e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 000-26679
Art Technology Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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04-3141918 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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25 First Street
Cambridge, Massachusetts
(Address of principal executive offices) |
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02141
(Zip Code) |
(617) 386-1000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value with Associated Preferred
Stock Purchase Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and
large accelerated filer in
Rule 12b-2 of the
Exchange Act.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
As of June 30, 2005 (the last business day of the
registrants most recently completed second fiscal
quarter), the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $115,023,000.
Documents Incorporated by Reference
Portions of the registrants proxy statement for its annual
meeting of stockholders to be held on May 23, 2006 are
incorporated by reference in Items 10, 11, 12, 13 and
14 of Part III.
ART TECHNOLOGY GROUP, INC.
INDEX TO
FORM 10-K
References in this report to we, us,
our and ATG refer to Art Technology
Group, Inc. and its subsidiaries. ATG and Art Technology Group
are our registered trademarks, and ATG Wisdom is our trademark.
This report also includes trademarks and trade names of other
companies.
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PART I
Certain of the information contained in this annual report on
Form 10-K consists
of forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These
statements are subject to risks and uncertainties and are based
on the beliefs and assumptions of our management based on
information currently available to our management. Use of words
such as believes, expects,
anticipates, intends, plans,
estimates, should, likely or
similar expressions, indicate a forward-looking statement.
Important factors that could cause actual results to differ
materially from the forward-looking statements include, but are
not limited to, those set forth below under the heading
Risk Factors. We assume no obligation to update any
forward-looking statements.
Our Business
We develop and market an integrated suite of Internet commerce,
service and marketing solutions, as well as related services,
including support and maintenance, education, application
hosting and professional services.
We deliver software solutions to help consumer-facing
organizations create an interactive experience for their
customers and partners via the Internet and other channels. Our
software helps our clients market, sell goods and services and
provide self-service opportunities to their customers and
partners, which can enhance clients revenues, reduce their
costs and improve their customers satisfaction.
Corporate Information
We were incorporated in 1991 in the State of Delaware and have
been a publicly traded corporation since 1999. Our corporate
headquarters are at 25 First Street, Cambridge, Massachusetts
02141. We have offices in Chicago, New York, Washington D.C.,
Seattle, the United Kingdom, France and Northern Ireland. As of
December 31, 2005, we had a total of 309 employees and we
had licensed our products to more than 600 customers. Our
Internet web site address is www.atg.com.
From 2001 through 2004, our annual revenue declined and we
incurred significant losses and negative cash flow from
operations. In 2005, our total revenues grew by 31% from 2004
and we achieved profitability and positive free cash flow.
Overview
Our software solutions help organizations market to, sell to and
service their customers and partners, via the Web, email,
contact centers and mobile devices. Our solutions can enhance
our clients revenues, reduce their costs and improve their
customers satisfaction. We also offer software solutions
that enable companies to deliver a superior customer experience
via contact centers, information technology help desks, Web
(intranet and Internet) self-service and electronic
communication channels. Businesses and government organizations
can use our solutions to provide a more productive and
satisfying experience to their customers. We seek to
differentiate ourselves by designing applications that enable
our customers to provide their customers a more consistent and
more relevant experience across the various touch points of Web,
email, contact centers and across the lifecycle of marketing,
commerce and service. Our software delivers better consistency
and relevancy by capturing and maintaining information about
those customers personal preferences, online activity, and
transaction and service history, and by using this information
to deliver more personalized and contextual content to such
users.
We traditionally have marketed our products and services to
Global 2000 companies, government organizations, and other
businesses that have large numbers of online users and utilize
the Internet as a primary business channel. In the past, we have
focused on providing our software and services to businesses in
financial services, retail, media and entertainment,
telecommunications, manufacturing, high-tech, consumer products
and services industries. Our customers include Best Buy, Office
Max, Kingfisher, Neiman Marcus, Target, Friends Provident,
Merrill Lynch, Wells Fargo, HSBC, A&E Networks, Warner
Music, Cingular,
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France Telecom, Philips, Procter & Gamble,
Hewlett-Packard, American Airlines, InterContinental Hotels
Group, US Army, and US Federal Aviation Administration.
Our business has evolved significantly since our incorporation
in 1991:
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Until 1995, we functioned primarily as a professional services
organization in the Internet commerce market. |
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In 1996, we began offering Internet commerce and software
solutions, initially focusing on infrastructure products such as
our ATG Dynamo Application Server. |
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In 2004, we began to concentrate on developing application
products, having concluded that the market for infrastructure
products had become increasingly standards driven and that we
could best differentiate ourselves by offering our clients
advanced applications functionality. |
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In November 2004, we acquired Primus Knowledge Solutions, Inc. a
provider of software solutions for customer service.
Primus software helps companies deliver a superior
customer experience via contact centers,
e-mail, information
technology help desks, and web self-service. The Primus solution
extended ATGs offerings beyond commerce and marketing and
into customer service. |
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In 2004, we also began to offer our clients hosted services as
an alternative delivery model for our application solutions. We
believe that hosted services can provide significant advantages
for our clients, and provide us with a substantial opportunity
for growth. |
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In late 2005, we released our new Wisdom application suite,
combining the ATG and Primus products. The Wisdom suite provides
integrated commerce, marketing and customer service/support
solutions on a common platform. ATG Wisdom represents our
strategy for enabling enterprises to create a more relevant and
consistent experience for their customers across the Web,
e-mail, call center,
and mobile channels, and throughout the marketing, commerce, and
service lifecycle. Our ATG Wisdom product suite enables
companies to connect with customers at a personal level,
leveraging both the knowledge and experience necessary to build
strong relationships and enhance lifetime value. |
Our Strategy
Our objective is to be the industry leader in providing a
comprehensive customer-facing software platform for companies
striving to give their customers a more consistent and relevant
online experience and grow their
e-commerce and
e-services presence. We
intend to achieve this objective by implementing the following
key components of our strategy:
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Facilitate integrated life cycle experience for online
customers. We believe that our clients online
customers want to cross seamlessly between the
information-gathering, purchase and service phases of their
online activity. We believe that consumers expect marketing
messages they receive to be informed by their purchase and
service history (for example, they should not be offered a
product which they have recently purchased), service responses
to be informed by their purchase history (for example, answers
should be relevant to the products they own), and
e-commerce should be
informed by their service history and response to marketing
campaigns. Rather than focusing solely on marketing or sales or
service, we design our core software functionality to allow our
clients to provide their customers with an integrated online
marketing, sales and service experience. |
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Develop new applications that operate on leading
infrastructure products. We believe the development of
infrastructure products has become standards driven, but that
there is an opportunity for continued innovation relating to
application products. We design our products to operate on
leading J2EE application server platforms, including WebLogic
from BEA, WebSphere from IBM, and JBoss in addition to our own
J2EE Dynamo Application Servers. As a result, our application
software can provide value to new and existing clients, across a
wide range of infrastructure environments. |
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Grow our hosted services as an alternate delivery model.
We now offer our customers hosting services for the full
spectrum of ATG applications. Clients can purchase licenses to
our solutions and elect a |
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Managed Services model where we host the clients solutions
in our hosted environment; or clients can elect a subscription
OnDemand model, which requires no investment in software
licenses or support and maintenance agreements. With OnDemand we
provide a full solution for the client, including the software,
hardware and management. There are several advantages for
organizations to choose a hosting model over a traditional
license model, which may make this a potential growth area for
us. These include: |
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avoiding large upfront and ongoing expenditures required to
purchase, implement and maintain software and hardware; |
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shortening the time to market (vs. in-house development,
deployment and maintenance); |
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shifting the clients technology risks to us; and |
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leveraging our experience to accelerate growth of the
clients online business and allowing clients to focus on
their core competencies. |
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Leverage existing sales channels. We sell our products
directly to our clients and through value-added resellers. In
addition, approximately 42% of our product revenue is co-sold or
influenced by a variety of business entities, including systems
integrators, solution providers, technology partners and
value-added resellers. We currently have a broad range of
business alliances throughout the world including large system
integrators like IBM, Capgemini, EDS, HP Consulting, Blast
Radius and CSC, as well as regional integrators such as Avenue
A/ Razorfish, Professional Access, Whittman Hart, McFadyen
Consulting and Rikei. In most geographies and situations, our
goal is to maintain close relationships directly with our
clients and to motivate systems integrators to implement our
applications in their projects and solution sets. |
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Leverage and expand service capabilities. We have
extensive experience in Web application development and
integration services, as well as knowledge management design and
call-center systems deployment. Through our Professional and
Education Services organizations, we provide services to train
our systems integrators, value added resellers and complementary
software vendors in the use of our products and offer consulting
services to assist with customer implementations. We seek to
motivate our business partners to provide joint implementation
services to our end user customers. We intend to continue to
seek additional opportunities to increase revenues from product
sales by expanding our base of partners trained in the
implementation and application of our products. |
Products
We provide a suite of powerful and dynamic software solutions
designed to enable companies to deploy commerce, marketing, and
service solutions. Our software is also designed to provide
content administrators and marketing executives with greater
flexibility in maintaining their website content and in
optimizing their consumers experience to improve revenue
and cost performance.
We offer application products in three functional areas: ATG
Commerce, ATG Service, and ATG Marketing.
Our online commerce applications are designed for the
development of large consumer-facing
e-commerce sites and
channel partner extranets, and are used by our clients to
facilitate transactions with consumers and channel partners. We
believe that, by using our online sales and marketing solutions
together, our clients can create sophisticated promotions and
offers that can drive incremental sales. We offer the following
ATG Commerce solutions:
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ATG Commerce provides a robust set of application
components for creating a customized experience for businesses,
channel partners and consumers purchasing goods or services
online. ATG Commerces functionality includes catalogs,
product management, shopping carts, checkout, pricing |
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management, merchandising, promotions, inventory management and
business-to-business
order management. |
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ATG Campaign Optimizer assists marketing professionals to
define comparative tests of different offers, promotions and
product representations through an A/ B split testing solution.
The product puts those tests into production, specifying the
segments of Web site visitors to be tested, and finally writes
reports on the test results. Methods for testing campaigns
provided by our competitors often require programming by expert
developers, and sometimes even involve network infrastructure
modifications. ATG Campaign Optimizer is designed to allow
non-technical marketing professionals to create and execute
comparative tests that can be used to increase the effectiveness
of online marketing activities without the need for expert
programming or infrastructure modifications. |
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ATG Merchandising enables merchandising professionals to
launch and update catalog information and cross-sell/up-sell
promotions using a customized, dynamic workflow that ensures an
efficient, smooth deployment to maximize online sales. |
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ATG Commerce Search is a fully integrated intelligent
search solution for commerce Web sites. ATG Commerce Search more
effectively interprets the intent of a user who submits a
search; it offers multiple sorting options, such as by brand,
price, and relevance. ATG Commerce Search integrates the
shopping cart right into search results, so that shoppers can
buy directly from the results page. In addition, ATG Commerce
Search can present cross-sell and up-sell offers tailored for
the shoppers interests. |
Our customer service applications are designed to decrease
call-center and help-desk service costs, to improve the speed
with which customer needs are met, and to increase customer
loyalty and satisfaction. We believe our self-service solutions
become more useful through the use of our advanced
personalization capabilities. These personalization capabilities
increase the likelihood that customer inquiries will be managed
online, avoiding the need for costly contact center inquiry, and
also help contact center personnel respond more quickly and
accurately to inquiries which are handled by them. We offer the
following ATG Service solutions:
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ATG Commerce Assist provides complete
e-commerce support for
call center agents to create and manage orders in a unified
browser-based application for the Web and call-center
environments. |
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ATG Knowledge is a knowledge management solution used by
call center agents and help-desk personnel who provide customers
with assisted service to find quickly and accurately the answers
to customer inquiries and to resolve problems. ATG Knowledge
empowers agents to locate, leverage, communicate, and capture
knowledge across the extended enterprise. |
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ATG Self-Service offers consumers access to highly
personalized answers to questions and helps the customer answer
his or her questions without telephoning for help. ATG
Self-Service combines an answer repository with multi-lingual
natural language search and navigation capabilities. The
application also offers comprehensive business reporting that
helps clients better understand customers needs and
preferences. |
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ATG Response Management is a solution for automating
responses to inbound electronic communications, and for our
clients to address their customers growing desire for
electronic communications while also gaining significant savings
in support costs. ATG Response Management integrates all forms
of electronic communication, not only
e-mail but also chat,
multimedia messaging service (MMS), short messaging service
(SMS), and Web forms. |
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ATG Advisor helps organizations systematically guide
users towards issue resolution by separating complicated tasks
into manageable steps supporting both self-service and assisted
service. |
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ATG Forum lets clients leverage the expertise of external
and internal customers by giving them an online forum in which
to help one another, thereby reducing the load on the service
and support team. |
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ATG Forum users can answer each others questions and
receive important updates from the client company. |
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ATG Outreach is an
e-marketing and
proactive service solution that leverages the understanding our
clients gain through their customers behaviors,
preferences, and Web interactions to help customer service and
e-marketing
professionals create more compelling, relevant campaigns by
personalizing the communications. |
Our marketing applications are designed to help businesses
attract new customers, promote new offerings to existing
customers, and improve the cost-effectiveness of existing
marketing expenditures. Our clients use our software to maintain
personalized, relevant email contact with their customers, and
to integrate their online marketing activities with related
sales and customer service initiatives. We strive to
differentiate ourselves from our competitors by providing better
integration among email, Web and contact center marketing
activities, and by enabling more personalized and relevant
campaigns. Our products are designed to allow businesses to
increase marketing effectiveness by visually defining desired
customer experience activities and events that will drive
desirable customer behavior. We offer the following ATG
Marketing products:
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ATG Campaign Optimizer, which is also included above as
an ATG Commerce product, is an A/ B split testing solution that
lets business users improve a Web sites effectiveness, for
example helping to convert more shoppers into buyers. |
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The ATG Adaptive Scenario Engine (ASE) is our core
marketing engine that helps create a more compelling and
relevant customer experience. The benefits are greater customer
loyalty, higher revenue, and reduced operating costs. By
adapting to customers ever changing needs and preferences,
ASE automates the process of leading customers toward a desired
outcome (such as accessing information, fulfilling a service
need, or making a purchase). |
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ATG Outreach, which is also included above as an ATG
Service product, is an
e-marketing and
proactive service solution that leverages the understanding of
customers gained through their behaviors, preferences, and Web
interactions to help
e-marketing and
customer service professionals create more compelling, relevant
campaigns by personalizing the communications. |
Our products allow companies to present a single view of
themselves to their customers through our repository
integration. This integration technology allows companies to
easily access and utilize data in the enterprise regardless of
the data storage format or location. The data can be leveraged
in native form without having to move, duplicate or convert the
data. By enabling these capabilities in a cost-effective manner,
we believe our products can help companies protect their brands
and keep their customers from becoming confused or frustrated,
all of which positively impact customer satisfaction and loyalty.
Our Adaptive Scenario Engine (ASE) capability is designed
to help our clients make each interaction with their customers
more productive and effective. These personalization
capabilities help ensure that consumers are presented with the
most relevant information. By avoiding information overload,
consumers are more likely to have their needs met through the
low cost online channel increasing the speed at
which customer needs are met and decreasing the likelihood the
consumer will use a more expensive channel such as a call
center. ASE capabilities can also make interactions with
consumers more effective for our clients. It allows a business
user to visually design a sequence of behaviors that our client
would like to encourage a consumer to undertake
which can lead to a specific goal such as a site registration or
transaction. Our capabilities automatically monitor and
encourage consumers to follow these pre-defined behavior
patterns, enabling our customer to maximize the effectiveness of
each interaction with the consumer.
We support the adoption of open application server
infrastructure by our existing and new clients and plan to work
closely with other platform vendors to increase the value
customers receive from our products regardless of the platform
they select.
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Services
Our services organization provides a variety of consulting,
design, application development, deployment, integration,
hosting, training and support services in conjunction with our
products. These services are provided through our customer
support, professional services, application hosting, and
education groups.
Customer Support Services. We offer five levels of
customer support ranging from our evaluation support program,
which is available for 30 days, to our Premium Support
Program, which includes access to technical support engineers
24 hours a day, seven days per week, for customers
deploying mission critical applications. For an annual
maintenance fee, customers are entitled to receive software
updates, maintenance releases, online documentation and
eServices including bug reports and unlimited technical support.
Professional Services. The primary goal of our
Professional Services organization is to ensure customer
satisfaction and the successful implementation of our
application solutions. ATG Professional Services has developed
an Adaptive Delivery Framework (ADF) to ensure consistent,
high-quality service delivery throughout all our project
engagements. The ADF is used to create repeatable delivery
processes from project to project to provide a consistent look
and feel for all ATG project deliverables. Our Professional
Services include four primary service offerings:
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Lifecycle Project Delivery. Our lifecycle project
development capability builds upon our deep knowledge of best
practices and the ATG Adaptive Delivery Framework methodology.
Because we are responsible for the project from beginning to
end, we can provide clients with a high-quality, structured
experience from planning to post-deployment support. |
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Packaged Offerings. Our packaged offerings are designed
to provide clients with targeted services that can accelerate
the adoption of ATG products. We provide packaged offerings
built to ease the cost and risk of implementation of ATG
products. For instance, our jumpstart package is designed to
assist ATG customers to more effectively follow best practices
methodologies and designs, and reduce the risk and increase the
speed of implementation of products such as ATG Commerce and ATG
Self Service and ATG Knowledge. |
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Structured Enabling Services. Working with a third party
service partner and the client or a designated team, we offer
Structured Enabling Services to facilitate project success.
Engaging our Professional Services organization gives partners
and clients access to best practices that we have developed over
hundreds of engagements. Structured Enabling Services also
leverage the ATG Adaptive Delivery Framework methodology,
while enabling the partners or clients project team
to complete a significant portion of the work. |
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Custom Solutions. We offer customized professional
services solutions tailored to meet the specific needs of our
clients across an entire project. Consulting services can
include a combination of system architecture design, project
management, Web design, technical training and business
consulting services. |
Application Hosting Services. We offer our customers
hosting services for the full spectrum of ATG applications.
These services include the provisioning, management and
monitoring of the application infrastructure including
bandwidth, network, security, servers, operating system,
enabling software, and ATG applications. In addition, we
support our hosted customers on a 24 hours a day, seven
days per week basis providing problem resolution services,
application change management services, and the support for
service level agreements related to application availability.
Our application hosting services are available for a fee to
customers that have purchased ATG product licenses in our
Managed Services program. Alternatively, customers can elect our
subscription-based OnDemand model. ATG OnDemand requires no
investment in software licenses or maintenance agreements. The
customer pays an initial
set-up fee, and after a
brief implementation period the solution is running from our
data center. For the OnDemand offerings, we control the
implementation and management process.
Education Services. We provide a broad selection of
educational programs designed to train customers and partners on
our applications. This curriculum addresses the educational
needs of developers, technical
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managers, business managers, and system administrators. ATG
Education Services also offers an online learning program that
complements our instructor-led training. Developers can become
certified on our base product or our commerce product by taking
a certification exam in a proctored environment. We also measure
partner quality using a partner accreditation program that
ensures ATG partners have the skills necessary to effectively
assist our clients with implementations. We provide a full range
of instructor-led solutions to assist clients with these key
initiatives.
Markets
Our principal target markets are Global 2000 companies,
government organizations, and other businesses that have large
numbers of online users and utilize the Internet as a primary
business channel. Our clients represent a broad spectrum of
enterprises within diverse industry sectors. The following is a
partial list:
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Consumer Retail |
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Financial Services |
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Manufacturing |
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American Eagle Outfitters
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Allstate |
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Abbott Laboratories |
Body Shop
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Barclays Global Investors |
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Boeing |
Best Buy Companies, Inc.
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Citicorp |
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Eastman Kodak |
Cabelas
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Conseco |
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General Motors |
Footlocker
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Deutsche Bank |
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Newell Rubbermaid |
J. Crew
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Dreyfus Services Corporation |
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Nike |
Neiman Marcus
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Fidelity |
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Procter & Gamble |
Office Max
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Ford Motor Credit |
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Restoration Hardware
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John Hancock Funds |
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Target Corporation
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HSBC |
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The Finish Line
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MFS Investment Management |
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Walgreens
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Merrill Lynch |
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Pioneer Investments |
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Communications and Technology |
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Travel Media and Entertainment |
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International |
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Adobe
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American Airlines |
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Airbus |
BellSouth
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BMG Direct |
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BBC Worldwide, Ltd. |
Cingular
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Elsevier |
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Direkt Anlage Bank |
EMC
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Hilton Hotels |
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Deutsche Post |
Palm One
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Hotels.com |
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France Telecom |
Hewlett Packard
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Hyatt |
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Heidelberger Druckmaschinen |
Hitachi
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Intercontinental Hotels Group |
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Hoffman la Roche |
Intuit
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Knight-Ridder |
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IBM |
Microsoft
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Media News Group |
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Kingfisher |
T-Mobile
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Meredith Corporation |
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Lavazza |
Verisign
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Nintendo |
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Louis Vuitton |
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Readers Digest |
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Orange PLC |
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Nokia |
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Pirelli |
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The MTVi Group |
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Philips |
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Time, Inc. |
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Premier Farnell |
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Warner Music |
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Royal Mail |
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Telefonica |
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Vodafone |
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Research and Development
Our research and development group is responsible for core
technology, product architecture, product development, quality
assurance, documentation and third-party software integration.
This group also assists with pre-sale, customer support
activities and quality assurance tasks supporting the services
and sales organizations.
Since we began focusing on selling software products in 1996,
the majority of our research and development activities have
been directed towards creating new versions of our products,
which extend and enhance competitive product features. In 2005,
we focused primarily on developing new and innovative
applications, as well as integrating our products with external
enterprise data sources. In September 2005, we released our
Wisdom application suite, combining the ATG and Primus products.
The Wisdom suite combines integrated solutions on a common
platform to offer customer service/support, commerce and
marketing. In line with these efforts, we have developed several
new applications and aligned our research and development
resources accordingly.
Sales and Marketing
We market and sell our products primarily through our direct
sales force and through channel partners, including systems
integrators and other technology partners. Our direct sales
force is compensated based on product and services sales made to
our clients, directly or through business partners. As of
December 31, 2005, our sales organization included 68
direct sales representatives, inside sales representatives,
managers, and sales support personnel.
To increase the effectiveness of our sales group, we build
awareness of our products through marketing programs. These
programs include industry and partner events, market research,
public relations activities, seminars, advertisements, direct
mailings and the development of our website. Our marketing
organization supports the sales process and helps identify key
strategic alliances and other opportunities. They prepare
product research, product planning, manage press coverage and
other public relations. As of December 31, 2005, our
marketing organization included 13 individuals.
As of December 31, 2005, in addition to offices throughout
the United States, we had sales offices located in the United
Kingdom, Northern Ireland and France.
Strategic Alliances
We have established strategic alliances with system integrators,
technology partners and resellers to augment our direct sales
activities.
Consulting and System Integration Partners: We work
closely with leading systems integrators, consulting firms and
outsourcing firms. Our systems integrator partners are involved
in most of our implementations. We believe that the support of
these systems integrators for our products is increasingly
important in influencing new customers decisions to
license our products. Our systems integration partners include
Accenture, HCL Technologies and IBM Business Consulting Services.
Technology Partners: We maintain technology partnerships
with Sun Microsystems, IBM, and JBoss.
Resellers: We have reseller relationships with Allstream,
EDS, Immix Technology, Group Inc., Professional Access, and
McFadyen in North America; Al-Faris Information Technologies,
AMG.net, Channels Overseas, DeltaDator,
E-Tree, iO Tech, and
Portal Technologies Systems in Europe, Middle East and Africa;
and D2C2 Taiwan Limited, Hewlett-Packard Japan, Rikei and
Professional Access in Asia.
We provide our systems integrators, technology partners and
resellers with sales and technical training in order to
encourage them to create demand for our products and to extend
our presence globally and regionally. Our sales training
includes an introduction to our company and an overview of our
products functionality, competitive advantages, packaging
and pricing. We also provide this training to business
development personnel, project managers, alliance managers and
sales representatives employed by our channel partners.
8
We provide technical training to developers, architects and
project managers at our learning centers or
on-site at channel
partners premises. This training typically extends for a
minimum of two-weeks. In addition, we encourage our channel
partners to enroll in our accreditation and certification
programs:
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Our ATG Certified Professional Program consists of two
exams. The first tests the developers expertise on our
Adaptive Scenario Engine. The second exam assesses a
developers proficiency with ATG Commerce, including
consumer and
business-to-business
tools and concepts. Certification can provide a developer with a
competitive advantage, since it offers evidence of the
developers capabilities using our software. |
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Our ATG Accredited Partner Program is intended to
identify our most qualified partners. To become an accredited
partner, a channel partner must complete sales training, obtain
certifications and complete at least two successful
implementations of our software. This program helps our clients
identify channel partners that are highly qualified to perform
successful implementations of our software. As of
December 31, 2005, we had approximately 34 accredited
partners. |
Competition
The market for online sales, marketing and customer-service
software is intensely competitive, subject to rapid
technological change, and significantly affected by new product
introductions and other market activities. We expect competition
to persist and intensify in the future. We currently have the
following primary sources of competition:
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e-commerce application vendors, such as IBM, Microsoft and
Ecometry Corporation; |
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e-commerce business process outsourcers, including Amazon,
Digital River and GSI Commerce; |
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hosting managed service providers, such as IBM, Accenture and
EDS. |
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hosting OnDemand service providers, such as RightNow
Technologies, Digital River, Amazon and GSI Commerce |
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marketing and customer-service application vendors, including
natural language, self-service and traditional customer
relationship management application vendors, such as RightNow
Technologies, Unica, Chordiant, E.piphany, Kana, eGain and
Inquira, some of which may have a vertical industry focus, which
may assist them in competing for customers in those
industries; and |
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in-house development efforts by potential clients or partners. |
We compete against these alternative products and services by
providing a solution that enables our clients to provide their
customers with an integrated customer experience for online
sales, marketing and customer-service. We believe our solutions
provide our clients with a rapid return on investment,
attractive long-term total cost of ownership, a way to present a
single view of themselves to their customers, the ability to
improve the productivity and effectiveness of customer
interactions, and the flexibility to adapt to rapidly changing
and often unpredictable market needs.
We seek to provide our clients with a rapid return on investment
through out-of-the-box
functionality for online sales (e-commerce), marketing and
service built on a flexible, component architecture that is
practical and cost-effective to customize. These capabilities
can enable our clients to get to market quickly in a manner that
exploits their competitive advantages, which helps drive their
return on investment.
Proprietary Rights and Licensing
Our success and ability to compete depends on our ability to
develop and protect the proprietary aspects of our technology
and to operate without infringing on the proprietary rights of
others. We rely on a combination of patent, trademark, trade
secret, copyright law and contractual restrictions to protect
our proprietary technology. We currently have 5 issued United
States and 6 issued European patents covering our technology,
and we have 12 additional patent applications pending, one of
which has been allowed, but not issued. In addition, we have
several trademarks that are registered or pending registration
in the U.S. or
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abroad. These legal protections afford only limited protection
for our technology. We seek to protect our source code for our
software, documentation and other written materials under trade
secret and copyright laws. We license our software pursuant to
signed license, click through or shrink
wrap agreements, which impose restrictions on the
licensees ability to use the software, such as prohibiting
reverse engineering and limiting the use of copies. We also seek
to avoid disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary
information to execute confidentiality agreements and by
restricting access to our source code. Due to rapid
technological change, we believe that factors such as the
technological and creative skills of our personnel, new product
developments and enhancements to existing products are more
important than legal protections to establish and maintain a
technology leadership position.
Employees
As of December 31, 2005, we had a total of 309 employees.
Of our employees, 91 were in research and development, 81 in
sales and marketing, 97 in services and 40 in general and
administrative. Our future success will depend in part on our
ability to attract, retain and motivate highly qualified
technical and management personnel, for whom competition is
intense. In addition, under outsourcing arrangements we employ
the services of approximately 51 persons at centers in India and
Belarus who perform product development and sustaining
engineering activities. From time to time, we also employ
independent contractors to support our professional services,
product development, sales, marketing and business development
organizations. Our employees are not represented by any
collective bargaining unit, and we have never experienced a work
stoppage. We believe our relations with our employees are good.
Internet Address and SEC Reports
We maintain a website with the address www.atg.com. We are not
including the information contained on our website as a part of,
or incorporating it by reference into, this Annual Report on
Form 10-K. We make
available free of charge through our website our Annual Reports
on Form 10-K,
Quarterly Reports on
Form 10-Q and
Current Reports on
Form 8-K, and
amendments to these reports, as soon as reasonably practicable
after we electronically file such material with, or furnish such
material to, the SEC. We also include on our website the
charters for each of the major committees of our board of
directors. In addition, we intend to disclose on our website any
amendments to, or waivers from, our code of business conduct and
ethics that are required to be publicly disclosed pursuant to
rules of the SEC and Nasdaq.
This annual report contains forward-looking statements,
including statements about our growth and future operating
results. For this purpose, any statement that is not a statement
of historical fact should be considered a forward-looking
statement. We often use the words believes,
anticipates, plans, expects,
intends and similar expressions to help identify
forward-looking statements. Forward-looking statements involve
risks, uncertainties and assumptions.
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 annual report.
Risks Related To Our Business
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We expect our revenues and operating results to continue
to fluctuate for the foreseeable future, and the price of our
common stock is likely to fall if quarterly or annual results
are lower than the expectations of securities analysts. |
Our revenues and operating results have varied from quarter to
quarter in the past, and are likely to vary significantly from
quarter to quarter in the foreseeable future. If our quarterly
or annual results fall below our
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expectations and those of securities analysts, the price of our
common stock is likely to fall. A number of factors are likely
to cause variations in our operating results, including:
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fluctuating economic conditions, particularly as they affect our
customers willingness to implement new
e-commerce solutions; |
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the timing of sales and revenue recognition of our products and
services; |
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the timing of customer orders and product implementations; |
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delays in introducing new products and services; |
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the size of price discounting and/or concessions; |
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changes in the mix of revenues derived from products and
services; |
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timing of hiring and utilization of services personnel; |
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cost overruns related to fixed-price services projects; |
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the mix of domestic and international sales; |
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variation in our actual costs from our cost estimates related to
long term hosting contracts; |
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increased expenses, whether related to sales and marketing,
product development or administration; and |
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costs related to possible acquisitions of technologies or
businesses. |
Accordingly, we believe that
quarter-to-quarter
comparisons of our operating results are not necessarily
meaningful. The results of one quarter or a series of quarters
should not be relied upon as an indication of our future
performance.
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If the market for our Hosting solutions does not develop
or develops more slowly than we expect, our business could be
negatively affected. |
Our hosting solution business is at an early stage of
development and it is uncertain whether we will achieve and
sustain demand for our hosted offerings. Our success in this
effort will depend in part on the price, performance and
availability of competing products and services and the
willingness of companies to increase their use of hosting
applications. Many companies have invested substantial personnel
and financial resources to integrate traditional enterprise
software into their businesses and such companies may be
reluctant or unwilling to migrate to a hosting model. While we
will continue to market and sell traditional licenses for our
software solutions, we believe that the widespread market
acceptance of our hosting software solutions is important to the
success of our business because of the growth opportunities.
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Interruptions, delays or failures in our hosting services
due to systems error or other causes, could adversely affect our
business and subject us to liability. |
Our hosting solution business is at an early stage of
development and any equipment failures, mechanical errors,
spikes in usage volume and/or failure to follow system protocols
and procedures could cause our systems to fail, resulting in
interruptions in our clients service to their customers.
Any such interruptions or delays in our hosting services,
whether as a result of third-party error, our own error, natural
disasters or security breaches, whether accidental or willful,
could harm our relationships with clients and our reputation.
This in turn could reduce our revenue, subject us to liability
cause us to issue credits or to pay penalties or cause our
clients to decide not to renew their hosting agreements any of
which could adversely affect our business, financial condition
and results of operations.
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Our product license revenue may not continue to grow at
the rate it did in 2005 if our implementation of
subscription-based OnDemand hosting services shifts more product
license revenue than anticipated to the subscription service
model. |
Under our OnDemand hosting service option for customers, the
customer uses ATG hosting services and pays a subscription-based
fee for the use of the product license. Under
SOP 97-2 the
revenues related to the license portion of the service are
recognized ratability over the hosting period. If a greater than
expected number of our customers were to select OnDemand, our
product license revenues would decrease in the near term as the
license fee is deferred and recognized ratably over the hosting
period. This could result in our revenue and cash flow in 2006
or subsequent periods being less than we had forecast, which
could negatively affect our share price.
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We could incur substantial costs defending against a claim
of infringement or protecting our intellectual property from
infringement. |
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. Companies providing Internet-related products and
services are increasingly bringing and becoming subject to suits
alleging infringement of proprietary rights, particularly patent
rights. We could incur substantial costs in prosecuting or
defending any intellectual property litigation. If we sue to
enforce our rights or are sued by a third party that claims that
our technology infringes its rights, the litigation could be
expensive and could divert our management resources. For
example, both ATG and our Primus subsidiary have been involved
in litigation alleging that we have infringed United States
patents owned by third parties. We may be required to incur
substantial costs in defending infringement litigation in the
future, which could have a material adverse effect on our
operating results and financial condition.
In addition, we have agreed to indemnify customers against
claims that our products infringe the intellectual property
rights of third parties. From time to time, our customers have
been subject to third party patent claims and we have agreed to
indemnify such customers from such claims to the extent the
claims related to our products. The results of any intellectual
property litigation to which we might become a party may force
us to do one or more of the following:
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cease selling or using products or services that incorporate the
challenged intellectual property; |
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obtain a license, which may not be available on reasonable
terms, to sell or use the relevant technology; or |
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redesign those products or services to avoid infringement. |
We seek to protect the source code for our proprietary software
under a combination of patent, copyright and trade secrets law.
However, because we make the source code available to some
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.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult and while
we are unable to determine the extent to which piracy of our
software exists; software piracy can be expected to be a
persistent problem. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect
proprietary rights to as great an extent as the laws of the
United States. Any such resulting litigation could result in
substantial costs and diversion of resources and could have a
material adverse effect on our business, operating results and
financial condition. There can be no assurance that our means of
protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology.
Any failure by us to meaningfully protect our intellectual
property could have a material adverse effect on our business,
operating results and financial condition.
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Finally, 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.
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We may not be able to sustain or increase our revenue or
attain profitability on a quarterly or annual basis which could
lead to a material decrease in the price of our common
stock. |
We incurred losses in the second quarter of 2005, the first,
second and fourth quarters of 2004, and in the first and third
quarters of 2003. As of December 31, 2005, we had an
accumulated deficit of $199.5 million. Although our
revenues increased 31% to $90.6 million for the year ended
December 31, 2005 compared with $69.2 million for the
year ended December 31, 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, we may experience other adverse effects on
our revenue, net income and cash flows, which could result in a
decline in the price of our common stock.
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Turnover in our personnel may impair our ability to
develop and implement a business strategy, which could have a
material adverse effect on our operating results and common
stock price. |
Members of our management team, including executives with
significant responsibilities in our finance, sales, marketing
and research and development operations and executives of our
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 or hire replacements.
We rely heavily on our direct sales force. Changes in the
structure of our sales force have historically resulted in
temporary lack of focus and reduced productivity.
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Our lengthy sales cycle makes it difficult to predict our
quarterly results and causes variability in our operating
results. |
Our long sales cycle, which can often take several months or
more, makes it difficult to predict the quarter in which sales
may occur. We have a long sales cycle because we generally need
to educate potential customers regarding the use and benefits of
our products and services. Our sales cycle varies depending on
the size and type of customer contemplating a purchase and
whether we have conducted business with a potential customer in
the past.
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 revenues on even a
relatively small number of license deals at quarter end can have
a significant impact on our reported operating results for that
quarter. This concentration of sales at quarter end can also
lead to customer pressure to provide higher price discounts than
anticipated. 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.
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We face intense competition in the market for Internet
online marketing, sales and service applications, and we expect
competition to intensify in the future. This competition could
cause our revenues to fall short of expectations, which could
adversely affect our future operating results and our ability to
grow our business. |
The market for online marketing, sales and services applications
is intensely competitive, and we expect competition to intensify
in the future. This level of competition could reduce our
revenues and result in increased losses or reduced profits. Our
primary competition currently comes from in-house development
efforts by potential customers or partners, as well as from
other vendors of Web-based application software. We currently
compete with e-commerce
and marketing vendors such as IBM, RightNow Technologies,
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, Kana, 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 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.
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If we fail to maintain our existing customer base, our
ability to generate revenues will be harmed. |
Historically, we have derived a significant portion of our
revenues from existing customers that purchase our support and
maintenance services and enhanced versions of our products.
Retention of our existing customer base requires that we provide
high levels of customer service and product support to help our
customers maximize the benefits that they derive from our
products. To compete, we must introduce enhancements and new
versions of our products that provide additional functionality.
Further, we must manage the transition from our older products
so as to minimize the disruption to our customers caused by such
migration and integration with the customers information
technology platform. If we are unable to continue to obtain
significant revenues from our existing customer base, our
ability to grow our business would be harmed and our competitors
could achieve greater market share.
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If we fail to address the challenges associated with
international operations, revenues from our products and
services may decline or the costs of providing our products or
services may increase. |
As of December 31, 2005, we had offices in the United
Kingdom, France and Northern Ireland. We derived 24% of our
total revenues in the year ended December 31, 2005 from
customers outside the United States. 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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difficulties related to entering into legal contracts under
local laws and in foreign languages; |
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potentially adverse tax consequences; and |
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political and economic instability. |
The impact of future exchange rate fluctuations on our operating
results cannot be accurately predicted. We may increase the
extent to which we denominate arrangements with international
customers in the currencies of the countries in which the
software or services are provided. From time to time we may
engage in hedges of contracts denominated in foreign currencies.
Any hedging policies implemented by us may not be successful,
and the cost of these hedging techniques may have a significant
negative impact on our operating results.
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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. |
In the fourth quarter of 2005, we amended our $20.0 million
line of credit to extend its expiration date from
December 24, 2005 to February 7, 2006. The credit
facility required net profitability of at least $1.00 for the
fourth quarter of 2005. In February 2006 we renewed and amended
the line of credit, and extended its expiration date until
January 31, 2008. 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 December 31, 2005, our
bank had issued letters of credit totaling $6.1 million,
which are supported by this facility. The letters of credit have
been issued in favor of various landlords to secure obligations
pursuant to leases expiring through January 2009.
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. The profitability
covenant, as amended, requires net profitability of at least
$1.00 for the first quarter of 2006 and a net profitability of
at least $500,000 for the second quarter of 2006 and for each
quarter thereafter. In the event that we do not comply with 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.
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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 the 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 could be
materially impaired.
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If systems integrators or value added resellers reduce
their support and implementation of our products, our revenues
may fail to meet expectations and our operating results would
suffer. |
Since our potential customers often rely on third-party systems
integrators to develop, deploy and manage websites for
conducting commerce on the Internet, we cultivate relationships
with systems integrators to encourage them to support our
products. Approximately 42% of our product license revenues in
2005 resulted directly from our relationships with system
integrators and value added resellers. 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.
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Competition with our resellers could limit our sales
opportunities and jeopardize these relationships. |
We sell products through resellers. In some instances, we target
our direct selling efforts toward markets that are also served
by some of these resellers. This competition may limit our
ability to sell our products and services directly in these
markets and may jeopardize, or result in the termination of,
these relationships.
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If we acquire other companies or businesses, we will be
subject to risks that could hurt our business. |
In addition to our acquisition of Primus, in the future, we may
pursue additional acquisitions to obtain complementary
businesses, products, services or technologies. Any such
acquisition may not produce the revenues, earnings or business
synergies that we anticipated, and an acquired business,
product, service or technology might not perform as we expected.
If we pursue an additional acquisition, our management could
spend a significant amount of time and effort in identifying and
completing the acquisition. If we complete an additional
acquisition, we may encounter significant difficulties and incur
substantial expenses in integrating the operations and personnel
of the acquired company into our operations while preserving the
goodwill of the acquired company. In particular, we may lose the
services of key employees of the acquired company and we may
make changes in management that impair the acquired
companys relationships with employees and customers.
Any of these outcomes could prevent us from realizing the
anticipated benefits of our additional acquisitions. To pay for
an acquisition, we might use stock or cash. Alternatively, we
might borrow money from a bank or other lender. If we use our
stock, our stockholders would experience dilution of their
ownership interests. If we use cash or debt financing, our
financial liquidity would be reduced. We may be required to
capitalize a significant amount of intangibles, including
goodwill, which may lead to significant amortization charges. In
addition, we may incur significant, one-time write offs and
amortization charges. These amortization charges and write offs
could decrease our future earnings or increase our future losses.
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We may need additional financing in the future, and any
additional financing may result in restrictions on our
operations or substantial dilution to our stockholders. |
We may need to raise additional funds in the future, for
example, to develop new technologies, support an expansion,
respond to competitive pressures, acquire complementary
businesses or respond to unanticipated situations. We may try to
raise additional funds through public or private financings,
strategic relationships or other arrangements. Our ability to
obtain debt or equity funding will depend on a number of
factors, including market conditions, our operating performance
and investor interest. Additional funding may not be available to
16
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.
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Our software products may contain errors or defects that
could result in lost revenues, delayed or limited market
acceptance, or product liability claims with substantial
litigation costs. |
Complex software products such as ours often contain errors or
defects, particularly when first introduced or when new versions
or enhancements are released. At the end of the third quarter of
we released our Wisdom enabled Service Suite. This is a
comprehensive set of Applications that provide a full-featured,
adaptively customized environment for managing all forms of
customer service interactions with individual attention. Despite
internal testing and testing by customers, our current and
future products may contain serious defects. Serious defects or
errors could result in lost revenues or a delay in market
acceptance.
Since our customers use our products for critical business
applications such as
e-commerce, errors,
defects or other performance problems could result in damage to
our customers. They could seek significant compensation from us
for the losses they suffer. Although our license agreements
typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitations. Even if not
successful, a product liability claim brought against us would
likely be time consuming and costly.
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Our software offerings under our agreements with IBM and
JBoss may not achieve market acceptance, which may harm our
business and operating results. |
We have entered into original equipment manufacturer, or OEM,
agreements with IBM and JBoss, Inc., under which we have agreed
to offer IBMs WebSphere Internet infrastructure software
and JBoss application server products, respectively as
part of packaged software offerings. Market acceptance of these
17
relationships is subject to a number of significant risks, many
of which are outside our control. These risks include:
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Our packaged software offerings must meet the requirements of
our current and prospective clients. We are working with IBM and
JBoss to further integrate our applications to optimize their
performance while running on IBM WebSphere and JBoss, but we
cannot assure you that our integration efforts will satisfy the
needs of current and prospective customers. |
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IBM and JBoss may determine not to devote significant resources
to the arrangements contemplated by our OEM agreements or may
disagree with us as to how to proceed with the integration of
our products, may not choose not to renew our agreements. The
amount and timing of resources dedicated by IBM and JBoss under
the OEM agreements are not under our direct control. |
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Our arrangements with IBM and JBoss may cause confusion among
current and prospective customers as to our product focus and
direction. |
If our relationships with IBM and JBoss do not achieve market
acceptance, our business and operating results may be harmed.
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Our announced restructurings may not result in the reduced
cost structure we anticipate and may have other adverse impacts
on productivity. |
During 2005, we incurred a net restructuring charge of $885,000,
primarily due to a $1.8 million charge related to the
relocation of our San Francisco office, offset by net
reversals of $932,000 due to changes in estimates of prior
restructuring charges. 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 previous restructuring charges resulted in 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.
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.
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The loss of technology licensed from third parties could
delay our ability to deliver our products. |
We rely in part on technology that we license from third
parties, which is integrated into our internally developed
software. Third-party technology licenses might not continue to
be available to us on commercially reasonable terms, or at all.
The loss of any significant technology license could cause
delays in our ability to deliver our products or services until
equivalent technology is developed internally or equivalent
third-party technology, if available, is identified, licensed
and integrated.
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We use the Java programming language to develop our
products, and our business could be harmed if Java loses market
acceptance or if we are not able to continue using Java or
Java-related technologies. |
We write our software in the Java computer programming language
developed by Sun Microsystems and we incorporate Suns Java
2 Platform, Enterprise Edition, or J2EE, and Suns Java
Runtime Environment,
18
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 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 either license the
equivalent technology from another source, create equivalent
technology ourselves, or rewrite portions of our software to
accommodate the change.
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 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.
Risks Related To the Internet Industry
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Our performance will depend on the growth of
e-commerce and
self-service. |
Our success will depend heavily on the continued use of the
Internet for
e-commerce. 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, requires a broad acceptance
of different methods of conducting business. Our future revenues
and profits will substantially depend on the Internet continuing
to be accepted and widely used for commerce and communication.
If Internet commerce does not continue to grow or grows more
slowly than expected, our future revenues and profits may not
meet our expectations or those of analysts. Similarly,
purchasers with established patterns of commerce may be
reluctant to alter those patterns or may otherwise resist
providing the personal data necessary to support our consumer
profiling capability.
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Regulations could be enacted that either directly restrict
our business or indirectly affect our business by limiting the
growth of
e-commerce. |
As e-commerce evolves,
federal, state and foreign agencies could adopt regulations
covering issues such as user privacy, content and taxation of
products and services. If enacted, government regulations could
limit the market for our products and services or could impose
burdensome requirements that render our business unprofitable.
Although many regulations might not apply to our business
directly, we expect that laws regulating the solicitation,
collection or processing of personal and consumer information
could indirectly affect our business. The Telecommunications Act
of 1996 prohibits certain types of information and content from
being transmitted over the Internet. The prohibitions
scope and the liability associated with a violation are
currently unsettled. In addition, although substantial portions
of the Communications Decency Act were held to be
unconstitutional, we cannot be certain that similar legislation
will not be enacted and upheld in the future. It is possible
that legislation could expose companies involved in
e-commerce to
liability, which could limit the growth of
e-commerce generally.
Legislation like the Telecommunications Act and the
Communications Decency Act could dampen the growth in Web usage
and decrease its acceptance as a medium of communications and
commerce.
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The Internet is generating privacy concerns that could
result in legislation or market perceptions that could harm our
business or result in reduced sales of our products, or
both. |
Businesses use our ATG Adaptive Scenario Engine product to
develop and maintain profiles to tailor the content to be
provided to website visitors. When a visitor first arrives at a
website, our software creates a profile for that visitor. If the
visitor registers or logs in, the visitors identity is
added to the profile, preserving any profile information that
was gathered up to that point. ATG Adaptive Scenario Engine
product tracks both explicit user profile data supplied by the
user as well as implicit profile attributes derived from the
users behavior on the website. Privacy concerns may cause
visitors to resist providing the personal data or to avoid
websites that track the Web behavioral information necessary to
support our profiling capability. More importantly, even the
perception of security and privacy concerns, whether or not
valid, may indirectly inhibit market acceptance of our products.
In addition, legislative or regulatory requirements may heighten
these concerns if businesses must notify website users that the
data captured after visiting websites may be used to direct
product promotion and advertising to that user. Other countries
and political entities, such as the European Economic Community,
have adopted such legislation or regulatory requirements. The
United States may adopt similar legislation or regulatory
requirements. If privacy legislation is enacted or consumer
privacy concerns are not adequately addressed, our business,
financial condition and operating results could be harmed.
Our products use cookies to track demographic
information and user preferences. A cookie is
information keyed to a specific user that is stored on a
computers hard drive, typically without the users
knowledge. Cookies are generally removable by the user, although
removal could affect the content available on a particular site.
Germany has imposed laws limiting the use of cookies, and a
number of Internet commentators and governmental bodies in the
United States and other countries have urged passage of laws
limiting or abolishing the use of cookies. If such laws are
passed or if users begin to delete or refuse cookies as a common
practice, demand for our personalization products could be
reduced.
Risks Related to the Securities Markets and Our Stock
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Our common stock price may continue to be volatile. |
The market price of our common stock has fluctuated in the past
and is likely to continue to be highly volatile. For example,
the market price of our common stock has ranged from
$0.58 per share to $126.88 per share since our initial
public offering in July 1999 and has ranged from $0.92 per
share to $2.13 per share between January 1, 2005 and
December 31, 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
among others, some of which are beyond our control:
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variations in our quarterly operating results; |
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changes in market valuations of Internet and software companies; |
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our announcement of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments; |
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timing of completion of significant sales; |
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additions or departures of our key personnel; |
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future sales of our common stock; or |
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changes in financial estimates by securities analysts. |
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We may incur significant costs from class action
litigation. |
We currently are the subject of securities class action
litigation. In addition, our Primus subsidiary is also subject
to a securities class action litigation. If a court awards
damages to the plaintiffs in these cases, the total amount could
exceed the limit of our existing insurance. These litigations
also may divert managements attention and resources. For a
further description of the pending litigation, see
Part II, Item 1. Legal
20
Proceedings. We may be the target of similar litigation in
the future if the market for our stock becomes volatile. While
we believe that we have an appropriate amount of insurance for
class action lawsuits, we cannot be certain that the insurance
coverage will be available or, if available, sufficient to cover
our liability with respect to a specific future action that may
be brought.
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Our common stock may not continue to trade on the Nasdaq
National Market, which could reduce the value of your investment
and make your shares more difficult to sell. |
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. As recently as October 2005, our common
stock has traded at prices near and below $1.00. If we do not
continue to meet Nasdaqs applicable minimum listing
standards, Nasdaq could delist us from the Nasdaq National
Market. If our common stock is delisted from the Nasdaq National
Market, we could seek to have our common stock listed on the
Nasdaq SmallCap Market. However, delisting of our common stock
from the Nasdaq National Market could hinder your ability to
sell, or obtain an accurate quotation for the price of, your
shares of our common stock. Delisting could also adversely
affect the perception among investors of ATG and its prospects,
which could lead to further declines in the market price of our
common stock. Delisting would also make it more difficult and
expensive for us to raise capital. In addition, delisting might
subject us to an SEC rule that could adversely affect the
ability of broker-dealers to sell or make a market in our common
stock, thus hindering your ability to sell your shares.
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Anti-takeover provisions in our charter documents and
Delaware law could prevent or delay a change in control of our
company. |
Certain provisions of our charter and by-laws may discourage,
delay or prevent a merger or acquisition that a stockholder may
consider favorable, which could reduce the market price of our
common stock. These provisions include:
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authorizing the issuance of blank check preferred
stock; |
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providing for a classified board of directors with staggered,
three-year terms; |
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providing that directors may only be removed for cause by a
two-thirds vote of stockholders; |
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limiting the persons who may call special meetings of
stockholders and prohibiting stockholder action by written
consent; |
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establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted on by stockholders at stockholder meetings; and |
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authorizing anti-takeover provisions. |
In addition, we adopted a shareholder rights plan in 2001 and
Delaware law may further discourage, delay or prevent someone
from acquiring or merging with us.
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The regulatory environment surrounding accounting and
corporate governance subjects us to certain legal uncertainties
in the operation of our business and may increase the cost of
doing business. |
We are facing 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 continue to review and monitor all of the
accounting policies and practices, legal disclosure and
corporate governance policies under the new legislation,
including those related to relationships with our independent
auditors, enhanced financial disclosures, internal controls,
board and board committee practices, corporate responsibility
and executive officer loan practices, and intend to fully comply
with such laws. Nevertheless, such increased scrutiny and
penalties involve risks to both the Company
21
and its executive officers and directors in monitoring and
ensuring compliance. A failure to properly navigate the legal
disclosure environment and implement and enforce appropriate
policies and procedures could harm the Companys business
and prospects, including its ability to recruit and retain
skilled officers and directors. In addition, it may be adversely
affected as a result of new or revised legislation or
regulations imposed by the Securities Exchange Commission, other
U.S. or foreign governmental regulatory authorities or
self-regulatory organizations that supervise the financial
markets. It also may be adversely affected by changes in the
interpretation or enforcement of existing laws and rules by
these governmental authorities and self-regulatory organizations.
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We are incurring significant costs to comply with changing
laws and we may in the future need to report significant
deficiencies or material weaknesses in our Annual Report, which
could affect our operating results and cause our stock price to
decline. |
Section 404 of the Sarbanes Oxley Act of 2002 requires that
we annually evaluate and report on our systems of internal
controls and that our independent auditors must report on
managements evaluation of those controls.
Managements evaluation and the auditors report
thereon is included in Item 9A of this
Form 10-K. We
cannot assure you that there will not in the future be
significant deficiencies or material weaknesses in our internal
controls that would be required to be reported. A negative
reaction by the equity markets to the reporting of a significant
deficiency or material weakness could cause our stock price to
decline.
We are also spending an increased amount of management time and
focus as well as external resources to comply with changing
laws, regulations and standards relating to corporate governance
and public disclosure. This has caused us to hire additional
personnel and outside advisory services and has resulted in
additional accounting and legal expenses. These additional
expenses could adversely affect our operating results and the
market price of our stock could suffer as a result.
In addition, if in the future we acquire companies with weak
internal controls, it will take time to get the internal
controls of the acquired company up to the same level of
operating effectiveness as ours. Our inability to address these
risks could negatively affect our operating results.
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Changes in the accounting treatment of stock options will
adversely affect our results of operations and our ability to
comply with covenants in our credit facility. |
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payment, we are
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 used the disclosure-only
alternative of SFAS No. 123, Accounting for
Stock-Based Compensation. We estimate the adoption of this
accounting principle will affect our reported results of
operations by at least $3.0 million to $4.0 million in
2006 as the stock-based compensation expense is charged directly
against our reported earnings. This estimate is based on our
current level of employees and related unvested stock options,
expected level of employees and stock options to be granted in
2006, and participation in our employee stock purchase plan in
2006. For pro forma disclosure illustrating the effect such a
change on our recent results of operations, see
Note 1(m) of the Consolidated Financial Statements.
The adoption of SFAS 123R could adversely affect our
ability to comply with the profitability covenants of our credit
facility with our bank. See Note 3 to the Consolidated
Financial Statements contained in Item 8 of this Annual
Report on Form 10-K.
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Item 1B. |
Unresolved Staff Comments |
Not applicable.
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Our principal administrative, research and development, sales,
consulting, training and support facilities occupy approximately
44,000 square feet in Cambridge, Massachusetts, pursuant to
a lease expiring in 2006. As a result, we may find it beneficial
to move our principal offices in the second half of 2006. We
anticipate any such relocation, if any at all, would be to
comparable space within the same general vicinity and
approximate price range. In addition, we occupy approximately
19,000 square feet in Seattle, Washington;
12,000 square feet in Chicago, Illinois 5,000 square
feet in San Francisco, California and 7,000 square
feet in Washington, D.C., pursuant to a lease expiring in
2006. Our European headquarters are located in Apex Plaza,
Reading, United Kingdom where we lease approximately
8,000 square feet pursuant to a lease expiring in 2009.
At December 31, 2005, we also had offices in Northern
Ireland and France. Since 2001, we have reached several lease
settlement agreements with landlords that significantly reduced
our lease obligations. For further information concerning our
lease restructuring activities and our obligations under all
operating leases, see Note 10 and Note 7,
respectively, of the Notes to our Consolidated Financial
Statements contained in Item 8 of this Annual Report on
Form 10-K.
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Item 3. |
Legal Proceedings |
We and certain of our former officers have been named as
defendants in seven purported class action suits that have been
consolidated into one action currently pending in the United
States District Court for the District of Massachusetts under
the caption In re Art Technology Group, Inc. Securities
Litigation (Master File No. 01-CV-11731-NG). This case
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 SEC
10b-5 promulgated
thereunder, which generally may subject issuers of securities
and persons controlling those issuers to civil liabilities for
fraudulent actions in connection with the purchase or sale of
securities The case was originally filed in 2001, and a
consolidated amended complaint was filed in March 2002. In
April, 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 was based on the veracity of a public statement made
by one of our former officers. In August 2004, we filed a
renewed motion to dismiss and motion for summary judgment as to
the remaining allegation, which the court granted in September
2005. The plaintiffs have moved for leave to file a second
consolidated amended complaint, which, if allowed, would revive
some of the claims previously dismissed by the court. The court
has deferred a final order of dismissal of plaintiffs case
to allow it time to consider plaintiffs motion for leave
to file a second consolidated amended complaint. We have opposed
that motion. Management believes that none of the claims that
plaintiffs seek to assert in their second amended complaint has
merit, and intends to continue 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.,
two former officers of Primus, and 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
under the caption In re Primus Knowledge Solutions, Inc.
Securities Litigation, Civil Action 01-Civ.-11201
(SAS) on behalf of a purported class of purchasers of
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. The consolidated and amended complaint asserts
claims under Sections 11 and 15 of the Securities Act of
1933 and Sections 10(b) (and SEC
Rule 10b-5
promulgated thereunder) and 20(a) of the Securities Exchange Act
of 1934. This action is one of more than 300 similar actions
coordinated for pretrial purposes under the caption In re
Initial Public Offering Securities Litigation, Civil Action
No. 21-MC-92. By action of a special committee of
disinterested directors (who were neither defendants in the
litigation nor members of Primuss Board of Directors at
the time of the actions challenged in the litigation), Primus
decided to accept a settlement proposal presented to all issuer
defendants. In the settlement, plaintiffs will dismiss and
release all claims against Primus and the individual defendants
in exchange for a contingent payment by the insurance
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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 August 31,
2005, the Court granted preliminary approval of the settlement.
The settlement is subject to a number of conditions, including
final Court approval after proposed settlement class members
have an opportunity to object or opt out. If the settlement does
not occur, and litigation against Primus continues, we believe
we have meritorious defenses and intend to defend the case
vigorously. While we cannot predict with certainty the outcome
of the litigation or whether the settlement will be approved, we
do not expect any material adverse impact to 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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PART II
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Item 5. |
Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock trades on the Nasdaq National Market under the
symbol ARTG. The following table sets forth the high
and low reported sales prices of our common stock for the
periods indicated as reported by the Nasdaq National Market.
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Year ending December 31, 2004
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First quarter
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$ |
2.25 |
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$ |
1.35 |
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Second quarter
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1.69 |
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1.09 |
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Third quarter
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1.23 |
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0.70 |
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Fourth quarter
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1.61 |
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0.84 |
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Year ending December 31, 2005
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First quarter
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$ |
1.40 |
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$ |
1.05 |
|
Second quarter
|
|
|
1.22 |
|
|
|
0.95 |
|
Third quarter
|
|
|
1.21 |
|
|
|
1.00 |
|
Fourth quarter
|
|
|
2.13 |
|
|
|
0.92 |
|
On March 7, 2006 the last reported sale price on the Nasdaq
National Market for our common stock was $2.80 per share.
On March 7, 2006, there were approximately 623 holders of
record of our common stock. This number does not include
stockholders for whom our shares were held in a
nominee or street name.
We currently intend to retain future earnings, if any, to
finance our growth. We do not anticipate paying cash dividends
on our common stock in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including
our financial condition, operating results, current and
anticipated cash needs, restrictions in financing agreements and
plans for expansion.
25
|
|
Item 6. |
Selected Consolidated Financial Data |
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
$ |
76,631 |
|
|
$ |
48,796 |
|
|
$ |
27,159 |
|
|
$ |
23,345 |
|
|
$ |
29,821 |
|
|
Services
|
|
|
63,707 |
|
|
|
52,697 |
|
|
|
45,333 |
|
|
|
45,874 |
|
|
|
60,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
140,338 |
|
|
|
101,493 |
|
|
|
72,492 |
|
|
|
69,219 |
|
|
|
90,646 |
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
5,981 |
|
|
|
4,278 |
|
|
|
2,118 |
|
|
|
2,206 |
|
|
|
1,816 |
|
|
Services
|
|
|
47,827 |
|
|
|
33,745 |
|
|
|
19,808 |
|
|
|
19,879 |
|
|
|
23,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
53,808 |
|
|
|
38,023 |
|
|
|
21,926 |
|
|
|
22,085 |
|
|
|
25,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
86,530 |
|
|
|
63,470 |
|
|
|
50,566 |
|
|
|
47,134 |
|
|
|
65,575 |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
30,518 |
|
|
|
22,046 |
|
|
|
17,928 |
|
|
|
16,209 |
|
|
|
17,843 |
|
|
Sales and marketing
|
|
|
93,437 |
|
|
|
43,122 |
|
|
|
31,174 |
|
|
|
29,602 |
|
|
|
30,034 |
|
|
General and administrative
|
|
|
24,116 |
|
|
|
11,087 |
|
|
|
9,538 |
|
|
|
7,742 |
|
|
|
11,231 |
|
|
Restructuring charge (benefit)
|
|
|
75,580 |
|
|
|
19,005 |
|
|
|
(10,476 |
) |
|
|
3,570 |
|
|
|
885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
223,651 |
|
|
|
95,260 |
|
|
|
48,164 |
|
|
|
57,123 |
|
|
|
59,993 |
|
Income (loss) from operations
|
|
|
(137,121 |
) |
|
|
(31,790 |
) |
|
|
2,402 |
|
|
|
(9,989 |
) |
|
|
5,582 |
|
|
Interest and other income, net
|
|
|
4,967 |
|
|
|
2,300 |
|
|
|
1,521 |
|
|
|
395 |
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
(132,154 |
) |
|
|
(29,490 |
) |
|
|
3,923 |
|
|
|
(9,594 |
) |
|
|
5,801 |
|
|
Provision (benefit) for income taxes
|
|
|
23,851 |
|
|
|
|
|
|
|
(255 |
) |
|
|
(50 |
) |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(156,005 |
) |
|
$ |
(29,490 |
) |
|
$ |
4,178 |
|
|
$ |
(9,544 |
) |
|
$ |
5,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(2.27 |
) |
|
$ |
(0.42 |
) |
|
$ |
0.06 |
|
|
$ |
(0.12 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(2.27 |
) |
|
$ |
(0.42 |
) |
|
$ |
0.06 |
|
|
$ |
(0.12 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
68,603 |
|
|
|
69,921 |
|
|
|
71,798 |
|
|
|
79,252 |
|
|
|
109,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
68,603 |
|
|
|
69,921 |
|
|
|
73,768 |
|
|
|
79,252 |
|
|
|
111,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash, cash equivalents and short term marketable securities
|
|
$ |
63,550 |
|
|
$ |
68,558 |
|
|
$ |
41,584 |
|
|
$ |
26,507 |
|
|
$ |
33,569 |
|
Restricted cash
|
|
|
16,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,001 |
|
|
|
|
|
Total assets
|
|
|
137,488 |
|
|
|
104,835 |
|
|
|
67,360 |
|
|
|
97,803 |
|
|
|
92,765 |
|
Long-term obligations, less current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
63 |
|
Total stockholders equity
|
|
$ |
42,909 |
|
|
$ |
16,023 |
|
|
$ |
20,937 |
|
|
$ |
42,185 |
|
|
$ |
50,160 |
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
consolidated financial statements and the related notes
contained in Item 8 of this Annual Report on
Form 10-K. This
discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these
forward-looking statements as a result of a number of factors,
including those set forth under Item 1A. Risk
Factors and elsewhere in this report.
We derive our revenues from the sale of software licenses and
related services that help consumer-facing organizations create
an interactive experience for their customers and partners via
the Internet and other channels. 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, support and maintenance,
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 limited cases, on
a fixed-price schedule defined in our contracts. Support and
maintenance 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. Revenue from
application hosting services is recognized monthly as the
services are provided. We market and sell our products worldwide
through our direct sales force, systems integrators, technology
alliances and original equipment manufacturers.
As of December 31, 2005 we had offices in the United
States, United Kingdom, France and Northern Ireland with sales
personnel in the United States, United Kingdom and France.
Revenues from customers outside the United States accounted for
24% of our total revenues in 2005, 33% in 2004 and 35% in 2003.
Critical Accounting Policies and Estimates
This managements discussion and analysis of financial
condition and results of operations discusses our consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States.
The preparation of these financial statements require 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
27
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies to be both
those most important to the portrayal of our financial condition
and those that require the most subjective judgment.
Not only is revenue recognition a key component of our results
of operations, the timing of our revenue recognition also
determines the timing of certain expenses, such as commissions.
In measuring revenues, we follow the specific guidelines of
Statement of Position (SOP) No. 97-2, Software
Revenue Recognition and SOP No. 98-9, Modification
of SOP 97-2,
Software Revenue Recognition, with Respect to Certain
Transactions.
SOP 97-2 requires
that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence that an arrangement
exists via a signed license agreement; (2) physical or
electronic delivery has occurred including the availability of
license keys or services rendered; (3) the fee is fixed or
determinable representing amounts that are due unconditionally
with no future obligations under customary payment terms; and
(4) collectibility is probable.
In 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. Many of our software
arrangements include consulting implementation services sold
separately under consulting engagement contracts. Consulting
revenues from these arrangements are generally accounted for
separately from software licenses because the arrangements
qualify as service transactions as defined in
SOP 97-2. The more
significant factors considered in determining whether the
revenue should be accounted for separately include the nature of
services (i.e., consideration of whether the services are
essential to the functionality of the licensed product), degree
of risk, availability of services from other vendors, timing of
payments and impact of milestones or acceptance criteria on the
realizability of the software license fee. 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 account for
these transactions in accordance with Emerging Issues Task Force
(EITF) 00-3, Application of AICPA Statement of Position
97-2, Software Revenue Recognition, to Arrangements That Include
the Right to Use Software Stored on Another Entitys
Hardware, and generally recognize the product license fee
upon delivery of the software license because we have
established the fair value of a vendor specific objective
evidence of hosting services, the customer has the contractual
right to take possession of the software at any time during the
hosting period without significant penalties and it is feasible
for the customer to run the software on its own hardware or
contract with another party to host the software. 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 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.
Deferred revenue primarily consists of advance payments related
to support and maintenance, hosting and service agreements.
28
We principally charge for 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 affect the timing of revenue recognition and could
result in significant losses on these projects. To date, our
actual results in completing projects have not deviated
significantly from managements estimates of the time to
complete those projects.
|
|
|
Accounts Receivable and Bad Debts |
We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. We continuously monitor collections and
payments from our customers and determine the allowance for
doubtful accounts based upon historical experience and specific
customer collection issues. If the financial condition of our
customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances would be
required.
|
|
|
Research and Development Costs |
We account for research and development costs in accordance with
SFAS No. 2, Accounting for Research and Development
Costs, and SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, which specifies that costs incurred internally to
develop computer software products should be charged to expense
as incurred until technological feasibility is reached for the
product. Once technological feasibility is reached, all software
costs should be capitalized until the product is made available
for general release to customers. Judgment is required in
determining when technological feasibility is established. We
believe that the time period from reaching technological
feasibility until the time of general product release is very
short. Costs incurred after technological feasibility is reached
are not material, and accordingly, all such costs are charged to
research and development expense as incurred.
During 2005, 2004, 2003, 2002 and 2001, we recorded net
restructuring charges (benefits) of $0.9 million,
$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 No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, SFAS No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits and Staff
Accounting Bulletin (SAB) No. 100 (SAB 100),
Restructuring and Impairment Charges. The 2002 and 2001
charges were recorded in accordance with Emerging Issues Task
Force, or EITF, Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring), SFAS 88, and SAB 100. In
determining the charges to record, we made certain estimates and
judgments surrounding the amounts ultimately to be paid for the
actions we have taken. At December 31, 2005, there were
various accruals recorded for termination benefits and lease
obligations, which may be adjusted periodically for either
resolution of certain contractual commitments or changes in
estimates of 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. Such
changes in estimates have had a material impact on 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 costs
attributable to excess leased facilities and included estimates
of future sublease income, future
29
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
December 31, 2005 was estimated sublease income of
$523,000. We based our estimate of sublease income on the status
of current negotiations with a potential subtenant and current
market conditions and rental rates for this location. Actual
results may vary significantly from this estimate, depending in
part on our ability to obtain approval of the sublease from the
landlord. 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 current best estimates.
|
|
|
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, and
2003, we evaluated the realizability of our long-lived assets
including fixed assets and leasehold improvements related to our
restructured facility leases. In 2005, 2004, and 2003 we deemed
leasehold improvements of approximately $118,000, $200,000 and
$310,000, respectively, to be impaired due to the fact we had
vacated the related office locations, and that the estimated
sublease income at the location was not sufficient to recover
the assets carrying value. In 2003, we determined that
approximately $78,000 of computer equipment and furniture and
fixtures were impaired as a result of our decision to abandon
the assets because of the termination of employees and related
closures of offices. Also in 2003, we determined that $169,000
of purchased software was impaired due to our revised product
development strategy.
Goodwill represents the excess of the purchase price in a
business combination over the fair value of net tangible and
intangible assets acquired in a business combination. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, the Company annually evaluates goodwill
for impairment as well as whenever events or changes in
circumstances suggest that the carrying amount may not be
recoverable from estimated discounted future cash flows. Because
the Company has one reporting segment under SFAS 142, the
Company utilizes the entity-wide approach for assessing goodwill
for impairment and compares the Companys market value to
its net book value to determine if impairment exists. No
impairment of goodwill resulted from the Companys
evaluation of goodwill in any of the fiscal years presented.
|
|
|
Accounting for Income Taxes |
We account for income taxes in accordance with
SFAS No. 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 the realizability of our
deferred tax assets quarterly and adjust the amount of such
allowance, if necessary. At December 31, 2005 and 2004, we
have provided a
30
full valuation allowance against our net deferred tax assets due
to the uncertainty of their realizability. The valuation
allowance increased $5.7 million to $119.4 million in
2005 from $113.7 million in 2004. The primary reason for
the increase in the valuation allowance is due to an increase of
$7.8 million related to tax credits and other temporary
differences not previously included in gross deferred tax assets
and a decrease of $2.1 million utilized to offset current
year book income. If substantial changes in our ownership have
occurred or should occur, or if we determine that there were
ownership changes at Primus prior to our acquisition thereof, as
defined by Section 382 of the Internal Revenue Code, there
could be annual limitations on the amount of net operating loss
carryforwards that can be realized in future periods.
In addition, we have provided for potential amounts due in
various foreign tax jurisdictions. Judgment is required in
determining our worldwide income tax expense provision. In the
ordinary course of global business, there are many transactions
and calculations where the ultimate tax outcome is uncertain.
Some of these uncertainties arise as a consequence of cost
reimbursement arrangements among related entities. Although we
believe our estimates are reasonable, no assurance can be given
that the final tax outcome of these matters will not be
different from that which is reflected in our historical income
tax provisions and accruals. Such differences could have a
material impact on our income tax provision and operating
results in the period in which such determination is made.
During 2004 and 2003, we reversed previously accrued taxes of
$158,000 and $332,000, respectively, for foreign locations, due
to the closure of the statute of limitations, or as a result of
changes in our estimates of potential amounts due, in those
locations.
Results of Operations
The following table sets forth statement of operations data as
percentages of total revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
|
33 |
% |
|
|
34 |
% |
|
|
37 |
% |
|
Services
|
|
|
67 |
|
|
|
66 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
Services
|
|
|
26 |
|
|
|
29 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
28 |
|
|
|
32 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
72 |
|
|
|
68 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
20 |
|
|
|
23 |
|
|
|
25 |
|
|
Sales and marketing
|
|
|
33 |
|
|
|
43 |
|
|
|
43 |
|
|
General and administrative
|
|
|
12 |
|
|
|
11 |
|
|
|
13 |
|
|
Restructuring (benefit) charges
|
|
|
1 |
|
|
|
5 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
66 |
|
|
|
83 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
6 |
|
|
|
(14 |
) |
|
|
3 |
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before (benefit) provision for income taxes
|
|
|
6 |
|
|
|
(14 |
) |
|
|
5 |
|
(Benefit) provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
6 |
% |
|
|
(14 |
)% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
31
The following table sets forth, for the periods indicated, the
cost of product license revenues as a percentage of product
license revenues and the cost of services revenues as a
percentage of services revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cost of product license revenues
|
|
|
6 |
% |
|
|
9 |
% |
|
|
8 |
% |
|
Gross margin on product license revenues
|
|
|
94 |
|
|
|
91 |
|
|
|
92 |
|
Cost of services revenues
|
|
|
38 |
|
|
|
43 |
|
|
|
44 |
|
|
Gross margin on services revenues
|
|
|
62 |
|
|
|
57 |
|
|
|
56 |
|
|
|
|
Years ended December 31, 2005, 2004 and 2003 |
Total revenues increased 31% to $90.6 million in 2005 from
$69.2 million in 2004. The increase was primarily
attributable to our acquisition of Primus in November 2004 and
the shift in our focus to marketing and selling application
products rather than infrastructure 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
2004 was also partly attributable to our new application hosting
services, which generated revenues of approximately
$5.3 million in 2005 compared to $0.7 million in 2004.
We expect revenue growth in 2006 resulting in revenues in the
range of $97 million to $105 million.
In 2004 total revenues decreased 5% to $69.2 million from
$72.5 million in 2003. The decrease was primarily
attributable to longer sales cycles, delayed purchasing
decisions and reduced Information Technology related spending by
our customers. Additionally, the transition in our marketing and
sales focus from infrastructure products to application
products, particularly in the
e-commerce and
self-service area, contributed to the decrease in revenues, as
sales of our new application products were not initially
sufficient to offset the reduction in sales of our older
infrastructure products. Revenues generated from international
customers decreased to $21.6 million or 23.9% of total
revenues in 2005, from $22.8 million, or 33% of total
revenues, in 2004 and from $25.3 million, or 35% of total
revenues, in 2003. During the fourth quarter of 2005, one
customer accounted for 16% of total revenues. No customer
accounted for more than 10% of total revenues in 2005, 2004 or
2003.
Product license revenues increased 28% to $29.8 million in
2005 from $23.3 million in 2004. The increase was primarily
attributable to our acquisition of Primus in November 2004 and
the shift in our focus of our marketing and selling efforts to
applications products from infrastructure products.
Product license revenues generated from international customers
decreased to $7.4 million in 2005 from $9.4 million in
2004. The decrease in international revenues was due primarily
due to timing of certain deals.
Product license revenues decreased 14% to $23.3 million in
2004 from $27.2 million in 2003. The decrease was primarily
attributable to longer sales cycles, delayed purchasing
decisions and reduced Information Technology related spending by
our customers, which affected both our infrastructure products
business and our application products business and resulted in
reduced sales volume in terms of both the number and size of
transactions with customers. Additionally, the transition in our
marketing and sales focus from infrastructure products to
application products, particularly in the
e-commerce and
self-service area, contributed to the decrease in revenues.
These decreases in revenues from our historical businesses were
partially offset by two months of Primus revenues. The decline
in product license revenues in 2004 as compared to 2003 is
attributable to reduced sales volume of both the number and size
of transactions with customers.
32
Product license revenues as a percentage of total revenues for
2005, 2004 and 2003 were 33%, 34% and 37%, respectively. We
expect this percentage to be in the range of 32% to 36% in 2006.
Our resellers generally receive a discount from our list prices.
The extent of any discount is based on negotiated contractual
agreements between us and the reseller. We do not grant our
resellers the right of return, price protection or favorable
payment terms. We rely upon resellers to market and sell our
products to governmental entities and to customers in geographic
regions where it is not cost effective for us to reach clients
directly. During 2005, we had approximately 15 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 reseller accounted for more than 10% of
our revenues for the years ended 2005, 2004 or 2003.
The table below sets forth product revenues recognized from
reseller arrangements for the years ended 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Reseller revenues
|
|
$ |
574 |
|
|
$ |
5,223 |
|
|
$ |
6,537 |
|
Percent of product license revenues
|
|
|
2 |
% |
|
|
22 |
% |
|
|
24 |
% |
Services revenues increased 33% to $60.8 million in 2005
from $45.9 million in 2004. The increase was attributable
to new service revenues from the acquisition of Primus,
including application hosting services of $5.3 million in
2005 compared to $0.7 million in 2004.
Support and maintenance revenues were 64% of total services
revenues in 2005 and 2004. Support and maintenance revenues, in
absolute dollars, were higher during 2005 due to the addition of
Primus active support and maintenance customer base,
offset by a portion of existing ATG customers terminating their
support coverage.
We expect support and maintenance revenues to increase in 2006
because of increases in new maintenance revenues associated with
expected 2006 product revenues, slightly offset by a portion of
existing customers terminating their support coverage.
Services revenues increased 1% to $45.9 million in 2004
from $45.3 million in 2003. The increase was attributable
to increased professional services revenues and new services
revenues from the acquisition of Primus, offset by decreased
support and maintenance revenues.
Support and maintenance revenues were 64% of total services
revenues in 2004 as compared to 69% in 2003. Support and
maintenance revenues, in absolute dollars, were lower in 2004
due to a combination of declining product revenues in prior
periods and some customers electing to decrease or terminate
their support coverage.
Services revenues as a percentage of total revenues for 2005,
2004 and 2003 were 67%, 66%, and 63%, respectively. We expect
services revenues to be higher in 2006 and to decrease slightly
as a percentage of total revenues.
|
|
|
Cost of Product License Revenues |
Cost of product license revenues includes salary and related
benefits of engineering staff and outsourced developers
dedicated to the maintenance of products that are in general
release, costs of fulfillment, external shipping cost, 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 decreased 18% to
$1.8 million in 2005 from $2.2 million in 2004. This
decrease was primarily related to a reduction in salary and
related costs along with decreased royalties paid on third party
software embedded in our products, together totaling
approximately $780,000. This was partially
33
offset by an increase in amortization expense of $376,000
related to developed technology, an intangible asset recorded as
part of the Primus acquisition in November 2004.
Cost of product license revenues increased 4% to
$2.2 million in 2004 from $2.1 million in 2003. This
increase was primarily related to amortization expense of
$441,000 related to developed technology, an intangible asset
recorded as part of the Primus acquisition in November 2004,
partially offset by decreased salaries and related costs and
decreased royalties paid on third party software embedded into
our products. Also, a $169,000 charge recorded in 2003, as a
result of our determination that certain purchased software was
impaired due to a change in our product development strategy,
did not recur in 2004.
|
|
|
Gross Margin on Product License Revenues |
For 2005, 2004 and 2003, gross margin on product license
revenues was 94%, or $28.0 million, 91%, or
$21.1 million, and 92%, or $25.0 million,
respectively. The increase in gross margin percentage in 2005
compared to 2004 is due to higher product revenues in 2005 and
lower salaries and royalties of $780,000 offset by an increase
in amortization expense of $376,000 related to developed
technology from the Primus acquisition. The decrease in gross
margin percentage in 2004 compared to 2003 is due to
amortization expense of $441,000 related to developed technology
from the Primus acquisition.
|
|
|
Cost of Services Revenues |
Cost of services revenues includes salary and other related
costs for our professional services, technical support staff and
hosting services as well as third-party contractor expenses.
Cost of services revenues will vary significantly from year to
year depending on the level of professional services staffing,
the effective utilization rates of our professional services
staff, the mix of services performed, including product license
technical support services, the extent to which these services
are performed by us or by third-party contractors and the level
of third-party contractor fees.
Cost of services revenues increased 17% to $23.3 million in
2005 from $19.9 million in 2004. The increase was primarily
attributable to an increase in service revenues of 33% for the
year and a full year of hosting activities; resulting in an
increase in salaries and benefits and increased use of third
party contractors. Our use of outside contractors increased by
$1.2 million compared to 2004.
Cost of services revenues increased slightly to
$19.9 million in 2004 from $19.8 million in 2003. The
increase was primarily attributable to an increase in salaries
and outside professional services costs, offset by reduced rent
expense, operating costs and infrastructure expenses as a result
of our restructuring efforts. Our use of outside contractors
increased by $800,000 compared to 2003.
|
|
|
Gross Margin on Services Revenues |
For 2005, 2004 and 2003, gross margin on services revenues was
62%, or $37.6 million, 57%, or $26.0 million, and 56%,
or $25.5 million, respectively. The increase in gross
margin in 2005 compared with 2004 was attributed primarily to
continued use of third party contractors to control costs. Gross
margin remained relatively flat in 2004 compared with 2003. We
expect gross margin on services revenues in 2006 to be in the
60% to 64% range.
|
|
|
Research and Development Expenses |
Research and development expenses consist primarily of salary
and related costs to support product development, as well as
costs related to outsourcing services. To date, all software
development costs have been expensed as research and development
in the period incurred.
Research and development expenses increased 10% to
$17.8 million in 2005 from $16.2 million in 2004. The
increase was primarily attributable to an increase in our use of
third party offshore contractors and to higher third party and
consultant fees, which increased by $1.6 million during
year ended December 31, 2005.
34
Research and development expenses decreased 9% to
$16.2 million in 2004 from $17.9 million in 2003. The
decrease was primarily attributable to a reduction in our
workforce and resulting decreases in salaries and related
benefits and to a lesser extent, to reduced operating expenses
as a result of our historical restructuring efforts. The
decrease was offset, in part, by an increase in the use of
off-shore developers.
For 2005, 2004 and 2003, research and development expenses as a
percentage of total revenues were 20%, 23% and 25%,
respectively. We anticipate that research and development
expenses will increase in 2006, but will remain consistent, as
compared with 2005, as a percentage of total revenues.
|
|
|
Sales and Marketing Expenses |
Sales and marketing expenses consist primarily of salaries,
commissions and other related costs for sales and marketing
personnel, travel, public relations, amortization of intangible
assets and marketing materials and events.
Sales and marketing expenses increased 1% to $30.0 million
in 2005 from $29.6 million in 2004. The increase is
primarily attributable to an increase of $808,000 during 2005 in
the amortization expense related to an intangible asset for
customer relationships from the Primus acquisition in November
2004. This increase was offset by cost saving initiatives that
resulted in 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 along with
a decrease in operating expenses resulting from our
restructuring efforts.
Sales and marketing expenses decreased 5% to $29.6 million
in 2004 from $31.2 million in 2003. The decrease is
primarily attributable to a reduction of our sales and marketing
group, a reduction in our spending on marketing programs and a
reduction in commissions from decreased product revenues.
Compensation, commissions and benefits costs decreased by
approximately $632,000 and marketing and promotional expenses
decreased by approximately $1.2 million, with the remainder
of the net decrease caused by a decrease in operating expenses
resulting from our restructuring efforts. These decreases were
offset in part by $559,000 of amortization of an intangible
asset related to customer relationships from the Primus
acquisition.
For 2005, 2004 and 2003, sales and marketing expenses as a
percentage of total revenues were 33%, 43% and 43%,
respectively. We expect that sales and marketing expenses will
remain consistent, as compared with 2005, as a percentage of
total revenues. However sales and marketing expenses can
fluctuate as a percentage of total revenues depending on
economic conditions, program spending, the rate at which new
sales personnel become productive and the level of revenue.
|
|
|
General and Administrative Expenses |
General and administrative expenses consist primarily of
salaries and other related costs for operations and finance
employees and legal and accounting fees.
General and administrative expenses increased 45% to
$11.2 million in 2005 from $7.7 million in 2004.
Approximately 55% of the increase was related to an increase in
outside services and professional fees of approximately
$1.9 million, with most of the remainder related to
increases in insurance expenses of $320,000, recruiting fees of
$128,000 and amortization of an intangible asset related to
non-compete agreements from the Primus purchase of $111,000.
Contributing to the increase in outside services of
approximately $1.9 million for the year ended
December 31, 2005 were costs associated with Sarbanes-Oxley
compliance and the integration of the Primus acquisition.
General and administrative expenses decreased 19% to
$7.7 million in 2004 from $9.5 million in 2003.
Approximately 52% of the decrease was related to a decrease in
our workforce, 28% of the decrease was the result of lower
hiring and training costs with the remainder related to
decreases in rent expense and facilities related charges and
other operating expenses resulting from our restructuring
efforts and cost containment initiatives, offset by an increase
in professional services comprising legal and accounting costs
primarily due to compliance with the internal control
requirements of Section 404 of the Sarbanes-Oxley Act of
2002.
35
For 2005, 2004 and 2003, general and administrative expenses as
a percentage of total revenues were 12%, 11% and 13%,
respectively. We anticipate that general and administrative
expenses will decrease slightly, as compared with 2005, as a
percentage of total revenues.
|
|
|
Restructuring Charges (Benefit) |
During each of the last five years we have taken restructuring
actions to realign our operating expenses and facilities with
the requirements of our business and current market conditions.
These actions have included closure and consolidation of excess
facilities, reductions in the number of our employees,
abandonment or disposal of tangible assets and settlement of
contractual obligations. In connection with each of these
actions we have recorded restructuring charges, based in part
upon our estimates of the costs ultimately to be paid for the
actions we have taken. When changes or circumstances result in
changes in our estimates relating to our accrued restructuring
costs, we reflect these changes as additional charges or
benefits in the period in which the change of estimate occurs.
For detailed information about our restructuring activities and
related costs and accruals, see Note 10 to the Consolidated
Financial Statements included in Item 8 of this Annual
Report on Form 10-K.
During 2005, we recorded a net restructuring charge of $885,000,
consisting of $1.8 million of costs associated with the
relocation of our San Francisco office and reduction of
space we occupy in San Francisco and other
facilities-related charges, which were partially offset by a net
benefit of $932,000, resulting from the net favorable effect of
changes of estimates relating to costs accrued in connection
with our prior restructuring activities. The principal
components of this $932,000 net benefit were a $792,000
reduction in estimated subleasing costs related to our 2001
restructuring actions, as a result of our re-evaluation of the
financial condition of our subtenants and their ability to meet
their financial obligations to us, and a $257,000 reduction in
estimated facilities-related costs attributable to our 2004
restructuring actions, as a result of our execution of a
sublease agreement for the vacated space. These favorable
changes more than offset net unfavorable changes in estimates in
the aggregate net amount of approximately $117,000 relating to
our restructuring actions in various prior periods.
In 2004, we recorded a net restructuring charge of
$3.6 million, consisting of $1.5 million of
facilities-related costs and $2.5 million of employee
severance and benefits costs related to our 2004 restructuring
actions, partially offset by $379,000 of net benefits resulting
from changes in estimates relating primarily to our 2001, 2002
and 2003 facility related restructuring actions. The
$1.5 million of facilities-related costs were 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 $2.5 million for severance and benefit costs related to
cost reduction actions taken to terminate 56 employees or 14% of
our worldwide employee base.
In 2003, we recorded a net restructuring benefit of
$10.5 million, consisting of charges of $1.5 million
for facilities-related costs and $1.2 million for employee
severance benefits costs related to restructuring actions in the
second and third quarters of 2003, which were more than offset
by $13.6 million of net benefits resulting from changes in
estimates relating to prior restructuring actions, primarily
consisting of a $11.5 million benefit attributable to the
settlement during 2003 of our obligations relating to five
leased premises vacated in connection with our 2001
restructuring actions and a $7.2 million benefit related to
a lease vacated in connection with our 2002 restructuring. These
benefits were offset by additional charges primarily for other
leases of $2.8 million related to our 2001 action and
$1.9 million related to our 2002 action. Other changes in
estimates were recorded in 2003.
As of December 31, 2005, we had an accrued restructuring
liability of $5.1 million primarily for facility related
costs. The long-term portion of the accrued restructuring
liability was $2.1 million.
At December 31, 2005, we had lease arrangements related to
seven abandoned facilities from our restructuring actions. One
of these leases is the subject of a lease settlement arrangement
under which we are obligated to make payments through 2006. The
lease agreements with respect to the other six facilities are
ongoing. Of these locations, the restructuring accrual for the
Reading, UK location is net of assumed sub-lease
36
income, as no sub-lease agreement had been executed by
December 31, 2005. The restructuring accrual for all other
locations is net of the contractual amounts due under an
executed sub-lease agreement or there is no assumed sub-lease
income included in the accrual. All locations for which we have
recorded restructuring charges have been exited, and thus our
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 |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Cambridge, MA*
|
|
$ |
1,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,035 |
|
Cambridge, MA
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91 |
|
Cambridge, MA
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399 |
|
Waltham, MA
|
|
|
1,452 |
|
|
|
1,452 |
|
|
|
1,452 |
|
|
|
364 |
|
|
|
4,720 |
|
Chicago, IL
|
|
|
427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
427 |
|
San Francisco, CA
|
|
|
513 |
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
1,025 |
|
Reading, UK
|
|
|
538 |
|
|
|
538 |
|
|
|
538 |
|
|
|
134 |
|
|
|
1,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility obligations, gross
|
|
|
4,455 |
|
|
|
2,502 |
|
|
|
1,990 |
|
|
|
498 |
|
|
|
9,445 |
|
Contracted and assumed sublet income
|
|
|
(1,664 |
) |
|
|
(1,401 |
) |
|
|
(1,149 |
) |
|
|
(287 |
) |
|
|
(4,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash obligations
|
|
$ |
2,791 |
|
|
$ |
1,101 |
|
|
$ |
841 |
|
|
$ |
211 |
|
|
$ |
4,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed sub-lease income
|
|
$ |
64 |
|
|
$ |
204 |
|
|
$ |
204 |
|
|
$ |
51 |
|
|
$ |
523 |
|
|
|
* |
represents a location for which we have executed a lease
settlement agreement |
|
|
|
Interest and Other Income, Net |
Interest and other income, net decreased 45% to $219,000 in 2005
from $395,000 in 2004. The decrease was primarily due to an
increase in the foreign exchange loss of $420,000 for the year,
offset by an increase in interest income of $161,000 and an
increase in other income of $83,000.
Interest and other income, net decreased 74% to $395,000 in 2004
from $1.5 million in 2003. The decrease was primarily due
to a decrease in foreign currency related gains of $767,000 and
decreased interest income due to lower balances of cash, cash
equivalents and marketable securities. Included in interest and
other income, net in 2004 and 2003 were gains of $18,000 and
$785,000, respectively, from foreign currency exchange
transactions and the re-measurement of foreign currency
denominated assets and liabilities into the functional currency
of the various subsidiaries.
|
|
|
Provision for Income Taxes |
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. The tax provision recorded in
2005 relates to foreign taxes. During 2004 and 2003 we reversed
previously accrued taxes of $158,000 and $332,000, respectively,
for foreign locations due to the closure of statute of
limitations, or as a result of changes in our estimates of
potential amounts due in those locations.
Liquidity and Capital Resources
Our capital requirements relate primarily to facilities,
employee infrastructure and working capital requirements.
Historically, we have funded our cash requirements primarily
through the public and private sales of equity securities, and
commercial credit facilities. More recently, we have been able
to fund our cash requirements in part from operations. At
February 28, 2006, we had $24.9 million in cash and
cash equivalents and $8.3 million in marketable securities.
37
Cash provided by operating activities was $3.9 million in
2005. This consisted primarily of net income of
$5.8 million, depreciation and amortization of
$4.2 million, a non-cash restructuring charge of
$1.2 million and a decrease in accounts receivable of
$3.0 million due to improved collection efforts, offset by
payments of accrued restructuring costs of $6.1 million, a
decrease in deferred revenues of $4.1 million and payments
of accounts payable of $1.4 million.
Cash used in operating activities was $14.1 million in
2004. This consisted primarily of a net loss of
$9.5 million, an increase in accounts receivable of
$7.1 million, a decrease in accrued restructuring of
$6.8 million and a decrease in accrued expenses of
$3.4 million offset by depreciation and amortization of
$3.0 million, non-cash restructuring charges of
$0.7 million, an increase in deferred revenue of
$7.0 million, a decrease in prepaid expenses and other
current assets and deferred rent of $1.6 million and an
increase in accounts payable of $0.5 million.
Our investing activities for 2005 used cash of $2.9 million
and consisted primarily of the payment of acquisition related
costs of $1.0 million, capital expenditures of
$1.9 million for computer hardware, offset by a decrease in
other assets of $0.3 million and net purchases of
marketable securities of $0.3 million. Our investing
activities for 2004 consisted primarily of capital expenditures
of $0.8 million and net proceeds from maturities of
marketable securities of $0.4 million, along with net cash
acquired in the Primus acquisition of $2.7 million. Our
lease in Cambridge expires in 2006 and we may find it beneficial
to move our headquarters, creating a requirement for additional
leasehold improvements. Therefore, we expect that capital
expenditures, including the additional leasehold improvements,
will total approximately $6.0 million in 2006.
Net cash provided by financing activities was $1.5 million
in 2005, representing proceeds from our employee stock purchase
plan and the exercise of stock options aggregating
$2.0 million, offset by principal payments on notes payable
and capital leases aggregating $0.5 million. Net cash
provided by financing activities was $1.0 million in 2004,
consisting of proceeds from stock option exercises and our
employee stock purchase plan of $1.5 million, offset by
principal payments on notes payable of $0.5 million.
|
|
|
Accounts Receivable and Days Sales Outstanding |
Our accounts receivable balance and days sales outstanding, or
DSO, as of December 31, 2005, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands (except DSO data)) | |
DSO
|
|
|
86 |
|
|
|
129 |
|
|
|
77 |
|
Revenue
|
|
$ |
90,646 |
|
|
$ |
69,219 |
|
|
$ |
72,492 |
|
Accounts receivable
|
|
$ |
21,459 |
|
|
$ |
24,430 |
|
|
$ |
15,364 |
|
The significant improvement in DSO as of December 31, 2005
compared to 2004 is due to the impact of acquiring Primus
accounts receivable balance late in 2004 with only two months of
Primus revenues in 2004 to offset the accounts receivable
and product license deals that closed before year end but were
not recognized into revenue during 2004.
We have a $20 million revolving line of credit with Silicon
Valley Bank (the Bank) which provides for borrowings of up to
$20 million. The line of credit bears interest at the
Banks prime rate (7.25% at December 31, 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. The
credit facility required net profitability of at least $1.00 for
the fourth quarter of 2005.
In February 2006, we entered into the Ninth Loan Modification
Agreement (the Ninth Amendment), which amended the Amended and
Restated Loan and Security Agreement dated as of June 13,
2002. Under the Ninth Amendment, the profitability covenant was
revised to require net income of at least $1.00 for the
38
quarter ending March 31, 2006 and net income of at least
$500,000 for the quarter ended June 30, 2006 and for each
quarter thereafter through the duration of the credit facility.
Our ability to meet these profitability covenants may be
affected by our adoption of SFAS 123R, effective
January 1, 2006. We estimate that stock based compensation
expense related to share-based payments to employees will have
an impact of at least $3.0 million to $4.0 million on
fiscal 2006 results related to the unvested portion of options
granted prior to January 1, 2006, options granted after
December 31, 2005 and Employee Stock Purchase Plan
transactions after December 31, 2005. This estimate is
based on our current level of employees and related unvested
stock options, expected level of employees and stock options to
be granted in 2006, and participation in our employee stock
purchase plan. We are also required to maintain unrestricted and
unencumbered cash, which includes cash equivalents and
marketable securities, of greater than $20.0 million at the
end of each month through the duration of the credit facility
To avoid additional bank fees and expenses, we are required to
maintain unrestricted cash, which includes cash equivalents and
marketable securities, at the Bank in an amount equal to two
times the amount of obligations outstanding, which includes
letters of credit that have been issued but not drawn upon,
under the loan agreement. In the event our cash balances at the
Bank fall below this amount, we will be required to pay fees and
expenses to compensate the Bank for lost income. At
December 31, 2005, we were in compliance with all related
financial covenants. In the event that we do not comply with 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, as
amended, expires on January 31, 2008.
While there were no outstanding borrowings under the facility at
December 31, 2005, the bank had issued LCs totaling
$6.1 million on our behalf, which are supported by this
facility. The LCs have been issued in favor of various landlords
to secure obligations under our facility leases pursuant to
leases expiring through January 2009. The line of credit bears
interest at the Banks prime rate (7.25% at
December 31, 2005). As of December 31, 2005,
approximately $13.9 million was available under the
facility.
At December 31, 2005 our contractual cash obligations were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than | |
|
|
|
After |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
2-3 Years | |
|
4-5 Years | |
|
5 Years |
|
|
| |
|
| |
|
| |
|
| |
|
|
Lease Commitments
|
|
$ |
12,073 |
|
|
$ |
5,869 |
|
|
$ |
5,500 |
|
|
$ |
704 |
|
|
$ |
|
|
Notes Payable
|
|
|
215 |
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
12,288 |
|
|
$ |
6,084 |
|
|
$ |
5,500 |
|
|
$ |
704 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $12.1 million in future minimum lease payments,
$8.8 million is included in the Companys accrued
restructuring charges. The $8.8 million was reduced to
$4.9 million restructuring charge after taking into
consideration estimated sublease income, contracted sublease
income, vacancy periods and operating costs of the various
subleased properties.
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 $33.6 million in cash and cash
equivalents and marketable securities at December 31, 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,
39
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
On December 16, 2004, the FASB issued SFAS 123
(revised 2004), Share-Based Payment, (SFAS 123(R)).
SFAS 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends
SFAS No. 95, Statement of Cash Flows.
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values at the date of
grant. Pro forma disclosure is no longer an alternative.
SFAS 123(R) permits companies to adopt its requirements
using one of two methods. A modified prospective
method recognizes compensation cost beginning with the effective
date (a) based on the requirements of SFAS 123(R) for
all share-based payments granted after the effective date and
(b) based on the requirements of SFAS 123 for all
awards granted to employees prior to the effective date of
SFAS 123(R) that remain unvested on the effective date. A
modified retrospective method includes the
requirements of the modified prospective method described above,
but also permits entities to restate their historical financial
statements based on the amounts previously recognized under
SFAS 123 for purposes of pro forma disclosures either
(a) for all prior periods presented or (b) for prior
interim periods of the year of adoption.
As permitted by SFAS 123, we currently account for
share-based payments to employees using APB Opinion
No. 25s intrinsic value method and, as such,
generally recognize no compensation cost for employee stock
options. Accordingly, the adoption of SFAS 123(R) will have
a significant impact on our results of operations, although it
will have no impact on our overall financial position.
SFAS 123(R) is required to be adopted effective at the
beginning of the first quarter of fiscal 2006. We will adopt
SFAS 123(R) in fiscal year 2006 on January 1, 2006
using the modified prospective method. We estimate that the
stock based compensation expense related to share-based payments
to employees will have an impact of at least $3.0 million
to $4.0 million on fiscal 2006 results related to the
unvested portion of options granted prior to January 1,
2006, options granted after December 31, 2005 and Employee
Stock Purchase Plan transactions after December 31, 2005.
This estimate is based on our current level of employees and
related unvested stock options, expected level of employees and
stock options to be granted in 2006, and participation in our
employee stock purchase plan in 2006.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
We maintain an investment portfolio consisting mainly of
investment grade money market funds, corporate obligations and
government obligations with a weighted average maturity of less
than one year. These
held-to-maturity
securities are subject to interest rate risk. However, a 10%
change in interest rates would not have a material impact to the
fair values of these securities primarily due to their short
maturity and our intent to hold the securities to maturity.
There have been no significant changes since December 31,
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 foreign currencies. Our primary foreign
currency exposures relate to our short-term intercompany
balances with our foreign subsidiaries and accounts receivable
valued in the United Kingdom in U.S. dollars. Our primary
foreign subsidiaries have functional currencies denominated in
the British pound and Euro, and foreign denominated assets and
liabilities are remeasured each reporting period with any
exchange gains and losses recorded in our consolidated
statements of operations. Based on currency exposures existing
at December 31, 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
December 31, 2005, we had no outstanding derivative
instruments. We do not use derivative instruments for trading or
speculative purposes.
40
|
|
Item 8. |
Consolidated Financial Statements and Supplementary
Data |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Art Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of
Art Technology Group, Inc. as of December 31, 2005 and
2004, and the related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for each of the three years in the period ended
December 31, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Art Technology Group, Inc. at
December 31, 2005 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Art Technology Group, Inc.s internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 9, 2006
expressed an unqualified opinion thereon.
Boston, Massachusetts
March 9, 2006
41
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except share | |
|
|
and per-share information) | |
ASSETS |
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
24,060 |
|
|
$ |
21,310 |
|
|
Marketable securities
|
|
|
9,509 |
|
|
|
5,197 |
|
|
Accounts receivable, net of allowances of $778 ($680 in 2004)
|
|
|
21,459 |
|
|
|
24,430 |
|
|
Prepaid expenses and other current assets
|
|
|
1,130 |
|
|
|
1,694 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
56,158 |
|
|
|
52,631 |
|
Marketable securities, long term
|
|
|
|
|
|
|
4,001 |
|
Property and equipment, net
|
|
|
2,995 |
|
|
|
3,120 |
|
Goodwill
|
|
|
27,347 |
|
|
|
27,458 |
|
Intangible assets, net
|
|
|
4,859 |
|
|
|
7,177 |
|
Other assets
|
|
|
1,406 |
|
|
|
3,416 |
|
|
|
|
|
|
|
|
|
|
$ |
92,765 |
|
|
$ |
97,803 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
2,719 |
|
|
$ |
5,186 |
|
|
Accrued expenses
|
|
|
13,359 |
|
|
|
13,156 |
|
|
Accrued restructuring, short-term
|
|
|
3,012 |
|
|
|
6,095 |
|
|
Capital lease obligations, current portion
|
|
|
56 |
|
|
|
56 |
|
|
Notes payable
|
|
|
198 |
|
|
|
595 |
|
|
Deferred revenue
|
|
|
21,113 |
|
|
|
25,355 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
40,457 |
|
|
|
50,443 |
|
Accrued restructuring, less current portion
|
|
|
2,085 |
|
|
|
5,063 |
|
Capital lease obligations, less current portion
|
|
|
63 |
|
|
|
112 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; Authorized
10,000,000 shares, Issued and outstanding no
shares
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; Authorized
200,000,000 shares, Issued and outstanding
110,637,606 shares and 108,141,966 shares at
December 31, 2005 and 2004, respectively
|
|
|
1,106 |
|
|
|
1,081 |
|
|
Additional paid-in capital
|
|
|
251,454 |
|
|
|
249,465 |
|
|
Accumulated deficit
|
|
|
(199,466 |
) |
|
|
(205,235 |
) |
|
Accumulated other comprehensive loss
|
|
|
(2,934 |
) |
|
|
(3,126 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
50,160 |
|
|
|
42,185 |
|
|
|
|
|
|
|
|
|
|
$ |
92,765 |
|
|
$ |
97,803 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per-share information) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
$ |
29,821 |
|
|
$ |
23,345 |
|
|
$ |
27,159 |
|
|
Services
|
|
|
60,825 |
|
|
|
45,874 |
|
|
|
45,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
90,646 |
|
|
|
69,219 |
|
|
|
72,492 |
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license
|
|
|
1,816 |
|
|
|
2,206 |
|
|
|
2,118 |
|
|
Services
|
|
|
23,255 |
|
|
|
19,879 |
|
|
|
19,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
25,071 |
|
|
|
22,085 |
|
|
|
21,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
65,575 |
|
|
|
47,134 |
|
|
|
50,566 |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
17,843 |
|
|
|
16,209 |
|
|
|
17,928 |
|
|
Sales and marketing
|
|
|
30,034 |
|
|
|
29,602 |
|
|
|
31,174 |
|
|
General and administrative
|
|
|
11,231 |
|
|
|
7,742 |
|
|
|
9,538 |
|
|
Restructuring charge (benefit)
|
|
|
885 |
|
|
|
3,570 |
|
|
|
(10,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
59,993 |
|
|
|
57,123 |
|
|
|
48,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
5,582 |
|
|
|
(9,989 |
) |
|
|
2,402 |
|
Interest and other income, net
|
|
|
219 |
|
|
|
395 |
|
|
|
1,521 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
5,801 |
|
|
|
(9,594 |
) |
|
|
3,923 |
|
Provision (benefit) for income taxes
|
|
|
32 |
|
|
|
(50 |
) |
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
5,769 |
|
|
$ |
(9,544 |
) |
|
$ |
4,178 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$ |
0.05 |
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$ |
0.05 |
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
109,446 |
|
|
|
79,252 |
|
|
|
71,798 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
111,345 |
|
|
|
79,252 |
|
|
|
73,768 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
| |
|
Additional | |
|
|
|
|
|
Other | |
|
Total | |
|
Comprehensive | |
|
|
Number of | |
|
Par | |
|
Paid-In | |
|
Deferred | |
|
Accumulated | |
|
Comprehensive | |
|
Stockholders | |
|
Income | |
|
|
Shares | |
|
Value | |
|
Capital | |
|
Compensation | |
|
Deficit | |
|
Loss | |
|
Equity | |
|
(Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share and per-share information) | |
Balance, January 1, 2003
|
|
|
70,941,478 |
|
|
$ |
709 |
|
|
$ |
217,288 |
|
|
$ |
(394 |
) |
|
$ |
(199,869 |
) |
|
$ |
(1,711 |
) |
|
$ |
16,023 |
|
|
|
|
|
Exercise of stock options
|
|
|
786,020 |
|
|
|
8 |
|
|
|
744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
752 |
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
1,208,667 |
|
|
|
12 |
|
|
|
1,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,095 |
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
136 |
|
|
|
|
|
Reversal of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(188 |
) |
|
|
247 |
|
|
|
|
|
|
|
(70 |
) |
|
|
(11 |
) |
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,178 |
|
|
|
|
|
|
|
4,178 |
|
|
$ |
4,178 |
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,236 |
) |
|
|
(1,236 |
) |
|
|
(1,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
72,936,165 |
|
|
|
729 |
|
|
|
218,927 |
|
|
|
(11 |
) |
|
|
(195,691 |
) |
|
|
(3,017 |
) |
|
|
20,937 |
|
|
|
|
|
Exercise of stock options
|
|
|
718,126 |
|
|
|
7 |
|
|
|
525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532 |
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
1,016,419 |
|
|
|
10 |
|
|
|
926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936 |
|
|
|
|
|
Issuances of common stock and valuation of options related to
Primus acquisition
|
|
|
33,471,256 |
|
|
|
335 |
|
|
|
29,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,422 |
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,544 |
) |
|
|
|
|
|
|
(9,544 |
) |
|
$ |
(9,544 |
) |
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109 |
) |
|
|
(109 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(9,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
108,141,966 |
|
|
|
1,081 |
|
|
|
249,465 |
|
|
|
|
|
|
|
(205,235 |
) |
|
|
(3,126 |
) |
|
|
42,185 |
|
|
|
|
|
Exercise of stock options
|
|
|
1,751,942 |
|
|
|
18 |
|
|
|
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,360 |
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
743,698 |
|
|
|
7 |
|
|
|
647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
654 |
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,769 |
|
|
|
|
|
|
|
5,769 |
|
|
$ |
5,769 |
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192 |
|
|
|
192 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
110,637,606 |
|
|
$ |
1,106 |
|
|
$ |
251,454 |
|
|
$ |
|
|
|
$ |
(199,466 |
) |
|
$ |
(2,934 |
) |
|
$ |
50,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
5,769 |
|
|
$ |
(9,544 |
) |
|
$ |
4,178 |
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
11 |
|
|
|
136 |
|
|
|
Depreciation and amortization
|
|
|
4,180 |
|
|
|
2,957 |
|
|
|
3,897 |
|
|
|
Non-cash restructuring charge
|
|
|
1,167 |
|
|
|
667 |
|
|
|
1,144 |
|
|
|
Loss on disposal of fixed assets, net
|
|
|
|
|
|
|
33 |
|
|
|
121 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
2,940 |
|
|
|
(7,147 |
) |
|
|
9,857 |
|
|
|
Prepaid expenses and other current assets
|
|
|
434 |
|
|
|
671 |
|
|
|
371 |
|
|
|
Deferred rent
|
|
|
664 |
|
|
|
978 |
|
|
|
(3,772 |
) |
|
|
Accounts payable
|
|
|
(1,428 |
) |
|
|
519 |
|
|
|
(1,417 |
) |
|
|
Accrued expenses
|
|
|
310 |
|
|
|
(3,364 |
) |
|
|
(5,856 |
) |
|
|
Deferred revenue
|
|
|
(4,067 |
) |
|
|
6,957 |
|
|
|
(759 |
) |
|
|
Accrued restructuring
|
|
|
(6,061 |
) |
|
|
(6,841 |
) |
|
|
(34,446 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
3,908 |
|
|
|
(14,103 |
) |
|
|
(26,546 |
) |
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(14,115 |
) |
|
|
(11,426 |
) |
|
|
(12,138 |
) |
|
Maturities of marketable securities
|
|
|
13,804 |
|
|
|
11,878 |
|
|
|
25,217 |
|
|
Purchases of property and equipment
|
|
|
(1,924 |
) |
|
|
(763 |
) |
|
|
(993 |
) |
|
Proceeds from sales of equipment
|
|
|
|
|
|
|
|
|
|
|
91 |
|
|
Cash acquired in acquisition, net of acquisition costs paid
|
|
|
|
|
|
|
2,730 |
|
|
|
|
|
|
Payment of acquisition costs
|
|
|
(1,010 |
) |
|
|
|
|
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
313 |
|
|
|
(12 |
) |
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(2,932 |
) |
|
|
2,407 |
|
|
|
12,275 |
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on notes payable
|
|
|
(413 |
) |
|
|
(502 |
) |
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,360 |
|
|
|
532 |
|
|
|
752 |
|
|
Proceeds from employee stock purchase plan
|
|
|
654 |
|
|
|
936 |
|
|
|
1,095 |
|
|
Payments on capital leases
|
|
|
(55 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,546 |
|
|
|
959 |
|
|
|
1,847 |
|
Effects of Foreign Exchange Rate Changes On Cash and Cash
Equivalents
|
|
|
228 |
|
|
|
113 |
|
|
|
(1,471 |
) |
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
2,750 |
|
|
|
(10,624 |
) |
|
|
(13,895 |
) |
Cash and Cash Equivalents, Beginning of Period
|
|
|
21,310 |
|
|
|
31,934 |
|
|
|
45,829 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period
|
|
$ |
24,060 |
|
|
$ |
21,310 |
|
|
$ |
31,934 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$ |
18 |
|
|
$ |
4 |
|
|
$ |
|
|
|
Cash paid during the period for income taxes
|
|
$ |
39 |
|
|
$ |
38 |
|
|
$ |
140 |
|
Supplemental Disclosure of Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of deferred compensation
|
|
$ |
|
|
|
$ |
|
|
|
$ |
247 |
|
|
|
Reversal of provision for income taxes
|
|
$ |
|
|
|
$ |
158 |
|
|
$ |
332 |
|
|
|
Issuance of stock and options related to acquisition of Primus
|
|
$ |
|
|
|
$ |
29,422 |
|
|
$ |
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
45
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(1) |
Organization, Business and Summary of Significant Accounting
Policies |
Art Technology Group, Inc. (ATG or the Company) offers an
integrated suite of Internet online marketing, sales and service
applications, as well as related application development,
integration and support services. The Company was incorporated
in 1991 in the State of Delaware and has been a publicly traded
corporation since 1999.
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 and
maintenance, education, professional services and application
hosting services.
|
|
(a) |
Principles of Consolidation |
The accompanying consolidated financial statements include the
accounts of ATG and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ATG earns 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 support and maintenance
services, the sale of certain other consulting and development
services and hosting services. ATG 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 regarding pricing and of selling
services separately, provide the basis for establishing
vendor-specific objective evidence of fair value. This allows
ATG to allocate revenue to the undelivered elements in a
multiple element arrangement and apply the residual method under
Statement of Position (SOP) No. 97-2
(SOP 97-2),
Software Revenue Recognitionand SOP No. 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 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. Many of the
Companys software arrangements include consulting
implementation services sold separately under consulting
engagement contracts. Consulting revenues from these
arrangements are generally accounted for separately from
software licenses because the arrangements qualify as service
transactions as defined in
SOP 97-2. The more
significant factors considered in determining whether the
revenue should be accounted for separately include the nature of
services
46
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(i.e., consideration of whether the services are essential
to the functionality of the licensed product), degree of risk,
availability of services from other vendors, timing of payments
and impact of milestones or acceptance criteria on the
realizability of the software license fee. Consequently, product
license revenue is generally recognized when the product is
shipped. Revenues from software support and 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 or two years. Customers who
have both purchased ATGs product licenses and have also
entered into an application hosting agreement typically have a
contractual right to cancel the application hosting agreement
with a minimum notice period. The Company accounts for these
transactions in accordance with Emerging Issues Task Force
(EITF) 00-3, Application of AICPA Statement of Position
97-2, Software Revenue Recognition, to Arrangements That Include
the Right to Use Software Stored on Another Entitys
Hardware, and generally recognizes the product license fee
upon delivery of the software license because the Company has
established the fair value of a vendor specific objective
evidence of hosting services, the customer has the contractual
right to take possession of the software at any time during the
hosting period without significant penalties and it is feasible
for the customer to run the software on its own hardware or
contract with another party to host the software. 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 based
upon actual sales to the resellers. ATG does not grant its
resellers the right of return or price protection.
Revenues from professional service arrangements are recognized
on either a time-and-materials, proportional performance method
or
percentage-of-completion
basis as the services are performed, provided that amounts due
from customers are fixed or determinable and deemed collectible
by management. From time to time the Company enters into fixed
price service arrangements. In those circumstances in which
services are essential to the functionality of the software, the
Company applies the
percentage-of-completion
method, and in those situations when only professional services
are provided, the Company applies the proportional performance
method. Both of these methods require that the Company track the
effort expended and the effort expected to complete a project.
Amounts collected or billed prior to satisfying the above
revenue recognition criteria are reflected as deferred revenue.
Deferred revenue primarily consists of advance payments related
to support and maintenance, service agreements and deferred
product license revenues.
|
|
(d) |
Allowances for Doubtful Accounts and Returns |
ATG records allowances for doubtful accounts based upon a
specific review of all significant outstanding invoices. For
those invoices not specifically reviewed, provisions are
provided at differing rates, based upon the age of the
receivable. In determining these percentages, ATG analyzes its
historical collection experience and current economic trends.
ATG also records a provision for estimated sales returns and
allowances on product and service related sales in the same
period the related revenues are recorded in accordance with
Statement of Financial Accounting Standards
(SFAS) No. 48, Revenue Recognition When Right of
Return Exists. These estimates are based on historical sales
returns, analysis of credit memo data and other known factors.
The following is a rollforward of ATGs allowance for
doubtful accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions/ | |
|
|
|
|
|
|
Beginning of | |
|
Charges to | |
|
Deductions/ | |
|
Balance at End | |
|
|
Period | |
|
Expense | |
|
Write-Offs | |
|
of Period | |
|
|
| |
|
| |
|
| |
|
| |
Year Ended December 31, 2003
|
|
$ |
1,941 |
|
|
$ |
210 |
|
|
$ |
(1,352 |
) |
|
$ |
799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
$ |
799 |
|
|
$ |
259 |
|
|
$ |
(378 |
) |
|
$ |
680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
$ |
680 |
|
|
$ |
677 |
|
|
$ |
(579 |
) |
|
$ |
778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(e) |
Cost of Product License Revenues |
Cost of product license revenues includes salary and related
benefits of engineering staff and outsourced developers
dedicated to maintenance of products that are in general
release, costs of fulfillment, external shipping costs, the
amortization of technology acquired in connection with the
Primus acquisition and licenses purchased in support of and used
in the Companys products and royalties paid to vendors
whose technology is incorporated into the Companys
products.
|
|
(f) |
Cost of Services Revenues |
Cost of services revenues includes salary and related benefits
costs and other costs for the Companys professional
services and technical support staff, costs associated with the
hosting centers as well as third-party contractor expenses.
|
|
(g) |
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 using the treasury
stock method. Common stock equivalents consist of stock options.
The following table sets forth the computation of basic and
diluted net income (loss) per share for the years ended
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per share amounts) | |
Net income (loss)
|
|
$ |
5,769 |
|
|
$ |
(9,544 |
) |
|
$ |
4,178 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
basic net income (loss) per share
|
|
|
109,446 |
|
|
|
79,252 |
|
|
|
71,798 |
|
Weighted average common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive employee common stock options
|
|
|
1,899 |
|
|
|
|
|
|
|
1,970 |
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common and common equivalent shares
outstanding used in computing diluted net income (loss) per share
|
|
|
111,345 |
|
|
|
79,252 |
|
|
|
73,768 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$ |
0.05 |
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$ |
0.05 |
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock options
|
|
|
7,443 |
|
|
|
15,236 |
|
|
|
5,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(h) |
Cash, Cash Equivalents and Marketable Securities |
ATG accounts for investments in marketable securities under
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Under SFAS 115, investments
consisting of cash equivalents and marketable securities, for
which ATG has the positive intent and the ability to hold to
maturity, 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 90 days. At December 31, 2005 and 2004,
48
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
all of ATGs marketable securities were classified as
held-to-maturity. The
average maturity of ATGs marketable securities was
approximately 3.2 months and 9.6 months at
December 31, 2005 and 2004, respectively. At
December 31, 2004, the average maturity of the marketable
securities classified as long-term was 13.6 months. At
December 31, 2005 and 2004, the difference between the
carrying value and market value of ATGs marketable
securities were unrealized losses of approximately $18,000 and
$77,000, respectively. Realized gains and loses were not
material for the years ended December 31, 2005, 2004 and
2003. At December 31, 2005 and 2004, ATGs cash, cash
equivalents and marketable securities consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
15,473 |
|
|
$ |
4,360 |
|
|
Money market accounts
|
|
|
5,253 |
|
|
|
13,529 |
|
|
U.S. Treasury and U.S. Government Agency securities
|
|
|
1,323 |
|
|
|
2,622 |
|
|
Commercial paper
|
|
|
2,011 |
|
|
|
799 |
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$ |
24,060 |
|
|
$ |
21,310 |
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. Government Agency securities
|
|
$ |
389 |
|
|
$ |
648 |
|
|
Certificate of Deposit
|
|
|
450 |
|
|
|
|
|
|
Commercial paper
|
|
|
2,011 |
|
|
|
796 |
|
|
Corporate debt securities
|
|
|
6,659 |
|
|
|
7,754 |
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$ |
9,509 |
|
|
$ |
9,198 |
|
|
|
|
|
|
|
|
Included in other assets at December 31, 2005 and 2004 is
deferred rent expense related to lease settlements reached with
landlords during 2003. These settlement agreements involved both
reaching a settlement on abandoned space and renegotiating a
reduction in the rate for continuing operating space. In these
cases, a portion of the settlement payment was accounted for as
deferred rent expense. The deferred rent is amortized over the
remaining lease term, which will have the effect of maintaining
the effective rent expense per square foot on the existing
operating space equal to the effective rent expense per square
foot per the original lease. In connection with the
Companys restructuring action in the second quarter of
2005, the Company wrote off $1.0 million of deferred rent
due to terminating the lease agreement with the landlord.
Other assets at December 31, 2005 and 2004 consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred rent resulting from lease settlements (see Note 10)
|
|
$ |
562 |
|
|
$ |
2,275 |
|
Other assets
|
|
|
844 |
|
|
|
1,141 |
|
|
|
|
|
|
|
|
|
|
$ |
1,406 |
|
|
$ |
3,416 |
|
|
|
|
|
|
|
|
|
|
(j) |
Property and Equipment |
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. ATG records depreciation and
amortization using the straight-line method.
49
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property and equipment at December 31, 2005 and 2004,
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
Asset Classification |
|
Estimated Useful Life | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Computer equipment
|
|
|
3 years |
|
|
$ |
12,564 |
|
|
$ |
10,985 |
|
Leasehold improvements
|
|
|
Lesser of useful |
|
|
|
3,342 |
|
|
|
3,711 |
|
|
|
|
life or life of lease |
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
5 years |
|
|
|
2,969 |
|
|
|
2,850 |
|
Computer software
|
|
|
3 years |
|
|
|
4,417 |
|
|
|
4,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,292 |
|
|
|
21,946 |
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
20,297 |
|
|
|
18,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,995 |
|
|
$ |
3,120 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense included in the accompanying statements of
operations was approximately $1.9 million,
$1.9 million and $3.9 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
|
|
(k) |
Research and Development Expenses for Software
Products |
ATG evaluates the establishment of technological feasibility of
its products in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed. ATG sells products in a
market that is subject to rapid technological change, new
product development and changing customer needs. Accordingly,
ATG has concluded that technological feasibility is not
established until the development stage of the product is nearly
complete. ATG defines technological feasibility as the
completion of a working model. The time period during which
costs could be capitalized, from the point of reaching
technological feasibility until the time of general product
release, is very short, and consequently, the amounts that could
be capitalized are not material to ATGs financial position
or results of operations. Therefore, ATG expenses all such costs
to research and development in the period incurred.
ATG accounts for income taxes in accordance with the provisions
of SFAS 109, Accounting for Income Taxes. This
statement requires ATG to recognize a current tax asset or
liability for current taxes payable or refundable and to record
deferred tax assets or liabilities for the estimated future tax
effects of temporary differences and carryforwards to the extent
that they are realizable. A valuation allowance is established
against net deferred tax assets, if based on the weighted
available evidence, it is more likely than not that all or a
portion of the deferred tax assets will not be realized (see
Note 4).
|
|
(m) |
Stock-Based Compensation |
ATG grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the
shares at the date of grant. ATG accounts for stock-based
compensation for employees in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related
interpretations, and follows the disclosure-only alternative
under SFAS No. 123, Accounting for Stock Based
Compensation.
50
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Had compensation expense for ATGs stock plans been
determined consistent with SFAS 123, the pro forma net
income (loss) and net income (loss) per share would have been as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per-share information) | |
Net income (loss) as reported
|
|
$ |
5,769 |
|
|
$ |
(9,544 |
) |
|
$ |
4,178 |
|
Add: Stock-based employee compensation expense included in
reported net income (loss)
|
|
|
|
|
|
|
11 |
|
|
|
136 |
|
Deduct: Total stock based employee compensation expense
determined under fair value based method for all awards
|
|
|
(2,553 |
) |
|
|
(15,659 |
) |
|
|
(40,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
3,216 |
|
|
$ |
(25,192 |
) |
|
$ |
(35,870 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.05 |
|
|
$ |
(0.12 |
) |
|
$ |
0.06 |
|
|
Pro forma
|
|
$ |
0.03 |
|
|
$ |
(0.32 |
) |
|
$ |
(0.50 |
) |
This presentation of pro forma financial information regarding
net income (loss) and net income (loss) per share is required by
SFAS 123 for stock-based awards as if the Company had
accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The fair value of the
Companys stock-based awards to employees was estimated
using the Black-Scholes option valuation model. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
Because the Companys stock-based awards to employees have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its stock-based awards to employees. The fair value of the
Companys stock-based awards to employees was estimated
assuming no expected dividends and the following weighted
average assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2001 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
3.70 |
% |
|
|
2.93 |
% |
|
|
2.51 |
% |
Expected life (years)
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Expected volatility
|
|
|
82 |
% |
|
|
102 |
% |
|
|
117 |
% |
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair values per share generated
by application of the Black-Scholes option valuation model
utilizing the assumptions noted above for the years ended
December 31, 2005, 2004 and 2003 were $0.75, $0.92 and
$0.97, respectively. Stock-based compensation expense is
recognized on a straight line basis over the vesting period of
the underlying stock options period adjusted for forfeitures.
|
|
(n) |
Comprehensive Income (Loss) |
SFAS No. 130, Reporting Comprehensive Income,
requires financial statements to include the reporting of
comprehensive income (loss), which includes net income (loss)
and certain transactions that have generally been reported in
the statement of stockholders equity. Comprehensive income
(loss) consists of net (income) loss and foreign currency
translation adjustments.
51
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(o) |
Fair Value of Financial Instruments |
Financial instruments mainly consist of cash and cash
equivalents, marketable securities and notes payable. The
carrying amounts of these instruments approximate their fair
values.
|
|
(p) |
Concentrations of Credit Risk |
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of marketable
securities and accounts receivable. ATG maintains cash, cash
equivalents and marketable securities with high credit quality
financial institutions. To reduce its concentration of credit
risk with respect to accounts receivable, the Company routinely
assesses the financial strength of its customers through
continuing credit evaluations and generally does not require
collateral.
At December 31, 2005 one customer balance, comprising
product and services invoices, accounted for 21% of accounts
receivable. At December 31, 2004 another customer balance,
comprising product and services invoices, accounted for 11% of
accounts receivable. During the fourth quarter of 2005, one
customer accounted for 16% of total revenues. No customer
accounts for more than 10% of revenues for the years ended
December 31, 2005, 2004 and 2003.
|
|
(q) |
Long-Lived Assets, including Intangible Assets |
In accordance with SFAS No. 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. The impairment loss is measured by comparing the fair
value of the assets to their carrying values. Fair value is
determined by either a quoted market price or a value determined
by a discounted cash flow technique, whichever is more
appropriate under the circumstances involved. Intangible assets
with determinable lives are amortized over their useful lives,
based upon the pattern in which the expected benefits will be
realized, or on a straight-line basis, whichever is greater. The
Company has recorded impairment charges related to fixed assets
in 2005, 2004 and 2003 as discussed in Note 10.
|
|
(r) |
Foreign Currency Translation |
The financial statements of the Companys foreign
subsidiaries are translated in accordance with
SFAS No. 52, Foreign Currency Translation. The
functional currency of the Companys foreign subsidiaries
has been determined to be the local currency. The Company
translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at year-end. Prior
to translation, the Company re-measures foreign currency
denominated assets and liabilities into the functional currency
of the respective Company entity, resulting in unrealized gains
or losses recorded in interest and other income, net in the
accompanying Consolidated Statements of Operations. Revenues and
expenses are translated using average exchange rates in effect
during the year. Gains and losses from foreign currency
translation are recorded to accumulated other comprehensive loss
included in stockholders equity in the accompanying
Consolidated Balance Sheets. During the years ended
December 31, 2005, 2004, and 2003, the Company recorded net
gains/(losses) of $(402,000), $18,000, and $785,000,
respectively, from realized foreign currency transactions gains
and losses and the re-measurement of foreign currency
denominated assets and liabilities. These amounts are included
in interest and other income, net in the accompanying
Consolidated Statements of Operations.
52
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill represents the excess of the purchase price in a
business combination over the fair value of net tangible and
intangible assets acquired in a business combination. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, annually in December the Company
evaluates goodwill for impairment as well as whenever events or
changes in circumstances suggest that the carrying amount may
not be recoverable from estimated discounted future cash flows.
Because the Company has one reporting segment under
SFAS No. 142, the Company utilizes the entity-wide
approach for assessing goodwill for impairment and compares the
Companys market value to its net book value to determine
if impairment exists. No impairment of goodwill resulted from
the Companys evaluation of goodwill in any of the fiscal
years presented.
|
|
(t) |
Recent Accounting Pronouncements |
On December 16, 2004, the FASB issued
SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123(R)). SFAS 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees,
and amends SFAS No. 95, Statement of Cash
Flows. SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values at
the date of grant. Pro forma disclosure is no longer an
alternative.
SFAS 123(R) permits companies to adopt its requirements
using one of two methods. A modified prospective
method recognizes compensation cost beginning with the effective
date (a) based on the requirements of SFAS 123(R) for
all share-based payments granted after the effective date and
(b) based on the requirements of SFAS 123 for all
awards granted to employees prior to the effective date of
SFAS 123(R) that remain unvested on the effective date. A
modified retrospective method includes the
requirements of the modified prospective method described above,
but also permits entities to restate their historical financial
statements based on the amounts previously recognized under
SFAS 123 for purposes of pro forma disclosures either
(a) for all prior periods presented or (b) for prior
interim periods of the year of adoption.
As permitted by SFAS 123, the Company currently accounts
for share-based payments to employees using APB Opinion
No. 25s intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of SFAS 123(R) will have
a significant impact on the Companys results of
operations, although it will have no impact on the
Companys overall financial position. SFAS 123(R) is
required to be adopted effective at the beginning of the first
quarter of fiscal 2006. The Company will adopt SFAS 123(R)
on January 1, 2006 using the modified prospective method.
The Company estimates that stock based compensation expense
related to share-based payments to employees will have an impact
of at least $3.0 million to $4.0 million on fiscal
2006 results related to the unvested portion of options granted
prior to January 1, 2006, options granted after
December 31, 2005 and Employee Stock Purchase Plan
transactions after December 31, 2005. This estimate is
based on the Companys current level of employees and
related unvested stock options, expected level of employees and
stock options to be granted in 2006, and participation in the
Companys employee stock purchase plan in 2006.
|
|
(2) |
Disclosures About Segments of an Enterprise |
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, establishes standards
for reporting information regarding operating segments in annual
financial statements. SFAS No. 131 also requires
related disclosures about products and services and geographic
areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information
is available for evaluation by the chief operating
decision-maker or decision-making group in making decisions on
how to allocate resources and assess performance. The
Companys chief operating decision-maker 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
53
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
these product offerings based on their respective gross margins.
As a result, the financial information disclosed in the
consolidated financial statements represents all of the material
financial information related to the Companys principal
operating segment.
Revenues from sources outside of the United States were
approximately $21.6 million, $22.9 million and
$25.3 million in 2005, 2004 and 2003, respectively.
ATGs revenues from international sources were primarily
generated from customers located in Europe and the Asia/ Pacific
region. All of ATGs product sales for the years ended
December 31, 2005, 2004 and 2003, were delivered from its
headquarters located in the United States.
The following table represents the percentage of total revenues
by geographic region from customers for 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
|
76 |
% |
|
|
67 |
% |
|
|
65 |
% |
Europe, Middle East and Africa (excluding UK)
|
|
|
9 |
|
|
|
20 |
|
|
|
17 |
|
United Kingdom (UK)
|
|
|
14 |
|
|
|
10 |
|
|
|
13 |
|
Asia Pacific
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
Other
|
|
|
0 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
Credit Facility and Notes Payable |
Effective June 13, 2002, ATG entered into a
$15 million revolving line of credit with Silicon Valley
Bank (the Bank) which provided for borrowings of up to the
lesser of $15 million or 80% of eligible accounts
receivable. The line of credit bore interest at the Banks
prime rate (7.25% at December 31, 2005). Effective
December 24, 2002 the revolving line of credit increased to
$20 million. The line of credit is secured by all of the
Companys tangible and intangible intellectual and personal
property and is subject to financial covenants including
liquidity coverage and profitability.
During the fourth quarter of 2005, the Company extended the line
of credit through February 7, 2006. The credit facility
required net profitability of at least $1.00 for the fourth
quarter of 2005. In February 2006, the Company entered into the
Ninth Loan Modification Agreement (the Ninth Amendment) with the
Bank, which amended the Amended and Restated Loan and Security
Agreement dated as of June 13, 2002. Under the Ninth
Amendment, the revolving line of credit was extended to
January 31, 2008 and the profitability covenant was revised
to require net income of at least $1.00 for the quarter ending
March 31, 2006 and net income of at least $500,000 for the
quarter ending June 30, 2006 and each quarter thereafter.
The Company is required to maintain unrestricted and
unencumbered cash, which includes cash equivalents and
marketable securities, of greater than $20 million at the
end of each month through the duration of the credit facility.
To avoid additional bank fees and expenses, the Company is
required to maintain unrestricted cash, which includes cash
equivalents and marketable securities, at the Bank in an amount
equal to two times the amount of obligations outstanding, which
includes letters of credit that have been issued but not drawn
upon, under the loan agreement. In the event the Companys
cash balances at the Bank fall below this amount, the Company
will be required to pay fees and expenses to compensate the Bank
for lost income. At December 31, 2005, the Company was in
compliance with all related financial covenants. In the event
that ATG does not comply with the financial covenants within the
line of credit or defaults on any of its provisions, the
Banks
54
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
While there were no outstanding borrowings under the facility at
December 31, 2005, the Bank has issued LCs totaling
$6.1 million on ATGs behalf, which are supported by
this facility. The LCs have been issued in favor of various
landlords to secure obligations under ATGs facility leases
pursuant to leases expiring through January 2009. The line of
credit bears interest at the Banks prime rate (7.25% at
December 31, 2005). As of December 31, 2005,
approximately $13.9 million was available under the
facility.
In connection with the November 2004 acquisition of Primus, the
Company assumed Primus outstanding obligation of
approximately $297,000 under a credit facility with a bank. The
facility is payable in monthly installments of approximately
$11,000, including interest at the banks prime rate plus
2% (6.75% at December 31, 2005), due June 2008. The
facility is callable on demand.
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 $300,000 was payable in January 2005 and was included in
notes payable at December 31, 2004 ($500,000 was paid
during 2004). The $300,000 payment was made on schedule in 2005.
Income (loss) before income taxes consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Domestic
|
|
$ |
5,777 |
|
|
$ |
(7,930 |
) |
|
$ |
13,539 |
|
Foreign
|
|
|
24 |
|
|
|
(1,664 |
) |
|
|
(9,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,801 |
|
|
$ |
(9,594 |
) |
|
$ |
3,923 |
|
|
|
|
|
|
|
|
|
|
|
55
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision (benefit) for income taxes shown in the
accompanying consolidated statements of operations is composed
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
32 |
|
|
|
(80 |
) |
|
|
(255 |
) |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32 |
|
|
$ |
(50 |
) |
|
$ |
(255 |
) |
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes differs from the
federal statutory rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Federal tax at statutory rate
|
|
|
35.0 |
% |
|
|
(35.0 |
)% |
|
|
35.0 |
% |
State taxes, net of federal benefit
|
|
|
0.9 |
|
|
|
.2 |
|
|
|
11.5 |
|
Meals and entertainment
|
|
|
2.5 |
|
|
|
1.8 |
|
|
|
4.3 |
|
Reversal of previously accrued taxes
|
|
|
0.0 |
|
|
|
(1.6 |
) |
|
|
(8.5 |
) |
Other
|
|
|
0.0 |
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
Provision before valuation allowance
|
|
|
38.4 |
|
|
|
(34.6 |
) |
|
|
43.1 |
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(37.8 |
) |
|
|
34.1 |
|
|
|
(49.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6 |
% |
|
|
(0.5 |
)% |
|
|
(6.5 |
)% |
|
|
|
|
|
|
|
|
|
|
56
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The approximate tax effect of each type of temporary difference
and carryforward is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Restructuring
|
|
$ |
1,968 |
|
|
$ |
5,161 |
|
Depreciation and amortization
|
|
|
1,036 |
|
|
|
1,154 |
|
Reserves and accruals
|
|
|
758 |
|
|
|
1,320 |
|
Capitalized expenses
|
|
|
24,305 |
|
|
|
1,637 |
|
Deferred revenue
|
|
|
|
|
|
|
3,653 |
|
US Income tax credits
|
|
|
5,195 |
|
|
|
1,037 |
|
Net operating losses
|
|
|
88,066 |
|
|
|
102,602 |
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
121,328 |
|
|
|
116,564 |
|
Valuation allowance
|
|
|
(119,384 |
) |
|
|
(113,693 |
) |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,944 |
|
|
|
2,871 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,944 |
) |
|
|
(2,871 |
) |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
As of December 31, 2005, ATG had net operating loss
carryforwards of approximately $196 million for federal
income tax purposes, $119 million for state income tax
purposes and approximately $31 million for non-US income
tax purposes. Approximately $90.5 million of the federal
and state income tax net operating loss carryforwards relate to
the exercise of incentive and nonqualified stock options which
are treated as compensation deductions for federal and state
income tax purposes. Approximately $56.0 million of this
amount was tax benefited through additional paid-in capital in
2000. ATG also has available federal tax credit carryforwards of
approximately $5.2 million. If not utilized, these
carryforwards will expire at various dates beginning 2011
through 2024. If substantial changes in ATGs ownership
have occurred or should occur, as defined by Section 382 of
the Internal Revenue Code (the Code), there could be annual
limitations on the amount of carryforwards that can be realized
in future periods. ATG has completed several refinancings since
its inception and has incurred ownership changes, as defined
under the Code, which could have an impact on the Companys
ability to utilize these tax credit and operating loss
carryforwards.
During the year ended December 31, 2005, the Company
amended 2001 through 2003 income tax returns for the purpose of
capitalizing certain expenses for income tax purposes. The
amended returns resulted in a decrease to net operating losses
and an increase in capitalized expenses of approximately
$51 million. The amortization of these capitalized costs
will become deductible in income tax returns for the years 2002
through 2013.
Included in the total net operating loss carryforwards is
approximately $28.5 million acquired as a result of the
acquisition of Primus. This amount includes only those net
operating losses which would not be limited as a result of the
acquisition of Primus triggering an ownership change pursuant to
Section 382 of the Code. If Primus incurred any ownership
changes prior to its acquisition by the Company, limitations
imposed under Section 382 of the Code could have an impact
on the Companys ability to utilize these net operating
loss carryforwards.
57
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
To the extent that any Primus pre-acquisition net operating
losses and other temporary differences result in future tax
benefits, such tax benefits will be recognized as a reduction in
goodwill associated with the acquisition of Primus.
As of December 31, 2005 and 2004, the Company recorded a
full valuation allowance against its deferred tax assets due to
the uncertainty surrounding the realizability of these assets.
The valuation allowance increased $5.7 million to
$119.4 million in 2005 from $113.7 million in 2004.
The primary reason for the increase in the valuation allowance
is due to an increase of $7.8 million related to the
capitalized research and development, tax credits and other
temporary differences not previously included in gross deferred
tax assets and a decrease of $2.1 million utilized to
offset current year book income.
The Company has provided for potential amounts due in various
foreign tax jurisdictions. Judgment is required in determining
the Companys worldwide income tax expense provision. In
the ordinary course of global business, there are many
transactions and calculations where the ultimate tax outcome is
uncertain. Some of these uncertainties arise as a consequence of
cost reimbursement arrangements among related entities. Although
we believe our estimates are reasonable, no assurance can be
given that the final tax outcome of these matters will not be
different from that which is reflected in our historical income
tax provisions and accruals. Such differences could have a
material impact on our income tax provision and operating
results in the period in which such determination is made.
During 2005, 2004 and 2003, the Company reversed previously
accrued taxes of $0, $158,000 and $332,000, respectively, due to
the closure of the statute of limitations in foreign locations.
Stock Plans
In April 1996, the 1996 Stock Option Plan (the 1996 Plan) was
approved by ATGs Board of Directors and stockholders. The
purpose of the 1996 Plan is to reward employees, officers and
directors and consultants and advisors to ATG who are expected
to contribute to the growth and success of ATG. The 1996 Plan
provides for the award of options to purchase shares of
ATGs common stock. Stock options granted under the 1996
Plan may be either incentive stock options or nonqualified stock
options. In 2004, shareholders approved resolutions to amend and
restate the 1996 Plan to allow for the grant of restricted stock
awards, performance share awards and other forms of equity based
compensation that were not previously provided for in the plan
and to extend the term of the 1996 Plan to December 31,
2013. The 1996 Plan is administered by the Board of Directors,
which has the authority to designate participants, determine the
number and type of awards to be granted, the time at which
awards are exercisable, the method of payment and any other
terms or conditions of the awards. Options generally vest
quarterly over a two to four-year period and expire
10 years from the date of grant. While the Board determines
the prices at which options may be exercised under the 1996
Plan, the exercise price of an incentive stock option shall be
at least 100% (110% for incentive stock options granted to a 10%
stockholder) of the fair market value of ATGs common stock
on the date of grant. As of December 31, 2005, there are
25,600,000 shares authorized and 8,644,000 shares
available for future grant under the 1996 Plan.
Additionally, in May 1999, ATG granted 150,000 options outside
ATGs stock option plans to an executive of ATG. As of
December 31, 2005, these options have not been exercised.
|
|
|
1999 Outside Director Stock Option Plan |
The 1999 Outside Director Stock Option Plan (Director Plan) was
adopted by ATGs Board of Directors and approved by
stockholders in May 1999. Under the terms of the Director Plan,
non-employee directors of ATG receive nonqualified options to
purchase shares of ATGs common stock. In 2004, shareholders
58
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approved resolutions to amend and restate the Director Plan to
allow for the grant of restricted stock awards, performance
share awards and other forms of equity based compensation that
were not previously provided for in the plan and to extend the
term of the Director Plan to December 31, 2013. Pursuant to
the amendments to the Director Plan, $2,500 of each outside
directors annual retainer is paid in the form of
restricted stock. A total of 800,000 shares of common stock
have been reserved under the Director Plan.
Under the terms of the Director Plan, each non-employee director
on the effective date of the initial public offering received an
option to purchase 10,000 shares of common stock at
the public offering price. As of December 31, 2005, there
were 475,000 shares available for future grant under the
Director Plan.
Primus Stock Option
Plans
In connection with the acquisition of Primus Knowledge
Solutions, Inc., the Company assumed certain options, as defined
in the merger agreement, issued under the Primus Solutions 1999
Stock Incentive Compensation Plan (the Primus 1999 Plan) and the
Primus Solutions 1999 Non-Officer Employee Stock Compensation
Plan (Primus 1999 NESC Plan) (together the Primus Stock Option
Plans) subject to the same terms and conditions as set forth in
the Primus Stock Option Plans, adjusted to give effect to the
conversion under the terms of the merger agreement. All options
assumed by the Company pursuant to the Primus Stock Option Plans
were fully vested upon the closing of the acquisition and
converted to options to acquire ATG common stock. Options
granted under the Primus Stock Option Plans typically vest over
four years and remain exercisable for a period not to exceed ten
years. At December 31, 2005, there were
1,920,000 shares available for grant under the Primus 1999
Plan. No additional options will be granted under the Primus
1999 NESC Plan.
The following table summarizes ATGs option activity under
the Companys 1996 Plan, Director Plan and the Primus Stock
Option Plans (in thousands except for the weighted average
exercise price data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
Number | |
|
Exercise | |
|
|
of Options | |
|
Price | |
|
|
| |
|
| |
Outstanding, December 31, 2002
|
|
|
11,571 |
|
|
$ |
7.91 |
|
|
Granted
|
|
|
4,807 |
|
|
|
1.26 |
|
|
Exercised
|
|
|
(786 |
) |
|
|
0.96 |
|
|
Canceled
|
|
|
(4,212 |
) |
|
|
9.94 |
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003
|
|
|
11,380 |
|
|
|
4.56 |
|
|
Granted
|
|
|
8,750 |
|
|
|
1.06 |
|
|
Exercised
|
|
|
(718 |
) |
|
|
0.74 |
|
|
Canceled
|
|
|
(4,176 |
) |
|
|
3.98 |
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
15,236 |
|
|
|
2.96 |
|
|
Granted
|
|
|
3,839 |
|
|
|
1.22 |
|
|
Exercised
|
|
|
(1,752 |
) |
|
|
0.78 |
|
|
Canceled
|
|
|
(4,079 |
) |
|
|
4.58 |
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
13,244 |
|
|
$ |
2.33 |
|
|
|
|
|
|
|
|
Exercisable, December 31, 2005
|
|
|
7,378 |
|
|
$ |
3.20 |
|
Exercisable, December 31, 2004
|
|
|
8,980 |
|
|
$ |
4.08 |
|
Exercisable, December 31, 2003
|
|
|
6,018 |
|
|
$ |
6.53 |
|
59
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information relating to currently
outstanding and exercisable options as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding | |
|
Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
|
|
|
|
|
|
|
Remaining | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Contractual Life | |
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Outstanding | |
|
Exercise | |
|
Number of | |
|
Exercise | |
Range of Exercise Prices |
|
Shares | |
|
(Years) | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except years and per-share information) | |
$ 0.06 $ 0.84
|
|
|
2,138 |
|
|
|
5.91 |
|
|
$ |
0.61 |
|
|
|
2,112 |
|
|
$ |
0.63 |
|
0.85 1.27
|
|
|
6,168 |
|
|
|
8.6 |
|
|
|
1.09 |
|
|
|
1,934 |
|
|
|
1.06 |
|
1.29 1.85
|
|
|
3,248 |
|
|
|
7.7 |
|
|
|
1.50 |
|
|
|
1,743 |
|
|
|
1.48 |
|
2.04 3.01
|
|
|
527 |
|
|
|
6.2 |
|
|
|
2.18 |
|
|
|
443 |
|
|
|
2.18 |
|
3.90 5.82
|
|
|
789 |
|
|
|
4.0 |
|
|
|
4.32 |
|
|
|
772 |
|
|
|
4.33 |
|
8.27 10.22
|
|
|
141 |
|
|
|
5.2 |
|
|
|
9.41 |
|
|
|
141 |
|
|
|
9.41 |
|
13.41 19.04
|
|
|
35 |
|
|
|
3.7 |
|
|
|
18.28 |
|
|
|
35 |
|
|
|
18.28 |
|
22.94 31.00
|
|
|
15 |
|
|
|
4.1 |
|
|
|
25.42 |
|
|
|
15 |
|
|
|
25.42 |
|
34.75 51.69
|
|
|
86 |
|
|
|
4.4 |
|
|
|
49.07 |
|
|
|
86 |
|
|
|
49.07 |
|
52.50 78.00
|
|
|
72 |
|
|
|
4.4 |
|
|
|
62.36 |
|
|
|
72 |
|
|
|
62.36 |
|
$87.00 $120.00
|
|
|
25 |
|
|
|
4.7 |
|
|
|
92.93 |
|
|
|
25 |
|
|
|
92.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,244 |
|
|
|
7.5 |
|
|
$ |
2.33 |
|
|
|
7,378 |
|
|
$ |
3.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through the fourth quarter of 1998, ATG recorded deferred
compensation of approximately $4.9 million, which
represented the aggregate difference between the exercise price
and the fair market value of the Companys common stock, as
determined for accounting purposes. The deferred compensation
was recognized as stock-based compensation expense over the
vesting period of the underlying stock options. ATG recorded
stock-based compensation expense of $0, $11,000 and $136,000 for
the years ended December 31, 2005, 2004 and 2003,
respectively, related to these options.
|
|
|
1999 Employee Stock Purchase Plan |
The 1999 Employee Stock Purchase Plan (the Stock Purchase Plan)
was adopted by ATGs Board of Directors and approved by
stockholders in May 1999. The Stock Purchase Plan, as amended,
authorizes the issuance of up to a total of
5,000,000 shares of ATGs common stock to
participating employees. All ATG employees, including directors
who are employees, are eligible to participate in the Stock
Purchase Plan. Employees who would immediately after the grant
own 5% or more of the total combined voting power or value of
the Companys stock are not eligible to participate. During
each designated quarterly offering period, each eligible
employee may deduct between 1% and 10% of base pay to purchase
shares of the Companys common stock. The purchase price is
85% of the closing market price of ATGs common stock on
either: (1) the first business day of the offering period
or (2) the last business day of the offering period,
whichever is lower.
During the years ended 2005, 2004 and 2003, approximately
744,000, 1,016,000 and 1,209,000 shares, respectively, were
issued under the 1999 Employee Stock Purchase Plan. As of
December 31, 2005, there were 108,000 shares remaining
unissued in the plan.
60
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Adoption of Shareholders Rights Plan |
On September 26, 2001, ATGs Board of Directors
adopted a Shareholder Rights Plan (the Shareholder Rights Plan)
pursuant to which preferred stock purchase rights were
distributed to shareholders as a dividend at the rate of one
Right for each share of common stock held of record as of the
close of business on October 9, 2001. The Shareholder
Rights Plan was adopted to enable the Board of Directors to
protect the Company against any takeover attempt that the Board
considers not to be in the best interests of shareholders.
When exercisable, each Right will entitle shareholders to buy
one one-thousandth of a share of Series A Junior
Participating Preferred Stock at an exercise price of
$15 per Right. Subject to certain exceptions, the Rights
will be exercisable after a person or group (except for certain
excluded persons) acquires beneficial ownership of 15% or more
of ATGs outstanding common stock or undertakes a tender or
exchange offer which, if consummated, would result in that
person or group beneficially owning 15% or more of ATGs
outstanding common stock. The Rights will be redeemable by the
Board at any time before a person or group acquires 15% or more
of ATGs outstanding common stock and under certain other
circumstances at a redemption price of $.001 per Right.
|
|
|
Acquisition of Primus Knowledge Solutions, Inc. |
Effective November 1, 2004, the Company acquired all of the
outstanding shares of common stock of Primus Knowledge
Solutions, Inc., 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 excess of the purchase
price over the net assets acquired resulted in goodwill of
$27.5 million.
In determining the purchase price allocation, the Company
considered, among other factors, the expected use of the
acquired assets, historical demand and estimates of future
demand of Primus products and services. The fair value of
intangible assets was primarily determined using the income
approach, which is based upon a forecast of the expected future
net cash flows associated with the assets. These net cash flows
were then discounted to a present value by applying a discount
rate of 18% to 19%. The discount rate was determined after
consideration of Primus weighted average cost of capital
and the risk associated with achieving forecast sales related to
the technology and assets acquired from Primus.
61
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The preliminary purchase price was allocated based on estimated
fair values as of the acquisition date. The following represents
the allocation of the purchase price (in thousands):
|
|
|
|
|
|
|
Cash
|
|
$ |
3,989 |
|
Accounts receivable
|
|
|
1,919 |
|
Other current assets
|
|
|
416 |
|
Property, plant and equipment
|
|
|
944 |
|
Goodwill
|
|
|
27,458 |
|
Intangible assets:
|
|
|
|
|
|
Customer relationships (estimated useful life of 4 years)
|
|
|
4,200 |
|
|
Developed product technology (estimated useful life of
5 years)
|
|
|
3,600 |
|
|
Non-competition agreements (estimated useful life of
3 years)
|
|
|
400 |
|
|
|
|
|
|
|
Total intangible assets
|
|
|
8,200 |
|
Other long-term assets
|
|
|
189 |
|
Accounts payable
|
|
|
(2,511 |
) |
Deferred revenue
|
|
|
(3,483 |
) |
Notes payable and current portion of capital lease obligations
|
|
|
(1,146 |
) |
Accrued and other expenses
|
|
|
(4,157 |
) |
Long-term liabilities
|
|
|
(126 |
) |
|
|
|
|
|
Total purchase price
|
|
$ |
31,692 |
|
|
|
|
|
During 2005, the Company finalized the purchase accounting and
recorded a net adjustment of $111,000 to reduce goodwill.
In connection with the Primus acquisition, the Company commenced
integration activities which resulted in involuntary
terminations and lease and contract terminations. The liability
for involuntary termination benefits was for 49 employees,
primarily in general and administrative and research and
development functions. The following summarizes the obligations
recognized in connection with the Primus acquisition and
activity to date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary | |
|
Facilities Related | |
|
|
|
|
Termination Benefits | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
Obligation
|
|
$ |
1,682 |
|
|
$ |
376 |
|
|
$ |
2,058 |
|
Payments
|
|
|
(464 |
) |
|
|
(97 |
) |
|
|
(561 |
) |
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
1,218 |
|
|
|
279 |
|
|
|
1,497 |
|
Payments
|
|
|
(891 |
) |
|
|
(279 |
) |
|
|
(1,170 |
) |
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
$ |
327 |
|
|
$ |
|
|
|
$ |
327 |
|
|
|
|
|
|
|
|
|
|
|
The consolidated financial statements include the results of
Primus from the date of acquisition. The following pro forma
information assumes the Primus acquisition occurred as of the
beginning of each year presented after giving effect to certain
adjustments, primarily amortization of intangible assets and
reduction of revenues for the fair market value adjustment to
Primus deferred revenue balance. The pro forma results
62
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are not necessarily indicative of what actually would have
occurred had the acquisition been in effect for the periods
presented or of results that may occur in the future (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
Revenue
|
|
$ |
86,135 |
|
|
$ |
95,660 |
|
Net loss
|
|
$ |
(23,105 |
) |
|
$ |
(3,519 |
) |
Net loss per weighted average share, basic and diluted
|
|
$ |
(0.22 |
) |
|
$ |
(0.03 |
) |
Intangible assets are being amortized based on the pattern in
which the economic benefits of the intangible assets are being
utilized or on a straight-line basis, if greater. The total
weighted average amortization period for the intangible assets
is 4.4 years.
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
Net Book | |
|
Carrying | |
|
Accumulated | |
|
Net Book | |
|
|
Amount | |
|
Amortization | |
|
Value | |
|
Amount | |
|
Amortization | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Purchased technology
|
|
$ |
3,600 |
|
|
$ |
(1,258 |
) |
|
$ |
2,342 |
|
|
$ |
3,600 |
|
|
$ |
(441 |
) |
|
$ |
3,159 |
|
Customer relationships
|
|
|
4,200 |
|
|
|
(1,927 |
) |
|
|
2,273 |
|
|
|
4,200 |
|
|
|
(559 |
) |
|
|
3,641 |
|
Non-compete agreements
|
|
|
400 |
|
|
|
(156 |
) |
|
|
244 |
|
|
|
400 |
|
|
|
(23 |
) |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$ |
8,200 |
|
|
$ |
(3,341 |
) |
|
$ |
4,859 |
|
|
$ |
8,200 |
|
|
$ |
(1,023 |
) |
|
$ |
7,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense from intangible assets was
$2.3 million and $1.0 million for the years ended
December 31, 2005 and 2004, respectively. As of
December 31, 2005, amortization expense on intangible
assets for the next five years is as follows (in thousands):
|
|
|
|
|
|
2006
|
|
$ |
2,055 |
|
2007
|
|
|
1,740 |
|
2008
|
|
|
848 |
|
2009
|
|
|
216 |
|
|
|
|
|
|
Total
|
|
$ |
4,859 |
|
|
|
|
|
|
|
(7) |
Commitments and Contingencies |
ATG has offices, primarily for sales and support personnel, in
six domestic locations as well as four foreign countries. At
December 31, 2005, ATGs bank had issued
$6.1 million of LCs under ATGs line of credit in
favor of various landlords and equipment leasing companies to
secure obligations under its leases, which expire from 2006
through 2009. ATGs principal facility has a lease expiring
in the second half of 2006. As a result the Company may find it
beneficial to move its principal offices in the second half of
2006. The Company anticipates any such relocation, if any at
all, would be to comparable space within the same general
vicinity and approximate price range.
The Company has both operating and capital lease obligations
related to equipment leases. Certain equipment leases include
purchase options at the end of the lease term.
63
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The future minimum payments of ATGs facility leases and
operating and capital lease obligations as of December 31,
2005, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital Leases | |
|
Operating Leases | |
|
|
| |
|
| |
Years Ending December 31,
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
61 |
|
|
$ |
5,808 |
|
2007
|
|
|
71 |
|
|
|
2,941 |
|
2008
|
|
|
|
|
|
|
2,488 |
|
2009
|
|
|
|
|
|
|
704 |
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
132 |
|
|
$ |
11,941 |
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
119 |
|
|
|
|
|
Less current portion of capital lease obligations
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, non-current
|
|
$ |
63 |
|
|
|
|
|
|
|
|
|
|
|
|
Of the $12.1 million in future minimum lease payments,
$8.8 million is included in the Companys accrued
restructuring charges. The $8.8 million was reduced to
$4.9 million of restructuring charges after taking into
consideration estimated sublease income, contracted sublease
income, vacancy periods and operating costs of the various
subleased properties (see Note 10).
Rent expense included in the accompanying statements of
operations was approximately $3.6 million,
$4.4 million, and $5.5 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
The Company frequently has agreed to indemnification provisions
in software license agreements with customers and in its real
estate leases in the ordinary course of its business.
With respect to software license agreements, these
indemnifications generally include provisions indemnifying the
customer against losses, expenses, and liabilities from damages
that may be awarded against the customer in the event the
Companys software is found to infringe upon the
intellectual property of others. The software license agreements
generally limit the scope of and remedies for such
indemnification obligations in a variety of industry-standard
respects. The Company relies on a combination of patent,
copyright, trademark and trade secret laws and restrictions on
disclosure to protect its intellectual property rights. The
Company believes such laws and practices, along with its
internal development processes and other policies and practices
limit its exposure related to the indemnification provisions of
the software license agreements. However, in recent years there
has been significant litigation in the United States involving
patents and other intellectual property rights. Companies
providing Internet-related products and services are
increasingly bringing and becoming subject to suits alleging
infringement of proprietary rights, particularly patent rights.
From time to time, the Companys customers have been
subject to third party patent claims and the Company has agreed
to indemnify such customers from claims to the extent the claims
relate to the Companys products.
With respect to real estate lease agreements or settlement
agreements with landlords, these indemnifications typically
apply to claims asserted against the landlord relating to
personal injury and property damage at the leased premises or to
certain breaches of the Companys contractual obligations
or representations and warranties included in the settlement
agreements. These indemnification provisions generally survive
the termination of the respective agreements, although the
provision generally has the most relevance during the contract
term and for a short period of time thereafter. The maximum
potential amount of future payments
64
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
(8) |
Employee Benefit Plan |
Effective January 1, 1997, ATG adopted the Art Technology
Group 401(k) Plan (the 401(k) Plan). All employees, as defined,
are eligible to participate in the 401(k) Plan. The 401(k) Plan
allows eligible employees to make salary-deferred contributions
of up to 15% of their annual compensation, as defined, subject
to certain Internal Revenue Service limitations. ATG may
contribute to the 401(k) Plan at its discretion. The Company has
not made any contributions in 2005, 2004 and 2003.
Accrued expenses at December 31, 2005 and 2004 consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Compensation and benefits costs
|
|
$ |
5,130 |
|
|
$ |
5,294 |
|
Taxes
|
|
|
4,172 |
|
|
|
4,022 |
|
Other
|
|
|
4,057 |
|
|
|
3,840 |
|
|
|
|
|
|
|
|
|
|
$ |
13,359 |
|
|
$ |
13,156 |
|
|
|
|
|
|
|
|
During the years ended 2005, 2004, 2003, 2002 and 2001, the
Company recorded net restructuring charges/(benefits) of
$0.9 million, $3.6 million, $(10.5) million,
$19.0 million and $75.6 million, respectively,
primarily 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, 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 to efficiently run the Companys operations. In
2005, the Company restructuring was to align workforce and
facilities needs. 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 No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, SFAS No. 88,
Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits
and Staff Accounting Bulletin (SAB) No. 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.
65
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2005, the Company had an accrued
restructuring liability of $5.1 million related primarily
to facility related costs. The long-term portion of the accrued
restructuring liability was $2.1 million.
A summary of the Companys charges is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charge (Benefit) | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Facility-related costs and impairments
|
|
$ |
1,817 |
|
|
$ |
1,488 |
|
|
$ |
1,464 |
|
|
$ |
14,634 |
|
|
$ |
59,418 |
|
Employee severance and benefits costs
|
|
|
|
|
|
|
2,461 |
|
|
|
1,236 |
|
|
|
3,553 |
|
|
|
7,938 |
|
Asset impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,205 |
|
Exchangeable share settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263 |
|
Marketing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
851 |
|
Legal and accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charges
|
|
|
1,817 |
|
|
|
3,949 |
|
|
|
2,700 |
|
|
|
18,187 |
|
|
|
74,080 |
|
Adjustments to 2001 action, net
|
|
|
(792 |
) |
|
|
(60 |
) |
|
|
(8,468 |
) |
|
|
818 |
|
|
|
1,500 |
|
Adjustments to 2002 action, net
|
|
|
43 |
|
|
|
(242 |
) |
|
|
(5,118 |
) |
|
|
|
|
|
|
|
|
Adjustments to 2003 action, net
|
|
|
74 |
|
|
|
(77 |
) |
|
|
410 |
|
|
|
|
|
|
|
|
|
Adjustments to 2004 action, net
|
|
|
(257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments of prior actions, net
|
|
|
(932 |
) |
|
|
(379 |
) |
|
|
(13,176 |
) |
|
|
818 |
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charge (benefit)
|
|
$ |
885 |
|
|
$ |
3,570 |
|
|
$ |
(10,476 |
) |
|
$ |
19,005 |
|
|
$ |
75,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the actions in accrued restructuring is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Restructuring Balance | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Restructuring charges for the year ended December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74,080 |
|
|
$ |
74,080 |
|
Changes in estimates resulting in additional charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,700 |
|
|
|
9,700 |
|
Changes in estimates reducing accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,200 |
) |
|
|
(8,200 |
) |
Write-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,219 |
) |
|
|
(16,219 |
) |
Facility related payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,308 |
) |
|
|
(6,308 |
) |
Employee related payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,748 |
) |
|
|
(6,748 |
) |
Legal and accounting payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(232 |
) |
|
|
(232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
46,073 |
|
|
$ |
46,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges for the year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,187 |
|
|
|
|
|
|
$ |
18,187 |
|
Changes in estimates resulting in additional charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,207 |
|
|
|
2,207 |
|
Changes in estimates reducing accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,389 |
) |
|
|
(1,389 |
) |
Write-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,613 |
) |
|
|
|
|
|
|
(2,613 |
) |
Facility related payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,016 |
) |
|
|
(9,016 |
) |
Employee related payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(920 |
) |
|
|
(920 |
) |
Legal and accounting payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(173 |
) |
|
|
(173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,574 |
|
|
$ |
36,782 |
|
|
$ |
52,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges for the year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
$ |
2,700 |
|
|
|
|
|
|
|
|
|
|
$ |
2,700 |
|
Changes in estimates resulting in additional charges and accruals
|
|
|
|
|
|
|
|
|
|
|
494 |
|
|
|
4,421 |
|
|
|
2,998 |
|
|
|
7,913 |
|
Changes in estimates reducing accruals
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
|
(7,321 |
) |
|
|
(11,466 |
) |
|
|
(18,871 |
) |
Write-offs
|
|
|
|
|
|
|
|
|
|
|
(371 |
) |
|
|
|
|
|
|
536 |
|
|
|
165 |
|
Facility related payments
|
|
|
|
|
|
|
|
|
|
|
(70 |
) |
|
|
(2,993 |
) |
|
|
(18,143 |
) |
|
|
(21,206 |
) |
Employee related payments
|
|
|
|
|
|
|
|
|
|
|
(994 |
) |
|
|
(3,794 |
) |
|
|
(270 |
) |
|
|
(5,058 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
|
|
|
|
|
|
|
|
$ |
1,675 |
|
|
$ |
5,887 |
|
|
$ |
10,437 |
|
|
$ |
17,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges for the year ended December 31, 2004
|
|
|
|
|
|
$ |
3,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,949 |
|
Changes in estimates resulting in additional charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
112 |
|
Changes in estimates reducing accruals
|
|
|
|
|
|
|
|
|
|
|
(77 |
) |
|
|
(242 |
) |
|
|
(172 |
) |
|
|
(491 |
) |
Write-offs
|
|
|
|
|
|
|
(667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(667 |
) |
Facility related payments
|
|
|
|
|
|
|
(71 |
) |
|
|
(179 |
) |
|
|
(4,490 |
) |
|
|
(4,066 |
) |
|
|
(8,806 |
) |
Employee related payments
|
|
|
|
|
|
|
(892 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
(938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
|
|
|
$ |
2,319 |
|
|
$ |
1,373 |
|
|
$ |
1,155 |
|
|
$ |
6,311 |
|
|
$ |
11,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Restructuring Balance | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance December 31, 2004
|
|
|
|
|
|
$ |
2,319 |
|
|
$ |
1,373 |
|
|
$ |
1,155 |
|
|
$ |
6,311 |
|
|
$ |
11,158 |
|
Restructuring charges for the year ended December 31, 2005
|
|
$ |
1,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,817 |
|
Changes in estimates resulting in additional charges
|
|
|
|
|
|
|
200 |
|
|
|
98 |
|
|
|
91 |
|
|
|
|
|
|
|
389 |
|
Changes in estimates reducing accruals
|
|
|
|
|
|
|
(457 |
) |
|
|
(24 |
) |
|
|
(48 |
) |
|
|
(792 |
) |
|
|
(1,321 |
) |
Write-offs
|
|
|
(1,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,167 |
) |
Facility related payments
|
|
|
(264 |
) |
|
|
(317 |
) |
|
|
(428 |
) |
|
|
(548 |
) |
|
|
(2,676 |
) |
|
|
(4,233 |
) |
Employee related payments
|
|
|
|
|
|
|
(1,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
$ |
386 |
|
|
$ |
199 |
|
|
$ |
1,019 |
|
|
$ |
650 |
|
|
$ |
2,843 |
|
|
$ |
5,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 in cost of product licenses an impairment
charge for purchased software of $1.4 million. Total
restructuring charges for 2001 totaled $75.6 million.
|
|
|
Facilities-Related Costs and Impairments |
During 2001, the Company recorded facilities-related charges of
$59.4 million of which $38.1 million was recorded in
the second quarter and $21.3 million was recorded in the
fourth quarter. The facilities-related charges comprised 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 based on then current rental rates and
estimated vacancy periods. During the fourth quarter of 2001,
the Company recorded an adjustment to increase the
facilities-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. 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 was
paid ratably over 4.5 years.
The leasehold improvements, which will continue to be in use,
are related to the facilities the Company vacated and is
subleasing or attempting to sublease, and 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
68
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
weakening in the real estate market. 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 estimated vacancy period.
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 $792,000. 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 September 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.
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
acquired 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.
69
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2002 Actions
Actions taken by the Company in 2002 included the consolidation
and closure of excess facilities, a worldwide workforce
reduction and the write-off of certain idle assets. In the
fourth quarter of 2002, the Company recorded a restructuring
charge of $18.2 million.
|
|
|
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 based on then current rental rates
and estimated vacancy periods.
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 and are
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 assumptions as to
the vacancy period and sublease income. 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.
During 2005, the Company recorded reversals of $48,000 to reduce
accruals primarily due to executing a sub-lease agreement.
Offsetting this reversal, the Company recorded additional
charges of $91,000 due to changes in its sublease assumptions at
one location.
|
|
|
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
70
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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.
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
then current rental rates and an estimated vacancy period. In
the fourth quarter of 2003, as result of updated market
conditions, the estimated sublet rental rate was lowered and the
vacancy period was extended resulting in an additional charge of
$227,000. 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 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 and are 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.
71
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
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 based on then current rental rates
and an estimated vacancy period. During the fourth quarter, as a
result of updated market conditions, the Company determined that
it was unlikely it would sublet this space before its lease
expires, resulting in an additional charge of $198,000. 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 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 would
not be sufficient to recover the carrying value of the assets.
In the fourth quarter of 2005 the Company recorded an adjustment
in estimates of sublease income resulting in additional charges
of $98,000.
|
|
|
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.
72
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004 Actions
During 2004, the Company recorded a restructuring charge of
$3.6 million, comprised of costs related to 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 then current rental rates
and an estimated vacancy period. 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.
During 2005, the Company recorded a net reversal of $267,000
primarily due to adjusting its estimates of net sublease
obligations as a result of executing a sublease agreement.
|
|
|
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 which was completed during 2005.
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. Offsetting this charge were
reversals of $190,000 due to final settlements.
2005 Actions
During 2005, the Company recorded net restructuring charges of
$885,000, comprised of costs related to new actions of
$1.8 million and net credits resulting from changes in
estimates related to prior actions of $0.9 million.
|
|
|
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
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 leasehold improvements written down
to their fair value, and $557,000 for an operating lease related
to idle office space vacated, net of assumptions for sublease
income
73
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based on an executed sublease agreement. In accordance with
SFAS 146, the Company recorded the net present value of the
net lease obligation.
|
|
|
Abandoned Facilities Obligations |
At December 31, 2005, the Company had lease arrangements
related to seven abandoned facilities. One of these leases is
the subject of a lease settlement arrangement under which the
Company is obligated to make payments through 2006. The lease
agreements with respect to the other six facilities are ongoing.
Of these locations, the restructuring accrual for the Reading,
UK location is net of assumed sub-lease income, as no sub-lease
agreement had been executed by December 31, 2005. The
restructuring accrual for all other locations is either net of
the contractual amounts due under an executed sub-lease
agreement, or there is no assumed sub-lease income included in
the accrual. All locations for which the Company has recorded
restructuring charges have been exited, and thus the
Companys 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 |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Cambridge, MA*
|
|
$ |
1,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,035 |
|
Cambridge, MA
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91 |
|
Cambridge, MA
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399 |
|
Waltham, MA
|
|
|
1,452 |
|
|
|
1,452 |
|
|
|
1,452 |
|
|
|
364 |
|
|
|
4,720 |
|
Chicago, IL
|
|
|
427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
427 |
|
San Francisco, CA
|
|
|
513 |
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
1,025 |
|
Reading, UK
|
|
|
538 |
|
|
|
538 |
|
|
|
538 |
|
|
|
134 |
|
|
|
1,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility obligations, gross
|
|
|
4,455 |
|
|
|
2,502 |
|
|
|
1,990 |
|
|
|
498 |
|
|
|
9,445 |
|
Contracted and assumed sublet income
|
|
|
(1,664 |
) |
|
|
(1,401 |
) |
|
|
(1,149 |
) |
|
|
(287 |
) |
|
|
(4,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash obligations
|
|
$ |
2,791 |
|
|
$ |
1,101 |
|
|
$ |
841 |
|
|
$ |
211 |
|
|
$ |
4,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed sub-lease income
|
|
$ |
64 |
|
|
$ |
204 |
|
|
$ |
204 |
|
|
$ |
51 |
|
|
$ |
523 |
|
|
|
* |
represents a location for which the Company has executed a lease
settlement agreement |
The Company and certain former officers have been named as
defendants in seven purported class action suits that have been
consolidated into one action currently pending in the United
States District Court for the District of Massachusetts under
the caption In re Art Technology Group, Inc. Securities
Litigation (Master File No. 01-CV-11731-NG). This case
alleges that the Company and certain former officers have
violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC
Rule 10b-5
promulgated thereunder, which generally may subject issuers of
securities and persons controlling those issuers to civil
liability for fraudulent actions in connection with the purchase
and sale of securities. The case was originally filed in 2001,
and a consolidated amended complaint was filed in March 2002. In
April, 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 was based on the veracity of a public statement made
by a former officer of the Company. In August 2004, the Company
filed a renewed motion to dismiss and motion for summary
judgment as to the remaining allegation, which the court granted
in September 2005. The plaintiffs have moved for leave to file a
second consolidated amended complaint, which, if allowed, would
revive some of the claims previously dismissed by the court. The
court has deferred a final order of dismissal of
plaintiffs case to allow it time to consider
plaintiffs motion for leave to file a second consolidated
amended complaint. The Company has opposed that motion.
Management believes that none of the claims that
74
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
plaintiffs seek to assert in their second amended complaint has
merit, and intends to continue 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), two former officers of Primus, and 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 under the caption In re Primus Knowledge Solutions, Inc.
Securities Litigation, Civil Action 01-Civ.-11201
(SAS) on behalf of a purported class of purchasers of
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. The consolidated and
amended complaint asserts claims under Sections 11 and 15
of the Securities Act of 1933 and Sections 10(b) (and SEC
Rule 10b-5
promulgated thereunder) and 20(a) of the Securities Exchange Act
of 1934. This action is one of more than 300 similar actions
coordinated for pretrial purposes under the caption In re
Initial Public Offering Securities Litigation, Civil Action
No. 21-MC-92. By action of a special committee of
disinterested directors (who were neither defendants in the
litigation nor members of Primuss Board of Directors at
the time of the actions challenged in the litigation), Primus
decided to accept a settlement proposal presented to all issuer
defendants. In the settlement 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 August 31, 2005, the Court granted
preliminary approval of the settlement. The settlement is
subject to a number of conditions, including final Court
approval after proposed settlement class members have an
opportunity to object or opt out. 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.
75
ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(12) |
Quarterly Results of Operations (Unaudited) |
The following table presents a condensed summary of quarterly
results of operations for the years ended December 31, 2005
and 2004 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter(1) | |
|
Quarter(1) | |
|
Quarter(1) | |
|
Quarter(1) | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
21,994 |
|
|
$ |
20,261 |
|
|
$ |
22,705 |
|
|
$ |
25,686 |
|
Gross profit
|
|
|
15,990 |
|
|
|
14,516 |
|
|
|
16,323 |
|
|
|
18,746 |
|
Net income (loss)
|
|
|
1,408 |
|
|
|
(327 |
) |
|
|
1,510 |
|
|
|
3,178 |
|
|
Basic and diluted net income (loss) per share
|
|
$ |
0.01 |
|
|
$ |
(0.00 |
) |
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter(1) | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
16,810 |
|
|
$ |
14,332 |
|
|
$ |
17,481 |
|
|
$ |
20,596 |
|
Gross profit
|
|
|
11,626 |
|
|
|
8,876 |
|
|
|
12,118 |
|
|
|
14,514 |
|
Net income (loss)
|
|
|
(1,787 |
) |
|
|
(4,247 |
) |
|
|
51 |
|
|
|
(3,561 |
) |
|
Basic and diluted net income (loss) per share
|
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.00 |
|
|
$ |
(0.04 |
) |
|
|
(1) |
Restructuring charges (benefits) were taken during these
quarters, see Note 10 for complete information. |
76
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
Item 9A. |
Controls and Procedures |
|
|
1. |
Disclosure Controls and Procedures |
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and 15d-15(e) under the
Exchange Act) as December 31, 2005. Based on this
evaluation, our chief executive officer and chief financial
officer concluded that, as of December 31, 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 the Companys controls
will succeed in achieving their goals under all potential future
conditions.
Based on the evaluation of our disclosure controls and
procedures as of December 31, 2005, our Chief Executive
Officer and Chief Financial Officer concluded that, as of such
date, our disclosure controls and procedures were effective at
the reasonable assurance level.
|
|
2. |
Internal Control over Financial Reporting |
|
|
(a) |
Managements Annual Report on Internal Control Over
Financial Reporting |
The management of Art Technology Group, Inc. (ATG or the
Company) is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rule 13a-15(f)
promulgated under the Securities Exchange Act of 1934 as a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers and effected by the companys board of directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the company; |
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and |
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements. |
ATGs internal control system was designed to provide
reasonable assurance to the Companys management and Board
of Directors regarding the preparation and fair presentation of
published financial
77
statements. All internal control systems, no matter how well
designed, have inherent limitations which may not prevent or
detect misstatements. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
ATGs management assessed the effectiveness of the
Companys internal controls over financial reporting as of
December 31, 2005. In making this assessment, it used the
criteria set forth in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on our assessment, we conclude
that, as of December 31, 2005, the Companys internal
control over financial reporting is effective based on those
criteria.
ATGs Independent Registered Public Accounting Firm,
Ernst & Young LLP, has issued a report on our
assessment of the Companys internal control over financial
reporting. This report appears on the next page.
78
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Art Technology Group, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that Art Technology Group, Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Art Technology Group, Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Art Technology
Group, Inc. maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, Art Technology Group, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Art Technology Group, Inc. as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss), and cash flows for each of the
three years in the period ended December 31, 2005 of Art
Technology Group, Inc. and our report dated March 9, 2006
expressed an unqualified opinion thereon.
Boston, Massachusetts
March 9, 2006
79
Item 9B. Other
information
Not applicable
PART III
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Item 10. |
Directors and Executive Officers of the Registrant |
The information required under this Item is incorporated herein
by reference to our definitive proxy statement pursuant to
Regulation 14A, with respect to our annual meeting of
stockholders to be held on May 23, 2006, to be filed with
the SEC not later than April 10, 2006 under the headings
Election of Class III Directors,
Background Information About Directors Continuing in
Office and Information About Executive
Officers.
We have adopted a Code of Business Conduct and Ethics that
applies to all of our directors, officers and employees,
including our principal executive officer and principal
financial officer. The Code of Business Conduct and Ethics is
posted on our website at http://www.atg.com/ under the caption
About ATG/ Legal Information/ Code of Conduct.
We intend to satisfy the disclosure requirement under
Item 10 of
Form 8-K regarding
an amendment to, or waiver from, a provision of this Code of
Business Conduct and Ethics by posting such information on our
website, at the address and location specified above and, to the
extent required by the listing standards of the Nasdaq Stock
Market, by filing a Current Report on
Form 8-K with the
SEC, disclosing such information
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Item 11. |
Information about Executive Compensation |
The information required under this Item is incorporated herein
by reference to our definitive proxy statement pursuant to
Regulation 14A, to be filed with the SEC not later than
April 10, 2006 under the heading Executive
Compensation.
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Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required under this Item is incorporated herein
by reference to our definitive proxy statement pursuant to
Regulation 14A, to be filed with the SEC not later than
April 10, 2006 under the heading Information About
Stock Ownership and Performance and Securities
Authorized for Issuance under Equity Compensation Plans.
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Item 13. |
Certain Relationships and Related Transactions |
The information, if any, required under this Item is
incorporated herein by reference to our definitive proxy
statement pursuant to Regulation 14A, to be filed with the
SEC not later than April 10, 2006 under the heading
Related Party Transactions.
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Item 14. |
Principal Accountant Fees and Services |
The information required under this Item is incorporated herein
by reference to our definitive proxy statement pursuant to
Regulation 14A, to be filed with the SEC not later than
April 10, 2006 under the caption Principal Accountant
Fees and Services.
80
PART IV
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Item 15. |
Exhibits, Financial Statement Schedules, and Reports on
Form 8-K |
(a)(1) Financial Statements
The following are included in Item 8:
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Report of Independent Registered Public Accounting Firm |
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Consolidated Balance Sheets as of December 31, 2005 and 2004 |
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Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003 |
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Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss) for the years ended
December 31, 2005, 2004 and 2003 |
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Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003 |
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Notes to Consolidated Financial Statements |
(a)(2) Financial Statement Schedule
Schedule II for Valuation and Qualifying Accounts is
contained in Item 8 in the Notes to the Consolidated
Financial Statements. All other schedules have been omitted
since the required information is not present, or not present in
amounts sufficient to require submission of the schedule or
because information required is included in the consolidated
financial statements or the notes thereto.
(a)(3) Exhibits
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Filed with | |
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Incorporated by Reference | |
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This | |
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Exhibit | |
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Form | |
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Exhibit | |
No. | |
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Description |
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10-K | |
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Form | |
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Filing Date | |
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No. | |
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3 |
.1 |
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Amended and Restated Certificate of Incorporation |
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S-8 |
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June 12, 2003 |
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4.1 |
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3 |
.2 |
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Amended and Restated By-Laws |
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S-3 |
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July 6, 2001 |
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4.2 |
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4 |
.1 |
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Rights Agreement dated September 26, 2001 with EquiServe
Trust Company, N.A |
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8-K |
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October 2, 2001 |
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4.1 |
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10 |
.1* |
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1996 Stock Option Plan, as amended |
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10-Q |
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November 8, 2005 |
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10.4 |
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10 |
.2* |
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1999 Outside Director Stock Option Plan, as amended (including
form of option agreement) |
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10-Q |
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November 8, 2005 |
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10.3 |
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10 |
.3 |
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1999 Employee Stock Purchase Plan |
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S-1 |
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June 21, 1999 |
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10.3 |
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10 |
.4 |
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Primus 1999 Non-Officer Stock Option Plan |
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10-K |
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March 16, 2005 |
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10.4 |
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10 |
.5 |
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Primus 1999 Stock Incentive Compensation Plan |
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10-K |
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March 16, 2005 |
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10.5 |
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10 |
.6* |
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Change-in-Control Policy for Employees |
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10-Q |
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November 9, 2004 |
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10.21 |
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10 |
.7* |
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Amended and Restated Employment Agreement dated November 8,
2004 with Robert Burke |
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10-Q |
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November 9, 2004 |
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10.22 |
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10 |
.8* |
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Offer letter with Julie M.B. Bradley dated July 6, 2005 |
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10-Q |
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November 8, 2005 |
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10.1 |
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10 |
.9* |
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2005 Executive Management Compensation Plan, as amended |
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X |
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10 |
.10* |
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2006 Executive Management Compensation Plan |
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8-K |
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February 15, 2006 |
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99.1 |
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10 |
.11* |
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Non-Employee Director Compensation Plan |
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10-Q |
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November 8, 2005 |
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10.2 |
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81
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Filed with | |
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Incorporated by Reference | |
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This | |
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Exhibit | |
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Form | |
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Exhibit | |
No. | |
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Description |
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10-K | |
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Form | |
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Filing Date | |
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No. | |
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10 |
.12 |
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Lease dated January 2004 with Davenport Building Limited
Partnership |
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10-K |
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March 15, 2004 |
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10.4 |
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10 |
.13 |
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Lease Termination Agreement dated January 2004 with Davenport
Building Limited Partnership |
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10-K |
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March 15, 2004 |
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10.5 |
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10 |
.14 |
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Lease dated October 6, 1999 with Pine Street Investors I,
LLC |
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10-K |
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March 28, 2003 |
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10.5 |
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10 |
.15 |
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First Amendment to Lease dated December 30, 1999 with Pine
Street Investors I, LLC |
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10-K |
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March 28, 2003 |
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10.6 |
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10 |
.16 |
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Second Amendment to Lease dated August 20, 2000 with Pine
Street Investors I, LLC |
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10-K |
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March 28, 2003 |
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10.7 |
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10 |
.17 |
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Third Amendment to Lease dated December 22, 2000 with Pine
Street Investors I, LLC |
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10-K |
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March 28, 2003 |
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10.8 |
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10 |
.18 |
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Fourth Amendment to Lease dated July 15, 2001 with Pine
Street Investors I, LLC |
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10-K |
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March 15, 2004 |
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10.10 |
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10 |
.19 |
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Fifth Amendment to Lease dated March 31, 2003 with Pine
Street Investors I, LLC |
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10-K |
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March 15, 2004 |
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10.11 |
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10 |
.20 |
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Lease dated March 19, 2001 with DIFA Deutsche Immobilien
Fonds AG |
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10-K |
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March 28, 2003 |
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10.9 |
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10 |
.21 |
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Lease Termination with DIFA Deutsche Immobilien Fonds AG |
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10-K |
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March 15, 2004 |
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10.13 |
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10 |
.22 |
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Amended and Restated Loan and Security Agreement dated
June 13, 2002 with Silicon Valley Bank |
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10-Q |
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August 14, 2002 |
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10.1 |
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10 |
.23 |
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First Loan Modification Agreement dated September 30, 2002
with Silicon Valley Bank |
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10-Q |
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November 14, 2002 |
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10.1 |
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10 |
.24 |
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Amendment Agreement dated October 4, 2002 with Silicon
Valley Bank |
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10-Q |
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November 14, 2002 |
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10.2 |
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10 |
.25 |
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Second Loan Modification Agreement dated December 20, 2002
with Silicon Valley Bank |
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10-K |
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March 28, 2003 |
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10.21 |
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10 |
.26 |
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Fourth Loan Modification Agreement dated November 26, 2003
with Silicon Valley Bank |
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10-K |
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March 15, 2004 |
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10.25 |
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10 |
.27 |
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Fifth Loan Modification Agreement dated June 2004 with Silicon
Valley Bank |
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10-Q |
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August 9, 2004 |
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10.26 |
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10 |
.28 |
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Letter Agreement re: loan dated June 16, 2004 with Silicon
Valley Bank |
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10-Q |
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August 9, 2004 |
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10.25 |
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10 |
.29 |
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Sixth Loan Modification Agreement dated November 24, 2004
with Silicon Valley Bank |
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10-K |
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March 16, 2005 |
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10.28 |
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10 |
.30 |
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Seventh Loan Modification Agreement dated December 21, 2004
with Silicon Valley Bank |
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10-K |
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March 16, 2005 |
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10.29 |
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10 |
.31 |
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Eighth Loan Modification Agreement dated December 30, 2005
with Silicon Valley Bank |
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X |
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10 |
.32 |
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Ninth Loan Modification Agreement dated February 10, 2006
with Silicon Valley Bank |
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X |
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82
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Filed with | |
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Incorporated by Reference | |
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This | |
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Exhibit | |
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Form | |
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Exhibit | |
No. | |
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Description |
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10-K | |
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Form | |
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Filing Date | |
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No. | |
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10 |
.33 |
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Securities Account Control Agreement dated December 20,
2002 with Silicon Valley Bank |
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10-K |
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March 28, 2003 |
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10.20 |
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10 |
.3 |
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Settlement Agreement dated November 1, 2004 with
ServiceWare Technologies, Inc. |
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10-K |
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March 16, 2005 |
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10.32 |
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21 |
.1 |
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Subsidiaries |
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X |
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23 |
.1 |
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Consent of Ernst & Young LLP |
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X |
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31 |
.1 |
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Certification pursuant to Rules 13a-14(a) and 15(d)-14(a)
of the Exchange Act of 1934 of the principal executive officer |
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X |
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31 |
.2 |
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Certification pursuant to Rules 13a-14(a) and 15(d)-14(a)
of the Exchange Act of 1934 of the principal financial officer |
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X |
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32 |
.1 |
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Certificate pursuant to 18 U.S.C. Section 1350 of the
principal executive officer |
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X |
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32 |
.2 |
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Certificate pursuant to 18 U.S.C. Section 1350 of the
principal financial officer |
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X |
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* |
Management contract or compensatory plan. |
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of March 13, 2006.
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ART TECHNOLOGY GROUP, INC. |
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(Registrant) |
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Robert D. Burke |
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Chief Executive Officer |
|
and President |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities as of
March 13, 2006.
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Name |
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Title |
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/s/ ROBERT D. BURKE
Robert D. Burke |
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Chief Executive Officer and President
(Principal Executive Officer) |
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/s/ JULIE M.B. BRADLEY
Julie M.B. Bradley |
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Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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/s/ DANIEL C. REGIS
Daniel C. Regis |
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Chairman of the Board |
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/s/ JOHN R. HELD
John R. Held |
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Director |
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/s/ ILENE H. LANG
Ilene H. Lang |
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Director |
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/s/ MARY E. MAKELA
Mary E. Makela |
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Director |
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/s/ MICHAEL A. BROCHU
Michael A. Brochu |
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Director |
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/s/ DAVID B. ELSBREE
David B. Elsbree |
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Director |
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/s/ PHYLLIS S. SWERSKY
Phyllis S. Swersky |
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Director |
84