e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 000-26679
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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04-3141918
(I.R.S. Employer Identification Number) |
25 First Street, Cambridge, Massachusetts
(Address of principal executive offices)
02141
(Zip Code)
(617) 386-1000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2 of the Exchange Act). Yes þ No o
As
of August 3, 2005 there were 109,561,722 shares of the Registrants common stock
outstanding.
ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-Q
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(UNAUDITED)
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June 30, |
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December 31, |
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2005 |
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2004 |
ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
19,097 |
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$ |
21,310 |
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Marketable securities |
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9,616 |
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5,197 |
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Accounts receivable, net of reserves of $560 ($680 in 2004) |
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19,196 |
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24,430 |
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Prepaid expenses and other current assets |
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2,992 |
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1,694 |
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Total current assets |
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50,901 |
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52,631 |
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Property and equipment, net |
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2,280 |
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3,120 |
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Long term marketable securities |
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4,001 |
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Goodwill |
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27,458 |
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27,458 |
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Intangible assets, net |
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6,018 |
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7,177 |
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Other assets |
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1,744 |
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3,416 |
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$ |
88,401 |
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$ |
97,803 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
2,918 |
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$ |
5,186 |
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Accrued expenses |
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11,759 |
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13,156 |
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Capital lease obligations, current portion |
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56 |
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56 |
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Notes payable |
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235 |
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595 |
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Deferred revenue |
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21,853 |
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25,355 |
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Accrued restructuring, short-term |
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4,207 |
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6,095 |
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Total current liabilities |
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41,028 |
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50,443 |
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Capital lease obligations, less current portion |
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84 |
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112 |
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Accrued restructuring, less current portion |
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2,860 |
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5,063 |
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Commitments and contingencies (Notes 11 and 13) |
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Stockholders Equity: |
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Preferred stock, $0.01 par value authorized 10,000,000
shares issued and outstanding no shares |
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Common stock, $0.01 par value authorized 200,000,000
shares issued and outstanding 109,545,656 shares and
108,141,966 shares at June 30, 2005 and December 31, 2004,
respectively |
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1,095 |
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1,081 |
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Additional paid-in capital |
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250,527 |
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249,465 |
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Accumulated deficit |
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(204,154 |
) |
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(205,235 |
) |
Accumulated other comprehensive loss |
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(3,039 |
) |
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(3,126 |
) |
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Total stockholders equity |
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44,429 |
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42,185 |
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$ |
88,401 |
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$ |
97,803 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-3-
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
Revenues: |
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Product licenses |
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$ |
5,319 |
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$ |
3,144 |
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$ |
12,702 |
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$ |
9,508 |
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Services |
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14,942 |
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11,188 |
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29,553 |
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21,634 |
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Total revenues |
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20,261 |
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14,332 |
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42,255 |
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31,142 |
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Cost of Revenues: |
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Product licenses |
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378 |
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331 |
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942 |
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|
730 |
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Services |
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5,367 |
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5,125 |
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10,806 |
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9,910 |
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Total cost of revenues |
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5,745 |
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5,456 |
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11,748 |
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10,640 |
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Gross Profit |
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14,516 |
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8,876 |
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30,507 |
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20,502 |
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Operating Expenses: |
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Research and development |
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4,548 |
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4,150 |
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9,137 |
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8,280 |
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Sales and marketing |
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6,996 |
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7,231 |
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13,796 |
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14,572 |
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General and administrative |
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2,704 |
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1,739 |
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5,692 |
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3,669 |
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Restructuring charges |
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671 |
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|
875 |
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Total operating expenses |
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14,919 |
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13,120 |
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29,500 |
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26,521 |
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Income (loss) from operations |
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(403 |
) |
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(4,244 |
) |
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1,007 |
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(6,019 |
) |
Interest and other income, net |
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89 |
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64 |
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|
100 |
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17 |
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Income (loss) before provision for income taxes |
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|
(314 |
) |
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|
(4,180 |
) |
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1,107 |
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(6,002 |
) |
Provision for income taxes |
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13 |
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|
67 |
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26 |
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|
32 |
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Net income (loss) |
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$ |
(327 |
) |
|
$ |
(4,247 |
) |
|
$ |
1,081 |
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|
$ |
(6,034 |
) |
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Basic net income (loss) per share |
|
$ |
(0.00 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.01 |
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|
$ |
(0.08 |
) |
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Diluted net income (loss) per share |
|
$ |
(0.00 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.01 |
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|
$ |
(0.08 |
) |
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Basic weighted average common shares outstanding |
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109,218 |
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|
73,524 |
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|
108,950 |
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|
73,289 |
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Diluted weighted average common shares outstanding |
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109,218 |
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|
73,524 |
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|
110,739 |
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|
73,289 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-4-
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
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Six months ended June 30, |
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2005 |
|
2004 |
Cash Flows from Operating Activities: |
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Net income (loss) |
|
$ |
1,081 |
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|
$ |
(6,034 |
) |
Adjustments to reconcile net income (loss) to
net cash used in operating activities: |
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Stock-based compensation |
|
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|
|
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|
11 |
|
Depreciation and amortization |
|
|
2,097 |
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|
|
1,039 |
|
Non-cash restructuring charge |
|
|
1,167 |
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Loss on disposal of fixed assets, net |
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|
100 |
|
Changes in current assets and liabilities: |
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|
Accounts receivable, net |
|
|
5,234 |
|
|
|
4,467 |
|
Prepaid expenses and other current assets |
|
|
(1,298 |
) |
|
|
(684 |
) |
Deferred rent |
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|
382 |
|
|
|
404 |
|
Accounts payable |
|
|
(1,258 |
) |
|
|
787 |
|
Accrued expenses |
|
|
(1,397 |
) |
|
|
(1,980 |
) |
Deferred revenues |
|
|
(3,502 |
) |
|
|
(719 |
) |
Accrued restructuring |
|
|
(4,091 |
) |
|
|
(6,700 |
) |
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Net cash used in operating activities |
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(1,585 |
) |
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|
(9,309 |
) |
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Cash Flows from Investing Activities: |
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Purchases of marketable securities |
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(2,908 |
) |
|
|
(9,313 |
) |
Maturities of marketable securities |
|
|
2,490 |
|
|
|
8,743 |
|
Purchases of property and equipment |
|
|
(271 |
) |
|
|
(345 |
) |
Payment of acquisition costs |
|
|
(1,010 |
) |
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|
Decrease in other assets |
|
|
241 |
|
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|
4 |
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Net cash used in investing activities |
|
|
(1,458 |
) |
|
|
(911 |
) |
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Cash Flows from Financing Activities: |
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|
Proceeds from exercise of stock options |
|
|
683 |
|
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|
332 |
|
Proceeds from employee stock purchase plan |
|
|
393 |
|
|
|
515 |
|
Principal payments on notes payable |
|
|
(360 |
) |
|
|
|
|
Payments on capital leases |
|
|
(28 |
) |
|
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|
|
Net cash provided by financing activities |
|
|
688 |
|
|
|
847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Foreign Exchange Rate Changes on
Cash and Cash Equivalents |
|
|
142 |
|
|
|
(28 |
) |
Net Decrease in Cash and Cash Equivalents |
|
|
(2,213 |
) |
|
|
(9,401 |
) |
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, Beginning of Period |
|
|
21,310 |
|
|
|
31,934 |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period |
|
$ |
19,097 |
|
|
$ |
22,533 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-5-
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND BASIS OF PRESENTATION
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 unaudited condensed consolidated financial statements of the Company have
been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports
on Form 10-Q. The disclosures do not include all of the information and footnotes required by
accounting principles generally accepted in the United States, and while the Company believes that
the disclosures presented are adequate to make information not misleading, these financial
statements should be read in conjunction with the audited financial statements and related notes
included in the Companys 2004 Annual Report on Form 10-K. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements and notes contain all
adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation
of the Companys financial position, results of operations and cash flows at the dates and for the
periods indicated. Certain prior period amounts have been reclassified to conform to current period
presentation, including classification of cost of revenues. The operating results for the three and
six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2005.
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.
The accompanying consolidated financial statements include the accounts of ATG and its wholly
owned subsidiaries, including Primus. All significant intercompany balances have been eliminated in
consolidation.
(2) STOCKHOLDERS EQUITY
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 and related interpretations, and follows the
disclosure-only alternative under Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock Based Compensation.
Had compensation expense for ATGs stock plans been determined consistent with SFAS 123, the
pro forma net loss and net loss per share would have been as follows (in thousands, except per
share amounts):
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net income (loss) as reported |
|
$ |
(327 |
) |
|
$ |
(4,247 |
) |
|
$ |
1,081 |
|
|
$ |
(6,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Stock-based compensation expense included
in reported net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards |
|
|
(469 |
) |
|
|
(4,522 |
) |
|
|
(1,927 |
) |
|
|
(10,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(796 |
) |
|
$ |
(8,769 |
) |
|
$ |
(846 |
) |
|
$ |
(16,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.00 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.01 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
(0.01 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.23 |
) |
-6-
(3) NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed in accordance with 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, which consists of stock options,
using the treasury stock method.
The following table sets forth the computation of basic and diluted net income (loss) per
share (in thousands, except per-share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net income (loss) |
|
$ |
(327 |
) |
|
$ |
(4,247 |
) |
|
$ |
1,081 |
|
|
$ |
(6,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
109,218 |
|
|
|
73,524 |
|
|
|
108,950 |
|
|
|
73,289 |
|
Weighted average common stock equivalents
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
|
|
|
|
|
|
|
|
1,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common stock and
common stock equivalents |
|
|
109,218 |
|
|
|
73,524 |
|
|
|
110,739 |
|
|
|
73,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.00 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.01 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(0.00 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.01 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) REVENUE RECOGNITION
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, the sale of certain other consulting and
development services and application and managed hosting services. ATG generally has separate
agreements with its customers that govern the terms and conditions of its software licenses,
consulting, hosting 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 and SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions.
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 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 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.
-7-
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.
(5) INCOME TAXES
ATG expects to have minimal or no Federal or foreign income taxes in 2005 due to the use of
net operating loss carryforwards and the projection of a taxable loss in domestic and foreign
locations in 2005. As a result of net operating losses incurred, and after evaluating its
anticipated performance over its normal planning horizon, the Company has provided a full valuation
allowance for its net operating loss carryforwards, research credit carryforwards and other net
deferred tax assets. For the three months ended June 30, 2005 and 2004, the Company had no
reversals of previously accrued taxes due to the closure of statutes of limitations in foreign
locations. For the six months ended June 30, 2005 and 2004, the Company reversed previously
accrued taxes of $0 and $105,000, respectively, due to the closure of statutes of limitations in
foreign locations.
(6) 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. 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 June 30, 2005 and December 31, 2004, all of ATGs
marketable securities were classified as held-to-maturity. The average maturity of ATGs marketable
securities was approximately 3.7 months and 9.6 months at June 30, 2005 and December 31, 2004,
respectively. At June 30, 2005 all marketable securities were classified as short-term. At December
31, 2004, the average maturity of the marketable securities classified as long-term was 13.6
months. At June 30, 2005 and December 31, 2004, the difference between the amortized cost and
market value of ATGs marketable securities resulted in unrealized losses of approximately $56,000
and $77,000, respectively. At June 30, 2005 and December 31, 2004, ATGs cash, cash equivalents and
marketable securities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
10,722 |
|
|
$ |
4,360 |
|
Money market accounts |
|
|
4,838 |
|
|
|
13,529 |
|
Commercial paper |
|
|
1,995 |
|
|
|
799 |
|
U.S. Treasury and Government Agency securities |
|
|
1,542 |
|
|
|
2,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
19,097 |
|
|
$ |
21,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
7,476 |
|
|
$ |
7,754 |
|
U.S. Treasury and Government Agency securities |
|
|
946 |
|
|
|
648 |
|
Commercial paper |
|
|
1,194 |
|
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
9,616 |
|
|
$ |
9,198 |
|
|
|
|
|
|
|
|
|
|
(7) GOODWILL
In accordance with SFAS 141, Business Combinations, the company accounts for its business
combinations using the purchase method. In accordance with SFAS 142, Goodwill and Other Intangible
Assets, the Company does not amortize goodwill, but instead tests for impairment at least annually
or more frequently upon the occurrence of certain events that 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.
-8-
The provisions of SFAS 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 subject to uncertainty. 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 performs the annual impairment assessment as of December 1 of each year.
(8) LONG-LIVED ASSETS, 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. The Company has recorded impairment charges as discussed in
Note 14.
(9) COMPREHENSIVE INCOME (LOSS)
SFAS 130, Reporting Comprehensive Income, requires that a full set of general purpose
financial statements include the reporting of comprehensive income (loss). Comprehensive income
(loss) is comprised of two components, net income (loss) and other comprehensive income (loss). The
following are the components of ATGs comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Net income (loss) |
|
$ |
(327 |
) |
|
$ |
(4,247 |
) |
|
$ |
1,081 |
|
$ |
(6,034 |
) |
Foreign currency translation adjustment |
|
|
34 |
|
|
|
68 |
|
|
|
87 |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(293 |
) |
|
$ |
(4,179 |
) |
|
$ |
1,168 |
|
$ |
(6,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated other comprehensive loss at June 30, 2005 and December 31, 2004 of $3.0 and
$3.1 million, respectively,
consisted entirely of the cumulative foreign currency translation adjustment.
(10) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
SFAS 131, Disclosures About Segments of an Enterprise and Related Information, 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. SFAS
131 also establishes standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise for 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.
-9-
Revenues from sources outside of the United States were approximately $4.5 million and $4.3 million
for the three months ended June 30, 2005 and 2004, respectively, and $10.2 million and $10.8
million for the six months ended June 30, 2005 and 2004, respectively. ATGs revenues from
international sources were primarily generated from customers located in Europe and the
Asia/Pacific region. All of ATGs product license sales for the three and six months ended June 30, 2005
and 2004 were delivered from its headquarters located in the United States.
The following table represents the percentage of total revenues by geographic region for the
three and six months ended June 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
United States |
|
|
78 |
% |
|
|
70 |
% |
|
|
76 |
% |
|
|
65 |
% |
United Kingdom (UK) |
|
|
11 |
|
|
|
8 |
|
|
|
11 |
|
|
|
17 |
|
Europe, Middle East and Africa (excluding UK) |
|
|
10 |
|
|
|
20 |
|
|
|
12 |
|
|
|
13 |
|
Asia Pacific |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Other |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11) CREDIT FACILITY AND NOTES PAYABLE
Credit Facility
On 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. Effective December 24, 2002 the revolving line of credit increased to $20
million. The line of credit bears interest at the Banks prime rate (6% at June 30, 2005). The line
of credit is secured by all of the Companys tangible and intangible intellectual and personal
property and is subject to financial covenants including liquidity coverage and profitability. 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 $500,000 for the second
quarter of 2005 and, $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 of $20 million at
the end of each month.
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 balance 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 June 30, 2005, 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 June 30, 2005, ATG has issued LCs totaling
$7.6 million, which are supported by this facility. The LCs have been issued in favor of various
landlords and equipment leasing companies to secure obligations under ATGs facility leases
pursuant to leases expiring from August 2006 through March 2009. As of June 30, 2005, approximately
$12.4 million was available under the facility.
-10-
Notes Payable
In connection with the November 2004 acquisition of Primus, the Company assumed Primus
outstanding obligation of $297,000 under a credit facility with a bank. The facility is payable in
monthly installments of $11,000, including interest at the banks prime rate plus 2% (6.75% at
June 30, 2005 and December 31, 2004), due June 2008. The facility is callable on demand. The loan
is denominated in British pounds. At June 30, 2005 and December 31, 2004, the balance on the note
was $235,000 and $295,000, respectively.
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. As part of the settlement, the Company was required to make cash
payments totaling $800,000, of which $500,000 was paid during 2004 and $300,000 was paid in January
2005 and was included in notes payable at December 31, 2004.
(12) ACQUISITION OF PRIMUS
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.
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 Company 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 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. After allocating the purchase price to the acquired net tangible and intangible
assets, the Company recorded $27.5 million of goodwill. The allocation of the purchase price is
preliminary and could be adjusted due to settlement of litigation (see Note 15) or other matters
that were not identified at the acquisition date.
Intangible assets, which are being amortized based on the pattern in which the economic
benefits of the intangible assets are being utilized, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
December 31, 2004 |
|
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
Accumulated |
|
Net Book |
|
Carrying |
|
Accumulated |
|
Net Book |
|
|
Amount |
|
Amortization |
|
Value |
|
Amount |
|
Amortization |
|
Value |
Purchased technology |
|
$ |
3,600 |
|
|
$ |
(850 |
) |
|
$ |
2,750 |
|
|
$ |
3,600 |
|
|
$ |
(441 |
) |
|
$ |
3,159 |
|
Customer relationships |
|
|
4,200 |
|
|
|
(1,243 |
) |
|
|
2,957 |
|
|
|
4,200 |
|
|
|
(559 |
) |
|
|
3,641 |
|
Non-compete agreements |
|
|
400 |
|
|
|
(89 |
) |
|
|
311 |
|
|
|
400 |
|
|
|
(23 |
) |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets,
excluding goodwill |
|
$ |
8,200 |
|
|
$ |
(2,182 |
) |
|
$ |
6,018 |
|
|
$ |
8,200 |
|
|
$ |
(1,023 |
) |
|
$ |
7,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense from intangible assets was $580,000 and $1.2 million for the three and
six months ended June 30, 2005, respectively. As of June 30, 2005, amortization expense on existing
intangibles for the next five years is as follows (in thousands):
|
|
|
|
|
Remainder of 2005 |
|
$ |
1,159 |
|
2006 |
|
|
2,055 |
|
2007 |
|
|
1,740 |
|
2008 |
|
|
848 |
|
2009 |
|
|
216 |
|
|
|
|
|
|
Total |
|
$ |
6,018 |
|
|
|
|
|
|
In connection with the Primus acquisition, integration activities resulted in involuntary
terminations and lease and contract terminations. As part of the purchase price of the acquisition,
the Company recorded restructuring costs of $2.1 million for these activities comprised of $1.7
million for involuntary termination benefits and $400,000 for facility related costs. The
liability for involuntary termination benefits is for 49 employees, primarily in general and
administrative and research and development functions.
-11-
The Company expects to pay the remaining balance for involuntary termination benefits and
facilities-related costs in 2005.
The following summarizes the obligations in connection with the Primus acquisition and activity to
date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at |
Category |
|
December 31, 2004 |
|
Payments |
|
June 30, 2005 |
Involuntary termination benefits |
|
$ |
1,218 |
|
|
$ |
(960 |
) |
|
$ |
258 |
|
Facilities-related costs |
|
|
279 |
|
|
|
(168 |
) |
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,497 |
|
|
$ |
(1,128 |
) |
|
$ |
369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance of $369,000 in costs associated with the integration activities at June 30, 2005 is
included in accrued expenses.
(13) COMMITMENTS AND CONTINGENCIES
Leases
ATG has offices, primarily for sales and support personnel, in five domestic locations as well
as four foreign countries. At June 30, 2005, ATG had issued $7.6 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 June 30, 2005, were as follows (in thousands):
|
|
|
|
|
|
|
Leases |
Remainder of 2005 |
|
$ |
4,158 |
|
2006 |
|
|
5,926 |
|
2007 |
|
|
2,997 |
|
2008 |
|
|
2,488 |
|
2009 |
|
|
704 |
|
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments |
|
$ |
16,273 |
|
|
|
|
|
|
Of the $16.3 million in future minimum lease payments, $11.0 million is included in the
Companys accrued restructuring charges. The $11.0 million is reduced to a $6.7 million
restructuring accrual after taking into consideration estimated sublease income, contracted
sublease income, vacancy periods and operating costs of the various subleased properties (see Note
14).
Rent expense included in the accompanying statements of operations was approximately $857,000
million and $1.2 million for the three months ended June 30, 2005 and 2004, and $2.2 million and
$2.4 million for the six months ended June 30, 2005 and 2004, respectively.
Indemnification
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 of others. The software license agreements generally limit the scope of
and remedies for such indemnification obligations in a variety of industry-standard respects. The
Company believes its internal development processes and other policies and practices limit its
exposure related to the indemnification provisions of the software license
-12-
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 June 30, 2005.
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.
(14) RESTRUCTURING
During the quarter ended June 30, 2005, the Company recorded a net restructuring charge of
$671,000, primarily due to a $1.8 million charge related to the relocation of its San Francisco
office and other facility charges; offset by $1.1 million for adjustments in estimates related to
sublease costs included in the 2001, 2002 and 2004 actions. During the quarter ended March 31,
2005, the Company recorded a net restructuring charge of approximately $204,000 due to adjustments
in estimates related to the 2004 restructuring charge for employee severance benefits payable in
international geographies. 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
strategic product realignments and the Companys acquisition of Primus, 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 2005, 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) 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 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
Accrued |
|
Adjustments |
|
|
|
|
|
Accrued |
|
|
Restructuring |
|
in Estimates |
|
|
|
|
|
Restructuring |
|
|
Balance as of |
|
Resulting in |
|
|
|
|
|
Balance as of |
|
|
December 31, 2004 |
|
Reduced Charges |
|
Payments |
|
June 30, 2005 |
Facilities-related costs and impairments |
|
$ |
6,254 |
|
|
$ |
(783 |
) |
|
$ |
(1,359 |
) |
|
$ |
4,112 |
|
Employee severance, benefits and related costs |
|
|
57 |
|
|
|
|
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,311 |
|
|
$ |
(783 |
) |
|
$ |
(1,416 |
) |
|
$ |
4,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-13-
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 comprise 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 leasehold 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.
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 from 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.
During 2005, the Company recorded an adjustment to its estimates of sublease costs related to
the 2001 actions, resulting in a credit to the restructuring charge of $783,000. The change in
estimate was primarily due to the Companys continued evaluation of the financial condition of its
subtenants and their ability to meet their financial obligations to the Company.
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 were from sales and marketing, 117 from services, 101 from general and
administrative and 63 from research and development. None of these employees remained employed as
of June 30, 2002. In addition, the Company settled 11,762 exchangeable shares with an 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 an employee terminated as part of the 2001 restructuring
action.
During 2004, the Company reached a final settlement with this employee resulting in a
reduction to the restructuring charge of $172,000.
Asset Impairments
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 related to purchased software to record the software at its net
realizable value of zero due to the Company abandoning a certain product development strategy. The
purchased software had no future use to the Company.
Marketing Costs and 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 of which, 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.
-14-
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 of $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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
Accrued |
|
Adjustments |
|
|
|
|
|
Accrued |
|
|
Restructuring |
|
in Estimates |
|
|
|
|
|
Restructuring |
|
|
Balance as of |
|
Resulting in |
|
|
|
|
|
Balance as of |
|
|
December 31, 2004 |
|
Reduced Charges |
|
Payments |
|
June 30, 2005 |
Facilities-related costs and impairments |
|
$ |
1,155 |
|
|
$ |
(36 |
) |
|
$ |
(255 |
) |
|
$ |
864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 from $23 to $18 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 in 2003 to $4.1 million.
During 2004, the Company recorded an adjustment to its estimates related to the 2002 actions,
resulting in a credit to the restructuring charge of $242,000.
The Company
executed a sub-lease agreement during the three months ended
June 30, 2005. As a result, the Company recorded an adjustment to its estimates of sublease costs related to
the 2002 actions, resulting in a credit to the restructuring charge of $36,000.
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. 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, due to amounts being settled at
less than the amount recorded as a result of foreign currency exchange movements.
-15-
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.
A summary of the charges and related activity of the restructuring accruals is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
Accrued |
|
Adjustments |
|
|
|
|
|
Accrued |
|
|
Restructuring |
|
in Estimates |
|
|
|
|
|
Restructuring |
|
|
Balance as of |
|
Resulting in |
|
|
|
|
|
Balance as of |
|
|
December 31, 2004 |
|
Reduced Charges |
|
Payments |
|
June 30, 2005 |
Facilities-related costs and impairments |
|
$ |
1,373 |
|
|
$ |
(24 |
) |
|
$ |
(249 |
) |
|
$ |
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2003 Actions
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 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 of 2003,
as result of updated market conditions, the estimated sublet rental rate was lowered from $35 per
square foot to $30 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 was 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 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.
Asset Impairments
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 its 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 has not changed its overall product
strategy for the purpose for which the software was acquired.
Third Quarter 2003 Actions
During the third quarter of 2003, the Company recorded a restructuring charge of approximately
$771,000.
-16-
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.
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
reduction to the restructuring charge of $77,000.
During 2005, the Company recorded an adjustment to its cost estimates related to the 2003 actions,
resulting in a credit to the restructuring charge of $24,000.
2004 Actions
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 related to 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 intended 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 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. As of June 30, 2005 the
termination process was completed.
-17-
A summary of the charges and related activity of the restructuring accruals is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments |
|
|
|
|
|
|
|
|
Accrued |
|
in Estimates |
|
|
|
|
|
Accrued |
|
|
Restructuring |
|
Resulting in |
|
|
|
|
|
Restructuring |
|
|
Balance as of |
|
Additional |
|
|
|
|
|
Balance as of |
|
|
December 31, 2004 |
|
(Decreased)
Charges |
|
Payments |
|
June 30, 2005 |
Facilities-related costs and impairments |
|
$ |
750 |
|
|
$ |
(267 |
) |
|
$ |
(239 |
) |
|
$ |
244 |
|
Employee severance, benefits and related costs |
|
|
1,569 |
|
|
|
168 |
|
|
|
(1,457 |
) |
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,319 |
|
|
$ |
(99 |
) |
|
$ |
(1,696 |
) |
|
$ |
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2005, the Company recorded a restructuring charge of $200,000,
resulting from adjustments to estimates made in 2004 for employee severance benefits payable in
international geographies, and a $4,000 charge to facilities related cost due to adjusting its
estimates.
During the second quarter of 2005, the Company recorded a credit of $32,000 to the employee
severance costs, and a credit of $271,000 to the facilities related cost charge, due to adjusting
its estimates of net sublease obligations as a result of executing a sub lease agreement for which
the term began in the second quarter of 2005.
2005 Actions
During 2005, the Company recorded net restructuring charges of $875,000, comprised of new
actions of $1.8 million and net credits resulting from changes in estimates related to prior
actions of $942,000.
Facilities-Related Costs and Impairments
During the second quarter of 2005, the Company relocated its San Francisco office and reduced
the amount of space it occupies in San Francisco. As a result of this action and the cessation of
the use of this facility and other minor facilities charges, the Company recorded
facilities-related charges of $1.8 million primarily comprised of $1.0 million of deferred rent
related to the abandoned space, $118,000 of lease hold improvements written down to their fair
value, and $557,000 for an operating lease related to idle office space
vacated during the second quarter of 2005 net of assumptions for sublease income based on an
executed sublease agreement. In accordance with SFAS 146, the Company recorded the net present
value of the net lease obligation.
A summary of the charges and related activity of the restructuring accruals is a as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-Offs |
|
|
|
|
2005 |
|
and |
|
Balance as of |
|
|
Charges |
|
Payments |
|
June 30, 2005 |
Facilities-related costs and impairments |
|
$ |
1,817 |
|
|
$ |
(1,350 |
) |
|
$ |
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned Facilities Obligations
At June 30, 2005, 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 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease locations |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Total |
Cambridge, MA* |
|
$ |
1,035 |
|
|
$ |
1,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,070 |
|
Cambridge, MA |
|
|
69 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160 |
|
Cambridge, MA |
|
|
200 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600 |
|
Waltham, MA |
|
|
696 |
|
|
|
1,452 |
|
|
$ |
1,452 |
|
|
$ |
1,452 |
|
|
$ |
363 |
|
|
|
5,415 |
|
Chicago, IL |
|
|
319 |
|
|
|
427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
746 |
|
San Francisco, CA |
|
|
256 |
|
|
|
513 |
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
1,281 |
|
Reading, UK |
|
|
285 |
|
|
|
570 |
|
|
|
570 |
|
|
|
570 |
|
|
|
142 |
|
|
|
2,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility obligations, gross |
|
|
2,860 |
|
|
|
4,488 |
|
|
|
2,534 |
|
|
|
2,022 |
|
|
|
505 |
|
|
|
12,409 |
|
Contracted and assumed
sub-lease income |
|
|
(1,026 |
) |
|
|
(1,718 |
) |
|
|
(1,467 |
) |
|
|
(1,215 |
) |
|
|
(304 |
) |
|
|
(5,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash obligations |
|
$ |
1,834 |
|
|
$ |
2,770 |
|
|
$ |
1,067 |
|
|
$ |
807 |
|
|
$ |
201 |
|
|
$ |
6,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed sub-lease income |
|
$ |
|
|
|
$ |
135 |
|
|
$ |
270 |
|
|
$ |
270 |
|
|
$ |
67 |
|
|
$ |
742 |
|
|
|
|
* |
|
represents a location for which we have executed a lease settlement agreement |
(15) LITIGATION
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 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
-18-
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 motion 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. While
management cannot predict with certainty the outcome of the litigation, management does not expect
any material adverse impact to the Companys business, or the results of its operations, from this
matter.
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 management believes 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, management believes the
Company has meritorious defenses and intends to defend the case vigorously. While management cannot
predict with certainty the outcome of the litigation or whether the settlement will be approved,
management does not expect any material adverse impact to the Companys business, or the results of
its operations, from this matter.
The Company is also subject to various other claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of these matters is not
expected to have a material effect on the Companys business, financial condition or results of
operations.
(16) CONCENTRATION OF CREDIT RISK
ATG provides credit to customers in the normal course of business. Credit is extended to new
customers based upon industry reputation and demonstrated financial stability. Credit is extended
to existing customers based upon prior payment history and demonstrated financial stability. Credit
risk associated with accounts receivable is limited due to the large number of customers and their
dispersion over multiple industries and geographic areas. ATG maintains an allowance for potential
credit losses but historically has not experienced any significant losses related to individual
customers or groups of customers in any particular industry or geographic area. There were no
customers at June 30, 2005 that accounted for greater than 10% of accounts receivable. At December
31, 2004 one customer accounted for 11% of accounts receivable.
(17) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued SFAS 123R, Share-Based
Payment, 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. The Company is
required to adopt SFAS 123R on January 1, 2006.
Public companies are required to adopt the new standard using a modified prospective method or
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 modified
-19-
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 utilizing
the modified prospective method. The Company has not yet determined the method of adoption it will
use and the Company has not completed its evaluation of the effects of adopting SFAS 123R.
Item 2. 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 1 of this Quarterly Report on Form 10-Q. 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 below under the heading Risk Factors that May Affect
Results and elsewhere in this report.
Between December 1991, when we were founded, and 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 provided software solutions that enabled 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 that are designed to help our clients market, sell
and provide self-service opportunities to their customers and partners. 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,
software maintenance and support and application hosting. 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. Application
hosting services are typically billed monthly as the services are provided.
As of June 30, 2005 we had offices in the United States, United Kingdom, France, Spain and
Northern Ireland with sales personnel in United States, United Kingdom, France, and Spain. Revenues
from customers outside the United States accounted for 22% and 30% of our total revenues for the
three months ended June 30, 2005 and 2004, and 24% and 35% of our total revenues for the six months
ended June 30, 2005 and 2004, respectively.
Critical Accounting Policies and Estimates
This managements discussion of financial condition and results of operations analyzes our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States.
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. The
preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the 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.
-20-
Revenue Recognition
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, or SOP, 97-2 ,
Software Revenue Recognition and 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) collection 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, service agreements and deferred product license revenues.
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 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 Debt
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 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.
Restructuring Expenses
During the three and six months ended June 30, 2005, the Company recorded net restructuring
charges of approximately $671,000 and $875,000, respectively. During
-21-
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,
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 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 June 30, 2005, we had recorded accruals for the costs to terminate employees and
exit certain facilities and lease obligations, which may be adjusted periodically for resolution of
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 in the real estate market or if 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.
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.
Included in our accrued restructuring balance at June 30, 2005 was estimated sublease income
of $742,000, 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 adjustments
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 2005, 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 2005, 2004, 2003 and 2002, we determined that $0, $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 2005, 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 2005, 2004, 2003 and 2002 we deemed $118,000, $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.
-22-
Goodwill
We account for goodwill under SFAS 142, Goodwill and Other Intangible Assets. 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 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 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 inherently subject to uncertainty. 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 perform the annual impairment assessment as of December 1 of each year.
Accounting for Income Taxes
We account for income taxes in accordance with SFAS 109, Accounting for Income Taxes, 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 June 30, 2005 and December 31, 2004, 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.
-23-
Results of Operations
The following table sets forth statement of operations data as a percentage of total revenues
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license |
|
|
26 |
% |
|
|
22 |
% |
|
|
30 |
% |
|
|
31 |
% |
Services |
|
|
74 |
|
|
|
78 |
|
|
|
70 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Services |
|
|
26 |
|
|
|
36 |
|
|
|
26 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
28 |
|
|
|
38 |
|
|
|
28 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
72 |
|
|
|
62 |
|
|
|
72 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
22 |
|
|
|
29 |
|
|
|
22 |
|
|
|
26 |
|
Sales and marketing |
|
|
34 |
|
|
|
51 |
|
|
|
32 |
|
|
|
47 |
|
General and administrative |
|
|
13 |
|
|
|
12 |
|
|
|
13 |
|
|
|
12 |
|
Restructuring charge |
|
|
3 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
74 |
|
|
|
92 |
|
|
|
69 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(2 |
) |
|
|
(30 |
) |
|
|
3 |
|
|
|
(19 |
) |
Interest and other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes |
|
|
(2 |
) |
|
|
(30 |
) |
|
|
3 |
|
|
|
(19 |
) |
Provision (benefit) for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(2 |
)% |
|
|
(30 |
)% |
|
|
3 |
% |
|
|
(19 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and the related gross margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Cost of product license revenues |
|
|
7 |
% |
|
|
11 |
% |
|
|
7 |
% |
|
|
8 |
% |
Gross margin on product license revenues |
|
|
93 |
% |
|
|
89 |
% |
|
|
93 |
% |
|
|
92 |
% |
Cost of services revenues |
|
|
36 |
% |
|
|
46 |
% |
|
|
37 |
% |
|
|
46 |
% |
Gross margin on services revenues |
|
|
64 |
% |
|
|
54 |
% |
|
|
63 |
% |
|
|
54 |
% |
-24-
Three and six months ended June 30, 2005 and 2004
Revenues
Total revenues increased 41% to $20.3 million for the three months ended June 30, 2005 from
$14.3 million for the three months ended June 30, 2004 and increased 36% to $42.3 million for the
six months ended June 30, 2005 from $31.1 million for the six months ended June 30, 2004. The
increase was primarily attributable to our acquisition of Primus in November 2004 and the shift in
the focus of our marketing and sales efforts from infrastructure products to application products.
Since 2004 our focus has been on e-commerce and 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 increase in revenues compared to the second quarter of 2004
was also partly attributable to our new application hosting service, which generated revenues of
approximately $1.1 million for the three months ended June 30, 2005 and $2.4 million during the six
months ended June 30, 2005.
Revenues generated from international customers increased to $4.5 million, or 22% of total
revenues, for the three months ended June 30, 2005, from $4.3 million, or 30% of total revenues,
for the three months ended June 30, 2004, and decreased to $10.2 million, or 24% of total revenues
for the six months ended June 30, 2005, from $10.8 million, or 35% of total revenues, for the six
months ended June 30, 2004.
We expect total revenues in 2005 in the range of $87 million to $93 million as we launch new
products and continue to realize the benefits of our Primus acquisition.
No customer accounted for more than 10% of our total revenues for the three or six months
ended June 30, 2005 or June 30, 2004.
Product License Revenues
Product license revenues increased 69% to $5.3 million for the three months ended June 30,
2005 from $3.1 million for the three
months ended June 30, 2004 and increased 34% to $12.7 million for the six months ended June 30,
2005 from $9.5 million for the six months ended June 30, 2004. The increase was primarily
attributable to our acquisition of Primus in November 2004 and the shift in the focus of our
marketing and sales efforts from infrastructure products to application products.
Product license revenues generated from international customers increased to $1.4 million for
the three months ended June 30, 2005 from $927,000 for the three months ended June 30, 2004. The
increase in international revenues was due primarily to timing of certain deals and the addition of
the Primus product line. Product license revenues generated from international customers decreased
to $3.3 million for the six months ended June 30, 2005 from $4.3 million for the six months ended
June 30, 2004. The decrease in international revenues was due primarily to the timing of certain
deals.
Product license revenues as a percentage of total revenues for the three months ended June 30,
2005 and 2004 were 26% and 22%, respectively, and for the six months ended June 30, 2005 and 2004
were 30% and 31% respectively. We expect this percentage to be in the range of 30% to 35% for 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 or price protection. 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 out to end users directly. We have approximately 22 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 quarter ended June 30,
2005 and 2004.
The table below sets forth, for the periods indicated, product revenues recognized from
reseller arrangements (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Reseller revenues |
|
$ |
22 |
|
|
$ |
122 |
|
|
$ |
782 |
|
|
$ |
1,018 |
|
Percentage of product revenues |
|
|
|
% |
|
|
4 |
% |
|
|
6 |
% |
|
|
11 |
% |
Services Revenues
Services revenues increased 34% to 15.0 million for the three months ended June 30, 2005 from
$11.2 million for the three months ended June 30, 2004 and increased 37% to $29.6 million for the
six months ended June 30, 2005 from $21.6 million for the six months ended June 30, 2004. The
increase was primarily attributable to new services revenues from the acquisition of Primus, along
with our new application hosting services offering, which generated revenues of $1.1 million and
$2.4 million for the three and six months ended June 30, 2005, respectively. We expect services
revenues to be higher in 2005 as compared to 2004.
Support and maintenance revenues were 64% of total service revenues for the three months ended
June 30, 2005, as compared to 61% for the three months ended June 30, 2004, and were 64% of total
service revenues for the six months ended June 30, 2005 as compared to 65% for the six months ended
June 30, 2004. Support and maintenance revenues, on a dollar value basis, were higher for the
three and six months ended June 30, 2005 due primarily to the addition of Primus active support
and maintenance customer base, offset by a portion of existing customers electing not to renew
their support coverage.
-25-
Table of Contents
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 14% to $378,000 for the three months ended June 30,
2005 from $331,000 for the three months ended June 30, 2004 and increased 29% to $942,000 for the
six months ended June 30, 2005 from $730,000 for the six months ended June 30, 2004. These
increases were primarily related to amortization expense of $204,000 and $408,000 for the three and
six months ended June 30, 2005 related to developed technology, an intangible asset recorded as
part of the Primus acquisition.
For the three and six months ended June 30, 2005 and 2004, cost of product license revenues as
a percentage of total revenues was 2%. We anticipate the cost of product license revenues, as a
percentage of total revenues, to be between 1% and 3% for 2005.
Gross Margin on Product License Revenues
For the three months ended June 30, 2005 and 2004, gross margin on product license revenues
was 93%, or $4.9 million, and 89%, or $2.8 million, respectively, and for the six months ended June
30, 2005 and 2004, gross margin on product license revenues was 93%, or $11.8 million, and 92%, or
$8.8 million, respectively. The increase was primarily related to increased product license
revenues primarily attributable to the acquisition of Primus.
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. Additionally cost
of services revenues includes fees for hosting facilities, as well as equipment and related
depreciation costs. Cost of services revenues varies significantly from period to period 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, the
level of third-party contractors fees, and the amount of equipment and hosting space required.
Cost of services revenues increased 5% to $5.4 million for the three months ended June 30,
2005 from $5.1 million for the three months ended June 30, 2004, and increased 9% to $10.8 million
for the six months ended June 30, 2005 from $9.9 million for the six months ended June 30, 2004.
The increase was primarily attributable to an increase in salaries and benefits attributable to
higher headcount and increased use of third party contractors. Our usage of outside professional
services increased by $156,000 and $420,000 for the three and six months ended June 30, 2005
compared to the same period in 2004.
For the three months ended June 30, 2005 and 2004, cost of services revenues as a percentage
of total revenues was 26% and 36%, respectively, and for the six months ended June 30, 2005 and
2004, cost of services revenues as a percentage of total revenues was 26% and 32%, respectively. We
anticipate the cost of services revenues, as a percentage of total revenues, to be between 25% and
30% for 2005.
Gross Margin on Services Revenues
For the three months ended June 30, 2005 and 2004, gross margin on services revenues were 64%,
or $9.6 million, and 54%, or $6.1 million, respectively, and for the six months ended June 30, 2005
and 2004, gross margin on services revenues were 63%, or $18.7 million, and 54%, or $11.7 million,
respectively. The increase in gross margin and gross margin as a
percentage of service revenues was primarily attributable to increased services
revenues, including our new application hosting offering, which generated $1.1 million and $2.4
million in revenue during the three and six months ended June 30, 2005, respectively.
We expect gross margin on services revenues for 2005 to be approximately 60% to 65% for 2005.
Research and Development Expenses
Research and development expenses consist primarily of salary and related costs to support
product development. To date, all software development costs have been expensed as research and
development in the period incurred.
Research and development expenses increased 10% to $4.5 million for the three months ended
June 30, 2005 from $4.2 million for the three months ended June 30, 2004, and increased 10% to $9.1
million for the six months ended June 30, 2005 from $8.3 million for the six months ended June 30,
2004. The increase in spending was primarily attributable to an increase in our use of third party
offshore contractors and to higher professional fees, which increased by $388,000 and $844,000
during the three and six months ended June 30, 2005 respectively.
Research and development expenses as a percentage of total revenues were 22% and 29% for the
three months ended June 30, 2005 and 2004 respectively and were 22% and 27% for the six months
ended June 30, 2005 and 2004, respectively. We anticipate that research and development expenses as
a percentage of total revenues will be in the range of 20% to 22% for 2005.
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 3% to $7.0 million for the three months ended June 30,
2005 from $7.2 million for the three months ended June 30, 2004 and decreased 5% to $13.8 million
for the six months ended June 30, 2005 from $14.6 million for the six months ended June 30, 2004.
The decrease is primarily attributable to cost saving initiatives that resulted from a reduction in
the workforce of our sales and marketing groups, reduced recruitment fees and training costs, and a
reduction in our spending on marketing programs, 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 $342,000 and $684,000 for the three and six months ended June 30, 2005, respectively.
-26-
For three months ended June 30, 2005 and 2004, sales and marketing expenses as a
percentage of total revenues were 35% and 50%, respectively and for six months ended June 30, 2005
and 2004, sales and marketing expenses as a percentage of total revenues were 33% and 47%,
respectively. We anticipate that sales and marketing expenses as a percentage of total revenues
will be in the range of 35% to 40% for 2005.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs for
human resource, legal, operations and finance employees and legal and accounting fees.
General and administrative expenses increased 55% to $2.7 million for the three months ended
June 30, 2005 from $1.7 million for the three months ended June 30, 2004 and increased 55% to $5.7
million for the six months ended June 30, 2005 from $3.7 million for the six months ended June 30,
2004. Approximately 86% of the increase was related to an increase in outside services and
professional fees, with most of the remainder related to an increase in insurance expenses.
Contributing to the increase in outside services of approximately $570,000 and $1.6 million for the
three and six months ended June 30, 2005, respectively, over the same period in 2004 were costs
associated with Sarbanes-Oxley compliance and the integration of the Primus acquisition.
For the three months ended June 30, 2005 and 2004, general and administrative expenses as a
percentage of total revenues were 13% and 12%, respectively, and for the six months ended June 30,
2005 and 2004, general and administrative expenses as a percentage of total revenues were 13% and
12% respectively. We anticipate that general and administrative
expenses will, as a percentage of revenue, be in the 12% to 14% range for 2005.
Restructuring
During the quarter ended June 30, 2005, we recorded a net restructuring charge of $671,000,
primarily due to a $1.8 million charge related to the relocation of our San Francisco office and
other facility charges; offset by $1.1 million for adjustments in estimates related to sublease
costs included in the 2001, 2002 and 2004 actions. During the quarter ended March 31, 2005, we
recorded a net restructuring charge of approximately $204,000 due to adjustments in estimates
related to the 2004 restructuring charge for employee severance benefits payable in international
geographies. 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 us 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 to our revenue
projections and changing staff requirements as a result of strategic product realignments and our
acquisition of Primus and to eliminate facilities that were not needed in order to efficiently run
our operations. In April 2005, we relocated our San Francisco office to gain further efficiencies.
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 2005, 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) 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 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
in Estimates |
|
|
|
|
|
Accrued |
|
|
Balance as of |
|
Resulting in |
|
|
|
|
|
Restructuring |
|
|
December 31, 2004 |
|
Reduced Charges |
|
Payments |
|
Balance as of June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities-related costs and impairments |
|
$ |
6,254 |
|
|
$ |
(783 |
) |
|
$ |
(1,359 |
) |
|
$ |
4,112 |
|
Employee severance, benefits and related costs |
|
|
57 |
|
|
|
|
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,311 |
|
|
$ |
(783 |
) |
|
$ |
(1,416 |
) |
|
$ |
4,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-27-
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 comprise 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 leasehold 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 from $25 to $18 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 from 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.
During 2005, we made adjustments to estimates of sublease income related to the 2001 actions,
resulting in a credit to the restructuring charge of $783,000. The change in estimate was primarily
due to our continued evaluation of the financial condition of our subtenants and their ability to
meet their financial obligations to us.
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. None of these employees remained employed as
of June 30, 2002. In addition, we settled 11,762 exchangeable shares with an 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 an employee terminated as part of the 2001 restructuring action.
During 2004, we reached final settlement with this employee resulting in a reduction to the
restructuring charge of $172,000.
Asset Impairments
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 related to
purchased software, to record the software at its net realizable value of zero due to our
abandoning a certain product development strategy. The purchased software had no future use to us.
Marketing Costs and Legal and 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 the Company. During 2002, we
unexpectedly were 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.
-28-
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 of $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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
in Estimates |
|
|
|
|
|
Accrued |
|
|
Balance as of |
|
Resulting in |
|
|
|
|
|
Restructuring |
|
|
December 31, 2004 |
|
Reduced Charges |
|
Payments |
|
Balance as of June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities-related costs and impairments |
|
$ |
1,155 |
|
|
$ |
(36 |
) |
|
$ |
(255 |
) |
|
$ |
864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 intend 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 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, 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 from $23
to $18 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 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 in 2003 to
$4.1 million.
During 2004, we recorded an adjustment to our estimates related to the 2002 actions, resulting
in a credit to the restructuring charge of $242,000.
We
executed a sub-lease agreement during the three months ended June 30,
2005. As a result, we recorded an adjustment to our estimates of
sub-lease costs related to the 2002 actions, resulting in a credit to
the restructuring charge of $36,000.
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. 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 benefits 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 due to amounts being settled at less than the amount recorded as a result of
foreign currency exchange movements.
-29-
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
Accrued |
|
Adjustments |
|
|
|
|
|
Accrued |
|
|
Restructuring |
|
in Estimates |
|
|
|
|
|
Restructuring |
|
|
Balance as of |
|
Resulting in |
|
|
|
|
|
Balance as of |
|
|
December 31, 2004 |
|
Reduced Charges |
|
Payments |
|
June 30, 2005 |
Facilities-related costs and impairments |
|
$ |
1,373 |
|
|
$ |
(24 |
) |
|
$ |
(249 |
) |
|
$ |
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2003 Actions
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 intended 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 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 of 2003, as result of updated
market conditions, the estimated sublet rental rate was lowered from $35 per square foot to $30 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 was 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.
Asset Impairments
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 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 have ceased future development work specifically related to this
third-party software. However, we have not changed our overall product strategy for the purpose for
which the software was acquired.
-30-
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 intended 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 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 sublet this space before our lease expires
resulting in an additional charge of $198,000. 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 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 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 reduction
to the restructuring charge of $77,000.
During 2005, we recorded an adjustment to our cost estimates related to the 2003 actions, resulting
in a credit to the restructuring charge of $24,000.
2004 Actions
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 related to 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 before December 31, 2004 and intended 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, 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. As of December
31, 2004, 13 employees had been terminated. As of June 30, 2005 the termination process was
completed.
-31-
A summary of the charges and related activity of the restructuring accruals is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
Accrued |
|
Adjustments |
|
|
|
|
|
Accrued |
|
|
Restructuring |
|
in Estimates |
|
|
|
|
|
Restructuring |
|
|
Balance as of |
|
Resulting in |
|
|
|
|
|
Balance as of |
|
|
December 31, 2004 |
|
Additional Charges |
|
Payments |
|
June 30, 2005 |
Facilities-related costs and impairments |
|
$ |
750 |
|
|
$ |
(267 |
) |
|
$ |
(239 |
) |
|
$ |
244 |
|
Employee severance, benefits and related costs |
|
|
1,569 |
|
|
|
168 |
|
|
|
(1,457 |
) |
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,319 |
|
|
$ |
(99 |
) |
|
$ |
(1,696 |
) |
|
$ |
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2005, we recorded a restructuring charge of $200,000, resulting
from adjustments to estimates made in 2004 for employee severance benefits payable in international
geographies, and a $4,000 charge to facilities related cost due to adjusting our estimates.
During the second quarter of 2005, we recorded a credit of $32,000 to the employee severance
costs, and a credit of $271,000 to the facilities related cost charge, due to adjusting our
estimates of net sublease obligations as a result of executing a sub lease agreement for which the
term began in the second quarter of 2005.
2005 Actions
During 2005, the Company recorded net restructuring charges of $875,000, comprised of new
actions of $1.8 million and net credits resulting from changes in estimates related to prior
actions of $942,000.
Facilities-Related Costs and Impairments
During the second quarter of 2005, we relocated our San Francisco office and reduced the amount of
space we occupy in San Francisco. As a result of this action and the cessation of the use of this
facility and other minor facilities charges, we recorded facilities-related charges of $1.8 million
primarily comprised of $1.0 million of deferred rent related to the abandoned space, $118,000 of
lease hold improvements written down to their fair value, and $557,000 for an operating lease
related to idle office space vacated during the second quarter of 2005 net of assumptions for
sublease income based on an executed sublease agreement. In accordance with SFAS 146, we recorded
the present value of the net lease obligation.
A summary of the charges and related activity of the restructuring accruals is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-Offs |
|
|
|
|
2005 |
|
And |
|
Balance as of |
|
|
Charges |
|
Payments |
|
June 30, 2005 |
Facilities-related costs and impairments |
|
$ |
1,817 |
|
|
$ |
(1,350 |
) |
|
$ |
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned Facilities Obligations
At June 30, 2005, 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 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Locations |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Total |
Cambridge, MA* |
|
$ |
1035 |
|
|
$ |
1,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,070 |
|
Cambridge, MA |
|
|
69 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160 |
|
Cambridge, MA |
|
|
200 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600 |
|
Waltham, MA |
|
|
696 |
|
|
|
1,452 |
|
|
$ |
1,452 |
|
|
$ |
1,452 |
|
|
$ |
363 |
|
|
|
5,415 |
|
Chicago, IL |
|
|
319 |
|
|
|
427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
746 |
|
San Francisco, CA |
|
|
256 |
|
|
|
513 |
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
1,281 |
|
Reading, UK |
|
|
235 |
|
|
|
570 |
|
|
|
570 |
|
|
|
570 |
|
|
|
142 |
|
|
|
2,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility obligations, gross |
|
|
2,860 |
|
|
|
4,488 |
|
|
|
2,534 |
|
|
|
2,022 |
|
|
|
505 |
|
|
|
12,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracted and assumed
sub-lease income |
|
|
(1,026 |
) |
|
|
(1,718 |
) |
|
|
(1,467 |
) |
|
|
(1,215 |
) |
|
|
(304 |
) |
|
|
(5,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash obligations |
|
$ |
1,834 |
|
|
$ |
2,770 |
|
|
$ |
1,067 |
|
|
$ |
807 |
|
|
$ |
201 |
|
|
$ |
6,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed sub-lease income |
|
$ |
|
|
|
$ |
135 |
|
|
$ |
270 |
|
|
$ |
270 |
|
|
$ |
67 |
|
|
$ |
742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents a location for which we have executed a lease settlement agreement |
Interest and Other Income (Expense), Net
Interest and other income (expense), net increased to $89,000 for the three months ended June
30, 2005 from $64,000 for the three months ended June 30, 2004 and increased to $100,000 for the
six months ended June 30, 2005 from $17,000 for the six months ended June 30, 2004 . The increase
was primarily due to an increase in interest income of $38,000 and $93,000 for the three and six
month periods, respectively.
-32-
Provision for Income Taxes
We expect to have minimal or no Federal or foreign income taxes in 2005 due to the use of net
operating loss carryforwards and the projection of a taxable loss in domestic and foreign locations
in 2005. As a result of net operating losses incurred, and after evaluating our anticipated
performance over our normal planning horizon, we have provided a full valuation allowance for our
net operating loss carryforwards, research credit carryforwards and other net deferred tax assets.
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 public
and private sales of equity securities, and commercial credit facilities. At July 31, 2005, we had
$16.0 million in cash and cash equivalents and $10.2 million in marketable securities.
Cash used in operating activities was $1.6 million for the six months ended June 30, 2005.
This consisted of net income of $1.1 million, depreciation and amortization of $2.1 million, a
non-cash restructuring charge of $1.2 million and a decrease in accounts receivable of $5.2
million, offset by a decrease in accrued restructuring of $4.1 million. Other changes in working
capital items consisted primarily of $1.4 million in cash used for accrued expenses, an increase in
prepaid expenses of $1.3 million, a decrease in accounts payable of $1.3 million, and a decrease in
deferred revenues of $3.5 million.
Cash used in operating activities was $9.3 million for the six months ended June 30, 2004.
This consisted of operating losses of $6.0 million, a decrease in accrued restructuring of $6.7 million and a decrease
in accrued expenses of $2.0 million, offset by depreciation and amortization of
$1.0 million and a decrease in accounts receivable of $4.5 million. Other
changes in working capital items consisted primarily of a $719,000 decrease in
deferred revenue, a $684,000 decrease in prepaid expenses, and an increase in
accounts payable of $787,000.
Our investing activities for the six months ended June 30, 2005 used cash
of $1.5 million and consisted primarily of payment of acquisition costs of $1.0
million, capital expenditures of $271,000, net proceeds from maturity of
marketable securities of $418,000, offset by a decrease in other assets of
$241,000. Our investing activities for the six months ended June 30, 2004 used
$911,000 and consisted primarily of capital expenditures of $345,000 and net
purchases of marketable securities of $570,000
We expect that capital expenditures will total approximately $1.0 million
for the year ending December 31, 2005.
Net cash provided by financing activities was $688,000 for the six months
ended June 30, 2005, representing proceeds from the employee stock purchase plan
and the exercise of stock options aggregating $1.1 million, offset by principal
payments on notes payable of $360,000 and payments on capital leases
of $28,000. Net cash provided by financing activities
was $847,000 for the six months ended June 30, 2004, representing proceeds from
the employee stock purchase plan and the exercise of stock options.
Accounts Receivable and Days Sales Outstanding
Our accounts receivable balance and days sales outstanding, or DSO, as
of June 30, 2005 and December 31, 2004 were as follows:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
DSO |
|
|
82 |
|
|
|
129 |
|
Revenue |
|
$ |
42,255 |
|
|
$ |
69,219 |
|
Accounts Receivable |
|
$ |
19,196 |
|
|
$ |
24,430 |
|
As of June 30, 2005 our DSO had decreased significantly from the DSO at
December 31, 2004 due to collections on support and maintenance renewals as well
as the effect of receiving payments during 2005 on deals that were recognized
into revenue during 2005, but had closed at the end of 2004. Also contributing
to the decrease is the effect of having a full 6 months of Primus revenue in
2005.
The higher DSO at December 31, 2004 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 accounts receivable balance at December 31, 2004
is offset by a significant deferred revenue balance of $25.4 million.
-33-
Credit Facility
On 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. Effective December 24, 2002 the revolving line of credit increased to $20
million. The line of credit bears interest at the Banks prime rate (6.0% at June 30, 2005). 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. 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 of $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.
We are required to maintain unrestricted and unencumbered cash, which includes cash equivalents and
marketable securities, of $20 million at the end of each month.
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 June 30, 2005, 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 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 June 30, 2005, we had issued LCs
totaling $7.6 million, which are supported by this facility. The LCs have been issued in favor of
various landlords and equipment leasing companies to secure obligations under our facility leases
pursuant to leases expiring from August 2006 through March 2009. As of June 30, 2005, approximately
$12.4 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 are $16.3 million, which
includes approximately $4.2 million payable in the remainder of 2005. Of the $16.3 million, $11.0
million is for leases that are included in restructuring. In accrued restructuring at June 30,
2005, the $11.0 million was reduced to $6.7 million after taking into consideration, estimated
sublease income, contracted sublease income, vacancy periods and operating cash of the various
subleased properties. Of the $16.3 million in lease payments, $15.8 million is for facility leases
and $ 479,000 is for equipment leases.
Contractual Obligations
On June 30, 2005, our contractual cash obligation, which consists of operating and capital
leases, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
|
|
|
Remainder |
|
|
|
|
|
|
|
|
|
5 |
Contractual Obligations |
|
Total |
|
of 2005 |
|
2-3 years |
|
4-5 years |
|
Years |
Lease Commitments |
|
$ |
16,273 |
|
|
$ |
4,158 |
|
|
$ |
8,923 |
|
|
$ |
3,192 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $28.7 million in cash and cash
equivalents and marketable securities at June 30, 2005, 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 SFAS 123R, Share-Based
Payment, which replaces SFAS 123 and supersedes APB Opinion 25. SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
-34-
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. We are required to adopt SFAS 123R on January 1, 2006.
Public companies are required to adopt the new standard using a modified prospective method or
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 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 utilizing 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.
RISK FACTORS THAT MAY AFFECT RESULTS
This quarterly 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.
Risks Related To Our Business
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:
|
|
|
fluctuating economic conditions, particularly as they affect our customers willingness to implement
new e-commerce solutions; |
|
|
|
|
the timing of sales and revenue recognition of our products and services; |
|
|
|
|
the timing of customer orders and product implementations; |
|
|
|
|
delays in introducing new products and services; |
|
|
|
|
the size of price discounting and/or concessions; |
|
|
|
|
the mix of revenues derived from products and services; |
|
|
|
timing of hiring and utilization of services personnel; |
|
|
|
|
cost overruns related to fixed-price services projects; |
|
|
|
|
the mix of domestic and international sales; |
|
|
|
|
increased expenses, whether related to sales and marketing, product development or administration; and |
|
|
|
|
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.
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:
-35-
|
|
|
sales, marketing, service and support organizations; |
|
|
|
|
research and development organizations; |
|
|
|
|
Information and communications systems; |
|
|
|
|
operating procedures; |
|
|
|
|
accounting systems and financial controls; and |
|
|
|
|
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:
|
|
|
problems with compatibility of business cultures; |
|
|
|
|
customer perception of an adverse change in service standards, business focus, billing practices or
product and service offerings; |
|
|
|
|
costs and inefficiencies in delivering products and services to our customers; |
|
|
|
|
problems in successfully coordinating our research and development efforts; |
|
|
|
|
difficulty in integrating sales, support and product marketing; |
|
|
|
|
costs and delays in implementing common systems and procedures, including financial accounting systems; and |
|
|
|
|
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.
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, our Primus subsidiary has previously been
involved in litigation alleging that Primus had infringed United States patents owned by
ServiceWare. 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.
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
-36-
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:
|
|
|
cease selling or using products or services that incorporate the challenged intellectual property; |
|
|
|
|
obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology; or |
|
|
|
|
redesign those products or services to avoid infringement. |
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 second quarter of 2005, 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 June 30, 2005, we
had an accumulated deficit of $204.0 million. Although our revenues increased 36% to $42.3 million
for the six months ended June 30, 2005 compared with $31.1 million for the six months ended June
30, 2004, this was primarily attributable to our acquisition of Primus. 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.
Turnover in our personnel may impair our ability to develop and implement a business strategy or
maintain internal control, 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
finance, 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. We
cannot assure you that there will not be additional departures in the future. These changes in
management, and any future similar changes, may be disruptive to our operations or affect our
ability to maintain effective internal controls over financial reporting. In addition, equity
incentives such as stock options constitute an important part of our total compensation program for
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.
In addition, the success of our recent Primus acquisition will depend in part on the retention
of key technical and management personnel critical to its business and operations. 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 or affect our
ability to maintain effective internal controls over financial reporting, 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.
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 quarters, 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
-37-
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.
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, BroadVision, Blue Martini, Epiphany, Amazon.com, Unica and
GSI Commerce.
The market for our service products is also rapidly evolving, and intensely competitive. Our
suite of service 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 Knova.
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.
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.
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 June 30, 2005 we had offices in the United Kingdom, France, Spain and Northern Ireland
with sales personnel in United Kingdom, France and Spain. We derived 24% of our total revenues in
the six months ended June 30, 2005 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, 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.
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 June 30, 2005, we had issued letters of credit
totaling $7.6 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 of $20 million at the end of each month.
At
July 31, 2005, we had $26.2 million in cash, cash equivalents and marketable securities,
which represents a decrease of $2.5 million from $28.7 million in cash, cash equivalents and
marketable securities at June 30, 2005. The profitability covenant, as amended, allows for net
losses not to exceed $500,000 for the second quarter of 2005 and
$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.
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 33% of our product license revenues in 2005 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,
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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 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.
Competition with our resellers could limit our sales opportunities and jeopardize our relationship
with our resellers.
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.
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.
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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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 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.
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.
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Since our customers use our products for critical business applications such as
e-commerce, errors, defects or other performance problems could result in damage to our customers.
They could seek significant compensation from us for the losses they suffer. Although our license
agreements typically contain provisions designed to limit our exposure to product liability claims,
existing or future laws or unfavorable judicial decisions could negate these limitations. Even if
not successful, a product liability claim brought against us would likely be time consuming and
costly.
Our announced restructurings may not result in the reduced cost structure we anticipate and may
have other adverse impacts on productivity.
During 2005 we incurred a net restructuring charge of $875,000, primarily due to a $1.8
million charge related to the relocation of our San Francisco office and a $204,000 charge related
to adjustments in estimates related to the 2004 restructuring charge for employee severance
benefits payable in international geographies, offset by $1.1 million for adjustments in estimates
related to sublease costs included in the 2001, 2002, and 2004 actions. At the end of 2004, we
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. The 2004 action resulted in a
net restructuring charge of $3.6 million, 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 and changes in estimates of previously recorded charges 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.
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.
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
support 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.
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Risks Related To the Internet Industry
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.
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.
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
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 $0.94
per share to $1.50 per share between January 1, 2005 and June 30, 2005. Fluctuations in market
price and
volume are particularly common among securities of Internet and software companies. The market
price of our common stock may fluctuate significantly in response to the following factors, some of
which are beyond our control:
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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. |
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.
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
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.
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.
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 our company and our
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 our companys business and prospects, including its ability to
recruit and retain skilled officers and directors. In addition, we 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. We 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. 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 in the future there will not be material
weaknesses in our internal controls, including internal controls related to our Primus subsidiary.
A negative reaction by the equity markets to the reporting of a 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.
Changes in the accounting treatment of stock options could adversely affect our results of
operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based
Payment, we will be required to expense employee stock options for financial reporting purposes,
effective for our 2006 fiscal year. Such stock option expensing will require us to value 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 2 of the Unaudited Condensed 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 11 to the Unaudited
Condensed Consolidated Financial Statements.
Item 3. 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 to the fair values of these securities since June 30, 2005.
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 June 30,
2005, 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 June 30, 2005 we held no outstanding derivative instruments. We do not
use derivative instruments for trading or speculative purposes.
Item 4. 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 of June 30, 2005. Based on this evaluation, our
chief executive officer and chief financial officer concluded that, as of June 30, 2005, 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 our controls will succeed in achieving their goals
under all potential future conditions.
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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
June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. 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. While we cannot predict with certainty the outcome of the
litigation, we do not expect any material adverse impact to our business, or the results of our
operations, from this matter.
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 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.
We are also subject to various other claims and legal actions arising in the ordinary course
of business. In the opinion of management, the ultimate disposition of these matters is not
expected to have a material effect on our business, financial condition or results of operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 25, 2005, we held our annual meeting of stockholders. Our stockholders elected Michael
A. Brochu, Robert D. Burke, and Mary E. Makela to serve as Class III directors for a three year
term. In addition, the terms of office of our other directors, David B. Elsbree, John R. Held,
Ilene H. Lang, Daniel C. Regis, Paul G. Shorthose, and Phyllis S. Swersky continued after our
annual meeting off stockholders. The votes cast to elect the Class III directors were as
follows:
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Votes for |
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Votes withheld |
Michael A. Brochu |
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99,030,267 |
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673,638 |
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Robert D. Burke |
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99,031,240 |
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672,665 |
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Mary E. Makela |
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98,575,006 |
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1,128,899 |
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Item 5. Other Information
Item 6. Exhibits
31.1 Certifications of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14 and
15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Principal Financial Officer Pursuant to Exchange Act Rules 13a-14 and
15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certifications of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
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ART TECHNOLOGY GROUP, INC.
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(Registrant) |
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By:
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/s/ ROBERT D. BURKE |
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Robert D. Burke |
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President and Chief Executive Officer |
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(principal executive officer) |
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By:
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/s/ JULIE M.B.BRADLEY |
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Julie M.B.Bradley |
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Senior Vice President, Finance and Chief |
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Financial Officer |
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(principal financial officer) |
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By:
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/s/ PAUL G. FITZGERALD |
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Paul G. Fitzgerald |
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Vice President, Finance and Corporate Controller |
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(principal accounting officer) |
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Date:
August 8, 2005
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