Art Technology Group, Inc. Form 10-K
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, 2004 |
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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 |
Commission file number 000-26679
Art Technology Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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04-3141918 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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25 First Street
Cambridge, Massachusetts
(Address of principal executive offices) |
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02141
(Zip Code) |
(617) 386-1000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value with Associated Preferred
Stock Purchase Rights
(Title of Class)
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 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. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant was
approximately $88,194,000 based on the closing price of the
registrants common stock on the Nasdaq National Market on
June 30, 2004.
The number of shares of the registrants common stock
outstanding as of March 11, 2005, was 108,892,161.
Documents Incorporated by Reference
Portions of the registrants proxy statement for its annual
meeting of stockholders to be held on May 25, 2005 are
incorporated by reference in Items 10, 11, 12, 13 and
14 of Part III.
ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-K
ATG, Art Technology Group and Dynamo are our registered
trademarks, and ATG Scenario Personalization and ATG Data
Anywhere Architecture are our service marks. This report also
includes trademarks, service marks and trade names of other
companies.
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PART I
Overview
We deliver software solutions to help organizations market to,
sell to and service their customers and partners, via the Web,
email, contact centers and mobile devices. Our solutions can
enhance our clients revenues, reduce their costs and
improve their customers satisfaction. We also offer
related services, including professional services, education,
application hosting and support and maintenance. As a result of
our recent acquisition of Primus Knowledge Solutions, Inc.
(Primus) we also offer software solutions that
enable companies to deliver a superior customer experience via
contact centers, information technology help desks, Web
(intranet and Internet) self-service and electronic
communication channels. Businesses and governments can use our
solutions to provide a more productive and satisfying experience
to their customers. We seek to differentiate ourselves by
designing applications that enable our customers to provide
their customers a more consistent and more relevant experience
across the various touch points of Web, email, contact centers
and across the lifecycle of marketing, commerce and service. Our
software delivers better consistency and relevancy by capturing
and maintaining information about those customers personal
preferences, online activity, and transaction and service
history, and by using this information to deliver more
personalized and contextual content to users.
Our principal target markets are Global 2000 companies,
government organizations, and other businesses that have large
numbers of online users and utilize the Internet as a primary
business channel. In the past, we (including our newly acquired
subsidiary, Primus Knowledge Solutions, Inc.) have focused on
providing our software and services to businesses in financial
services, retail, media and entertainment, telecommunications,
manufacturing, high-tech, consumer products and services
industries. We have delivered online solutions to companies such
as Best Buy, Kingfisher, Neiman Marcus, Target, Friends
Provident, Merrill Lynch, Wells Fargo, HSBC, A&E Networks,
Warner Music, Cingular, France Telecom, Philips,
Procter & Gamble, Hewlett-Packard, American Airlines,
InterContinental Hotels Group, US Army, and US Federal Aviation
Administration.
We historically have provided Internet commerce and software
solutions, including an application server and application
products. We believe that the development of infrastructure
products, including our application server, has become
increasingly standards driven and that in the future there will
be limited opportunities to differentiate ourselves based on our
application server. As a result, we are focusing principally on
developing application products, including several new
application products that were introduced in 2004 or acquired
via our acquisition of Primus. We offer application products in
the following three functional areas:
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Our online commerce applications are designed for the
development of large consumer-facing e-commerce sites and
channel partner extranets, and are used by our clients to
facilitate transactions with consumers and channel partners. We
believe that, by using our online sales and marketing solutions
together, our clients can create sophisticated promotions and
offers that can drive incremental sales. |
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Our customer service applications are designed to decrease
call-center and help-desk service costs, to improve the speed
with which customer needs are met, and to increase customer
loyalty and satisfaction. We believe our self-service solutions
become more useful through the use of our advanced
personalization capabilities, which are designed to increase the
likelihood that customer inquiries will be managed online
avoiding the need for costly contact center inquiry, and to more
quickly and accurately respond to inquiries which are handled by
the contact center. |
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Our marketing applications are designed to help businesses
attract new customers, promote new offerings to existing
customers, and improve the cost-effectiveness of existing
marketing expenditures. Our clients use our software to maintain
personalized, relevant email contact with their customers, and
to integrate their online marketing activities with related
sales and customer service initiatives. We strive to
differentiate by providing better integration between email, Web
and contact center marketing activities, and by enabling more
personalized and relevant campaigns. Our products are designed to |
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allow businesses to increase marketing effectiveness by visually
defining desired customer experience activities and events that
will drive desirable customer behavior. |
Our Strategy
Our objective is to be the industry leader in providing a
comprehensive customer-facing software platform for companies
striving to give their customers a more consistent and relevant
online experience. We intend to achieve this objective by
implementing the following key components of our strategy:
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Facilitate integrated life cycle experience for
customers. We believe that customers want to cross
seamlessly between the information-gathering, purchase and
service phases of their online activity. We believe that
consumers expect marketing messages they receive to be informed
by their purchase and service history (for example, they should
not be offered a product which they have recently purchased),
service responses to be informed by their purchase history (for
example, answers should be relevant to the products they own),
and e-commerce should be informed by their service history and
response to marketing campaigns. Rather than focusing solely on
marketing or sales or service, we design our core software
functionality to allow our clients to provide their customers
with an integrated online marketing, sales and service
experience. |
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Develop new applications that operate on leading
infrastructure products. We believe the development of
infrastructure products has become standards driven, but that
there is an opportunity for continued innovation relating to
application products. We design our products to operate on
leading J2EE application server platforms, including those from
BEA and IBM, in addition to our own J2EE application server
software. As a result, our application software can provide
value to new and existing clients, across a wide range of
infrastructure environments. |
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Leverage existing sales channels. We sell our products
directly to end-users and through value-added resellers. In
addition, approximately one-half of our product revenue is
co-sold or influenced by a variety of business entities,
including systems integrators, solution providers, technology
partners and value-added resellers. We currently have a broad
range of business alliances throughout the world, including
large system integrators like Capgemini, EDS, HP Consulting ,
Bearing Point and CSC, as well as regional integrators such as
Avenue A/ Razorfish, Blast Radius, Professional Access, Whittman
Hart, McFadyen Consulting and Rikei. In most geographies and
situations, our goal is to maintain close relationships directly
with our clients and to motivate systems integrators to
implement our applications in their projects and solution sets. |
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Leverage and expand service capabilities. We have
extensive experience in Web application development and
integration services, as well as knowledge management design and
call-center systems deployment. Through our Professional and
Education Services organizations, we provide services to train
our systems integrators, value added resellers and complementary
software vendors in the use of our products and offer consulting
services to assist with customer implementations. We seek to
motivate our business partners to provide joint implementation
services to our end user customers. We intend to continue to
seek additional opportunities to increase revenues from product
sales by expanding our base of partners trained in the
implementation and application of our products. |
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Grow managed services as an alternate delivery model.
Prior to our acquisition of Primus, it had been deploying and
operating its software in a managed services/hosted model for
nearly four years. We intend to expand this capability to
include most of our other products, and we will market it as an
alternative delivery option to the class of customers we
currently address. |
Products
We provide a comprehensive software solution set designed to
allow companies to deploy marketing, commerce and service
solutions and application developers to develop customized
websites more effectively and efficiently. Our software is also
designed to provide content administrators and marketing
executives with
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greater flexibility in maintaining their website content and in
optimizing their consumers experience in order to improve
revenue and cost performance.
Our products historically have included both application and
infrastructure components. We are no longer actively marketing
our infrastructure products, including our application server
infrastructure products. We refer collectively to the
application components that we are currently actively marketing
as the ATG Customer Experience Platform. This product set
includes:
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ATG Adaptive Scenario Engine. This product provides a
rich set of features to support online marketing, sales and
service solutions. ATG Adaptive Scenario Engine collects and
maintains customer profile information enabling consumer-facing
applications to be personalized to the needs of a customer or
customer segment. It also enables development of scenarios that
model and respond to consumer behavior, guiding consumers
through the data and processes appropriate to their situation.
ATG Adaptive Scenario Engine incorporates a data repository
integration capability. Some of our clients build custom
applications directly on ATG Adaptive Scenario Engine, and our
commerce, marketing and self-service application products
utilize the capabilities of ATG Adaptive Scenario Engine. |
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ATG Commerce. This application provides a robust set of
application components that allow our clients to create a
customized experience for consumers, businesses and channel
partners purchasing goods or services online, and facilitates
administration by the online vendor. ATG Commerces
functionality includes catalogs, product management, shopping
carts, checkout, pricing management, merchandising, promotions,
inventory management and business-to-business order management. |
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ATG Campaign Optimizer. This application enables
marketing professionals to define comparative tests of different
offers, promotions and product representations, sometimes called
A/ B tests, to put those tests into production, specifying the
segments of site visitors to be tested, and finally to receive
reports on the test results. Other methods for testing campaigns
often involve programming by expert developers, and sometimes
even involve network infrastructure modifications. 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. |
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ATG Adaptive Customer Outreach. This application enables
marketing professionals to design and deploy multi-step
campaigns that include email, web interactions and external
touch points. It is differentiated by its ability to target
content, extend campaigns across many steps, and integrate Web
interactions and email. |
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ATG Adaptive Customer Assistance. This application
combines natural language search technology (acquired with
Primus) with the customer profile repositories in the ATG
Adaptive Scenario Engine to provide a personalized tool for
answering consumers questions during the buying process
and for self-service. ATG Adaptive Customer Assistance provides
consumers with personal transactional information by, for
example, facilitating automated replies to questions such as
How much is my account balance? ATG Adaptive
Customer Assistance also enables a consumer to take direct
action through relevant links built into the results. The
product includes capabilities for creating and maintaining the
answer repository, and for consumer feedback. |
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ATG Content Administration. This application enables
marketing professionals and others to create, manage, preview,
and deploy content while ensuring proper quality control. The
ATG Adaptive Scenario Engine and ATG Content Administration
products provide the means to create and update dynamically
changing content such as catalogs and offers for marketing
campaigns. |
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ATG Knowledge Center. This knowledge management solution
is used by call center agents and help-desk personnel to more
quickly and accurately find the answers to customer inquiries
and resolve problems (also known as assisted service). By doing
so, they can improve the satisfaction of their customers, and
also reduce service expense. We will strive to differentiate our
assisted service products by integrating our personalization,
commerce and marketing technologies, thus enabling more relevant
answers, and facilitating cross- and up-selling as part of the
service encounter. |
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ATG Communications Center. This inbound response solution
facilitates the reception, categorization, routing, and
answering of inbound queries received via email, Web forms and
mobile devices. We will strive to differentiate this product by
integrating it with the knowledge base common to our self- and
assisted-service offerings. |
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ATG Search. This natural language search solution enables
customers and agents to locate the answers, catalog items and
other content they seek more quickly and more accurately, with
fewer irrelevant responses. |
Our ATG Knowledge Center, ATG Communications Center and ATG
Search products were acquired with our November 2004 acquisition
of Primus.
Our product license revenues were $23.3 million, or 34% of
total revenues, in 2004; $27.1 million, or 37% of total
revenues, in 2003; and $48.8 million, or 48% of total
revenues, in 2002.
Services
Our services organization provides a variety of consulting,
design, application development, deployment, integration,
training and support services in conjunction with our products.
These services are provided through our professional services,
education, application hosting and support and maintenance
offerings.
Professional Services. The primary goal of our
Professional Services organization is to ensure customer
satisfaction and the successful implementation of our
application solutions. Our Professional Services include four
primary service offerings:
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Lifecycle Project Delivery. Our lifecycle project
development capability builds upon our deep knowledge of best
practices and the ATG Adaptive Delivery Framework methodology.
Because we are responsible for the project from beginning to
end, we can provide clients with a high-quality, structured
experience from planning to post-deployment support. |
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Packaged Offerings. Our upgrade and migration packaged
offerings are designed to provide clients with targeted services
that can accelerate adoption of new versions of existing ATG
products. We offer packaged offerings built to ease the
implementation of newer products such as ATG Adaptive Customer
Assistance. Our bundled implementation packages, which include
best practices and methodologies, reduce the risk and increase
the speed of implementation of products such as Content
Administration and ATG Commerce. |
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Structured Enabling Services. Working with a service
partner and the client or a designated team, we offer Structured
Enabling Services to facilitate project success. Engaging our
Professional Services organization gives partners and clients
access to best practices that we have developed over hundreds of
engagements. Structured Enabling Services also leverage the ATG
Adaptive Delivery Framework methodology, while enabling the
partners or clients project team to complete a
significant portion of the work. |
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Custom Solutions. We offer customized professional
services solutions tailored to meet the specific needs of our
clients across an entire project. Consulting services can
include a combination of system architecture design, project
management, Web design, technical training and business
consulting services. |
Education. We provide a broad selection of educational
programs designed to train customers and partners on our
applications. This curriculum addresses the educational needs of
developers, technical managers, business managers, and system
administrators. ATG Education Services also offers an online
learning program that complements our instructor-led training.
Developers can become certified on our base product or our
commerce product by taking a certification exam in a proctored
environment. We also measure partner quality using a partner
accreditation program that ensures ATG partners have the skills
necessary to effectively assist our clients with
implementations. We provide a full range of instructor-led
solutions to assist clients with these key initiatives.
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Customer Support Services. We offer five levels of
customer support ranging from our evaluation support program,
which is available for 30 days, to our Premium Support
Program, which includes access to technical support engineers
24 hours a day, seven days per week, for customers
deploying mission critical applications. For an annual
maintenance fee, customers are entitled to receive software
updates, maintenance releases, online documentation and
eServices including bug reports and unlimited technical support.
Application Hosting Services. We offer our customers
hosting services for the full spectrum of ATG applications.
These services include the provisioning, management and
monitoring of the application infrastructure including
bandwidth, network, security, servers, operating system,
enabling software, and ATG applications. In addition, we support
our hosted customers on a 24 hours a day, seven days per
week basis providing problem resolution services, application
change management services, and the support for service level
agreements related to application availability. Our application
hosting services are available to customers that have purchased
ATG product licenses or for customers who prefer application
access/user fees to be included with monthly hosting services.
Our services revenues were $45.9 million, or 66% of total
revenues, in 2004; $45.3 million, or 63% of total revenues,
in 2003; and $52.7 million, or 52% of total revenues, in
2002.
Markets
Our principal target markets are Global 2000 companies,
government organizations, and other businesses that have large
number of online users and utilize the Internet as a primary
business channel. Our clients represent a broad spectrum of
enterprises within diverse industry sectors. The following is a
partial list:
Consumer Retail
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Best Buy Companies, Inc. |
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Cabelas |
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J. Crew |
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Neiman Marcus |
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Restoration Hardware |
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Target Corporation |
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The Finish Line |
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Walgreens |
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Footlocker |
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Body Shop |
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American Eagle Outfitters |
Financial Services
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John Hancock Funds |
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Citicorp |
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Deutsche Bank |
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Ford Motor Credit |
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HSBC |
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Barclays Global Investors |
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MFS Investment Management |
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Dreyfus Services Corporation |
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Merrill Lynch |
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Pioneer Investments |
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Conseco |
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Manufacturing
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Abbott Laboratories |
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Eastman Kodak |
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General Motors |
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Newell Rubbermaid |
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Procter & Gamble |
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Boeing |
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Nike |
Communications & Technology
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Adobe |
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BellSouth |
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Cisco |
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EMC |
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Palm One |
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Hewlett Packard |
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Intuit |
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Microsoft |
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Hitachi |
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Cingular |
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T-Mobile |
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Verisign |
Travel Media and Entertainment
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American Airlines |
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BMG Direct |
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Hilton Hotels |
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Hyatt |
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Intercontinental Hotels Group |
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Meredith Corporation |
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Nintendo |
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Readers Digest |
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Nokia |
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The MTVi Group |
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Warner Music |
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Knight-Ridder |
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Time, Inc. |
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Hotels.com |
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Media News Group |
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Elsevier |
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International
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Airbus |
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Kingfisher |
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Direkt Anlage Bank |
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Pirelli |
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BBC Worldwide, Ltd. |
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Philips |
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Heidelberger Druckmaschinen |
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Lavazza |
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Hoffman la Roche |
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Premier Farnell |
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Royal Mail |
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Vodafone |
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France Telecom |
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Telefonica |
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Deutsche Post |
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LVMH |
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Orange PLC |
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Research and Development
Our research and development group is responsible for core
technology, product architecture, product development, quality
assurance, documentation and third-party software integration.
This group also assists with pre-sale, customer support
activities and quality assurance tasks supporting the services
and sales organizations.
Since we began focusing on selling software products in 1996,
the majority of our research and development activities have
been directed towards creating new versions of our products,
which extend and enhance competitive product features. In 2004,
we focused primarily on developing new and innovative
applications, as well as integrating our products with external
enterprise data sources. In line with these efforts, we have
developed several new applications and aligned our research and
development resources accordingly. Our research and development
expenses were $16.2 million in 2004, $17.9 million in
2003 and $22.0 million in 2002.
Sales Coverage Model
Our principal target markets are leading organizations with
large constituencies who use the Internet as a primary business
channel. We target these potential customers through our direct
sales force and through channel partners, including systems
integrators and other technology partners.
Our direct sales force is compensated based on product and
services sales made directly to end-users and through business
partners. In addition to directly selling our products to end
customers, we also sell our products in cooperation with our
business partners. We provide our partners with sales and
technical training in order to encourage them to create demand
for our products and to extend our presence globally and
regionally. Our sales training includes an introduction to our
company and an overview of our products functionality,
competitive advantages, packaging and pricing. We provide this
training to business development personnel, project managers,
alliance managers and sales representatives employed by our
channel partners.
We provide technical training to developers, architects and
project managers at our learning centers or on-site at channel
partners premises. This training typically extends for a
minimum of two-weeks. In addition, we encourage our channel
partners to enroll in our accreditation and certification
programs:
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Our ATG Certified Professional Program consists of
two exams. The first tests the developers expertise on our
Adaptive Scenario Engine, including Dynamo Application Framework
and ATG |
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Scenario Personalization. The second exam assesses a
developers proficiency with ATG Commerce, including
consumer and business-to-business tools and concepts.
Certification can provide a developer with a competitive
advantage, since it offers evidence of the developers
capabilities using our software. |
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Our ATG Accredited Partner Program is intended to
identify our most qualified partners. In order to become an
accredited partner, a channel partner must complete sales
training, obtain certifications and complete implementations of
our software. This program helps our clients identify channel
partners that are highly qualified to perform successful
implementations of our software. As of December 31, 2004,
we had 5 accredited partners. |
Set forth below is a partial list of organizations with which we
have active selling and marketing relationships:
North America
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Avenue A/ Razorfish |
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Blast Radius |
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Capgemini |
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Critical Mass |
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EDS |
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IBM |
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Immix Technology (federal government) |
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McFayden Consulting |
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Professional Access |
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Computer Sciences Corporation (federal government) |
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Whittman Hart |
International
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Europe, Middle East and Africa |
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Al-Faris Information Technologies |
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AMG.net |
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Atos-Origina Integration SAS |
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Capgemini |
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CSC Computer Sciences Limited |
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Coheris |
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Conexus Limited |
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EDS |
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E-Tree |
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European Technology Consultants (ETC) |
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SDG Consulting |
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Sequenza SPA |
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Unilog |
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Valoris |
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HP Japan |
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Rikei Corporation (Japan) |
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XM Sydney |
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D2C2 Taiwan Limited |
As of December 31, 2004, in addition to offices throughout
the United States, we had offices located in the United Kingdom,
Northern Ireland, and sales personnel located in France,
Germany, Italy and Spain. Our revenues from sources outside the
United States were $22.8 million, or 33% of total revenue,
in 2004, $25.3 million, or 35% of total revenue, in 2003
and $30.1 million, or 30% of total revenue, in 2002.
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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 four
primary sources of competition:
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e-commerce application vendors, such as IBM, Microsoft and Blue
Martini; |
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e-commerce business process outsourcers, including Amazon,
Digital River and GSI Commerce; |
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marketing and customer-service application vendors, including
natural language, self-service and traditional customer
relationship management application vendors, such as RightNow
Technologies, Unica, Chordiant, E.piphany, Kana, eGain, Inquira,
iPhrase Technologies and ServiceWare, some which may have a
vertical industry focus, which may assist them in competing for
customers in those industries; and |
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in-house development efforts by potential customers or partners. |
We compete against these alternative solutions by focusing on an
integrated customer experience for online sales, marketing and
customer-service. We believe our solutions provide our clients
with a rapid time to return on investment, attractive long-term
total cost of ownership, a way to present a single view of
themselves to their customers, the ability to improve the
productivity and effectiveness of customer interactions, and the
flexibility to adapt to rapidly changing and often unpredictable
market needs.
We seek to provide our clients with a rapid time to return on
investment through out-of-the-box functionality for online sales
(e-commerce), marketing and service built on a flexible,
component architecture that is practical and cost-effective to
customize. These capabilities can enable our clients to get to
market quickly in a manner that exploits their competitive
advantages which helps drive their return on
investment.
Our products allow companies to present a single view of
themselves to their customers through our repository
integration. This integration technology allows companies to
easily access and utilize data in the enterprise regardless of
the data storage format or location. The data can be leveraged
in their native form without having to move, duplicate or
convert them. By enabling these capabilities in a cost-effective
manner, we believe our products can help companies protect their
brand and keep their customers from becoming confused or
frustrated all of which positively impact customer
satisfaction and loyalty.
Our adaptive scenario capability is designed to help companies
make each interaction with their customers more productive and
effective. These personalization capabilities help ensure that
consumers are presented with the most relevant information. By
avoiding information overload, consumers are more likely to have
their needs met through the low cost online channel
increasing the speed at which customer needs are met and
decreasing the likelihood the consumer will use a more expensive
channel such as a call center. Adaptive scenario capabilities
can also make interactions with consumers more effective for our
clients. It allows a business user to visually design a sequence
of behaviors that our customer would like to encourage a
consumer to undertake which can lead to a specific
goal such as a site registration or transaction. Our
capabilities automatically monitor and encourage consumers to
follow these pre-defined behavior patterns enabling
our customer to maximize the effectiveness of each interaction
with the consumer.
Finally, we believe the combination of our out-of-the-box
functionality, our component architecture and our repository
integration helps companies that use our products to adapt
quickly and economically to rapidly changing and unanticipated
market needs.
We support the adoption of open application server
infrastructure by our existing and new customers and plan to
work closely with other platform vendors to increase the value
customers receive from our products regardless of the platform
they select. We intend to focus our future development and
marketing efforts on applications rather than on infrastructure
software like Web application servers, and as a result we expect
our business and operating results will be less affected by
competition with infrastructure software vendors such as BEA
Systems and IBM.
9
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 trademark, trade secret and
copyright law and contractual restrictions to protect our
proprietary technology. These legal protections afford only
limited protection for our technology. We seek to protect our
source code for our software, documentation and other written
materials under trade secret and copyright laws. We license our
software pursuant to signed license, click through
or shrink wrap agreements, which impose restrictions
on the 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, 2004, we had a total of 332 employees.
Of our employees, 95 were in research and development, 87 in
sales and marketing, 103 in services and 47 in general and
administrative. Our future success will depend in part on our
ability to attract, retain and motivate highly qualified
technical and management personnel, for whom competition is
intense. In addition, under outsourcing arrangements we employ
the services of approximately 34 persons at centers in India and
Belarus who perform product development and sustaining
engineering activities. From time to time, we also employ
independent contractors to support our professional services,
product development, sales, marketing and business development
organizations. Our employees are not represented by any
collective bargaining unit, and we have never experienced a work
stoppage. We believe our relations with our employees are good.
Internet Address and SEC Reports
We maintain a website with the address www.atg.com. We are not
including the information contained on our website as a part of,
or incorporating it by reference into, this Annual Report on
Form 10-K. We make available free of charge through our
website our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable
after we electronically file such material with, or furnish such
material to, the SEC. We also include on our website the
charters for each of the major committees of our board of
directors. In addition, we intend to disclose on our website any
amendments to, or waivers from, our code of business conduct and
ethics that are required to be publicly disclosed pursuant to
rules of the SEC and Nasdaq.
RISK FACTORS THAT MAY AFFECT RESULTS
This annual report contains forward-looking statements,
including statements about our growth and future operating
results. For this purpose, any statement that is not a statement
of historical fact should be considered a forward-looking
statement. We often use the words believes,
anticipates, plans, expects,
intends and similar expressions to help identify
forward-looking statements.
There are a number of important factors that could cause our
actual results to differ materially from those indicated or
implied by forward-looking statements. Factors that could cause
or contribute to such differences include those discussed below,
as well as those discussed elsewhere in this quarterly report.
10
Risks Related To Our Business
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We expect our revenues and operating results to continue
to fluctuate for the foreseeable future, and the price of our
common stock is likely to fall if quarterly or annual results
are lower than the expectations of securities analysts. |
Our revenues and operating results have varied from quarter to
quarter in the past, and are likely to vary significantly from
quarter to quarter in the foreseeable future. If our quarterly
or annual results fall below our expectations and those of
securities analysts, the price of our common stock is likely to
fall. 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
customers willingness to implement new e-commerce
solutions; |
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the timing of sales and revenue recognition of our products and
services; |
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the timing of customer orders and product implementations; |
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delays in introducing new products and services; |
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the mix of revenues derived from products and services; |
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timing of hiring and utilization of services 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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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. |
Accordingly, we believe that quarter-to-quarter comparisons of
our operating results are not necessarily meaningful. The
results of one quarter or a series of quarters should not be
relied upon as an indication of our future performance.
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Failure of our recent Primus acquisition to achieve its
potential benefits could harm our business and operating
results. |
We recently acquired our subsidiary Primus Knowledge Solutions,
Inc. The acquisition will not achieve its anticipated benefits
unless we are successful in combining our operations and
integrating our products in a timely manner. Integration is a
complex, time consuming and expensive process and may result in
disruption of our operations and revenues if not completed in a
timely and efficient manner. We are only recently beginning to
operate as a combined organization using common:
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sales, marketing, service and support organizations; |
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information and communications systems; |
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operating procedures; |
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accounting systems and financial controls; and |
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human resource practices, including benefit, training and
professional development programs. |
There may be substantial difficulties, costs and delays involved
in integrating Primus into our business. These could include:
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problems with compatibility of business cultures; |
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customer perception of an adverse change in service standards,
business focus, billing practices or product and service
offerings; |
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costs and inefficiencies in delivering products and services to
our customers; |
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problems in successfully coordinating our research and
development efforts; |
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difficulty in integrating sales, support and product marketing; |
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costs and delays in implementing common systems and procedures,
including financial accounting systems; and |
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the inability to retain and integrate key management, research
and development, technical sales and customer support personnel. |
Further, we cannot assure you that we will realize any of the
anticipated benefits and synergies of the acquisition. Any one
or all of the factors identified above could cause increased
operating costs, lower than anticipated financial performance,
or the loss of customers, employees or business partners. The
failure to integrate Primus successfully would have a material
adverse effect on our business, financial condition and results
of operations.
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The substantial costs of our Primus acquisition could harm
our financial results. |
In connection with our acquisition of Primus, we incurred
substantial costs. These include fees to investment bankers,
legal counsel, independent accountants and consultants, costs
associated with the solicitation of proxies, and printing and
other fees and expenses related to our special meeting to
approve the transaction, as well as costs associated with the
elimination of duplicative facilities, operational realignment
expenses and related workforce reductions and costs associated
with the resolution of contingent liabilities of Primus. If the
benefits of the acquisition do not exceed the associated costs,
including any dilution to our stockholders resulting from the
issuance of shares of our common stock in the transaction, our
financial results, including earnings per share, could suffer,
and the market price of our common stock could decline.
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We could incur substantial costs protecting our
intellectual property from infringement or defending against a
claim of infringement. |
Our professional services may involve the development of custom
software applications for specific customers. In some cases,
customers retain ownership or impose restrictions on our ability
to use the technologies developed from these projects. Issues
relating to the ownership of software can be complicated, and
disputes could arise that affect our ability to resell or reuse
applications we develop for customers.
We seek to protect the source code for our proprietary software
both as a trade secret and as a copyrighted work. However,
because we make the source code available to some customers,
third parties may be more likely to misappropriate it. Our
policy is to enter into confidentiality agreements with our
employees, consultants, vendors and customers and to control
access to our software, documentation and other proprietary
information. Despite these precautions, it may be possible for
someone to copy our software or other proprietary information
without authorization or to develop similar software
independently.
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. We could incur substantial costs 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. For
example, in October 2003, ServiceWare Technologies, Inc. filed
suit against our Primus subsidiary, alleging that Primus had
infringed United States patents owned by ServiceWare. On
November 1, 2004, we entered into a settlement agreement
with ServiceWare in which we obtained a fully paid, irrevocable,
nonexclusive, nontransferable (with certain exceptions specified
in the agreement), worldwide, perpetual limited license under
the patents at issue and Primus agreed to pay ServiceWare
$800,000 in cash and to issue to ServiceWare shares of Primus
common stock having a value, determined in the manner specified
in the settlement, equal to $850,000. We may be required to
incur substantial costs in defending other similar litigation in
the future, which could have a material adverse effect on our
operating results and financial condition.
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Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult and while
we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a
persistent problem. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect
proprietary rights to as great an extent as the laws of the
United States. Any such resulting litigation could result in
substantial costs and diversion of resources and could have a
material adverse effect on our business, operating results and
financial condition. There can be no assurance that our means of
protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology.
Any failure by us to meaningfully protect our intellectual
property could have a material adverse effect on our business,
operating results and financial condition.
In addition, we have agreed to indemnify customers against
claims that our products infringe the intellectual property
rights of third parties. The results of any intellectual
property litigation to which we might become a party may force
us to do one or more of the following:
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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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We may not be able to sustain or increase our revenue or
attain profitability on a quarterly or annual basis, which could
lead to a material decrease in the price of our common
stock. |
We incurred losses in the first, second and fourth quarters of
2004, in the first and third quarters of 2003 and in each
quarter of 2002. As of December 31, 2004, we had an
accumulated deficit of $205.2 million. Our revenues
decreased 5% to $69.2 million for the year ended
December 31, 2004 compared with $72.5 million for the
year ended December 31, 2003. Because we operate in a
rapidly evolving industry, we have difficulty predicting our
future operating results and 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, in recent years the slowdown in the
software industry and the decrease in spending by companies in
our target markets have reduced the rate of growth of the
Internet as a channel for consumer branded retail and financial
services companies. If current industry conditions continue for
an extended period of time or worsen, we may experience
additional adverse effects on our revenue, net income and cash
flows, which could result in a decline in the price of our
common stock.
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Turnover in our personnel may impair our ability to
develop and implement a business strategy, which could have a
material adverse effect on our operating results and common
stock price. |
Members of our management team, including executives with
significant responsibilities in our sales, marketing and
research and development operations and executives of our newly
acquired Primus subsidiary, have left us during the past few
years for a variety of reasons, and we cannot assure you that
there will not be additional departures. These changes in
management, and any future similar changes, may be disruptive to
our operations. In addition, equity incentives such as stock
options constitute an important part of our total compensation
program for management, and the volatility or lack of positive
performance of our stock price may from time to time adversely
affect our ability to retain our management team.
We rely heavily on our direct sales force. In connection with
our Primus acquisition, we have recently restructured and
reduced the size of the combined sales force. Changes in the
structure of our sales force have generally resulted in
temporary lack of focus and reduced productivity.
We have recently restructured our research and development group
in connection with the Primus acquisition, which could result in
interruptions in product development and reduced productivity.
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In addition, the success of our recent Primus acquisition will
depend in part on the retention of personnel critical to our
business and operations due to, for example, their technical
skills or management expertise. Employees may experience
uncertainty about their future role with us until plans with
regard to these employees are announced or executed. Several
senior Primus executives have resigned, and other Primus
employees may not want to continue to work for us. In addition,
competitors may seek to recruit employees during the
integration, as is common in high technology mergers. If we are
unable to retain personnel that are critical to the successful
integration and our future operations, we could face disruptions
in our operations, loss of existing customers, loss of key
information, expertise or know-how, and unanticipated additional
recruitment and training costs. In addition, the loss of key
personnel could diminish the anticipated benefits of the
acquisition.
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Our lengthy sales cycle makes it difficult to predict our
quarterly results and causes variability in our operating
results. |
Our long sales cycle, which can often take several months, makes
it difficult to predict the quarter in which sales may occur. We
have a long sales cycle because we generally need to educate
potential customers regarding the use and benefits of our
products and services. Our sales cycle varies depending on the
size and type of customer contemplating a purchase and whether
we have conducted business with a potential customer in the past.
We may incur significant sales and marketing expenses in
anticipation of licensing 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. These potential
customers frequently need to obtain approvals from multiple
decision makers prior to making purchase decisions. Delays in
sales could cause significant variability in our revenues and
operating results for any particular period.
Like most software companies, a significant proportion of our
sales are concentrated near the end of each fiscal quarter.
Failure to close or be able to recognize anticipated revenues on
even a relatively small number of license deals at quarter end
can have a significant impact on our reported operating results
for that quarter. In addition, there can be no assurance that
deals that are not closed at the end of a fiscal quarter, will
be entered into during any subsequent quarter. Competition could
materially and adversely affect our ability to obtain revenues
from license fees from new or existing customers and
professional services revenues from existing customers.
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We face intense competition in the market for Internet
online marketing, sales and service applications, and we expect
competition to intensify in the future. This competition could
cause our revenues to fall short of expectations, which could
adversely affect our future operating results and our ability to
grow our business. |
The market for online marketing, sales and services applications
is intensely competitive, and we expect competition to intensify
in the future. This level of competition could reduce our
revenues and result in increased losses or reduced profits. Our
primary competition currently comes from in-house development
efforts by potential customers or partners, as well as from
other vendors of Web-based application software. We currently
compete with e-commerce and marketing vendors such as IBM,
E.piphany Unica and Kana.
The market for our Primus products is also rapidly evolving, and
intensely competitive. Our Primus suite of products competes
against various vendor 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. We also face competition from in-house designed
products and third-party custom development efforts. The high
level of competition in this market has resulted in pricing
pressures, which if such conditions continue or increase, could
harm our results of operations. Some of the companies providing
advanced natural language self service and traditional service
resolution management solutions that may compete with us include
eGain, Inquira, iPhrase Technologies, Kana, RightNow
Technologies and ServiceWare.
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In addition, competition may increase as a result of current
competitors expanding their product offerings, new companies
entering the market, software industry consolidations and
formations of alliances among industry participants or with
third parties. Many of our competitors have longer operating
histories and significantly greater financial, technical,
marketing and other resources than we do and may be able to
respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and
potential competitors have greater name recognition and more
extensive customer bases that they can use to gain market share.
These competitors may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies
and offer more attractive terms to purchasers than we can.
Moreover, our current and potential competitors, such as
Microsoft, may bundle their products in a manner that may
discourage users from purchasing our products. In addition,
current and potential competitors have established or may
establish cooperative relationships among themselves or with
third parties to enhance their products and expand their
markets. Accordingly, new competitors or alliances among
competitors may emerge and rapidly acquire significant market
share.
Competition could materially and adversely affect our ability to
obtain revenues from license fees from new or existing customers
and professional services revenue from existing customers.
Further, competitive pressures could require us to reduce the
price of our software products. In either case, our business,
operating results and financial condition would be materially
and adversely affected.
While the list price for our software generally has been
maintained over the past three years, in the first quarter of
2004, we reduced our list prices on purchases exceeding certain
volumes. Additional volume-based reductions in our list price
could adversely affect our business, operating results and
financial condition.
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If we fail to maintain our existing customer base, our
ability to generate revenues will be harmed. |
Historically, we have derived a significant portion of our
revenues from existing customers that purchase our support and
maintenance services and enhanced versions of our products.
Retention of our existing customer base requires that we provide
high levels of customer service and product support to help our
customers maximize the benefits that they derive from our
products. To compete, we must introduce enhancements and new
versions of our products that provide additional functionality.
Further, we must manage the transition from our older products
so as to minimize the disruption to our customers caused by such
migration and integration with the customers information
technology platform. If we are unable to continue to obtain
significant revenues from our existing customer base, our
ability to grow our business would be harmed and our competitors
could achieve greater market share.
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If systems integrators or value added resellers reduce
their support and implementation of our products, our revenues
may fail to meet expectations and our operating results would
suffer. |
Since our potential customers 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, 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 probably would fall.
Approximately 56% of our product license revenues in 2004
related to our relationships with systems integrators and value
added resellers. Since a substantial portion of our product
license revenues are related to our relationships with systems
integrators and our potential customers often rely on
third-parties to develop, deploy and manage websites for
conducting commerce on the Internet, we cultivate relationships
with systems integrators and value added resellers to encourage
them to create demand for and support our products.
Our systems integrators and value added resellers are not
required to implement solutions that include our products or to
maintain minimum sales levels of our products. If we fail to
train our systems integrators or
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value added resellers, including a sufficient number of
accredited partners and certified professionals, we believe that
the product license revenues resulting from our relationships
with these channel partners will decrease. In addition, if
systems integrators or value added resellers devote their
efforts to integrating or reselling competitors products
our product revenues would decline. 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 probably would fall.
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Competition with our resellers could limit our sales
opportunities and jeopardize these relationships. |
We sell products through resellers and may in the future sell
through original equipment manufacturers. In some instances, we
target our direct selling efforts toward markets that are also
served by some of these resellers. This competition may limit
our ability to sell our products and services directly in these
markets and may jeopardize, or result in the termination of,
these relationships.
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If we acquire other companies or businesses, we will be
subject to risks that could hurt our business. |
In addition to our recent acquisition of Primus, in the future,
we may pursue additional acquisitions to obtain complementary
businesses, products, services or technologies. Any such
acquisition may not produce the revenues, earnings or business
synergies that we anticipated, and an acquired business,
product, service or technology might not perform as we expected.
If we pursue an additional acquisition, our management could
spend a significant amount of time and effort in identifying and
completing the acquisition. If we complete an additional
acquisition, we may encounter significant difficulties and incur
substantial expenses in integrating the operations and personnel
of the acquired company into our operations while preserving the
goodwill of the acquired company. In particular, we may lose the
services of key employees of the acquired company and we may
make changes in management that impair the acquired
companys relationships with employees and customers.
Any of these outcomes could prevent us from realizing the
anticipated benefits of our additional acquisitions. To pay for
an acquisition, we might use stock or cash. Alternatively, we
might borrow money from a bank or other lender. If we use our
stock, our stockholders would experience dilution of their
ownership interests. If we use cash or debt financing, our
financial liquidity would be reduced. We may be required to
capitalize a significant amount of intangibles, including
goodwill, which may lead to significant amortization charges. In
addition, we may incur significant, one-time write offs and
amortization charges. These amortization charges and write offs
could decrease our future earnings or increase our future losses.
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We may need additional 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 additional funds in the future, for
example, to develop new technologies, support an expansion,
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 revise our business plan 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, 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.
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Failure by us to comply with the financial covenants in
our line of credit or the refusal of our bank to renew this
facility, could negatively impact our cash, cash equivalents and
marketable securities balances. |
We renewed and amended our $20.0 million line of credit in
the fourth quarter of 2004. This line of credit is secured by
all of our tangible and intangible intellectual and personal
property and is subject to financial covenants including
liquidity coverage and profitability. While there were no
outstanding borrowings under the facility at February 28,
2005, we had issued letters of credit totaling
$8.6 million, which are supported by this facility. The
letters of credit have been issued in favor of various landlords
and equipment vendors to secure obligations pursuant to leases
expiring from December 2005 through January 2009. This revolving
line of credit expires on December 24, 2005.
The liquidity covenant in the line of credit mandates that we
maintain cash, cash equivalents and marketable securities, at
the end of each month as follows:
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For the months ending January 31, 2005, February 28,
2005, April 30, 2005, and May 31, 2005, the greater of
(i) $15.0 million or (ii) two times the amount of
outstanding obligations under the loan agreement, and |
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For the months ending March 31, 2005 and June 30,
2005, and as of the last day of each month thereafter,
$20 million. |
At February 28, 2005, we had $25.3 million in cash,
cash equivalents and marketable securities, which represents a
decrease of $5.2 million from $30.5 million in cash,
cash equivalents and marketable securities at December 31,
2004. The profitability covenant, as amended, allows for net
losses not to exceed: $4.5 million for the fourth quarter
of 2004; $2.0 million for the first quarter of 2005,
$500,000 for the second quarter of 2005, $1.5 million for
the third quarter of 2005 and requires net profitability of at
least $1.00 for the fourth quarter of 2005 and for each quarter
thereafter. In the event that we do not comply with any of the
financial covenants within the line of credit or default on any
of its provisions, the banks significant remedies include
declaring all obligations immediately due and payable and
ceasing to advance money or extend credit for our benefit.
Accordingly, if we do not comply with any of the financial
covenants in the line of credit or if our line of credit
agreement expires, the bank may require outstanding letters of
credit to be cash secured. If the bank required us to secure
each outstanding letter of credit on a dollar for dollar basis,
our cash, cash equivalents and marketable securities balances
would decrease substantially and our liquidity would be
materially impaired.
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If we fail to adapt to rapid changes in the market for
Internet online marketing, sales, and service applications, our
existing products could become obsolete. |
The market for our products is marked by rapid technological
change, frequent new product introductions and Internet-related
technology enhancements, uncertain product life cycles, changes
in customer demands, coalescence of product differentiators,
product commoditization and evolving industry standards. We may
not be able to develop and market or acquire new products or
product enhancements that comply with present or emerging
Internet technology standards and to 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.
For example, functionality that once differentiated our products
over time has been incorporated into products offered by the
major operating system and infrastructure providers, as occurred
in the case of our application server products, leading to our
recent decision to discontinue active marketing of these
products.
To succeed, we will need to enhance our current products,
develop new products on a timely basis to keep pace with
developments related to Internet technology and to satisfy the
increasingly sophisticated requirements of customers and
leverage strategic alliances with third parties in the
e-commerce field who have
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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 customers.
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If we fail to address the challenges associated with
international operations, revenues from our products and
services may decline or the costs of providing our products or
services may increase. |
As of December 31, 2004 we had offices in the United
Kingdom and Northern Ireland with sales personnel in France,
Germany, Italy and Spain. We derived 33% of our total revenues
in the year ended December 31, 2004 from customers outside
the United States. In December 2002, we initiated a
restructuring plan, which included the closing of our offices in
Australia, Canada, and the Netherlands at varying times during
the first quarter of 2003. In November, 2004, we initiated a
restructuring plan, which included closing of our offices in
Italy and Germany during the fourth quarter of 2004. Our
operations outside North America are subject to additional
risks, including:
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changes in regulatory requirements, exchange rates, tariffs and
other barriers; |
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longer payment cycles and problems in collecting accounts
receivable in Western Europe and the Far East; |
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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 to the extent that our
products are sold in countries that do not have English as their
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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potentially adverse tax consequences; and |
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political and economic instability. |
The impact of future exchange rate fluctuations on our operating
results cannot be accurately predicted. We may increase the
extent to which we denominate arrangements with international
customers in the currencies of the countries in which the
software or services are provided. From time to time we may
engage in hedges of contracts denominated in foreign currencies.
Any hedging policies implemented by us may not be successful,
and the cost of these hedging techniques may have a significant
negative impact on our operating results.
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Our software products may contain errors or defects that
could result in lost revenues, delayed or limited market
acceptance, or product liability claims with substantial
litigation costs. |
Complex software products such as ours often contain errors or
defects, particularly when first introduced or when new versions
or enhancements are released. We began shipping the ATG Version
7.0 products in the fourth quarter of 2004. Despite internal
testing and testing by customers, our current and future
products may contain serious defects. Serious defects or errors
could result in lost revenues or a delay in market acceptance.
Since our customers use our products for critical business
applications such as e-commerce, errors, defects or other
performance problems could result in damage to our customers.
They could seek significant compensation 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.
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Our software offerings under our agreement with IBM may
not achieve market acceptance, which may harm our business and
operating results. |
In June 2003, we entered into an original equipment
manufacturer, or OEM, agreement with IBM under which we agreed
to offer IBMs WebSphere Internet infrastructure software
as part of our packaged software offerings. Market acceptance of
our relationship with IBM is subject to a number of significant
risks, many of which are outside our control. These risks
include:
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Our packaged software offerings must meet the requirements of
our current and prospective clients. We are working with IBM to
further integrate our applications to optimize their performance
while running on IBM WebSphere, but we cannot assure you that
our integration efforts will satisfy the needs of current and
prospective customers. |
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IBM may determine not to devote significant resources to the
arrangements contemplated by our OEM agreement or may disagree
with us as to how to proceed with the integration of our
products. The amount and timing of resources dedicated by IBM
under the OEM agreement are not under our direct control. |
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Our arrangement with IBM may cause confusion among current and
prospective customers as to our product focus and direction. |
If our relationship with IBM does not achieve market acceptance,
our business and operating results may be harmed.
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Our announced restructurings may not result in the reduced
cost structure we anticipate and may have other adverse impacts
on productivity. |
We recently initiated a plan to effect a worldwide headcount
reduction and a reduction in the amount of space we occupy in
our headquarters facility in Cambridge, Massachusetts. These
actions resulted in a net restructuring charge of
$3.6 million during the fourth quarter of 2004, which
included costs of employee severance and lease costs associated
with vacated premises. During 2003, we had corporate
restructurings involving workforce reductions and closures of
excess facilities. In addition, there were changes in
assumptions and estimates connected to prior restructuring
charges and the leases that were settled during the period.
These actions resulted in recording a net restructuring benefit
of $10.5 million during 2003. In January 2003, we publicly
announced a corporate restructuring involving a workforce
reduction and the closing and consolidation of office facilities
in selected locations. These actions resulted in recording a
restructuring charge of $19.0 million in the fourth quarter
of 2002. In addition, we recorded restructuring charges of
$75.6 million in 2001. These restructuring activities
required that we close facilities, maintain sales efforts and
provide continuing customer support and service in regions where
the sales and support staff have been reduced or eliminated,
reallocate workload among continuing employees, and seek to
reduce liability for idle lease space. The outcomes of such
restructuring activities are difficult to predict. While we
believe our restructuring and consolidation activities will
reduce our cost structure, we may not achieve the cost
reductions that we are expecting. In addition, our restructuring
activities may result in lower revenues as a result of the
decreased staff in our sales and marketing and professional
services groups or other adverse impacts on productivity that we
did not anticipate. Our restructuring and consolidation
activities are further complicated by the integration of
Primus operations with our other operations, which could
make the risks described above more severe.
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The loss of technology licensed from third parties could
delay our ability to deliver our products. |
We rely in part on technology that we license from third
parties, which is integrated into our internally developed
software. Third-party technology licenses might not continue to
be available to us on commercially reasonable terms, or at all.
The loss of any significant technology license could cause
delays in our ability to deliver our products or services until
equivalent technology is developed internally or equivalent
third-party technology, if available, is identified, licensed
and integrated.
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We use the Java programming language to develop our
products, and our business could be harmed if Java loses market
acceptance or if we are not able to continue using Java or
Java-related technologies. |
We write our software in the Java computer programming language
developed by Sun Microsystems and we incorporate Suns Java
2 Platform, Enterprise Edition, or J2EE, and Suns Java
Runtime Environment, Java Naming and Directory Interface, Java
Servlet Development Kit, Java Foundation Classes, JavaMail and
JavaBeans Activation Framework into our products under licenses
granted to us by Sun. Our Version 7.0 ATG Adaptive Scenario
Engine has been designed to support Suns J2EE standards.
If Sun were to decline to continue to allow us to use these
technologies for any reason, we would be required to
(a) license the equivalent technology from another source,
(b) rewrite the technology ourselves or (c) rewrite
portions of our software to accommodate the change or no longer
use the technology.
While a number of companies have introduced Web applications
based on Java, Java could fall out of favor, and support by Sun
Microsystems or other companies could decline. Moreover, our new
Version 7.0 ATG Adaptive Scenario Engine is designed to support
J2EE standards for developing modular Java programs that can be
accessed over a network. We have licensed the J2EE brand and
certification tests from Sun. There can be no assurance that
these standards will be widely adopted, that we can continue to
support J2EE standards established by Sun from time to time or
that the J2EE brand will continue to be made available to us on
commercially reasonable terms. If Java or J2EE support decreased
or we could not continue to use Java or related Java
technologies or to support J2EE, we might have to rewrite the
source code for our entire product line to enable our products
to run on other computer platforms. Also, changes to Java or
J2EE standards or the loss of our license to the J2EE brand
could require us to change our products and adversely affect the
perception of our products by our customers. If we were unable
to develop or implement appropriate modifications to our
products on a timely basis, we could lose revenue opportunities
and our business could be harmed.
Many of our Primus products run on Microsoft Windows NT,
Microsoft Windows 2000 and Sun Solaris UNIX.
Some of these products require the use of third party software.
Any change to our customers operating systems could
require us to modify our Primus products and could cause us to
delay product releases. In addition, any decline in the market
acceptance of these operating systems we supports may force us
to ensure that all of our products and services are compatible
with other operating systems to meet the demands of our
customers. If potential customers do not want to use the
Microsoft, Sun Solaris or J2EE operating systems we support, we
will need to develop more products that run on other operating
systems adopted by our customers.
Risks Related To the Internet Industry
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Our performance will depend on the growth of e-commerce
and self-service. |
Our success will depend heavily on the continued use of the
Internet for e-commerce. The United States economic downturn
that began in 2000 reduced demand for our products as customers
and potential customers delayed or cancelled the implementation
of online marketing, sales and service applications. If the
market for our products and services fails to mature, we will be
unable to execute our business plan. Adoption of electronic
commerce and online marketing, sales and service applications,
particularly by those companies that have historically relied
upon traditional means of commerce, will require a broad
acceptance of different methods of conducting business. Our
future revenues and profits will substantially depend on the
Internet being accepted and widely used for commerce and
communication. If Internet commerce does not continue to grow or
grows more slowly than expected, our future revenues and profits
may not meet our expectations or those of analysts. Similarly,
purchasers with established patterns of commerce may be
reluctant to alter those patterns or may otherwise resist
providing the personal data necessary to support our consumer
profiling capability.
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Regulations could be enacted that either directly restrict
our business or indirectly impact our business by limiting the
growth of e-commerce. |
As e-commerce evolves, federal, state and foreign agencies could
adopt regulations covering issues such as user privacy, content
and taxation of products and services. If enacted, government
regulations could limit the market for our products and services
or could impose burdensome requirements that render our business
unprofitable. Although many regulations might not apply to our
business directly, we expect that laws regulating the
solicitation, collection or processing of personal and consumer
information could indirectly affect our business. The
Telecommunications Act of 1996 prohibits certain types of
information and content from being transmitted over the
Internet. The 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.
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The Internet is generating privacy concerns that could
result in legislation or market perceptions that could harm our
business or result in reduced sales of our products, or
both. |
Businesses use our 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 regulatory requirements. The
United States may adopt similar legislation or regulatory
requirements. If privacy legislation is enacted or consumer
privacy concerns are not adequately addressed, our business,
financial condition and operating results could be harmed.
Our 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. Cookies are generally removable by the user, although
removal could affect the content available on a particular site.
Germany has imposed laws limiting the use of cookies, and a
number of Internet commentators and governmental bodies in the
United States and other countries have urged passage of laws
limiting or abolishing the use of cookies. If such laws are
passed or if users begin to delete or refuse cookies as a common
practice, demand for our personalization products could be
reduced.
Risks Related To The Securities Markets And Our Stock
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Our common stock price may continue to be volatile. |
The market price of our common stock has fluctuated in the past
and is likely to continue to be highly volatile. For example,
the market price of our common stock has ranged from
$0.58 per share to $126.88 per share since our initial
public offering in July 1999 and has ranged from $0.70 per
share to $2.25 per share between January 1, 2004 and
December 31, 2004. Fluctuations in market price and volume
are particularly
21
common among securities of Internet and software companies. The
market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our
control:
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variations in our quarterly operating results; |
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changes in market valuations of Internet and software companies; |
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our announcement of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments; |
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timing of completion of significant sales; |
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additions or departures of our key personnel; |
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future sales of our common stock; or |
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changes in financial estimates by securities analysts. |
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We may incur significant costs from class action
litigation. |
We currently are the subject of securities class action
litigation. In addition, our Primus subsidiary is also subject
to a securities class action litigation. If a court awards
damages to the plaintiffs in these cases, the total amount could
exceed the limit of our existing insurance. These litigations
also may divert managements attention and resources. For a
further description of the pending litigation, see
Part II, Item 1. Legal Proceedings. We may
be the target of similar litigation in the future if the market
for our stock becomes volatile. While we believe that we have an
appropriate amount of insurance for class action lawsuits, we
cannot be certain that the insurance coverage will be available
or, if available, sufficient to cover our liability with respect
to a specific future action that may be brought.
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Our common stock may not continue to trade on the Nasdaq
National Market, which could reduce the value of your investment
and make your shares more difficult to sell. |
In order for our common stock to trade on the Nasdaq National
Market, we must continue to meet the listing standards of that
market. Among other things, those standards require that our
common stock maintain a minimum closing bid price of at least
$1.00 per share. Recently, our common stock has traded at
prices near and below $1.00. If we do not continue to meet
Nasdaqs applicable minimum listing standards, Nasdaq could
delist us from the Nasdaq National Market. If our common stock
is delisted from the Nasdaq National Market, we could seek to
have our common stock listed on the Nasdaq SmallCap Market.
However, delisting of our common stock from the Nasdaq National
Market could hinder your ability to sell, or obtain an accurate
quotation for the price of, your shares of our common stock.
Delisting could also adversely affect the perception among
investors of ATG and its prospects, which could lead to further
declines in the market price of our common stock. Delisting
would also make it more difficult and expensive for us to raise
capital. In addition, delisting might subject us to an SEC rule
that could adversely affect the ability of broker-dealers to
sell or make a market in our common stock, thus hindering your
ability to sell your shares.
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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 a stockholder may
consider favorable, which could reduce the market price of our
common stock. These provisions include:
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authorizing the issuance of blank check preferred
stock; |
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providing for a classified board of directors with staggered,
three-year terms; |
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providing that directors may only be removed for cause by a
two-thirds vote of stockholders; |
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limiting the persons who may call special meetings of
stockholders and prohibiting stockholder action by written
consent; |
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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 |
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authorizing anti-takeover provisions. |
In addition, we adopted a shareholder rights plan in 2001 and
Delaware law may further discourage, delay or prevent someone
from acquiring or merging with us.
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The regulatory environment surrounding accounting and
corporate governance subjects us to certain legal uncertainties
in the operation of our business and may increase the cost of
doing business. |
We will face increased regulatory scrutiny associated with the
highly publicized financial scandals and the various accounting
and corporate governance rules promulgated under the
Sarbanes-Oxley Act of 2002 and related regulations. Our
management will review and will continue to monitor all of the
accounting policies and practices, legal disclosure and
corporate governance policies under the new legislation,
including those related to relationships with our independent
auditors, enhanced financial disclosures, internal controls,
board and board committee practices, corporate responsibility
and executive officer loan practices, and intend to fully comply
with such laws. Nevertheless, such increased scrutiny and
penalties involve risks to both the combined company and its
executive officers and directors in monitoring and ensuring
compliance. A failure to properly navigate the legal disclosure
environment and implement and enforce appropriate policies and
procedures, if needed, could harm the combined companys
business and prospects, including its ability to recruit and
retain skilled officers and directors. In addition, it may be
adversely affected as a result of new or revised legislation or
regulations imposed by the Securities Exchange Commission, other
U.S. or foreign governmental regulatory authorities or
self-regulatory organizations that supervise the financial
markets. It also may be adversely affected by changes in the
interpretation or enforcement of existing laws and rules by
these governmental authorities and self-regulatory organizations.
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We are incurring significant costs to comply with changing
laws and we may in the future need to report significant
deficiencies or material weaknesses in our Annual Report, which
could affect our operating results and cause our stock price to
decline. |
Section 404 of the Sarbanes Oxley Act of 2002 requires that
we annually evaluate and report on our systems of internal
controls and that our independent auditors must report on
managements evaluation of those controls.
Managements evaluation and the auditors report
thereon is included in Item 9A. of this Form 10-K. As
permitted by applicable rules of the Securities and Exchange
Commission, our management report on internal financial control
for 2004 did not include the internal controls of Primus. We
cannot assure you that there will not in the future be
significant deficiencies or material weaknesses in our internal
controls, including internal controls related to our Primus
subsidiary, that would be required to be reported. A negative
reaction by the equity markets to the reporting of a significant
deficiency or material weakness could cause our stock price to
decline.
We are also spending an increased amount of management time and
focus as well as external resources to comply with changing
laws, regulations and standards relating to corporate governance
and public disclosure. This has caused us to hire additional
personnel and outside advisory services and has resulted in
additional accounting and legal expenses. These additional
expenses could adversely affect our operating results and the
market price of our stock could suffer as a result.
In addition, if in the future we acquire companies with weak
internal controls, it will take time to get the internal
controls of the acquired company up to the same level of
operating effectiveness as ours. Our inability to address these
risks could negatively affect our operating results.
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Changes in the accounting treatment of stock options could
adversely affect our results of operations. |
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123R, Share-Based Payment to
require companies to expense employee stock options for
financial reporting purposes, effective for interim or annual
periods beginning after June 15, 2005. Such stock option
expensing will require us to value
23
our employee stock option grants pursuant to an option valuation
formula and amortize that value against our earnings over the
vesting period in effect for those options. We currently account
for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and have adopted the
disclosure-only alternative of SFAS No. 123,
Accounting for Stock-Based Compensation. When we are
required to expense employee stock options in the future, this
change in accounting treatment could materially and adversely
affect our reported results of operations as the stock-based
compensation expense would be charged directly against our
reported earnings. For pro forma disclosure illustrating the
effect such a change on our recent results of operations, see
Note 1(l) of the Consolidated Financial Statements.
The adoption of SFAS 123R could adversely affect our
ability to comply with the profitability covenants of our credit
facility with our bank. See Note 3 to the Consolidated
Financial Statements.
Our principal administrative, research and development, sales,
consulting, training and support facilities occupy approximately
42,000 square feet in Cambridge, Massachusetts, pursuant to
a lease expiring in 2006. Our west coast headquarters occupy
approximately 10,000 square feet in San Francisco,
California pursuant to a lease expiring in 2007. Our European
headquarters are located in Apex Plaza, Reading, United Kingdom
where we lease approximately 8,000 square feet pursuant to
a lease expiring in 2009.
At December 31, 2004, we also had offices in Northern
Ireland with sales personnel in France, Italy, Germany and
Spain. Since 2001, we have reached several lease settlement
agreements with landlords that significantly reduced our lease
obligations. For further information concerning our lease
restructuring activities and concerning our obligations under
all operating leases, see Note 7 and Note 12,
respectively, of the Notes to our Consolidated Financial
Statements contained in Item 8 of this Annual Report on
Form 10-K.
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Item 3. |
Legal Proceedings |
We and certain of our former officers have been named defendants
in seven purported class action suits currently pending in the
United States District Court for the District of Massachusetts.
Each of these cases alleges that we, and certain of our former
officers, have violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder,
which generally may subject issuers of securities and persons
controlling those issuers to civil liabilities for fraudulent
actions or defects in the public disclosure required by
securities laws. Four of the cases were filed on various dates
in October 2001 in the U.S. District Court for the District
of Massachusetts. Three of the cases were initially filed in the
Central District of California on various dates in August and
September 2001. All of the actions were consolidated and
transferred to the District of Massachusetts on or about
November 27, 2001. On December 13, 2001, the court
issued an order of consolidation in which it consolidated all
actions filed against us and appointed certain individuals as
lead plaintiffs in the consolidated action. It also appointed
two law firms as co-lead counsel, and a third law firm as
liaison counsel. Counsel for the plaintiffs filed a consolidated
amended complaint applicable to all of the consolidated actions.
On April 19, 2002, we filed a motion to dismiss the case.
On September 4, 2003, the court issued a ruling dismissing
all but one of the plaintiffs allegations. The remaining
allegation is based on the veracity of a public statement made
by one of our former officers and is the subject of a motion to
dismiss and summary judgment filed by us on August 31, 2004
currently pending before the court. Management continues to
believe the remaining claim against us is without merit, and
intends to defend the action vigorously.
Our wholly owned subsidiary Primus Knowledge Solutions, Inc., an
officer and a former officer of Primus and FleetBoston Robertson
Stephens, Inc., J.P. Morgan Securities Inc.,
U.S. Bancorp Piper Jaffray Inc., CIBC World Markets, Dain
Rauscher, Inc. and Salomon Smith Barney Holdings Inc., the
underwriters of Primus initial public offering, have been
named as defendants in an action filed in December 2001 in the
United States District Court for the Southern District of New
York on behalf of persons who purchased Primus common stock from
June 30, 1999 to December 6, 2000, which was issued
pursuant to the June 30, 1999 registration statement and
prospectus for Primus initial public offering. This is one
of a number of actions coordinated for pretrial purposes.
Plaintiffs in the coordinated proceeding have brought claims
under
24
the federal securities laws against numerous underwriters,
companies, and individuals, alleging generally that defendant
underwriters engaged in improper and undisclosed activities
concerning the allocation of shares in the IPOs of more than
300 companies during the period from late 1998 through
2000. Specifically, among other things, the plaintiffs allege
that the prospectus pursuant to which shares of Primus common
stock were sold in the IPO contained certain false and
misleading statements regarding the practices of Primus
underwriters with respect to their allocation of shares of
common stock in Primus IPO to their customers and their
receipt of commissions from those customers related to such
allocations, and that such statements and omissions caused
Primus post-IPO stock price to be artificially inflated.
The individual defendants have been dismissed from the action
without prejudice pursuant to a tolling agreement. In June 2003,
the plaintiffs in this action announced a proposed settlement
with the issuer defendants and their insurance carriers. Primus
elected to participate in the settlement, which generally
provides that plaintiffs will dismiss and release all claims
against us and the individual defendants in exchange for a
contingent payment by the insurance companies collectively
responsible for insuring the issuers in all of the consolidated
IPO cases, and for the assignment or release of certain
potential claims that we may have against the underwriters. We
will not be required to make any cash payments in the
settlement, unless the pro rata amount paid by the insurers in
the settlement on our behalf exceeds the amount of the insurance
coverage, a circumstance that we believe is not likely to occur.
A stipulation of settlement of claims against the issuer
defendants, including Primus, was submitted to the Court for
preliminary approval in June 2004. On February 15, 2005,
the Court preliminarily approved the settlement contingent on
specified modifications. The settlement is subject to final
Court approval, after proposed settlement class members have an
opportunity to object, and a number of other conditions. If the
settlement does not occur, and litigation against us continues,
we believe we have meritorious defenses and intend to defend the
case vigorously. While we cannot predict with certainty the
outcome of the litigation or whether the settlement will be
approved, we do not expect any material adverse impact to our
business, or the results of our operations, from this matter.
In October 2003, Primus received notice that ServiceWare, Inc.
had filed a complaint against them in the United States District
Court for the Western District of Pennsylvania, which alleges
that aspects of Primus technology infringe one or more
patents issued in 1998 alleged to be held by the plaintiff. The
complaint was served on us on January 28, 2004. In February
of 2004, Primus filed its answer, denying all substantive
claims, raising multiple affirmative defenses (including that
the patents are invalid and unenforceable, that Primus
products dont infringe the patents in any event and that
these claims on 1998 patents are barred by equitable estoppel
and latches) and including a number of counterclaims. In May
2004, ServiceWare, Inc. filed counterclaims in the lawsuit,
including allegations of interference, defamation and unfair
competition. On or about November 1, 2004, without any
admission of liability by either party and in exchange for
certain good and valuable consideration, ServiceWare and Primus
agreed to dismiss with prejudice all of the claims,
counterclaims and reply claims in the lawsuit and to deliver to
each other mutual general releases. ServiceWare agreed to grant
Primus and its affiliates, including us, a fully paid,
irrevocable, nonexclusive, nontransferable (with certain
exceptions specified in the agreement), worldwide, perpetual
limited license under the patents at issue in the lawsuit and a
covenant not to sue under those patents. Primus agreed to pay
ServiceWare the sum of $800,000 in cash and to issue to
ServiceWare, immediately prior to the closing of ATGs
acquisition of Primus, shares of Primus common stock having a
value, determined in the manner specified in the settlement,
equal to $850,000. The settlement amount was accrued for in the
opening balance sheet of Primus.
We are also subject to various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material
effect on our business, financial condition or results of
operations.
25
PART II
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Item 5. |
Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock trades on the Nasdaq National Market under the
symbol ARTG. The following table sets forth the high
and low reported sales prices of our common stock for the
periods indicated as reported by the Nasdaq National Market.
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Year ending December 31, 2003
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First quarter
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$ |
1.38 |
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$ |
0.81 |
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Second quarter
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1.96 |
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0.75 |
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Third quarter
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2.84 |
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1.57 |
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Fourth quarter
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2.13 |
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1.34 |
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Year ending December 31, 2004
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First quarter
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$ |
2.25 |
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$ |
1.35 |
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Second quarter
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1.69 |
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1.09 |
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Third quarter
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1.23 |
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0.70 |
|
Fourth quarter
|
|
|
1.61 |
|
|
|
0.84 |
|
On March 11, 2005 the last reported sale price on the
Nasdaq National Market for our common stock was $1.25 per share.
On March 11, 2005, there were approximately 566 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 currently intend to retain future earnings, if any, to
finance our growth. We do not anticipate paying cash dividends
on our common stock in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including
our financial condition, operating results, current and
anticipated cash needs, restrictions in financing agreements and
plans for expansion.
26
|
|
Item 6. |
Selected Consolidated Financial Data |
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
$ |
121,525 |
|
|
$ |
76,631 |
|
|
$ |
48,796 |
|
|
$ |
27,159 |
|
|
$ |
23,345 |
|
|
Services
|
|
|
42,917 |
|
|
|
63,707 |
|
|
|
52,697 |
|
|
|
45,333 |
|
|
|
45,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
164,442 |
|
|
|
140,338 |
|
|
|
101,493 |
|
|
|
72,492 |
|
|
|
69,219 |
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
3,426 |
|
|
|
5,981 |
|
|
|
4,278 |
|
|
|
2,118 |
|
|
|
2,206 |
|
|
Services
|
|
|
36,221 |
|
|
|
47,827 |
|
|
|
33,745 |
|
|
|
19,808 |
|
|
|
19,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
39,647 |
|
|
|
53,808 |
|
|
|
38,023 |
|
|
|
21,926 |
|
|
|
22,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
124,795 |
|
|
|
86,530 |
|
|
|
63,470 |
|
|
|
50,566 |
|
|
|
47,134 |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
19,390 |
|
|
|
30,518 |
|
|
|
22,046 |
|
|
|
17,928 |
|
|
|
16,209 |
|
|
Sales and marketing
|
|
|
73,535 |
|
|
|
93,437 |
|
|
|
43,122 |
|
|
|
31,174 |
|
|
|
29,602 |
|
|
General and administrative
|
|
|
22,984 |
|
|
|
24,116 |
|
|
|
11,087 |
|
|
|
9,538 |
|
|
|
7,742 |
|
|
Restructuring charge (benefit)
|
|
|
|
|
|
|
75,580 |
|
|
|
19,005 |
|
|
|
(10,476 |
) |
|
|
3,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
115,909 |
|
|
|
223,651 |
|
|
|
95,260 |
|
|
|
48,164 |
|
|
|
57,123 |
|
Income (loss) from operations
|
|
|
8,886 |
|
|
|
(137,121 |
) |
|
|
(31,790 |
) |
|
|
2,402 |
|
|
|
(9,989 |
) |
|
Interest and other income, net
|
|
|
8,979 |
|
|
|
4,967 |
|
|
|
2,300 |
|
|
|
1,521 |
|
|
|
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before (provision) benefit for income taxes
|
|
|
17,865 |
|
|
|
(132,154 |
) |
|
|
(29,490 |
) |
|
|
3,923 |
|
|
|
(9,594 |
) |
|
Provision (benefit) for income taxes
|
|
|
3,378 |
|
|
|
23,851 |
|
|
|
|
|
|
|
(255 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
14,487 |
|
|
$ |
(156,005 |
) |
|
$ |
(29,490 |
) |
|
$ |
4,178 |
|
|
$ |
(9,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.22 |
|
|
$ |
(2.27 |
) |
|
$ |
(0.42 |
) |
|
$ |
0.06 |
|
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.20 |
|
|
$ |
(2.27 |
) |
|
$ |
(0.42 |
) |
|
$ |
0.06 |
|
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
66,932 |
|
|
|
68,603 |
|
|
|
69,921 |
|
|
|
71,798 |
|
|
|
79,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
73,138 |
|
|
|
68,603 |
|
|
|
69,921 |
|
|
|
73,768 |
|
|
|
79,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash, cash equivalents and short term marketable securities
|
|
$ |
126,473 |
|
|
$ |
63,550 |
|
|
$ |
68,558 |
|
|
$ |
41,584 |
|
|
$ |
26,507 |
|
Restricted cash
|
|
|
|
|
|
|
16,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term marketable securities
|
|
|
17,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,001 |
|
Total assets
|
|
|
259,515 |
|
|
|
137,488 |
|
|
|
104,835 |
|
|
|
67,360 |
|
|
|
97,803 |
|
Long-term obligations, less current maturities
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
Total stockholders equity
|
|
$ |
191,973 |
|
|
$ |
42,909 |
|
|
$ |
16,023 |
|
|
$ |
20,937 |
|
|
$ |
42,185 |
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
consolidated financial statements and the related notes
contained in Item 8 of this Annual Report on
Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
number of factors, including those set forth under
Item 1. Business Risk Factors that May
Affect Results and elsewhere in this report.
We were founded in December 1991. From 1991 through 1995, we
devoted our efforts principally to building, marketing and
selling our professional services capabilities and to research
and development activities related to our software products.
Beginning in 1996, we began to focus on selling our software
products. To date, we have enhanced and released several
versions of our products. On November 1, 2004, we acquired
all of the outstanding shares of common stock of Primus
Knowledge Solutions, Inc. (Primus) (see Note 6
to the Consolidated Financial Statements). Primus is a provider
of software solutions that enable companies to deliver a
superior customer experience via contact centers, information
technology help desks, web (intranet and internet) self-service
and electronic communication channels. The consolidated
financial statements include Primus financial results from
the date of acquisition. We market and sell our products
worldwide through our direct sales force, systems integrators,
technology alliances and original equipment manufacturers.
We derive our revenues from the sale of software product
licenses and related services. Our software licenses are priced
based on either the size of the customer implementation or site
license terms. Services revenues are derived from fees for
professional services, training and software maintenance and
support. Professional services include implementation, custom
application development and project and technical consulting. We
bill professional service fees primarily on a time and materials
basis or in some cases, on a fixed-price schedule defined
specifically in our contracts. Software maintenance and support
arrangements are priced based on the level of services provided.
Generally, customers are entitled to receive software updates,
maintenance releases as well as on-line and telephone technical
support for an annual maintenance fee. Training is billed as
services are provided.
As of December 31, 2004 we had offices in the United
States, United Kingdom and Northern Ireland with sales personnel
in France, Italy, Germany, and Spain. Revenues from customers
outside the United States accounted for 33% of our total
revenues in 2004, 35% in 2003 and 30% in 2002.
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 accounting principles generally accepted in the United
States. 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
28
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management
evaluates its estimates and judgments, including those related
to revenue recognition, the allowance for doubtful accounts,
research and development costs, restructuring expenses, the
impairment of long-lived assets and income taxes. 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 believe the following critical accounting policies to be both
those most important to the portrayal of our financial condition
and those that require the most subjective judgment.
Not only is revenue recognition a key component of our results
of operations, the timing of our revenue recognition also
determines the timing of certain expenses, such as commissions.
In measuring revenues, we follow the specific guidelines of
Statement of Position (SOP) No. 97-2 (SOP 97-2),
Software Revenue Recognition and SOP 98-9
(SOP 98-9), Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions.
SOP 97-2 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence
that an arrangement exists via a signed license agreement;
(2) physical or electronic delivery has occurred including
the availability of license keys or services rendered;
(3) the fee is fixed or determinable representing amounts
that are due unconditionally with no future obligations under
customary payment terms; and (4) collectibility is
probable. In addition, revenue results are difficult to predict
and any shortfall or delay in recognizing revenue could cause
our operational results to vary significantly from quarter to
quarter and could result in future operating losses.
In accordance with SOP 97-2 and SOP 98-9, revenues
from software product license agreements are recognized upon
execution of a license agreement and delivery of the software,
provided that the fee is fixed or determinable and deemed
collectible by management. If conditions for acceptance are
required subsequent to delivery, revenues are recognized upon
customer acceptance if such acceptance is not deemed to be
perfunctory. In multiple element arrangements, we use the
residual value method in accordance with SOP 97-2 and
SOP 98-9. Revenue earned on software arrangements involving
multiple elements which qualify for separate element accounting
treatment is allocated to each undelivered element using the
relative fair values of those elements based on vendor specific
objective evidence with the remaining value assigned to the
delivered element, the software license. Typically our software
licenses do not include significant post-delivery obligations to
be fulfilled by us and payments are due within a three-month
period from the date of delivery. Consequently, license fee
revenue is generally recognized when the product is shipped.
Revenues from software maintenance or hosting agreements are
recognized ratably over the term of the maintenance or hosting
period, which for application hosting and support and
maintenance is typically one year. Customers who have purchased
our product licenses and have also entered into a hosting
agreement typically have a contractual right to cancel the
hosting agreement with a minimum notice period.. We enter into
reseller arrangements that typically provide for sublicense fees
payable to us based upon a percentage of our list price.
Revenues are recognized under reseller agreements as earned for
guaranteed minimum royalties, or based upon actual sales to the
resellers. We do not grant our resellers the right of return or
price protection.
Revenues from professional service arrangements are recognized
as the services are performed, provided that amounts due from
customers are fixed or determinable and deemed collectible by
management. Amounts collected prior to satisfying the above
revenue recognition criteria are reflected as deferred revenue.
Unbilled services represent service revenues that have been
earned by us in advance of billings. Deferred revenue primarily
consists of advance payments related to support and maintenance
and service agreements.
We principally recognize professional services revenues on a
time-and-material basis. From time to time we enter into
fixed-price service arrangements. In those circumstances in
which services are essential to the functionality of the
software, we apply the percentage-of-completion method, and in
those situations when only professional services are provided,
we apply the proportional performance method. Both of these
methods
29
require that we track the effort expended and the effort
expected to complete a project. The most significant assumption
by management in accounting for this type of arrangement is the
estimated time to complete the project. Significant deviations
in actual results from managements estimates with respect
to one or more projects could significantly impact the timing of
revenue recognition and could result in significant losses on
these projects. To date, our actual results in completing
projects have not deviated significantly from managements
estimates of the time to complete those projects.
|
|
|
Accounts Receivable and Bad Debts |
We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. We continuously monitor collections and
payments from our customers and determine the allowance for
doubtful accounts 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.
|
|
|
Research and Development Costs |
We account for research and development costs in accordance with
SFAS No. 2, Accounting for Research and Development
Costs, and SFAS 86, 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.
During 2004, 2003, 2002 and 2001, we recorded net restructuring
charges (benefits) of $3.6 million,
$(10.5) million, $19.0 million and $75.6 million,
respectively, pertaining to the closure and consolidation of
excess facilities, impairment of assets as discussed below,
employee severance benefits and settlement of certain
contractual obligations. These charges and benefits were
recorded in accordance with SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities,
SFAS 88, Employers Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits and Staff Accounting Bulletin
(SAB) No. 100 (SAB 100), Restructuring and
Impairment Charges. The 2002 and 2001 charges were recorded
in accordance with Emerging Issues Task Force, or EITF, Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring),
SFAS 88, and SAB 100. In determining the charges to
record, we made certain estimates and judgments surrounding the
amounts ultimately to be paid for the actions we have taken. At
December 31, 2004, there were various accruals recorded for
the costs to terminate employees and exit certain facilities and
lease obligations, which may be adjusted periodically for either
resolution of certain contractual commitments or changes in
estimates of severance payments, sublease income or the period
of time the facilities will be vacant and subleased. Although we
do not anticipate additional significant changes to our
restructuring accruals, the actual costs may differ from those
recorded in the event that the subleasing assumptions require
adjustment due to changes in economic conditions surrounding the
real estate market or we terminate our lease obligations prior
to the scheduled termination dates. Such changes had a material
impact to our operating results in the past and could have a
material impact on our operating results in the future.
In order to estimate the costs related to our restructuring
efforts, management made its best estimates of the most likely
expected outcomes of the significant actions to accomplish the
restructuring. These estimates principally related to charges
for excess facilities and included estimates of future sublease
income, future net operating expenses of the facilities,
brokerage commissions and other expenses. The most significant
of these estimates related to the timing and extent of future
sublease income that would reduce our lease obligations.
30
Included in our accrued restructuring balance at
December 31, 2004 was estimated sublease income of
$1.0 million, net of adjustments. We based our estimates of
sublease income on, among other things, (a) opinions of
independent real estate experts, (b) current market
conditions and rental rates, (c) an assessment of the time
period over which reasonable estimates could be made,
(d) the status of negotiations with potential subtenants
and (e) the locations of the facilities. These estimates,
together with other estimates made by us in connection with the
restructuring actions, may vary significantly from the actual
results, depending in part on factors beyond our control. For
example, the actual results will depend on our success in
negotiating with lessors, the time periods required for us to
locate and contract suitable subleases and the market rental
rates at the time of such subleases. Adjustments to the
facilities reserve may be required if actual lease settlement
costs or sublease income differ from the amounts previously
estimated. We review the status of our restructuring activities
on a quarterly basis and, if appropriate, record changes to our
restructuring obligations in our financial statements for such
quarter based on managements then-current estimates.
Additionally, we estimate the required severance accrual at
foreign locations based on the minimum statutory requirements of
each country. The amount of severance that ultimately is paid
may differ from the amount we have accrued. In our history, we
have not experienced significant variations between the amounts
initially accrued for severance at foreign locations and the
amounts ultimately paid out.
|
|
|
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 market 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.
As a result of our restructuring activities in 2004, 2003 and
2002, we evaluated the realizability of our long-lived assets
including fixed assets and leasehold improvements related to our
restructured facility leases and intangible assets consisting
primarily of unamortized goodwill. In 2004, 2003 and 2002, we
determined that $0, 78,000 and $1.7 million, respectively,
of furniture and fixtures, computer equipment and software were
impaired as a result of our decision to abandon the assets
because of the termination of employees and related closures of
offices in our 2004, 2003 and 2002 restructuring plans. These
assets are no longer being used or will not be used in the
future upon completion of the restructuring activities. In
addition, in 2004, 2003 and 2002 we deemed $147,000, $232,000
and $909,000, respectively, of leasehold improvements to be
impaired due to exiting certain office locations, and the
estimated sublease income was not sufficient to recover the
assets carrying value. In addition we determined that
approximately $169,000 in 2003 of purchased software was
impaired due to our revised product development strategy.
We account for goodwill under SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS 142).
SFAS 142 requires that goodwill not be amortized but
instead tested for impairment annually and more frequently upon
the occurrence of certain events which may indicate that
impairment has occurred.
The provisions of SFAS No. 142 require that a two-step
impairment test be performed on goodwill. In the first step, we
compare the fair value, which is determined by use of a
discounted cash flow technique, of the reporting entity to its
carrying value. If the fair value of the reporting entity
exceeds the carrying value of the net assets of that entity,
goodwill is not impaired and we are not required to perform
further testing. If the carrying value of the net assets
assigned to the reporting entity exceeds the fair value of that
entity, then we
31
must perform the second step of the impairment test in order to
determine the implied fair value of the reporting entitys
goodwill. If the carrying value of a reporting entitys
goodwill exceeds its implied fair value, then we record an
impairment loss equal to the difference.
Determining the fair value of a reporting entity is judgmental
in nature and involves the use of significant estimates and
assumptions. These estimates and assumptions may include revenue
growth rates and operating margins used to calculate projected
future cash flows, risk-adjusted discount rates, future economic
and market conditions, and determination of appropriate market
comparables. The estimates are based upon historical experience
and projections of future activity, factoring in customer
demand, changes in technology and a cost structure necessary to
achieve the related revenues. We base our fair value estimates
on assumptions we believe to be reasonable but that are
unpredictable and inherently uncertain. Actual future results
may differ from those estimates. In addition, we may make
certain judgments and assumptions in allocating shared assets
and liabilities to determine the carrying values of reporting
entities.
We plan on performing the annual impairment assessment as of
December 1 of each year.
|
|
|
Accounting for Income Taxes |
We account for income taxes in accordance with
SFAS No. 109 Accounting for Income Taxes
(SFAS 109), which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect
of temporary differences between the book and tax bases of
recorded assets and liabilities. SFAS 109 also requires
that deferred tax assets be reduced by a valuation allowance if
it is more likely than not that some portion or all of the
deferred tax assets will not be realized. We evaluate quarterly
the realizability of our deferred tax assets and adjust the
amount of such allowance, if necessary. At December 31,
2004 and 2003, we had provided a full valuation allowance
against our net deferred tax assets due to the uncertainty of
their realizability. If substantial changes in our ownership
have occurred or should occur, as defined by Section 382 of
the Internal Revenue Code, there could be annual limitations on
the amount of net operating loss carryforwards that can be
realized in future periods.
In addition, we have provided for potential amounts due in
various foreign tax jurisdictions. Judgment is required in
determining our worldwide income tax expense provision. In the
ordinary course of global business, there are many transactions
and calculations where the ultimate tax outcome is uncertain.
Some of these uncertainties arise as a consequence of cost
reimbursement arrangements among related entities. Although we
believe our estimates are reasonable, no assurance can be given
that the final tax outcome of these matters will not be
different from that which is reflected in our historical income
tax provisions and accruals. Such differences could have a
material impact on our income tax provision and operating
results in the period in which such determination is made.
During 2004 and 2003, we reversed previously accrued taxes of
$158,000 and $332,000, respectively, for foreign locations, due
to the closure of the statute of limitations, or as a result of
changes in our estimates of potential amounts due, in those
locations.
32
Results of Operations
The following table sets forth statement of operations data as
percentages of total revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
|
34 |
% |
|
|
37 |
% |
|
|
48 |
% |
|
Services
|
|
|
66 |
|
|
|
63 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
|
Services
|
|
|
29 |
|
|
|
27 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
32 |
|
|
|
30 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
68 |
|
|
|
70 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
23 |
|
|
|
25 |
|
|
|
22 |
|
|
Sales and marketing
|
|
|
43 |
|
|
|
43 |
|
|
|
42 |
|
|
General and administrative
|
|
|
11 |
|
|
|
13 |
|
|
|
11 |
|
|
Restructuring (benefit) charges
|
|
|
5 |
|
|
|
(14 |
) |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
83 |
|
|
|
66 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(14 |
) |
|
|
3 |
|
|
|
(31 |
) |
Interest and other income, net
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before (benefit) provision for income taxes
|
|
|
(14 |
) |
|
|
5 |
|
|
|
(29 |
) |
(Benefit) provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(14 |
)% |
|
|
6 |
% |
|
|
(29 |
)% |
|
|
|
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, the
cost of product license revenues as a percentage of product
license revenues and the cost of services revenues as a
percentage of services revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Cost of product license revenues
|
|
|
9 |
% |
|
|
8 |
% |
|
|
9 |
% |
|
Gross margin on product license revenues
|
|
|
91 |
|
|
|
92 |
|
|
|
91 |
|
Cost of services revenues
|
|
|
43 |
|
|
|
44 |
|
|
|
64 |
|
|
Gross margin on services revenues
|
|
|
57 |
|
|
|
56 |
|
|
|
36 |
|
|
|
|
Years ended December 31, 2004, 2003 and 2002 |
Total revenues decreased 5% to $69.2 million in 2004 from
$72.5 million in 2003. The decrease was primarily
attributable to longer sales cycles, delayed purchasing
decisions and reduced Information Technology related spending by
our customers, along with a shift in our business focus from
infrastructure products to application products, particularly in
the e-commerce and self-service area. Our focus in 2004 has been
principally on e-commerce, self-service applications, and
through our Primus acquisition, solutions that enable our
customers to deliver a superior customer experience via contact
centers, information technology help
33
desks, web (intranet and internet) self-service and electronic
communication channels. Revenues generated from international
customers decreased to $22.8 million, or 33% of total
revenues, in 2004, from $25.3 million, or 35% of total
revenues, in 2003. We expect total revenues in 2005 in the range
of $90-$100 million as we recognize a full years
revenue from the products added through our Primus acquisition
and launch new products. Primus contributed approximately 5.6%
of our revenues for 2004. We expect international revenues as a
percentage of total revenues to remain at approximately 30-35%.
Total revenues decreased 29% to $72.5 million in 2003 from
$101.5 million in 2002. The decrease was primarily
attributable to a shift in our business focus during 2003 from
infrastructure products to application products, particularly in
the e-commerce and self service area. As a result, we
experienced a decrease in product license revenues and services
revenues relating to our infrastructure products business.
Further, in 2003 we began developing several new application
products that did not generate any revenues in 2003. Revenues
generated from international customers decreased to
$25.3 million, or 35% of total revenues, in 2003, from
$30.1 million, or 30% of total revenues, in 2002.
No individual customer accounted for more than 10% of total
revenues in 2004, 2003 or 2002.
Product license revenues decreased 14% to $23.3 million in
2004 from $27.2 million in 2003. The decrease was primarily
attributable to longer sales cycles, delayed purchasing
decisions and reduced Information Technology related spending by
our customers, along with a shift in our business focus from
infrastructure products to application products, particularly in
the e-commerce and self-service area, partially offset by Primus
revenues for two months. As a result we experienced decreases in
product license revenues relating to both our infrastructure
products business and our application products business. Our
focus in 2004 has been principally on e-commerce, self-service
applications, and through our Primus acquisition, solutions that
enable our customers to deliver a superior customer experience
via contact centers, information technology help desks, web
(intranet and internet) self-service and electronic
communication channels. The decline in product license revenues
in 2004 as compared to 2003 is attributable to reduced sales
volume in terms of both the number and size of transactions with
customers. Product license revenues generated from international
customers decreased to $9.4 million in 2004 from
$11.6 million in 2003. We expect product license revenues
to increase in 2005 and to increase slightly as a percentage of
total revenues.
Product license revenues decreased 44% to $27.2 million in
2003 from $48.8 million in 2002. The decrease was primarily
attributable to a shift in our business focus during 2003 from
infrastructure products to application products particularly in
the e-commerce and self service area. As a result, we
experienced a decrease in our infrastructure products business.
Further, in 2003 we began developing several new application
products that did not generate any revenues in 2003. Product
license revenues generated from international customers
decreased to $11.6 million in 2003 from $15.4 million
in 2002. The decline in product license revenues in 2003 as
compared to 2002 is attributable to reduced sales volume in
terms of both the number and size of transactions with customers.
Product license revenues as a percentage of total revenues for
2004, 2003 and 2002 were 34%, 37% and 48%, respectively. We
expect this percentage to be in the range of 34% to 36% in 2005.
Our resellers generally receive a discount from our list prices.
The extent of any discount is based on negotiated contractual
agreements between us and the reseller. We do not grant our
resellers the right of return, price protection or favorable
terms. We rely upon resellers to market and sell our products to
governmental entities and to customers in geographic regions
where it is not cost effective for us to reach end users
directly. We have approximately 21 active resellers. Reseller
revenues and the percentage of revenues from resellers can vary
significantly from period to period depending on the revenues
from large deals, if any, closed through this channel during any
period. No resellers accounted for more than 10% of our revenues
for the years ended 2004, 2003 or 2002.
34
The table below sets forth product revenues recognized from
reseller arrangements for the years ended 2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Reseller revenues
|
|
$ |
5,223 |
|
|
$ |
6,537 |
|
|
$ |
9,154 |
|
Percent of product license revenues
|
|
|
22 |
% |
|
|
24 |
% |
|
|
19 |
% |
Services revenues increased 1% to $45.9 million in 2004
from $45.3 million in 2003. The increase was attributable
to increased professional services revenues due to improved
utilization within ATG and new services revenues from the
acquisition of Primus, offset by decreased support and
maintenance revenues. We expect services revenues to be higher
in 2005 and to decrease slightly as a percentage of total
revenues.
Support and maintenance revenues were 64% of total services
revenues in 2004 as compared to 69% in 2003. Support and
maintenance revenues, in absolute dollars, were lower during
2004 due to a combination of declining product revenues in prior
periods and some customers electing to decrease or terminate
their support coverage. We expect support and maintenance
revenues to increase in 2005 . This is due to increases from new
maintenance revenues associated with expected increased 2005
product revenues and the addition of Primus active support
and maintenance customer base, offset by a portion of existing
customers terminating their support coverage.
Services revenues decreased 14% to $45.3 million in 2003
from $52.7 million in 2002. The decrease was attributable
to decreased services volume associated with decreased software
license revenues as well as a reduction in our services capacity
as we reduced headcount in professional services.
Support and maintenance revenues were 69% of total services
revenues in 2003 as compared to 61% in 2002. Support revenues,
in absolute dollars, were slightly lower during 2003 due
primarily to declining product revenues, partially offset by
successful maintenance renewal and reinstatement efforts during
2003.
Services revenues as a percentage of total revenues for 2004,
2003 and 2002 were 66%, 63% and 52%, respectively.
|
|
|
Cost of Product License Revenues |
Cost of product license revenues includes salary and related
benefits 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.
Cost of product license revenues increased 4% to
$2.2 million in 2004 from $2.1 million in 2003. This
increase was primarily related to amortization expense of
$441,000 related to developed technology, an intangible asset
recorded as part of the Primus acquisition, offset by decreased
salaries and related costs and decreased royalties paid on third
party software embedded into our products and a non-recurring
impairment recorded in 2003.
Cost of product license revenues decreased 50% to
$2.1 million in 2003 from $4.3 million in 2002. This
decrease was primarily related to lower product revenues and a
decline in amortization of $2.3 million related to the
BroadVision settlement due to the expiration of amortization as
of December 31, 2002. In February 2000, we settled a
lawsuit filed by BroadVision in December 1998, which alleged
that we were infringing on a patent for a method of conducting
electronic commerce. In connection with the settlement
agreement, we agreed to pay BroadVision a total of
$15.0 million for a perpetual license. Of this amount, we
recognized $8.0 million in 1999 in cost of product license
revenues as a settlement for historical use of the technology,
and we recorded the remaining $7.0 million as a perpetual
license to use the patented technology in our products in the
future. We amortized this asset over an estimated remaining
useful life of three years. As a result, cost of product license
revenues includes amortization expense of approximately
$2.3 million in each of 2002 and 2001. The estimated useful
life of the perpetual license ended on December 31, 2002,
and we therefore did not
35
record any cost of product license revenues related to the
BroadVision settlement in 2003. The decline in cost of product
license revenues was partially offset by an increase in royalty
fees of approximately $143,000 payable to original equipment
manufacturers and $169,000 to reduce the carrying value of
third-party software embedded into one of our products based on
expected net future cash flows to be generated from this
software.
In 2003, we recorded a charge in cost of product license of
$169,000 to reduce the carrying value of third-party software
embedded into one of our products, which is a minor component of
our suite of products, to its net realizable value of $210,000
based on managements best estimate of future net cash
flows to be generated from the sale of the software to
customers. We discontinued marketing of this software and ceased
future development work specifically related to this third-party
software.
For 2004, 2003 and 2002, cost of product license revenues as a
percentage of total revenues was 3%, 3% and 4%, respectively. We
anticipate the cost of product license revenues, as a percentage
of total revenues, to be between 3% and 5% in 2005.
|
|
|
Gross Margin on Product License Revenues |
For 2004, 2003 and 2002, gross margin on product license
revenues was 91%, or $21.1 million, 92%, or
$25.0 million, and 91%, or $44.5 million,
respectively. The decrease in gross margin percentage in 2004
compared to 2003 is due to amortization expense of $441,000
related to developed technology from the Primus acquisition. The
increase in gross margin percentage in 2003 compared to 2002 was
attributed to the expiration of amortization related to the
Broadvision perpetual license, which was fully amortized by the
end of 2002.
|
|
|
Cost of Services Revenues |
Cost of services revenues includes salary and other related
costs for our professional services and technical support staff,
as well as third-party contractor expenses. Cost of services
revenues will vary significantly from year to year depending on
the level of professional services staffing, the effective
utilization rates of our professional services staff, the mix of
services performed, including product license technical support
services, the extent to which these services are performed by us
or by third-party contractors and the level of third-party
contractor fees.
Cost of services revenues increased slightly to
$19.9 million in 2004 from $19.8 million in 2003. The
increase was primarily attributable to an increase in salaries
and outside professional services costs, offset by reduced rent
expense, operating costs and infrastructure expenses as a result
of our restructuring efforts. Our use of outside services
increased by $800,000.
Cost of services revenues decreased 41% to $19.8 million in
2003 from $33.7 million in 2002. The decrease was primarily
attributable to a reduction in our professional services
workforce as a result of lower product license and services
revenues. Approximately 60% of the decrease was attributable to
decreased compensation costs due to a reduction in our work
force. The remaining 40% of the decrease was due to a decrease
in operating expenses as a result of our restructuring efforts
and cost-containment initiatives.
For 2004, 2003 and 2002, cost of services revenues as a
percentage of total revenues were 29%, 27% and 33%,
respectively. We anticipate the cost of services revenues to
increase in 2005 and, as a percentage of total revenues, to be
in the 26% to 28% range.
|
|
|
Gross Margin on Services Revenues |
For 2004, 2003 and 2002, gross margin on services revenues was
57%, or $26.0 million, 56%, or $25.5 million and 36%,
or $19.0 million, respectively. Gross margin has remained
relatively flat in 2004 compared with 2003. The increase in
gross margin in 2003 compared with 2002 was attributed primarily
to the increase in support and maintenance revenue as a
percentage of total services revenue, increased utilization
rates and a decrease in our professional services workforce and
operating expenses. We expect gross margin on services revenues
be relatively flat in 2005 and be in the 55% to 60% range.
36
|
|
|
Research and Development Expenses |
Research and development expenses consist primarily of salary
and related costs to support product development. To date, all
software development costs have been expensed as research and
development in the period incurred.
Research and development expenses decreased 9% to
$16.2 million in 2004 from $17.9 million in 2003. The
decrease was primarily attributable to a reduction in our
workforce and resulting decreases in salaries and related
benefits and to a lesser extent, to reduced operating expenses
as a result of our historical restructuring efforts. The
decrease was offset, in part, by an increase in the use of
off-shore developers.
Research and development expenses decreased 19% to
$17.9 million in 2003 from $22.0 million in 2002. The
decrease was primarily attributable to reductions in our
workforce. Approximately 55% of the decrease is related to
workforce-related expenditures. Approximately 10% of the
decrease was due to a reduction in the use of third-party
contractors. The remaining 35% of the decrease was due to a
decrease in operating expenses as a result of our historical
restructuring efforts and cost-containment initiatives.
For 2004, 2003 and 2002, research and development expenses as a
percentage of total revenues were 23%, 25% and 22%,
respectively. We anticipate that research and development
expenses will increase in 2005, but will decrease, as compared
with 2004, as a percentage of total revenues.
|
|
|
Sales and Marketing Expenses |
Sales and marketing expenses consist primarily of salaries,
commissions and other related costs for sales and marketing
personnel, travel, public relations and marketing materials and
events.
Sales and marketing expenses decreased 5% to $29.6 million
in 2004 from $31.2 million in 2003. The decrease is
primarily attributable to a reduction of our sales and marketing
group, a reduction in our spending on marketing programs and a
reduction in commissions from decreased product revenues.
Compensation, commissions and benefits costs decreased by
approximately $632,000, marketing and promotional expenses
decreased by approximately $1.2 million, with the remainder
of the net decrease caused by a decrease in operating expenses
resulting from our restructuring efforts, offset in part, by
amortization of an intangible asset related to customer
relationships from the Primus acquisition of $559,000.
Sales and marketing expenses decreased 28% to $31.2 million
in 2003 from $43.1 million in 2002. The decrease is
primarily attributable to cost saving initiatives that resulted
from a reduction of our sales and marketing group. Approximately
63% of the decrease was related to a decrease in compensation
and benefits costs, and 9% of the decrease was related to a
reduction in our marketing and promotional expenses. The
remaining 28% was due to a decrease in operating expenses as a
result of our restructuring efforts and cost-containment
initiatives.
For 2004, 2003 and 2002, sales and marketing expenses as a
percentage of total revenues were 43%, 43% and 42%,
respectively. We expect that sales and marketing expenses will
increase slightly in absolute dollars in 2005, but will
decrease, as compared with 2004, as a percentage of total
revenues. However sales and marketing expenses can fluctuate as
a percentage of total revenues depending on economic conditions,
program spending, the rate at which new sales personnel become
productive and the level of revenue.
|
|
|
General and Administrative Expenses |
General and administrative expenses consist primarily of
salaries and other related costs for operations and finance
employees and legal and accounting fees.
General and administrative expenses decreased 19% to
$7.7 million in 2004 from $9.5 million in 2003.
Approximately 52% of the decrease was related to a decrease in
our workforce, 28% of the decrease was the result of lower
hiring and training costs with the remainder related to
decreases in rent expense and facilities related charges and
other operating expenses resulting from our restructuring
efforts and cost containment initiatives, offset by an increase
in professional services comprising legal and accounting costs
primarily due to compliance with the internal control
requirements of Section 404 of the Sarbanes-Oxley Act of
2002.
37
General and administrative expenses decreased 14% to
$9.5 million in 2003 from $11.1 million in 2002.
Approximately 84% of the decrease was related to a decrease in
headcount and related expenses, with the remainder related to a
decrease in professional services partially offset by an
increase in recruiting, hiring and training.
For 2004, 2003 and 2002, general and administrative expenses as
a percentage of total revenues were 11%, 13% and 11%,
respectively. We anticipate that general and administrative
expenses will increase slightly in absolute dollars in 2005, but
will decrease, as compared with 2004, as a percentage of total
revenues.
|
|
|
Restructuring (Benefit) Charges |
As of December 31, 2004, we had an accrued restructuring
liability of $11.2 million, of which $6.3 million
related to 2001 restructuring charges, $1.2 million related
to 2002 restructuring charges, $1.4 million related to 2003
restructuring charges and $2.3 million related to 2004
restructuring charges. The long-term portion of the accrued
restructuring liability was $5.1 million.
We believe our restructuring efforts have resulted in a cost
structure that aligns us with current market opportunities and
reflects changes in our product and geographic focus. We expect
to fund the payments for our restructuring accruals by use of
our current cash and marketable securities and from resources
generated from our future operations. We do not believe that the
restructuring actions have impaired our ability to produce
competitive products in a timely fashion. All of our
restructuring actions were completed by December 31, 2004.
We expect the 2004 activities to result in aggregate annual
reductions in cost of revenues, sales and marketing, research
and development and general and administrative expenses of
$7.0 million to $8.0 million, which does not include
any savings from staff reductions and facilities consolidation
actions undertaken in connection with the Primus acquisition
(see Note 6 to Consolidated Financial Statements).
During the years ended 2004, 2003, 2002 and 2001 we recorded net
restructuring charges (benefits) of $3.6 million,
$(10.5) million, $19.0 million and $75.6 million,
respectively, as a result of the global slowdown in information
technology spending. The significant drop in demand in 2001 for
technology oriented products, particularly internet related
technologies, caused management to significantly scale back our
prior growth plans, resulting in a significant reduction in our
workforce and consolidation of our facilities in 2001.
Throughout 2002, the continued softness of demand for technology
products, as well as near term revenue projections, caused
management to further evaluate our marketing, sales and service
resource capabilities as well as our overall general and
administrative cost structure, which resulted in additional
restructuring actions being taken in 2002. These actions
resulted in a further reduction in headcount and consolidation
of additional facilities. In 2003, as we continued to refine our
business strategy and to consider future revenue opportunities,
we took further restructuring actions to reduce costs, including
product development costs, in order to help move us towards
profitability. In 2004, our restructuring activities were
undertaken to align our headcount more closely with
managements revenue projections and changing staff
requirements as a result of strategic product realignments and
our acquisition of Primus Knowledge Solutions, Inc., and to
eliminate facilities that were not needed in order to
efficiently run our operations. The charges referred to above
primarily pertain to the closure and consolidation of excess
facilities, impairment of assets, employee severance benefits,
and the settlement of certain contractual obligations. The 2004
and 2003 charges were recorded in accordance with SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities, SFAS 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits and Staff Accounting Bulletin
(SAB) No. 100 (SAB 100), Restructuring and
Impairment Charges. The 2002 and 2001 charges were recorded
in accordance with Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring,
SFAS 88 and SAB 100.
2001 Actions
Actions taken by us in 2001 included the consolidation and
closure of excess facilities, a worldwide workforce reduction,
the write-off of certain unrealizable assets and settling
certain obligations that had no future benefit. In the second
quarter of 2001, we recorded a restructuring charge of
$44.2 million, and in the
38
fourth quarter of 2001, we recorded a restructuring charge of
$31.4 million. In connection with these actions, we also
recorded an impairment charge in cost of product licenses for
purchased software of $1.4 million. Total restructuring
charges for 2001 totaled $75.6 million.
A summary of the charges and related activity of the
restructuring accruals is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 | |
|
2001 | |
|
|
|
|
|
|
|
|
Adjustments | |
|
Adjustments | |
|
|
|
Accrued | |
|
|
|
|
in Estimates | |
|
in Estimates | |
|
|
|
Restructuring | |
|
|
2001 | |
|
Resulting in | |
|
Resulting in | |
|
Write-Offs and | |
|
Balance as of | |
|
|
Charges | |
|
Additional Charges | |
|
Credits | |
|
Payments | |
|
December 31, 2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
59,418 |
|
|
$ |
9,700 |
|
|
$ |
(8,200 |
) |
|
$ |
16,208 |
|
|
$ |
44,710 |
|
Employee severance, benefits and related costs
|
|
|
7,938 |
|
|
|
|
|
|
|
|
|
|
|
6,748 |
|
|
|
1,190 |
|
Asset impairments
|
|
|
4,205 |
|
|
|
|
|
|
|
|
|
|
|
4,205 |
|
|
|
|
|
Exchangeable share settlement
|
|
|
1,263 |
|
|
|
|
|
|
|
|
|
|
|
1,263 |
|
|
|
|
|
Marketing costs
|
|
|
851 |
|
|
|
|
|
|
|
|
|
|
|
851 |
|
|
|
|
|
Legal and accounting
|
|
|
405 |
|
|
|
|
|
|
|
|
|
|
|
232 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
74,080 |
|
|
$ |
9,700 |
|
|
$ |
(8,200 |
) |
|
$ |
29,507 |
|
|
$ |
46,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2002 | |
|
|
|
|
|
|
Accrued | |
|
Adjustments | |
|
Adjustments | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
in Estimates | |
|
in Estimates | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
Resulting in | |
|
Resulting in | |
|
|
|
Balance as of | |
|
|
December 31, 2001 | |
|
Additional Charges | |
|
Credits | |
|
Payments | |
|
December 31, 2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
44,710 |
|
|
$ |
2,207 |
|
|
$ |
(853 |
) |
|
$ |
9,016 |
|
|
$ |
37,048 |
|
Employee severance, benefits and related costs
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
920 |
|
|
|
270 |
|
Marketing costs
|
|
|
|
|
|
|
|
|
|
|
(536 |
) |
|
|
|
|
|
|
(536 |
) |
Legal and accounting
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
46,073 |
|
|
$ |
2,207 |
|
|
$ |
(1,389 |
) |
|
$ |
10,109 |
|
|
$ |
36,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2003 | |
|
|
|
|
|
|
Accrued | |
|
Adjustments | |
|
Adjustments | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
in Estimates | |
|
in Estimates | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
Resulting in | |
|
Resulting in | |
|
|
|
Balance as of | |
|
|
December 31, 2002 | |
|
Additional Charges | |
|
Credits | |
|
Payments | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
37,048 |
|
|
$ |
2,769 |
|
|
$ |
(11,466 |
) |
|
$ |
18,143 |
|
|
$ |
10,208 |
|
Employee severance, benefits and related costs
|
|
|
270 |
|
|
|
229 |
|
|
|
|
|
|
|
270 |
|
|
|
229 |
|
Marketing costs
|
|
|
(536 |
) |
|
|
|
|
|
|
|
|
|
|
(536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
36,782 |
|
|
$ |
2,998 |
|
|
$ |
(11,466 |
) |
|
$ |
17,877 |
|
|
$ |
10,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2004 | |
|
|
|
|
|
|
Accrued | |
|
Adjustments | |
|
Adjustments | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
in Estimates | |
|
in Estimates | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
Resulting in | |
|
Resulting in | |
|
|
|
Balance as of | |
|
|
December 31, 2003 | |
|
Additional Charges | |
|
Credits | |
|
Payments | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
10,208 |
|
|
$ |
112 |
|
|
$ |
|
|
|
$ |
4,066 |
|
|
$ |
6,254 |
|
Employee severance, benefits and related costs
|
|
|
229 |
|
|
|
|
|
|
|
(172 |
) |
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,437 |
|
|
$ |
112 |
|
|
$ |
(172 |
) |
|
$ |
4,066 |
|
|
$ |
6,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities-Related Costs and Impairments |
During 2001, we recorded facility-related charges of
$59.4 million of which $38.1 million was recorded in
the second quarter and $21.3 million was recorded in the
fourth quarter. The facilities-related charges comprised of
excess rental space for offices worldwide, net of estimates for
vacancy periods and sublease income based on the then-current
real estate market data, and related write-offs of abandoned
leasehold improvements and fixed assets of $7.7 million and
$2.2 million, respectively, which were directly related to
excess office facilities. The estimated sublease income was
$25.9 million and based on rental rates ranging from $18 to
$40 per square foot with estimated vacancy periods prior to
the expected sublease income ranging from 10 to 15 months.
During the fourth quarter of 2001, we recorded an adjustment to
increase the facility-related costs for a change in estimate of
the lease obligations for two leases by $9.7 million as a
result of a market analysis indicating lower sublease rates and
longer vacancy periods due to the continued weakening of the
real estate market. The sublease income was adjusted by
decreasing anticipated sublease rates from the range of $18 to
$40 to the range of $18 to $35 per square foot and
extending the initial vacancy periods by approximately
9 months. In addition, we reduced our lease accruals by
$8.2 million for a lease settlement in consideration of a
buy-out totaling $9.3 million, which is being paid ratably
over 4.5 years.
The leaseholds improvements, which will continue to be in use,
related to the facilities we vacated and are subleasing or
attempting to sublease, were written down to their estimated
fair value of zero because the estimated cash flows to be
generated by sublease income at those locations are not and will
not be sufficient to recover the carrying value of the assets.
Furniture and fixtures were written down to their fair value
based on the expected discounted cash flows they will generate
over their remaining economic life. Because these assets ceased
being used as of the end of the period in which the write-downs
were recorded, the fair value of these assets was estimated to
be zero. The assets were abandoned and disposed of at the time
of the charge.
During 2002, we recorded an adjustment to increase the
facilities-related portion of the 2001 charge by an additional
$2.2 million for changes to sublease and vacancy
assumptions due to the continued weakening in the real estate
market. The sublease income was adjusted by decreasing two
anticipated sublease rates to $18 from $25 per square foot
and extending the initial vacancy periods by 7 months. In
addition, during 2002, we executed sublease agreements for two
locations and recorded a reduction to our lease accruals of
$853,000 due to favorable sublease terms compared to our
original estimates.
During 2003, we settled future lease obligations for five leases
for aggregate payments of $17.1 million, resulting in an
aggregate reduction to our lease accruals relating to our 2001
restructuring of $11.5 million, net of sublease and vacancy
assumptions. We also recorded an additional charge of
$2.8 million for facilities-related costs comprising
$2.3 million for updated management assumptions of probable
settlement outcomes based on the then-current negotiations and
$450,000 for updated sublease assumptions based on current real
estate market conditions extending the vacancy period to
33 months form 12 months.
During 2004, we made adjustments in cost estimates related to
space vacated in 2001. These adjustments resulted in an increase
to the restructuring charge of $112,000.
40
|
|
|
Employee Severance, Benefits and Related Costs and
Exchangeable Shares |
As part of the 2001 restructuring actions, we recorded charges
of $7.9 million for employee severance. We terminated the
employment of 530 employees, or 46% of our workforce, of which
249 of these employees were from sales and marketing, 117 from
services, 101 from general and administrative and 63 from
research and development. No employees remained employed as of
June 30, 2002. In addition, we settled 11,762 exchangeable
shares with a certain employee, who was terminated in connection
with the restructuring action, and recorded $1.3 million as
a charge to restructuring for this settlement. During 2003, we
recorded additional charges of $229,000 for severance related to
a specific employee terminated as part of the 2001 restructuring
action. During 2004, we reached final settlement with an
employee that had been included in the 2001 charge. The
settlement resulted in a credit to the restructuring charge of
$172,000.
The asset impairment charges included the write-off of
approximately $4.0 million of the remaining unamortized
goodwill related to the two professional service organizations
acquisitions completed in 2000. We had closed these operations
and terminated the employees as part of the 2001 restructuring
action, and, as a result, the unamortized goodwill was impaired
and had no future value. In addition, we recorded an impairment
charge of approximately $1.4 million in cost of product
license revenues in the accompanying Consolidated Statements of
Operations related to purchased software to record the software
at our net realizable value of zero due to ATG abandoning a
certain product development strategy. The purchased software had
no future use to us.
|
|
|
Marketing Costs and Legal & Accounting |
We recorded charges of $851,000 to write-off certain prepaid
costs for future marketing services to their fair value of zero
due to changes in our product development strategy. As a result,
the prepaid marketing cost had no future utility to us. During
2002, we unexpectedly was able to recoup $536,000 and recorded a
credit for the amount received. During 2001, we also recorded
$405,000 for legal and accounting services incurred in
connection with the 2001 restructuring action.
The 2001 actions were substantially completed by
February 28, 2002.
2002 Actions
Actions taken by us in 2002 included the consolidation and
closure of excess facilities, a worldwide workforce reduction
and the write-off of certain idle assets. In the fourth quarter
of 2002, we recorded a restructuring charge $18.2 million.
A summary of the charges and related activity of the
restructuring accruals related to the 2002 restructuring actions
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
|
|
|
Restructuring | |
|
|
|
|
|
|
Balance as of | |
|
|
|
|
Write-Offs and | |
|
December 31, | |
|
|
2002 Charges | |
|
Payments | |
|
2002 | |
|
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
14,634 |
|
|
$ |
2,613 |
|
|
$ |
12,021 |
|
Employee severance, benefits and related costs
|
|
|
3,553 |
|
|
|
|
|
|
|
3,553 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
18,187 |
|
|
$ |
2,613 |
|
|
$ |
15,574 |
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
2003 | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
|
|
Adjustments | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
2003 | |
|
in Estimates | |
|
|
|
Balance as of | |
|
|
December 31, | |
|
Adjustments | |
|
Resulting in | |
|
|
|
December 31, | |
|
|
2002 | |
|
in Estimates | |
|
Credits | |
|
Payments | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
12,021 |
|
|
$ |
4,094 |
|
|
$ |
(7,235 |
) |
|
$ |
2,993 |
|
|
$ |
5,887 |
|
Employee severance, benefits and related costs
|
|
|
3,553 |
|
|
|
327 |
|
|
|
(86 |
) |
|
|
3,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
15,574 |
|
|
$ |
4,421 |
|
|
$ |
(7,321 |
) |
|
$ |
6,787 |
|
|
$ |
5,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
2004 | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
|
|
Adjustments | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
2004 |
|
in Estimates | |
|
|
|
Balance as of | |
|
|
December 31, | |
|
Adjustments |
|
Resulting in | |
|
|
|
December 31, | |
|
|
2003 | |
|
in Estimates |
|
Credits | |
|
Payments | |
|
2004 | |
|
|
| |
|
|
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
5,887 |
|
|
$ |
|
|
|
$ |
(242 |
) |
|
$ |
4,490 |
|
|
$ |
1,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,887 |
|
|
$ |
|
|
|
$ |
(242 |
) |
|
$ |
4,490 |
|
|
$ |
1,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities-Related Costs and Impairments |
During 2002, we recorded facilities-related charges of
$14.6 million, which included $12.0 million for
operating lease obligations, net of assumptions for vacancy
periods and sublease income based on the then-current real
estate market data, related to office space that was either idle
or vacated during the first quarter of 2003. This action was
completed by January 31, 2003. This charge also included
write-offs of leasehold improvements and furniture and fixtures
associated with these facilities of $948,000 and $507,000,
respectively, and computer equipment and software of
$1.2 million. The lease charge was for office space we
vacated and intends to sublease. The estimated sublease income
was $4.8 million and based on rental rates ranging from $23
to $35 per square foot with estimated vacancy periods prior
to the expected sublease income ranging from 12 to
21 months.
As a result of this action and the actions taken in 2001, we
wrote-off certain computer equipment and software, aggregating
$1.2 million, and furniture and fixtures, aggregating
$507,000, which were no longer being used due to the reduction
in personnel and office locations. These assets were abandoned
and written down to their fair value based on the expected
discounted cash flows they would generate over their remaining
economic life. Due to the short remaining economic life and
current market conditions for such assets, the fair value of
these assets was estimated to be zero. These assets ceased being
used either as of December 31, 2002 or in the first quarter
of 2003 and were disposed of in the quarter ended March 31,
2003. In addition, we wrote-off leasehold improvements, which
will continue to be in use, related to the facilities we are
attempting to sublease to their fair value of zero because the
estimated cash flows to be generated by sublease income at those
locations will not be sufficient to recover the carrying value
of the assets.
During 2003, we recorded an adjustment of $1.9 million
primarily to increase our lease obligation accrual at two
locations because of changes in the assumptions of the vacancy
period and sublease income. The sublease income was adjusted by
decreasing anticipated sublease rates to $18 from $23 per
square foot for one facility and from $35 to $30 per square
foot at the other location. We also extended the initial vacancy
periods from 12 to 21 months to 24 to 42 months. These
changes resulted in an estimated reduction of sublease income of
$1.8 million. In addition, principally due to a favorable
lease settlement relating to our 2002 restructuring activities,
we reduced our lease obligations by $7.2 million. The
settlement resulted in us terminating a future lease obligation
for an aggregate payment of $3.3 million, which was paid in
January 2004. As a result of this transaction, we recorded
prepaid rent of $2.2 million increasing the accrual
adjustments to $4.1 million.
During 2004, we recorded an adjustment to our estimates of the
2002 actions, resulting in a credit to the restructuring charge
of $242,000.
42
|
|
|
Employee Severance, Benefits and Related Costs |
As part of the 2002 restructuring action, we recorded a charge
of $3.6 million for severance and benefit costs related to
cost reduction actions taken across the worldwide employee base.
The severance and benefit costs were for 125 employees, or 23%
of our workforce, none of whom remained employed at
December 31, 2003. Of the 125 employees, 53 of the
employees were from sales and marketing, 45 from services, 19
from general and administrative and 8 from research and
development. We accrued employee benefits pursuant to ongoing
benefit plans and statutory minimum requirements in foreign
locations. We began the termination process on January 6,
2003 and all employees had been terminated by June 30,
2003. During the second quarter of 2003, we recorded an
adjustment to increase the severance accrual by $327,000 based
on final severance settlements with certain employees at our
foreign locations. During the fourth quarter of 2003, we reduced
certain severance accruals by $86,000, primarily at our foreign
locations, primarily as a result of amounts being settled at
less than the amount recorded due to foreign currency exchange
movements.
2003 Actions
As a result of several reorganization decisions, we undertook
plans to restructure operations in the second and third quarters
of 2003. Actions taken by us included the closure of excess
facilities, a worldwide workforce reduction and the write-off of
certain idle assets.
A summary of the charges and related activity of the
restructuring accruals is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2003 | |
|
|
|
|
|
|
|
|
Three Months | |
|
Adjustments | |
|
Adjustments | |
|
|
|
|
|
|
Three Months | |
|
Ended | |
|
in Estimates | |
|
in Estimates | |
|
|
|
Balance at | |
|
|
Ended June 30, | |
|
September 30 | |
|
Resulting in | |
|
Resulting in | |
|
Write-Offs and | |
|
December 31, | |
|
|
2003 | |
|
2003 | |
|
Charges | |
|
Credits | |
|
Payments | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
1,071 |
|
|
$ |
393 |
|
|
$ |
425 |
|
|
$ |
|
|
|
$ |
275 |
|
|
$ |
1,614 |
|
Employee severance, benefits and related costs
|
|
|
927 |
|
|
|
309 |
|
|
|
69 |
|
|
$ |
(84 |
) |
|
|
1,160 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,998 |
|
|
$ |
702 |
|
|
$ |
494 |
|
|
|
(84 |
) |
|
$ |
1,435 |
|
|
$ |
1,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Adjustments |
|
2004 | |
|
|
|
|
|
|
|
|
in Estimates |
|
Adjustments | |
|
|
|
|
|
|
Balance at | |
|
Resulting in |
|
in Estimates | |
|
|
|
Balance at | |
|
|
December 31, | |
|
Additional |
|
Resulting in | |
|
|
|
December 31, | |
|
|
2003 | |
|
Charges |
|
Credits | |
|
Payments | |
|
2004 | |
|
|
| |
|
|
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
1,614 |
|
|
$ |
|
|
|
$ |
(62 |
) |
|
$ |
179 |
|
|
$ |
1,373 |
|
Employee severance, benefits and related costs
|
|
|
61 |
|
|
|
|
|
|
|
(15 |
) |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,675 |
|
|
$ |
|
|
|
$ |
(77 |
) |
|
$ |
225 |
|
|
$ |
1,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2003 Action
During the quarter ended June 30, 2003, we recorded a
restructuring charge of $2.0 million. We also recorded an
impairment charge in cost of product licenses of $169,000
related to certain purchased software.
|
|
|
Facilities-Related Costs and Impairments |
During the second quarter of 2003, we recorded
facilities-related charges of $1.1 million comprising
$866,000 for an operating lease related to idle office space,
$144,000 of leasehold improvements and fixed assets written down
to their fair value, and $61,000 for various office equipment
leases. The lease charge was for office space we vacated and
intend to sublease. The amount of the operating lease charge was
based on assumptions from current real estate market data for
sublease income rates and vacancy rates at the location.
43
The estimated sublease income was $500,000 and based on a rental
rate of $35 per square foot with an estimated vacancy
period prior to the expected sublease income of 24 months.
In the fourth quarter, as result of updated market conditions,
the estimated sublet rental rate was lowered to $30 per
square foot from $35 per square foot and the vacancy period
was extended to 36 months from 24 months resulting in
an additional charge of $227,000. In accordance with
SFAS 146, we have recorded the present value of the net
lease obligation.
As a result of a reduction of employees and closure of an office
location, we wrote-off computer and office equipment to their
fair value based on the expected discounted cash flows they
would generate over their remaining economic life. Due to the
short remaining economic life and current market conditions for
such assets, the fair value of these assets were estimated to be
zero. These assets ceased being used by June 30, 2003 and
were disposed of by September 30, 2003. In addition, we
wrote off leasehold improvements, which continue to be in use,
related to the facility it is attempting to sublease to their
fair value of zero because the estimated cash flows to be
generated from that location will not be sufficient to recover
the carrying value of the assets.
|
|
|
Employee Severance, Benefits and Related Costs |
As part of the second quarter 2003 restructuring action, we
recorded a charge of $927,000 for severance and benefit costs
related to cost reduction actions taken across the worldwide
employee base. The severance and benefit costs were for 32
employees, or 7.4% of our workforce, consisting of 11 employees
from sales and marketing, 3 from services, 3 from general and
administrative and 15 from research and development. We accrued
employee benefits pursuant to our ongoing benefit plans for
domestic locations and under statutory minimum requirements in
foreign locations. All employees were notified of their
termination as of June 30, 2003. The termination process
was completed during the fourth quarter of 2003. During the
third quarter of 2003, we accrued an additional $69,000 for
employees at our foreign locations based on managements
best estimate of the final payments for severance. During the
fourth quarter of 2003, we reduced certain severance accruals by
$84,000 at our international locations as a result of final
settlements.
We recorded a charge in cost of product license revenues of
$169,000 to reduce the carrying value of third-party software
embedded into one of our products, which was a minor component
of our suite of products, to their net realizable value of
$210,000 based on managements best estimate of future net
cash flows to be generated from the sale of the software to
customers. We discontinued marketing of this software and ceased
future development work specifically related to this third-party
software. However, we did not change our overall product
strategy for the purpose for which the software was acquired.
Third Quarter 2003 Action
During the third quarter of 2003, we recorded a restructuring
charge of approximately $771,000.
|
|
|
Facilities-Related Costs and Impairments |
We recorded facilities-related charges of $393,000 comprising
$227,000 for an operating lease related to idle office space and
$166,000 of leasehold improvements and fixed assets written down
to their fair value. The lease charge was for office space we
vacated and intend to sublease. The amount of the operating
lease charge was based on assumptions from current real estate
market data for sublease income rates and vacancy rates at the
location. The estimated sublease income was $216,000 and based
on a rental rate of $19 per square foot with an estimated
vacancy period prior to the expected sublease income of
12 months. During the fourth quarter, as a result of
updated market conditions, we determined that it is unlikely we
will be able to sublet this space before the lease expires
resulting in an additional charge of $198,000. In accordance
with FAS 146, we have recorded the present value of the net
lease obligation.
As a result of a reduction of employees and the closure of one
office location, we wrote off computer and office equipment to
their fair value based on the expected discounted cash flows
they would generate over their
44
remaining economic life. Due to the short remaining economic
life and current market conditions for such assets, the fair
value of these assets was estimated to be zero. These assets
ceased being used prior to September 30, 2003 and were
disposed of by December 31, 2003. In addition, we
wrote-down leasehold improvements to their fair value of zero
because the estimated cash flows to be generated from that
location will not be sufficient to recover the carrying value of
the assets.
|
|
|
Employee Severance, Benefits and Related Costs |
We recorded a charge of $309,000 for severance and benefit costs
related to cost reduction actions taken across the worldwide
employee base. The severance and benefit costs were for 16
employees, or 4.3% of our workforce, consisting of 7 employees
from sales and marketing, 4 from services and 5 from research
and development. We accrued employee benefits pursuant to our
ongoing benefit plans. All employees were notified of their
termination as of September 30, 2003. The termination
process was completed during the fourth quarter of 2003.
During 2004, we made adjustments in cost estimates related to
space vacated in 2003 and employee severance estimates related
to 2003 actions. These adjustments resulted in a net credit to
the restructuring charge $77,000.
2004 Action
During 2004, we recorded a restructuring charge of
$3.6 million, comprised of new actions of $3.9 million
and net credits resulting from changes in estimates from prior
actions of $379,000.
|
|
|
Facilities-Related Costs and Impairments |
During the fourth quarter of 2004, we recorded
facilities-related charges of $1.5 million primarily
comprised of $800,000 for an operating lease related to idle
office space net of assumptions for vacancy period and sublease
income based on the then current real estate market data,
$200,000 of leasehold improvements written down to their fair
value and $500,000 of prepaid rent related to the abandoned
space, which was recorded as part of prior lease settlements.
The lease charge was for office space we vacated and intend to
sublease. The amount of the operating lease charge was based on
assumptions from current real estate market data for sublease
income rates and vacancy rates at the location. The estimated
sublease income was $350,000 based on a rental rate of
$13 per square foot with an estimated vacancy period prior
to the expected sublease income of 6 months. In accordance
with SFAS 146, we have recorded the present value of the
net lease obligation.
As a result of a reduction of employees and the closure of
office space, we wrote-off $200,000 of leasehold improvements
related to the vacated space to their estimated fair value of
zero because the estimated cash flows to be generated from that
location will not be sufficient to recover the carrying value of
the assets.
|
|
|
Employee Severance, Benefits and Related Costs |
As part of the fourth quarter 2004 restructuring action, we
recorded a charge of $2.5 million for severance and benefit
costs related to cost reduction actions taken across the
worldwide employee base. The severance and benefit costs were
for 56 employees, or 14% of our workforce, consisting of 27
employees from sales and marketing, 8 from services, 6 from
general and administrative and 15 from research and development.
We accrued employee benefits pursuant to our ongoing benefit
plans for domestic locations and under statutory minimum
requirements in foreign locations. All employees were notified
of their termination as of December 31, 2004. The
termination process is expected to be completed during 2005. We
expect to record additional restructuring charges in 2005.
45
A summary of the charges and related activity of the
restructuring accruals is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
2004 | |
|
Write-Offs and | |
|
December 31, | |
|
|
Charges | |
|
Payments | |
|
2004 | |
|
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
1,488 |
|
|
$ |
738 |
|
|
$ |
750 |
|
Employee severance, benefits and related costs
|
|
|
2,461 |
|
|
|
892 |
|
|
|
1,569 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,949 |
|
|
$ |
1,630 |
|
|
$ |
2,319 |
|
|
|
|
|
|
|
|
|
|
|
Abandoned Facilities Obligations
At December 31, 2004, we had lease arrangements related to
seven abandoned facilities. The lease arrangements with respect
to six of these facilities are ongoing, and one is the subject
of a lease settlement arrangement under which we are obligated
to make payments through 2006. All locations for which we have
recorded restructuring charges have been exited, and thus
managements plans with respect to these leases have been
completed. A summary of the remaining facility locations and the
timing of the remaining cash payments is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Locations |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cambridge, MA*
|
|
$ |
2,069 |
|
|
$ |
1,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,104 |
|
Cambridge, MA
|
|
|
137 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228 |
|
Cambridge, MA
|
|
|
531 |
|
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,062 |
|
Waltham, MA
|
|
|
1,466 |
|
|
|
1,466 |
|
|
$ |
1,466 |
|
|
$ |
1,466 |
|
|
$ |
122 |
|
|
|
5,986 |
|
Chicago, IL
|
|
|
652 |
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,087 |
|
San Francisco, CA
|
|
|
111 |
|
|
|
111 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
333 |
|
Reading, UK
|
|
|
570 |
|
|
|
570 |
|
|
|
570 |
|
|
|
570 |
|
|
|
142 |
|
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility obligations, gross
|
|
|
5,536 |
|
|
|
4,239 |
|
|
|
2,147 |
|
|
|
2,036 |
|
|
|
264 |
|
|
|
14,222 |
|
Contracted and assumed sublet income
|
|
|
(700 |
) |
|
|
(1,438 |
) |
|
|
(1,302 |
) |
|
|
(1,256 |
) |
|
|
(150 |
) |
|
|
(4,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash obligations
|
|
$ |
4,836 |
|
|
$ |
2,801 |
|
|
$ |
845 |
|
|
$ |
780 |
|
|
$ |
114 |
|
|
$ |
9,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed sub-lease income
|
|
$ |
74 |
|
|
$ |
320 |
|
|
$ |
315 |
|
|
$ |
270 |
|
|
$ |
67 |
|
|
$ |
1,046 |
|
|
|
* |
represents a location for which we have executed a lease
settlement agreement |
Rental rates vary from $13.00 per square foot to
$35.00 per square foot depending upon local market rates.
Remaining vacancy periods as of December 31, 2004 vary from
6 months to 33 months depending upon rentable square
feet in the local market and recent vacancy histories.
Rental assumptions or sublease start dates may vary considerably
from the above assumptions, which could cause us to take an
additional charge. If the estimated sublease dates were to be
extended by six months, based on our current estimates, we would
potentially have to recognize an additional charge of $269,000
in our statement of operations for restructuring and other
related charges. We have a history of settling lease obligations
favorably as compared with the amounts we have accrued, which
could result in a restructuring benefit in a future period.
|
|
|
Interest and Other Income, Net |
Interest and other income, net decreased 74% to $395,000 in 2004
from $1.5 million in 2003. The decrease was primarily due
to a decrease in foreign currency related gains of $767,000 and
decreased interest income due to lower balances of cash, cash
equivalents and marketable securities. Included in interest and
other income, net in 2004 and 2003 were gains of $18,000 and
$785,000, respectively, from foreign currency exchange
transactions and the re-measurement of foreign currency
denominated assets and liabilities into the functional currency
of the various subsidiaries.
46
Interest and other income, net decreased 34% to
$1.5 million in 2003 from $2.3 million in 2002. The
decrease was primarily due to a decrease in our average cash and
marketable securities balances in 2003 as compared to 2002,
coupled with lower earned interest rates. Included in interest
and other income, net in 2003 were gains of $785,000 from
foreign currency exchange transactions and the re-measurement of
foreign currency denominated assets and liabilities into the
functional currency of various subsidiaries. Foreign currency
related gains in 2003 decreased $165,000 from $950,000 in 2002.
|
|
|
Provision for Income Taxes |
As a result of net operating losses incurred in 2004, 2003 and
2002, and after evaluating our anticipated performance over our
normal planning horizon, we have provided a full valuation
allowance for our net operating loss carryforwards and other net
deferred tax assets. Due to the uncertainty surrounding the
utilization of our net deferred tax assets, net operating losses
and research credits carryforwards, we have recorded a 100%
valuation allowance. During 2004 and 2003, we reversed
previously accrued taxes of $158,000 and $332,000, respectively,
for foreign locations, due to the closure of the statute of
limitations, or as a result of changes in our estimates of
potential amounts due, in those locations.
Liquidity and Capital Resources
Our capital requirements relate primarily to facilities,
employee infrastructure and working capital requirements.
Historically, we have funded our cash requirements primarily
through the public and private sales of equity securities,
commercial credit facilities and operating and capital leases.
In the past, we also funded our cash requirements in part from
operations. At February 28, 2005, we had $16.4 million
in cash and cash equivalents and $8.9 million in marketable
securities.
Cash used in operating activities was $14.1 million in
2004. This consisted primarily of a net loss of
$9.5 million, an increase in accounts receivable of
$7.1 million, a decrease in accrued restructuring of
$6.8 million and a decrease in accrued expenses of
$3.4 million offset by depreciation and amortization of
$3.0 million, non-cash restructuring charges of $700,000,
an increase in deferred revenue of $7.0 million, a decrease
in prepaid expenses and other current assets and deferred rent
of $1.6 million and an increase in accounts payable of
$500,000.
Cash used in operating activities was $26.5 million in
2003. This consisted primarily of net income of
$4.2 million, depreciation and amortization of
$3.9 million, non-cash restructuring charges of
$1.1 million, and a decrease in accounts receivable of
$9.9 million, offset by a decrease in accrued restructuring
of $34.4 million, accrued expenses of $5.9 million,
accounts payable of $1.4 million and an increase in
deferred rent of $3.8 million related to lease settlements.
Our investing activities for 2004 consisted primarily of capital
expenditures of $800,000 and net proceeds from maturities of
marketable securities of $400,000, along with net cash acquired
in the Primus acquisition of $2.7 million. Our investing
activities for 2003 consisted primarily of capital expenditures
of $1.0 million and net proceeds from maturities of
marketable securities of $13.1 million. Assets acquired in
both 2004 and 2003 consisted principally of leasehold
improvements, computer hardware and software. We expect that
capital expenditures will total approximately $2.0 million
in 2005.
Net cash provided by financing activities was $1.0 million
in 2004, consisting of proceeds from stock option exercises and
our employee stock purchase plan of $1.5 million, offset by
principal payments on notes payable of $500,000. Net cash
provided by financing activities was $1.8 million in 2003,
consisting of proceeds from stock option exercises and our
employee stock purchase plan.
47
|
|
|
Accounts Receivable and Days Sales Outstanding |
Our accounts receivable balance and days sales outstanding, or
DSO, as of December 31, 2004, 2003 and 2002 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands (except DSO data)) | |
DSO
|
|
|
129 |
|
|
|
77 |
|
|
|
91 |
|
Revenue
|
|
$ |
69,219 |
|
|
$ |
72,492 |
|
|
$ |
101,493 |
|
Accounts Receivable
|
|
$ |
24,430 |
|
|
$ |
15,364 |
|
|
$ |
25,221 |
|
The increase in our DSO in 2004 compared to 2003 is due to the
impact of acquiring Primus accounts receivable balance in
2004 with only two months of Primus revenues in 2004, a
high volume of support and maintenance renewals at year-end and
product license deals that closed before year end but were not
recognized into revenue during 2004. The increase in DSO is
offset by a significant increase in deferred revenues to
$25.4 million at December 31, 2004 from
$14.9 million at December 31, 2003.
Effective June 13, 2002, we entered into a $15 million
revolving line of credit with Silicon Valley Bank (the Bank)
which provided for borrowings of up to the lesser of
$15 million or 80% of eligible accounts receivable. The
line of credit bore interest at the Banks prime rate.
Effective December 24, 2002 the revolving line of credit
increased to $20 million. The line of credit is secured by
all of our tangible and intangible intellectual and personal
property and is subject to financial covenants including
liquidity coverage and profitability.
Effective November 25, 2003, we modified our existing
working capital facility with our Bank. The line of credit is
secured by all of our tangible and intangible intellectual and
personal property and is subject to financial covenants
including liquidity coverage and profitability. The liquidity
covenant mandates we maintain $25.0 million in unrestricted
cash, which includes cash equivalents and marketable securities,
at the end of each month throughout the duration of the facility.
On December 24, 2004 we entered into the Seventh Loan
Modification Agreement (the Seventh Amendment) with the Bank,
which amended the Amended and Restated Loan and Security
Agreement dated as of June 13, 2002. Under the Seventh
Amendment, the profitability covenant was revised to allow for
quarterly net losses not to exceed $4.5 million for the
fourth quarter of 2004, $2.0 million for the first quarter
of 2005, $500,000 for the second quarter of 2005,
$1.5 million for the third quarter of 2005, and net
profitability of at least $1.00 for the fourth quarter of 2005
and for each quarter thereafter. Our ability to meet these
profitability covenants may be affected by the adoption of
SFAS 123R, which we plan to adopt on July 1, 2005 (see
Recent Accounting Pronouncements). We are required to maintain
unrestricted and unencumbered cash, which includes cash
equivalents and marketable securities, at the end of each month
as follows:
|
|
|
|
|
for the months ending January 31, 2005, February 28,
2005, April 30, 2005, and May 31, 2005, the greater of
(i) $15.0 million or (ii) two times the amount of
outstanding obligations, which includes letters of credit, under
the loan agreement, and |
|
|
|
for the months ending March 31, 2005 and June 30,
2005, and as of the last day of each month thereafter,
$20.0 million. |
To avoid additional bank fees and expenses, we are required to
maintain unrestricted cash, which includes cash equivalents and
marketable securities, at the Bank in an amount equal to two
times the amount of obligations outstanding, which includes
letters of credit that have been issued but not drawn upon,
under the loan agreement. In the event our cash balances at the
Bank fall below this amount, we will be required to pay fees and
expenses to compensate the Bank for lost income. At
December 31, 2004, we were in compliance with all related
financial covenants. In the event that we do not comply with any
of the financial covenants within the line of credit or defaults
on any of its provisions, the Banks significant remedies
include: (1) declaring all obligations immediately due and
payable, which could include requiring us to cash collateralize
our outstanding Letters of Credit (LCs); (2) ceasing
to advance money or extend credit for our
48
benefit; (3) applying to the obligations any balances and
deposits held by us or any amount held by the Bank owing to or
for the credit of our account; and, (4) putting a hold on
any deposit account held as collateral. If the agreement
expires, is not extended, the Bank will require outstanding
LCs at that time to be cash secured on terms acceptable to
the Bank. The revolving line of credit expires on
December 24, 2005.
While there were no outstanding borrowings under the facility at
December 31, 2004, we had issued LCs totaling
$8.6 million, which are supported by this facility. The
LCs have been issued in favor of various landlords to
secure obligations under our facility leases pursuant to leases
expiring from December 2005 through January 2009. The line of
credit bears interest at the Banks prime rate (4.75% at
December 31, 2004). As of December 31, 2004,
approximately $11.4 million was available under the
facility.
We lease our facilities and equipment under operating and
capital leases that expire between 2005 and 2009. The aggregate
minimum annual payments under these leases is
$21.5 million, which includes approximately
$8.8 million payable in 2005. Of the $21.5 million,
$12.8 million is for leases that are included in
restructuring. In accrued restructuring at December 31,
2004, the $12.8 million was reduced to $9.4 million
after taking into consideration estimated operating costs,
estimated sublease income, contracted sublease income, and
vacancy periods. Of the $21.5 million in lease payments,
$20.8 million is for facility leases and $.7 million
is for equipment leases. For additional information relating to
our commercial and contractual commitments, see Notes 3 and
7 to our Consolidated Financial Statements contained in
Item 8 of this Annual Report on Form 10-K.
At December 31, 2004, our contractual cash obligations,
which consist of operating and capital leases, were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than | |
|
|
|
After |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
4-5 Years | |
|
5 Years |
|
|
| |
|
| |
|
| |
|
| |
|
|
Lease Commitments
|
|
$ |
21,495 |
|
|
$ |
8,842 |
|
|
$ |
9,402 |
|
|
$ |
3,251 |
|
|
$ |
|
|
We believe that there will not be any material real estate lease
settlements beyond those completed to date. As such, we believe
that our balance of $30.5 million in cash and cash
equivalents and marketable securities at December 31, 2004,
along with other working capital and cash expected to be
generated by our operations will allow us to meet our liquidity
needs over the next twelve months. However, our actual cash
requirements will depend on many factors, including
particularly, overall economic conditions both domestically and
abroad. We may 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.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123R
Share-Based Payment (SFAS 123R), which replaces
SFAS 123 and supersedes APB Opinion No. 25.
SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the financial statements based on their fair values. The pro
forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement
recognition. SFAS 123R is effective for fiscal periods
beginning after June 15, 2005. Early application of
SFAS 123R is encouraged, but not required. We plan to adopt
SFAS 123R on July 1, 2005.
Public companies are required to adopt the new standard using a
modified prospective method and may elect to restate prior
periods using the modified retrospective method. Under the
modified prospective method, companies are required to record
compensation cost for new and modified awards over the related
vesting period of such awards prospectively and record
compensation cost prospectively for the unvested portion, at
49
the date of adoption, of previously issued and outstanding
awards over the remaining vesting period of such awards. No
change to prior periods presented is permitted under the
modified prospective method. Under the modified retrospective
method, companies record compensation costs for prior periods
retroactively through restatement of such periods using the
exact pro forma amounts disclosed in the companies
footnotes. Also, in the period of adoption and after, companies
record compensation cost based on the modified prospective
method. We have not yet determined the method of adoption we
will use. We have not completed our evaluation of the effects of
adopting SFAS 123R. The adoption of SFAS 123R could
impact our ability to comply with the profitability covenants of
our credit facility with our bank (see Note 3 to the
Consolidated Financial Statements).
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
We maintain an investment portfolio consisting mainly of
investment grade money market funds, corporate obligations and
government obligations with a weighted average maturity of less
than one year. These held-to-maturity 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 primarily due to their short maturity and our intent
to hold the securities to maturity. There have been no
significant changes since December 31, 2004.
The majority of our operations are based in the U.S., and
accordingly, the majority of our transactions are denominated in
U.S. dollars. However, we have foreign-based operations
where transactions are denominated in foreign currencies and are
subject to market risk with respect to fluctuations in the
relative value of currencies. Our primary foreign currency
exposures relate to our short-term intercompany balances with
our foreign subsidiaries. The primary foreign subsidiaries have
functional currencies denominated in the British pound, Euro and
Australian dollar that 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, 2004, 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, 2004, there were no outstanding derivative
instruments. We do not use derivative instruments for trading or
speculative purposes.
50
|
|
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. as of December 31, 2004 and
2003, 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, 2004. 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Art Technology Group, Inc. at
December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Art Technology Group, Inc.s internal
control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 14, 2005
expressed an unqualified opinion thereon.
Boston, Massachusetts
March 14, 2005
51
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands, except share | |
|
|
and per-share information) | |
ASSETS |
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
21,310 |
|
|
$ |
31,934 |
|
|
Marketable securities
|
|
|
5,197 |
|
|
|
9,650 |
|
|
Accounts receivable, net of reserves of $680 ($799 in 2003)
|
|
|
24,430 |
|
|
|
15,364 |
|
|
Prepaid expenses and other current assets
|
|
|
1,694 |
|
|
|
1,949 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
52,631 |
|
|
|
58,897 |
|
Marketable securities, long term
|
|
|
4,001 |
|
|
|
|
|
Property and equipment, net
|
|
|
3,120 |
|
|
|
3,751 |
|
Goodwill
|
|
|
27,458 |
|
|
|
|
|
Intangible assets, net
|
|
|
7,177 |
|
|
|
|
|
Other assets
|
|
|
3,416 |
|
|
|
4,712 |
|
|
|
|
|
|
|
|
|
|
$ |
97,803 |
|
|
$ |
67,360 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
5,186 |
|
|
$ |
1,146 |
|
|
Accrued expenses
|
|
|
13,156 |
|
|
|
12,363 |
|
|
Capital lease obligations, current portion
|
|
|
56 |
|
|
|
|
|
|
Notes payable
|
|
|
595 |
|
|
|
|
|
|
Deferred revenue
|
|
|
25,355 |
|
|
|
14,915 |
|
|
Accrued restructuring, short-term
|
|
|
6,095 |
|
|
|
9,427 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
50,443 |
|
|
|
37,851 |
|
Capital lease obligations, less current portion
|
|
|
112 |
|
|
|
|
|
Accrued restructuring, less current portion
|
|
|
5,063 |
|
|
|
8,572 |
|
Commitments and contingencies (Notes 3 and 7)
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Issued and outstanding 108,141,966 shares and
72,936,165 shares at December 31, 2004 and 2003,
respectively
|
|
|
1,081 |
|
|
|
729 |
|
|
Additional paid-in capital
|
|
|
249,465 |
|
|
|
218,927 |
|
|
Deferred compensation
|
|
|
|
|
|
|
(11 |
) |
|
Accumulated deficit
|
|
|
(205,235 |
) |
|
|
(195,691 |
) |
|
Accumulated other comprehensive loss
|
|
|
(3,126 |
) |
|
|
(3,017 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
42,185 |
|
|
|
20,937 |
|
|
|
|
|
|
|
|
|
|
$ |
97,803 |
|
|
$ |
67,360 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per-share information) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
$ |
23,345 |
|
|
$ |
27,159 |
|
|
$ |
48,796 |
|
|
Services
|
|
|
45,874 |
|
|
|
45,333 |
|
|
|
52,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
69,219 |
|
|
|
72,492 |
|
|
|
101,493 |
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
|
2,206 |
|
|
|
2,118 |
|
|
|
4,278 |
|
|
Services
|
|
|
19,879 |
|
|
|
19,808 |
|
|
|
33,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
22,085 |
|
|
|
21,926 |
|
|
|
38,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
47,134 |
|
|
|
50,566 |
|
|
|
63,470 |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16,209 |
|
|
|
17,928 |
|
|
|
22,046 |
|
|
Sales and marketing
|
|
|
29,602 |
|
|
|
31,174 |
|
|
|
43,122 |
|
|
General and administrative
|
|
|
7,742 |
|
|
|
9,538 |
|
|
|
11,087 |
|
|
Restructuring charge (benefit)
|
|
|
3,570 |
|
|
|
(10,476 |
) |
|
|
19,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
57,123 |
|
|
|
48,164 |
|
|
|
95,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(9,989 |
) |
|
|
2,402 |
|
|
|
(31,790 |
) |
Interest and other income, net
|
|
|
395 |
|
|
|
1,521 |
|
|
|
2,300 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before benefit from income taxes
|
|
|
(9,594 |
) |
|
|
3,923 |
|
|
|
(29,490 |
) |
Benefit from income taxes
|
|
|
(50 |
) |
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(9,544 |
) |
|
$ |
4,178 |
|
|
$ |
(29,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
$ |
(0.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
$ |
(0.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
79,252 |
|
|
|
71,798 |
|
|
|
69,921 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
79,252 |
|
|
|
73,768 |
|
|
|
69,921 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
53
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
| |
|
Additional | |
|
|
|
|
|
Other | |
|
Total | |
|
Comprehensive | |
|
|
Number of | |
|
Par | |
|
Paid-In | |
|
Deferred | |
|
Accumulated | |
|
Comprehensive | |
|
Stockholders | |
|
Income | |
|
|
Shares | |
|
Value | |
|
Capital | |
|
Compensation | |
|
Deficit | |
|
Loss | |
|
Equity | |
|
(Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share and per-share information) | |
Balance, January 1, 2002
|
|
|
68,982,030 |
|
|
$ |
689 |
|
|
$ |
214,597 |
|
|
$ |
(1,558 |
) |
|
$ |
(170,379 |
) |
|
|
(440 |
) |
|
$ |
42,909 |
|
|
|
|
|
Exercise of stock options
|
|
|
343,006 |
|
|
|
3 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
1,616,442 |
|
|
|
17 |
|
|
|
1,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,771 |
|
|
|
|
|
Tudor Settlement (Note 12)
|
|
|
|
|
|
|
|
|
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,050 |
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
942 |
|
|
|
|
|
|
|
|
|
|
|
942 |
|
|
|
|
|
Reversal of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(222 |
) |
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,490 |
) |
|
|
|
|
|
|
(29,490 |
) |
|
$ |
(29,490 |
) |
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,271 |
) |
|
|
(1,271 |
) |
|
|
(1,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(30,761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
70,941,478 |
|
|
|
709 |
|
|
|
217,288 |
|
|
|
(394 |
) |
|
|
(199,869 |
) |
|
|
(1,711 |
) |
|
|
16,023 |
|
|
|
|
|
Exercise of stock options
|
|
|
786,020 |
|
|
|
8 |
|
|
|
744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
752 |
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
1,208,667 |
|
|
|
12 |
|
|
|
1,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,095 |
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
136 |
|
|
|
|
|
Reversal of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(188 |
) |
|
|
247 |
|
|
|
|
|
|
|
(70 |
) |
|
|
(11 |
) |
|
|
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,178 |
|
|
|
|
|
|
|
4,178 |
|
|
$ |
4,178 |
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,236 |
) |
|
|
(1,236 |
) |
|
|
(1,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
72,936,165 |
|
|
$ |
729 |
|
|
$ |
218,927 |
|
|
$ |
(11 |
) |
|
$ |
(195,691 |
) |
|
$ |
(3,017 |
) |
|
$ |
20,937 |
|
|
|
|
|
Exercise of stock options
|
|
|
718,126 |
|
|
|
7 |
|
|
|
525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532 |
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
1,016,419 |
|
|
|
10 |
|
|
|
926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936 |
|
|
|
|
|
Issuances of common stock and valuation of options related to
business combination
|
|
|
33,471,256 |
|
|
|
335 |
|
|
|
29,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,422 |
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,544 |
) |
|
|
|
|
|
|
(9,544 |
) |
|
$ |
(9,544 |
) |
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(109 |
) |
|
|
(109 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(9,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
108,141,966 |
|
|
$ |
1,081 |
|
|
$ |
249,465 |
|
|
$ |
|
|
|
$ |
(205,235 |
) |
|
$ |
(3,126 |
) |
|
$ |
42,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
54
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(9,544 |
) |
|
$ |
4,178 |
|
|
$ |
(29,490 |
) |
|
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
11 |
|
|
|
136 |
|
|
|
942 |
|
|
|
Depreciation and amortization
|
|
|
2,957 |
|
|
|
3,897 |
|
|
|
7,147 |
|
|
|
Non-cash restructuring charge
|
|
|
667 |
|
|
|
1,144 |
|
|
|
2,613 |
|
|
|
Loss on disposal of fixed assets, net
|
|
|
33 |
|
|
|
121 |
|
|
|
198 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(7,147 |
) |
|
|
9,857 |
|
|
|
5,311 |
|
|
|
Unbilled services
|
|
|
|
|
|
|
|
|
|
|
269 |
|
|
|
Prepaid expenses and other current assets
|
|
|
671 |
|
|
|
371 |
|
|
|
3,057 |
|
|
|
Deferred rent
|
|
|
978 |
|
|
|
(3,772 |
) |
|
|
|
|
|
|
Accounts payable
|
|
|
519 |
|
|
|
(1,417 |
) |
|
|
(1,597 |
) |
|
|
Accrued expenses
|
|
|
(3,364 |
) |
|
|
(5,856 |
) |
|
|
(6,499 |
) |
|
|
Deferred revenue
|
|
|
6,957 |
|
|
|
(759 |
) |
|
|
(1,954 |
) |
|
|
Accrued restructuring
|
|
|
(6,841 |
) |
|
|
(34,446 |
) |
|
|
6,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(14,103 |
) |
|
|
(26,546 |
) |
|
|
(13,224 |
) |
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(11,426 |
) |
|
|
(12,138 |
) |
|
|
(41,360 |
) |
|
Maturities of marketable securities
|
|
|
11,878 |
|
|
|
25,217 |
|
|
|
32,688 |
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
16,757 |
|
|
Purchases of property and equipment
|
|
|
(763 |
) |
|
|
(993 |
) |
|
|
(945 |
) |
|
Proceeds from sales of equipment
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
Cash acquired in acquisition, net of acquisition costs paid
|
|
|
2,730 |
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(12 |
) |
|
|
98 |
|
|
|
3,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
2,407 |
|
|
|
12,275 |
|
|
|
10,234 |
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tudor settlement
|
|
|
|
|
|
|
|
|
|
|
1,050 |
|
|
Principal payments on notes payable
|
|
|
(502 |
) |
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
532 |
|
|
|
752 |
|
|
|
112 |
|
|
Proceeds from employee stock purchase plan
|
|
|
936 |
|
|
|
1,095 |
|
|
|
1,771 |
|
|
Payments on capital leases
|
|
|
(7 |
) |
|
|
|
|
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
959 |
|
|
|
1,847 |
|
|
|
933 |
|
Effects of Foreign Exchange Rate Changes On Cash and Cash
Equivalents
|
|
|
113 |
|
|
|
(1,471 |
) |
|
|
(1,607 |
) |
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash and Cash Equivalents
|
|
|
(10,624 |
) |
|
|
(13,895 |
) |
|
|
(3,664 |
) |
Cash and Cash Equivalents, Beginning of Period
|
|
|
31,934 |
|
|
|
45,829 |
|
|
|
49,493 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period
|
|
$ |
21,310 |
|
|
$ |
31,934 |
|
|
$ |
45,829 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$ |
4 |
|
|
$ |
|
|
|
$ |
|
|
|
Cash paid during the period for income taxes
|
|
$ |
38 |
|
|
$ |
140 |
|
|
$ |
447 |
|
Supplemental Disclosure of Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of deferred compensation
|
|
$ |
|
|
|
$ |
247 |
|
|
$ |
222 |
|
|
|
Reversal of provision for income taxes
|
|
$ |
158 |
|
|
$ |
332 |
|
|
$ |
|
|
|
|
Issuance of stock and options related to acquisition of Primus
|
|
$ |
29,422 |
|
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
55
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(1) |
Organization, Business and Summary of Significant Accounting
Policies |
Art Technology Group, Inc. (ATG or the Company) offers an
integrated suite of Internet online marketing, sales and service
applications, as well as related application development,
integration and support services.
ATG delivers software solutions to help consumer-facing
organizations create an interactive experience for their
customers and partners via the Internet and other channels. The
Companys software helps its clients market, sell and
provide self-service opportunities to their customers and
partners, which can enhance clients revenues, reduce their
costs and improve their customers satisfaction. The
Company also offers related services, including support,
education, professional services and application hosting
services.
The accompanying consolidated financial statements reflect the
application of certain significant accounting policies as
described below and elsewhere in the accompanying notes to the
consolidated financial statements.
On November 1, 2004, ATG acquired all of the shares of
outstanding common stock of Primus Knowledge Solutions, Inc.
(Primus). Primus is a provider of software solutions
that enable companies to deliver a superior customer experience
via contact centers, information technology help desks, web
(intranet and internet) self-service and electronic
communication channels (see Note 6).
|
|
(a) |
Principles of Consolidation |
The accompanying consolidated financial statements include the
accounts of ATG and its wholly owned subsidiaries, including
Primus Knowledge Solutions, Inc., which was acquired by ATG on
November 1, 2004. All significant intercompany balances
have been eliminated in consolidation.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ATG recognizes product license revenues from licensing the
rights to use its software to end-users. ATG also generates
service revenues from integrating its software with its
customers operating environments, the sale of maintenance
services and the sale of certain other consulting and
development services. ATG generally has separate agreements with
its customers that govern the terms and conditions of its
software licenses, consulting and support and maintenance
services. These separate agreements, along with ATGs
business practices of selling services separately, provide the
basis for establishing vendor-specific objective evidence of
fair value. This allows ATG to allocate revenue among the
undelivered elements in an arrangement and apply the residual
method under Statement of Position (SOP) No. 97-2,
Software Revenue Recognition(SOP 97-2) and
SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions
(SOP 98-9).
ATG recognizes revenue in accordance with SOP 97-2 and
SOP 98-9. Revenues from software product license agreements
are recognized upon execution of a license agreement and
delivery of the software, provided that the fee is fixed or
determinable and deemed collectible by management. If conditions
for acceptance are required subsequent to delivery, revenues are
recognized upon customer acceptance if such acceptance is not
deemed to be perfunctory. In multiple element arrangements, ATG
uses the residual value
57
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
method in accordance with SOP 97-2 and SOP 98-9.
Revenue earned on software arrangements involving multiple
elements that qualify for separate element accounting treatment
is allocated to each undelivered element using the relative fair
values of those elements based on vendor-specific objective
evidence with the remaining value assigned to the delivered
element, the software license. Typically, the Companys
software licenses do not include significant post-delivery
obligations to be fulfilled by the Company and payments are due
within a three-month period from the date of delivery.
Consequently, product license revenue is generally recognized
when the product is shipped. Revenues from software maintenance
or application hosting agreements are recognized ratably over
the term of the support and maintenance or application hosting
period, which for application hosting and support and
maintenance is typically one year. Customers who have both
purchased ATGs product licenses and have also entered into
an application hosting agreement typically have a contractual
right to cancel the application hosting agreement with a minimum
notice period. ATG enters into reseller arrangements that
typically provide for sublicense fees payable to ATG based upon
a percentage of ATGs list price. Revenues are recognized
under reseller agreements as earned for guaranteed minimum
royalties, or based upon actual sales to the resellers. ATG does
not grant its resellers the right of return or price protection.
Revenues from professional service arrangements are recognized
on either a time-and-materials, proportional performance method
or percentage-of-completion basis as the services are performed,
provided that amounts due from customers are fixed or
determinable and deemed collectible by management. From time to
time the Company enters into fixed price service arrangements.
In those circumstances in which services are essential to the
functionality of the software, the Company applies the
percentage-of-completion method, and in those situations when
only professional services are provided, the Company applies the
proportional performance method. Both of these methods require
that the Company track the effort expended and the effort
expected to complete a project. Amounts collected or billed
prior to satisfying the above revenue recognition criteria are
reflected as deferred revenue. Deferred revenue primarily
consists of advance payments related to support and maintenance,
service agreements and deferred product license revenues.
|
|
(d) |
Cost of Product License Revenues |
Cost of product license revenues includes salary and related
benefits costs of fulfillment, external shipping costs, and
engineering staff dedicated to maintenance of products that are
in general release, the amortization of developed technology
acquired in connection with the Primus acquisition 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.
|
|
(e) |
Cost of Services Revenues |
Cost of services revenues includes salary and related benefits
costs and other costs for the Companys professional
services and technical support staff, as well as third-party
contractor expenses.
|
|
(f) |
Net Income (Loss) Per Share |
Net income (loss) per share is computed in accordance with
Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings 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 (loss) per
share is computed by dividing net income (loss) 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.
58
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted net income (loss) per share for the years ended
December 31, 2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per share amounts) | |
Net income (loss)
|
|
$ |
(9,544 |
) |
|
$ |
4,178 |
|
|
$ |
(29,490 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
basic net income (loss) per share
|
|
|
79,252 |
|
|
|
71,798 |
|
|
|
69,921 |
|
Weighted average common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee common stock options
|
|
|
|
|
|
|
1,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common and common equivalent shares
outstanding used in computing diluted net income (loss) per share
|
|
|
79,252 |
|
|
|
73,768 |
|
|
|
69,921 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
$ |
(0.42 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
$ |
(0.42 |
) |
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents
|
|
|
15,236 |
|
|
|
5,489 |
|
|
|
11,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(g) |
Cash, Cash Equivalents and Marketable Securities |
ATG accounts for investments in marketable securities under
SFAS 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). Under SFAS 115,
investments for which ATG has the positive intent and the
ability to hold to maturity, consisting of cash equivalents and
marketable securities, are reported at amortized cost, which
approximates fair market value. Cash equivalents are highly
liquid investments with maturities at the date of acquisition of
less than 90 days. Marketable securities are investment
grade debt securities with maturities at the date of acquisition
of greater than ninety days. At December 31, 2004 and 2003,
all of ATGs marketable securities were classified as
held-to-maturity. The average maturity of ATGs marketable
securities was approximately 9.6 months and 3.5 months
at December 31, 2004 and 2003, respectively. At
December 31, 2004, the average maturity of the marketable
securities classified as long-term was 13.6 months. All
long-term marketable securities, consisting of corporate debt
securities, mature in 2006. At December 31, 2004 and 2003,
the difference between the amortized cost and market value of
ATGs marketable securities were (losses)/gains of
approximately ($77,000) and $4,000, respectively. At
December 31, 2004 and 2003, ATGs cash, cash
equivalents and marketable securities consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
4,360 |
|
|
$ |
11,767 |
|
|
Money market accounts
|
|
|
13,529 |
|
|
$ |
20,167 |
|
|
U.S. Treasury and U.S. Government Agency securities
|
|
|
2,622 |
|
|
|
|
|
|
Commercial paper
|
|
|
799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$ |
21,310 |
|
|
$ |
31,934 |
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. Government Agency securities
|
|
$ |
648 |
|
|
$ |
1,008 |
|
|
Commercial paper
|
|
|
796 |
|
|
|
|
|
|
Corporate debt securities
|
|
|
7,754 |
|
|
|
8,642 |
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$ |
9,198 |
|
|
$ |
9,650 |
|
|
|
|
|
|
|
|
59
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Included in Other Assets at December 31, 2004 and 2003 is
deferred rent expense related to lease settlements reached with
landlords during 2003. These settlement agreements involved both
reaching a settlement on abandoned space and renegotiating a
reduction in the rate for continuing operating space. In these
cases, a portion of the settlement payment was accounted for as
deferred rent expense. The deferred rent will be amortized over
the remaining lease term, which will have the effect of
maintaining the effective rent expense per square foot on the
existing operating space equal to the effective rent expense per
square foot per the original lease (see Note 10).
|
|
(i) |
Property and Equipment |
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. ATG provides for depreciation and
amortization using the straight-line method.
Property and equipment at December 31, 2004 and 2003,
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
Asset Classification |
|
Estimated Useful Life | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Computer equipment
|
|
|
3 years |
|
|
$ |
10,985 |
|
|
$ |
10,154 |
|
Leasehold improvements
|
|
|
Lesser of useful |
|
|
|
3,711 |
|
|
|
4,407 |
|
|
|
|
life or life of lease |
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
5 years |
|
|
|
2,850 |
|
|
|
2,687 |
|
Computer software
|
|
|
3 years |
|
|
|
4,400 |
|
|
|
4,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,946 |
|
|
|
21,455 |
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
18,826 |
|
|
|
17,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,120 |
|
|
$ |
3,751 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense included in the accompanying statements of
operations was approximately $1.9 million,
$3.9 million and $7.1 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
|
|
(j) |
Research and Development Expenses for Software
Products |
ATG evaluates the establishment of technological feasibility of
its products in accordance with SFAS 86, Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. ATG sells products in a market that is subject to
rapid technological change, new product development and changing
customer needs. Accordingly, ATG has concluded that
technological feasibility is not established until the
development stage of the product is nearly complete. ATG defines
technological feasibility as the completion of a working model.
The time period during which costs could be capitalized, from
the point of reaching technological feasibility until the time
of general product release, is very short, and consequently, the
amounts that could be capitalized are not material to ATGs
financial position or results of operations. Therefore, ATG has
charged all such costs to research and development in the period
incurred.
ATG accounts for income taxes in accordance with the provisions
of SFAS 109, Accounting for Income Taxes. This
statement requires ATG to recognize a current tax asset or
liability for current taxes payable or refundable and to record
deferred tax assets or liabilities for the estimated future tax
effects of temporary differences and carryforwards to the extent
that they are realizable. A valuation allowance is established
60
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 4).
|
|
(l) |
Stock-Based Compensation |
ATG grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the
shares at the date of grant. ATG accounts for stock-based
compensation for employees in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related
interpretations, and follows the disclosure-only alternative
under SFAS 123, Accounting for Stock Based Compensation
(SFAS 123) (see Note 5).
Had compensation expense for ATGs stock plans been
determined consistent with FAS 123, the pro forma net loss
and net loss per share would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per-share information) | |
Net income (loss) as reported
|
|
$ |
(9,544 |
) |
|
$ |
4,178 |
|
|
$ |
(29,490 |
) |
Add: Stock-based employee compensation expense included in
reported net income (loss)
|
|
|
11 |
|
|
|
136 |
|
|
|
942 |
|
Deduct: Total stock based employee compensation expense
determined under fair value based method for all awards
|
|
|
(15,659 |
) |
|
|
(40,184 |
) |
|
|
(39,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(25,192 |
) |
|
$ |
(35,870 |
) |
|
$ |
(68,461 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
$ |
(0.42 |
) |
|
Pro forma
|
|
$ |
(0.32 |
) |
|
$ |
(0.50 |
) |
|
$ |
(0.98 |
) |
|
|
(m) |
Comprehensive Income (Loss) |
SFAS 130, Reporting Comprehensive Income, requires a
full set of general-purpose 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.
Comprehensive income (loss) comprises net (income) loss and
foreign currency translation adjustments.
|
|
(n) |
Fair Value of Financial Instruments |
Financial instruments mainly consist of cash and cash
equivalents, marketable securities and accounts receivable. The
carrying amounts of these instruments approximate their fair
values.
|
|
(o) |
Concentrations of Credit Risk and Bad Debts |
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of marketable
securities and accounts receivable. ATG maintains cash, cash
equivalents and marketable securities with high credit quality
financial institutions. To reduce its concentration of credit
risk with respect to accounts receivable, the Company routinely
assesses the financial strength of its customers through
continuing credit evaluations and generally does not require
collateral. ATG maintains an allowance for potential credit
losses based on historical collections experience and specific
identification, but historically has not experienced any
significant losses related to individual customers or groups of
customers in any particular industry or geographic area.
61
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2004 one customer balance, comprising
product and services invoices, accounted for 11% of accounts
receivable. At December 31, 2003, no customers accounted
for greater than 10% of accounts receivable.
|
|
(p) |
Long-Lived Asset, including Intangible Assets |
In accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
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 comparison of 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 such assets the assets are considered
impaired, and 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. Intangible assets
with determinable lives are amortized over their useful lives,
based upon the pattern in which the expected benefits will be
realized, or on a straight-line basis, whichever is greater. The
Company has recorded impairment charges as discussed in
Note 12.
A portion of the Companys revenues, earnings and cash
flows are exposed to changes in foreign exchange rates. On
September 18, 2002, the Companys Board of Directors
formally approved a foreign currency-hedging program to mitigate
the risk of foreign currency fluctuations on earnings and cash
flows. Under this program, the Company may at times seek to
manage its foreign exchange risk through the use of foreign
currency forward-exchange contracts. ATG may use these contracts
to offset the potential foreign currency impact to earnings and
cash flows from short-term foreign currency assets and
liabilities that arise from operations. SFAS 133,
Accounting for Derivative Instruments and Hedging
Activities, requires that all derivative contracts and
hedging activities be recorded at fair value in the financial
statements. Such contracts are marked to market in each
reporting period with the resulting change in fair value
recognized immediately in Other Income in the Consolidated
Statement of Operations as unrealized gains and losses up
through their maturity, at which time the gains or losses become
realized. These gains and losses offset the changes in fair
value of the asset or liability being hedged. Realized gains and
losses were not material in 2004, 2003 or 2002. As of
December 31, 2004 and 2003, there were no foreign
currency-hedging contracts or other option or derivative
contracts outstanding.
|
|
(r) |
Foreign Currency Translation |
The financial statements of the Companys foreign
subsidiaries are translated in accordance with SFAS 52,
Foreign Currency Translation. The functional currency of
the Companys foreign subsidiaries has been determined to
be the local currency. The Company translates the assets and
liabilities of its foreign subsidiaries at the exchange rates in
effect at year-end. Prior to translation, the Company
re-measures foreign currency denominated assets and liabilities
into the functional currency of the respective Company entity,
resulting in unrealized gains or losses recorded in Interest and
Other Income, Net in the accompanying Consolidated Statement 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 loss included in Stockholders Equity in the
accompanying Consolidated Balance Sheets. During the years ended
December 31, 2004, 2003, and 2002, the Company recorded net
gains of $18,000, $785,000, and $950,000, respectively, from
realized foreign currency transactions gains and the re-measure-
62
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ment of foreign currency denominated assets and liabilities,
which are included in Interest and Other Income, Net in the
accompanying Consolidated Statements of Operations.
The Financial Accounting Standards Board (FASB) issued
SFAS 141, Business Combinations (SFAS 141) and
SFAS 142, Goodwill and Other Intangible Assets
(SFAS 142) in July 2001. SFAS 141 requires all
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. SFAS 142 requires
that goodwill not be amortized but instead tested for impairment
at least annually and more frequently upon the occurrence of
certain events which may indicate that an impairment has
occurred. Intangible assets acquired in conjunction with a
business combination are required to be separately recognized if
the benefit of the intangible asset obtained is through
contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirers intent to do so. The adoption
of SFAS 141 and SFAS 142 effective January 1,
2002 did not have a material impact on the Companys
financial position or results of operations.
The provisions of SFAS No. 142 require that a two-step
impairment test be performed on goodwill. In the first step, the
Company compares the fair value, which is determined by use of a
discounted cash flow technique, of the reporting entity to its
carrying value. If the fair value of the reporting entity
exceeds the carrying value of the net assets of that entity,
goodwill is not impaired and the Company is not required to
perform further testing. If the carrying value of the net assets
assigned to the reporting entity exceeds the fair value of that
entity, then the Company must perform the second step of the
impairment test in order to determine the implied fair value of
the reporting entitys goodwill. If the carrying value of a
reporting entitys goodwill exceeds its implied fair value,
then the Company records an impairment loss equal to the
difference.
Determining the fair value of a reporting entity is judgmental
in nature and involves the use of significant estimates and
assumptions. These estimates and assumptions may include revenue
growth rates and operating margins used to calculate projected
future cash flows, risk-adjusted discount rates, future economic
and market conditions, and determination of appropriate market
comparables. The Company bases its fair value estimates on
assumptions it believes to be reasonable but that are
unpredictable and inherently uncertain. Actual future results
may differ from those estimates. In addition, the Company may
make certain judgments and assumptions in allocating shared
assets and liabilities to determine the carrying values of its
reporting entities.
The Company plans on performing the annual impairment assessment
as of December 1 of each year.
|
|
|
(t) Recent Accounting
Pronouncements |
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123R Share-Based Payment
(SFAS 123R), which replaces SFAS 123 and supersedes
APB Opinion No. 25. SFAS 123R requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their fair values. The pro forma disclosures previously
permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. SFAS 123R is effective
for fiscal periods beginning after June 15, 2005. Early
application of SFAS 123R is encouraged, but not required.
The Company will adopt SFAS 123R on July 1, 2005.
Public companies are required to adopt the new standard using a
modified prospective method and may elect to restate prior
periods using the modified retrospective method. Under the
modified prospective method, companies are required to record
compensation cost for new and modified awards over the related
vesting period of such awards prospectively and record
compensation cost prospectively for the unvested portion, at the
date of adoption, of previously issued and outstanding awards
over the remaining vesting period of such awards. No change to
prior periods presented is permitted under the modified
prospective method. Under the
63
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
modified retrospective method, companies record compensation
costs for prior periods retroactively through restatement of
such periods using the exact pro forma amounts disclosed in the
companies footnotes. Also, in the period of adoption and
after, companies record compensation cost based on the modified
prospective method. The Company has not yet determined the
method of adoption it will use. The Company has not completed
its evaluation of the effects of adopting SFAS 123R. The
adoption of SFAS 123R could impact the Companys
ability to comply with the profitability covenants of its credit
facility with its bank (see Note 3.)
|
|
(2) |
Disclosures About Segments of an Enterprise |
SFAS 131, Disclosures About Segments of an Enterprise
and Related Information (SFAS 131), establishes
standards for reporting information regarding operating segments
in annual financial statements and requires selected information
for those segments to be presented in interim financial reports
issued to stockholders. FAS 131 also establishes standards
for related disclosures about products and services and
geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete
financial information is available for evaluation by the chief
operating decision-maker or decision-making group in making
decisions on how to allocate resources and assess performance.
The Companys chief operating decision-maker, as defined
under SFAS 131, is its executive management team. To date,
the Company has viewed its operations and manages its business
as principally one segment with two product offerings: software
licenses and services. The Company evaluates these product
offerings based on their respective gross margins. As a result,
the financial information disclosed in the consolidated
financial statements represents all of the material financial
information related to the Companys principal operating
segment.
Revenues from sources outside of the United States were
approximately $22.9 million, $25.3 million and
$30.1 million in 2004, 2003 and 2002, respectively.
ATGs revenues from international sources were primarily
generated from customers located in Europe and the Asia/ Pacific
region. All of ATGs product sales for the years ended
December 31, 2004, 2003 and 2002, were delivered from its
headquarters located in the United States.
The following table represents the percentage of total revenues
by geographic region from customers for 2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
United States
|
|
|
67 |
% |
|
|
65 |
% |
|
|
70 |
% |
Europe, Middle East and Africa (excluding UK)
|
|
|
20 |
|
|
|
17 |
|
|
|
6 |
|
United Kingdom (UK)
|
|
|
10 |
|
|
|
13 |
|
|
|
18 |
|
Asia Pacific
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
Other
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
Credit Facility and Notes Payable |
Effective June 13, 2002, ATG entered into a
$15 million revolving line of credit with Silicon Valley
Bank (the Bank) which provided for borrowings of up to the
lesser of $15 million or 80% of eligible accounts
receivable. The line of credit bore interest at the Banks
prime rate. Effective December 24, 2002 the revolving line
of credit increased to $20 million. The line of credit is
secured by all of the Companys tangible and
64
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
intangible intellectual and personal property and is subject to
financial covenants including liquidity coverage and
profitability.
Effective November 25, 2003, ATG modified its existing
working capital facility with the Bank. The line of credit is
secured by all of ATGs tangible and intangible
intellectual and personal property and is subject to financial
covenants including liquidity coverage and profitability. The
liquidity covenant mandates ATG maintain $25.0 million in
cash, which includes cash equivalents and marketable securities,
at the end of each month throughout the duration of the facility.
On December 24, 2004, the Company entered into the Seventh
Loan Modification Agreement (the Seventh Amendment) with the
Bank, which amended the Amended and Restated Loan and Security
Agreement dated as of June 13, 2002. Under the Seventh
Amendment, the profitability covenant was revised to allow for
quarterly net losses not to exceed $4.5 million for the
fourth quarter of 2004, $2.0 million for the first quarter
of 2005, $500,000 for the second quarter of 2005,
$1.5 million for the third quarter of 2005, and to require
net profitability of at least $1.00 for the fourth quarter of
2005 and for each quarter thereafter. The Company is required to
maintain unrestricted and unencumbered cash, which includes cash
equivalents and marketable securities, at the end of each month
as follows:
|
|
|
|
|
For the months ending January 31, 2005, February 28,
2005, April 30, 2005, and May 31, 2005, the greater of
(i) $15.0 million or (ii) two times the amount of
outstanding obligation, which includes letters of credit, under
the loan agreement, and |
|
|
|
For the months ending March 31, 2005 and June 30,
2005, and as of the last day of each month thereafter,
$20 million |
To avoid additional bank fees and expenses, the Company is
required to maintain unrestricted cash, which includes cash
equivalents and marketable securities, at the Bank in an amount
equal to two times the amount of obligations outstanding, which
includes letters of credit that have been issued but not drawn
upon, under the loan agreement. In the event the Companys
cash balances at the Bank falls below this amount, the Company
will be required to pay fees and expenses to compensate the Bank
for lost income. At December 31, 2004, ATG was in
compliance with all related financial covenants. In the event
that ATG does not comply with any of the financial covenants
within the line of credit or defaults on any of its provisions,
the Banks significant remedies include: (1) declaring
all obligations immediately due and payable, which could include
requiring ATG to cash collateralize its outstanding Letters of
Credit (LCs); (2) ceasing to advance money or extend
credit for the Companys benefit; (3) applying to the
obligations any balances and deposits held by the Company or any
amount held by the Bank owing to or for the credit or the
account of ATG; and, (4) putting a hold on any deposit
account held as collateral. If the agreement expires, or is not
extended, the Bank will require outstanding LCs at that
time to be cash secured on terms acceptable to the Bank. The
revolving line of credit expires on December 24, 2005.
While there were no outstanding borrowings under the facility at
December 31, 2004, ATG has issued LCs totaling
$8.6 million, which are supported by this facility. The
LCs have been issued in favor of various landlords to
secure obligations under ATGs facility leases pursuant to
leases expiring from December 2005 through January 2009. The
line of credit bears interest at the Banks prime rate
(4.75% at December 31, 2004). As of December 31, 2004,
approximately $11.4 million was available under the
facility.
In connection with the November 2004 acquisition of Primus, the
Company assumed Primus outstanding obligation of
approximately $297,000 under a credit facility with a bank. The
facility is payable in monthly installments of approximately
$11,000, including interest at the banks prime rate plus
2% (6.75% at December 31, 2004), due June 2008. The
facility is callable on demand. The loan is denominated in
British pounds.
65
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On November 1, 2004, the Company entered into a settlement
agreement with ServiceWare Technologies, Inc. (ServiceWare)
related to their allegation that Primus had infringed certain
patents owned by ServiceWare (see Note 13). As part of the
settlement, the Company was required to make cash payments
totaling $800,000, of which $300,000 was payable in January 2005
and was included in notes payable at December 31, 2004
($500,000 was paid during 2004). The $300,000 payment was made
on schedule in 2005. The settlement amount was accrued for in
the opening balance sheet of Primus (see Note 6).
Income (loss) before benefit for income taxes consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Domestic
|
|
$ |
(7,930 |
) |
|
$ |
13,539 |
|
|
$ |
(22,197 |
) |
Foreign
|
|
|
(1,664 |
) |
|
|
(9,616 |
) |
|
|
(7,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(9,594 |
) |
|
$ |
3,923 |
|
|
$ |
(29,490 |
) |
|
|
|
|
|
|
|
|
|
|
The benefit for income taxes shown in the accompanying
consolidated statements of operations is composed of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
December 31, |
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 |
|
|
| |
|
| |
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(80 |
) |
|
|
(255 |
) |
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(50 |
) |
|
$ |
(255 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The benefit for income taxes differs from the federal statutory
rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Federal tax at statutory rate
|
|
|
(35.0 |
)% |
|
|
35.0 |
% |
|
|
(35.0 |
)% |
State taxes, net of federal benefit
|
|
|
.2 |
|
|
|
11.5 |
|
|
|
(2.4 |
) |
Meals and entertainment
|
|
|
1.8 |
|
|
|
4.3 |
|
|
|
0.3 |
|
Reversal of previously accrued taxes
|
|
|
(1.6 |
) |
|
|
(8.5 |
) |
|
|
|
|
Other
|
|
|
|
|
|
|
0.8 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
Provision before valuation allowance
|
|
|
(34.6 |
) |
|
|
43.1 |
|
|
|
(35.7 |
) |
|
|
|
|
|
|
|
|
|
|
Unbenefitted losses
|
|
|
34.1 |
|
|
|
(49.6 |
) |
|
|
35.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
)% |
|
|
(6.5 |
)% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
66
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The approximate tax effect of each type of temporary difference
and carryforward is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Restructuring
|
|
$ |
5,161 |
|
|
$ |
6,727 |
|
Depreciation and Amortization
|
|
|
1,154 |
|
|
|
1,183 |
|
Reserves and Accruals
|
|
|
1,320 |
|
|
|
351 |
|
Other
|
|
|
1,637 |
|
|
|
12 |
|
Deferred Revenue
|
|
|
3,653 |
|
|
|
109 |
|
US Income tax credits
|
|
|
1,037 |
|
|
|
1,037 |
|
Net operating losses
|
|
|
102,602 |
|
|
|
79,200 |
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
116,564 |
|
|
|
88,619 |
|
Valuation allowance
|
|
|
(113,693 |
) |
|
|
(88,619 |
) |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,871 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(2,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
As of December 31, 2004, ATG had net operating loss
carryforwards of approximately $231.4 million for federal
income tax purposes, $216.0 million for state income tax
purpses and approximately $30.9 million for non-US income
tax purposes. Approximately $90.5 million of the federal
and state income tax net operating loss carryforwards relate to
the exercise of incentive and nonqualified stock options which
are treated as compensation deductions for federal and state
income tax purposes. Approximately $56.0 million of this
amount was tax benefited through additional paid-in capital in
2000. ATG also has available federal tax credit carryforwards of
approximately $1.0 million. If not utilized, these
carryforwards will expire at various dates beginning 2011
through 2024. If substantial changes in ATGs ownership
have occurred or should occur, as defined by Section 382 of
the Internal Revenue Code (the Code), there could be annual
limitations on the amount of carryforwards that can be realized
in future periods. ATG has completed several refinancings since
its inception and has incurred ownership changes, as defined
under the Code, which could have an impact on the Companys
ability to utilize these tax credit and operating loss
carryforwards.
Included in the total net operating loss carryforwards is
approximately $28.5 million acquired as a result of the
acquisition of Primus. This amount includes only those net
operating losses which would not be limited as a result of the
acquisition of Primus triggering an ownership change pursuant to
Section 382 of the Code. If Primus incurred any ownership
changes prior to its acquisition by the Company, limitations
imposed under Section 382 of the Code could have an impact
on the Companys ability to utilize these net operating
loss carryforwards.
As of December 31, 2004 and 2003, the Company recorded a
full valuation allowance against its deferred tax assets due to
the uncertainty surrounding the realizability of these assets.
The valuation allowance increased $25.1 million to
$113.7 million in 2004 from $88.6 million in 2003. The
primary reason for the increase in the valuation allowance is
due to $28.5 million of unbenefitted net operating losses
related to Primus.
The Company has provided for potential amounts due in various
foreign tax jurisdictions. Judgment is required in determining
the Companys worldwide income tax expense provision. In
the ordinary course of global business, there are many
transactions and calculations where the ultimate tax outcome is
uncertain. Some of these uncertainties arise as a consequence of
cost reimbursement arrangements among related
67
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
entities. Although we believe our estimates are reasonable, no
assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in
our historical income tax provisions and accruals. Such
differences could have a material impact on our income tax
provision and operating results in the period in which such
determination is made. During 2004 and 2003, the Company
reversed previously accrued taxes of $158,000 and $332,000,
respectively, for foreign locations, due to the closure of the
statute of limitations, or as a result of changes in its
estimates of potential amounts due, in those locations.
In April 1996, the 1996 Stock Option Plan (the 1996 Plan) was
approved by ATGs Board of Directors and stockholders. The
purpose of the 1996 Plan is to reward employees, officers and
directors and consultants and advisors to ATG who are expected
to contribute to the growth and success of ATG. The 1996 Plan
provides for the award of options to purchase shares of
ATGs common stock. Stock options granted under the 1996
Plan may be either incentive stock options or nonqualified stock
options. In 2004, shareholders approved resolutions to amend and
restate the 1996 Plan to allow for the grant of restricted stock
awards, performance share awards and other forms of equity based
compensation that were not previously provided for in the plan
and to extend the term of the 1996 Plan to December 31,
2013. The 1996 Plan is administered by the Board of Directors,
which 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. While the Board determines
the prices at which options may be exercised under the 1996
Plan, the exercise price of an incentive stock option shall be
at least 100% (110% for incentive stock options granted to a 10%
stockholder) of the fair market value of ATGs common stock
on the date of grant. As of December 31, 2004, there are
25,600,000 shares authorized and 8,089,000 shares
available for future grant under the 1996 Plan.
Additionally, in May 1999, ATG granted 150,000 options outside
ATGs stock option plans to an executive of ATG. As of
December 31, 2004, these options have not been exercised.
|
|
|
1999 Outside Director Stock Option Plan |
The 1999 Outside Director Stock Option Plan (Director Plan) was
adopted by ATGs Board of Directors and approved by
stockholders in May 1999. Under the terms of the Director Plan,
non-employee directors of ATG receive nonqualified options to
purchase shares of ATGs common stock. In 2004,
shareholders approved resolutions to amend and restate the
Director Plan to allow for the grant of restricted stock awards,
performance share awards and other forms of equity based
compensation that were not previously provided for in the plan
and to extend the term of the Director Plan to December 31,
2013. Pursuant to the amendments to the Director Plan, $2,500 of
each outside directors annual retainer will be paid in the
form of restricted stock. A total of 800,000 shares of
common stock have been reserved under the Director Plan.
Under the terms of the Director Plan, each non-employee director
on the effective date of the initial public offering received an
option to purchase 10,000 shares of common stock on
the effective date of the Companys initial public offering
at the public offering price. As of December 31, 2004,
there were 411,000 shares available for future grant under
the Director Plan.
68
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Primus Stock Option Plans |
In connection with the acquisition of Primus Knowledge
Solutions, Inc., the Company assumed certain options, as defined
in the merger agreement, issued under the Primus Solutions 1999
Stock Incentive Compensation Plan (the Primus 1999 Plan) and the
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
assumed by the Company pursuant to the Primus Stock Option Plans
were fully vested upon the closing of the acquisition and
converted to options to acquire ATG common stock. Options
granted under the Primus Stock Option Plans typically vest over
four years and remain exercisable for a period not to exceed ten
years. At December 31, 2004, there were
2,359,000 shares available for grant under the Primus 1999
Plan. No additional options will be granted under the Primus
1999 NESC Plan.
The following table summarizes ATGs option activity under
the Companys 1996 Plan, Director Plan and the Primus Stock
Option Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
Average | |
|
|
Number | |
|
|
|
Exercise | |
|
|
of Shares | |
|
Exercise Price |
|
Price | |
|
|
| |
|
|
|
| |
|
|
(In thousands except per share data) | |
Outstanding, December 31, 2001
|
|
|
13,038 |
|
|
$0.06 $120.00 |
|
$ |
21.25 |
|
|
Granted
|
|
|
4,288 |
|
|
0.90 4.3 |
|
|
1 2.39 |
|
|
Exercised
|
|
|
(343 |
) |
|
0.06 2.1 |
|
|
3 0.33 |
|
|
Canceled
|
|
|
(5,412 |
) |
|
0.06 120.0 |
|
|
0 36.16 |
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2002
|
|
|
11,571 |
|
|
.06 120.00 |
|
|
7.91 |
|
|
Granted
|
|
|
4,807 |
|
|
0.84 2.8 |
|
|
2 1.26 |
|
|
Exercised
|
|
|
(786 |
) |
|
0.06 2.1 |
|
|
3 0.96 |
|
|
Canceled
|
|
|
(4,212 |
) |
|
0.06 120.0 |
|
|
0 9.94 |
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003
|
|
|
11,380 |
|
|
0.06 120.00 |
|
|
4.56 |
|
|
Granted
|
|
|
8,750 |
|
|
0.33 2.02 |
|
|
1.06 |
|
|
Exercised
|
|
|
(718 |
) |
|
0.07 1.3 |
|
|
1 0.74 |
|
|
Canceled
|
|
|
(4,176 |
) |
|
0.70 1.2 |
|
|
0 3.98 |
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
15,236 |
|
|
$0.06 $120.00 |
|
$ |
2.96 |
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2004
|
|
|
8,980 |
|
|
$0.06 $ 94.63 |
|
$ |
4.08 |
|
Exercisable, December 31, 2003
|
|
|
6,018 |
|
|
$ .06 $120.00 |
|
$ |
6.53 |
|
Exercisable, December 31, 2002
|
|
|
5,523 |
|
|
$ .06 $120.00 |
|
$ |
9.78 |
|
69
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information relating to currently
outstanding and exercisable options as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding | |
|
Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
|
|
|
|
|
|
|
Remaining | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Contractual Life | |
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Outstanding | |
|
Exercise | |
|
Number of | |
|
Exercise | |
Range of Exercise Prices |
|
Shares | |
|
(Years) | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except years and per-share information) | |
$ 0.06
|
|
|
2 |
|
|
|
5.1 |
|
|
$ |
0.06 |
|
|
|
2 |
|
|
$ |
0.06 |
|
0.25
|
|
|
184 |
|
|
|
3.4 |
|
|
$ |
0.25 |
|
|
|
183 |
|
|
$ |
0.25 |
|
0.38 0.56
|
|
|
84 |
|
|
|
7.3 |
|
|
$ |
0.53 |
|
|
|
84 |
|
|
$ |
0.53 |
|
0.58 0.86
|
|
|
2,956 |
|
|
|
6.0 |
|
|
$ |
0.66 |
|
|
|
2,842 |
|
|
$ |
0.65 |
|
0.88 1.31
|
|
|
5,069 |
|
|
|
8.4 |
|
|
$ |
1.01 |
|
|
|
1,861 |
|
|
$ |
1.02 |
|
1.33 2.00
|
|
|
3,601 |
|
|
|
8.4 |
|
|
$ |
1.53 |
|
|
|
965 |
|
|
$ |
1.54 |
|
2.01 3.01
|
|
|
832 |
|
|
|
5.3 |
|
|
$ |
2.17 |
|
|
|
760 |
|
|
$ |
2.16 |
|
3.06 4.05
|
|
|
759 |
|
|
|
6.0 |
|
|
$ |
3.89 |
|
|
|
568 |
|
|
$ |
3.89 |
|
4.78 6.19
|
|
|
1,121 |
|
|
|
4.7 |
|
|
$ |
4.96 |
|
|
|
1,090 |
|
|
$ |
4.97 |
|
8.27 12.00
|
|
|
253 |
|
|
|
4.7 |
|
|
$ |
9.46 |
|
|
|
251 |
|
|
$ |
9.44 |
|
13.41 19.03
|
|
|
52 |
|
|
|
3.2 |
|
|
$ |
18.02 |
|
|
|
52 |
|
|
$ |
18.02 |
|
22.94 32.44
|
|
|
20 |
|
|
|
5.6 |
|
|
$ |
26.69 |
|
|
|
20 |
|
|
$ |
26.79 |
|
34.75 51.69
|
|
|
145 |
|
|
|
5.1 |
|
|
$ |
49.09 |
|
|
|
144 |
|
|
$ |
49.12 |
|
52.50 78.00
|
|
|
122 |
|
|
|
4.0 |
|
|
$ |
63.02 |
|
|
|
122 |
|
|
$ |
63.02 |
|
87.00 120.00
|
|
|
36 |
|
|
|
5.6 |
|
|
|
94.63 |
|
|
|
36 |
|
|
|
94.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.06 120.00
|
|
|
15,236 |
|
|
|
7.2 |
|
|
$ |
2.96 |
|
|
|
8,980 |
|
|
$ |
4.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through the fourth quarter of 1998, ATG recorded deferred
compensation of approximately $4.9 million, which
represents the aggregate difference between the exercise price
and the fair market value of the Companys common stock, as
determined for accounting purposes. The deferred compensation is
being recognized as an expense over the vesting period of the
underlying stock options. ATG recorded compensation expense of
$11,000, $136,000 and $942,000 for the years ended
December 31, 2004, 2003 and 2002, respectively, related to
these options.
|
|
|
1999 Employee Stock Purchase Plan |
The 1999 Employee Stock Purchase Plan (the Stock Purchase Plan)
was adopted by ATGs Board of Directors and approved by
stockholders in May 1999. The Stock Purchase Plan, as amended,
authorizes the issuance of up to a total of
5,000,000 shares of ATGs common stock to
participating employees. All ATG employees, including directors
who are employees, are eligible to participate in the Stock
Purchase Plan. Employees who would immediately after the grant
own 5% or more of the total combined voting power or value of
the Companys stock are not eligible to participate. During
each designated quarterly offering period, each eligible
employee may deduct between 1% to 10% of base pay to purchase
shares of the Companys common stock. The purchase price is
85% of the closing market price of ATGs 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.
70
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended 2004, 2003 and 2002, approximately
1,016,000, 1,209,000 and 1,616,000 shares, respectively,
were issued under the 1999 Employee Stock Purchase Plan. As of
December 31, 2004, there were 852,000 shares remaining
unissued in the plan.
As permitted under SFAS 123, the Company has elected to
follow APB 25, and related Interpretations, in accounting
for stock-based awards to employees. Under APB 25, the
Company generally recognizes no compensation expense with
respect to such awards.
Pro forma financial measures regarding net income (loss) and
earnings per share is required by SFAS 123 for stock-based
awards as if the Company had accounted for its stock-based
awards to employees under the fair value method of
SFAS 123. The fair value of the Companys stock-based
awards to employees was estimated using the Black-Scholes option
valuation model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price
volatility. Because the Companys stock-based awards to
employees have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate,
in managements opinion the existing models do not
necessarily provide a reliable single measure of the fair value
of its stock-based awards to employees. The fair value of the
Companys stock-based awards to employees was estimated
assuming no expected dividends and the following weighted
average assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
2.93 |
% |
|
|
2.51 |
% |
|
|
3.43 |
% |
Expected life (years)
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Expected volatility
|
|
|
102 |
% |
|
|
117 |
% |
|
|
125 |
% |
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair values per share generated
by application of the Black-Scholes option valuation model
utilizing the assumptions noted above for the years ended
December 31, 2004, 2003 and 2002 were $0.92, $0.97 and
$1.97, respectively, resulting in total compensation expense of
$4,338,000, $5,061,000 and $8,549,000 for stock-based awards
granted in 2004, 2003 and 2002, respectively. Total compensation
expense is recognized over the vesting period of the underlying
stock options period adjusted for forfeitures. As required by
SFAS 123, the reported net (loss) income and basic and
diluted earnings (loss) per share have been presented to reflect
the impact had the Company been required to account for
stock-based awards using the fair value method under
SFAS 123. For purposes of this disclosure, the estimated
fair value of the options is amortized to expense over the
options vesting periods. See Note 1(l) for the
disclosure of pro forma net loss and net loss per share.
|
|
|
Adoption of Shareholders Rights Plan |
On September 26, 2001, ATGs Board of Directors
adopted a Shareholder Rights Plan (the Shareholder Rights Plan)
pursuant to which preferred stock purchase rights were
distributed to shareholders 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 Company against any takeover attempt that the Board
considers not to be in the best interests of shareholders.
When exercisable, each Right will entitle shareholders to buy
one one-thousandth of a share of Series A Junior
Participating Preferred Stock at an exercise price of
$15 per Right. Subject to certain exceptions, the
71
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rights will be exercisable after a person or group (except for
certain excluded persons) acquires beneficial ownership of 15%
or more of ATGs 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
ATGs outstanding common stock. The Rights will be
redeemable by the Board at any time before a person or group
acquires 15% or more of ATGs outstanding common stock and
under certain other circumstances at a redemption price of
$.001 per Right.
On August 1, 2002, the Company offered all full-time and
part-time employees, other than the officers as defined in
Rule 16a-1(f) of the Securities Exchange Act of 1934, and
directors, the opportunity to participate in a stock option
exchange program. The voluntary program gave employees the
opportunity to exchange options with exercise prices of $15.00
or more per share that were granted under the Amended and
Restated 1996 Stock Option Plan. However, if an employee elected
to cancel any awards, all options granted after January 26,
2002 were also required to be canceled and the employee could
not be granted any additional shares of stock before
March 3, 2003. The new options were exercisable for one
share of ATGs common stock for every three shares of the
Companys common stock issuable upon exercise of a
surrendered option to be granted at least six months and one day
after the old options were cancelled. Options to acquire
approximately 3,000,495 shares were eligible for exchange
under this program.
On August 29, 2002, options to acquire
1,997,819 shares were cancelled under the stock option
exchange program. On March 3, 2003, options to acquire
479,447 shares were granted to employees of ATG in
accordance with the option exchange program, at a grant price of
$0.99 per share. Twenty-five percent of each new option
vested immediately on the date of grant. The remaining
seventy-five percent will vest in three equal installments in
six-month intervals.
|
|
|
Acquisition of Primus Knowledge Solutions, Inc. |
Effective November 1, 2004, the Company acquired all of the
outstanding shares of common stock of Primus Knowledge
Solutions, Inc. (Primus). Primus is a provider of
software solutions that enable companies to deliver a superior
customer experience via contact centers, information technology
help desks, web (intranet and internet) self-service and
electronic communication channels. Primus technology
powers every interaction with knowledge to increase customer
satisfaction and reduce operational costs. The Company
determined that combining the technology, research and
development resources, customer relationships and sales and
marketing capabilities of the two companies would create a
stronger and more competitive company, with the breadth and
scale that the market demands.
In reaching the decision to enter into the merger, which
resulted in the recognition of $27.5 million of goodwill,
there were a number of additional specific reasons why the
Company believed the acquisition would be beneficial. These
potential benefits include the following:
|
|
|
|
|
the belief that the acquisition will better enable the Company
to satisfy demand for a single, integrated application suite
that includes functionality for online commerce and customer
service and covers the full range of customer interactions
including call centers, e-mail and the internet; |
|
|
|
the fact that the two product offerings are largely
complementary, with only limited functional overlap, and utilize
compatible technology; |
|
|
|
the opportunity to increase revenues by combining Primus
customers with ATGs customers, and by cross selling each
companys product set to the customers of the other company; |
72
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
the belief that enlarging the Companys installed base and
adding to its stream of maintenance and support revenue would
benefit its results of operations; |
|
|
|
the opportunity to achieve expense reduction synergies through
elimination of duplicative functions and expenses; and |
|
|
|
the belief that the combined experience, research and
development resources and sales and marketing capabilities of
the two companies will better enable the Company to respond
quickly and effectively to rapid changes in technology, customer
requirements and competitive landscape which characterize our
industry |
The aggregate purchase price was approximately
$31.7 million, which consisted of $28.1 million of the
Companys Common Stock, $1.3 million for the fair
value of fully-vested stock options exchanged in the acquisition
and $2.3 million of transaction costs, which primarily
consisted of fees paid for financial advisory, legal and
accounting services. The Compamy issued approximately
33.5 million shares of ATG Common Stock, the fair value of
which was based upon a five-day average of the closing price two
days before and two days after the terms of the acquisition were
agreed to and publicly announced. The fair value of the stock
options issued to employees was estimated using a Black-Scholes
option valuation model. The fair value of the stock options was
estimated assuming no expected dividends and the following
weighted-average assumptions:
|
|
|
|
|
Expected life (in years)
|
|
|
1.42 |
|
Expected volatility
|
|
|
93.5 |
% |
Risk free interest rate
|
|
|
2.52 |
% |
The consolidated financial statements include the results of
Primus from the date of acquisition. The purchase price has been
allocated based on estimated fair values as of the acquisition
date. The allocation of the purchase price is preliminary and
could be adjusted due to settlement of litigation (see
Note 13) or other matters that were not identified at the
acquisition date. The following represents the allocation of the
purchase price (in thousands):
|
|
|
|
|
|
|
Cash
|
|
$ |
3,989 |
|
Accounts receivable
|
|
|
1,919 |
|
Other current assets
|
|
|
416 |
|
Property, plant & equipment
|
|
|
944 |
|
Goodwill
|
|
|
27,458 |
|
Intangible assets:
|
|
|
|
|
|
Customer relationships (estimated useful life of 4 years)
|
|
|
4,200 |
|
|
Developed product technology (estimated useful life of
5 years)
|
|
|
3,600 |
|
|
Non-competition agreements (estimated useful life of
3 years)
|
|
|
400 |
|
|
|
|
|
|
|
Total intangible assets
|
|
|
8,200 |
|
Other long-term assets
|
|
|
189 |
|
Accounts payable
|
|
|
(2,511 |
) |
Deferred revenue
|
|
|
(3,483 |
) |
Notes payable and current portion of capital lease obligations
|
|
|
(1,146 |
) |
Accrued and other expenses
|
|
|
(4,157 |
) |
Long-term liabilities
|
|
|
(126 |
) |
|
|
|
|
|
Total purchase price
|
|
$ |
31,692 |
|
|
|
|
|
73
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In determining the purchase price allocation, the Company
considered, among other factors, the expected use of the
acquired assets, historical demand and estimates of future
demand of Primus products and services. The fair value of
intangible assets was primarily determined using the income
approach, which is based upon a forecast of the expected future
net cash flows associated with the assets. These net cash flows
were then discounted to a present value by applying a discount
rate of 18% to 19%. The discount rate was determined after
consideration of Primus weighted average cost of capital
and the risk associated with achieving forecast sales related to
the technology and assets acquired from Primus.
The total weighted average amortization period for the
intangible assets is 4.4 years. The intangible assets are
being amortized based upon the pattern in which the economic
benefits of the intangible assets are being utilized, or on a
straight-line basis, if greater. None of the goodwill is
deductible for income tax purposes.
In connection with the Primus acquisition, the Company commenced
integration activities which have resulted in involuntary
terminations and lease and contract terminations. The liability
for involuntary termination benefits is for 49 employees,
primarily in general and administrative and research and
development functions. The Company expects to pay the remaining
balance for involuntary termination benefits and
facilities-related costs in 2005. The following summarizes the
obligations recognized in connection with the Primus acquisition
and activity to date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending | |
Category |
|
Obligation | |
|
Payments | |
|
Balance | |
|
|
| |
|
| |
|
| |
Involuntary termination benefits
|
|
$ |
1,682 |
|
|
$ |
(464 |
) |
|
$ |
1,218 |
|
Facilities-related costs
|
|
|
376 |
|
|
|
(97 |
) |
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,058 |
|
|
$ |
(561 |
) |
|
$ |
1,497 |
|
|
|
|
|
|
|
|
|
|
|
The balance of $1.5 million in costs associated with the
integration activities at December 31, 2004 is included in
accrued expenses.
The following pro forma information assumes the Primus
acquisition occurred as of the beginning of each year presented
after giving effect to certain adjustments, primarily
amortization of intangible assets and reduction of revenues for
the fair market value adjustment to Primus deferred
revenue balance. The pro forma results are not necessarily
indicative of what actually 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, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
Revenue
|
|
$ |
86,135 |
|
|
$ |
95,660 |
|
Net loss
|
|
$ |
(23,105 |
) |
|
$ |
(3,519 |
) |
Net loss per weighted average share, basic and diluted
|
|
$ |
(0.22 |
) |
|
$ |
(0.03 |
) |
In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 142 ceased goodwill amortization but requires
testing for impairment on an annual basis or more frequently if
events or changes in circumstances indicate that the asset might
be impaired. SFAS No. 142 also requires purchased
intangible assets other than goodwill to continue to be
amortized over their estimated useful lives. There was no
impairment to goodwill during fiscal year 2004.
74
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets as of December 31, 2004 consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
Gross Carrying | |
|
Accumulated | |
|
Net Book | |
Category |
|
Amount | |
|
Amortization | |
|
Value | |
|
|
| |
|
| |
|
| |
Purchased technology
|
|
$ |
3,600 |
|
|
$ |
(441 |
) |
|
$ |
3,159 |
|
Customer relationships
|
|
|
4,200 |
|
|
|
(559 |
) |
|
|
3,641 |
|
Non-compete agreements
|
|
|
400 |
|
|
|
(23 |
) |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, excluding goodwill
|
|
$ |
8,200 |
|
|
$ |
(1,023 |
) |
|
$ |
7,177 |
|
|
|
|
|
|
|
|
|
|
|
Amortization expense from intangible assets was
$1.0 million in 2004. As of December 31, 2004,
amortization expense on existing intangibles for the next five
years is as follows (in thousands):
|
|
|
|
|
|
2005
|
|
$ |
2,318 |
|
2006
|
|
|
2,055 |
|
2007
|
|
|
1,740 |
|
2008
|
|
|
848 |
|
2009
|
|
|
216 |
|
|
|
|
|
|
Total
|
|
$ |
7,177 |
|
|
|
|
|
|
|
(7) |
Commitments and Contingencies |
ATG has offices, primarily for sales and support personnel, in
six domestic locations as well as five foreign countries. At
December 31, 2004, ATG had issued $8.6 million of
LCs under its line of credit in favor of various landlords
and equipment leasing companies to secure obligations under its
leases, which expire from 2005 through 2009.
The Company has both operating and capital lease obligations
related to equipment leases. The obligations on these leases,
which are included in the schedule of future minimum payments,
represent the contractual minimum obligations. Certain equipment
leases include purchase options at the end of the lease term.
The future minimum payments of ATGs facility leases and
operating and capital lease obligations as of December 31,
2004, were as follows (in thousands):
|
|
|
|
|
|
Years Ending December 31, |
|
Leases | |
|
|
| |
2005
|
|
$ |
8,842 |
|
2006
|
|
|
6,268 |
|
2007
|
|
|
3,134 |
|
2008
|
|
|
2,625 |
|
2009
|
|
|
626 |
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$ |
21,495 |
|
|
|
|
|
Of the $21.5 million in future minimum lease payments,
$12.8 million is included in the Companys accrued
restructuring charges. The $12.8 million was reduced to
$9.4 million restructuring charge after taking into
consideration estimated sublease income, contracted sublease
income, vacancy periods and operating costs of the various
subleased properties (see Note 12).
75
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rent expense included in the accompanying statements of
operations was approximately $4,418,000, $5,472,000 and
$9,434,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
The Company frequently has agreed to indemnification provisions
in software license agreements with customers and in its real
estate leases in the ordinary course of its business.
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. The software license agreements generally
limit the scope of and remedies for such indemnification
obligations in a variety of industry-standard respects. The
Company believes its internal development processes and other
policies and practices limit its exposure related to the
indemnification provisions of the software license agreements.
In addition, the Company requires its employees to sign a
proprietary information and inventions agreement, which assigns
the rights to its employees development work to the
Company. To date, the Company has not had to reimburse any of
its customers for any losses related to these indemnification
provisions and no material claims are outstanding as of
December 31, 2004.
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. The Company has
never paid any amounts to defend lawsuits or settle claims
related to these indemnification provisions. Accordingly, the
Company believes the estimated fair value of these
indemnification arrangements is minimal.
In connection with a settlement of the patent infringement claim
by BroadVision Inc. (BroadVision), ATG acquired a perpetual,
paid-up license for BroadVisions patented technology. As a
part of the settlement, ATG paid $2.0 million in 2002. ATG
expensed $2.3 million of the settlement as cost of product
revenues in 2002.
|
|
(8) |
Employee Benefit Plan |
Effective January 1, 1997, ATG adopted the Art Technology
Group 401(k) Plan (the 401(k) Plan). All employees, as defined,
are eligible to participate in the 401(k) Plan. The 401(k) Plan
allows eligible employees to make salary-deferred contributions
of up to 15% of their annual compensation, as defined, subject
to certain Internal Revenue Service limitations. ATG may
contribute to the 401(k) Plan at its discretion. For the years
ended December 31, 2004, 2003 and 2002, ATG made a
discretionary contribution to the 401(k) Plan of approximately
$0, $0 and $1,216,000, respectively.
76
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses at December 31, 2004 and 2003 consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Payroll and related costs
|
|
$ |
5,294 |
|
|
$ |
3,894 |
|
Accrued accounts payable
|
|
|
439 |
|
|
|
1,190 |
|
Taxes
|
|
|
4,022 |
|
|
|
3,796 |
|
Other
|
|
|
3,401 |
|
|
|
3,483 |
|
|
|
|
|
|
|
|
|
|
$ |
13,156 |
|
|
$ |
12,363 |
|
|
|
|
|
|
|
|
Other assets at December 31, 2004 and 2003 consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred rent resulting from lease settlements (see Note 12)
|
|
$ |
2,275 |
|
|
$ |
3,772 |
|
Other assets
|
|
|
1,141 |
|
|
|
940 |
|
|
|
|
|
|
|
|
|
|
$ |
3,416 |
|
|
$ |
4,712 |
|
|
|
|
|
|
|
|
|
|
(11) |
Valuation and Qualifying Accounts |
The following is a rollforward of ATGs allowance for
doubtful accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions/ | |
|
|
|
|
|
|
|
|
Charges | |
|
|
|
|
|
|
Beginning of | |
|
to | |
|
Deductions/ | |
|
Balance at End | |
|
|
Period | |
|
Expense | |
|
Write-Offs | |
|
of Period | |
|
|
| |
|
| |
|
| |
|
| |
Year Ended December 31, 2002
|
|
$ |
3,539 |
|
|
$ |
694 |
|
|
$ |
(2,292 |
) |
|
$ |
1,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003
|
|
$ |
1,941 |
|
|
$ |
210 |
|
|
$ |
(1,352 |
) |
|
$ |
799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
$ |
799 |
|
|
$ |
259 |
|
|
$ |
(378 |
) |
|
$ |
680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended 2004, 2003, 2002 and 2001, the Company
recorded net restructuring charges/ (benefits) of
$3.6 million, $(10.5) million, $19.0 million and
$75.6 million, respectively, as a result of the global
slowdown in information technology spending. The significant
drop in demand in 2001 for technology oriented products,
particularly internet related technologies, caused management to
significantly scale back the Companys prior growth plans,
resulting in a significant reduction in the Companys
workforce and consolidation of the Companys facilities in
2001. Throughout 2002, the continued softness of demand for
technology products, as well as near term revenue projections,
caused management to further evaluate the Companys
marketing, sales and service resource capabilities as well as
its overall general and administrative cost structure, which
resulted in additional restructuring actions being taken in
2002. These actions resulted in a further reduction in headcount
and consolidation of additional facilities. In 2003, as the
Company continued to refine its business strategy and to
consider future revenue opportunities, the Company took further
restructuring actions to reduce costs, including product
development costs, in order to help move the Company towards
profitability. In 2004, the Companys restructuring
activities were undertaken to align the Companys headcount
more closely with managements revenue projections and
changing staff requirements as a result of
77
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
strategic product realignments and the Companys
acquisition of Primus Knowledge Solutions, Inc., and to
eliminate facilities that were not needed in order to
efficiently run the Companys operations. The charges
referred to above primarily pertain to the closure and
consolidation of excess facilities, impairment of assets,
employee severance benefits, and the settlement of certain
contractual obligations. The 2004 and 2003 charges were recorded
in accordance with FAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, FAS 88,
Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits (FAS 88) and Staff Accounting
Bulletin (SAB) 100, Restructuring and Impairment
Charges. The 2002 and 2001 charges were recorded in
accordance with Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring), FAS 88 and
SAB 100.
2001 Actions
Actions taken by the Company in 2001 included the consolidation
and closure of excess facilities, a worldwide workforce
reduction, the write-off of certain unrealizable assets and
settling certain obligations that had no future benefit. In the
second quarter of 2001, the Company recorded a restructuring
charge of $44.2 million, and in the fourth quarter of 2001,
the Company recorded a restructuring charge of
$31.4 million. In connection with these actions, the
Company also recorded an impairment charge in cost of product
licenses for purchased software of $1.4 million. Total
restructuring charges for 2001 totaled $75.6 million.
A summary of the charges and related activity of the
restructuring accruals is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 | |
|
2001 | |
|
|
|
|
|
|
|
|
Adjustments | |
|
Adjustments | |
|
|
|
Accrued | |
|
|
|
|
in Estimates | |
|
in Estimates | |
|
|
|
Restructuring | |
|
|
2001 | |
|
Resulting in | |
|
Resulting in | |
|
Write-Offs and | |
|
Balance as of | |
|
|
Charges | |
|
Additional Charges | |
|
Credits | |
|
Payments | |
|
December 31, 2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
59,418 |
|
|
$ |
9,700 |
|
|
$ |
(8,200 |
) |
|
$ |
16,208 |
|
|
$ |
44,710 |
|
Employee severance, benefits and related costs
|
|
|
7,938 |
|
|
|
|
|
|
|
|
|
|
|
6,748 |
|
|
|
1,190 |
|
Asset impairments
|
|
|
4,205 |
|
|
|
|
|
|
|
|
|
|
|
4,205 |
|
|
|
|
|
Exchangeable share settlement
|
|
|
1,263 |
|
|
|
|
|
|
|
|
|
|
|
1,263 |
|
|
|
|
|
Marketing costs
|
|
|
851 |
|
|
|
|
|
|
|
|
|
|
|
851 |
|
|
|
|
|
Legal and accounting
|
|
|
405 |
|
|
|
|
|
|
|
|
|
|
|
232 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
74,080 |
|
|
$ |
9,700 |
|
|
$ |
(8,200 |
) |
|
$ |
29,507 |
|
|
$ |
46,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2002 | |
|
|
|
|
|
|
Accrued | |
|
Adjustments | |
|
Adjustments | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
in Estimates | |
|
in Estimates | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
Resulting in | |
|
Resulting in | |
|
|
|
Balance as of | |
|
|
December 31, 2001 | |
|
Additional Charges | |
|
Credits | |
|
Payments | |
|
December 31, 2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
44,710 |
|
|
$ |
2,207 |
|
|
$ |
(853 |
) |
|
$ |
9,016 |
|
|
$ |
37,048 |
|
Employee severance, benefits and related costs
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
920 |
|
|
|
270 |
|
Marketing costs
|
|
|
|
|
|
|
|
|
|
|
(536 |
) |
|
|
|
|
|
|
(536 |
) |
Legal and accounting
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
46,073 |
|
|
$ |
2,207 |
|
|
$ |
(1,389 |
) |
|
$ |
10,109 |
|
|
$ |
36,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2003 | |
|
|
|
|
|
|
Accrued | |
|
Adjustments | |
|
Adjustments | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
in Estimates | |
|
in Estimates | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
Resulting in | |
|
Resulting in | |
|
|
|
Balance as of | |
|
|
December 31, 2002 | |
|
Additional Charges | |
|
Credits | |
|
Payments | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
37,048 |
|
|
$ |
2,769 |
|
|
$ |
(11,466 |
) |
|
$ |
18,143 |
|
|
$ |
10,208 |
|
Employee severance, benefits and related costs
|
|
|
270 |
|
|
|
229 |
|
|
|
|
|
|
|
270 |
|
|
|
229 |
|
Marketing costs
|
|
|
(536 |
) |
|
|
|
|
|
|
|
|
|
|
(536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
36,782 |
|
|
$ |
2,998 |
|
|
$ |
(11,466 |
) |
|
$ |
17,877 |
|
|
$ |
10,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2004 | |
|
|
|
|
|
|
Accrued | |
|
Adjustments | |
|
Adjustments | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
in Estimates | |
|
in Estimates | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
Resulting in | |
|
Resulting in | |
|
|
|
Balance as of | |
|
|
December 31, 2003 | |
|
Additional Charges | |
|
Credits | |
|
Payments | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
10,208 |
|
|
$ |
112 |
|
|
$ |
|
|
|
$ |
4,066 |
|
|
$ |
6,254 |
|
Employee severance, benefits and related costs
|
|
|
229 |
|
|
|
|
|
|
|
(172 |
) |
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,437 |
|
|
$ |
112 |
|
|
$ |
(172 |
) |
|
$ |
4,066 |
|
|
$ |
6,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities-Related Costs and Impairments |
During 2001, the Company recorded facility-related charges of
$59.4 million of which $38.1 million was recorded in
the second quarter and $21.3 million was recorded in the
fourth quarter. The facilities-related charges comprised of
excess rental space for offices worldwide, net of estimates for
vacancy periods and sublease income based on the then-current
real estate market data, and related write-offs of abandoned
leasehold improvements and fixed assets of $7.7 million and
$2.2 million, respectively, which were directly related to
excess office facilities. The estimated sublease income was
$25.9 million and based on rental rates ranging from $18 to
$40 per square foot with estimated vacancy periods prior to
the expected sublease income ranging from 10 to 15 months.
During the fourth quarter of 2001, the Company recorded an
adjustment to increase the facility-related costs for a change
in estimate of the lease obligations for two leases by
$9.7 million as a result of a market analysis indicating
lower sublease rates and longer vacancy periods due to the
continued weakening of the real estate market. The sublease
income was adjusted by decreasing anticipated sublease rates
from the range of $18 to $40 to the range of $18 to $35 per
square foot and extending the initial vacancy periods by
approximately 9 months. In addition, the Company reduced
its lease accruals by $8.2 million for a lease settlement
in consideration of a buy-out totaling $9.3 million, which
is being paid ratably over 4.5 years.
The leaseholds improvements, which will continue to be in use,
related to the facilities the Company vacated and is subleasing
or attempting to sublease, were written down to their estimated
fair value of zero because the estimated cash flows to be
generated by sublease income at those locations are not and will
not be sufficient to recover the carrying value of the assets.
Furniture and fixtures were written down to their fair value
based on the expected discounted cash flows they will generate
over their remaining economic life. Because these assets ceased
being used as of the end of the period in which the write-downs
were recorded, the fair value of these assets was estimated to
be zero. The assets were abandoned and disposed of at the time
of the charge.
79
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2002, the Company recorded an adjustment to increase the
facilities-related portion of the 2001 charge by an additional
$2.2 million for changes to sublease and vacancy
assumptions due to the continued weakening in the real estate
market. The sublease income was adjusted by decreasing two
anticipated sublease rates to $18 from $25 per square foot
and extending the initial vacancy periods by 7 months. In
addition, during 2002, the Company executed sublease agreements
for two locations and recorded a reduction to its lease accruals
of $853,000 due to favorable sublease terms compared to the
Companys original estimates.
During 2003, the Company settled future lease obligations for
five leases for aggregate payments of $17.1 million,
resulting in an aggregate reduction to its lease accruals
relating to its 2001 restructuring of $11.5 million, net of
sublease and vacancy assumptions. The Company also recorded an
additional charge of $2.8 million for facilities-related
costs comprising $2.3 million for updated management
assumptions of probable settlement outcomes based on the
then-current negotiations and $450,000 for updated sublease
assumptions based on current real estate market conditions
extending the vacancy period to 33 months
form 12 months.
During 2004, the Company made adjustments in cost estimates
related to space vacated in 2001. These adjustments resulted in
an increase to the restructuring charge of $112,000.
|
|
|
Employee Severance, Benefits and Related Costs and
Exchangeable Shares |
As part of the 2001 restructuring actions, the Company recorded
charges of $7.9 million for employee severance. The Company
terminated the employment of 530 employees, or 46% of the
Companys workforce, of which 249 of these employees were
from sales and marketing, 117 from services, 101 from general
and administrative and 63 from research and development. No
employees remained employed as of June 30, 2002. In
addition, the Company settled 11,762 exchangeable shares with a
certain employee, who was terminated in connection with the
restructuring action, and recorded $1.3 million as a charge
to restructuring for this settlement. During 2003, the Company
recorded additional charges of $229,000 for severance related to
a specific employee terminated as part of the 2001 restructuring
action. During 2004, the Company reached final settlement with
an employee that had been included in the 2001 charge. The
settlement resulted in a credit to the restructuring charge of
$172,000.
The asset impairment charges included the write-off of
approximately $4.0 million of the remaining unamortized
goodwill related to the two professional service organizations
acquisitions completed in 2000. The Company had closed these
operations and terminated the employees as part of the 2001
restructuring action, and as a result, the unamortized goodwill
was impaired and had no future value. In addition, the Company
recorded an impairment charge of approximately $1.4 million
in cost of product license revenues in the accompanying
Consolidated Statements of Operations related to purchased
software to record the software at its net realizable value of
zero due to ATG abandoning a certain product development
strategy. The purchased software had no future use to the
Company.
|
|
|
Marketing Costs, Legal and Accounting |
The Company recorded charges of $851,000 to write-off certain
prepaid costs for future marketing services to their fair value
of zero due to changes in the Companys product development
strategy. As a result, the prepaid marketing cost had no future
utility to the Company. During 2002, the Company unexpectedly
was able to recoup $536,000 and recorded a credit for the amount
received. During 2001, the Company also recorded $405,000 for
legal and accounting services incurred in connection with the
2001 restructuring action.
The 2001 actions were substantially completed by
February 28, 2002.
80
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2002 Actions
Actions taken by the Company in 2002 included the consolidation
and closure of excess facilities, a worldwide workforce
reduction and the write-off of certain idle assets. In the
fourth quarter of 2002, the Company recorded a restructuring
charge $18.2 million.
A summary of the charges and related activity of the
restructuring accruals related to the 2002 restructuring actions
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
|
|
|
Restructuring | |
|
|
|
|
|
|
Balance as of | |
|
|
|
|
Write-Offs and | |
|
December 31, | |
|
|
2002 Charges | |
|
Payments | |
|
2002 | |
|
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
14,634 |
|
|
$ |
2,613 |
|
|
$ |
12,021 |
|
Employee severance, benefits and related costs
|
|
|
3,553 |
|
|
|
|
|
|
|
3,553 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
18,187 |
|
|
$ |
2,613 |
|
|
$ |
15,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
2003 | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
|
|
Adjustments | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
2003 | |
|
in Estimates | |
|
|
|
Balance as of | |
|
|
December 31, | |
|
Adjustments | |
|
Resulting in | |
|
|
|
December 31, | |
|
|
2002 | |
|
in Estimates | |
|
Credits | |
|
Payments | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
12,021 |
|
|
$ |
4,094 |
|
|
$ |
(7,235 |
) |
|
$ |
2,993 |
|
|
$ |
5,887 |
|
Employee severance, benefits and related costs
|
|
|
3,553 |
|
|
|
327 |
|
|
|
(86 |
) |
|
|
3,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
15,574 |
|
|
$ |
4,421 |
|
|
$ |
(7,321 |
) |
|
$ |
6,787 |
|
|
$ |
5,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
2004 | |
|
|
|
Accrued | |
|
|
Restructuring | |
|
|
|
Adjustments | |
|
|
|
Restructuring | |
|
|
Balance as of | |
|
2004 |
|
in Estimates | |
|
|
|
Balance as of | |
|
|
December 31, | |
|
Adjustments |
|
Resulting in | |
|
|
|
December 31, | |
|
|
2003 | |
|
in Estimates |
|
Credits | |
|
Payments | |
|
2004 | |
|
|
| |
|
|
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
5,887 |
|
|
$ |
|
|
|
$ |
(242 |
) |
|
$ |
4,490 |
|
|
$ |
1,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,887 |
|
|
$ |
|
|
|
$ |
(242 |
) |
|
$ |
4,490 |
|
|
$ |
1,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities-Related Costs and Impairments |
During 2002, the Company recorded facilities-related charges of
$14.6 million, which included $12.0 million for
operating lease obligations, net of assumptions for vacancy
periods and sublease income based on the then-current real
estate market data, related to office space that was either idle
or vacated during the first quarter of 2003. This action was
completed by January 31, 2003. This charge also
included write-offs of leasehold improvements and furniture and
fixtures associated with these facilities of $948,000 and
$507,000, respectively, and computer equipment and software of
$1.2 million. The lease charge was for office space the
Company vacated and intends to sublease. The estimated sublease
income was $4.8 million and based on rental rates ranging
from $23 to $35 per square foot with estimated vacancy
periods prior to the expected sublease income ranging from 12 to
21 months.
As a result of this action and the actions taken in 2001, the
Company wrote-off certain computer equipment and software,
aggregating $1.2 million, and furniture and fixtures,
aggregating $507,000, which were no longer being used due to the
reduction in personnel and office locations. These assets were
abandoned
81
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and written down to their fair value based on the expected
discounted cash flows they would generate over their remaining
economic life. Due to the short remaining economic life and
current market conditions for such assets, the fair value of
these assets was estimated to be zero. These assets ceased being
used either as of December 31, 2002 or in the first quarter
of 2003 and were disposed of in the quarter ended March 31,
2003. In addition, the Company wrote-off leasehold improvements,
which will continue to be in use, related to the facilities it
is attempting to sublease to their fair value of zero because
the estimated cash flows to be generated by sublease income at
those locations will not be sufficient to recover the carrying
value of the assets.
During 2003, the Company recorded an adjustment of
$1.9 million primarily to increase its lease obligation
accrual at two locations because of changes in the assumptions
of the vacancy period and sublease income. The sublease income
was adjusted by decreasing anticipated sublease rates to $18
from $23 per square foot for one facility and from $35 to
$30 per square foot at the other location. The Company also
extended the initial vacancy periods from 12 to 21 months
to 24 to 42 months. These changes resulted in an estimated
reduction of sublease income of $1.8 million. In addition,
principally due to a favorable lease settlement relating to its
2002 restructuring activities, the Company reduced its lease
obligations by $7.2 million. The settlement resulted in the
Company terminating a future lease obligation for an aggregate
payment of $3.3 million, which was paid in January 2004. As
a result of this transaction, the Company recorded prepaid rent
of $2.2 million increasing the accrual adjustments to
$4.1 million.
During 2004, the Company recorded an adjustment to its estimates
of the 2002 actions, resulting in a credit to the restructuring
charge of $242,000.
|
|
|
Employee Severance, Benefits and Related Costs |
As part of the 2002 restructuring action, the Company recorded a
charge of $3.6 million for severance and benefit costs
related to cost reduction actions taken across the worldwide
employee base. The severance and benefit costs were for 125
employees, or 23% of the Companys workforce, none of whom
remained employed at December 31, 2003. Of the 125
employees, 53 of the employees were from sales and marketing, 45
from services, 19 from general and administrative and 8 from
research and development. The Company accrued employee benefits
pursuant to ongoing benefits plans and statutory minimum
requirements in foreign locations. The Company began the
termination process on January 6, 2003 and all employees
had been terminated by June 30, 2003. During the second
quarter of 2003, the Company recorded an adjustment to increase
the severance accrual by $327,000 based on final severance
settlements with certain employees at its foreign locations.
During the fourth quarter of 2003, the Company reduced certain
severance accruals by $86,000, primarily at its foreign
locations, primarily as a result of amounts being settled at
less than the amount recorded due to foreign currency exchange
movements.
2003 Actions
As a result of several reorganization decisions, the Company
undertook plans to restructure operations in the second and
third quarters of 2003. Actions taken by the Company included
the closure of excess facilities, a worldwide workforce
reduction and the write-off of certain idle assets.
82
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the charges and related activity of the
restructuring accruals is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2003 | |
|
|
|
|
|
|
|
|
|
|
Adjustments | |
|
Adjustments | |
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
in Estimates | |
|
in Estimates | |
|
|
|
Balance at | |
|
|
Ended June 30, | |
|
Ended September 30 | |
|
Resulting in | |
|
Resulting in | |
|
Write-Offs | |
|
December 31, | |
|
|
2003 | |
|
2003 | |
|
Charges | |
|
Credits | |
|
and Payments | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
1,071 |
|
|
$ |
393 |
|
|
$ |
425 |
|
|
$ |
|
|
|
$ |
275 |
|
|
$ |
1,614 |
|
Employee severance, benefits and related costs
|
|
|
927 |
|
|
|
309 |
|
|
|
69 |
|
|
|
(84 |
) |
|
|
1,160 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,998 |
|
|
$ |
702 |
|
|
$ |
494 |
|
|
$ |
(84 |
) |
|
$ |
1,435 |
|
|
$ |
1,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Adjustments |
|
2004 | |
|
|
|
|
|
|
|
|
in Estimates |
|
Adjustments | |
|
|
|
|
|
|
Balance at | |
|
Resulting in |
|
in Estimates | |
|
|
|
Balance at | |
|
|
December 31, | |
|
Additional |
|
Resulting in | |
|
|
|
December 31, | |
|
|
2003 | |
|
Charges |
|
Credits | |
|
Payments | |
|
2004 | |
|
|
| |
|
|
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
1,614 |
|
|
|
|
|
|
$ |
(62 |
) |
|
$ |
179 |
|
|
$ |
1,373 |
|
Employee severance, benefits and related costs
|
|
|
61 |
|
|
|
|
|
|
|
(15 |
) |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,675 |
|
|
$ |
|
|
|
$ |
(77 |
) |
|
$ |
225 |
|
|
$ |
1,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2003 Action
During the quarter ended June 30, 2003, the Company
recorded a restructuring charge of $2.0 million. The
Company also recorded an impairment charge in cost of product
licenses of $169,000 related to certain purchased software.
|
|
|
Facilities-Related Costs and Impairments |
During the second quarter of 2003, the Company recorded
facilities-related charges of $1.1 million comprising
$866,000 for an operating lease related to idle office space,
$144,000 of leasehold improvements and fixed assets written down
to their fair value, and $61,000 for various office equipment
leases. The lease charge was for office space the Company
vacated and intends to sublease. The amount of the operating
lease charge was based on assumptions from current real estate
market data for sublease income rates and vacancy rates at the
location. The estimated sublease income was $500,000 and based
on a rental rate of $35 per square foot with an estimated
vacancy period prior to the expected sublease income of
24 months. In the fourth quarter, as result of updated
market conditions, the estimated sublet rental rate was lowered
to $30 per square foot from $35 per square foot and
the vacancy period was extended to 36 months from
24 months resulting in an additional charge of $227,000. In
accordance with SFAS 146, the Company has recorded the
present value of the net lease obligation.
As a result of a reduction of employees and closure of an office
location, the Company wrote-off computer and office equipment to
their fair value based on the expected discounted cash flows
they would generate over their remaining economic life. Due to
the short remaining economic life and current market conditions
for such assets, the fair value of these assets were estimated
to be zero. These assets ceased being used by June 30, 2003
and were disposed of by September 30, 2003. In addition,
the Company wrote off leasehold improvements, which continue to
be in use, related to the facility it is attempting to sublease
to their fair value
83
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of zero because the estimated cash flows to be generated from
that location will not be sufficient to recover the carrying
value of the assets.
|
|
|
Employee Severance, Benefits and Related Costs |
As part of the second quarter 2003 restructuring action, the
Company recorded a charge of $927,000 for severance and benefit
costs related to cost reduction actions taken across the
worldwide employee base. The severance and benefit costs were
for 32 employees, or 7.4% of the Companys workforce,
consisting of 11 employees from sales and marketing, 3 from
services, 3 from general and administrative and 15 from research
and development. The Company accrued employee benefits pursuant
to its ongoing benefit plans for domestic locations and under
statutory minimum requirements in foreign locations. All
employees were notified of their termination as of June 30,
2003. The termination process was completed during the fourth
quarter of 2003. During the third quarter of 2003, the Company
accrued an additional $69,000 for employees at its foreign
locations based on managements best estimate of the final
payments for severance. During the fourth quarter of 2003, the
Company reduced certain severance accruals by $84,000 at its
international locations as a result of final settlements.
The Company recorded a charge in cost of product license
revenues of $169,000 to reduce the carrying value of third-party
software embedded into one of its products, which was a minor
component of our suite of products, to its net realizable value
of $210,000 based on managements best estimate of future
net cash flows to be generated from the sale of the software to
customers. The Company discontinued marketing of this software
and ceased future development work specifically related to this
third-party software. However, the Company did not change its
overall product strategy for the purpose for which the software
was acquired.
Third Quarter 2003 Action
During the third quarter of 2003, the Company recorded a
restructuring charge of approximately $771,000.
|
|
|
Facilities-Related Costs and Impairments |
The Company recorded facilities-related charges of $393,000
comprising $227,000 for an operating lease related to idle
office space and $166,000 of leasehold improvements and fixed
assets written down to their fair value. The lease charge was
for office space the Company vacated and intends to sublease.
The amount of the operating lease charge was based on
assumptions from current real estate market data for sublease
income rates and vacancy rates at the location. The estimated
sublease income was $216,000 and based on a rental rate of
$19 per square foot with an estimated vacancy period prior
to the expected sublease income of 12 months. During the
fourth quarter, as a result of updated market conditions, the
Company determined that it is unlikely it will sublet this space
before its lease expires resulting in an additional charge of
$198,000. In accordance with SFAS 146, the Company has
recorded the present value of the net lease obligation.
As a result of a reduction of employees and the closure of one
office location, the Company wrote off computer and office
equipment to their fair value based on the expected discounted
cash flows they would generate over their remaining economic
life. Due to the short remaining economic life and current
market conditions for such assets, the fair value of these
assets was estimated to be zero. These assets ceased being used
prior to September 30, 2003 and were disposed of by
December 31, 2003. In addition, the Company wrote-down
leasehold improvements to their fair value of zero because the
estimated cash flows to be generated from that location will not
be sufficient to recover the carrying value of the assets.
84
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Employee Severance, Benefits and Related Costs |
The Company recorded a charge of $309,000 for severance and
benefit costs related to cost reduction actions taken across the
worldwide employee base. The severance and benefit costs were
for 16 employees, or 4.3% of the Companys workforce,
consisting of 7 employees from sales and marketing, 4 from
services and 5 from research and development. The Company
accrued employee benefits pursuant to its ongoing benefit plans.
All employees were notified of their termination as of
September 30, 2003. The termination process was completed
during the fourth quarter of 2003.
During 2004, the Company made adjustments in cost estimates
related to space vacated in 2003 and employee severance
estimates related to 2003 actions. These adjustments resulted in
a net credit to the restructuring charge $77,000.
2004 Action
During 2004, the Company recorded a restructuring charge of
$3.6 million, comprised of new actions of $3.9 million
and net credits resulting from changes in estimates from prior
actions of $379,000.
|
|
|
Facilities-Related Costs and Impairments |
During the fourth quarter of 2004, the Company recorded
facilities-related charges of $1.5 million primarily
comprised of $800,000 for an operating lease related to idle
office space net of assumptions for vacancy period and sublease
income based on the then current real estate market data,
$200,000 of leasehold improvements written down to their fair
value and $500,000 of prepaid rent related to the abandoned
space, which was recorded as part of prior lease settlements.
The lease charge was for office space the Company vacated before
December 31, 2004 and intends to sublease. The estimated
sublease income was $350,000 based on a rental rate of
$13 per square foot with an estimated vacancy period prior
to the expected sublease income of 6 months. In accordance
with SFAS 146, the Company has recorded the present value
of the net lease obligation.
As a result of a reduction of employees and the closure of
office space, the Company wrote-off $200,000 of leasehold
improvements related to the vacated space to their estimated
fair value of zero because the estimated cash flows to be
generated from that location will not be sufficient to recover
the carrying value of the assets.
|
|
|
Employee Severance, Benefits and Related Costs |
As part of the fourth quarter 2004 restructuring action, the
Company recorded a charge of $2.5 million for severance and
benefit costs related to cost reduction actions taken across the
worldwide employee base. The severance and benefit costs were
for 56 employees, or 14% of the Companys workforce,
consisting of 27 employees from sales and marketing, 8 from
services, 6 from general and administrative and 15 from research
and development. The Company accrued employee benefits pursuant
to its ongoing benefit plans for domestic locations and under
statutory minimum requirements in foreign locations. All
employees were notified of their termination as of
December 31, 2004. As of December 31, 2004, 13
employees had been terminated. The termination process is
expected to be completed during 2005.
85
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the charges and related activity of the
restructuring accruals is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
2004 | |
|
Write-Offs | |
|
December 31, | |
|
|
Charges | |
|
and Payments | |
|
2004 | |
|
|
| |
|
| |
|
| |
Facilities-related costs and impairments
|
|
$ |
1,488 |
|
|
$ |
738 |
|
|
$ |
750 |
|
Employee severance, benefits and related costs
|
|
|
2,461 |
|
|
|
892 |
|
|
|
1,569 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,949 |
|
|
$ |
1,630 |
|
|
$ |
2,319 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004 the Company had an accrued
restructuring liability of $11.2 million, of which
$6.3 million related to 2001 restructuring charges,
$1.2 million related to 2002 restructuring charges,
$1.4 million related to 2003 restructuring charges and
$2.3 million related to 2004 restructuring charges. The
long-term portion of the accrued restructuring liability was
$5.1 million.
Abandoned Facilities Obligations
At December 31, 2004, the Company had lease arrangements
related to seven abandoned facilities. The lease arrangements
with respect to six of these facilities are ongoing, and one is
the subject of a lease settlement arrangement under which the
Company is obligated to make payments through 2006. All
locations for which the Company has recorded restructuring
charges have been exited, and thus managements plans with
respect to these leases have been completed. A summary of the
remaining facility locations and the timing of the remaining
cash payments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Locations |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cambridge, MA*
|
|
$ |
2,069 |
|
|
$ |
1,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,104 |
|
Cambridge, MA
|
|
|
137 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228 |
|
Cambridge, MA
|
|
|
531 |
|
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,062 |
|
Waltham, MA
|
|
|
1,466 |
|
|
|
1,466 |
|
|
$ |
1,466 |
|
|
$ |
1,466 |
|
|
$ |
122 |
|
|
|
5,986 |
|
Chicago, IL
|
|
|
652 |
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,087 |
|
San Francisco, CA
|
|
|
111 |
|
|
|
111 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
333 |
|
Reading, UK
|
|
|
570 |
|
|
|
570 |
|
|
|
570 |
|
|
|
570 |
|
|
|
142 |
|
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility obligations, gross
|
|
|
5,536 |
|
|
|
4,239 |
|
|
|
2,147 |
|
|
|
2,036 |
|
|
|
264 |
|
|
|
14,222 |
|
Contracted and assumed sublet income
|
|
|
(700 |
) |
|
|
(1,438 |
) |
|
|
(1,302 |
) |
|
|
(1,256 |
) |
|
|
(150 |
) |
|
|
(4,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash obligations
|
|
$ |
4,836 |
|
|
$ |
2,801 |
|
|
$ |
845 |
|
|
$ |
780 |
|
|
$ |
114 |
|
|
$ |
9,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed sub-lease income
|
|
$ |
74 |
|
|
$ |
320 |
|
|
$ |
315 |
|
|
$ |
270 |
|
|
$ |
67 |
|
|
$ |
1,046 |
|
|
|
* |
represents a location for which the Company has executed a lease
settlement agreement |
The Company and certain former officers have been named
defendants in seven purported class action suits currently
pending in the United States District Court for the District of
Massachusetts. Each of these cases alleges that the Company and
certain former officers have violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, which generally may subject issuers of securities
and persons controlling those issuers to civil liabilities for
fraudulent actions or defects in the public disclosure required
by securities laws. Four of the cases were filed on various
dates in October 2001 in the U.S. District Court for the
District of Massachusetts. Three of the cases were initially
filed in the Central District of California (the
California actions) on various dates in August and
September 2001. The California actions
86
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
were consolidated and transferred to the District of
Massachusetts on or about November 27, 2001. On
December 13, 2001, the Court issued an Order of
Consolidation in which it consolidated all actions filed against
the Company and appointed certain individuals as Lead Plaintiffs
in the consolidated action. It also appointed two law firms as
Co-Lead Counsel, and a third law firm as Liaison Counsel.
Counsel for the plaintiffs has filed a Consolidated Amended
Complaint applicable to all of the consolidated actions. On
April 19, 2002, the Company filed a motion to dismiss the
case. On September 4, 2003 the court issued a ruling
dismissing all but one of the plaintiffs allegations. The
remaining allegation is based on the veracity of a public
statement made by a former officer of the Company and is the
subject of a motions to dismiss and summary judgment filed by
the Company on August 31, 2004 currently pending before the
Court. Management continues to believe the remaining claim
against the Company is without merit, and intends to defend the
action vigorously.
The Companys wholly owned subsidiary Primus Knowledge
Solutions, Inc. (Primus), an officer and former officer of
Primus and FleetBoston Robertson Stephens, Inc.,
J.P. Morgan Securities Inc., U.S. Bancorp Piper
Jaffray Inc., CIBC World Markets, Dain Rauscher, Inc. and
Salomon Smith Barney Holdings Inc., the underwriters of
Primus initial public offering, have been named as
defendants in an action filed during December 2001 in the United
States District Court for the Southern District of New York on
behalf of persons who purchased Primus common stock during the
period from June 30, 1999 through December 6, 2000,
which was issued pursuant to the June 30, 1999 registration
statement and prospectus for Primus initial public offering.
This is one of a number of actions coordinated for pretrial
purposes. Plaintiffs in the coordinated proceeding have brought
claims under the federal securities laws against numerous
underwriters, companies, and individuals, alleging generally
that defendant underwriters engaged in improper and undisclosed
activities concerning the allocation of shares in the IPOs
of more than 300 companies during the period from late 1998
through 2000. Specifically, among other things, the plaintiffs
allege that the prospectus pursuant to which shares of Primus
common stock were sold in the IPO contained certain false and
misleading statements regarding the practices of Primus
underwriters with respect to their allocation of shares of
common stock in Primus IPO to their customers and their
receipt of commissions from those customers related to such
allocations, and that such statements and omissions caused
Primus post-IPO stock price to be artificially inflated.
The individual defendants have been dismissed from the action
without prejudice pursuant to a tolling agreement. In June 2003
the plaintiffs in this action announced a proposed settlement
with the issuer defendants and their insurance carriers. Primus
elected to participate in the settlement, which generally
provides that plaintiffs will dismiss and release all claims
against Primus and the individual defendants in exchange for a
contingent payment by the insurance companies collectively
responsible for insuring the issuers in all of the consolidated
IPO cases, and for the assignment or release of certain
potential claims that Primus may have against the underwriters.
Primus will not be required to make any cash payments in the
settlement, unless the pro rata amount paid by the insurers in
the settlement on Primus behalf exceeds the amount of the
insurance coverage, a circumstance that we believe is not likely
to occur. A stipulation of settlement of claims against the
issuer defendants, including Primus, was submitted to the Court
for preliminary approval in June 2004. On February 15,
2005, the Court preliminarily approved the settlement contingent
on specified modifications. The settlement is subject to final
Court approval, after proposed settlement class members have an
opportunity to object, and a number of other conditions. If the
settlement does not occur, and litigation against Primus
continues, we believe we have meritorious defenses and intend to
defend the case vigorously. While we cannot predict with
certainty the outcome of the litigation or whether the
settlement will be approved, we do not expect any material
adverse impact to the Companys business, or the results of
its operations, from this matter.
In October 2003, Primus received notice that ServiceWare, Inc.
had filed a complaint against Primus in the United States
District Court for the Western District of Pennsylvania, which
alleges that aspects of Primus technology infringe one or
more patents issued in 1998 alleged to be held by the plaintiff.
The complaint was served on Primus on January 28, 2004. In
February of 2004, Primus filed its answer, denying all
87
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
substantive claims, raising multiple affirmative defenses
(including that the patents are invalid and unenforceable, that
Primus products dont infringe the patents in any event and
that these claims on 1998 patents are barred by equitable
estoppel and latches) and including a number of counterclaims.
In May 2004, ServiceWare, Inc. filed counterclaims in the
lawsuit, including allegations of interference, defamation and
unfair competition. On or about November 1, 2004, without
any admission of liability by either party and in exchange for
certain good and valuable consideration, ServiceWare and Primus
agreed to dismiss with prejudice all of the claims,
counterclaims and reply claims in the lawsuit and to deliver to
each other mutual general releases. ServiceWare agreed to grant
Primus and its affiliates, including ATG, a fully paid,
irrevocable, nonexclusive, nontransferable (with certain
exceptions specified in the Agreement), worldwide, perpetual
limited license under the patents at issue in the lawsuit and a
covenant not to sue under those patents (see Note 3).
Primus agreed to pay ServiceWare the sum of $800,000 in cash and
to issue to ServiceWare, immediately prior to the closing of
ATGs acquisition of Primus, shares of Primus common stock
having a value, determined in the manner specified in the
settlement, equal to $850,000. The settlement amount was accrued
for in the opening balance sheet of Primus (see Note 6).
The Company is also subject to various other claims and legal
actions arising in the ordinary course of business. In the
opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to
have a material effect on the Companys business, financial
condition or results of operations.
|
|
(14) |
Quarterly Results of Operations (Unaudited) |
The following table presents a condensed summary of quarterly
results of operations for the years ended December 31, 2004
and 2003 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter(1) | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
16,810 |
|
|
$ |
14,332 |
|
|
$ |
17,481 |
|
|
$ |
20,596 |
|
Gross profit
|
|
|
11,626 |
|
|
|
8,876 |
|
|
|
12,118 |
|
|
|
14,514 |
|
Net income (loss)
|
|
|
(1,787 |
) |
|
|
(4,247 |
) |
|
|
51 |
|
|
|
(3,561 |
) |
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.02 |
) |
|
|
(0.06 |
) |
|
|
0.00 |
|
|
|
(0.04 |
) |
|
Diluted
|
|
|
(0.02 |
) |
|
|
(0.06 |
) |
|
|
0.00 |
|
|
|
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003 | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter(1) | |
|
Quarter(1) | |
|
Quarter(1) | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
19,425 |
|
|
$ |
21,306 |
|
|
$ |
16,009 |
|
|
$ |
15,752 |
|
Gross profit
|
|
|
13,201 |
|
|
|
15,555 |
|
|
|
10,863 |
|
|
|
10,947 |
|
Net income (loss)
|
|
|
(2,754 |
) |
|
|
6,050 |
|
|
|
(3,195 |
) |
|
|
4,077 |
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.04 |
) |
|
|
0.08 |
|
|
|
(0.04 |
) |
|
|
0.06 |
|
|
Diluted
|
|
|
(0.04 |
) |
|
|
0.08 |
|
|
|
(0.04 |
) |
|
|
0.05 |
|
|
|
(1) |
Restructuring charges (benefits) were taken during these
quarters, see Note 12 for complete information. |
88
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
Item 9A. |
Controls and Procedures |
|
|
1. |
Disclosure Controls and Procedures |
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as
December 31, 2004. Based on this evaluation, our chief
executive officer and chief financial officer concluded that, as
of December 31, 2004, our disclosure controls and
procedures were (1) designed to ensure that material
information relating to our company, including our consolidated
subsidiaries, is made known to our chief executive officer and
chief financial officer by others within those entities,
particularly during the period in which this report was being
prepared and (2) effective, in that they provide reasonable
assurance 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 SECs rules and forms.
In designing and evaluating our disclosure controls and
procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable, and not absolute, assurance that the
objectives of the control system will be met. In addition, the
design of any control system is based in part upon certain
assumptions about the likelihood of future events and the
application of judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Because of
these and other inherent limitations of control systems, there
is only reasonable assurance that the Companys controls
will succeed in achieving their goals under all potential future
conditions.
There has been no change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter ended
December 31, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
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2. |
Internal Control over Financial Reporting |
(a) Managements Annual Report on Internal
Control Over Financial Reporting
The management of Art Technology Group, Inc. (ATG or the
Company) is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rule 13a-15(f) promulgated under the Securities Exchange
Act of 1934 as a process designed by, or under the supervision
of, the companys principal executive and principal
financial officers and effected by the companys board of
directors, management and other personnel, 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 and
includes those policies and procedures that:
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Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the company; |
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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 |
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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. |
ATGs internal control system was designed to provide
reasonable assurance to the Companys management and Board
of Directors regarding the preparation and fair presentation of
published financial statements. All internal control systems, no
matter how well designed, have inherent limitations which may
not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide
89
bonly reasonable assurance with respect to financial statement
preparation and presentation. 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.
ATGs management assessed the effectiveness of the
Companys internal controls over financial reporting as of
December 31, 2004. In making this assessment, it used the
criteria set forth in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on our assessment, we conclude
that, as of December 31, 2004, the Companys internal
control over financial reporting is effective based on those
criteria.
On November 1, 2004, we acquired Primus for an aggregate
purchase price of approximately $31.7 million. Primus
constituted 46% of total assets as of December 31, 2004 and
5.6% of revenues for the year then ended. For purposes of
evaluating the internal controls over financial reporting,
management determined that the internal control over financial
reporting of Primus Knowledge Solutions, Inc. would be excluded
from the 2004 internal control assessment, as permitted by the
rules and regulations of the Securities and Exchange Commission.
ATGs Independent Registered Public Accounting Firm, Ernst
& Young LLP, has issued a report on our assessment of the
Companys internal control over financial reporting. This
report appears below.
90
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Art Technology Group, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
over Financial Reporting, that Art Technology Group, Inc.
maintained effective internal control over financial reporting
as of December 31, 2004, 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. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, 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.
As indicated in the accompanying Managements Annual Report
on Internal Control over Financial Reporting, managements
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of Primus Knowledge Solutions, Inc., which is included
in the 2004 consolidated financial statements of Art Technology
Group, Inc. and constituted 46% of total assets as of
December 31, 2004 and 5.6% of revenues for the year then
ended. Our audit of internal control over financial reporting of
Art Technology Group, Inc. also did not include an evaluation of
the internal control over financial reporting of Primus
Knowledge Solutions, Inc.
In our opinion, managements assessment that maintained
effective internal control over financial reporting as of
December 31, 2004 is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, Art
Technology Group, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
91
We have also 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, 2004 and 2003, 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, 2004 of Art
Technology Group, Inc. and our report dated March 14, 2005
expressed an unqualified opinion thereon.
Boston, Massachusetts
March 14, 2005
92
PART III
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Item 10. |
Directors and Executive Officers of the Registrant |
The information required under this Item is incorporated herein
by reference to our definitive proxy statement pursuant to
Regulation 14A, with respect to our annual meeting of
stockholders to be held on May 25, 2005, to be filed with
the SEC not later than April 30, 2005 under the headings
Election of Class III Directors,
Background Information About Directors Continuing in
Office and Information About Executive
Officers.
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/ under the caption
About ATG/ Legal Information/ Code of Conduct.
We intend to satisfy the disclosure requirement under
Item 10 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
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Item 11. |
Information about Executive Compensation |
The information required under this Item is incorporated herein
by reference to our definitive proxy statement pursuant to
Regulation 14A, to be filed with the SEC not later than
April 30, 2005 under the heading Executive
Compensation.
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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 pursuant to
Regulation 14A, to be filed with the SEC not later than
April 30, 2005 under the heading Information About
Stock Ownership and Performance and Securities
Authorized for Issuance under Equity Compensation Plans.
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Item 13. |
Certain Relationships and Related Transactions |
The information, if any, required under this Item is
incorporated herein by reference to our definitive proxy
statement pursuant to Regulation 14A, to be filed with the
SEC not later than April 30, 2005 under the heading
Related Party Transactions.
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Item 14. |
Principal Accountant Fees and Services |
The information required under this Item is incorporated herein
by reference to our definitive proxy statement pursuant to
Regulation 14A, to be filed with the SEC not later than
April 30, 2005 under the caption Principal Accountant
Fees and Services.
PART IV
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Item 15. |
Exhibits, Financial Statement Schedules, and Reports on
Form 8-K |
(a)(1) Financial Statements
The following are included in Item 8:
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Report of Independent Registered Public Accounting Firm |
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Consolidated Balance Sheets as of December 31, 2004 and 2003 |
93
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Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 |
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Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss) for the years ended
December 31, 2004, 2003 and 2002 |
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Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 |
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Notes to Consolidated Financial Statements |
(a)(2) Financial Statement Schedule
Schedule II for 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
The following exhibits are included in Item 15(c)*:
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Filed with |
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Incorporated by Reference |
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This |
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Exhibit |
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Form |
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Exhibit |
No. |
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Description |
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10-K |
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Form |
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Filing Date |
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No. |
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2 |
.1 |
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Agreement and Plan of Merger dated August 10, 2004 with
Autobahn Acquisition, Inc. and Primus Knowledge Solutions,
Inc. |
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8-K |
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August 18, 2004 |
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99.1 |
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3 |
.1 |
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Amended and Restated Certificate of Incorporation |
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S-8 |
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June 12, 2003 |
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4.1 |
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3 |
.2 |
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Amended and Restated By-Laws |
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S-3 |
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July 6, 2001 |
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4.2 |
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4 |
.1 |
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Rights Agreement dated September 26, 2001 with EquiServe
Trust Company, N.A |
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8-K |
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October 2, 2001 |
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4.1 |
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10 |
.1 |
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1996 Stock Option Plan, as amended |
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X |
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10 |
.2* |
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1999 Outside Director Stock Option Plan, as amended |
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X |
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10 |
.3 |
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1999 Employee Stock Purchase Plan |
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S-1 |
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June 21, 1999 |
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10.3 |
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10 |
.4 |
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Primus 1999 Non-Officer Stock Option Plan |
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X |
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10 |
.5 |
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Primus 1999 Stock Incentive Compensation Plan |
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X |
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10 |
.6* |
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Nonstatutory Option Agreement dated October 23, 2001 with
Paul Shorthouse |
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10-K |
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March 27, 2002 |
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10.16 |
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10 |
.7 |
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Promissory Note dated October 23, 2001 issued by Edward
Terino to the registrant |
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10-K |
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March 27, 2002 |
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10.14 |
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10 |
.8 |
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Edward Terino Change-in-Control Agreement dated December 1,
2002 |
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10-K |
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March 28, 2003 |
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10.18 |
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10 |
.9 |
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Change-in-Control Policy for Employees |
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10-Q |
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November 9, 2004 |
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10.21 |
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10 |
.10* |
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Amended and Restated Employment Agreement dated November 8,
2004 with Robert Burke |
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10-Q |
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November 9, 2004 |
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10.22 |
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10 |
.11 |
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Lease dated January 2004 with Davenport Building Limited
Partnership |
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10-K |
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March 15, 2004 |
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10.4 |
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94
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Filed with | |
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Incorporated by Reference | |
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This | |
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Exhibit | |
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Form | |
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Exhibit | |
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Description |
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10-K | |
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Filing Date | |
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10 |
.12 |
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Lease Termination Agreement dated January 2004 with Davenport
Building Limited Partnership |
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10-K |
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March 15, 2004 |
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10.5 |
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10 |
.13 |
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Lease dated October 6, 1999 with Pine Street
Investors I, LLC |
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10-K |
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March 28, 2003 |
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10.5 |
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10 |
.14 |
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First Amendment to Lease dated December 30, 1999 with Pine
Street Investors I, LLC |
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10-K |
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March 28, 2003 |
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10.6 |
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10 |
.15 |
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Second Amendment to Lease dated August 20, 2000 with Pine
Street Investors I, LLC |
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10-K |
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March 28, 2003 |
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10.7 |
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10 |
.16 |
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Third Amendment to Lease dated December 22, 2000 with Pine
Street Investors I, LLC |
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10-K |
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March 28, 2003 |
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10.8 |
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10 |
.17 |
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Fourth Amendment to Lease dated July 15, 2001 with Pine
Street Investors I, LLC |
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10-K |
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March 15, 2004 |
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10.10 |
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10 |
.18 |
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Fifth Amendment to Lease dated March 31, 2003 with Pine
Street Investors I, LLC |
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10-K |
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March 15, 2004 |
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10.11 |
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10 |
.19 |
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Lease dated March 19, 2001 with DIFA Deutsche Immobilien
Fonds AG |
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10-K |
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March 28, 2003 |
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10.9 |
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10 |
.20 |
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Lease Termination with DIFA Deutsche Immobilien Fonds AG |
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10-K |
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March 15, 2004 |
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10.13 |
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10 |
.21 |
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Amended and Restated Loan and Security Agreement dated
June 13, 2002 with Silicon Valley Bank |
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10-Q |
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August 14, 2002 |
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10.1 |
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10 |
.22 |
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First Loan Modification Agreement dated September 30, 2002
with Silicon Valley Bank |
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10-Q |
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November 14, 2002 |
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10.1 |
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10 |
.23 |
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Amendment Agreement dated October 4, 2002 with Silicon
Valley Bank |
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10-Q |
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November 14, 2002 |
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10.2 |
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.24 |
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Second Loan Modification Agreement dated December 20,
2002 with Silicon Valley Bank |
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10-K |
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March 28, 2003 |
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10.21 |
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10 |
.25 |
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Fourth Loan Modification Agreement dated November 26,
2003 with Silicon Valley Bank |
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10-K |
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March 15, 2004 |
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10.25 |
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10 |
.26 |
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Fifth Loan Modification Agreement dated June 2004 with Silicon
Valley Bank |
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10-Q |
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August 9, 2004 |
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10.26 |
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10 |
.27 |
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Letter Agreement re: loan dated June 16, 2004 with Silicon
Valley Bank |
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10-Q |
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August 9, 2004 |
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10.25 |
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10 |
.28 |
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Sixth Loan Modification Agreement dated November 24, 2004
with Silicon Valley Bank |
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10 |
.29 |
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Seventh Loan Modification Agreement dated December 21, 2004
with Silicon Valley Bank |
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10 |
.30 |
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Securities Account Control Agreement dated
December 20, 2002 with Silicon Valley Bank |
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10-K |
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March 28, 2003 |
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10.20 |
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Filed with | |
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This | |
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Exhibit | |
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Form | |
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Exhibit | |
No. | |
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Description |
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10-K | |
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Form | |
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Filing Date | |
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10 |
.31 |
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Amended and Restated Intellectual Property Agreement dated
January 2004 |
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10-K |
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March 15, 2004 |
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10.26 |
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10 |
.32 |
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Settlement Agreement dated November 1, 2004 with
ServiceWare Technologies, Inc. |
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X |
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21 |
.1 |
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Subsidiaries |
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X |
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23 |
.1 |
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Consent of Ernst & Young LLP |
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X |
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31 |
.1 |
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Certification pursuant to Rules 13a-14(a) and 15(d)-14(a)
of the Exchange Act of 1934 of the principal executive officer |
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X |
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31 |
.2 |
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Certification pursuant to Rules 13a-14(a) and 15(d)-14(a)
of the Exchange Act of 1934 of the principal financial officer |
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X |
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32 |
.1 |
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Certificate pursuant to 18 U.S.C. Section 1350 of the
principal executive officer |
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32 |
.2 |
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Certificate pursuant to 18 U.S.C. Section 1350 of the
principal financial officer |
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* |
Management contract or compensatory plan. |
96
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 March 16, 2005.
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ART TECHNOLOGY GROUP, INC. |
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(Registrant) |
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Robert D. Burke |
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Chief Executive Officer |
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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
March 16, 2005.
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Name |
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Title |
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/s/ ROBERT D. BURKE
Robert
D. Burke |
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Chief Executive Officer and President
(Principal Executive Officer) |
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/s/ EDWARD TERINO
Edward
Terino |
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Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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/s/ PAUL G. SHORTHOSE
Paul
G. Shorthose |
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Chairman of the Board |
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/s/ JOHN R. HELD
John
R. Held |
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Director |
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/s/ ILENE H. LANG
Ilene
H. Lang |
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Director |
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/s/ MARY E. MAKELA
Mary
E. Makela |
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Director |
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/s/ MICHAEL A. BROCHU
Michael
A. Brochu |
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Director |
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/s/ DANIEL C. REGIS
Daniel
C. Regis |
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Director |
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/s/ DAVID B. ELSBREE
David
B. Elsbree |
|
Director |
|
/s/ PHYLLIS S. SWERSKY
Phyllis
S. Swersky |
|
Director |
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