
InstantService is invalid and is not infringed by LivePerson.
Discovery in the LivePerson action has not yet commenced.
InstantService has filed a motion to dismiss the action which is
pending. We are investigating the claims made by LivePerson and
at this early stage have reached no conclusion as to the
likelihood of an adverse outcome in the litigation, which we
intend to contest vigorously.
Our industry is characterized by the existence of a large number
of patents, trademarks and copyrights, and by increasingly
frequent litigation based on allegations of infringement or
other violations of intellectual property rights. Some of our
competitors in the market for
e-commerce
software and services have filed or may file patent applications
covering aspects of their technology that they may claim our
technology infringes. Such competitors could make claims of
infringement against us with respect to our products and
technology. Additionally, third parties who are not actively
engaged in providing
e-commerce
products or services but who hold or acquire patents upon which
they may allege our current or future products or services
infringe may make claims of infringement against us or our
customers. Our agreements with our customers typically require
us to indemnify them against claims of intellectual property
infringement resulting from their use of our products and
services. We periodically receive notices from customers
regarding patent license inquiries they have received which may
or may not implicate our indemnity obligations, and certain of
our customers are currently parties to litigation in which it is
alleged that the patent rights of others are infringed by our
products or services. Any litigation over intellectual property
rights, whether brought by us or by others, could result in the
expenditure of significant financial resources and the diversion
of managements time and efforts. In addition, litigation
in which we or our customers are accused of infringement might
cause product shipment or service delivery delays, require us to
develop alternative technology or require us to enter into
royalty or license agreements, which might not be available on
acceptable terms, or at all. We could incur substantial costs in
prosecuting or defending any intellectual property litigation.
These claims, whether meritorious or not, could be time
consuming, result in costly litigation, require expensive
16
changes in our methods of doing business or could require us to
enter into costly royalty or licensing agreements, if available.
As a result, these claims could harm our business.
The ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative
impact on our results of operations, consolidated balance sheets
and cash flows, due to defense costs, diversion of management
resources and other factors.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Our common stock trades on The NASDAQ Global Market under the
symbol ARTG. 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 Global Market.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
4.59
|
|
|
$
|
2.78
|
|
Second quarter
|
|
|
4.08
|
|
|
|
2.93
|
|
Third quarter
|
|
|
4.49
|
|
|
|
3.03
|
|
Fourth quarter
|
|
|
3.50
|
|
|
|
1.02
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
2.87
|
|
|
$
|
1.45
|
|
Second quarter
|
|
|
3.99
|
|
|
|
2.36
|
|
Third quarter
|
|
|
4.55
|
|
|
|
3.64
|
|
Fourth quarter
|
|
|
4.88
|
|
|
|
3.60
|
|
Fiscal 2010
|
|
|
|
|
|
|
|
|
First quarter (through January 27, 2010)
|
|
$
|
4.85
|
|
|
$
|
4.20
|
|
On January 27, 2010, the last reported sale price on The
NASDAQ Global Market for our common stock was $4.31 per share.
On January 27, 2010, there were approximately 450 holders
of record of our common stock. This number does not include
stockholders for whom our shares were held in a
nominee or street name.
We have never paid or declared any cash dividends on shares of
our common stock or other securities and do not anticipate
paying any cash dividends in the foreseeable future. We
currently intend to retain all future earnings, if any, for use
in the operation of our business.
17
The following graph compares the cumulative total stockholder
return on our common stock during the period December 31,
2004 to December 31, 2009 with the cumulative total return
of the NASDAQ Market Index and a peer group index over the same
period. This comparison assumed the investment of $100 on
December 31, 2004 in our common stock, the NASDAQ Market
Index, and the peer group index and assumes dividends, if any,
are reinvested. The peer group index that we used is Hemscott
Industry Group 852 (Internet Software and Services), which
reflects the stock performance of 94 publicly traded companies
in the Internet software and services marketplace.
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG ART TECHNOLOGY GROUP, INC.,
NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
ASSUMES
$100 INVESTED ON DECEMBER 31, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Investment($)
|
|
|
December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Art Technology Group, Inc.
|
|
$
|
100.00
|
|
|
$
|
130.67
|
|
|
$
|
155.33
|
|
|
$
|
288.00
|
|
|
$
|
128.67
|
|
|
$
|
300.67
|
|
Hemscott Industry Group 852 Index
|
|
$
|
100.00
|
|
|
$
|
102.20
|
|
|
$
|
112.68
|
|
|
$
|
124.57
|
|
|
$
|
74.71
|
|
|
$
|
108.56
|
|
NASDAQ Market Index
|
|
$
|
100.00
|
|
|
$
|
86.54
|
|
|
$
|
82.14
|
|
|
$
|
87.81
|
|
|
$
|
56.38
|
|
|
$
|
81.12
|
|
18
Stock
Repurchase Program
On October 27, 2009 our Board of Directors authorized a new
stock repurchase program providing for the repurchase of up to
$25.0 million of our outstanding common stock in the open
market or in privately negotiated transactions, at times and
prices considered appropriate depending on the prevailing market
conditions. This new authorization was in addition to the
$3.9 million that remained available under the
$20.0 million repurchase program authorized in April 2007.
During the years ended December 31, 2009, 2008, and 2007,
we repurchased 1,084,594 shares, 4,618,541 shares, and
986,960 shares of our common stock at a cost of
$4.3 million, $8.9 million, and $2.9 million,
respectively. For the life of the stock repurchase program
through December 31, 2009, we have repurchased
6,690,095 shares of our common stock at a cost of
$16.1 million. We purchased no shares of our common stock
during the quarter ended December 31, 2009 and we have not
yet purchased any shares under the $25.0 million
authorization that took place on October 27, 2009.
Our stock repurchase authorization does not have an expiration
date and the pace of our repurchase activity will depend on
factors such as our working capital needs, our cash requirements
for acquisitions, any debt repayment obligations which may
arise, our stock price, and economic and market conditions. Our
stock repurchases may be effected from time to time through open
market purchases or pursuant to a
Rule 10b5-1
plan. Our stock repurchase program may be accelerated,
suspended, delayed or discontinued at any time.
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and related notes and with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and other financial data included elsewhere in
this Annual Report on
Form 10-K.
Except as set forth below, the consolidated statement of
operations data and balance sheet data for all periods presented
are derived from audited consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K
or in Annual Reports on
Form 10-K
for prior years on file with the United States Securities and
Exchange Commission.
On January 1, 2006, we adopted the provisions of ASC
718-10,
Compensation Stock Compensation, using the
modified prospective transition method, which requires us to
record stock-based compensation expense for employee stock
awards based on the fair value of the equity award at the time
of grant. Stock-based compensation expense was
$8.9 million, $7.9 million, $5.8 million, and
$3.8 million for the years ended December 31, 2009,
2008, 2007, and 2006, respectively.
19
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
$
|
54,370
|
|
|
$
|
47,429
|
|
|
$
|
30,529
|
|
|
$
|
32,784
|
|
|
$
|
29,821
|
|
Recurring services
|
|
|
98,535
|
|
|
|
91,039
|
|
|
|
76,672
|
|
|
|
51,113
|
|
|
|
44,258
|
|
Professional and education services
|
|
|
26,477
|
|
|
|
26,173
|
|
|
|
29,859
|
|
|
|
19,335
|
|
|
|
16,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
179,382
|
|
|
|
164,641
|
|
|
|
137,060
|
|
|
|
103,232
|
|
|
|
90,646
|
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
1,818
|
|
|
|
2,186
|
|
|
|
2,197
|
|
|
|
1,751
|
|
|
|
1,816
|
|
Recurring services
|
|
|
36,786
|
|
|
|
34,077
|
|
|
|
24,119
|
|
|
|
11,239
|
|
|
|
6,575
|
|
Professional and education services
|
|
|
22,323
|
|
|
|
25,619
|
|
|
|
29,223
|
|
|
|
19,560
|
|
|
|
16,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
60,927
|
|
|
|
61,882
|
|
|
|
55,539
|
|
|
|
32,550
|
|
|
|
25,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
118,455
|
|
|
|
102,759
|
|
|
|
81,521
|
|
|
|
70,682
|
|
|
|
65,575
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
30,520
|
|
|
|
29,329
|
|
|
|
24,963
|
|
|
|
21,517
|
|
|
|
18,481
|
|
Sales and marketing
|
|
|
52,193
|
|
|
|
49,569
|
|
|
|
44,397
|
|
|
|
30,909
|
|
|
|
29,396
|
|
General and administrative
|
|
|
18,990
|
|
|
|
19,432
|
|
|
|
18,211
|
|
|
|
12,952
|
|
|
|
11,231
|
|
Restructuring charge (benefit)
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
(62
|
)
|
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
101,703
|
|
|
|
98,330
|
|
|
|
87,512
|
|
|
|
65,316
|
|
|
|
59,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
16,752
|
|
|
|
4,429
|
|
|
|
(5,991
|
)
|
|
|
5,366
|
|
|
|
5,582
|
|
Interest and other income, net
|
|
|
56
|
|
|
|
960
|
|
|
|
2,237
|
|
|
|
1,712
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
16,808
|
|
|
|
5,389
|
|
|
|
(3,754
|
)
|
|
|
7,078
|
|
|
|
5,801
|
|
Provision (benefit) for income taxes
|
|
|
12
|
|
|
|
1,590
|
|
|
|
433
|
|
|
|
(2,617
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16,796
|
|
|
$
|
3,799
|
|
|
$
|
(4,187
|
)
|
|
$
|
9,695
|
|
|
$
|
5,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share
|
|
$
|
0.13
|
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
126,842
|
|
|
|
128,534
|
|
|
|
127,528
|
|
|
|
115,280
|
|
|
|
109,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
133,054
|
|
|
|
133,916
|
|
|
|
127,528
|
|
|
|
120,096
|
|
|
|
111,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash, cash equivalents and short-term marketable securities
(including restricted cash of $50 and $1,669 at
December 31, 2009 and 2008, respectively)
|
|
$
|
79,094
|
|
|
$
|
60,983
|
|
|
$
|
50,879
|
|
|
$
|
31,223
|
|
|
$
|
33,569
|
|
Long-term marketable securities (including restricted cash of
$738 and $419 at December 31, 2009 and 2008, respectively)
|
|
|
6,439
|
|
|
|
419
|
|
|
|
1,062
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
214,036
|
|
|
|
188,767
|
|
|
|
177,719
|
|
|
|
149,981
|
|
|
|
92,765
|
|
Total deferred revenue
|
|
|
52,996
|
|
|
|
54,067
|
|
|
|
46,354
|
|
|
|
24,209
|
|
|
|
21,113
|
|
Long-term obligations, less current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
Total stockholders equity
|
|
$
|
135,911
|
|
|
$
|
110,946
|
|
|
$
|
107,097
|
|
|
$
|
105,074
|
|
|
$
|
50,160
|
|
20
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
This Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with our consolidated financial statements and notes
thereto which appear elsewhere in this Annual Report on
Form 10-K.
The following discussion contains forward-looking statements.
See Risk Factors elsewhere in this Annual Report on
Form 10-K
for a discussion of important factors and risks associated with
our business that could cause our actual results to differ
materially from these forward-looking statements. The
forward-looking statements do not include the potential impact
of any mergers, acquisitions, or divestitures of business
combinations that may be announced after the date hereof.
We develop and market a comprehensive suite of
e-commerce
software solutions, as well as provide related services in
conjunction with our products, including support and
maintenance, professional services, managed application hosting
services, and Optimization services for enhancing online sales
and support. We primarily derive revenue from the sale of
software products and related services. Our software licenses
are priced based on the size of the customer implementation. Our
recurring services revenue is comprised of managed application
hosting services, Optimization services, and support and
maintenance services. Managed application hosting revenue is
recognized monthly as the services are provided and pricing is
based on a per transaction, per CPU or percent of
customers revenue basis. Optimization services are priced
on a per transaction basis and recognized monthly as the
services are provided. Support and maintenance arrangements are
priced based on the level of support services provided as a
percent of net license fees per annum. Under support and
maintenance services, customers are generally entitled to
receive software upgrades and updates, maintenance releases and
technical support. Professional and education services revenue
includes implementation, technical consulting and education
training. We bill professional service fees primarily on a time
and materials basis. Education services are billed as services
are provided.
Shift to
Increasing Ratably Recognized Revenue
Before 2007, most of our revenue from arrangements involving the
sale of our software was derived from perpetual software
licenses and in most circumstances was recognized at the time
the license agreement was executed and the software was
delivered. Beginning in the first quarter of 2007, an increasing
number of our perpetual software license arrangements have also
included the sale of our managed application hosting services or
Optimization services. As a result of applying the requirements
of U.S. generally accepted accounting principles
(GAAP) to our evolving business model, the revenue
from these arrangements with combined product offerings is
recognized on a ratable basis over the estimated term of the
contract or arrangement, commencing with the
site-delivered date for providing the managed
application hosting services or Optimization services.
The addition of Optimization services and managed application
hosting services solution offerings introduced new products in
our portfolio for which we do not have vendor-specific objective
evidence (or VSOE) of fair value. As a result, when
we sell Optimization services and managed application hosting
services in conjunction with
e-commerce
software, we defer all up-front fees, such as those for
licenses, support and maintenance, and professional services,
received prior to the delivery of the managed application
hosting services or Optimization services. We recognize revenue
from these fees ratably over either the term of the contract or
estimated life of the arrangement depending on the specific
facts of the arrangement, commencing with the
site-delivered date for providing the managed
application hosting services or Optimization services. In
addition, when professional services revenue is deferred in
connection with these arrangements and other instances in which
there are undelivered elements to a transaction for which we do
not have VSOE of fair value, we defer the direct costs related
to performing the professional services prior to delivery of the
element related to these services. These amounts are recognized
ratably to cost of revenue in the same manner as the related
revenue.
Key
Measures that We Use to Evaluate Our Performance
In addition to the traditional measures of financial performance
that are reflected in our results of operations determined in
accordance with GAAP, we also monitor certain non-GAAP financial
measures related to the performance of our business. A
non-GAAP financial measure is a numerical measure of
a companys historical or
21
future financial performance that excludes amounts that are
included in the most directly comparable measure calculated and
presented in the GAAP statement of operations. Among the GAAP
and non-GAAP measures that we believe are most important in
evaluating the performance of our business are the following:
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|
|
|
|
We use product license bookings, a non-GAAP financial measure,
as an important measure of growth in demand for our ATG
e-commerce
platform and the success of our sales and marketing efforts. We
define product license bookings as the sale of perpetual
software licenses regardless of the timing of revenue
recognition under GAAP. When considering the value of perpetual
software licenses executed during the period we use our judgment
in assessing collectability and likelihood of granting future
concessions. Factors that we consider include the financial
condition of the customer and contractual provisions included in
the license contract. See Results of Operations-Product
license bookings below.
|
We believe that this measure provides us with an indication of
the amount of new software license business that our direct
sales team has added in the period. Product license revenue
associated with a particular transaction may be deferred for
reasons other than the presence of a managed application hosting
or Optimization services arrangement, such as the presence of
credit risk or other contractual terms that, under GAAP, require
us to defer the recognition of revenue. The deferred revenue for
such a transaction may be recognized in a single future period
rather than ratably when the conditions that originally required
deferral have been resolved. We include all additions to
deferred product license revenue in our calculation of product
license bookings.
|
|
|
|
|
We use cash flow from operations as an indicator of the success
of the business. Because a portion of our revenue is deferred in
the near term, our net income may be significantly different
from the cash that we generate from operations.
|
|
|
|
We use recurring services revenue, as reported under GAAP, to
evaluate the success of our strategy to deliver site-independent
online services and the growth of our recurring revenue sources.
Recurring services revenue includes Optimization services,
application hosting services, and support and maintenance
related to ATG
e-commerce
platform sales.
|
|
|
|
We use revenue and gross margins on our various lines of
business to measure our success at meeting cash and non-cash
cost and expense targets in relation to revenue earned.
|
|
|
|
We use days sales outstanding (DSO), calculated by
dividing accounts receivable at period end (including unbilled
accounts receivable which may exist as a result of extended
payment terms) by revenue and multiplying the result by the
number of days in the period. The percentage of accounts
receivable that are less than 60 days old is an important
factor that our management uses to understand the strength of
our accounts receivable portfolio. This measure is important
because a disproportionate percentage of our product license
bookings often occur late in the quarter, which has the effect
of increasing our DSO.
|
Trends in
On-Line Sales and our Business
Set forth below is a discussion of recent developments in our
industry that we believe offer us significant opportunities, or
present us with significant challenges, and have the potential
to significantly influence our results of operations.
Impact of weak economy. The global recession
that has affected all sectors of the U.S. and most foreign
economies has created substantial uncertainty for our business.
Weakening economic conditions have led to delays or reductions
in capital spending, including purchases of information
technology across industries and markets, and some customers in
markets that we serve, such as luxury retailers, have been
particularly affected. We cannot accurately predict the duration
or severity of the current adverse economic conditions or their
specific impact on our customers demand for our products
and services.
Trend in on-line sales. The growth of
e-commerce
as an important sales channel is the principal driver for demand
for our products and services. We believe that in the current
environment, the on-line channel is growing in importance for
many of our customers, as
e-commerce
may offer more opportunities for revenue growth as well as
significant cost savings and operational benefits such as
improved inventory control and purchasing processes.
22
E-commerce
replatforming. Enterprises
periodically upgrade or replace the network and enterprise
applications software and the related hardware systems that they
use to run their
e-commerce
operations in order to take advantage of advances in computing
power, system architectures, and enterprise software
functionality that enable them to increase the capabilities of
their
e-commerce
systems while simplifying operation and maintenance of these
systems and reducing their cost of ownership. In the
e-commerce
software industry, we refer to these major system upgrades or
replacements as replatforming. We believe that on
average, customers in our market replatform or refresh their
e-commerce
software approximately every four to five years. The extent to
which this trend will continue in light of current adverse
economic conditions is unknown. However, we are cautiously
optimistic that in the near term spending on
e-commerce
technology will continue at levels comparable to those we have
recently experienced, and that it may even increase as a
priority for some of our customers and prospects, due to the
growing importance and cost benefits of the on-line channel.
Emergence of the on demand model of Software as a
Service. An important trend throughout the
enterprise software industry in recent years has been the
emergence of the SaaS software delivery model whereby a software
vendor that has developed a software application hosts and
operates it for use by its customers over the Internet. The
emergence of SaaS has been driven by customers desire to
reduce the costs of owning and operating critical applications
software, while shifting the risks and burdens associated with
operating and maintaining the software to the software vendor,
enabling the customer to focus its resources on its core
business.
Rapidly evolving and increasingly complex customer
requirements. The market for
e-commerce
is constantly and rapidly evolving, as we and our competitors
introduce new and enhanced products, retire older ones, and
react to changes in Internet-related technology and customer
demands. The market for
e-commerce
has seen diminishing product differentiators, increasing product
commoditization, and evolving industry standards. To succeed, we
need to enhance our current products and develop or acquire new
products on a timely basis to keep pace with market needs,
satisfy the increasingly sophisticated requirements of
customers, and leverage strategic alliances with third parties
in the
e-commerce
field who have complementary products. Our customers may request
that we structure our arrangements with them in new ways that
may impact the timing of revenue recognition and cash flows.
International expansion. Revenues derived from
foreign sales as a percentage of our total revenues increased to
31% in 2009 from 29% in 2008. We seek to invest resources into
further developing our reach internationally. In support of this
initiative we have entered into partnership agreements abroad
that will support our continued growth. As the international
market opportunity continues to develop we will adjust our
strategy.
Competitive trend. The market for online
sales, marketing, and customer service software is intensely
competitive, subject to rapid technological change, and
significantly affected by new product introductions by large
competitors with significantly greater resources and installed
customer bases. We expect competition to persist and intensify
in the future.
Virtualization. The trend towards
virtualization could challenge our current software license
pricing structure. Virtualization is an approach to computing
wherein the actual, physical hardware resources of a computer
system are configured to simulate the operations of one or more
abstract computers, known as virtual machines, on
which software can be executed. The introduction of
virtualization technologies may require us to consider
alternative pricing strategies.
Development of ATGs partner
ecosystem. As we train and develop our ATG
partner ecosystem we will see a larger number of implementations
outsourced to these partners resulting in stable, or potentially
lower, professional services revenue.
Critical
Accounting Policies and Estimates
This managements discussion and analysis of financial
condition and results of operations discusses our consolidated
financial statements, which have been prepared in accordance
with United States generally accepted accounting principles. The
preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
23
reporting period. On an ongoing basis, management evaluates its
estimates and judgments, including those related to revenue
recognition, deferral of costs, the allowance for accounts
receivable, research and development costs, the impairment of
long-lived assets and goodwill, income taxes, and assumptions
for stock-based compensation. Management bases its estimates and
judgments on historical experience, known trends, or events and
various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
We define our critical accounting policies as those
that require us to make subjective estimates about matters that
are uncertain and are likely to have a material impact on our
financial condition and results of operations or that concern
the specific manner in which we apply GAAP. Our estimates are
based upon assumptions and judgments about matters that are
highly uncertain at the time the accounting estimate is made and
applied and require us to assess a range of potential outcomes.
We believe the following critical accounting policies are those
that are most important to the portrayal of our results of
operations and financial condition and that require the most
subjective judgment.
Revenue
Recognition
We generate revenue through the sale of perpetual software
licenses, recurring services, which are comprised of support and
maintenance services, application hosting services, Optimization
services, and professional and education services. Please refer
to the notes to the consolidated financial statements appearing
elsewhere in this Annual Report on
Form 10-K
for a more comprehensive discussion of our revenue recognition
policy.
Our policy is to recognize revenue when the applicable revenue
recognition criteria have been met, which generally include the
following:
Persuasive evidence of an arrangement We use
a legally binding contract signed by the customer as evidence of
an arrangement. We consider the signed contract to be the most
persuasive evidence of the arrangement.
Delivery has occurred or services rendered
Software and the corresponding access keys are generally
delivered to customers electronically. Electronic delivery
occurs when we provide the customer access to the software. Our
software license agreements generally do not contain conditions
for acceptance. Our support and maintenance services,
Optimization services, and application hosting services are
delivered on a monthly basis. Professional services are
generally delivered on a time and material basis.
Fee is fixed or determinable We assess
whether the fee is fixed or determinable at the outset of the
arrangement, primarily based on the payment terms associated
with the transaction. Our standard payment terms are normally
within 90 days. In some circumstances we provide extended
payment terms, and in certain cases consider amounts payable
beyond 90 days but less than 12 months to be fixed or
determinable. Significant judgment is involved in assessing
whether a fee is fixed or determinable. Our experience has been
that we are generally able to determine whether a fee is fixed
or determinable.
Collection is probable We assess the
probability of collection from each customer at the outset of
the arrangement based on a number of factors, including the
customers payment history and its current
creditworthiness. If in our judgment collection of a fee is not
probable, we do not record revenue until the uncertainty is
removed, which generally means revenue is recognized upon our
receipt of the cash payment. Our experience has been that we are
generally able to estimate whether collection is probable.
Our standard payment terms are normally within 90 days. In
some circumstances we provide extended payment terms, and in
certain cases we consider amounts payable beyond 90 days
but less than 12 months to be fixed or determinable. In
such cases, judgment is required in evaluating the
creditworthiness of the customer and the likelihood of a
concession. Beginning with the first quarter of 2009 we
determined that we have a sufficient history of successfully
collecting, without concessions, accounts receivable involving
extended credit terms of up to twelve months granted to a
specific class of customer to conclude that the fees under such
arrangements may be considered to be both fixed and determinable
and probable of collection. Consequently, the fees under such
arrangements may
24
be recognized as revenue assuming other criteria for recognition
are met. As a result, we recognized approximately
$5.2 million of revenue during 2009 that previously would
have been deferred until the payments became due in future
periods. We monitor our ability to collect amounts due under the
stated contractual terms of such arrangements and to date we
have not experienced any material concessions to this class of
customer. Significant judgment is involved in assessing whether
a contractual amendment constitutes a concession. If in the
future we experience adverse changes in our ability to collect
without concession the amounts due under arrangements involving
extended payment terms to this class of customer, we may no
longer be able to conclude that such amounts are fixed or
determinable and probable of collection, which could adversely
affect our revenue in future periods.
Generally we enter into arrangements that include multiple
elements. Such arrangements may include sales of software
licenses and related support and maintenance services in
conjunction with application hosting services, Optimization
services or professional services. In these situations we must
determine whether the various elements meet the applicable
criteria to be accounted for as separate elements. If the
elements cannot be separated, revenue is recognized once the
revenue recognition criteria for the entire arrangement have
been met or over the period that our obligations to the customer
are fulfilled, as appropriate. If the elements are determined to
be separable, revenue is allocated to the separate elements
based on VSOE of fair value and recognized separately for each
element when the applicable revenue recognition criteria for
each element have been met. In accounting for these multiple
element arrangements, we must make determinations about whether
elements can be accounted for separately and make estimates
regarding their relative fair values.
Recording revenue from arrangements that include application
hosting services requires us to estimate the expected life of
the customer arrangement. Pursuant to the application of
relevant GAAP literature, ASC
605-25,
Multiple Element Arrangements, our arrangements with
application hosting services are accounted for as one unit of
accounting. In such situations, we recognize the entire
arrangement fee ratably over the term of the estimated life of
the customer arrangement. Based on our historical experience
with our customers, we estimate the life of the typical customer
arrangement to be approximately four years.
Our VSOE of fair value for certain elements of an arrangement is
based upon the pricing in comparable transactions when the
element is sold separately. VSOE of fair value for support and
maintenance is based upon our history of charging our customers
stated annual renewal rates. VSOE of fair value for professional
services and education is based on the price charged when the
services are sold separately. Annually, we evaluate whether or
not we have maintained VSOE of fair value for support and
maintenance services and professional services. We have
concluded that we have maintained VSOE of fair value for both
support and maintenance services and professional services
because the majority of our support and maintenance contract
renewal rates and professional service rates per personnel level
fall in a narrow range of variability within each service
offering.
For multiple element arrangements, VSOE of fair value must exist
to allocate the total arrangement fee among all delivered and
undelivered elements of a perpetual license arrangement. If VSOE
of fair value does not exist for all elements to support the
allocation of the total fee among all delivered and undelivered
elements of the arrangement, revenue is deferred until such
evidence does exist for the undelivered elements, or until all
elements are delivered, whichever is earlier. If VSOE of fair
value of all undelivered elements exists but VSOE of fair value
does not exist for one or more delivered elements, revenue is
recognized using the residual method. Under the residual method,
the VSOE of fair value of the undelivered elements is deferred,
and the remaining portion of the arrangement fee is recognized
as revenue as the elements are delivered.
We also sell perpetual software licenses with application
hosting services
and/or
Optimization services. We do not have VSOE of fair value for
either of these services. In these situations all elements in
the arrangement for which we receive up-front fees, which
typically include perpetual software fees, support and
maintenance fees, and
set-up and
implementation fees, are recognized as revenue ratably over the
period of providing the application hosting service or
Optimization services. We allocate and classify revenue in our
statement of operations based on our evaluation of VSOE of fair
value, or a proxy of fair value thereof, available for each
applicable element of the transaction. We generally base our
proxy of fair value on arms-length negotiations for the
contracted elements. This allocation methodology requires
judgment and is based on our analysis of our sales transactions.
25
Allowances
for Accounts Receivable
We maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. We perform
credit reviews of each customer, monitor collections and
payments from our customers, and determine the allowance based
upon historical experience and specific customer collection
issues. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required. In addition,
we record allowances to revenue based on past credit memo
history.
Research
and Development Costs
We account for research and development costs for our software
products that we license to our customers in accordance with ASC
730-10,
Accounting for Research and Development Costs, and ASC
985-20,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, which specifies that costs
incurred internally to develop computer software products should
be charged to expense as incurred until technological
feasibility is reached for the product. Once technological
feasibility is reached, all software costs should be capitalized
until the product is made available for general release to
customers. Judgment is required in determining when
technological feasibility is established. We believe that the
time period from reaching technological feasibility until the
time of general product release is very short. Costs incurred
after technological feasibility is reached are not material, and
accordingly, all such costs are charged to research and
development expense as incurred.
Costs incurred to develop software applications used internally
in our Optimization services are accounted for in accordance
with ASC
350-10,
Accounting for Computer Software Developed or Obtained for
Internal Use. Our capitalized costs include certain external
direct costs of materials and services incurred in developing or
obtaining internal-use computer software and payroll and
payroll-related costs for employees who are directly associated
with, and who devote time to, the project. These costs generally
consist of internal labor during configuration, coding, and
testing activities. Costs incurred during the preliminary
project stage or costs incurred for data conversion activities,
training, maintenance, and general and administrative or
overhead costs are expenses as incurred. Costs that cannot be
separated between maintenance of, and relatively minor upgrades
and enhancements to, internal-use software are also expensed as
incurred. Capitalization begins when the preliminary project
stage is complete, management with the relevant authority
authorizes and commits to the funding of the software project,
it is probable the project will be completed, the software will
be used to perform the functions intended, and certain
functional and quality standards have been met. We evaluate any
capitalized costs for impairment whenever conditions or events
indicate that the carrying amount of the asset may not be
recoverable.
Impairment
or Disposal of Long Lived Assets, including Intangible
Assets
We review our long-lived assets, including intangible assets
subject to amortization, whenever events or changes in
circumstances indicate that the carrying amount of such an asset
may not be recoverable. Recoverability of these assets is
measured by comparison of their carrying amount to the future
undiscounted cash flows the assets are expected to generate. If
such assets are considered impaired, the impairment to be
recognized is equal to the amount by which the carrying value of
the assets exceeds their fair value determined by either a
quoted market price, if any, or a value determined by utilizing
a discounted cash flow technique. In assessing recoverability,
we must make assumptions regarding estimated future cash flows
and discount factors. If these estimates or related assumptions
change in the future, we may be required to record impairment
charges. Intangible assets with determinable lives are amortized
over their estimated useful lives, based upon the pattern in
which the expected benefits will be realized, or on a
straight-line basis, whichever is greater. We did not record any
impairment charges in any of the years presented.
Goodwill
Goodwill represents the excess of the purchase price over the
fair value of net tangible and intangible assets acquired in a
business combination. In accordance with ASC
350-10,
Goodwill and Other Intangible Assets, we evaluate
goodwill for impairment annually on December 1, as well as
whenever events or changes in circumstances
26
suggest that the carrying amount may not be recoverable. Because
we have one reporting segment under ASC
350-10, we
utilize the entity-wide approach for assessing goodwill for
impairment and compare our market value to our net book value to
determine if impairment exists. No impairment of goodwill
resulted from our evaluation of goodwill in any of the years
presented, however in the future these impairment tests may
result in impairment losses that could have a material adverse
impact on our results of operations.
Accounting
for Income Taxes
In connection with preparing our financial statements, we are
required to compute income tax expense in each jurisdiction in
which we operate. This process requires us to project our
current tax liability and estimate our deferred tax assets and
liabilities, including net operating loss and tax credit
carryforwards. We also are required to assess the need for a
valuation allowance against deferred tax assets. As part of this
assessment, we have considered our recent operating results,
future taxable income projections, and all prudent and feasible
tax planning strategies.
As of December 31, 2009 and 2008 we have recognized a
deferred tax asset of $0.9 million and $0.6 million,
respectively, in certain foreign jurisdictions that we believe
will more likely than not be realized. Our assessment was based
upon our cumulative history of earnings before taxes for
financial reporting purposes over a three year period in those
jurisdictions and an assessment as of December 31, 2009 and
2008 of our expected future results of operations related to our
foreign operations.
As of December 31, 2009 and 2008 we maintained a full
valuation allowance against our U.S. net deferred tax
assets. We currently do not believe that we have sustained
profitability over an appropriate time period and in amounts
that are sufficient to support a conclusion that a valuation
allowance is not required. We believe there is significant
uncertainty in our future profits due to the growing breadth of
our product mix and the effect it can have on the timing of
revenue recognition, and the related effect on
U.S. reported income. Specifically, we may be required to
defer the recognition of revenue in amounts greater than we are
currently projecting. Assuming that, among other factors of
positive and negative evidence, we meet our estimates of 2010
forecasted earnings, we may release a portion of our
U.S. valuation allowance during the second half of 2010,
which is consistent with the timing of our annual forecasting
exercise. Additionally, in connection with our January 2010
acquisition of InstantService, during the first quarter of 2010
we will assess the acquired deferred tax assets and liabilities
and we may release a portion of our valuation allowance to
offset acquired net deferred tax liabilities.
We account for our uncertain tax positions in accordance with
ASC 740-10,
Income Taxes. During the year ended December 31,
2009, we recorded an increase to our gross liability for
unrecognized tax benefits of $0.2 million and a decrease of
$3.5 million in connection with the lapse of the applicable
statute of limitations in certain tax jurisdictions. The
decreases resulted in an income tax benefit of
$1.7 million. The remaining increases and decreases had no
net impact on our effective tax rate as they related to various
uncertain tax positions in our tax net operating loss
carryforward. At December 31, 2009 we have recorded less
than $0.1 million of interest and penalties in our
statement of operations and have accrued $0.1 million of
potential interest and penalties in our statement of financial
position. If the uncertain tax positions are ultimately resolved
in our favor, the effective tax rates in any future periods
would be favorably affected by approximately $0.4 million.
Stock-Based
Compensation Expense
We account for stock-based compensation in accordance with ASC
718-10,
Compensation Stock Compensation. Under the
fair value recognition provisions of ASC
718-10,
stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as
expense over the vesting period. We use the Black-Scholes option
pricing model to determine the fair value of our stock option
awards. Determining the fair value of stock-based awards at the
grant date requires judgment, including estimating the expected
life of the stock awards and the volatility of our underlying
common stock. Changes to the assumptions may have a significant
impact on the fair value of stock options, which could have a
material impact on our financial statements. In addition,
judgment is also required in estimating the amount of
stock-based awards that are expected to be forfeited. Should our
actual forfeiture rates differ significantly from our estimates,
our stock-based compensation expense and results of operations
could be materially impacted.
27
Results
of Operations
The following table sets forth statement of operations data as a
percentage of total revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
30
|
%
|
|
|
29
|
%
|
|
|
22
|
%
|
Recurring services
|
|
|
55
|
%
|
|
|
55
|
%
|
|
|
56
|
%
|
Professional and education services
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
Recurring services
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
18
|
%
|
Professional and education services
|
|
|
12
|
%
|
|
|
16
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
34
|
%
|
|
|
38
|
%
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
66
|
%
|
|
|
62
|
%
|
|
|
59
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
17
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
Sales and marketing
|
|
|
29
|
%
|
|
|
30
|
%
|
|
|
33
|
%
|
General and administrative
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
57
|
%
|
|
|
60
|
%
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
9
|
%
|
|
|
2
|
%
|
|
|
(5
|
)%
|
Interest and other income, net
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
Income (loss) before provision (benefit) for income taxes
|
|
|
9
|
%
|
|
|
3
|
%
|
|
|
(3
|
)%
|
Provision for income taxes
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
9
|
%
|
|
|
2
|
%
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth gross margin on product license
revenue, recurring services revenue and professional and
education services revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Cost of product license revenue
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
7
|
%
|
Gross margin on product license revenue
|
|
|
97
|
%
|
|
|
95
|
%
|
|
|
93
|
%
|
Cost of recurring services revenue
|
|
|
37
|
%
|
|
|
37
|
%
|
|
|
31
|
%
|
Gross margin on recurring services revenue
|
|
|
63
|
%
|
|
|
63
|
%
|
|
|
69
|
%
|
Cost of professional and education services revenue
|
|
|
84
|
%
|
|
|
98
|
%
|
|
|
98
|
%
|
Gross margin on professional and education services revenue
|
|
|
16
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Product
license bookings
We use product license bookings, a non-GAAP financial measure,
as an important measure of growth in demand for our ATG Commerce
and the success of our sales and marketing efforts. We define
product license bookings as the sale of perpetual software
licenses regardless of the timing of revenue recognition under
GAAP. When considering the value of perpetual software licenses
executed during the period we use our judgment in assessing
collectability and likelihood of granting future concessions.
Factors that we consider include the financial condition of the
customer and contractual provisions included in the license
contract.
28
The following table summarizes and reconciles to our product
license revenue, as reported under GAAP, our product license
bookings for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Product license bookings
|
|
$
|
56,888
|
|
|
$
|
52,782
|
|
|
$
|
43,412
|
|
Product license bookings not recognized
|
|
|
(21,357
|
)
|
|
|
(25,546
|
)
|
|
|
(14,166
|
)
|
Product license deferred revenue recognized
|
|
|
18,839
|
|
|
|
20,193
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license revenue
|
|
$
|
54,370
|
|
|
$
|
47,429
|
|
|
$
|
30,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license bookings increased $4.1 million, or 8%, to
$56.9 million in 2009 from $52.8 million in 2008 and
increased $9.4 million, or 22%, to $52.8 million in
2008 from $43.4 million in 2007. These increases reflect
growth in the
e-commerce
market and the success of our sales and marketing initiatives.
Product license bookings not recognized was 38%, 48%, and 33% of
our total product license bookings for 2009, 2008 and 2007,
respectively. The decrease in the deferral of bookings in 2009
is due to more of our larger product license transactions in
2008 including optimization services when compared to our larger
product license transactions in 2009. Deferred revenue will be
recognized in future periods when delivery of the service occurs
or as contractual requirements or other conditions that required
deferral are met.
Product license deferred revenue recognized was
$18.8 million, $20.2 million, and $1.3 million in
2009, 2008, and 2007. The significant increase in 2008 reflects
the shift in our business model at the beginning of 2007 to a
greater portion of our arrangements including elements where
revenue was deferred. In 2009 we recognized $15.7 million
from product license deferred revenue on a ratable basis and the
remaining $3.1 million was recognized upon the resolution
of contractual conditions or other conditions that required
deferral. In 2008 we recognized $7.0 million from product
license deferred revenue on a ratable basis and the remaining
$13.2 million was recognized upon the resolution of
contractual conditions or other conditions that required
deferral.
We expect 2010 product license bookings to be in the range of 5
to 10% greater than 2009. We expect first quarter 2010 product
license bookings to be in the range of 5 to 10% greater than the
first quarter of 2009.
Years
ended December 31, 2009, 2008 and 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Total revenue
|
|
$
|
179,382
|
|
|
$
|
164,641
|
|
|
$
|
137,060
|
|
Total revenue increased $14.8 million, or 9%, to
$179.4 million for 2009 from $164.6 million for 2008.
Revenue is derived from perpetual software licenses, recurring
services, and professional and education services. The revenue
growth in 2009 is due to an increase of $6.9 million, or
15%, in product license revenue, an increase of
$7.5 million, or 8%, in recurring services revenue and an
increase of $0.3 million, or 1.0% in professional and
education services.
Total revenue increased $27.6 million, or 20%, to
$164.6 million for 2008 from $137.1 million for 2007.
Revenue is derived from perpetual software licenses, recurring
services, and professional and education services. The revenue
growth in 2008 is due to an increase of $16.9 million, or
55%, in product license revenue and an increase of
$14.4 million, or 19%, in recurring services revenue.
Partially offsetting the increase was a decrease in professional
and education services of $3.7 million, or 12%.
Revenue generated from foreign sources increased to
$56.3 million, or 31% of total revenue compared to
$48.4 million, or 29% in 2008, and $43.4 million, or
32% in 2007.
We expect 2010 revenues in the range of $197.0 million to
$203.0 million. We expect first quarter 2010 revenue to be
in the range of $43.0 million to $45.0 million.
29
Product
License Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollar amounts in thousands)
|
|
Product license revenue
|
|
$
|
54,370
|
|
|
$
|
47,429
|
|
|
$
|
30,529
|
|
As a percent of total revenue
|
|
|
30
|
%
|
|
|
29
|
%
|
|
|
22
|
%
|
Product license revenue increased $6.9 million, or 15%, to
$54.4 million for 2009 from $47.4 million in 2008. The
increase for 2009 resulted from growth in demand for our
e-commerce
solutions and the success of our sales and marketing
initiatives, and a net decrease in the amount of product license
deferred revenue. Product license bookings increased
$4.1 million in 2009 compared to 2008. In addition, we
deferred $4.2 million fewer product license bookings in
2009 compared to 2008 due to the inclusion of optimization
services, application hosting, and other elements in a fewer
number of our larger contracts during 2009. Partially offsetting
these increases to revenue, in 2009 product license deferred
revenue recognized was $18.8 million, compared to
$20.2 million in 2008. Revenue generated and deferred in
prior periods is recognized when delivery of the service occurs
or as contractual requirements are met. Product license revenue
generated from international customers increased 37% to
$24.0 million for 2009 from $17.5 million in 2008.
Product license revenue as a percentage of our total revenue
increased to 30% in 2009 from 29% in 2008.
Product license revenue increased 55% to $47.4 million for
2008 from $30.5 million in 2007. The increase for 2008 was
driven by significant growth in sales of software licenses
recognized in 2008, an $18.9 million increase in revenue
recognized from deferred revenue, partially offset by an
$11.4 million increase in deferred product license revenue
in 2008. In 2008, we recognized $20.2 million, or 43%, of
our product license revenue from balances deferred in prior
periods. Product license revenue generated from international
customers increased 42% to $17.5 million for 2008 from
$12.3 million in 2007. Product license revenue as a
percentage of our total revenue increased to 29% in 2008 from
22% in 2007.
We expect first quarter 2010 product license revenues to be in
the range of $13.0 million to $14.0 million.
Recurring
services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Support and maintenance
|
|
$
|
49,003
|
|
|
$
|
45,716
|
|
|
$
|
41,923
|
|
Optimization services and managed application hosting services
|
|
|
49,532
|
|
|
|
45,323
|
|
|
|
34,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring services revenue
|
|
$
|
98,535
|
|
|
$
|
91,039
|
|
|
$
|
76,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenue
|
|
|
55
|
%
|
|
|
55
|
%
|
|
|
56
|
%
|
Our recurring services revenue increased $7.5 million, or
8%, to $98.5 million in 2009 from $91.0 million in
2008, as follows:
|
|
|
|
|
Support and maintenance revenue increased $3.3 million, or
7%, to $49.0 million in 2009 from $45.7 million in
2008. The increase is due to growth in our installed base of ATG
e-commerce
software.
|
|
|
|
Optimization services and managed application hosting services
revenue increased $4.2 million, or 9%, to
$49.5 million in 2009 from $45.3 million in 2008. The
increased optimization services revenue in 2009 is a result of
increased contract values on new customers added during 2009.
The increased hosting services revenue in 2009 is due to
increases in monthly recurring revenue rates on new customers
added in 2009, increased amortization of previously deferred
revenue, and increased professional services provided.
Additionally in 2009, a customer for which we were providing
managed services elected to migrate its site to an on-premise
ATG solution resulting in the recognition of previously deferred
revenue.
|
30
Our recurring services revenue increased 19% to
$91.0 million in 2008 from $76.7 million in 2007, as
follows:
|
|
|
|
|
Support and maintenance revenue increased 9% to
$45.7 million in 2008 from $41.9 million in 2007. The
increase is due to growth in our installed base of ATG
e-commerce
software.
|
|
|
|
Optimization services and managed application hosting services
revenue increased 30% to $45.3 million in 2008 from
$34.7 million in 2007. The increased revenue in 2008 is
driven by growth in the number of customers utilizing our
optimization services and increased utilization by our existing
customer base.
|
We expect first quarter 2010 recurring services revenue to be in
the range of $25.5 million to $26.0 million.
Professional
and education services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollar amounts in thousands)
|
|
Professional and education services revenue
|
|
$
|
26,477
|
|
|
$
|
26,173
|
|
|
$
|
29,859
|
|
As a percent of total revenue
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
22
|
%
|
Professional and education services revenue increased
$0.3 million, or 1%, to $26.5 million in 2009 from
$26.2 million in 2008, and declined as a percentage of
total revenue to 15% in 2009 from 16% in 2008. Professional and
education services revenue consists primarily of revenue from
consulting and implementation services, which typically are
performed in the quarters closely following the execution of a
product license transaction. During 2009, revenue related to
government contracts (a legacy business from our CleverSet
acquisition) increased $1.4 million from 2008 due to an
increase in work performed under the existing contracts as
compared to 2008. Offsetting this increase was a decline in our
consulting and implementation services revenue due to our
strategy to expand our partner ecosystem in order to leverage
our partners global reach and resources. International
professional and education services revenue increased to
$6.2 million in 2009 from $5.6 million in 2008.
Professional and education services revenue declined 12% to
$26.2 million in 2008 from $29.9 million in 2007, and
declined as a percentage of total revenue to 16% in 2008 from
22% in 2007. Based on our strategy to expand our partner
ecosystem in order to leverage our partners global reach
and resources, in 2008 we were focused on testing and certifying
partners rather than continuing to grow our professional
services business. As a result of this strategy, professional
services revenue declined 13% in 2008 from 2007. International
professional and education service revenue decreased to
$5.6 million in 2008 from $7.8 million in 2007.
We expect first quarter 2010 professional and education services
revenue to be in the range of $4.5 million to
$5.0 million.
Cost of
Product License Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollar amounts in thousands)
|
|
Cost of product license revenue
|
|
$
|
1,818
|
|
|
$
|
2,186
|
|
|
$
|
2,197
|
|
As a percent of license revenue
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
7
|
%
|
Gross margin on product license revenue
|
|
$
|
52,552
|
|
|
$
|
45,243
|
|
|
$
|
28,332
|
|
As a percent of license revenue
|
|
|
97
|
%
|
|
|
95
|
%
|
|
|
93
|
%
|
Cost of product license revenue primarily includes salary,
benefits, and stock-based compensation costs of fulfillment and
engineering staff dedicated to maintenance of products that are
in general release, the amortization of licenses purchased in
support of and used in our products, royalties paid to vendors
whose technology is incorporated into our products, and
amortization expense related to acquired developed technology.
During 2009, the decline in cost of product license revenue as
compared to 2008 was due to a decrease in the amortization
related to certain previously acquired intangible assets.
31
Cost of
Recurring Services Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollar amounts in thousands)
|
|
Cost of recurring services revenue
|
|
$
|
36,786
|
|
|
$
|
34,077
|
|
|
$
|
24,119
|
|
As a percent of recurring services revenue
|
|
|
37
|
%
|
|
|
37
|
%
|
|
|
31
|
%
|
Gross margin on recurring services revenue
|
|
$
|
61,749
|
|
|
$
|
56,962
|
|
|
$
|
52,553
|
|
As a percent of recurring services revenue
|
|
|
63
|
%
|
|
|
63
|
%
|
|
|
69
|
%
|
Cost of recurring services revenues primarily includes salary,
benefits, and stock-based compensation and other costs for
recurring services support staff, costs associated with the
hosting centers, third-party contractors, and amortization of
technology acquired in connection with the eStara and CleverSet
acquisitions, and royalties.
When we perform professional consulting and implementation
services in connection with managed application hosting
arrangements we generally defer the direct costs incurred prior
to delivery of the element related to the performance of these
services. Deferred costs are amortized to cost of recurring
services revenue ratably over the estimated life of the
arrangement, which generally we estimate to be four years
commencing on the site-delivered date.
Cost of recurring services revenue increased $2.7 million,
or 8%, to $36.8 million in 2009 from $34.1 million in
2008. Gross margin on recurring services revenue was 63%, or
$61.7 million for 2009 compared to 63%, or
$57.0 million for 2008. The increase in cost of recurring
services for 2009 was primarily due to a $1.3 million
increase in outside service fees related to hosting services and
a $1.4 million increase in salary costs.
During 2009, we capitalized $0.2 million of costs of
recurring services revenue related to certain internal use
software development projects related to our hosting services,
compared to $0 capitalized in 2008.
Cost of recurring services revenue increased 41% to
$34.1 million in 2008 from $24.1 million in 2007.
Gross margin on recurring services revenue was 63%, or
$57.0 million for 2008 compared to 69%, or
$52.6 million for 2007. The increase in cost of recurring
services and the resulting decline in gross margin percentage on
recurring services for 2008 was due to a $3.2 million
increase in telecommunications costs in our optimization
services business correlating with increased call traffic
resulting from growth in customer utilization of these services.
In addition, we experienced a $2.7 million increase in
labor related costs from additional investment in our
application hosting services infrastructure, a net
$1.6 million increase in recognition of previously deferred
implementation costs and $1.3 million in depreciation
expense related to fixed assets acquired to support growth in
the business and the acquisition of CleverSet. In addition,
costs of hosted services increased $0.8 million in 2008 as
a result of non-recurring costs related to transitioning hosting
services to a new hosting services provider.
We expect first quarter 2010 recurring services gross margin to
be in the 60% to 63% range.
Cost of
Professional and Education Services Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollar amounts in thousands)
|
|
Cost of professional and education services revenue
|
|
$
|
22,323
|
|
|
$
|
25,619
|
|
|
$
|
29,223
|
|
As a percent of professional and education services revenue
|
|
|
84
|
%
|
|
|
98
|
%
|
|
|
98
|
%
|
Gross margin on professional and education services revenue
|
|
$
|
4,154
|
|
|
$
|
554
|
|
|
$
|
636
|
|
As a percent of professional and education services revenue
|
|
|
16
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Cost of professional and education services revenues primarily
includes salary, benefits, and stock-based compensation and
other costs for professional services and technical support
staff and third-party contractors.
Cost of professional and education services revenue decreased
$3.3 million, or 13%, to $22.3 million for 2009 from
$25.6 million for 2008. The decrease in cost of
professional and education services for 2009 was driven by a
$4.9 million decrease in labor related contractor costs and
increased utilization of internal resources. Partially
offsetting the cost reduction in 2009 was a $1.5 million
increase in costs incurred related to government contracts (a
32
legacy business from our CleverSet acquisition) as a result of
an increase in work performed under those contracts as compared
to 2008.
Cost of professional and education services revenue decreased
12% to $25.6 million for 2008 from $29.2 million for
2007. The decrease in cost of professional and education
services for 2008 was driven by a $5.7 million decrease in
labor related costs and a decrease of $1.2 million in
travel related costs for professional services. These decreases
were attributable to a reduction in the use of contract labor in
the delivery of our professional services and less travel,
resulting from the successful execution of our strategy to
develop our partner networks. The decreases in expenses were
partially offset by a $1.7 million decrease in the amount
of costs deferred in 2008 compared with the 2007 period and the
inclusion in 2008 of $1.6 million in CleverSet expenses.
We expect first quarter 2010 professional and educational
services gross margin to be approximately 5%.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollar amounts in thousands)
|
|
Research and development expenses
|
|
$
|
30,520
|
|
|
$
|
29,329
|
|
|
$
|
24,963
|
|
As a percent of total revenue
|
|
|
17
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
Research and development expenses consist primarily of salary,
benefits, and stock-based compensation costs to support product
development.
Research and development expenses increased $1.2 million,
or 4%, to $30.5 million in 2009 from $29.3 million in
2008, but fell to 17% of revenue in 2009 from 18% of revenue in
2008 due primarily to revenue growth in 2009. The increase in
research and development spending was driven by an increase of
$1.5 million in labor related costs, primarily salary
costs. The increased salary in research and development in 2009
was due to hiring engineers for product development efforts
across all product lines.
Research and development expenses increased 17% to
$29.3 million in 2008 from $25.0 million in 2007 and
remained 18% of revenue due to revenue growth in 2008. The
increase in research and development spending was primarily
attributable to an increase of $3.4 million in labor
related costs from 2007 to develop the capacity of the
organization to further drive creative product development. As a
result of increased capital expenditures in 2008 and 2007
related to growth in the research and development organization,
depreciation and allocated infrastructure costs increased
$0.7 million in 2008 from the prior year.
During 2009 we capitalized $0.4 million of research and
development costs for internal use software development costs
under ASC
350-10
related to Optimization services. Our research and development
efforts during 2008 that related to our Optimization services
were primarily maintenance and data conversion costs. We did not
capitalize any research and development costs during 2008.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollar amounts in thousands)
|
|
Sales and marketing expenses
|
|
$
|
52,193
|
|
|
$
|
49,569
|
|
|
$
|
44,397
|
|
As a percent of total revenue
|
|
|
29
|
%
|
|
|
30
|
%
|
|
|
33
|
%
|
Sales and marketing expenses consist primarily of salaries,
commissions, benefits, and stock-based compensation and other
related costs for sales and marketing personnel, travel, public
relations and marketing materials and events. We generally
recognize commission expense upon contract execution with the
result that commission expense may be recognized earlier than
the related revenue.
Sales and marketing expenses increased $2.6 million, or 5%,
to $52.2 million in 2009 from $49.6 million in 2008,
and decreased as a percentage of total revenue to 29% from 30%
due to revenue growth in 2009. The increase in costs in 2009 was
primarily due to an increase of $1.9 million in labor
related costs. In addition, we had a
33
$0.9 million increase in spending on marketing programs.
Partially offsetting these increased costs was a decrease of
$0.7 million in travel costs in 2009 driven by cost
containment initiatives.
Sales and marketing expenses increased 12% to $49.6 million
in 2008 from $44.4 million in 2007, and decreased as a
percentage of total revenue to 30% from 33% due to revenue
growth in 2008. The increase was due to an increase in cost of
$3.4 million in labor related costs, including a
$1.4 million increase in commissions related to higher
product license bookings, a $0.7 million increase in
stock-based compensation and a $0.4 million increase in
travel costs. In addition, we had a $0.4 million increase
in spending on marketing programs.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollar amounts in thousands)
|
|
General and administrative expenses
|
|
$
|
18,990
|
|
|
$
|
19,432
|
|
|
$
|
18,211
|
|
As a percent of total revenue
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
General and administrative expenses consist primarily of
salaries, benefits, and stock-based compensation and other
related costs for internal systems, finance, human resources,
legal and executive related functions.
General and administrative expenses decreased $0.4 million,
or 2%, to $19.0 million in 2009 from $19.4 million in
2008, and decreased as a percentage of total revenue to 11% from
12% The decrease in 2009 of $0.4 million was due to lower
external resource fees and labor related costs, partially offset
by higher stock compensation and telecommunications costs.
General and administrative expenses increased 7% to
$19.4 million in 2008 from $18.2 million in 2007, and
decreased as a percentage of total revenue to 12% from 13%. The
increase in 2008 of $1.2 million was due to additional
salaries and other related costs, including stock-based
compensation, and $0.6 million related to additional
outside professional services, legal and accounting and tax
services.
First
Quarter 2010 Operating Expenses
We expect first quarter 2010 total operating expenses, which
include research and development, sales and marketing, and
general and administrative expenses, to be in the range of
$27.0 million to $28.0 million.
Stock-Based
Compensation Expense
We record stock-based compensation expense in accordance with
ASC 718-10,
Compensation Stock Compensation. We recorded
$8.9 million, $7.9 million, and $5.8 million in
stock-based compensation expense for the years ended
December 31, 2009, 2008, and 2007, respectively. The
increase in stock-based compensation expense is due to granting
restricted stock units in 2009, 2008, and 2007 at higher values
compared to the fair value of stock options granted in prior
years.
As of December 31, 2009, the total compensation cost
related to unvested awards not yet recognized in the statement
of operations was approximately $15.9 million, which will
be recognized over a weighted average period of approximately
2.0 years.
Interest
and Other Income, Net
Interest and other income, net decreased to approximately
$0.06 million in 2009 from $1.0 million in 2008. The
decrease was due to a $0.5 million decrease in interest
income as a result of lower interest rates, and a
$0.5 million increase in foreign currency exchange losses.
We incurred a foreign currency exchange loss of
$0.5 million in 2009 compared to a loss of
$0.04 million in 2008. The foreign currency based losses
were driven by the movement of the GBP and the Euro compared to
the USD in 2009.
Interest and other income, net decreased to $1.0 million in
2008 from $2.2 million in 2007. The decrease was primarily
due to foreign currency exchange losses on remeasuring
non-functional currency denominated assets and liabilities.
Additionally, the decrease included net realized losses on
foreign currency based transactions. We
34
incurred a foreign currency exchange loss of $0.04 million
in 2008 compared to a gain of $0.7 million in 2007. The
foreign currency based losses were driven by the movement of the
GBP and the Euro compared to the USD in 2008, compared to 2007
in which net gains were recorded. In addition, we experienced a
decrease in interest income resulting from lower prevailing
interest rates despite our higher ending cash and investment
balances.
Provision
for Income Taxes
For the year ended December 31, 2009, we recorded a net
$0.01 million income tax expense compared to
$1.6 million of income tax expense for the year ended
December 31, 2008. The detail of our income tax expense is
shown in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Income tax (benefit) expense related to earnings in foreign
subsidiaries including foreign withholding taxes
|
|
$
|
1,567
|
|
|
$
|
(377
|
)
|
Non-cash decrease resulting from the expiration of the statute
of limitations on reserves for uncertain tax positions
|
|
|
(1,663
|
)
|
|
|
|
|
U.S. federal and state income tax expense (benefit)
|
|
|
108
|
|
|
|
(43
|
)
|
Non-cash income tax expense recorded resulting from the
utilization of previously unbenefitted acquired net operating
losses
|
|
|
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
12
|
|
|
$
|
1,590
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2009 we adopted ASC
805-10,
Business Combinations, which changed the accounting for
the utilization of acquired net operating losses. Prior to the
effective date of the standard, the reduction to the valuation
allowance in connection with the utilization of unbenefitted
acquired net operating losses was recorded as a reduction to
goodwill and a corresponding increase to income tax expense.
Subsequent to the effective date of the new guidance, the
reduction to the valuation allowance in connection with the
utilization of previously unbenefitted acquired net operating
losses is recorded as a reduction to income tax expense. The
effect on income tax expense in 2009 was a reduction of
$3.2 million.
In connection with preparing our financial statements, we are
required to compute income tax expense in each jurisdiction in
which we operate. This process requires us to project our
current tax liability and estimate our deferred tax assets and
liabilities, including net operating loss and tax credit
carryforwards. We also are required to assess the need for a
valuation allowance against deferred tax assets. As part of this
assessment, we have considered our recent operating results,
future taxable income projections, and all prudent and feasible
tax planning strategies.
As of December 31, 2009 and 2008, we have recognized a
deferred tax asset of $0.9 million and $0.6 million,
respectively, in certain foreign jurisdictions that we believe
will more likely than not be realized. Our assessment was based
upon our cumulative history of earnings before taxes for
financial reporting purposes over a three year period in those
jurisdictions and an assessment as of December 31, 2009 and
2008 of our expected future results of operations related to our
foreign operations.
As of December 31, 2009 and 2008 we maintained a full
valuation allowance against our U.S. deferred tax assets.
We currently do not believe that we have sustained profitability
over an appropriate time period and in amounts that are
sufficient to support a conclusion that a valuation allowance is
not required. We believe there is significant uncertainty in our
future profits due to the growing breadth of our product mix and
the effect it can have on the timing of revenue recognition, and
the related effect on reported U.S. income. Assuming that,
among other factors of positive and negative evidence, we meet
our estimates of 2010 forecasted earnings, we may release a
portion of our U.S. valuation allowance during the second
half of 2010, which is consistent with the timing of our annual
forecasting exercise. Additionally, in connection with our
January 2010 acquisition of InstantService, during the first
quarter of 2010 we will assess the acquired deferred tax assets
and liabilities and we may release a portion of our valuation
allowance to offset acquired net deferred tax liabilities.
35
Since January 1, 2007, we have accounted for our uncertain
tax positions in accordance with ASC
740-10,
Income Taxes. At December 31, 2009 and 2008 we
reported a net liability of $0.4 million and
$1.8 million, respectively. These obligations are detailed
in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Reserve for uncertain tax positions at January 1
|
|
$
|
3,673
|
|
|
$
|
4,294
|
|
Increases for tax positions taken during a prior period
|
|
|
195
|
|
|
|
|
|
Decreases for tax positions taken during the current period
|
|
|
|
|
|
|
(39
|
)
|
Decreases relating to settlements
|
|
|
|
|
|
|
(582
|
)
|
Decreases resulting from the expiration of the statute of
limitations
|
|
|
(3,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for uncertain tax positions at December 31
|
|
$
|
331
|
|
|
$
|
3,673
|
|
Reserves for uncertain tax positions net against losses
|
|
|
|
|
|
|
(2,838
|
)
|
Related interest and penalties on uncertain tax positions
|
|
|
114
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
Reported net liability for uncertain tax positions at
December 31,
|
|
$
|
445
|
|
|
$
|
1,775
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
InstantService
Acquisition
On January 8, 2010, we acquired privately held
InstantService for a purchase price of approximately
$17.0 million. The results of InstantService will be
included in our results from the date of the acquisition. The
purchase of InstantService augments our optimization service
offerings with additional
click-to-chat
functionality and adds an
e-mail
management solution. At the date of the acquisition,
InstantService had more than 300 customers.
CleverSet
Acquisition
On February 5, 2008, we acquired privately held
eShopperTools.com, Inc., dba CleverSet
(CleverSet) for a purchase price of approximately
$9.4 million, comprised of $9.2 million paid to the
shareholders, including the extinguishment of convertible debt,
and acquisition costs of $0.2 million. The purchase of
CleverSet augmented our Optimization service offerings with
CleverSets automated personalization engines, which
present
e-commerce
visitors with relevant recommendations and information designed
to increase conversion rates and order size.
For detailed information about our acquisitions, see Note 5
to the Consolidated Financial Statements contained in
Item 8 of this Annual Report on
Form 10-K.
Liquidity
and Capital Resources
Our capital requirements relate primarily to labor costs,
facilities, employee and customer infrastructure, and working
capital requirements. Our primary sources of liquidity at
December 31, 2009 were our cash, cash equivalents, short
and long-term marketable securities of $85.5 million,
including $0.8 million of restricted cash used to
collateralize letters of credit, and our cash flows from
operations.
Cash provided by operating activities was $30.2 million in
2009, a decrease of $3.9 million from the prior year. The
primary movements are as follows:
|
|
|
|
|
Net income for 2009 of $16.8 million included non-cash
expenses for depreciation and amortization of $9.2 million,
stock-based compensation expense of $8.9 million, net of a
non-cash tax benefit of $1.9 million. In 2008, net income
was $3.8 million, including non-cash expenses for
depreciation and amortization of $8.9 million, stock-based
compensation expense of $7.9 million, and non-cash tax
expense of $2.0 million.
|
|
|
|
An increase in accounts receivable outstanding as of
December 31, 2009 compared to December 31, 2008
resulted in a decrease in cash flows of $5.7 million in
2009 Accounts receivable increased at December 31,
|
36
|
|
|
|
|
2009 as a result of significant product license bookings which
were invoiced late in the fourth quarter of 2009 with due dates
in fiscal 2010.
|
|
|
|
|
|
Cash inflows due to accrued expenses and accounts payable were
$3.0 million in 2009 due to the timing of vendor payments
at year end. We will be required to pay cash in future periods
for these expenses that were recorded in 2009.
|
|
|
|
Deferred revenue declined $1.7 million during 2009,
compared to an increase of $7.7 million during 2008. We
invoice customers as licenses and services are delivered and
collect these invoices under customary business practices.
Accordingly, the invoices that generated the deferred revenue
balance at December 31, 2009 were subject to our collection
process and, to the extent collected, are in our cash flow from
operations. The increase in deferred revenue during 2008, and
the relative decrease in 2009, was a result of the relatively
recent change in our business model that in 2008 resulted in a
greater number of our transactions including elements which
required deferral of revenue recognition.
|
Net cash used in investing activities in 2009 was
$19.4 million, which included $14.1 million in net
purchases of marketable securities. During 2008, we realized net
inflows from maturities of marketable securities of $5.5
million. As of December 31, 2009, we held
$85.5 million in cash, cash equivalents, and short-term and
long-term marketable securities, compared to $61.4 million
at December 31, 2008. During 2009, we had $5.3 million
of capital expenditures, primarily related to computer equipment
and software for the managed application hosting business
compared to $7.0 million in 2008. Also during 2008, we had
cash outflows of $9.8 million related to acquisitions. In
January of 2010, we acquired InstantService for approximately
$17.0 million in cash.
Net cash used in financing activities in 2009 was
$2.0 million, compared to $6.2 million in 2008. During
2009, financing activities consisted primarily of
$4.3 million used for repurchases of our common stock,
partially offset by $3.2 million in proceeds from exercised
stock options and the employee stock purchase plan. During 2008,
financing activities consisted primarily of $8.9 million
used for repurchases of our common stock, partially offset by
$3.2 million in proceeds from exercised stock options and
the employee stock purchase plan.
On October 27, 2009 our Board of Directors authorized a new
stock repurchase program providing for the repurchase of up to
$25.0 million of our outstanding common stock in the open
market or in privately negotiated transactions, at times and
prices considered appropriate depending on the prevailing market
conditions. This new authorization is in addition to the
remaining $3.9 million under our existing
$20.0 million repurchase program authorized in April 2007.
During the years ended December 31, 2009, 2008, and 2007,
we repurchased 1,084,594 shares, 4,618,541 shares, and
986,960 shares of our common stock at a cost of
$4.3 million, $8.9 million, and $2.9 million,
respectively.
As of December 31, 2009, we held $85.5 million in
cash, cash equivalents, and marketable securities, including
$0.8 million of restricted cash. This balance was reduced
by approximately $17.0 million as a result of our purchase
of InstantService on January 8, 2010. We believe that our
remaining cash, cash equivalents, and marketable securities,
along with other working capital and cash expected to be
generated by our operations, will allow us to meet our liquidity
requirements over at least the next twelve months and for the
foreseeable future. However, our actual cash requirements will
depend on many factors, including particularly, overall economic
conditions both domestically and abroad. We may find it
necessary or advisable to seek additional external funds through
public or private securities offerings, strategic alliances or
other financing sources. There can be no assurance that if we
seek external funding, it will be available on favorable terms,
if at all.
We expect 2010 cash flow from operations to be in the range of
$37.0 million to $41.0 million. We expect first
quarter 2010 cash flow from operations to be in the range of
$8.0 million to $10.0 million.
37
Accounts
Receivable and Days Sales Outstanding
Our accounts receivable balance and days sales outstanding for
the fourth quarter ended December 31, 2009 and 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Dollar amounts in thousands)
|
|
Days sales outstanding
|
|
|
75
|
|
|
|
70
|
|
Revenue
|
|
$
|
49,663
|
|
|
$
|
45,397
|
|
Accounts receivable, net
|
|
$
|
41,522
|
|
|
$
|
35,109
|
|
Percent of accounts receivable less than 60 days
|
|
|
97
|
%
|
|
|
92
|
%
|
We evaluate our performance on collections on a quarterly basis.
As of December 31, 2009, our days sales outstanding
increased from December 31, 2008 primarily due to a
$4.5 million increase in unbilled accounts receivable as a
result of extended payment terms, as well as timing of product
billings and the effect of receiving payments on sales that were
made during the current and previous quarters.
Contractual
Obligations
On December 31, 2009, our contractual cash obligations,
which consist of operating leases and long-term tax obligations,
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Operating leases
|
|
$
|
31,706
|
|
|
$
|
3,416
|
|
|
$
|
7,214
|
|
|
$
|
7,137
|
|
|
$
|
13,939
|
|
Long-term tax obligations
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
32,151
|
|
|
$
|
3,416
|
|
|
$
|
7,214
|
|
|
$
|
7,137
|
|
|
$
|
14,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In September 2009, the FASB issued ASU
2009-13,
Multiple Element Arrangements. ASU
2009-13
addresses the determination of when the individual deliverables
included in a multiple arrangement may be treated as separate
units of accounting. ASU
2009-13 also
modifies the manner in which the transaction consideration is
allocated across separately identified deliverables and
establishes definitions for determining fair value of elements
in an arrangement. This standard must be adopted by us no later
than January 1, 2011 with earlier adoption permitted. We
are currently evaluating the impact, if any, that this standard
update will have on our consolidated financial statements.
In June 2009, the FASB issued ASC
105-10,
Generally Accepted Accounting Principles (the
Codification). The Codification will be the single source
of authoritative nongovernmental U.S. generally accepted
accounting principles. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. ASC
105-10 is
effective for interim and annual periods ending after
September 15, 2009. All existing accounting standards are
superseded as described in ASC
105-10-5.
All other accounting literature not included in the Codification
is non-authoritative. The adoption of ASC
105-10 did
not have a material impact on our financial condition or results
of operations.
In May 2009, the FASB issued ASC
855-10,
Subsequent Events. ASC
855-10
establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
The adoption of ASC
855-10 had
no impact on our financial condition or results of operations.
In December 2007, the FASB issued ASC
805-10,
Business Combinations. ASC
805-10 is
effective for fiscal years beginning on or after
December 15, 2008 and applies to all business combinations.
ASC 805-10
provides that, upon initially obtaining control, an acquirer
shall recognize 100 percent of the fair values of acquired
assets,
38
including goodwill, and assumed liabilities, with only limited
exceptions, even if the acquirer has not acquired
100 percent of its target. As a consequence, the current
step acquisition model will be eliminated. Additionally, ASC
805-10
changes current practice, in part, as follows:
(1) contingent consideration arrangements will be fair
valued at the acquisition date and included on that basis in the
purchase price consideration; (2) transaction costs will be
expensed as incurred, rather than capitalized as part of the
purchase price; (3) pre-acquisition contingencies, such as
legal issues, will generally have to be accounted for in
purchase accounting at fair value; (4) in order to accrue
for a restructuring plan in purchase accounting, the
requirements in ASC
420-10,
Exit or Disposal Cost Obligations, would have to be met
at the acquisition date; and (5) in-process research and
development charges will no longer be recorded. With the
adoption of ASC
805-10
goodwill is no longer reduced when utilizing net operating loss
carry forwards for which a full valuation allowance exists. The
effect of the adoption of ASC
805-10 on
income tax expense in 2009 was a reduction of $3.2 million.
The adoption of ASC
805-10 could
materially change the accounting for business combinations
consummated subsequent to January 1, 2009, including our
acquisition of InstantService. Acquisition-related costs related
to the January 2010 acquisition of InstantService were not
material during 2009.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We maintain an investment portfolio consisting mainly of money
market funds, corporate obligations and government obligations
with a weighted average maturity of less than one year. These
available-for-sale
securities are subject to interest rate risk. However, a 10%
change in interest rates would not have a material impact to the
fair values of these securities at December 31, 2009 and
2008 primarily due to their short maturity. There have been no
significant changes since December 31, 2009.
The majority of our operations are based in the U.S., and
accordingly, the majority of our transactions are denominated in
USD. However, we have foreign-based operations where
transactions are denominated in foreign currencies and are
subject to market risk with respect to fluctuations in the
relative value of foreign currencies. Our primary foreign
currency exposures relate to our short-term intercompany
balances with our foreign subsidiaries and accounts receivable
valued in the United Kingdom in USD. Our primary foreign
subsidiaries have functional currencies denominated in the GBP
and Euro, and foreign denominated assets and liabilities are
remeasured each reporting period with any exchange gains and
losses recorded in our consolidated statements of operations.
Based on currency exposures existing at December 31, 2009
and 2008, a 10% movement in foreign exchange rates would not
expose us to significant gains or losses in earnings or cash
flows. We may use derivative instruments to manage the risk of
exchange rate fluctuations. However, at December 31, 2009,
we had no outstanding derivative instruments. We do not use
derivative instruments for trading or speculative purposes.
39
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
Report of
Independent Registered Public Accounting Firm
The Board of
Directors and Stockholders
Art Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of
Art Technology Group, Inc. (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss), and cash flows for each of the
three years in the period ended December 31, 2009. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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
consolidated financial position of Art Technology Group, Inc. at
December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 (w) to the consolidated
financial statements, the Company changed its method of
accounting for business combinations with the adoption of the
guidance originally issued as Statement of Financial Accounting
Standards No. 141(R), Business Combinations
(codified as the Financial Accounting Standards Board ASC
Topic 805, Business Combinations), effective
January 1, 2009.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Art
Technology Group, Inc.s internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 1, 2010 expressed
an unqualified opinion thereon.
Boston, Massachusetts
February 1, 2010
40
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
57,319
|
|
|
$
|
47,413
|
|
Marketable securities (including restricted cash of $50 and
$1,699 at December 31, 2009 and 2008, respectively)
|
|
|
21,775
|
|
|
|
13,570
|
|
Accounts receivable, net of reserves of $1,060 and $1,234 at
December 31, 2009 and 2008, respectively)
|
|
|
41,522
|
|
|
|
35,109
|
|
Deferred costs, current
|
|
|
767
|
|
|
|
924
|
|
Deferred tax assets
|
|
|
430
|
|
|
|
560
|
|
Prepaid expenses and other current assets
|
|
|
3,359
|
|
|
|
3,814
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
125,172
|
|
|
|
101,390
|
|
Property and equipment, net
|
|
|
9,934
|
|
|
|
10,098
|
|
Deferred costs, less current portion
|
|
|
1,387
|
|
|
|
1,984
|
|
Marketable securities (including restricted cash of $738 and
$419 at December 31, 2009 and 2008, respectively)
|
|
|
6,439
|
|
|
|
419
|
|
Deferred tax asset, less current portion
|
|
|
450
|
|
|
|
|
|
Other assets
|
|
|
907
|
|
|
|
1,423
|
|
Intangible assets, net
|
|
|
4,064
|
|
|
|
7,770
|
|
Goodwill
|
|
|
65,683
|
|
|
|
65,683
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214,036
|
|
|
$
|
188,767
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,720
|
|
|
$
|
2,958
|
|
Accrued expenses
|
|
|
18,873
|
|
|
|
18,875
|
|
Deferred revenue, current portion
|
|
|
42,640
|
|
|
|
38,782
|
|
Accrued restructuring, current portion
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
67,233
|
|
|
|
60,761
|
|
Deferred revenue, less current portion
|
|
|
10,356
|
|
|
|
15,285
|
|
Other liabilities
|
|
|
536
|
|
|
|
1,775
|
|
Commitments and contingencies (Notes 7 and 10)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; authorized
10,000,000 shares; issued and outstanding no
shares
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; authorized
200,000,000 shares; 134,117,921 shares and
131,572,773 shares issued, respectively; and
127,427,826 shares and 125,967,272 shares outstanding,
respectively at December 31, 2009 and 2008
|
|
|
1,341
|
|
|
|
1,316
|
|
Additional paid-in capital
|
|
|
326,925
|
|
|
|
315,730
|
|
Accumulated deficit
|
|
|
(175,150
|
)
|
|
|
(191,946
|
)
|
Treasury stock, at cost (6,690,095 shares and
5,605,501 shares at December 31, 2009 and 2008,
respectively)
|
|
|
(16,075
|
)
|
|
|
(11,810
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,130
|
)
|
|
|
(2,344
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
135,911
|
|
|
|
110,946
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214,036
|
|
|
$
|
188,767
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
$
|
54,370
|
|
|
$
|
47,429
|
|
|
$
|
30,529
|
|
Recurring services
|
|
|
98,535
|
|
|
|
91,039
|
|
|
|
76,672
|
|
Professional and education services
|
|
|
26,477
|
|
|
|
26,173
|
|
|
|
29,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
179,382
|
|
|
|
164,641
|
|
|
|
137,060
|
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
1,818
|
|
|
|
2,186
|
|
|
|
2,197
|
|
Recurring services
|
|
|
36,786
|
|
|
|
34,077
|
|
|
|
24,119
|
|
Professional and education services
|
|
|
22,323
|
|
|
|
25,619
|
|
|
|
29,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
60,927
|
|
|
|
61,882
|
|
|
|
55,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
118,455
|
|
|
|
102,759
|
|
|
|
81,521
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
30,520
|
|
|
|
29,329
|
|
|
|
24,963
|
|
Sales and marketing
|
|
|
52,193
|
|
|
|
49,569
|
|
|
|
44,397
|
|
General and administrative
|
|
|
18,990
|
|
|
|
19,432
|
|
|
|
18,211
|
|
Restructuring benefit
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
101,703
|
|
|
|
98,330
|
|
|
|
87,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
16,752
|
|
|
|
4,429
|
|
|
|
(5,991
|
)
|
Interest and other income, net
|
|
|
56
|
|
|
|
960
|
|
|
|
2,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
16,808
|
|
|
|
5,389
|
|
|
|
(3,754
|
)
|
Provision for income taxes
|
|
|
12
|
|
|
|
1,590
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16,796
|
|
|
$
|
3,799
|
|
|
$
|
(4,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share
|
|
$
|
0.13
|
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
126,842
|
|
|
|
128,534
|
|
|
|
127,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
133,054
|
|
|
|
133,916
|
|
|
|
127,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Comprehensive
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Income
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Loss
|
|
|
Equity
|
|
|
(Loss)
|
|
|
Balance, December 31, 2006
|
|
|
127,055,373
|
|
|
|
1,270
|
|
|
|
296,291
|
|
|
|
(191,558
|
)
|
|
|
|
|
|
|
(929
|
)
|
|
|
105,074
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,622,028
|
|
|
|
16
|
|
|
|
2,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,047
|
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
410,720
|
|
|
|
4
|
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
901
|
|
|
|
|
|
Vesting of restricted stock and stock based compensation related
to the eStara acquisition
|
|
|
198,646
|
|
|
|
2
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530
|
|
|
|
|
|
Vesting of restricted stock and stock based compensation issued
under the non-employee director plan
|
|
|
6,454
|
|
|
|
1
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(986,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,902
|
)
|
|
|
|
|
|
|
(2,902
|
)
|
|
|
|
|
Stock based compensation expense related to employee stock
option awards
|
|
|
|
|
|
|
|
|
|
|
5,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,173
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,187
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,187
|
)
|
|
$
|
(4,187
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
229
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
128,306,261
|
|
|
|
1,293
|
|
|
|
305,151
|
|
|
|
(195,745
|
)
|
|
|
(2,902
|
)
|
|
|
(700
|
)
|
|
|
107,097
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,393,479
|
|
|
|
14
|
|
|
|
2,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,252
|
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
398,071
|
|
|
|
4
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
978
|
|
|
|
|
|
Vesting of restricted stock and stock based compensation related
to the eStara acquisition
|
|
|
14,182
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
Vesting of restricted stock and stock based compensation issued
under the non-employee director plan
|
|
|
146,454
|
|
|
|
1
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(4,618,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,908
|
)
|
|
|
|
|
|
|
(8,908
|
)
|
|
|
|
|
Stock based compensation expense related to employee stock
option awards
|
|
|
|
|
|
|
|
|
|
|
4,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,304
|
|
|
|
|
|
Vesting of restricted stock units and stock based compensation
|
|
|
327,366
|
|
|
|
4
|
|
|
|
3,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,039
|
|
|
|
|
|
Tax withholding on restricted stock
|
|
|
|
|
|
|
|
|
|
|
(529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(529
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,799
|
|
|
|
|
|
|
|
|
|
|
|
3,799
|
|
|
$
|
3,799
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,540
|
)
|
|
|
(1,540
|
)
|
|
|
(1,540
|
)
|
Unrealized loss on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104
|
)
|
|
|
(104
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
125,967,272
|
|
|
$
|
1,316
|
|
|
$
|
315,730
|
|
|
$
|
(191,946
|
)
|
|
$
|
(11,810
|
)
|
|
$
|
(2,344
|
)
|
|
$
|
110,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,257,452
|
|
|
|
13
|
|
|
|
2,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,128
|
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
449,702
|
|
|
|
4
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,086
|
|
|
|
|
|
Vesting of restricted stock and stock based compensation related
to the eStara acquisition
|
|
|
8,724
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
Vesting of restricted stock units and stock based compensation
under the non-employee director plan
|
|
|
175,000
|
|
|
|
2
|
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(1,084,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,265
|
)
|
|
|
|
|
|
|
(4,265
|
)
|
|
|
|
|
Stock based compensation expense related to employee stock
option awards
|
|
|
|
|
|
|
|
|
|
|
3,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,742
|
|
|
|
|
|
Vesting of restricted stock units and stock based compensation
|
|
|
654,270
|
|
|
|
6
|
|
|
|
4,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,552
|
|
|
|
|
|
Tax withholding on restricted stock
|
|
|
|
|
|
|
|
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(938
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,796
|
|
|
|
|
|
|
|
|
|
|
|
16,796
|
|
|
$
|
16,796
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,097
|
|
|
|
1,097
|
|
|
|
1,097
|
|
Unrealized gain on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
|
|
117
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
127,427,826
|
|
|
$
|
1,341
|
|
|
$
|
326,925
|
|
|
$
|
(175,150
|
)
|
|
$
|
(16,075
|
)
|
|
$
|
(1,130
|
)
|
|
$
|
135,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16,796
|
|
|
$
|
3,799
|
|
|
$
|
(4,187
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,221
|
|
|
|
8,895
|
|
|
|
7,862
|
|
Stock-based compensation expense
|
|
|
8,944
|
|
|
|
7,896
|
|
|
|
5,843
|
|
Non-cash tax (benefit) expense
|
|
|
(1,663
|
)
|
|
|
2,009
|
|
|
|
|
|
Deferred income taxes
|
|
|
(320
|
)
|
|
|
(560
|
)
|
|
|
|
|
Net changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(5,651
|
)
|
|
|
5,586
|
|
|
|
(5,584
|
)
|
Prepaid expense and other assets
|
|
|
1,059
|
|
|
|
(745
|
)
|
|
|
(657
|
)
|
Deferred costs
|
|
|
754
|
|
|
|
219
|
|
|
|
(3,127
|
)
|
Accounts payable
|
|
|
2,752
|
|
|
|
(1,208
|
)
|
|
|
1,012
|
|
Accrued expenses and other liabilities
|
|
|
66
|
|
|
|
1,413
|
|
|
|
4,118
|
|
Deferred revenue
|
|
|
(1,654
|
)
|
|
|
7,713
|
|
|
|
22,145
|
|
Accrued restructuring
|
|
|
(146
|
)
|
|
|
(934
|
)
|
|
|
(1,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
30,158
|
|
|
|
34,083
|
|
|
|
26,261
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(34,550
|
)
|
|
|
(19,771
|
)
|
|
|
(21,779
|
)
|
Maturities of marketable securities
|
|
|
20,445
|
|
|
|
25,288
|
|
|
|
17,569
|
|
Purchases of property and equipment
|
|
|
(5,288
|
)
|
|
|
(7,010
|
)
|
|
|
(4,840
|
)
|
Payments for acquisitions, net of cash acquired
|
|
|
|
|
|
|
(9,766
|
)
|
|
|
(829
|
)
|
Collateralization of letters of credit
|
|
|
|
|
|
|
(2,088
|
)
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(19,393
|
)
|
|
|
(13,347
|
)
|
|
|
(9,901
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
2,127
|
|
|
|
2,252
|
|
|
|
2,047
|
|
Proceeds from employee stock purchase plan
|
|
|
1,086
|
|
|
|
978
|
|
|
|
901
|
|
Repurchase of common stock
|
|
|
(4,265
|
)
|
|
|
(8,908
|
)
|
|
|
(2,902
|
)
|
Payment of employee restricted stock tax withholdings
|
|
|
(938
|
)
|
|
|
(529
|
)
|
|
|
|
|
Payments on capital leases
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,990
|
)
|
|
|
(6,207
|
)
|
|
|
(10
|
)
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
|
|
1,131
|
|
|
|
(1,535
|
)
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
9.906
|
|
|
|
12,994
|
|
|
|
16,508
|
|
Cash and cash equivalents, beginning of period
|
|
|
47,413
|
|
|
|
34,419
|
|
|
|
17,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
57,319
|
|
|
$
|
47,413
|
|
|
$
|
34,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Cash paid for income taxes
|
|
$
|
974
|
|
|
$
|
520
|
|
|
$
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
|
|
(1)
|
Organization,
Business and Summary of Significant Accounting
Policies
|
Art Technology Group, Inc. (ATG or the
Company) develops and markets a comprehensive suite of
e-commerce
software products, and provides related services including
support and maintenance, education, application hosting,
professional services and eStara Optimization service solutions
for enhancing online sales and support.
|
|
(a)
|
Principles
of Consolidation
|
The accompanying consolidated financial statements include the
accounts of ATG and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of consolidated financial statements in
conformity with U.S. 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. Such estimates relate
to revenue recognition, the allowance for doubtful accounts,
useful lives of fixed assets and identifiable intangible assets,
deferred costs, software development costs, accrued liabilities,
accrued taxes, deferred tax valuation allowances, and
assumptions pertaining to share-based payments. Actual results
could differ from those estimates.
ATG derives revenue from the following sources:
(1) perpetual software licenses, (2) recurring
services, which are comprised of support and maintenance
services, application hosting services and Optimization
services, and (3) professional and education services. ATG
sells these product and service offerings individually or more
commonly in multiple element arrangements under various
arrangements as follows: 1. Sale of Perpetual Software Licenses
and Professional and Education Services, 2. Sale of Application
Hosting Services, and 3. Sale of Optimization Services.
The Company recognizes revenue in accordance with FASB ASC
985-605,
Software Revenue Recognition, formerly known as AICPA
Statement of Position
97-2,
Software Revenue Recognition
(SOP 97-2),
or Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition
(SAB 104), applying the provisions of FASB ASC
605-25,
Multiple Element Arrangements, formerly known as Emerging
Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables,
depending on the nature of the arrangement.
Revenue is recognized only when persuasive evidence of an
arrangement exists, the fee is fixed or determinable, the
product or service has been delivered, and collectability of the
resulting receivable is probable. ATG makes significant
judgments when evaluating if fees are fixed or determinable and
in assessing the customers ability to pay for the products
or services provided. This judgment is based on a combination of
factors, including the contractual terms of the arrangement,
completion of a credit check or financial review, payment
history with the customer, and other forms of payment assurance.
Upon the completion of these steps and provided all other
revenue recognition criteria are met, ATG recognizes revenue
consistent with its revenue recognition policies provided below.
ATGs standard payment terms are normally within
90 days. The Company in some circumstances provides
extended payment terms, and in certain cases considers amounts
payable beyond 90 days but less than 12 months to be
fixed or determinable. In such cases, judgment is required in
evaluating the creditworthiness of the customer and the
likelihood of a concession. Beginning with the first quarter of
2009 the Company determined that it has a sufficient history of
successfully collecting, without concessions, accounts
receivable involving extended credit terms of up to twelve
months granted to a specific class of customer to conclude that
the fees under such arrangements may be considered to be both
fixed and determinable and probable of collection. Consequently,
the fees under such arrangements may be recognized as revenue
assuming other criteria for recognition are met. As a result,
ATG recognized approximately $5.2 million of revenue during
2009 that previously would have been
45
deferred until the payments became due in future periods. The
Company monitors its ability to collect amounts due under the
stated contractual terms of such arrangements and to date has
not experienced any material concessions to this class of
customer. If in the future the Company experiences adverse
changes in its ability to collect without concession the amounts
due under arrangements involving extended payment terms to this
class of customer, it may no longer be able to conclude that
such amounts are fixed or determinable and probable of
collection, which could adversely affect the Companys
revenue in future periods.
1. Sales
of Perpetual Software Licenses and Professional and Education
Services
ATG licenses software under perpetual license agreements and
applies the provisions of ASC
985-605,
Software Revenue Recognition. In accordance with ASC
985-605,
revenue from software license agreements is recognized when the
following criteria are met: (1) execution of a legally
binding license agreement, (2) delivery of the software,
which is generally through electronic license keys for the
software, (3) the fee is fixed or determinable, as
determined by the Companys payment terms, and free of
contingencies or significant uncertainties as to payment, and
(4) collection is deemed probable by management based on a
credit evaluation of the customer. In addition, under multiple
element arrangements, to recognize software license revenue
up-front, the Company must have vendor specific objective
evidence (VSOE) of fair value of the undelivered
elements in the transaction. Substantially all of the
Companys software license arrangements do not include
acceptance provisions. However, if conditions for acceptance
subsequent to delivery are required, revenue is recognized upon
customer acceptance if such acceptance is not deemed to be
perfunctory.
In connection with the sale of its software licenses, ATG sells
support and maintenance services, which are recognized ratably
over the term of the arrangement, typically one year. Under
support and maintenance services, customers receive unspecified
software product upgrades, maintenance and patch releases during
the term, and internet and telephone access to technical support
personnel. Support and maintenance is priced as a percent of the
net software license fee and is based on the contracted level of
support.
Many of the Companys software arrangements also include
professional services for consulting implementation services
sold separately under separate agreements. Professional services
revenue from these arrangements is generally accounted for
separately from the software license because the services
qualify as a separate element under ASC
985-605,
Software Revenue Recognition. The more significant
factors considered in determining whether professional services
revenue should be accounted for separately include the nature of
services (i.e. consideration of whether the services are
essential to the functionality of the licensed product), degree
of risk, availability of services from other vendors, timing of
payments, and impact of milestones or acceptance criteria on the
realizability of the software license fee. Professional services
revenue under these arrangements is recognized as the services
are performed on a time and materials basis using the
proportional performance method.
Education revenue, which is recognized as the training is
provided to customers, is derived from instructor led training
classes either at ATG or onsite at the customer location.
For software arrangements with multiple elements, the Company
applies the residual method in accordance with ASC
985-605. The
residual method requires that the portion of the total
arrangement fee attributable to the undelivered elements be
deferred based on its VSOE of fair value and subsequently
recognized as the service is delivered. The difference between
the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the
delivered elements, which is generally the software license.
VSOE of fair value for all elements in an arrangement is based
upon the normal pricing for those products and services when
sold separately. VSOE of fair value for support and maintenance
services is additionally determined by the renewal rate in
customer contracts. The Company has established VSOE of fair
value for support and maintenance services, professional
services, and education. The Company has not established VSOE
for its software licenses, application hosting services or
Optimization services. In arrangements that do not include
application hosting services or Optimization services, product
license revenue is generally recognized upon delivery of the
software products.
2. Sales
of Application Hosting Services
ATG derives revenue from application hosting services either
from hosting ATG perpetual software licenses purchased by the
customer or by providing the software as a service solution to
the customer in an arrangement in
46
which the customer does not have the rights to the software
license itself but can use the software for the contracted term.
In both situations, ATG recognizes application hosting revenue
in accordance with ASC
985-605,
Software Revenue Recognition, SAB 104, and ASC
605-25,
Multiple Element Arrangements.
In accordance with ASC
985-605,
these arrangements are within the scope of ASC
605-10,
Revenue Recognition, and the Company therefore applies
the provisions of SAB 104 and ASC
605-25, and
accounts for the arrangement as a service contract. Pursuant to
ASC 605-25,
all elements of the arrangement are considered to be one unit of
accounting. The elements in these arrangements generally include
set-up and
implementation services, support and maintenance services, the
monthly hosting service and in certain instances a perpetual
software license. All fees received up-front under these
arrangements, regardless of the nature of the element, are
deferred until the application hosting service commences, which
is referred to as the site-delivered date. Upon
site-delivered, the up-front fees are recognized ratably over
the hosting period or estimated life of the customer
arrangement, whichever is longer. ATG currently estimates the
life of the customer arrangement to be four years. In addition,
the monthly application hosting service fee is recognized as the
application hosting service is provided.
3. Sales
of Optimization Services
ATG derives revenue from Optimization services, which are hosted
services providing ATGs customers with
click-to-call,
click-to-chat
and recommendations services. Optimization services are
site-independent and are not required to be used in conjunction
with ATGs software products. These services are a
stand-alone independent service solution, which are typically
contracted for a one-year term. The Company recognizes revenue
on a monthly basis as the services are provided. Fees are
generally based on monthly minimums and transaction volumes. In
certain instances Optimization services are bundled with ATG
software arrangements, which typically include perpetual
software licenses, support and maintenance services and
professional services for the perpetual software license. The
Company does not have VSOE of fair value for Optimization
services, as such the up-front fees received under the
arrangement regardless of the nature of the element are deferred
and recognized ratably over the period of providing the
Optimization services, provided that the professional services,
if applicable, have commenced.
In certain instances, the Company sells perpetual software
licenses with application hosting services and Optimization
services. In these situations all elements in the arrangement,
for which the Company receives up-front fees, are recognized as
revenue ratably over the period of providing the related service
or estimated life of the customer arrangement, whichever is
longer.
The Company allocates and classifies revenue in its statement of
operations based on its evaluation of VSOE of fair value, or a
proxy of fair value thereof, available for each applicable
element of the transaction: professional services, support and
maintenance services, application hosting services,
and/or
Optimization services. ATG uses the residual method to determine
the amount of revenue to allocate to product license revenue.
The fee for each element is recognized ratably, and as such, a
portion of software license revenue recorded in the statement of
operations is from these ratably recognized arrangements.
The Company defers direct costs incurred for the
set-up and
implementation of application hosting services until
commencement of the application hosting service, referred to as
the site delivered date. In addition, for
arrangements that require the Company to defer professional
services revenue, such as arrangements in which the Company does
not have VSOE of fair value for an undelivered element in an
arrangement, the Company defers the direct costs incurred prior
to delivery of the element related to performing the
professional services. Deferred costs are amortized to cost of
revenue ratably over the period of recognizing the related
revenue under the customer arrangement. Deferred costs include
incremental direct third party costs and specific internal
direct costs, such as direct salary and benefits, related to the
set-up and
implementation services and professional services. Total
deferred costs were $2.2 million and $2.9 million at
December 31, 2009 and 2008, respectively.
47
|
|
(e)
|
Accounts
Receivable and Allowances for Accounts Receivable
|
Accounts receivable represents amounts currently due from
customers. Accounts receivable also include $1.3 million
and $1.2 million of unbilled accounts receivable at
December 31, 2009 and 2008, respectively. Unbilled accounts
receivable consist of future billings related to transactions
with extended payment terms, as well as future billings for
professional services performed but not yet invoiced to the
customer. Unbilled accounts receivable related to professional
services are generally invoiced the following month.
ATG records allowances for accounts receivable based upon a
specific review of all outstanding invoices and unbilled
accounts receivable, known collection issues and historical
experience. ATG also records a provision for estimated sales
returns and allowances on professional service fees in the same
period the related revenues are recorded as a reduction to
revenue. These estimates are based on historical sales returns,
analysis of credit memo data and other known factors and are
generally recorded as a reduction in revenue.
The following is a rollforward of the Companys allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
|
|
|
Deductions/
|
|
|
Balance at End
|
|
|
|
Period
|
|
|
Additions
|
|
|
Write-Offs
|
|
|
of Period
|
|
|
|
(In thousands)
|
|
|
Year Ended December 31, 2007
|
|
$
|
447
|
|
|
$
|
1,670
|
|
|
$
|
(1,159
|
)
|
|
$
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
$
|
958
|
|
|
$
|
677
|
|
|
$
|
(401
|
)
|
|
$
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
$
|
1,234
|
|
|
$
|
758
|
|
|
$
|
(932
|
)
|
|
$
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
Cost
of Product License Revenues
|
Cost of product license revenues primarily includes salary,
benefits, and stock-based compensation for engineering staff and
outsourced developers dedicated to the maintenance of products
that are in general release, costs of fulfillment, external
shipping costs, the amortization of technology acquired through
acquisitions and licenses purchased in support of and used in
the Companys products and royalties paid to vendors whose
technology is incorporated into the Companys products and
services.
|
|
(g)
|
Cost
of Recurring Services Revenues
|
Cost of recurring services revenues primarily includes salary,
benefits, and stock-based compensation and other costs for
recurring services support staff, costs associated with the
hosting centers, third-party contractors, amortization of
technology acquired through acquisitions and royalties paid to
vendors whose technology is incorporated into recurring service
products.
|
|
(h)
|
Cost
of Professional and Education Services Revenues
|
Cost of professional and education services revenues primarily
includes salary, benefits, and stock-based compensation and
other costs for professional services and technical support
staff, and third-party contractors.
|
|
(i)
|
Net
Income (Loss) Per Share
|
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding during the period. Diluted net income per
share is computed by dividing net income by the weighted average
number of shares of common stock outstanding plus the dilutive
effect of common stock equivalents using the treasury stock
method. Common stock equivalents consist of stock options,
restricted stock and restricted stock unit awards. The assumed
proceeds under the treasury stock method include the average
unrecognized compensation expense of stock options that are
in-the-money
and restricted stock awards. This results in the
assumed buyback of additional shares thereby
reducing the dilutive impact of stock options and restricted
stock awards.
48
The following table sets forth the computation of basic and
diluted net income (loss) per share for the years ended
December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income (loss)
|
|
$
|
16,796
|
|
|
$
|
3,799
|
|
|
$
|
(4,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
basic net income (loss) per share
|
|
|
126,842
|
|
|
|
128,534
|
|
|
|
127,528
|
|
Dilutive common stock equivalents
|
|
|
6,212
|
|
|
|
5,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common stock and common stock equivalent
shares outstanding used in computing diluted net income (loss)
per share
|
|
|
133,054
|
|
|
|
133,916
|
|
|
|
127,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share
|
|
$
|
0.13
|
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents
|
|
|
12,078
|
|
|
|
7,995
|
|
|
|
16,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(j)
|
Cash,
Cash Equivalents and Marketable Securities
|
ATG accounts for investments in marketable securities under ASC
320-10,
Investments Debt and Equity Securities
(ASC
320-10).
The Company classifies its investments in readily marketable
debt and equity securities as
held-to-maturity,
available-for-sale
or trading at the time of purchase. Cash equivalents
are investments with maturities at the date of acquisition of
less than 90 days. Cash, cash equivalents, and marketable
securities consist primarily of corporate obligations such as
commercial paper and corporate bonds and institutional money
market funds. They also include bank certificates of deposit and
U.S. Government Treasury securities.
Prior to 2008, the Company classified all of its cash
equivalents and marketable securities as
held-to-maturity.
In the first quarter of 2008, the Company transferred its
marketable securities, except for bank certificates of deposit,
to
available-for-sale
in accordance with ASC
320-10 due
to having sold certain debt securities prior to their maturity
dates in order to finance the acquisition of eShopperTools.com,
Inc., dba CleverSet (CleverSet) CleverSet
acquisition. The total transfer was $17.5 million (at
amortized cost) of marketable securities with an unrealized loss
of $1,000. The Company continues to classify bank certificates
of deposit that are used to collateralize letters of credit as
held-to-maturity
securities, which are carried at amortized cost, as the Company
has the positive intent and ability to hold them to maturity.
The Companys other readily marketable cash equivalents and
marketable securities are classified as
available-for-sale.
Available-for-sale
securities are carried at fair value with unrealized gains and
losses reported in accumulated other comprehensive income
(loss). No securities were classified as trading. The Company
classifies its investments as short-term or long-term based on
their maturity dates.
Realized gains and losses, as well as interest and dividends on
all securities, are included in earnings. No realized gains or
losses were recorded during any of the years presented.
The Company periodically evaluates its investments for
impairment. When a decline in fair value is deemed to be
other-than-temporary,
the Company records an impairment loss in the consolidated
statement of operations. There were no
other-than-temporary
impairments of marketable securities in any of the years
presented.
Unrealized gains and losses on
available-for-sale
securities consisted of a gross unrealized gain of $23,000
offset by a gross unrealized loss of $8,000 at December 31,
2009.
49
At December 31, 2009 and 2008, cash, cash equivalents, and
marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
48,044
|
|
|
$
|
42,894
|
|
Money market accounts
|
|
|
9,275
|
|
|
|
4,519
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
57,319
|
|
|
$
|
47,413
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Maturities within 1 year:
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
8,166
|
|
|
$
|
1,000
|
|
Certificates of deposit
|
|
|
4,095
|
|
|
|
2,744
|
|
Commercial paper
|
|
|
2,996
|
|
|
|
1,597
|
|
Corporate debt securities
|
|
|
6,837
|
|
|
|
8,229
|
|
Maturities within 1 to 3 years:
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
5,009
|
|
|
|
|
|
Certificates of deposit
|
|
|
419
|
|
|
|
419
|
|
Corporate debt securities
|
|
|
692
|
|
|
|
8,229
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
28,214
|
|
|
$
|
13,989
|
|
|
|
|
|
|
|
|
|
|
|
|
(k)
|
Fair
Value Measurement
|
As defined in ASC
820-10,
Fair Value Measurements and Disclosures (ASC
820-10),
fair value is based on the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
In order to increase consistency and comparability in fair value
measurements, ASC
820-10
establishes a fair value hierarchy that prioritizes observable
and unobservable inputs used to measure fair value into three
broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that
are accessible at the measurement date for assets or
liabilities. The fair value hierarchy gives the highest priority
to Level 1 inputs.
Level 2: Other inputs that are observable directly or
indirectly, such as quoted prices for similar assets and
liabilities or market corroborated inputs.
Level 3: Unobservable inputs are used when little or no
market data is available, which requires the Company to develop
its own assumptions about how market participants would value
the assets or liabilities. The fair value hierarchy gives the
lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation
techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs to the extent possible
in its assessment of fair value.
50
The following table presents the Companys financial assets
and liabilities that are carried at fair value, classified
according to the three categories described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Assets
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash equivalents
|
|
$
|
9,275
|
|
|
$
|
|
|
|
|
9,275
|
|
|
|
|
|
Short-term
available-for-sale
securities
|
|
|
18,000
|
|
|
|
8,166
|
|
|
$
|
9,834
|
|
|
|
|
|
Long-term
available-for-sale
securities
|
|
|
5,701
|
|
|
|
5,009
|
|
|
$
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
32,976
|
|
|
$
|
13,175
|
|
|
$
|
19,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company has collateralized
$0.8 million in outstanding letters of credit with
certificates of deposit. The letters of credit were issued in
favor of various landlords to secure obligations under
ATGs facility leases expiring through December 2018. The
collateral for the letters of credit is reflected on the
Companys balance sheet as restricted cash within
short-term and long-term marketable securities dependent on the
underlying term of the leases.
|
|
(m)
|
Property
and Equipment
|
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. ATG records depreciation and
amortization using the straight-line method. Property and
equipment at December 31, 2009 and 2008 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Asset Classification
|
|
Estimated Useful Life
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(In thousands)
|
|
|
Computer equipment
|
|
3 years
|
|
$
|
14,801
|
|
|
$
|
11,711
|
|
Leasehold improvements
|
|
Lesser of useful life or life of lease
|
|
|
2,923
|
|
|
|
2,618
|
|
Furniture and fixtures
|
|
5 years
|
|
|
814
|
|
|
|
686
|
|
Computer software
|
|
3 years
|
|
|
4,894
|
|
|
|
3,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,432
|
|
|
|
18,910
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(13,498
|
)
|
|
|
(8,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,934
|
|
|
$
|
10,098
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and
equipment was $5.5 million, $4.6 million and
$3.0 million for the years ended December 31, 2009,
2008, and 2007, respectively.
During 2008, in connection with the Companys annual
evaluation of its property and equipment for impairment, the
Company identified $2.1 million of fully depreciated assets
that were disposed of or no longer in use. As a result, the
Company wrote off the cost basis and related accumulated
depreciation for these fully depreciated assets with no impact
to the statement of operations. No such write-offs were recorded
in 2009 or 2007.
ATG reviews the carrying value of its long-lived assets,
including intangible assets subject to amortization, for
impairment whenever events and circumstances indicate that the
carrying value of the assets may not be recoverable.
Recoverability of these assets is measured by comparing the
carrying value of the assets to the undiscounted cash flows
estimated to be generated by those assets over their remaining
economic life. If the undiscounted cash flows are not sufficient
to recover the carrying value of the assets, the assets are
considered impaired. The impairment loss is measured by
comparing the fair value of the assets to their carrying value.
Fair value is determined by either a quoted market price or a
value determined by a discounted cash flow technique,
51
whichever is more appropriate under the circumstances involved.
There were no impairment charges related to property and
equipment in 2009, 2008, and 2007.
|
|
(n)
|
Research
and Development Expenses for Software Products
|
The Company accounts for research and development costs for
software products that are licensed to its customers in
accordance with ASC
730-10,
Accounting for Research and Development Costs, and ASC
985-20,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, which specifies that costs
incurred internally to develop computer software products should
be charged to expense as incurred until technological
feasibility is reached for the product. Once technological
feasibility is reached, all software costs should be capitalized
until the product is made available for general release to
customers. Judgment is required in determining when
technological feasibility is established. The Company believes
that the time period from reaching technological feasibility
until the time of general product release is very short. Costs
incurred after technological feasibility is reached are not
material, and accordingly, all such costs are charged to
research and development expense as incurred.
Costs incurred to develop software applications used in the
Companys Optimization services and managed application
hosting services are accounted for in accordance with ASC
350-10,
Accounting for Computer Software Developed or Obtained for
Internal Use. Costs capitalized consist of (a) certain
external direct costs of materials and services incurred in
developing or obtaining internal-use computer software and
(b) payroll and payroll-related costs for employees who are
directly associated with, and who devote time to, the project.
These costs generally consist of internal labor during
configuration, coding and testing activities. Research and
development costs incurred during the preliminary project stage
or costs incurred for data conversion activities, training,
maintenance and general and administrative or overhead costs are
expensed as incurred. Costs that cannot be separated between
maintenance of, and relatively minor upgrades and enhancements
to, internal-use software are also expensed as incurred.
Capitalization begins when the preliminary project stage is
complete, management with the relevant authority authorizes and
commits to the funding of the software project, it is probable
the project will be completed, the software will be used to
perform the functions intended and certain functional and
quality standards have been met. The Company evaluates any
capitalized costs for impairment whenever conditions or events
indicate that the carrying amount of the asset may not be
recoverable.
Beginning in 2009 the Company reached the stage of development
on certain
e-commerce
and managed application hosting services projects to begin
capitalization of the external direct costs of services and
direct internal labor costs incurred. The Company did not record
any capitalized costs in 2008 or 2007. In 2009, the Company
capitalized $0.6 million in costs, of which
$0.1 million were placed in service. These capitalized
costs are included in property and equipment, net on
the consolidated balance sheets. The Company has evaluated these
assets and has concluded that as of December 31, 2009 the
amounts are not impaired.
ATG accounts for income taxes in accordance with the provisions
of ASC
740-10,
Income Taxes. ASC
740-10
requires companies to recognize deferred tax assets and
liabilities based on the differences between financial reporting
and tax bases of assets and liabilities. These differences are
measured using the enacted tax rates and laws that are expected
to be in effect when the temporary differences are expected to
reverse. A valuation allowance is established against net
deferred tax assets, if based on the weighted available
evidence, it is more likely than not that all or a portion of
the deferred tax assets will not be realized (see Note 3).
On January 1, 2007, the Company adopted ASC
740-10,
Income Taxes, as it applies to accounting for uncertainty
in income taxes, which did not result in an adjustment to its
tax contingencies.
|
|
(p)
|
Stock-Based
Compensation
|
The Company accounts for share-based payments in accordance with
ASC 718-10,
Compensation Stock Compensation. As such, all
share-based payments to employees, including grants of employee
stock options, restricted shares and restricted share units, are
recognized in the income statement based on their fair values at
the date of grant. On January 1, 2006, ATG adopted ASC
718-10 using
the modified prospective transition method as
52
permitted under SFAS 123R. Under this transition method,
compensation cost for the years ended December 31, 2009,
2008 and 2007 includes: (a) compensation cost for all
share-based payments granted before but not yet vested as of
December 31, 2005 based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123,
and (b) compensation cost for all share-based payments
granted after December 31, 2005 based on the grant-date
fair value estimated in accordance with the provisions of
SFAS 123R. In accordance with the modified prospective
method of adoption, results of operations and financial position
for prior periods were not restated. See Note 4 for further
information relating to stock-based compensation.
|
|
(q)
|
Comprehensive
Income (Loss)
|
Accounting guidance requires financial statements to include the
reporting of comprehensive income (loss), which includes net
income (loss) and certain transactions that have generally been
reported in the statement of stockholders equity.
ATGs comprehensive income (loss) consists of net income
(loss), foreign currency translation adjustments and unrealized
gains and losses on
available-for-sale
securities.
The components of accumulated other comprehensive income (loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Foreign currency translation adjustment
|
|
$
|
(1,145
|
)
|
|
$
|
(2,240
|
)
|
Unrealized gain (loss) on
available-for-sale
securities
|
|
|
15
|
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,130
|
)
|
|
$
|
(2,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(r)
|
Concentration
of Credit Risk
|
Financial instruments that potentially subject ATG to
concentrations of credit risk consist principally of marketable
securities and accounts receivable.
The Company sells its products and services to customers in a
variety of industries, including consumer retail, financial
services, manufacturing, communications and technology, travel,
media and entertainment. The Company has credit policies and
standards and routinely assesses the financial strength of its
customers through continuing credit evaluations. The Company
generally does not require collateral or letters of credit from
its customers.
At December 31, 2009 and 2008, no customer accounted for
more than 10% of accounts receivable. No single customer
accounted for more than 10% of total revenues during the years
ended December 31, 2009, 2008, and 2007.
Goodwill represents the excess of the purchase price in a
business combination over the fair value of net tangible and
intangible assets acquired. During 2008, the Company acquired
all of the outstanding shares of common stock of privately held
eShopperTools.com, Inc., dba CleverSet
(CleverSet). As a result of this acquisition, the
Company recorded $8.1 million of goodwill.
The Company annually evaluates goodwill for impairment at
December 1, and throughout the reporting period whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable. Because the Company has one
reporting segment, it utilizes the entity-wide approach for
assessing goodwill for impairment and compares the
Companys market value to its net book value to determine
if impairment exists. No impairment of goodwill resulted from
this evaluation of goodwill in any of the fiscal years presented.
53
The following table presents the changes in goodwill during 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
As of and For
|
|
|
|
The Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
65,683
|
|
|
$
|
59,675
|
|
Acquisition of CleverSet
|
|
|
|
|
|
|
8,138
|
|
Collection of accounts receivable previously reserved
|
|
|
|
|
|
|
(121
|
)
|
Release of valuation allowance on deferred tax assets related to
NOLs from the Primus acquisition (Note 3)
|
|
|
|
|
|
|
(2,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,683
|
|
|
$
|
65,683
|
|
|
|
|
|
|
|
|
|
|
See Note 5 for additional information on the Companys
acquisitions.
The Company reviews identified intangible assets for impairment
whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. The Company
evaluates recoverability of these assets by comparing the
carrying value of the assets to the undiscounted cash flows
estimated to be generated by those assets over their remaining
economic life. If the undiscounted cash flows are not sufficient
to recover the carrying value of the assets, the assets are
considered impaired. The impairment loss is measured by
comparing the fair value of the assets to their carrying values.
Fair value is determined by either a quoted market price or a
value determined by a discounted cash flow technique, whichever
is more appropriate under the circumstances involved. No
impairment of intangible assets resulted from this evaluation in
any of the years presented.
Intangible assets with determinable lives are amortized over
their estimated useful lives, based upon the pattern in which
the expected benefits will be realized, or on a straight-line
basis.
Total intangible assets, which are being amortized, consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Customer relationships
|
|
$
|
11,660
|
|
|
$
|
(10,232
|
)
|
|
$
|
1,428
|
|
|
$
|
11,660
|
|
|
$
|
(8,600
|
)
|
|
$
|
3,060
|
|
Purchased technology
|
|
$
|
9,710
|
|
|
$
|
(7,564
|
)
|
|
$
|
2,146
|
|
|
$
|
9,710
|
|
|
$
|
(5,770
|
)
|
|
|
3,940
|
|
Trademarks
|
|
$
|
1,400
|
|
|
$
|
(910
|
)
|
|
$
|
490
|
|
|
$
|
1,400
|
|
|
$
|
(630
|
)
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
22,770
|
|
|
$
|
(18,706
|
)
|
|
$
|
4,064
|
|
|
$
|
22,770
|
|
|
$
|
(15,000
|
))
|
|
$
|
7,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was
$3.7 million, $4.3 million and $4.9 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. The remaining amortization expense will be
recognized over a weighted average period of approximately
1.4 years. At December 31, 2009, annual amortization
expense for intangible assets is expected to be as follows:
|
|
|
|
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
3,032
|
|
2011
|
|
|
1,032
|
|
|
|
|
|
|
Total
|
|
$
|
4,064
|
|
|
|
(u)
|
Foreign
Currency Translation
|
The financial statements of the Companys foreign
subsidiaries are translated into U.S. dollars. The functional
currency of the Companys foreign subsidiaries has
generally been determined to be the local currency. ATG
54
translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at year-end. Before
translation, the Company re-measures foreign currency
denominated assets and liabilities into the functional currency
of the respective ATG entity, resulting in unrealized gains or
losses recorded in interest and other income, net in the
accompanying consolidated statements of operations. Revenues and
expenses are translated using average exchange rates in effect
during the year. Gains and losses from foreign currency
translation are recorded to accumulated other comprehensive
income (loss) included in stockholders equity. During the
years ended December 31, 2009, 2008, and 2007, the Company
recorded net gains (losses) of approximately $(533,000),
($40,000) and $742,000, respectively, from realized foreign
currency transactions gains and losses and the re-measurement of
foreign currency denominated assets and liabilities.
The Company has evaluated all subsequent events through
February 1, 2010, the date these financial statements were
issued, and determined there are no material recognized or
unrecognized subsequent events. Refer to Note 5 for a
discussion of the acquisition of InstantService subsequent to
December 31, 2009.
|
|
(w)
|
Recent
Accounting Pronouncements
|
In September 2009, the FASB issued ASU
2009-13,
Multiple Element Arrangements. ASU
2009-13
addresses the determination of when the individual deliverables
included in a multiple arrangement may be treated as separate
units of accounting. ASU
2009-13 also
modifies the manner in which the transaction consideration is
allocated across separately identified deliverables and
establishes definitions for determining fair value of elements
in an arrangement. This standard must be adopted by the Company
no later than January 1, 2011 with earlier adoption
permitted. The Company is currently evaluating the impact, if
any, that this standard update will have on its consolidated
financial statements.
In June 2009, the FASB issued ASC
105-10,
Generally Accepted Accounting Principles (the
Codification). The Codification will be the single
source of authoritative nongovernmental U.S. generally
accepted accounting principles. Rules and interpretive releases
of the SEC under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. All existing
accounting standards are superseded as described in ASC
105-10. All
other accounting literature not included in the Codification is
non-authoritative. ASC
105-10 is
effective for interim and annual periods ending after
September 15, 2009. The adoption of ASC
105-10 did
not have a material impact on the Companys financial
condition or results of operations.
In May 2009, the FASB issued ASC
855-10,
Subsequent Events. ASC
855-10
establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
The adoption of ASC
855-10 had
no impact on the Companys financial condition or results
of operations.
In December 2007, the FASB issued ASC
805-10,
Business Combinations. ASC
805-10 is
effective for fiscal years beginning on or after
December 15, 2008 and applies to all business combinations.
ASC 805-10
provides that, upon initially obtaining control, an acquirer
shall recognize 100 percent of the fair values of acquired
assets, including goodwill, and assumed liabilities, with only
limited exceptions, even if the acquirer has not acquired
100 percent of its target. As a consequence, the current
step acquisition model will be eliminated. Additionally, ASC
805-10
changes current practice, in part, as follows:
(1) contingent consideration arrangements will be fair
valued at the acquisition date and included on that basis in the
purchase price consideration; (2) transaction costs will be
expensed as incurred, rather than capitalized as part of the
purchase price; (3) pre-acquisition contingencies, such as
legal issues, will generally have to be accounted for in
purchase accounting at fair value; (4) in order to accrue
for a restructuring plan in purchase accounting, the
requirements in ASC
420-10,
Exit or Disposal Cost Obligations, would have to be met
at the acquisition date; and (5) in-process research and
development charges will no longer be recorded. With the
adoption of ASC
805-10
goodwill is no longer reduced when utilizing net operating loss
carry forwards for which a full valuation allowance exists. The
effect of the adoption of ASC
805-10 on
income tax expense in 2009 was a reduction of $3.2 million.
The adoption of ASC
805-10 could
materially change the accounting for business combinations
consummated subsequent to January 1, 2009, and was
effective for the Companys acquisition of
InstantService.com, Inc. (InstantService) in January
2010. Acquisition-related costs related to the acquisition of
InstantService were not material during 2009.
55
|
|
(2)
|
Disclosure
About Segments of an Enterprise
|
Operating segments are components of an enterprise for which
separate discrete financial information is available for
evaluation by the chief operating decision-maker in making
decisions on how to allocate resources and assess performance.
The Companys chief operating decision-maker is its chief
executive officer. ATG views its operations and manages its
business as one segment with three product offerings: software
licenses, recurring services, and professional and education
services. ATG evaluates these product offerings based on their
respective revenues and gross margins. As a result, the
financial information disclosed in the consolidated financial
statements represents the material financial information related
to ATGs principal operating segment.
Revenues from foreign sources were approximately
$56.3 million, $48.4 million and $43.4 million in
2009, 2008, and 2007, respectively. Revenues from foreign
sources were primarily generated from customers located in
Europe and the Asia/Pacific region. All of the Companys
product sales for the years ended December 31, 2009, 2008,
and 2007, were delivered from ATGs headquarters located in
the United States.
The following table represents the percentage of total revenues
by geographic region from customers for 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
|
69
|
%
|
|
|
71
|
%
|
|
|
68
|
%
|
Europe, Middle East, Africa (excluding UK)
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
16
|
%
|
United Kingdom (UK)
|
|
|
14
|
%
|
|
|
12
|
%
|
|
|
14
|
%
|
Other
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
13,355
|
|
|
$
|
3,097
|
|
|
$
|
(7,280
|
)
|
Foreign
|
|
|
3,453
|
|
|
|
2,292
|
|
|
|
3,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,808
|
|
|
$
|
5,389
|
|
|
$
|
(3,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes shown in the
accompanying consolidated statements of operations is comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(161
|
)
|
|
$
|
(102
|
)
|
|
$
|
9
|
|
Deferred
|
|
|
|
|
|
|
2,009
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
269
|
|
|
|
59
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
224
|
|
|
|
184
|
|
|
|
424
|
|
Deferred
|
|
|
(320
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12
|
|
|
$
|
1,590
|
|
|
$
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The provision (benefit) for income taxes differs from the
federal statutory rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Federal tax at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
State taxes, net of federal benefit
|
|
|
3.3
|
|
|
|
4.7
|
|
|
|
(4.7
|
)
|
Stock-based compensation
|
|
|
2.2
|
|
|
|
12.6
|
|
|
|
2.8
|
|
Meals and entertainment
|
|
|
2.6
|
|
|
|
3.5
|
|
|
|
3.4
|
|
Reversal of previously accrued taxes
|
|
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
Tax credits
|
|
|
(28.7
|
)
|
|
|
(33.5
|
)
|
|
|
(13.6
|
)
|
Other, including foreign income and withholding taxes
|
|
|
4.1
|
|
|
|
(2.6
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision before valuation allowance
|
|
|
8.6
|
|
|
|
19.7
|
|
|
|
(45.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (use) of fully reserved net operating losses
|
|
|
(8.5
|
)
|
|
|
9.8
|
|
|
|
57.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)%
|
|
|
29.5
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The approximate tax effect of each type of temporary difference
and carryforward is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Restructuring
|
|
$
|
5
|
|
|
$
|
51
|
|
Depreciation and amortization
|
|
|
1,268
|
|
|
|
980
|
|
Deferred revenue
|
|
|
2,026
|
|
|
|
2,188
|
|
Reserves and accruals
|
|
|
627
|
|
|
|
686
|
|
Stock-based compensation
|
|
|
3,934
|
|
|
|
2,674
|
|
Capitalized expenses
|
|
|
9,100
|
|
|
|
13,112
|
|
Federal and state income tax credits
|
|
|
14,785
|
|
|
|
9,969
|
|
Net operating losses
|
|
|
67,840
|
|
|
|
70,691
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
99,585
|
|
|
|
100,351
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(97,151
|
)
|
|
|
(96,706
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,434
|
|
|
|
3,645
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,554
|
)
|
|
|
(3,085
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
880
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
In connection with preparing its financial statements, the
Company is required to compute income tax expense in each
jurisdiction in which it operates. This process requires the
Company to project its current tax liability and estimate its
deferred tax assets and liabilities, including net operating
loss and tax credit carryforwards. The Company is also required
to assess the need for a valuation allowance against deferred
tax assets. As part of this assessment, the Company has
considered its recent operating results, future taxable income
projections, and all prudent and feasible tax planning
strategies.
As of December 31, 2009 and 2008 the Company recognized a
deferred tax asset of $0.9 million and $0.6 million,
respectively in certain foreign jurisdictions that it believes
will more likely than not be realized. The Companys
assessment was based upon its cumulative history of earnings
before taxes for financial reporting purposes over a
three-year
period in those jurisdictions and an assessment as of
December 31, 2009 and 2008 of its expected future results
of operations related to its foreign operations.
57
As of December 31, 2009 and 2008 the Company maintained a
full valuation allowance against its net U.S. deferred tax
assets. The Company does not currently believe that it has
sustained profitability over an appropriate time period and in
amounts that are sufficient to support a conclusion that a
valuation allowance is not required. The Company believes there
is significant uncertainty in its future profits due to the
growing breadth of its product mix and the effect it can have on
the timing of revenue recognition, and the related effect on
reported U.S. income. Assuming that, among other factors of
positive and negative evidence, the Company meets its estimates
of 2010 forecasted earnings, it may release a portion of its
U.S. valuation allowance during the second half of 2010,
which is consistent with the timing of the Companys annual
forecasting exercise. Additionally, in connection with the
Companys January 2010 acquisition of InstantService,
during the first quarter of 2010 the Company will assess the
acquired deferred tax assets and liabilities and may release a
portion of its valuation allowance to offset acquired net
deferred tax liabilities.
The valuation allowance increased overall by $0.4 million
primarily as a result of the Companys tax credit
carryforward and foreign net operating losses which were
previously netted against the Companys reserve for
uncertain tax positions. During 2008, $2.0 million of the
reversal of the valuation allowance was recorded as a decrease
to goodwill as the reduction related to the utilization of
Primus pre-acquisition tax assets. The use of the previously
unbenefitted acquired net operating losses did not require any
payment by the Company and was recorded as income tax expense.
On January 1, 2009 the Company adopted ASC
805-10,
Business Combinations, which changed the accounting for
the utilization of acquired net operating losses. Prior to the
effective date of the standard, the reduction to the valuation
allowance in connection with the utilization of unbenefitted
acquired net operating losses was recorded as a reduction to
goodwill and a corresponding increase to income tax expense.
Subsequent to the effective date of the standard, the reduction
to the valuation allowance in connection with the utilization of
unbenefitted acquired net operating losses is recorded as a
reduction to the related deferred tax asset and a reduction to
the related valuation allowance thereby causing no change in
income tax expense. The effect of the adoption of the standard
on income tax expense in 2009 was a reduction of
$3.2 million.
As of December 31, 2009, the Company had net operating loss
carryforwards of approximately $165.0 million for federal
income tax purposes, $102.0 million for state income tax
purposes, and approximately $14.3 million for non-U.S.
income tax purposes. The Company has an additional
$37.3 million of federal net operating losses not reflected
above, that are attributable to stock option exercises which
will be recorded as an increase in additional paid
in capital on the balance sheet once they are
realized in accordance with ASC
718-10,
Compensation Stock Compensation. The
Companys federal net operating losses will begin to expire
in 2012 and its state net operating losses have already begun
expiring. These tax attributes will continue to expire through
2027 if not utilized. The Companys foreign net operating
losses can be carried forward indefinitely. The Company also has
available federal and state tax credit carryforwards of
approximately $10.0 million and $7.4 million
respectively. If not utilized, these carryforwards will expire
at various dates beginning 2011 through 2027. If substantial
changes in the Companys ownership have occurred or should
occur, as defined by Section 382 of the U.S. Internal
Revenue Code (the Code), there could be annual
limitations on the amount of carryforwards that can be realized
in future periods. The Company has completed several
refinancings since its inception and has incurred ownership
changes, as defined under the Code, which could have an impact
on its ability to utilize these tax credit and operating loss
carryforwards.
Since January 1, 2007, the Company has accounted for its
uncertain tax positions in accordance with ASC
740-10,
Income Taxes. The Company recognizes any interest and
penalties related to unrecognized tax benefits in income tax
expense.
As of December 31, 2009, earnings of
non-U.S.
subsidiaries considered to be indefinitely reinvested totaled
$2.9 million. No provision for U.S. income taxes has been
provided thereon. Upon distribution of those earnings in the
form of dividends or otherwise, the Company would be subject to
both U.S. taxes and withholding taxes payable to the various
foreign countries. It is not practicable to estimate the amount
of additional tax that might be payable on this undistributed
foreign income.
During the year ended December 31, 2009, the Company
recorded an increase to its gross liability for unrecognized tax
benefits of $0.2 million and also recorded a decrease of
$3.5 million resulting from the lapse of the applicable
statute of limitations in certain tax jurisdictions. The
decreases resulted in an income tax benefit of
58
$1.7 million. The remaining increases and decreases had no
net impact on the Companys effective tax rate as they
related to various uncertain tax positions in the Companys
tax net operating loss carryforward. At December 31, 2009
the Company recorded less than $0.1 million of interest and
penalties in its statement of operations and has accrued
$0.1 million of potential interest and penalties in its
statement of financial position. If the uncertain tax positions
are ultimately resolved in the Companys favor, the tax
provision in any future periods would be favorably affected by
approximately $0.4 million.
A reconciliation of the gross allowance for uncertain tax
positions is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at January 1
|
|
$
|
3,673
|
|
|
$
|
4,294
|
|
Increases for tax positions taken during a prior period
|
|
|
195
|
|
|
|
|
|
Decreases for tax positions taken during the current period
|
|
|
|
|
|
|
(39
|
))
|
Decreases relating to settlements
|
|
|
|
|
|
|
(582
|
)
|
Decreases resulting from the expiration of the statute of
limitations
|
|
|
(3,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
331
|
|
|
$
|
3,673
|
|
|
|
|
|
|
|
|
|
|
The Company believes that it is reasonably possible that its
gross allowance for uncertain tax positions will decrease by up
to $0.1 million over the next twelve month period as a
result of the expiration of the statutes of limitations within
certain tax jurisdictions.
The Company files income tax returns in the U.S. and
various state and foreign jurisdictions. The Company is
generally subject to examinations by U.S. federal and state
tax authorities from 1992 to the present as the
U.S. Company has historically generated federal and state
tax losses and tax credits since inception which, if utilized in
future periods, may subject some or all periods to examination.
The Company is generally subject to examinations by foreign tax
authorities from 2002 to the present.
|
|
(4)
|
Stock-Based
Compensation and Stockholders Equity
|
Equity
Compensation Plans
The Company grants, or has granted, stock options and other
stock and stock-based awards under the following equity
compensation plans:
1996
Stock Option Plan
In April 1996, the Companys Board of Directors and
stockholders adopted and approved the 1996 Stock Option Plan
(the 1996 Plan). At December 31, 2009, there
were 32,000,000 shares authorized for issuance under the
1996 Plan, as amended. The Board of Directors administers the
1996 Plan and has the authority to designate participants,
determine the number and type of awards to be granted, the time
at which awards are exercisable, the method of payment and any
other terms or conditions of the awards. Options generally vest
quarterly over a two to four-year period and expire
10 years from the date of grant. As of December 31,
2009, there were 4,259,930 shares available for future
grant under the 1996 Plan.
1999
Outside Director Stock Option Plan
In May 1999, the Board of Directors and stockholders adopted and
approved the 1999 Outside Director Stock Option Plan
(Director Plan). Under the terms of the Director
Plan, as amended, non-employee directors of ATG receive
nonqualified options to purchase shares of ATGs common
stock restricted stock awards, and restricted stock unit awards.
The Director Plan terminates December 31, 2013 if it is not
otherwise extended. As of December 31, 2009, there were
641,564 shares available for future grant under the
Director Plan.
Primus
Stock Option Plans
In connection with the acquisition of Primus Knowledge
Solutions, Inc. in 2004, ATG assumed certain options issued
under the Primus Solutions 1999 Stock Incentive Compensation
Plan (the Primus 1999 Plan) and the
59
Primus Solutions 1999 Non-Officer Employee Stock Compensation
Plan (Primus 1999 NESC Plan) (together the
Primus Stock Option Plans) subject to the same terms and
conditions as set forth in the Primus Stock Option Plans,
adjusted to give effect to the conversion under the terms of the
merger agreement. All options that ATG assumed pursuant to the
Primus Stock Option Plans were fully vested upon the closing of
the acquisition and converted into options to acquire ATG common
stock. Options granted under the Primus Stock Option Plans
typically vested over four years and have a contractual term of
ten years. No additional options will be granted under the
Primus 1999 NESC Plan.
1999
Employee Stock Purchase Plan
In May 1999, the Board of Directors and stockholders adopted and
approved the 1999 Employee Stock Purchase Plan (the Stock
Purchase Plan). The Stock Purchase Plan, as amended,
authorizes the issuance of up to a total of
8,000,000 shares of ATGs common stock to
participating employees. All of the Companys employees,
including directors who are also employees, are eligible to
participate in the Stock Purchase Plan. During each designated
quarterly offering period, each eligible employee may deduct
between 1% and 10% of base pay to purchase shares of our common
stock. The purchase price is 85% of the closing market price of
the Companys 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. As of
December 31, 2009, there were 1,528,009 shares
available for future issuance under the Stock Purchase Plan.
Grant-Date
Fair Value
The Company uses the Black-Scholes option pricing model to
calculate the grant-date fair value of an award. Information
pertaining to stock options granted during the years ended
December, 31, 2009, 2008 and 2007 and related assumptions are
noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Stock Options
|
|
2009
|
|
2008
|
|
2007
|
|
Options granted (in thousands)
|
|
|
1,526
|
|
|
|
1,639
|
|
|
|
1,478
|
|
Weighted-average exercise price
|
|
$
|
3.20
|
|
|
$
|
3.63
|
|
|
$
|
2.86
|
|
Weighted average grant date fair value
|
|
$
|
2.07
|
|
|
$
|
2.46
|
|
|
$
|
2.25
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
68.5
|
%
|
|
|
73.9
|
%
|
|
|
95.3
|
%
|
Expected term (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
2.51
|
%
|
|
|
3.19
|
%
|
|
|
4.33
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility The Company has determined that
the historical volatility of its common stock is the best
indicator of the future volatility of its common stock, and
therefore uses historical volatility to estimate the grant-date
fair value of stock options. Historical volatility is calculated
for a period that is commensurate with the stock options
expected term.
Expected term The Company has been unable to use
historical employee exercise and option expiration data to
estimate the expected term assumption for the Black-Scholes
grant-date fair value calculation. As such, the Company has
utilized the safe harbor provision in SEC Staff Accounting
Bulletin No. 110 to determine the expected term of its
stock options.
Risk-free interest rate The yield on zero-coupon
U.S. Treasury securities with a maturity that is
commensurate with the expected term of the option is used as the
risk-free interest rate.
Expected dividend yield The Companys Board of
Directors has never declared dividends nor does it expect to
issue dividends.
60
Stock-Based
Compensation Expense
The Company uses the straight-line attribution method to
recognize stock-based compensation expense for stock options.
The amount of stock-based compensation recognized during a
period is based on the value of the portion of the awards that
are ultimately expected to vest. Expected forfeitures are
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. The term forfeitures is distinct from
cancellations or expirations and
represents only the unvested portion of the surrendered option.
The Company has applied a forfeiture rate of 9% to all unvested
options as of December 31, 2009. This analysis is
re-evaluated quarterly and the forfeiture rate is adjusted as
necessary. Ultimately, the actual expense recognized over the
vesting period will only be for those shares that vest. The
Company recorded $8.9 million, $7.9 million and
$5.8 million in stock-based compensation expense for the
years ended December 31, 2009, 2008, and 2007, respectively.
Stock-Based
Compensation Activity
A summary of the activity under the Companys stock option
plans as of December 31, 2009 and changes during the year
then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Aggregate
|
|
|
|
of Options
|
|
|
Per Share
|
|
|
in Years
|
|
|
Intrinsic Value
|
|
|
|
(In thousands, except weighted average exercise price and
|
|
|
|
weighted average remaining contractual term in years)
|
|
|
Outstanding, December 31, 2008
|
|
|
13,424
|
|
|
$
|
2.80
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,526
|
|
|
|
3.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,257
|
)
|
|
|
1.69
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(690
|
)
|
|
|
5.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
13,003
|
|
|
$
|
2.83
|
|
|
|
5.7
|
|
|
$
|
30,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2009
|
|
|
10,156
|
|
|
$
|
2.72
|
|
|
|
4.9
|
|
|
$
|
26,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest at December 31, 2009(1)
|
|
|
12,684
|
|
|
$
|
2.82
|
|
|
|
5.7
|
|
|
$
|
29,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In addition to the vested options, the Company expects a portion
of the unvested options to vest at some point in the future.
Options expected to vest are calculated by applying an estimated
forfeiture rate to the unvested options. |
During the years ended December 31, 2009, 2008, and 2007,
the total intrinsic value of options exercised (i.e. the
difference between the market price at exercise and the price
paid by the employee to exercise the options) was
$2.8 million, $2.3 million, and $3.3 million,
respectively. The total amount of cash received from exercise
was $2.1 million, $2.3 million, and $2.0 million
in 2009, 2008, and 2007, respectively.
A summary of the Companys restricted stock and restricted
stock unit (RSU(s)) award activity as of
December 31, 2009 and changes during the year then ended is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average Grant
|
|
|
|
Stock
|
|
|
Date Fair Value
|
|
|
|
and RSUs
|
|
|
Per Share
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Non-Vested shares outstanding at December 31, 2008
|
|
|
3,763
|
|
|
$
|
3.17
|
|
Awards granted
|
|
|
3,169
|
|
|
$
|
2.65
|
|
Restrictions lapsed
|
|
|
(1,184
|
)
|
|
$
|
3.10
|
|
Awards forfeited
|
|
|
(302
|
)
|
|
$
|
3.12
|
|
|
|
|
|
|
|
|
|
|
Non-Vested shares outstanding at December 31, 2009
|
|
|
5,446
|
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
|
61
In 2007, the Company began granting RSUs to executives,
employees and members of the Board of Directors. During the
years ended December 31, 2009 and 2008, the Company granted
3.2 million and 2.6 million RSUs, respectively, to
employees and members of the Board of Directors. The fair value
of the RSUs is based on the market value of ATGs common
stock price on the date of grant. Stock-based compensation
expense related to RSUs is recognized on a straight-line basis
over the requisite service period provided there are no
performance-based measures. The Company has applied a forfeiture
rate of 18% to its RSUs as of December 31, 2009. The RSUs
provide the holder with the right to receive shares of ATG
common stock upon vesting.
RSUs granted to employees generally vest over four years. A
majority of the RSUs vest based on the lapsing of time. A
portion of the RSUs granted to executives are subject to
performance criteria. Of the RSUs outstanding at
December 31, 2009 1.3 million were performance-based.
For the year ended December 31, 2009, the level of the
performance measures achieved by the Company was such that the
executives will receive 92% of the shares subject to the
RSUs granted in 2009, provided that they remain employed
by the Company for the remaining service period. The fair value
of these
performance-based
awards is being recognized over the requisite service period
under the accelerated method. The performance-based RSUs granted
in 2009 and 2008 contain additional provisions which, if
achieved, would result in the immediate vesting of the awards.
At December 31, 2009, the achievement of these additional
provisions is not deemed probable by the Company. As of
December 31, 2009, the unrecognized compensation expense
related to restricted shares and RSUs is $10.8 million.
Stock compensation expense related to RSUs and restricted stock
awards made to employees and non-employee directors was
$5.2 million, $3.6 million, and $1.6 million for
the years ended December 31, 2009, 2008, and 2007,
respectively.
During the years ended December 31, 2009, 2008, and 2007,
the total fair value of RSUs vested was $3.1 million,
$1.6 million, and $0.5 million, respectively.
As of December 31, 2009, there was $15.9 million of
total unrecognized compensation cost related to unvested awards
of stock options, restricted stock and RSUs. That cost is
expected to be recognized over a weighted-average period of
approximately 2.0 years.
Shareholder
Rights Plan
On September 26, 2001, the Companys Board of
Directors adopted a Shareholder Rights Plan (the
Shareholder Rights Plan) pursuant to which preferred stock
purchase rights (Right(s)) were distributed to
stockholders as a dividend at the rate of one Right for each
share of common stock held of record as of the close of business
on October 9, 2001. The Shareholder Rights Plan was adopted
to enable the Board of Directors to protect the interests of
stockholders in the event of a takeover attempt that is coercive
or the Board otherwise considers not to be in the best interests
of stockholders. The Shareholder Rights Plan expires in
September 2011.
When exercisable, each Right will entitle stockholders to buy
one one-thousandth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $15.00 per
Right. Subject to certain exceptions, the Rights will be
exercisable after a person or group (except for certain excluded
persons) acquires beneficial ownership of 15% or more of the
Company outstanding common stock or undertakes a tender or
exchange offer which, if consummated, would result in that
person or group beneficially owning 15% or more of the
Companys outstanding common stock. The Rights will be
redeemable by the Board at any time before a person or group
acquires 15% or more of the Companys outstanding common
stock and under certain other circumstances at a redemption
price of $.001 per Right.
Acquisition
of InstantService
On January 8, 2010, the Company acquired all of the
outstanding shares of common stock of privately held
InstantService for a purchase price of approximately
$17.0 million. The results of InstantService will be
included in the Companys results from the date of the
acquisition. The purchase of InstantService augments the
Companys optimization service offerings with additional
click-to-chat
functionality and adds an
e-mail
management solution. At the date of the acquisition,
InstantService had more than 300 customers.
The Company has determined that the acquisition of Instant
Service, Inc. was a non-material business combination under the
guidance of ASC Topic 805, Business Combinations,
formerly known as Statement of Financial Accounting Standards
No. 141(R), Business Combinations (SFAS 141R).
As such, pro forma
62
disclosures are not required and will not be presented within
this or future filings. The company is in the process of
determining the allocation of purchase price.
Acquisition
of CleverSet
On February 5, 2008, the Company acquired all of the
outstanding shares of common stock of privately held CleverSet
for a purchase price of approximately $9.4 million,
comprised of $9.2 million paid to the shareholders,
including the extinguishment of convertible debt, and
acquisition costs of $0.2 million. The purchase of
CleverSet augmented the Companys optimization service
offerings with CleverSets automated personalization
engines, which present
e-commerce
visitors with relevant recommendations and information designed
to increase conversion rates and order size.
The consolidated financial statements include the results of
CleverSet from the date of acquisition. The following unaudited
consolidated pro forma financial information, which assumes the
CleverSet acquisition occurred as of January 1, 2007, is
presented after giving effect to certain adjustments, primarily
amortization of intangible assets. The unaudited consolidated
pro forma financial information is not necessarily indicative of
the results that would have occurred had the acquisition been in
effect for the periods presented or of results that may occur in
the future (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Pro forma revenue
|
|
$
|
164,739
|
|
|
$
|
138,733
|
|
Pro forma net income (loss)
|
|
|
3,262
|
|
|
|
(7,416
|
)
|
Pro forma net income (loss) per share basic and
diluted
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
|
(6)
|
Commitments
and Contingencies
|
Leases
ATG has offices, primarily for sales and support personnel, in
seven domestic locations as well as four foreign countries. At
December 31, 2009, ATGs bank had issued
$0.8 million of letters of credit in favor of various
landlords to secure obligations under its leases, which expire
through 2010. In addition, the Company has operating leases
related to equipment, some of which include purchase options at
the end of the lease term.
The future minimum payments under operating leases as of
December 31, 2009, were as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
3,416
|
|
2011
|
|
|
3,687
|
|
2012
|
|
|
3,527
|
|
2013
|
|
|
3,594
|
|
2014
|
|
|
3,543
|
|
Thereafter
|
|
|
13,939
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
31,706
|
|
|
|
|
|
|
The Company recorded rent expense of $3.5 million,
$4.4 million and $3.4 million and for the years ended
December 31, 2009, 2008 and 2007, respectively
Indemnifications
The Company in general agrees to indemnification provisions in
its software license agreements and real estate leases in the
ordinary course of its business.
63
With respect to software license agreements, these
indemnifications generally include provisions indemnifying the
customer against losses, expenses, and liabilities from damages
that may be awarded against the customer in the event the
Companys software is found to infringe upon the
intellectual property rights of others. The software license
agreements generally limit the scope of and remedies for such
indemnification obligations in a variety of industry-standard
respects. The Company relies on a combination of patent,
copyright, trademark and trade secret laws and restrictions on
disclosure to protect its intellectual property rights. The
Company believes such laws and practices, along with its
internal development processes and other policies and practices,
limit its exposure related to the indemnification provisions of
the software license agreements. However, in recent years there
has been significant litigation in the United States involving
patents and other intellectual property rights. Companies
providing Internet-related products and services are
increasingly bringing and becoming subject to suits alleging
infringement of proprietary rights, particularly patent rights.
From time to time, the Companys customers have been
subject to third party patent claims, and the Company has agreed
to indemnify these customers from claims to the extent the
claims relate to the Companys products.
With respect to real estate lease agreements or settlement
agreements with landlords, these indemnifications typically
apply to claims asserted against the landlord relating to
personal injury and property damage at the leased premises or to
certain breaches of the Companys contractual obligations
or representations and warranties included in the settlement
agreements.
These indemnification provisions generally survive the
termination of the respective agreements, although the provision
generally has the most relevance during the contract term and
for a short period of time thereafter. The maximum potential
amount of future payments that the Company could be required to
make under these indemnification provisions is unlimited. The
Company has purchased insurance that reduces its monetary
exposure for landlord indemnifications, and the Company has not
recorded any claims or paid out any amounts related to
indemnification provisions in its real estate lease agreements.
|
|
(7)
|
Employee
Benefit Plan
|
The Company sponsors employee benefits plans covering
substantially all employees. The employee benefit plans allow
eligible employees to make salary-deferred contributions subject
to certain U.S. Internal Revenue Service limitations and
similar legislation in foreign jurisdictions where the Company
has employees. The Company may contribute to the employee
benefit plans at its discretion. The Company contributed
$1.4 million in 2009, $1.1 million in 2008, and
$1.0 million in 2007 as matching payments under the plan.
Accrued expenses at December 31, 2009 and 2008 consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
9,966
|
|
|
$
|
8,358
|
|
Income taxes
|
|
|
707
|
|
|
|
209
|
|
Outside contractor and professional fees
|
|
|
4,229
|
|
|
|
3,391
|
|
VAT and sales and use taxes
|
|
|
2,463
|
|
|
|
3,298
|
|
Other
|
|
|
1,508
|
|
|
|
3,619
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,873
|
|
|
$
|
18,875
|
|
|
|
|
|
|
|
|
|
|
In December 2001, a purported class action complaint was filed
against the Companys wholly owned subsidiary Primus
Knowledge Solutions, Inc., two former officers of Primus and the
underwriters of Primus 1999 initial public offering. The
complaints are similar and allege violations of the Securities
Act of 1933, as amended, and the Securities Exchange Act of
1934, primarily based on the allegation that the underwriters
received undisclosed compensation in connection with
Primus initial public offering. The litigation has been
coordinated in the United States District Court for the Southern
District of New York with claims against approximately 300
64
other companies that had initial public offerings during the
same general time period. The parties have reached a global
settlement of the litigation under which insurance will pay the
full amount of the settlement share allocated to Primus, and
Primus bears no financial liability. In October 2009, the Court
issued an order granting final approval of the settlement.
Certain objectors are appealing the final order. While the
Company cannot predict the outcome of the litigation, it does
not expect any material adverse impact to its business, or the
results of its operations, from this matter.
The Companys industry is characterized by the existence of
a large number of patents, trademarks and copyrights, and by
increasingly frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. Some of the Companys competitors in the
e-commerce
software and services market have filed or may file patent
applications covering aspects of their technology that they may
claim the Companys technology infringes. Such competitors
could make claims of infringement against the Company with
respect to the Companys products and technology.
Additionally, third parties who are not actively engaged in
providing
e-commerce
products or services but who hold or acquire patents upon which
they may allege the Companys current or future products or
services infringe may make claims of infringement against the
Company or the Companys customers. The Companys
agreements with its customers typically require it to indemnify
them against claims of intellectual property infringement
resulting from their use of the Companys products and
services. The Company periodically receives notices from
customers regarding patent license inquiries they have received
which may or may not implicate the Companys indemnity
obligations, and certain of its customers are currently parties
to litigation in which it is alleged that the patent rights of
others are infringed by the Companys products or services.
Any litigation over intellectual property rights, whether
brought by the Company or by others, could result in the
expenditure of significant financial resources and the diversion
of managements time and efforts. In addition, litigation
in which the Company or its customers are accused of
infringement might cause product shipment or service delivery
delays, require the Company to develop alternative technology or
require the Company to enter into royalty or license agreements,
which might not be available on acceptable terms, or at all. ATG
could incur substantial costs in prosecuting or defending any
intellectual property litigation. These claims, whether
meritorious or not, could be time consuming, result in costly
litigation, require expensive changes in the Companys
methods of doing business or could require the Company to enter
into costly royalty or licensing agreements, if available. As a
result, these claims could harm the Companys business.
The ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative
impact on the Companys financial position, results of
operations, consolidated balance sheets and cash flows, due to
defense costs, diversion of management resources and other
factors.
|
|
(10)
|
Share
Repurchase Program
|
On October 27, 2009 the Companys Board of Directors
authorized a new stock repurchase program providing for the
repurchase of up to $25.0 million of its outstanding common
stock in the open market or in privately negotiated
transactions, at times and prices considered appropriate
depending on the prevailing market conditions. This new
authorization is in addition to the remaining $3.9 million
under the Companys existing $20.0 million repurchase
program authorized in April of 2007. During the years ended
December 31, 2009, 2008, and 2007, the Company repurchased
1,084,594 shares, 4,618,541 shares and
986,960 shares of its common stock at a cost of
$4.3 million, $8.9 million, and $2.9 million,
respectively. For the life of the stock repurchase program
through December 31,2009, the Company has repurchased
6,690,095 shares of its common stock at a cost of
$16.1 million.
65
|
|
(11)
|
Quarterly
Results of Operations (Unaudited)
|
The following table presents a condensed summary of quarterly
results of operations for the years ended December 31, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
|
(In thousands, except per share amounts)
|
|
Total revenues
|
|
$
|
41,911
|
|
|
$
|
44,427
|
|
|
$
|
43,381
|
|
|
$
|
49,663
|
|
Gross profit
|
|
|
27,322
|
|
|
|
29,743
|
|
|
|
27,560
|
|
|
|
33,830
|
|
Net income
|
|
|
2,974
|
|
|
|
4,620
|
|
|
|
3,963
|
|
|
|
5,239
|
|
Basic and diluted net income per share
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2008
|
|
2008
|
|
2008
|
|
2008
|
|
|
(In thousands, except per share amounts)
|
|
Total revenues
|
|
$
|
36,530
|
|
|
$
|
41,920
|
|
|
$
|
40,794
|
|
|
$
|
45,397
|
|
Gross profit
|
|
|
21,623
|
|
|
|
25,665
|
|
|
|
25,251
|
|
|
|
30,220
|
|
Net income (loss)
|
|
|
(842
|
)
|
|
|
348
|
|
|
|
786
|
|
|
|
3,507
|
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
66
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
1.
|
Managements
Report on Disclosure Controls and Procedures
|
As of December 31, 2009, we carried out an evaluation,
under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act)). Our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and
procedures are effective to ensure that information required to
be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that such information is
accumulated and communicated to our management (including our
Chief Executive Officer and Chief Financial Officer) to allow
timely decisions regarding required disclosures. Based on such
evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and
procedures are effective.
|
|
2.
|
Internal
Control over Financial Reporting
|
|
|
(a)
|
Managements
Annual Report on Internal Control Over Financial
Reporting
|
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting and for the
assessment of the effectiveness of internal control over
financial reporting. As defined by the Securities and Exchange
Commission, internal control over financial reporting is a
process designed by, or under the supervision of our principal
executive and principal financial officers and effected by our
Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the consolidated financial
statements in accordance with U.S. generally accepted
accounting principles.
Our internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect our transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of the consolidated
financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our
management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our annual consolidated
financial statements, management has undertaken an assessment of
the effectiveness of our internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or the COSO Framework. Managements
assessment included an evaluation of the design of our internal
control over financial reporting and testing of the operational
effectiveness of those controls. Based on this evaluation,
management has concluded that our internal control over
financial reporting is effective as of December 31, 2009
based on those criteria.
Ernst & Young LLP, our independent registered public
accounting firm, has issued its report on the effectiveness of
our internal control over financial reporting as of
December 31, 2009. This report appears below.
67
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Art Technology Group, Inc.
We have audited Art Technology Group, Inc.s internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Art Technology Group, Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Art Technology Group, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Art Technology Group, Inc. as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss), and cash flows for each of the
three years in the period ended December 31, 2009 of Art
Technology Group, Inc. and our report dated February 1,
2010 expressed an unqualified opinion thereon.
Boston, Massachusetts
February 1, 2010
68
|
|
3.
|
Changes
in internal control over financial reporting.
|
There have been no changes in our internal control over
financial reporting during the fiscal quarter ended
December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
information
|
Not applicable
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement for our 2010
annual meeting of stockholders, to be filed with the Securities
and Exchange Commission (SEC) not later than April 30, 2010
(the Definitive Proxy Statement), including under
the headings Election of Class II Directors,
Background Information About Directors Continuing in
Office. Information About Executive Officers,
Compliance with Section 16(a) of The Exchange
Act and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics that
applies to all of our directors, officers and employees,
including our principal executive officer and principal
financial officer. The Code of Business Conduct and Ethics is
posted on our website at
http://www.atg.com/about-atg/investors/corporate-governance/conduct.
We intend to satisfy the disclosure requirement under
Item 5.05 of
Form 8-K
regarding an amendment to, or waiver from, a provision of this
Code of Business Conduct and Ethics by posting such information
on our website, at the address and location specified above and,
to the extent required by the listing standards of The NASDAQ
Stock Market, by filing a Current Report on
Form 8-K
with the SEC, disclosing such information.
|
|
Item 11.
|
Executive
Compensation
|
The information required under this Item is incorporated herein
by reference to our Definitive Proxy Statement, including under
the headings Executive Compensation, Director
Compensation, Compensation Committee Interlocks and
Insider Participation, and Compensation Committee
Report.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required under this Item is incorporated herein
by reference to our Definitive Proxy Statement, including under
the headings Information About Stock Ownership and
Securities Authorized for Issuance under Equity
Compensation Plans.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information, if any, required under this Item is
incorporated herein by reference to our Definitive Proxy
Statement, including under the headings Related Party
Transactions and Corporate Governance.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required under this Item is incorporated herein
by reference to our Definitive Proxy Statement, including under
the caption Principal Accountant Fees and Services.
69
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1) Financial
Statements
The following are included in Item 8:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated Balance Sheets as of December 31, 2009 and 2008
|
|
|
|
Consolidated Statements of Operations for the years ended
December 31, 2009, 2008, and 2007
|
|
|
|
Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss) for the years ended
December 31, 2009, 2008, and 2007
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008, and 2007
|
|
|
|
Notes to Consolidated Financial Statements
|
(a) (2) Financial
Statement Schedule
The information required by Schedule II, Valuation and
Qualifying Accounts, is contained in Item 8 in the Notes to
the Consolidated Financial Statements. All other schedules have
been omitted since the required information is not present, or
not present in amounts sufficient to require submission of the
schedule or because information required is included in the
consolidated financial statements or the notes thereto.
(a) (3) Exhibits
Documents listed below, except for documents followed by
references to other filings, are being filed as exhibits.
Documents followed by references to other filings are not being
filed herewith and, pursuant to
Rule 12b-32
of the General Rules and Regulations promulgated by the SEC
under the Securities Exchange Act of 1934 (the Act),
reference is made to such documents as previously filed as
exhibits with the SEC. Our file number under the Act is
000-26679.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
|
|
|
|
|
|
|
|
This
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Form
|
|
|
|
|
|
Exhibit
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation
|
|
|
|
S-8
|
|
June 12, 2003
|
|
|
4.1
|
|
|
|
3
|
.2
|
|
Amended and Restated By-Laws of Art Technology Group, Inc. (as
further amended and adopted April 17, 2008)
|
|
|
|
8-K
|
|
April 23, 2008
|
|
|
3.1
|
|
|
|
4
|
.1
|
|
Rights Agreement dated September 26, 2001 with EquiServe
Trust Company, N.A. (SEC file
no. 000-26679)
|
|
|
|
8-K
|
|
October 2, 2001
|
|
|
4.1
|
|
|
|
10
|
.1*
|
|
Amended and Restated 1996 Stock Option Plan (including forms of
agreements)
|
|
|
|
10-K
|
|
March 2, 2009
|
|
|
10.1
|
|
|
|
10
|
.2*
|
|
Form of Restricted Stock Unit Agreement with Performance-Based
Vesting
|
|
|
|
8-K
|
|
March 30, 2009
|
|
|
99.2
|
|
|
|
10
|
.3*
|
|
Form of Restricted Stock Unit Agreement with
Time-Based
Vesting
|
|
|
|
8-K
|
|
March 30, 2009
|
|
|
99.2
|
|
|
|
10
|
.4*
|
|
Amended and Restated 1999 Outside Director Stock Option Plan
(including forms of agreements)
|
|
|
|
10-Q
|
|
August 7, 2007
|
|
|
10.2
|
|
|
|
10
|
.5*
|
|
1999 Employee Stock Purchase Plan
|
|
|
|
S-8
|
|
November 2, 2009
|
|
|
4.5
|
|
|
|
10
|
.6
|
|
Primus 1999 Non-Officer Stock Option Plan
|
|
|
|
10-K
|
|
March 16, 2005
|
|
|
10.4
|
|
|
|
10
|
.7
|
|
Primus 1999 Stock Incentive Compensation Plan, as amended
|
|
|
|
8-K
|
|
April 25, 2007
|
|
|
99.3
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
|
|
|
|
|
|
|
|
This
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Form
|
|
|
|
|
|
Exhibit
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
10
|
.8*
|
|
General
Change-in-Control
Policy for Employees
|
|
|
|
10-Q
|
|
November 9, 2004
|
|
|
10.21
|
|
|
|
10
|
.9*
|
|
Amended and Restated Employment Agreement dated April 14,
2008 with Robert Burke
|
|
|
|
10-Q
|
|
May 12, 2008
|
|
|
10.3
|
|
|
|
10
|
.10*
|
|
Offer letter with Julie M.B. Bradley dated July 6, 2005
|
|
|
|
10-Q
|
|
November 8, 2005
|
|
|
10.9
|
|
|
|
10
|
.11
|
|
Offer letter with Andrew Reynolds dated July 23, 2007
|
|
|
|
10-K
|
|
March 17, 2008
|
|
|
10.10
|
|
|
|
10
|
.12*
|
|
Offer letter with Nina P. McIntyre dated January 27, 2009
|
|
|
|
10-K
|
|
March 2, 2009
|
|
|
10.10
|
|
|
|
10
|
.13*
|
|
Form of Change in Control Agreement by and among Art Technology
Group, Inc. and Executive Management Team Members, dated
April 14, 2008
|
|
|
|
10-Q
|
|
May 12, 2008
|
|
|
10.4
|
|
|
|
10
|
.14*
|
|
2009 Executive Management Compensation Plan
|
|
|
|
8-K
|
|
March 30, 2009
|
|
|
99.1
|
|
|
|
10
|
.15
|
|
Amended and Restated Non-Employee Director Compensation Plan, as
amended on September 16, 2008
|
|
|
|
10-Q
|
|
November 7, 2008
|
|
|
10.1
|
|
|
|
10
|
.16
|
|
Lease agreement dated May 6, 2006 with RREEF America REIT
II Corp. PPP
|
|
|
|
10-Q
|
|
May 10, 2006
|
|
|
10.33
|
|
|
|
10
|
.17
|
|
Second Amendment to Lease dated December 18, 2009 with
RREEF America REIT II Corp PPP
|
|
|
|
8-K
|
|
December 23, 2009
|
|
|
10.1
|
|
|
|
21
|
.1
|
|
Subsidiaries
|
|
X
|
|
|
|
|
|
|
|
|
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
X
|
|
|
|
|
|
|
|
|
|
|
31
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
Exchange Act
Rules 13a-14
and 15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
31
|
.2
|
|
Certification of Principal Financial and Accounting Officer
Pursuant to Exchange Act
Rules 13a-14
and 15d-14,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
32
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
32
|
.2
|
|
Certification of the Principal Financial and Accounting Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
The following materials from Art Technology Group, Inc.s
Annual Report on Form 10-K for the year ended December 31, 2009,
formatted in XBRL (Extensible Business Reporting Language):
(i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Operations, (iii) the
Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss), (iv) the Consolidated
Statements of Cash Flows, and (v) Notes to Consolidated
Financial Statements, tagged as blocks of text.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Management contract or compensatory plan. |
|
|
|
Furnished herewith |
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of February 1, 2010.
ART TECHNOLOGY GROUP, INC.
(Registrant)
Robert D. Burke
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities as of
February 1, 2010.
|
|
|
|
|
Name
|
|
Title
|
|
|
|
|
/s/ ROBERT
D. BURKE
Robert
D. Burke
|
|
Chief Executive Officer and President
(Principal Executive Officer)
|
|
|
|
/s/ JULIE
M.B. BRADLEY
Julie
M.B. Bradley
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ MICHAEL
A. BROCHU
Michael
A. Brochu
|
|
Director
|
|
|
|
/s/ DAVID
B. ELSBREE
David
B. Elsbree
|
|
Director
|
|
|
|
/s/ JOHN
R. HELD
John
R. Held
|
|
Director
|
|
|
|
/s/ ILENE
H. LANG
Ilene
H. Lang
|
|
Director
|
|
|
|
/s/ MARY
E. MAKELA
Mary
E. Makela
|
|
Director
|
|
|
|
/s/ DANIEL
C. REGIS
Daniel
C. Regis
|
|
Chairman of the Board
|
|
|
|
/s/ PHYLLIS
S. SWERSKY
Phyllis
S. Swersky
|
|
Director
|
72
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
|
|
|
|
|
|
|
|
This
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Form
|
|
|
|
|
|
Exhibit
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation
|
|
|
|
S-8
|
|
June 12, 2003
|
|
|
4.1
|
|
|
|
3
|
.2
|
|
Amended and Restated By-Laws of Art Technology Group, Inc. (as
further amended and adopted April 17, 2008)
|
|
|
|
8-K
|
|
April 23, 2008
|
|
|
3.1
|
|
|
|
4
|
.1
|
|
Rights Agreement dated September 26, 2001 with EquiServe
Trust Company, N.A. (SEC file
no. 000-26679)
|
|
|
|
8-K
|
|
October 2, 2001
|
|
|
4.1
|
|
|
|
10
|
.1*
|
|
Amended and Restated 1996 Stock Option Plan (including forms of
agreements)
|
|
|
|
10-K
|
|
March 2, 2009
|
|
|
10.1
|
|
|
|
10
|
.2*
|
|
Form of Restricted Stock Unit Agreement with Performance-Based
Vesting
|
|
|
|
8-K
|
|
March 30, 2009
|
|
|
99.2
|
|
|
|
10
|
.3*
|
|
Form of Restricted Stock Unit Agreement with
Time-Based
Vesting
|
|
|
|
8-K
|
|
March 30, 2009
|
|
|
99.2
|
|
|
|
10
|
.4*
|
|
Amended and Restated 1999 Outside Director Stock Option Plan
(including forms of agreements)
|
|
|
|
10-Q
|
|
August 7, 2007
|
|
|
10.2
|
|
|
|
10
|
.5*
|
|
1999 Employee Stock Purchase Plan
|
|
|
|
S-8
|
|
November 2, 2009
|
|
|
4.5
|
|
|
|
10
|
.6
|
|
Primus 1999 Non-Officer Stock Option Plan
|
|
|
|
10-K
|
|
March 16, 2005
|
|
|
10.4
|
|
|
|
10
|
.7
|
|
Primus 1999 Stock Incentive Compensation Plan, as amended
|
|
|
|
8-K
|
|
April 25, 2007
|
|
|
99.3
|
|
|
|
10
|
.8*
|
|
General
Change-in-Control
Policy for Employees
|
|
|
|
10-Q
|
|
November 9, 2004
|
|
|
10.21
|
|
|
|
10
|
.9*
|
|
Amended and Restated Employment Agreement dated April 14,
2008 with Robert Burke
|
|
|
|
10-Q
|
|
May 12, 2008
|
|
|
10.3
|
|
|
|
10
|
.10*
|
|
Offer letter with Julie M.B. Bradley dated July 6, 2005
|
|
|
|
10-Q
|
|
November 8, 2005
|
|
|
10.9
|
|
|
|
10
|
.11
|
|
Offer letter with Andrew Reynolds dated July 23, 2007
|
|
|
|
10-K
|
|
March 17, 2008
|
|
|
10.10
|
|
|
|
10
|
.12*
|
|
Offer letter with Nina P. McIntyre dated January 27, 2009
|
|
|
|
10-K
|
|
March 2, 2009
|
|
|
10.10
|
|
|
|
10
|
.13*
|
|
Form of Change in Control Agreement by and among Art Technology
Group, Inc. and Executive Management Team Members, dated
April 14, 2008
|
|
|
|
10-Q
|
|
May 12, 2008
|
|
|
10.4
|
|
|
|
10
|
.14*
|
|
2009 Executive Management Compensation Plan
|
|
|
|
8-K
|
|
March 30, 2009
|
|
|
99.1
|
|
|
|
10
|
.15
|
|
Amended and Restated Non-Employee Director Compensation Plan, as
amended on September 16, 2008
|
|
|
|
10-Q
|
|
November 7, 2008
|
|
|
10.1
|
|
|
|
10
|
.16
|
|
Lease agreement dated May 6, 2006 with RREEF America REIT
II Corp. PPP
|
|
|
|
10-Q
|
|
May 10, 2006
|
|
|
10.33
|
|
|
|
10
|
.17
|
|
Second Amendment to Lease dated December 18, 2009 with
RREEF America REIT II Corp PPP
|
|
|
|
8-K
|
|
December 23, 2009
|
|
|
10.1
|
|
|
|
21
|
.1
|
|
Subsidiaries
|
|
X
|
|
|
|
|
|
|
|
|
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
X
|
|
|
|
|
|
|
|
|
|
|
31
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
Exchange Act
Rules 13a-14
and 15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
31
|
.2
|
|
Certification of Principal Financial and Accounting Officer
Pursuant to Exchange Act
Rules 13a-14
and 15d-14,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
|
|
|
|
|
|
|
|
This
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Form
|
|
|
|
|
|
Exhibit
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
32
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
32
|
.2
|
|
Certification of the Principal Financial and Accounting Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
The following materials from Art Technology Group, Inc.s
Annual Report on Form 10-K for the year ended December 31, 2009,
formatted in XBRL (Extensible Business Reporting Language):
(i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Operations, (iii) the
Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss), (iv) the Consolidated
Statements of Cash Flows, and (v) Notes to Consolidated
Financial Statements, tagged as blocks of text.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Management contract or compensatory plan. |
|
|
|
Furnished herewith |
74