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, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-26679
Art Technology Group,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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04-3141918
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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One Main Street
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02142
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Cambridge, Massachusetts
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(Zip Code)
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(Address of principal executive
offices)
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(617) 386-1000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value with Associated Preferred
Stock Purchase Rights
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The Nasdaq Stock Market, LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark 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, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o Smaller
reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As June 30, 2007 (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 $338,216,845.
As of March 10, 2008, the number of shares of the
registrants common stock outstanding was 129,642,923.
Documents
Incorporated by Reference
Portions of the registrants definitive proxy statement for
its annual meeting of stockholders to be held on May 22,
2008 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
Some of the information contained in this Report consists of
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Use of words
such as believes, expects,
anticipates, intends, plans,
estimates, should, likely or
similar expressions indicate a forward-looking statement. These
statements are subject to risks and uncertainties and are based
on the beliefs and assumptions of our management based on
information currently available to our management. Important
factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited
to, those set forth below under the heading Risk
Factors. We assume no obligation to update any
forward-looking statements.
Our
Business
We develop and market a comprehensive suite of
e-commerce
software products and software-as-a-service (SaaS)
solutions as well as provide related services, including support
and maintenance, professional services, application hosting,
eStara e-commerce optimization services solutions for enhancing
online sales, and education. Our customers use our products and
services to power their
e-commerce
websites, attract prospects, convert sales, and offer ongoing
customer care services. Our solutions are designed to provide a
scalable, reliable and sophisticated
e-commerce
website for our customers to create a satisfied, loyal and
profitable online customer base.
Corporate
Information
We were incorporated in 1991 in the Commonwealth of
Massachusetts and in 1997 in the State of Delaware, and have
been a publicly traded corporation since 1999. Our corporate
headquarters are at One Main Street, Cambridge, Massachusetts
02142. We have domestic offices in Chicago, Illinois; New York,
New York; Washington D.C.; Reston, Virginia; San Francisco,
California; and Seattle, Washington; and international offices
in Canada; France; Northern Ireland; Singapore; and the United
Kingdom. As of December 31, 2007, we had a total of
442 employees and we have more than 900 customers. Our
Internet web site address is www.atg.com.
Overview
We provide software and services that help online businesses
increase their revenues. We seek to differentiate ourselves by
enabling businesses to use our solutions to provide a richer,
more personalized and more compelling online shopping
experience. We provide merchandisers and marketers more control
over the online channel, and enable customer service agents to
provide consumers more consistent, personalized and relevant
assistance. Our solutions deliver better consistency and
relevancy by capturing and maintaining information about
customers personal preferences, online activity, and
transaction history, and by using this information to deliver
more personalized and contextual content.
We offer our products and services under two brands; our ATG
e-commerce
platform solutions and eStara
e-commerce
optimization services. Our ATG
e-commerce
platform solutions are delivered through perpetual software
licenses and managed application hosting services offerings. Our
eStara
e-commerce
optimization services are site-independent solutions, meaning
that they are interoperable with any
e-commerce
platform, and are delivered as recurring SaaS. Our eStara
e-commerce
optimization services include
Click-to-Call,
Click-to-Chat
and Call Tracking services. On February 5, 2008 we acquired
eShopperTools.com, Inc., also known as CleverSet,
and will begin offering CleverSets personalization and
recommendation services in early 2008, under the eStara brand.
We market our products and services primarily to Global
2000 companies and other businesses that have large numbers
of online users and utilize the Internet as an important
business channel. We focus primarily on providing our software
and services to businesses in the retail, consumer products,
manufacturing, media and entertainment, telecommunications,
financial services, travel and insurance industries. We have
over 900 customers, including Amazon, American Eagle Outfitters,
American Express, AOL, AT&T, Best Buy, B&Q,
Cabelas, Carrefour, Cingular, Coca Cola, Continental
Airlines, Dell, DirecTV, El Corte Ingles, Expedia, France
Telecom, Harvard Business School Publishing, Hewlett-Packard,
Intuit, Hilton, HSBC, L.L Bean, Macys, Meredith,
Microsoft,
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Neiman Marcus, New York & Company, Nokia, OfficeMax,
Overstock.com, PayPal, Philips, Procter & Gamble,
Sears, Sony, Symantec, T Mobile, Target, Urban Outfitters,
Verizon, Viacom, Vodafone and Walgreens.
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.
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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.
(Primus), a provider of software solutions for
customer service designed to help companies deliver a superior
customer experience via contact centers,
e-mail and
web self-service. The Primus solution extended our offerings
beyond commerce and marketing and into customer service.
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In 2004, we also began to offer our clients hosted SaaS 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 2005, we completed the integration of Primus applications
into the ATG platform.
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In October 2006, we acquired eStara, Inc. (eStara),
a provider of
e-commerce
optimization service solutions for enhancing online sales and
support initiatives. The eStara solutions provided us with a new
channel to help our clients convert web browsing activities into
sales, as well as business opportunities independent of
ATG-powered websites.
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In 2007, we initiated a strategy to sell site-independent
OnDemand services to enable our customers to increase on-line
sales. One result of this strategy is that we will recognize
revenue from more of our transactions on a ratable basis. This
increase in ratably recognized revenue should allow for more
predictable revenue and earnings in future periods.
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In February 2008, we acquired CleverSet, a provider of automated
personalization engines, used to optimize
e-commerce
experiences by presenting visitors with relevant recommendations
and information. CleverSets next-generation technology has
been shown to significantly lift
e-commerce
revenue by increasing conversion rates and order size. We will
offer these services under our eStara brand.
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Online retailers periodically upgrade or replace the network and
enterprise applications software and the related hardware
systems that they use to run their
e-commerce
operations in order to take advantage of advances in computing
power, system architectures and enterprise software
functionality that enable them to increase the capabilities of
their
e-commerce
systems while simplifying operation and maintenance of these
systems and reducing their cost of ownership. We refer to these
major system upgrades or replacements as
replatforming.
We believe that a companys replatforming is a significant
event that often leads to a sale of a
e-commerce
software license. We believe that on average, customers in our
market replatform or refresh their
e-commerce
software approximately every five years. We currently believe
that we are in a period of increased corporate spending on
e-commerce
solutions across many of our sectors.
Our
Strategy
Our objective is to be the industry leader in helping businesses
do more business on the Internet. We intend to achieve this
objective by implementing the following key components of our
strategy:
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Deliver a commerce platform with leadership functionality,
suitable for the most demanding enterprises. Our
clients tell us that, in some cases, our platform handles over
100,000 orders per day in peak periods. Leading industry
analysts rank our overall offering number one among commerce
platforms for
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business-to-consumer
sites on criteria, including reliability and scalability,
administration and management, catalog/content management,
campaign management and customer self-service. It is our
objective to continue to provide leadership in
e-commerce
functionality and operational excellence.
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Through our eStara
e-commerce
optimization services brand, deliver solutions independent of
the choice of web platform. Our eStara
e-commerce
optimization service solutions can be delivered to clients on a
site-independent basis on any
e-commerce
platform, or custom-built websites, across all industries. This
increases the size of our market opportunity and customer
penetration.
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Through managed application hosting services, provide the
same quality platform to mid-tier companies and others who opt
to outsource their
e-commerce
operations. By leveraging our experience with the
pre-built OnDemand offerings, our Professional Services
organization assists our clients with their ATG implementations,
thus helping our clients quickly and economically launch their
e-commerce
and service projects.
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Differentiate by providing a more personalized, more
relevant, more consistent shopping experience. We
give merchandisers and marketers the power and analytics to
define offers and cross-sells, to follow up on abandoned
shopping carts, to perform A/B split tests and to create
multi-channel, multi-stage web and
e-mail
campaigns that match a companys selling strategy with
information about a visitors browsing behavior, purchase
and interaction history, preferences and profile. This increases
basket size and the number of website visitors who go on to
purchase items from that website, resulting in increased
revenue. We use this same information to extend the consistent
customer experience to the customer service agent in the call
center, which can result in a more satisfied, loyal and
profitable customer.
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Leverage existing sales channels. We sell our
products primarily through our direct sales organization. In
addition, a significant portion of our product revenue is
co-sold or influenced by a variety of business partners,
including systems integrators, solution providers and other
technology partners. We currently have a broad range of business
alliances throughout the world, with companies such as
Accenture, Capgemini, Deloitte Consulting, Sapient, Tata
Consulting Services and Wipro as well as regional integrators
and interactive agencies such as aQuantive, BlastRadius,
imc2,
CGI, LBi Group, McFadyen Consulting, Professional Access,
Resource Interactive and D2C2. In most geographies and
situations, our goal is both to maintain close relationships
directly with our clients while also motivating systems
integrators and other channel partners to implement our
applications in their projects and solution sets.
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Leverage and expand our 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 business partners trained in the
implementation and application of our products.
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International expansion. We have seen an
increase in sales and pipeline growth in Europe and India. We
seek to invest resources into further developing our reach
internationally. In support of this initiative we have entered
into partnership agreements abroad that will support our
continued growth. As the international market opportunity
continues to develop we will adjust our strategy.
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ATG
Licensed Software Products
We provide a comprehensive
e-commerce
product suite designed to enable our clients to attract
visitors, convert them to buyers, deliver customer service and
analyze the results. The products that comprise our
comprehensive
e-commerce
product suite are as follows:
ATG Commerce is a comprehensive, highly scalable
e-commerce
platform. Its flexible, component-based architecture enables our
clients to personalize the online buying experience for their
customers, so that customers can more easily find desired
products, comparison shop, register for gifts, pre-order
products, redeem coupons and execute other useful features. ATG
Commerces functionality includes catalogs, product
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management, shopping carts, checkout, pricing management,
merchandising, promotions, inventory management and
business-to-business
order management.
The ATG Adaptive Scenario Engine is a platform that
provides the enabling technology and core functionality to allow
our clients to develop and manage robust, adaptable, scalable
and personalized
e-commerce
applications across channels and through the complete customer
lifecycle. The ATG platform is designed to allow our clients to
easily integrate these applications across their
marketing/merchandising,
e-commerce
and customer care organizations.
ATG Commerce Search is a dynamic, integrated search
solution that incorporates natural language technology into our
clients online storefronts. ATG Commerce Search is
designed to enable shoppers to navigate our clients
e-commerce
sites quickly and efficiently to find merchandise they want and
discover new items, as well as make purchases directly from the
search results page.
ATG Merchandising enables our clients merchandising
professionals to directly manage their online
storefronts including catalogs, products, search
facets, promotions, pricing, coupons and special
offers to help quickly connect shoppers with the
items most likely to interest them.
ATG Content Administration is a comprehensive web content
management solution to support personalized websites throughout
the entire content process, including creation, version
tracking, preview, editing, revision, approval and site
deployment.
ATG Outreach is an
e-marketing
solution that leverages customer information gained through web
interactions, preferences and behaviors to enable our clients to
create relevant, personalized outbound marketing and service
campaigns.
ATG Self-Service offers consumers access to personalized
answers to questions and helps the customer answer his or her
questions without telephoning for help. ATG Self-Service
combines an answer repository with multi-lingual natural
language search and navigation capabilities. The application
also offers comprehensive business reporting that helps clients
better understand customers needs and preferences.
ATG Commerce Service Center provides complete
e-commerce
support for call center agents to create and manage orders in a
unified browser based application for the web and call-center
environments.
ATG Knowledge is a knowledge management solution that
call center agents who provide customers with assisted service
can use to find the answers to customer inquiries and resolve
problems. ATG Knowledge enables our clients agents to
fulfill a wide range of customer needs by unifying customer
management, knowledge management and incident management into a
single solution.
ATG Campaign Optimizer assists marketing professionals in
defining 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 website 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.
ATG Customer Intelligence is an integrated set of
datamart and reporting capabilities to monitor and analyze
commerce and customer care performance. It is designed to
combine key data from the ATG product suite, such as purchases,
searches, escalations and click-throughs, with behavioral data
from web traffic analysis and demographic data, such as age,
gender and geography.
Our products allow companies to present a single view of
themselves to their customers through our repository
integration. This integration technology is designed to allow
companies to easily access and utilize data in the enterprise
regardless of the data storage format or location. 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
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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.
We support the adoption of open application server
infrastructure by our existing and new clients and work closely
with other application server, operating system and database
vendors to increase the value customers receive from our
products on a variety of popular infrastructure components.
Recurring
Revenue
We deliver OnDemand Services that generate recurring revenue
under both of our brands. Under the eStara brand, we offer
site-independent solutions which we call eStara
e-commerce
optimization services. These solutions are designed to increase
conversion rates and increase basket size for our customers. We
also offer managed application hosting services under our ATG
e-Commerce
brand
eStara
e-Commerce
Optimization Services Offerings
eStara
e-Commerce
optimization services are hosted on our servers and are platform
and site-independent so a client can benefit from eStaras
e-commerce
optimization services whether it elects to run its online
environment on an ATG-powered
e-commerce
platform, another
e-commerce
platform or a custom built website.
eStara Click to Call is designed to allow online
prospects and customers to transition seamlessly within the
context of their online session into immediate telephone or
PC-based voice contact with businesses. Web site visitors,
e-mail
recipients or viewers of a banner ad simply click a Click to
Call button and select
PC-to-phone
or
phone-to-phone
to connect in real-time with our clients sales or customer
service agents.
eStara Click to Chat allows online prospects and
customers to initiate a text chat session online with our
clients sales or customer service agents by simply
clicking a Click to Chat button.
eStara Call Tracking is designed to allow our clients to
accurately track every inbound telephone response to their print
and online promotional campaigns.
eStara Recommendations (formerly CleverSet) is an
automated personalized recommendation engine, used to optimize
e-commerce
experiences by presenting visitors with relevant recommendations
and information. This next-generation technology has been shown
to significantly lift
e-commerce
revenue by increasing conversion rates and order size.
ATG
OnDemand
For clients that do not wish to expend resources on running
e-commerce
applications
in-house, we
offer managed application hosting services for the full spectrum
of ATG software applications, which we call ATG OnDemand. Under
this model, clients can purchase licenses to our software or
receive the software as a service paying a monthly subscription
fee, and then we host the solutions in our hosted environment
and provide all additional software, hardware, network and full
technical operational and support services. These services
include the provisioning, management and monitoring of the
application infrastructure including bandwidth, network,
security, servers, operating systems, enabling software and ATG
applications. We support our ATG OnDemand clients on a 24/7
basis and provide problem resolution services, application
change management services, and service level agreements related
to application availability.
There are several advantages for organizations to choose an ATG
OnDemand managed services model, which makes this a potential
growth area for us. These include:
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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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shifting the clients technology risks to us;
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shortening the time to market (vs. in-house development,
deployment and maintenance); and
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avoiding upfront and ongoing expenditures required to purchase
and maintain software and hardware.
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Customer
Support and Maintenance Services
We offer four levels of customer support and maintenance
including our Premium Support Program, which consists of access
to technical support engineers 24/7, for customers deploying
mission critical applications. For an annual support and
maintenance fee, customers are entitled to receive software
upgrades and updates, maintenance releases, online documentation
and eServices including bug reports and unlimited technical
support.
Professional
and Educational Services Revenue
Our professional services organization provides a variety of
consulting, design, application development, deployment,
integration, hosting, training, and support services in
conjunction with our products. We provide these services through
our Professional Services and Education Services groups.
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 in order to provide a
consistent look and feel for all ATG project deliverables. Our
Professional Services include four primary service offerings:
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OnDemand Offerings. By leveraging our
experience with the pre-built OnDemand offerings, our
Professional Services organization assists our clients with
their implementations, thus helping our clients quickly and
economically launch their
e-commerce
and service projects.
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Full-lifecycle Solutions. We work with our
clients from the earliest stages of their projects. The
full-lifecycle approach encompasses everything from working with
our clients end users and technical staff to define
project requirements to solution design, implementation,
usability testing, staging and deployment.
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Custom Solutions. We can also manage specific
areas of our clients projects, such as designing a
solution to meet a clients requirements, implementing
scenarios or integrating our solutions with a third-party
application.
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Structured Enablement. In this model, we give
our clients the guidance they need while maximizing the skills
of the clients own personnel. Depending on a clients
project goals and the expertise of its team, appropriate ATG
personnel (such as architects or engineers) work onsite as
advisors to aid the clients personnel in areas such as
reviewing completed work or advising on a particular project
area.
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Education Services. We provide a broad
selection of educational programs designed to train clients and
partners on our applications. This curriculum addresses the
educational needs of developers, technical managers, business
managers, and system administrators. ATG Education Services also
offers an online learning program that complements our
instructor-led training. Developers can become certified on our
base product or our commerce product by taking a certification
exam in a proctored environment. We also measure partner quality
using a partner accreditation program that ensures ATG partners
have the skills necessary to effectively assist our clients with
implementations. We provide a full range of instructor-led
solutions to assist clients with these key initiatives.
Markets
Our principal target markets are Global 2000 companies and
other businesses that have large numbers of online users and
utilize the Internet as an important business channel. Our
clients represent a broad spectrum of enterprises within diverse
industry sectors, and include some of the worlds leading
corporations. As of December 31, 2007, we had more than 900
customers.
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.
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Our research and development activities are primarily directed
towards creating new versions of our products, which extend and
enhance competitive product features. In 2007, we focused
primarily on developing new and innovative applications,
integrating and improving our eStara
e-commerce
optimization services and developing and enhancing our OnDemand
offerings.
Sales and
Marketing
We market and sell our products and services primarily through
our direct sales force, which is compensated based on product
and services sales made to our clients, directly or through
business partners. We also sell products and services through
channel partners, including systems integrators and other
technology partners. The majority of our revenue is from direct
sales.
Our sales and service organization includes employees in direct
and channel sales, system engineers and account management. As
of December 31, 2007, we had approximately
100 employees in our sales, marketing and sales support
organization, including 63 direct sales representatives whose
performance is measured on the basis of achievement of quota
objectives. Our direct sales team is comprised of two teams;
ATG e-commerce
platform sales and eStara
e-commerce
optimization services sales. Of our 63 direct sales
representatives, 15 are located outside the United States.
To support our sales efforts and promote the ATG brands, we
conduct comprehensive marketing programs. These programs include
industry and partner events, market research, public relations
activities, seminars, webinars, advertisements, direct mailings
and the development of our website. Our marketing organization
supports the sales process and helps identify potential sales
and other opportunities. They prepare product research, product
planning, manage press coverage and other public relations. As
of December 31, 2007, we had 16 employees in our
global marketing organization.
As of December 31, 2007, in addition to offices throughout
the United States, we had sales offices located in the United
Kingdom, France, Canada and Singapore.
Strategic
Alliances
We have established strategic alliances with system integrators,
technology partners and resellers to augment our direct sales
activities. We provide our systems integrators, technology
partners and resellers with sales and technical training in
order to encourage them to create demand for our products and
services and to extend our presence globally and regionally. In
addition, we encourage our channel partners to enroll in our
accreditation and certification programs. Our ATG Certified
Professional Program is a training program for developers to
learn more about our products and services, and our ATG
Accredited Partner Program is intended to identify our most
qualified 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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in-house development efforts by potential clients or partners;
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e-commerce
application vendors, such as Escalate Retail and IBM;
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e-commerce
business process outsourcers, such as Digital River and GSI
Commerce;
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providers of hosted managed service offerings, such as
Accenture, EDS and IBM;
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providers of hosted on-demand subscription services, such as
Demandware, Digital River, MarketLive and Venda;
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vendors of marketing and customer-service applications,
including natural language, self-service and traditional
customer relationship management application vendors; and
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commerce optimization vendors, such as Avail Intelligence,
Baynote and LivePerson.
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7
We strive to compete against these alternatives by providing
products and services that are richer, offer a more flexible set
of capabilities and features and are more reliable and scalable.
Our
e-commerce
products are consistently reviewed as the most feature-rich by
the leading industry analysts. Many commerce sites known for
their unique and aggressive merchandising are built on our
platform. Commerce sites in industries as diverse as fashion,
industrial distribution, satellite TV, professional publishing,
office supplies and travel are deployed on our commerce
platform. Our
e-commerce
platform is used successfully by several of the highest volume
online retailers, powers the highest volume telecommunications
site, and has performed for many of our high-volume customers
with 100% uptime during peak holiday periods. We believe that
our eStara Click-to-Call services are more suitable for
enterprise-class corporations, and used by more of them, than
competitive products. Our eStara Recommendations service
(formerly CleverSet), expected to be available in early 2008,
uses more data in its algorithms and is regarded as having more
advanced technology than the recommendation solutions offered by
our competitors.
Proprietary
Rights and Licensing
Our success and ability to compete depends on our ability to
develop and protect the proprietary aspects of our technology
and to operate without infringing on the proprietary rights of
others. We rely on a combination of patent, trademark, trade
secret and copyright law and contractual restrictions to protect
our proprietary technology. At December 31, 2007, we had 13
issued United States patents, 2 allowed United States
patents, 17 pending United States patents, and numerous
foreign issued and pending patents. In addition, we have several
trademarks that are registered or pending registration in the
U.S. or abroad. We seek to protect our source code for our
software, documentation and other written materials under trade
secret and copyright laws. These legal protections afford only
limited protection for our technology, however.
We license our software pursuant to signed master license
agreements, as well as click through or shrink
wrap agreements, which impose restrictions on the
licensees ability to use the software, such as prohibiting
reverse engineering and limiting the use of copies. We also seek
to avoid disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary
information to execute confidentiality agreements and by
restricting access to our source code. Due to rapid
technological change, we believe that factors such as the
technological and creative skills of our personnel, new product
developments and enhancements to existing products are more
important than legal protections to establish and maintain a
technology leadership position.
Employees
As of December 31, 2007, we had a total of
442 employees. Our success depends on our ability to
attract, retain and motivate highly qualified technical and
management personnel, for whom competition is intense. 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 are registered as a reporting company under the Securities
Exchange Act of 1934, as amended, which we refer to as the
Exchange Act. Accordingly, we file or furnish with the
Securities and Exchange Commission, or the Commission, annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
as required by the Exchange Act and the rules and regulations of
the Commission. We refer to these reports as Periodic Reports.
The public may read and copy any Periodic Reports or other
materials we file with the Commission at the Commissions
Public Reference Room at 100 F Street, NE, Washington,
DC 20549. Information on the operation of the Public Reference
Room is available by calling
1-800-SEC-0330.
In addition, the Commission maintains an Internet website that
contains reports, proxy and other information regarding issuers,
such as Art Technology Group, that file electronically with the
Commission. The address of this website is
http://www.sec.gov.
Our Internet website is www.atg.com. We make available,
free of charge, on or through our Internet website our Period
Reports and amendments to those Periodic Reports as soon as
reasonably practicable after we electronically file them with
the Commission. We are not, however, including the information
contained on
8
our website, or information that may be accessed through links
on our website, as part of, or incorporating it by reference
into, this annual report on
Form 10-K.
The following are certain of the important factors that could
cause our actual operating results to differ materially from
those indicated or suggested by forward-looking statements made
in this annual report on
Form 10-K
or presented elsewhere by management from time to time.
We
expect our revenues and operating results to continue to
fluctuate for the foreseeable future. If our quarterly or annual
results are lower than the expectations of securities analysts,
then the price of our common stock is likely to
fall.
Our revenues and operating results have varied from quarter to
quarter in the past and will probably continue to vary
significantly from quarter to quarter in the foreseeable future.
We provide annual guidance on revenues and operating results. A
number of factors are likely to cause variations in our
operating results, including:
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the timing of revenue recognition of our products and services,
which is affected by the mix of product license revenue and
services provided; due to the growth of our service offerings
and evolution of our sales terms with our customers, an
increasing portion of our revenue is being recognized ratably
over a period of time rather than at the time of invoice and we
expect this trend to continue in the near term;
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the timing of customer orders, especially larger transactions,
and product implementations;
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Our ability to cultivate and maintain strategic alliances;
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fluctuating economic conditions, particularly as they affect our
customers willingness to implement new
e-commerce
solutions and their ability to pay for our products and services;
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delays in introducing new products and services;
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the size of price discounting and 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 personnel;
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cost overruns related to fixed-price services projects;
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the mix of domestic and international sales;
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variation in our actual costs from our cost estimates related to
long term hosting contracts;
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increased expenses, whether related to sales and marketing,
product development or administration; and
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costs related to possible acquisitions of technologies or
businesses.
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In any given quarter, we often depend on several relatively
large license transactions to meet expected revenues for that
quarter. If we expect to complete a large sale to a specific
customer in a particular quarter and the sale is not completed
in that quarter, then we are not likely to be able to generate
revenue from alternate sources in time to compensate for the
shortfall. In addition, as is the case with many software
companies, a significant number of our sales transactions are
concentrated near the end of each fiscal quarter. If we are
unable to close or recognize revenues on even a relatively small
number of license deals at quarter-end, then we may not be able
to meet expected revenues for that quarter. Because of this
concentration of sales at quarter end, customers may seek to
obtain higher price discounts than we might otherwise provide by
waiting until quarter-end to complete their transactions with us.
We may
not be able to sustain or increase our revenue or attain
profitability on a quarterly or annual basis.
We operate in a rapidly evolving industry, which makes it more
difficult to predict our future operating results. We cannot be
certain that our revenues will grow or our expenses will
decrease at rates that will allow us to achieve
9
profitability on a quarterly or annual basis. Additionally, we
expect to recognize an increasing portion of our revenue ratably
over a period of time rather than at the time invoice. In the
near term, this may have an adverse effect on our revenue and
net income, which could result in a decline in the price of our
common stock.
Our
lengthy sales cycle makes it difficult to predict our quarterly
results and causes variability in our operating
results.
We have a long sales cycle, often several months or quarters,
because our clients often need to make large expenditures and
invest substantial resources in order to take advantage of our
products and services and also because we generally need to
educate potential customers about the use and benefits of our
products and services. This long sales cycle makes it difficult
to predict the quarter in which sales may occur. We may incur
significant sales and marketing expenses in anticipation of
selling our products, and if we do not achieve the level of
revenues we expected, our operating results will suffer and our
stock price may decline. Further, our potential customers
frequently need to obtain approvals from multiple decision
makers before making purchase decisions. Delays in sales could
cause significant variability in our revenues and operating
results for any particular period.
If the
market for
e-commerce
does not continue to grow, then demand for our products and
services may decrease.
Our success depends heavily on the continued use of the Internet
for
e-commerce.
Many companies continue to rely primarily or exclusively on
traditional means of commerce and may be reluctant to change
their patterns of commerce. For our customers and potential
customers to be willing to invest in our electronic commerce and
online marketing, sales and service applications, the Internet
must continue to be accepted and widely used for commerce and
communication. If Internet commerce does not grow or grows more
slowly than expected, then our future revenues and profits may
not meet our expectations or those of analysts.
A
slowdown in the economy could negatively impact our revenue and
earnings.
General economic conditions affect our customers and sales
opportunities. Our ability to achieve our business objectives is
affected by many factors, including, among others: general
business conditions, interest rates, inflation, taxation, fuel
prices and electrical power rates, unemployment trends,
terrorist attacks and acts of war, and other matters that
influence consumer confidence and spending. Additionally, in the
event of an economic downturn, we could experience customer
bankruptcies, reduced volume of business from existing
customers, delayed or reversal of recognition of revenue due to
adverse credit events affecting our customers and bad debt
losses, any of which could adversely affect our financial
position and results of operations.
If we
fail to adapt to rapid changes in the market for online business
applications, then our products and services could become
obsolete.
The market for our products is constantly and rapidly evolving,
as we and our competitors introduce new and enhanced products,
retire older ones, and react to changes in Internet-related
technology and customer demands, coalescence of product
differentiators, product commoditization and evolving industry
standards. We may not be able to develop or acquire new products
or product enhancements that comply with present or emerging
Internet technology standards or differentiate our products
based on functionality and performance. In addition, we may not
be able to establish or maintain strategic alliances with
operating system and infrastructure vendors that will permit
migration or upgrade opportunities for our current user base.
New products based on new technologies or new industry standards
could render our existing products obsolete and unmarketable.
To succeed, we need to enhance our current products and develop
new products on a timely basis to keep pace with market needs,
satisfy the increasingly sophisticated requirements of 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.
10
We
face intense competition in the market for online commerce
applications and services, and we expect competition to
intensify in the future. If we fail to remain competitive, then
our revenues may decline, which could adversely affect our
future operating results and our ability to grow our
business.
A number of competitive factors could cause us to lose potential
sales or to sell our products and services at lower prices or at
reduced margins, including, among others:
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Potential clients or partners may choose to develop
e-commerce
applications in-house, rather than paying for our products or
services.
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Some of our current and potential competitors have greater
financial, marketing and technical resources than we do,
allowing them to leverage a larger installed customer base and
distribution network, adopt more aggressive pricing policies and
offer more attractive sales terms, adapt more quickly to new
technologies and changes in customer requirements, and devote
greater resources to the promotion and sale of their products
and services than we can.
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Our suite of service products competes against various 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.
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Current and potential competitors have established or may
establish cooperative relationships among themselves or with
third parties to enhance their products and expand their
markets. Accordingly, new competitors or alliances among
competitors may emerge and rapidly acquire significant market
share.
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Some of current and potential competitors, especially our larger
competitors like IBM that offer broad suites of computer and
software applications may offer free or low-cost
e-commerce
applications and functionality bundled with their own computer
and software products. Potential customers may not see the need
to buy our products and services separately when they can use
the bundled applications and functionality in our
competitors product suites for little or no additional
cost.
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If the
market for our OnDemand service offerings does not develop or
develops more slowly than we expect, then our business could be
negatively affected.
Our OnDemand hosted service and subscription offerings are at an
early stage of development, and we may not achieve or sustain
demand for these offerings. Our success in this effort will
depend in part on the price, performance and availability of our
products and services in comparison with competing products and
services and on the willingness of companies to increase their
use of hosting applications. While we will continue to market
and sell traditional licenses for our software solutions, we
believe that the widespread market acceptance of our hosting
software solutions is important to the success of our business
because of the growth opportunities.
If our
clients experience interruptions, delays or failures in our
hosted services, then we could incur significant costs and lose
revenue opportunities.
Our OnDemand hosted services and our eStara
e-commerce
optimization services are at an early stage of development and
any equipment failures, mechanical errors, spikes in usage
volume 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
accidental or willful security breaches, could harm our
relationships with clients and our reputation. This in turn
could reduce our revenue, subject us to liability, cause us to
issue credits or pay penalties or cause our clients to decide
not to renew their hosting agreements, any of which could
adversely affect our business, financial condition and results
of operations.
We
depend heavily on key employees in a competitive labor
market.
Our success depends on our ability to attract, motivate and
retain skilled personnel, especially in the areas of management,
finance, sales, marketing and research and development, and we
compete with other companies for a small pool of highly
qualified employees. Members of our management team, including
executives with significant
11
responsibilities in these areas, have left us during the past
few years for a variety of reasons, and there may be additional
departures in the future. These historical and potential future
changes in personnel may be disruptive to our operations or
affect our ability to maintain effective internal controls over
financial reporting. In addition, equity incentives such as
stock options constitute an important part of our total
compensation program for employees, and the volatility or lack
of positive performance of our stock price may adversely affect
our ability to retain our employees or hire replacements.
If we
fail to anticipate and address the risks associated with
CleverSets business, then our business could be
harmed.
The integration of the business and operations of CleverSet,
which we acquired in February 2008, into our business and
operations is an important process. In order to be successful,
we need to retain key CleverSet personnel and also understand
and address the risks associated with CleverSets business
and products. For example, it is possible that the market for
CleverSets products may be more limited than we
anticipated or that CleverSets technology may infringe
upon a third partys intellectual property. If we fail to
successfully integrate CleverSets business and operations,
retain valuable CleverSet personnel and address the risks
associated with our acquisition of its business, then we could
fail to realize the anticipated benefits of the acquisition, and
the disruption caused by the acquisition could hurt our business.
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 we 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 these customers to the extent the claims related to
our products. The results of any intellectual property
litigation to which we might become a party may force us to do
one or more of the following:
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cease selling or using products or services that incorporate the
challenged intellectual property;
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obtain a license, which may not be available on reasonable
terms, to sell or use the relevant technology; or
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redesign those products or services to avoid infringement.
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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, we expect software piracy to be a
persistent problem. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect
proprietary rights to as great an extent as the laws of the
United States. Any such resulting litigation could result in
substantial costs and
12
diversion of resources and could have a material adverse effect
on our business, operating results and financial condition.
There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will
not independently develop similar technology. If we fail to
meaningfully protect our intellectual property, then our
business, operating results and financial condition could be
materially harmed.
Finally, our professional services may involve the development
of custom software applications for specific 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.
If we
fail to maintain our existing customer base, then 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 license enhanced versions of our
products. If we are unable to continue to obtain significant
revenues from our existing customer base, then our ability to
grow our business would be harmed, and our competitors could
achieve greater market share. The current trend toward
e-commerce
replatforming may increase this risk. When existing ATG
customers re-evaluate their
e-commerce
platforms and solutions, they may elect to replace our
e-commerce
solutions with those of other vendors. If they do, these
customers, as well as other prospective customers who choose
e-commerce
solutions other than ours in connection with their
replatforming, are likely to commit substantial expenditures and
investments of time and resources to the implementation of the
e-commerce
solution included in their new chosen platforms, reducing the
probability that we will be able to penetrate those accounts in
the near future.
If we
fail to address the challenges associated with our international
operations, then revenues from our products and services may
decline, and the costs of providing our products or services may
increase.
At December 31, 2007, we had offices in the United Kingdom,
France, Northern Ireland, Canada and Singapore. We derived 32%
of our total revenues in 2007 and 25% of our total revenues in
2006 from customers outside the United States. Our operations
outside the United States 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 Asia;
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difficulties in managing systems integrators and technology
partners;
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difficulties in staffing and managing foreign subsidiary
operations;
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differing technology standards;
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difficulties and delays in translating products and product
documentation into foreign languages for countries in which
English is not the primary language;
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reduced protection for intellectual property rights in some of
the countries in which we operate or plan to operate;
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difficulties related to entering into legal contracts under
local laws and in foreign languages;
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fluctuations in the exchange rates between foreign and United
States currency;
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potentially adverse tax consequences; and
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political and economic instability.
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We may
need financing in the future, and any additional financing may
result in restrictions on our operations or substantial dilution
to our stockholders.
We may need to raise funds in the future, for example, to
develop new technologies, expand our business, respond to
competitive pressures, acquire complementary businesses or
respond to unanticipated situations. We may try to raise
additional funds through public or private financings, strategic
relationships or other arrangements.
13
Our ability to obtain debt or equity funding will depend on a
number of factors, including market conditions, our operating
performance and investor interest. Additional funding may not be
available to us on acceptable terms or at all. If adequate funds
are not available, we may be required to reduce expenditures,
including curtailing our growth strategies, foregoing
acquisitions or reducing our product development efforts. If we
succeed in raising additional funds through the issuance of
equity or convertible securities, then the issuance could result
in substantial dilution to existing stockholders. If we raise
additional funds through the issuance of debt securities or
preferred stock, these new securities would have rights,
preferences and privileges senior to those of the holders of our
common stock. The terms of these securities, as well as any
borrowings under our credit agreement, could impose restrictions
on our operations.
If
systems integrators or value added resellers reduce their
support and implementation of our products, then our revenues
may fail to meet expectations and our operating results would
suffer.
Since our potential customers often rely on third-party systems
integrators to develop, deploy and manage websites for
conducting commerce on the Internet, we cultivate relationships
with systems integrators to encourage them to support our
products. We do not, however, generally have written agreements
with our systems integrators, and they are not required to
implement solutions that include our products or to maintain
minimum sales levels of our products. Our revenues would be
reduced if we fail to train a sufficient number of systems
integrators adequately or if systems integrators devote their
efforts to integrating or co-selling products of other
companies. Any such reduction in revenue would not be
accompanied by a significant offset in our expenses. As a
result, our operating results would suffer, and the price of our
common stock would probably fall.
If our
software products contain serious errors or defects, then we may
lose revenues and market acceptance and may incur costs to
defend or settle product liability claims.
Complex software products such as ours often contain errors or
defects, particularly when first introduced or when new versions
or enhancements are released. Despite internal testing and
testing by our customers, our current and future products may
contain serious defects, which 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 and
could seriously damage our reputation in the marketplace, making
it harder for us to sell our products.
Government
or industry regulations could directly restrict our business or
indirectly affect our business by limiting the growth of
e-commerce.
As
e-commerce
evolves, federal, state and foreign agencies have adopted and
could in the future adopt regulations covering issues such as
user privacy, content and taxation of products and services.
Government regulations could limit the market for our products
and services or impose burdensome requirements that render our
business unprofitable. Although many regulations might not apply
to our business directly, we expect that laws regulating the
solicitation, collection or processing of personal and consumer
information could indirectly affect our business. The
Telecommunications Act of 1996 prohibits certain types of
information and content from being transmitted over the
Internet. The prohibitions scope and the liability
associated with a violation are currently unsettled. In
addition, although substantial portions of the Communications
Decency Act were held to be unconstitutional, we cannot be
certain that similar legislation will not be enacted and upheld
in the future. It is possible that legislation could expose
companies involved in
e-commerce
to liability, which could limit the growth of
e-commerce
generally. Legislation like the Telecommunications Act and the
Communications Decency Act could dampen the growth in web usage
and decrease its acceptance as a medium of communications and
commerce.
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The
Internet has generated privacy concerns that could result in
legislation or market perceptions that could result in reduced
sales of our products and harm our business.
Businesses use our ATG Adaptive Scenario Engine product to
develop and maintain profiles to tailor the content to be
provided to website visitors. When a visitor first arrives at a
website, our software creates a profile for that visitor. If the
visitor registers or logs in, the visitors identity is
added to the profile, preserving any profile information that
was gathered up to that point. ATG Adaptive Scenario Engine
product tracks both explicit user profile data supplied by the
user as well as implicit profile attributes derived from the
users behavior on the website. Privacy concerns may cause
visitors to resist providing the personal data or to avoid
websites that track the web behavioral information necessary to
support our profiling capability. More importantly, even the
perception of security and privacy concerns, whether or not
valid, may indirectly inhibit market acceptance of our products.
In addition, legislative or regulatory requirements may heighten
these concerns if businesses must notify website users that the
data captured after visiting websites may be used to direct
product promotion and advertising to that user. Other countries
and political entities, such as the European Economic Community,
have adopted such legislation or regulatory requirements, and
the United States may follow suit. Privacy legislation and
consumer privacy concerns could make it harder for us to sell
our products and services, resulting in reduced revenues.
Our products use cookies to track demographic
information and user preferences. A cookie is
information keyed to a specific user that is stored on a
computers hard drive, typically without the users
knowledge. The user can generally remove the cookies, although
removal could affect the content available on a particular site.
Germany has imposed laws limiting the use of cookies, and a
number of Internet commentators and governmental bodies in the
United States and other countries have urged passage of laws
limiting or abolishing the use of cookies. If such laws are
passed or if users begin to delete or refuse cookies as a common
practice, then demand for our personalization products could be
reduced.
Anti-takeover
provisions in our charter documents and Delaware law could
prevent or delay a change in control of our
company.
Certain provisions of our charter and by-laws may discourage,
delay or prevent a merger or acquisition that some of our
stockholders may consider favorable, which could reduce the
market price of our common stock. These provisions include:
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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.
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In addition, we adopted a shareholder rights plan in 2001. The
existence of our shareholder rights plan, as well as certain
provision of Delaware law may further discourage, delay or
prevent someone from acquiring or merging with us.
Continued
compliance with regulatory and accounting requirements will be
challenging and will require significant
resources.
We are spending a significant amount of management time and
external resources to comply with changing laws, regulations and
standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new
Securities and Exchange Commission rules and regulations and
NASDAQ Global Market rules. In particular, Section 404 of
the Sarbanes-Oxley Act of 2002 requires managements annual
review and evaluation of internal control over financial
reporting. The process of documenting and testing internal
control over
15
financial reporting has required that we hire additional
personnel and outside services and has resulted in higher
accounting and legal expenses. While we invested significant
time and money in our effort to evaluate and test our internal
control over financial reporting, a material weakness was
identified in our internal control over financial reporting in
2006. Although the material weakness was remediated in 2007,
there are inherent limitations to the effectiveness of any
system of internal controls and procedures, including cost
limitations, the possibility of human error, judgments and
assumptions regarding the likelihood of future events, and the
circumvention or overriding of the controls and procedures.
Accordingly, even effective controls and procedures can provide
only reasonable assurance of achieving their control objectives.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
On December 21, 2007, we received a comment letter from the
staff of the United States Securities and Exchange Commission
( the Staff ). We submitted a response to
the Staff on January 29, 2008. On March 13, 2008, we
received a second letter from the Staff, seeking additional
clarification concerning one of our responses. The unresolved
Staff comment concerns the methodology we used in our financial
statements included in our 2006
Form 10-K
and third quarter 2007 Form 10-Q for allocating and
classifying revenue derived from multi-element arrangements
between product license revenue and service revenue. The
ultimate resolution will not have any impact on our total
revenue or profits in any fiscal year or quarter previously
reported nor will it have any impact on our future total revenue
or profits. We are in the process of responding to the
Staffs request for future clarification.
Our headquarters are located in 45,000 square feet of
leased office space in Cambridge, Massachusetts. In addition, we
have major United States facilities in Seattle, Washington
(approximately 9,000 square feet); Chicago, Illinois
(approximately 6,000 square feet); San Francisco,
California (approximately 3,000 square feet); Reston,
Virginia (approximately 10,000 square feet) and
Washington, D.C. (approximately 7,000 square feet).
Our European headquarters are located in Apex Plaza, Reading,
United Kingdom where we lease approximately 8,000 square
feet. We also maintain offices in Northern Ireland, Canada,
France and Singapore. All of our facilities are leased. We
believe our facilities are sufficient to meet our needs for the
foreseeable future and, if needed, additional space will be
available at a reasonable cost.
|
|
Item 3.
|
Legal
Proceedings
|
As previously disclosed, in 2001, we were named as defendants in
seven purported class action suits that were consolidated into
one action in the United States District Court for the District
of Massachusetts under the caption In re Art Technology Group,
Inc. Securities Litigation. The action alleges that we, and
certain of our former officers, violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and SEC
Rule 10b-5
promulgated there under. In October 2006, the court ruled in our
favor and dismissed the case on summary judgment. The plaintiffs
have appealed the decision. The parties have filed appeal briefs
and we expect that oral arguments will be presented in 2008.
Management believes that none of the claims that plaintiffs have
asserted have merit, and we intend to continue to defend the
action vigorously. While we cannot predict with certainty the
outcome of the litigation or the appeal, we do not expect any
material adverse impact to our business, or the results of our
operations, from this matter.
As previously disclosed, in December 2001, a purported class
action complaint was filed against our wholly owned subsidiary
Primus Knowledge Solutions, Inc., two former officers of Primus
and the underwriters of Primus 1999 initial public
offering. The complaints are similar and allege violations of
the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934 primarily based on the allegation that the
underwriters received undisclosed compensation in connection
with Primus initial public offering. The litigation has
been consolidated in the United States District Court for the
Southern District of New York (SDNY) with claims
against approximately 300 other companies that had initial
public offerings during the same general time period. In
February 2005, the court issued an opinion and order granting
preliminary approval of a proposed settlement, subject to
certain non-material modifications. However in June 2007, the
court terminated the settlement process due to the parties
inability to certify the settlement class. Plaintiffs
counsel are seeking certification of a narrower class of
plaintiffs and filed amended complaints in September 2007. We
believe we have meritorious defenses and intend to defend
16
the case vigorously. While we cannot predict the outcome of the
litigation, we do not expect any material adverse impact to our
business, or the results of our operations, from this matter.
Our industry is characterized by the existence of a large number
of patents, trademarks and copyrights, and by increasingly
frequent litigation based on allegations of infringement or
other violations of intellectual property rights. Some of our
competitors in the market for
e-commerce
software and services have filed or may file patent applications
covering aspects of their technology that they may claim our
technology infringes. Such competitors could make claims of
infringement against us with respect to our products and
technology. Additionally, third parties who are not actively
engaged in providing
e-commerce
products or services but who hold or acquire patents upon which
they may allege our current or future products or services
infringe may make claims of infringement against us or our
customers. Our agreements with our customers typically require
us to indemnify them against claims of intellectual property
infringement resulting from their use of our products and
services. We periodically receive notices from customers
regarding patent licence inquiries they have received which may
or may not implicate our indemnity obligations, and we and
certain of our customers are currently parties to litigation in
which it is alleged that the patent rights of others are
infringed by our products or services. Any litigation over
intellectual property rights, whether brought by us or by
others, could result in the expenditure of significant financial
resources and the diversion of managements time and
efforts. In addition, litigation in which we or our customers
are accused of infringement might cause product shipment or
service delivery delays, require us to develop alternative
technology or require us to enter into royalty or license
agreements, which might not be available on acceptable terms, or
at all. We could incur substantial costs in prosecuting or
defending any intellectual property litigation. These claims,
whether meritorious or not, could be time-consuming, result in
costly litigation, require expensive changes in our methods of
doing business or could require us to enter into costly royalty
or licensing agreements, if available. As a result, these claims
could harm our business.
The ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative
impact on our results of operations, consolidated balance sheets
and cash flows, due to defense costs, diversion of management
resources and other factors.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Our common stock trades on The NASDAQ Global Market (formerly
known as 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 Global Market.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
3.49
|
|
|
$
|
1.83
|
|
Second quarter
|
|
|
3.81
|
|
|
|
2.12
|
|
Third quarter
|
|
|
3.10
|
|
|
|
2.32
|
|
Fourth quarter
|
|
|
2.66
|
|
|
|
1.91
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
2.67
|
|
|
$
|
2.04
|
|
Second quarter
|
|
|
2.88
|
|
|
|
2.19
|
|
Third quarter
|
|
|
3.33
|
|
|
|
2.69
|
|
Fourth quarter
|
|
|
4.75
|
|
|
|
3.10
|
|
On March 10, 2008 the last reported sale price on The
NASDAQ Global Market for our common stock was $3.18 per share.
On March 10, 2008, there were approximately 606 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.
17
We have never paid or declared any cash dividends on shares of
our common stock or other securities and do not anticipate
paying any cash dividends in the foreseeable future. We
currently intend to retain all future earnings, if any, for use
in the operation of our business.
The following graph compares the cumulative total stockholder
return on our common stock during the period December 31,
2002 to December 31, 2007 with the cumulative total return
of the NASDAQ Market Index and a peer group index over the same
period. This comparison assumed the investment of $100 on
December 31, 2002 in our common stock, the NASDAQ Market
Index and the peer group index and assumes dividends, if any,
are reinvested. The peer group index that we used is Hemscott
Industry Group 852 (Internet Software and Services), which
reflects the stock performance of 70 publicly traded companies
in the Internet software and services marketplace.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Investment($)
|
|
|
|
12/31/2002
|
|
|
12/31/2003
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/29/2006
|
|
|
12/31/2007
|
|
|
|
|
|
|
Art Technology Group Inc.
|
|
$
|
100.00
|
|
|
$
|
123.39
|
|
|
$
|
120.97
|
|
|
$
|
158.06
|
|
|
$
|
187.90
|
|
|
$
|
348.39
|
|
Internet Software & Svcs
|
|
$
|
100.00
|
|
|
$
|
200.13
|
|
|
$
|
252.24
|
|
|
$
|
218.28
|
|
|
$
|
207.19
|
|
|
$
|
221.50
|
|
NASDAQ Market Index
|
|
$
|
100.00
|
|
|
$
|
150.36
|
|
|
$
|
163.00
|
|
|
$
|
166.58
|
|
|
$
|
183.68
|
|
|
$
|
201.91
|
|
18
Stock
Repurchase Program
On April 19, 2007 our Board of Directors authorized a stock
repurchase program providing for repurchases of our outstanding
common stock of up to $20 million, in the open market or in
privately negotiated transactions, at times and prices
considered appropriate depending on prevailing market
conditions. During the year ended December 31, 2007, we
repurchased 986,960 shares of our common stock at a cost of
$2.9 million.
Our stock repurchase authorization does not have an expiration
date and the pace of our repurchase activity will depend on
factors such as our working capital needs, our cash requirements
for acquisitions, any debt repayment obligations which may
arise, our stock price, and economic and market conditions. Our
stock repurchases may be effected from time to time through open
market purchases or pursuant to a
Rule 10b5-1
plan. Our stock repurchase program may be accelerated,
suspended, delayed or discontinued at any time.
The table below presents information regarding our repurchases
of our common stock during the three months ended
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
(d)
|
|
|
|
|
|
|
Total number of
|
|
Approximate dollar
|
|
|
(a)
|
|
(b)
|
|
shares purchased
|
|
value of shares that may
|
|
|
Total number of
|
|
Average price
|
|
as part of publicly
|
|
yet be purchased under
|
Period
|
|
shares purchased
|
|
paid per share
|
|
announced plan
|
|
the plans or programs
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
November 2007
|
|
|
171,300
|
|
|
$
|
4.15
|
|
|
|
171,300
|
|
|
$
|
17,098
|
|
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and related notes and with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and other financial data included elsewhere in
this Annual Report on
Form 10-K.
Except as set forth below, the consolidated statement of
operations data and balance sheet data for all periods presented
are derived from audited consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K
or in Annual Reports on
Form 10-K
for prior years on file with the United States Securities and
Exchange Commission.
On January 1, 2006, we adopted, on a modified prospective
basis, the provisions of SFAS No. 123(R), which
requires us to record stock-based compensation expense for
employee stock awards at fair value at the time of grant.
Stock-based compensation expense was $5.8 million and
$3.8 million for the years ended December 31, 2007 and
2006, respectively.
19
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
$
|
30,529
|
|
|
$
|
32,784
|
|
|
$
|
29,821
|
|
|
$
|
23,345
|
|
|
$
|
26,793
|
|
Recurring services
|
|
|
76,672
|
|
|
|
51,113
|
|
|
|
44,258
|
|
|
|
29,359
|
|
|
|
31,266
|
|
Professional and education services
|
|
|
29,859
|
|
|
|
19,335
|
|
|
|
16,567
|
|
|
|
16,515
|
|
|
|
14,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
137,060
|
|
|
|
103,232
|
|
|
|
90,646
|
|
|
|
69,219
|
|
|
|
72,106
|
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
2,197
|
|
|
|
1,751
|
|
|
|
1,816
|
|
|
|
2,206
|
|
|
|
2,118
|
|
Recurring services
|
|
|
24,119
|
|
|
|
11,239
|
|
|
|
6,575
|
|
|
|
3,884
|
|
|
|
4,689
|
|
Professional and education services
|
|
|
29,223
|
|
|
|
19,560
|
|
|
|
16,680
|
|
|
|
15,995
|
|
|
|
15,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
55,539
|
|
|
|
32,550
|
|
|
|
25,071
|
|
|
|
22,085
|
|
|
|
21,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
81,521
|
|
|
|
70,682
|
|
|
|
65,575
|
|
|
|
47,134
|
|
|
|
50,258
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
24,963
|
|
|
|
21,517
|
|
|
|
18,481
|
|
|
|
16,209
|
|
|
|
17,928
|
|
Sales and marketing
|
|
|
44,397
|
|
|
|
30,909
|
|
|
|
29,396
|
|
|
|
29,602
|
|
|
|
31,400
|
|
General and administrative
|
|
|
18,211
|
|
|
|
12,952
|
|
|
|
11,231
|
|
|
|
7,742
|
|
|
|
9,265
|
|
Restructuring charge (benefit)
|
|
|
(59
|
)
|
|
|
(62
|
)
|
|
|
885
|
|
|
|
3,570
|
|
|
|
(10,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
87,512
|
|
|
|
65,316
|
|
|
|
59,993
|
|
|
|
57,123
|
|
|
|
48,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,991
|
)
|
|
|
5,366
|
|
|
|
5,582
|
|
|
|
(9,989
|
)
|
|
|
2,011
|
|
Interest and other income, net
|
|
|
2,237
|
|
|
|
1,712
|
|
|
|
219
|
|
|
|
395
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
(3,754
|
)
|
|
|
7,078
|
|
|
|
5,801
|
|
|
|
(9,594
|
)
|
|
|
2,187
|
|
Provision (benefit) for income taxes
|
|
|
433
|
|
|
|
(2,617
|
)
|
|
|
32
|
|
|
|
(50
|
)
|
|
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,187
|
)
|
|
$
|
9,695
|
|
|
$
|
5,769
|
|
|
$
|
(9,544
|
)
|
|
$
|
2,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
127,528
|
|
|
|
115,280
|
|
|
|
109,446
|
|
|
|
79,252
|
|
|
|
71,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
127,528
|
|
|
|
120,096
|
|
|
|
111,345
|
|
|
|
79,252
|
|
|
|
73,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash, cash equivalents and short-term marketable securities
|
|
$
|
50,879
|
|
|
$
|
31,223
|
|
|
$
|
33,569
|
|
|
$
|
26,507
|
|
|
$
|
41,584
|
|
Long-term marketable securities
|
|
|
1,062
|
|
|
|
|
|
|
|
|
|
|
|
4,001
|
|
|
|
|
|
Total assets
|
|
|
177,719
|
|
|
|
149,981
|
|
|
|
92,765
|
|
|
|
97,803
|
|
|
|
67,360
|
|
Total deferred revenue
|
|
|
46,354
|
|
|
|
24,209
|
|
|
|
21,113
|
|
|
|
25,355
|
|
|
|
14,915
|
|
Long-term obligations, less current maturities
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
112
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
107,097
|
|
|
$
|
105,074
|
|
|
$
|
50,160
|
|
|
$
|
42,185
|
|
|
$
|
20,937
|
|
20
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
This Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with our consolidated financial statements and notes
thereto which appear elsewhere in this Annual Report on
Form 10-K.
See Risk Factors elsewhere in this Annual Report on
Form 10-K
for a discussion of certain risks associated with our business.
The following discussion contains forward-looking statements.
The forward-looking statements do not include the potential
impact of any mergers, acquisitions, or divestitures of business
combinations that may be announced after the date hereof.
We develop and market a comprehensive suite of
e-commerce
software products, as well as provide related services in
conjunction with our products, including support and
maintenance, professional services, managed application hosting
services, eStara
e-commerce
optimization services solutions for enhancing online sales and
support. We primarily derive revenue from the sale of software
products and related services. Our software licenses are priced
based on the size of the customer implementation. Services
revenue is derived from fees for recurring services,
professional services and education services. Our recurring
services revenue is comprised of managed application hosting
services, eStara
e-commerce
optimization service solutions and support and maintenance.
Managed application hosting revenue is recognized monthly as the
services are provided based on a per transaction, per CPU or
percent of customers revenue basis. eStara
e-commerce
optimization service solutions are priced on a per transaction
basis and recognized monthly as the services are provided.
Support and maintenance arrangements are priced based on the
level of support services provided as a percent of net license
fees per annum. Under support and maintenance services,
customers are generally entitled to receive software upgrades
and updates, maintenance releases and technical support.
Professional and educational service revenue includes
implementation, custom application development, technical
consulting and educational training. We bill professional
service fees primarily on a time and materials basis. Education
services are billed as services are provided.
Shift to
increasing ratably recognized revenue
Before 2007, most of our revenue from arrangements involving the
sale of our software was derived from perpetual software
licenses and was recognized at the time the license agreement
was executed and delivery of the software occurred provided that
the other criteria of revenue recognition was met. Beginning in
the first quarter of 2007, a significant number of our perpetual
software licenses also included the sale of our eStara
e-commerce
optimization services solutions or managed application hosting
services. As a result of applying the requirements of
U.S. generally accepted accounting principles
(GAAP) to our evolving business model, the revenue
from an increasing number of our arrangements is being
recognized on a ratable basis over the estimated term of the
contract or arrangement.
The addition of eStara
e-commerce
optimization services and managed application hosting services
solution offerings introduced new products in our portfolio for
which we do not have vendor specific objective evidence of fair
value. As a result, when we sell eStara
e-commerce
optimization services solutions and managed application hosting
services in conjunction with
e-commerce
software, we defer all fees incurred prior to the delivery of
the service solutions and recognize the fees as revenue ratably
over either the term of the contract or estimated life of the
arrangement depending on the specific facts of the arrangement.
In the longer term, we expect this transition to result in
greater stability and predictability in our revenues, and a
pattern of growth in our total GAAP revenue over any current
period that is more reflective of our level of business activity
in that period. In the interim, however, the effect of this
shift in our business model has been to adversely affect our
near term revenue growth and net income.
Key
measures that we use to evaluate our performance:
The change to our business model has required our management to
re-consider the measures that we use to evaluate our business
results. In addition to the traditional measures of financial
performance that are reflected in our results of operations
determined in accordance with GAAP, we also monitor certain
non-GAAP financial measures of the performance of our business.
A non-GAAP financial measure is a numerical measure
of a
21
companys historical or future financial performance that
excludes amounts that are included in the most directly
comparable measure calculated and presented in the GAAP
statement of operations. Among the GAAP and non-GAAP measures
that we believe are most important in evaluating the performance
of our business are the following:
|
|
|
|
|
We use net income and gross margins on our recurring services
revenue and professional services and education services
revenue, to measure our success at meeting cash and non-cash
cost and expense targets in relation to revenue earned.
|
|
|
|
We use product license bookings, a non-GAAP financial measure,
as an important measure of growth in demand for our ATG
e-commerce
platform and the success of our sales and marketing efforts. We
define product license bookings as product license revenue as
reported on our statement of operations plus the contract value
of licenses executed in the current period less revenue that was
recognized from licenses executed in prior periods. We believe
that this measure provides us with an indication of the amount
of new software license business that our direct sales team has
added in the period. Product license revenue associated with a
particular transaction may be deferred for reasons other than
the presence of a managed application hosting or eStara
e-commerce
optimization solutions arrangement, such as the presence of
credit risk or other contractual terms that, under GAAP, require
us to defer the recognition of revenue. The deferred revenue for
such a transaction may be recognized in a single future period
when the conditions that originally required deferral have been
resolved, rather than ratably. We include all additions to
deferred product license revenue in our calculation of product
license bookings.
|
|
|
|
We use cash flow from operations as an indicator of the success
of the business. Because a significant portion of our revenue is
deferred, in the near term our net income may be significantly
different from the cash that we generate from operations. Cash
flow from operations is typically higher in the quarters
following our seasonally stronger product license bookings
quarters, which have historically been the fourth and second
quarters.
|
|
|
|
We use recurring services revenue, as reported on our statement
of operations, to evaluate the success of our strategy to
deliver site-independent online services and the growth of our
ratable revenue sources. We expect that recurring services
revenue will continue to increase as a percentage of total
revenue in future periods. Recurring services revenue includes
eStara
e-commerce
optimization services solutions, application hosting services
and support and maintenance related to ATG
e-commerce
platform sales.
|
|
|
|
We use days sales outstanding (DSO), calculated by
dividing accounts receivable in the period by revenue and
multiplying the result by the number of days in the period. We
also use a modified DSO that adjusts our revenue by the change
in deferred revenue during the period to provide us with a more
accurate picture of the strength of our accounts receivables and
related collection efforts. The percentage of accounts
receivable that are less than 60 days old is an important
factor that our management uses to understand the strength of
our accounts receivable portfolio. This measure is important
because a disproportionate percentage of our product license
bookings often occurs late in the quarter, which has the effect
of increasing our DSO and modified DSO.
|
Trends in
On-Line Sales and our Business
Set forth below is a discussion of recent developments in our
industry that we believe offer us significant opportunities,
present us with significant challenges, and have the potential
to significantly influence our results of operations.
Trend in on-line sales. The growth of
e-commerce
as an important sales channel is the principal driver for demand
for our products and services. According to Forrester Research
and Gartner,
e-commerce
sales grew 21% to $175 billion in 2007 and they are
projected to grow to $335 billion by 2012. Online holiday
sales grew 19% in 2007, five times the rate of growth for
offline stores. As online sales continue to outpace store growth
and the importance of this channel grows, we believe that
retailers require more sophisticated
e-commerce
solutions in order to stay competitive on-line and increase
conversion rates, order size and revenue.
E-commerce
replatforming. Enterprises
periodically upgrade or replace the network and enterprise
applications software and the related hardware systems that they
use to run their
e-commerce
operations in order
22
to take advantage of advances in computing power, system
architectures and enterprise software functionality that enable
them to increase the capabilities of their
e-commerce
systems while simplifying operation and maintenance of these
systems and reducing their cost of ownership. In the
e-commerce
software industry, we refer to these major system upgrades or
replacements as replatforming. We believe that on
average, customers in our market replatform or refresh their
e-commerce
software approximately every five years. In large part due to
the increased significance of the on-line sales channel,
industry analysts believe that
e-commerce
is currently in a period of increased replatforming activity,
with increased corporate spending on
e-commerce
solutions across many of our markets.
Emergence of the on demand model of Software as a
Service. An important trend throughout the
enterprise software industry in recent years has been the
emergence of Software as a Service, or SaaS. SaaS is
a software delivery model whereby a software vendor that has
developed a software application hosts and operates it for use
by its customers over the Internet. The emergence of SaaS has
been driven by customers desire to reduce the costs of
owning and operating critical applications software, while
shifting the risks and burdens associated with operating and
maintaining the software to the software vendor, enabling the
customer to focus its resources on its core business.
Rapidly evolving and increasingly complex customer
requirements. The market for
e-commerce
solutions is constantly and rapidly evolving, as we and our
competitors introduce new and enhanced products, retire older
ones, and react to changes in Internet-related technology and
customer demands, coalescence of product differentiators,
product commoditization and evolving industry standards. To
succeed, we need to enhance our current products and develop new
products on a timely basis to keep pace with market needs,
satisfy the increasingly sophisticated requirements of customers
and leverage strategic alliances with third parties in the
e-commerce
field who have complementary products.
International expansion. We have seen an
increase in sales and pipeline growth in Europe and India. We
seek to invest resources into further developing our reach
internationally. In support of this initiative we have entered
into partnership agreements abroad that will support our
continued growth. As the international market opportunity
continues to develop we will adjust our strategy.
Competitive trend. The market for online
sales, marketing and customer service software is intensely
competitive, subject to rapid technological change, and
significantly affected by new product introductions and other
market activities. We expect competition to persist and
intensify in the future. See Item 1, Business, for a more
detailed discussion of our competition.
Recent
Events
On February 5, 2008, we acquired CleverSet for
approximately $10 million in cash, before adjustments.
CleverSet is a provider of automated personalization engines
used to optimize
e-commerce
experiences by presenting visitors with relevant recommendations
and information. CleverSets next-generation technology has
been shown to significantly lift
e-commerce
revenue by increasing conversion rates and order size. We will
offer these services under our eStara brand. We are currently
determining the allocation of the purchase price based on the
estimated fair values of assets and liabilities as of the
acquisition date. We expect CleverSet to be dilutive to our
earnings in 2008.
Critical
Accounting Policies and Estimates
This Managements Discussion and Analysis of financial
condition and results of operations discusses our consolidated
financial statements, which have been prepared in accordance
with United States generally accepted accounting principles.
The preparation of these financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management
evaluates its estimates and judgments, including those related
to revenue recognition, the allowance for accounts receivable,
research and development costs, the impairment of long-lived
assets and
23
goodwill, income taxes and assumptions for stock-based
compensation. Management bases its estimates and judgments on
historical experience, known trends or events and various other
factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
Definitions
We define our critical accounting policies as those
that require us to make subjective estimates about matters that
are uncertain and are likely to have a material impact on our
financial condition and results of operations or that concern
the specific manner in which we apply GAAP. Our estimates are
based upon assumptions and judgments about matters that are
highly uncertain at the time the accounting estimate is made and
applied and require us to assess a range of potential outcomes.
We believe the following critical accounting policies to be both
those most important to the portrayal of our financial condition
and those that require the most subjective judgment.
Revenue
Recognition
We generate revenue through the sale of product software
licenses and related support and maintenance services, eStara
e-commerce
optimization services solutions, application hosting services
and professional services. Please refer to the footnotes to the
consolidated financial statements contained in Item 8 of
this Annual Report on
Form 10-K
for a more comprehensive discussion of our revenue recognition
policy. Our policy is to recognize revenue when the applicable
revenue recognition criteria have been met, which generally
include the following:
Persuasive evidence of an arrangement We use
a legally binding contract signed by the customer as evidence of
an arrangement. We consider the signed contract to be the most
persuasive evidence of the arrangement.
Delivery has occurred or services rendered
Software and the corresponding access keys are generally
delivered to customers electronically. Electronic delivery
occurs when we provide the customer access to the software. Our
software license agreements generally do not contain conditions
for acceptance. Our eStara
e-commerce
optimization services solutions and application hosting services
are delivered on a monthly basis. Professional services are
generally delivered on a time and material basis.
Price is fixed or determinable We assess
whether a price is fixed or determinable at the outset of the
arrangement, primarily based on the payment terms associated
with the transaction. We have established a history of
collecting under the original contract without providing
concessions on payments, products or services. Our standard
payment terms are primarily net 30 days.
Significant judgment is involved in assessing whether a fee is
fixed or determinable. We must also make judgments when
assessing whether a contract amendment constitutes a concession.
Our experience has been that we are able to determine whether a
fee is fixed or determinable. While we do not expect that
experience to change, if we no longer were to have a history of
collecting under the original contract terms without providing
concessions on licenses, revenue from licenses would be required
to be recognized when cash is received. Such a change could have
a material impact on our results of operations.
Collection is probable We assess the
probability of collecting from each customer at the outset of
the arrangement based on a number of factors, including the
customers payment history and its current
creditworthiness. If in our judgment collection of a fee is not
probable, we do not record revenue until the uncertainty is
removed, which generally means revenue is recognized upon our
receipt of the cash payment. Our experience has been that we are
generally able to estimate whether collection is probable. While
we do not expect that experience to change, if we were to
determine that collection is not probable for any arrangement,
revenue from the elements of an arrangement would be recognized
upon the receipt of cash payment unless other revenue
recognition criteria are not met. Such a change could have a
material impact on our results of operations.
24
Generally we enter into arrangements that include multiple
elements. Such arrangements may include sales of software
licenses and related support and maintenance services in
conjunction with application hosting services, eStara
e-commerce
optimization services solutions or professional services. In
these situations we must determine whether the various elements
meet the criteria to be accounted for as separate elements. If
the elements cannot be separated, revenue is recognized once the
revenue recognition criteria for the entire arrangement have
been met or over the period that our obligations to the customer
are fulfilled, as appropriate. If the elements are determined to
be separable, revenue is allocated to the separate elements
based on vendor specific objective evidence (VSOE)
of fair value and recognized separately for each element when
the applicable revenue recognition criteria for each element
have been met. In accounting for these multiple element
arrangements, we must make determinations about whether elements
can be accounted for separately and make estimates regarding
their relative fair values.
Recording revenue from arrangements that include application
hosting services require us to estimate the estimated life of
the customer arrangement. Pursuant to the application of
relevant GAAP literature, EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or
EITF 00-21,
our arrangements with application hosting services are accounted
for as one unit of accounting. In such situations, we recognize
the entire arrangement fee ratably over the term of the
estimated life of the customer arrangement. Based on our
historical experience with our customers, we estimate the life
of the typical customer arrangement to be approximately four
years.
Our VSOE of fair value for certain product elements of an
arrangement is based upon the pricing in comparable transactions
when the element is sold separately. VSOE of fair value for
support and maintenance is generally based upon our history of
charging our customers stated annual renewal rates. VSOE of fair
value for professional services is generally based on the price
charged when the services are sold separately. Annually, we
evaluate whether or not we have maintained VSOE of fair value
for support and maintenance services and professional services.
We have concluded that we have maintained VSOE of fair value for
both support and maintenance services and professional services
because the majority of our support and maintenance contract
renewal rates and professional service rates per personnel level
fall in a narrow range of variability within each service
offering.
For multiple element arrangements, VSOE of fair value must exist
to allocate the total arrangement fee among all delivered and
undelivered elements of a perpetual license arrangement. If VSOE
of fair value does not exist for all elements to support the
allocation of the total fee among all delivered and undelivered
elements of the arrangement, revenue is deferred until such
evidence does exist for the undelivered elements, or until all
elements are delivered, whichever is earlier. If VSOE of fair
value of all undelivered elements exists but VSOE of fair value
does not exist for one or more delivered elements, revenue is
recognized using the residual method. Under the residual method,
the VSOE of fair value of the undelivered elements is deferred,
and the remaining portion of the arrangement fee is recognized
as revenue as the elements are delivered.
In certain instances, we sell perpetual software licenses with
application hosting services and eStara
e-commerce
optimization services solutions. We do not have VSOE of fair
value for any of these elements. In these situations all
elements in the arrangement for which we receive up-front fees,
which typically includes perpetual software fees, support and
maintenance fees and
set-up and
implementation fees, are recognized as revenue ratably over the
period of providing the application hosting service or eStara
e-commerce
optimization services solutions. We allocate and classify
revenue in our statement of operations based on our evaluation
of VSOE of fair value, or a proxy of fair value thereof,
available for each applicable element of the transaction. We
generally base our proxy of fair value on arms-length
negotiations for the contracted elements. This allocation
methodology requires judgment and is based on our analysis of
our sales transactions.
Allowances
for Accounts Receivable
We maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. We monitor
collections and payments from our customers and determine the
allowance based upon historical experience and specific customer
collection issues. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances would be required.
Generally, we record allowances to revenue based on past credit
memo history in the professional services business.
25
Research
and Development Costs
We account for research and development costs for our software
products that we license to our customers 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.
Costs incurred to develop software applications used in our
eStara
e-commerce
optimization services solutions are accounted for in accordance
with AICPA Statement of
Position 98-1,
Accounting for Computer Software Developed or Obtained for
Internal Use
(SOP 98-1).
Capitalizable costs consist of (a) certain external direct
costs of materials and services incurred in developing or
obtaining internal-use computer software and (b) payroll
and payroll-related costs for employees who are directly
associated with, and who devote time to, the project. These
costs generally consist of internal labor during configuration,
coding and testing activities. Research and development costs
incurred during the preliminary project stage or costs incurred
for data conversion activities, training, maintenance and
general and administrative or overhead costs are expenses as
incurred. Costs that cannot be separated between maintenance of,
and relatively minor upgrades and enhancements to, internal-use
software are also expensed as incurred. Capitalization begins
when the preliminary project stage is complete, management with
the relevant authority authorizes and commits to the funding of
the software project, it is probable the project will be
completed, the software will be used to perform the functions
intended and certain functional and quality standards have been
met.
Our research and development efforts during 2007 related to our
eStara
e-commerce
optimization services were primarily maintenance and data
conversion costs. We did not capitalize any research and
development costs during 2007.
Impairment
or Disposal of Long Lived Assets, including Intangible
Assets
We review our long-lived assets, including intangible assets
subject to amortization, whenever events or changes in
circumstances indicate that the carrying amount of such an asset
may not be recoverable. Recoverability of these assets is
measured by comparison of their carrying amount to the future
undiscounted cash flows the assets are expected to generate. If
such assets are considered impaired, the impairment to be
recognized is equal to the amount by which the carrying value of
the assets exceeds their fair value determined by either a
quoted market price, if any, or a value determined by utilizing
a discounted cash flow technique. In assessing recoverability,
we must make assumptions regarding estimated future cash flows
and discount factors. If these estimates or related assumptions
change in the future, we may be required to record impairment
charges. Intangible assets with determinable lives are amortized
over their estimated useful lives, based upon the pattern in
which the expected benefits will be realized, or on a
straight-line basis, whichever is greater.
Goodwill
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, we evaluate goodwill for impairment
annually, as well as whenever events or changes in circumstances
suggest that the carrying amount may not be recoverable. Because
we have one reporting segment under SFAS 142, we utilize
the entity-wide approach for assessing goodwill for impairment
and compare our market value to our net book value to determine
if impairment exists. No impairment of goodwill resulted from
our evaluation of goodwill in any of the fiscal years presented,
however these impairment tests may result in impairment losses
that could have a material adverse impact on our results of
operations.
26
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, 2007 and 2006, we
have provided a full valuation allowance against our net
deferred tax assets due to the uncertainty surrounding the
realizability of these assets.
On January 1, 2007 we adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, or FIN 48, which did not
result in a material adjustment in the liability for
unrecognized income tax contingencies. The total net liability
for uncertain tax positions was $0.5 million as of
December 31, 2007. If these tax positions were settled in
our favor these liabilities would be reversed and lower our
effective tax rate in the period recorded.
Stock-Based
Compensation Expense
Since January 1, 2006, we have accounted for stock-based
compensation in accordance with SFAS No. 123(R). Under
the fair value recognition provisions of
SFAS No. 123(R), stock-based compensation cost is
measured at the grant date based on the fair value of the award
and is recognized as expense over the vesting period. We use the
Black-Scholes option pricing model to determine the fair value
of our stock option awards. Determining the fair value of
stock-based awards at the grant date requires judgment,
including estimating the expected life of the stock awards and
the volatility of our underlying common stock. Changes to the
assumptions may have a significant impact on the fair value of
stock options, which could have a material impact on our
financial statements. In addition, judgment is also required in
estimating the amount of stock-based awards that are expected to
be forfeited. Should our actual forfeiture rates differ
significantly from our estimates, our stock-based compensation
expense and results of operations could be materially impacted.
27
Results
of Operations
The following table sets forth statement of operations data as a
percentages of total revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
22
|
%
|
|
|
32
|
%
|
|
|
33
|
%
|
Recurring services
|
|
|
56
|
%
|
|
|
50
|
%
|
|
|
49
|
%
|
Professional and education services
|
|
|
22
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Recurring services
|
|
|
18
|
%
|
|
|
11
|
%
|
|
|
7
|
%
|
Professional and education services
|
|
|
21
|
%
|
|
|
19
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
41
|
%
|
|
|
32
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
59
|
%
|
|
|
68
|
%
|
|
|
72
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
18
|
%
|
|
|
21
|
%
|
|
|
20
|
%
|
Sales and marketing
|
|
|
33
|
%
|
|
|
30
|
%
|
|
|
33
|
%
|
General and administrative
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
Restructuring charge (benefit)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
64
|
%
|
|
|
63
|
%
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5
|
)%
|
|
|
5
|
%
|
|
|
6
|
%
|
Interest and other income, net
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
(3
|
)%
|
|
|
7
|
%
|
|
|
6
|
%
|
Provision (benefit) for income taxes
|
|
|
0
|
%
|
|
|
(2
|
)%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(3
|
)%
|
|
|
9
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth gross margin on product license
revenue, recurring services revenue and professional and
education services revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of product license revenue
|
|
|
7
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
Gross margin on product license revenue
|
|
|
93
|
%
|
|
|
95
|
%
|
|
|
94
|
%
|
Cost of recurring services revenue
|
|
|
31
|
%
|
|
|
22
|
%
|
|
|
15
|
%
|
Gross margin on recurring services revenue
|
|
|
69
|
%
|
|
|
78
|
%
|
|
|
85
|
%
|
Cost of professional and education services revenue
|
|
|
98
|
%
|
|
|
101
|
%
|
|
|
101
|
%
|
Gross margin on professional and education services revenue
|
|
|
2
|
%
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
28
Years
ended December 31, 2007, 2006 and 2005
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Total revenue
|
|
$
|
137,060
|
|
|
$
|
103,232
|
|
|
$
|
90,646
|
|
Total revenue increased $33.8 million, or 33%, to
$137.1 million for 2007 from $103.2 million for 2006,
as a result of the acquisition of eStara in October 2006 which
contributed revenue of $26.0 million in 2007 and to growth
in professional and educational services revenue of
$10.5 million. Partially offsetting the increase was a
decrease in product license revenue of $2.3 million that
was directly a result of the change in our business model
requiring us to defer all revenue recognition for fees received
up front when software licenses are sold in conjunction with
managed application hosting services and or eStara
e-commerce
optimization services.
Total revenue increased 14% to $103.2 million for 2006 from
$90.6 million for 2005, due to increases in product license
revenue of $3.0 million, managed application hosting
revenue of $1.8 million and professional service revenue of
$2.6 million. Additionally, the fourth quarter of 2006
included $4.7 million of revenue attributable to the eStara
acquisition.
Revenue generated from international customers increased to
$43.4 million, or 32% of total revenue compared to 25% and
24% of revenue in the years ended December 31, 2006 and
2005, respectively.
No single customer accounted for 10% or more of total revenue
for the years ended December 31, 2007, 2006 or 2005.
We expect full year 2008 revenues in the range of
$159 million to $165 million.
Product
License Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Product license revenue
|
|
$
|
30,529
|
|
|
$
|
32,784
|
|
|
$
|
29,821
|
|
As a percent of total revenue
|
|
|
22
|
%
|
|
|
32
|
%
|
|
|
33
|
%
|
Product license revenue decreased 7%, to $30.5 million, for
2007 from $32.8 million in 2006. Product license revenue
increased 10% to $32.8 million for 2006 from
$29.8 million for 2005. The decrease for 2007 is due to
deferrals of license revenue related to multiple element
transactions in which we are hosting the software or providing
e-commerce
optimization service solutions. This license revenue will be
recognized ratably over the term or life of the arrangement.
Partially offsetting this impact is the recognition of
$1.3 million in product license revenue which was deferred
in prior periods. Product license revenue generated from
international customers increased 37% to $12.3 million for
2007 from $9.0 million in 2006.
Product license revenue increased 10% to $32.8 million for
2006 from $29.8 million for 2005. The increase for 2006 is
due to increased demand for our
e-commerce
product suite due to an improvement in the overall
e-commerce
market. Product license revenue generated from international
customers increased 22% to $9.0 million in 2006 from
$7.4 million for 2005 due to the development of several new
international customers.
Product license revenue as a percentage of our total revenue
declined to 22% in 2007 from 32% in 2006 and 33% in 2005. This
change in revenue mix is due in part to the introduction in late
2006 of new services, such as our eStara
e-commerce
optimization services, that are recognized ratably and included
in our recurring services revenue. The change in revenue mix is
also a result of the change in our business model described
above, that has resulted in an increased percentage of our
software license revenue being recognized ratably. We expect
that this percentage will increase over time as deferred product
license revenue is recognized in future periods.
We expect that this transition in our revenue mix to continue in
the near term. Although the diversity of our customers
preferences regarding delivery models and business terms and the
broad range of our products and services makes it challenging to
predict the rate of this transition from quarter to quarter, we
expect the percent of
29
our product license revenue that is recognized ratably to
increase throughout 2008 to approximately 50% on average for the
year. We expect full year 2008 product license revenues to
increase approximately 18-28% from 2007.
Product
license bookings
Product License Bookings is a non-GAAP term that we define as
product license revenue as reported in our statement of
operations plus the net change in deferred product license
revenue during the period. We believe that this measure provides
us with a comparable result of the amount of new business that
our direct sales team has added in the period. The following
table summarizes our product license bookings for the years
ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Product license revenue
|
|
$
|
30,529
|
|
|
$
|
32,784
|
|
|
$
|
29,821
|
|
Increase in product license deferred revenue
|
|
|
14,166
|
|
|
|
505
|
|
|
|
|
|
Product license deferred revenue recognized
|
|
|
(1,283
|
)
|
|
|
(477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license bookings
|
|
$
|
43,412
|
|
|
$
|
32,812
|
|
|
$
|
29,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect full year 2008 product license bookings to increase
approximately 10-20% from 2007.
Recurring
services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Support and maintenance
|
|
$
|
41,923
|
|
|
$
|
39,303
|
|
|
$
|
38,942
|
|
eStara
e-commerce
optimization services
|
|
|
25,980
|
|
|
|
4,690
|
|
|
|
|
|
On demand
|
|
|
8,769
|
|
|
|
7,120
|
|
|
|
5,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring services revenue
|
|
$
|
76,672
|
|
|
$
|
51,113
|
|
|
$
|
44,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenue
|
|
|
56
|
%
|
|
|
50
|
%
|
|
|
49
|
%
|
Our recurring services revenue increased 50% to
$76.7 million in 2007 from $51.1 million in 2006, as
follows:
|
|
|
|
|
Support and maintenance revenue increased 7% to
$41.9 million in 2007 from $39.3 million in 2006. The
increase is due to growth in our installed base of ATG
e-commerce
software attributable to the increase in product license
bookings partially offset by approximately $1.1 million of
revenue that was deferred due to arrangements that were sold in
conjunction with application hosting services or eStara
e-commerce
optimization services.
|
|
|
|
eStara
e-commerce
optimization services revenue increased to $26.0 million in
2007 from $4.7 million in 2006. Revenues in 2007 included
the full years results of eStara, which we acquired in
October 2006, and represented 34% of total recurring service
revenue for 2007 compared with 9% in 2006.
|
|
|
|
On demand revenue, which represents revenue from arrangements in
which we sold our ATG
e-commerce
software as a service on a hosted basis, increased 23% to
$8.8 million for 2007 from $7.1 million for 2006.
|
Our recurring services revenue increased 16% to
$51.1 million in 2006 from $44.3 million in 2005, as
follows:
|
|
|
|
|
Support and maintenance revenue increased 1%, to
$39.3 million, in 2006 from $38.9 million in 2005. The
increase is due to growth in our installed base of ATG
e-commerce
software.
|
|
|
|
eStara
e-commerce
optimization services revenue increased to $4.7 million in
2006 from a base of zero in 2006 as a result of our acquisition
of eStara in October 2006, and represented 9% of total recurring
revenue in 2006.
|
|
|
|
On demand revenue increased 42% to $7.1 million in 2006
from $5.3 million in 2005 due to an increase of customers
using our managed application hosting services.
|
30
Recurring services revenue as a percent of total revenue
increased to 56% in 2007, from 50% in 2006 and 49% in 2005,
consistent with the change in our business model described
above. We expect our recurring services revenue as a percentage
of total revenue to increase in the future. We expect full year
2008 recurring services revenue to increase approximately 23-24%
from 2007, which includes approximately 10% growth in support
and maintenance and approximately 35-45% growth in eStara and
ATG On Demand.
Professional
and educational services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Professional services
|
|
$
|
27,236
|
|
|
$
|
17,634
|
|
|
$
|
15,046
|
|
Education
|
|
|
2,623
|
|
|
|
1,701
|
|
|
|
1,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total professional & education services revenue
|
|
$
|
29,859
|
|
|
$
|
19,335
|
|
|
$
|
16,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenue
|
|
|
22
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
Professional and education services revenue increased 54% to
$29.9 million in 2007 from $19.3 million in 2006, and
increased as a percentage of total revenue to 22% in 2007 from
18% in 2006, as follows:
|
|
|
|
|
Professional services revenue consists primarily of revenue from
consulting and implementation services, which typically are
performed in the quarters closely following the execution of a
product license transaction. Professional services revenue
increased 55% to $27.2 million in 2007 from
$17.6 million in 2006, due to an increase in implementation
activity associated with growth in our product license bookings
in 2007, partially offset by the deferral of revenue for
services related to managed application hosting and
e-commerce
optimization arrangements that will be recognized ratably once
the services commence.
|
|
|
|
Education revenue, which consists primarily of training of
customer personnel, consultants and strategic partners on the
use of our products and services, increased 54% to
$2.6 million in 2007 from $1.7 million in 2006. The
increase is a result of an increased focus on developing our
partner and consultant practices.
|
Professional and educational services revenue increased 17% to
$19.3 million in 2006 from $16.6 million in 2005, and
represented 18% of total revenue in both 2006 and 2005. The
increase in professional services revenue was driven by the
following:
|
|
|
|
|
Professional services revenues increased 17% to
$17.6 million in 2006 from $15.0 million in 2005. The
increase was a result of growth and product license bookings
during 2006.
|
|
|
|
Education revenue increased 12% to $1.7 million in 2006
from $1.5 million in 2005.
|
International professional and educational service revenue
increased to $7.8 million in 2007 from $3.8 million in
2006 and $3.3 million in 2005. Based on our strategy to
expand our partner ecosystem in order to leverage our
partners global reach and resources, we are increasingly
focusing on testing and certifying partners rather than
continuing to grow our professional services business. For this
reason, we expect minimal growth in professional services
revenue for the full year of 2008.
Cost of
Product License Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of product license revenue
|
|
$
|
2,197
|
|
|
$
|
1,751
|
|
|
$
|
1,816
|
|
As a percent of license revenue
|
|
|
7
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
Gross margin on product license revenue
|
|
$
|
28,332
|
|
|
$
|
31,033
|
|
|
$
|
28,005
|
|
As a percent of license revenue
|
|
|
93
|
%
|
|
|
95
|
%
|
|
|
94
|
%
|
Cost of product license revenue includes salary, benefits and
stock-based compensation costs of fulfillment and engineering
staff dedicated to maintenance of products that are in general
release, the amortization of licenses
31
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 revenue increased 26% to
$2.2 million in 2007 from $1.8 million for 2006. Gross
margin on product license revenue was 93%, or
$28.3 million, in 2007 compared to 95%, or
$31.0 million, in 2006. The increase in the cost of product
license revenue and decrease in gross margin for 2007 was driven
by an increase in royalty costs due to the mix of products sold
and the decrease in product license revenue due to increased
deferrals of product license revenue that will be recognized
ratably in future periods.
Cost of product license revenue was $1.8 million in 2006
and 2005. Gross margin on product license revenue was 95%, or
$31.0 million, in 2006 compared to 94%, or
$28.0 million in 2005. The increase in product license
gross margin for 2006 is attributable to higher product license
revenue, partially offset by an increase in royalties.
We expect full year 2008 gross margin on product license revenue
to approximately be 90% to 93% of product license revenue.
Cost of
Recurring Services Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of recurring services revenue
|
|
$
|
24,119
|
|
|
$
|
11,239
|
|
|
$
|
6,575
|
|
As a percent of recurring services revenue
|
|
|
31
|
%
|
|
|
22
|
%
|
|
|
15
|
%
|
Gross margin on recurring services revenue
|
|
$
|
52,553
|
|
|
$
|
39,874
|
|
|
$
|
37,683
|
|
As a percent of recurring services revenue
|
|
|
69
|
%
|
|
|
78
|
%
|
|
|
85
|
%
|
Cost of recurring services revenues includes salary, benefits,
and stock-based compensation and other costs for recurring
services support staff, costs associated with the hosting
centers, third-party contractors, amortization of technology
acquired in connection with the eStara acquisition and royalties
paid to vendors whose technology is incorporated into the
software we use to provide recurring service products. When we
perform professional consulting and implementation services in
connection with on demand application hosting arrangements, we
generally defer the cost of our implementation and
set-up
activities and amortize these to cost of revenue ratably over
the estimated life of the arrangement once the hosting services
commence. We deferred an aggregate of $3.1 million of
set-up and
implementation costs in 2007.
Cost of recurring services revenue increased 114% to
$24.1 million in 2007 from $11.2 million in 2006.
Gross margin on recurring services revenue was 69%, or
$52.6 million, in 2007 compared to 78%, or
$39.9 million, in 2006. The increase in cost of recurring
services and the resulting decline in gross margin on recurring
services in 2007 was due to direct costs associated with eStara
e-commerce
optimization services for a full year and to the amortization of
intangible assets associated with the acquisition of eStara in
the fourth quarter of 2006.
Cost of recurring services revenue increased 71% to
$11.2 million in 2006 from $6.6 million in 2005. Gross
margin on recurring services revenue was 78%, or
$39.9 million, in 2006 and 85%, or $37.7 million, in
2005.
We expect full year 2008 gross margin on recurring services
revenue to be 66% to 68% of recurring services revenue.
Cost of
Professional and Education Services Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of professional and education services revenue
|
|
$
|
29,223
|
|
|
$
|
19,560
|
|
|
$
|
16,680
|
|
As a percent of professional and education services revenue
|
|
|
98
|
%
|
|
|
101
|
%
|
|
|
101
|
%
|
Gross margin on professional and education services revenue
|
|
$
|
636
|
|
|
$
|
(225
|
)
|
|
$
|
(113
|
)
|
As a percent of professional and education services revenue
|
|
|
2
|
%
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
Cost of professional and education services revenues includes
salary, benefits, and stock-based compensation and other costs
for professional services and technical support staff and
third-party contractors.
32
Cost of professional and education services revenue increased
49% to $29.2 million in 2007 from $19.6 million in
2006. Gross margin on professional and education services
revenue was 2%, or $0.7 million in 2007 compared to (1)%,
or $(0.2) million in 2006. The increase in cost of
professional and education services in 2007 was driven by an
increase in labor related costs for professional services due to
growth in our professional services organization in respect to
increased demand for implementation services resulting from
higher product license bookings in 2007 compared to 2006.
Cost of professional and education services revenue increased
17% to $19.6 million in 2006 from $16.7 million in
2005. Gross margin on professional and education services
revenue was (1)%, or $(0.2) million, in 2006 compared to
(1)%, or $(0.1) million, in 2005. The increased cost of
professional and education services revenue in 2006 was due to
higher professional services salaries and salary related
expenses of $1.3 million due to growth in our headcount,
including stock-based compensation expense of $0.3 million
related to our adoption of SFAS 123R in 2006.
We expect full year 2008 gross margin on professional and
eduction services revenue to approximate 5-10% of professional
and education services revenue.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Research & development expenses
|
|
$
|
24,963
|
|
|
$
|
21,517
|
|
|
$
|
18,481
|
|
As a percent of total revenue
|
|
|
18
|
%
|
|
|
21
|
%
|
|
|
20
|
%
|
Research and development expenses consist primarily of salary,
benefits, and stock-based compensation costs to support product
development. To date, all of our software development costs have
been expensed as research and development in the period incurred.
Research and development expenses increased 16% to
$25.0 million in 2007 from $21.5 million in 2006 and
decreased as a percentage of revenue to 18% from 21%. The
increase in research and development spending was due to a full
year of expenses related to eStara which was acquired in the
fourth quarter of 2006.
Research and development expenses increased 16% to
$21.5 million in 2006 from $18.5 million in 2005 and
increased as a percentage of revenue to 21% from 20%. The
increase was due to an increase in outsourcing services of
$1.6 million, eStara research and development costs of
$0.3 million and stock-based compensation expense of
$0.9 million related to our adoption of SFAS 123R in
2006.
We expect full year 2008 research and development expense will
be approximately 19% of total revenue.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales and marketing expenses
|
|
$
|
44,397
|
|
|
$
|
30,909
|
|
|
$
|
29,396
|
|
As a percent of total revenue
|
|
|
33
|
%
|
|
|
30
|
%
|
|
|
33
|
%
|
Sales and marketing expenses consist primarily of salaries,
commissions, benefits, and stock-based compensation and other
related costs for sales and marketing personnel, travel, public
relations and marketing materials and events.
Sales and marketing expenses increased 44% to $44.4 million
in 2007 from $30.9 million in 2006, and increased as a
percentage of total revenue to 33% from 30%. The increase was
due to an increase in cost of $8.9 million related to the
eStara acquisition, a $2.4 million increase in commission
expense related to higher product license bookings and increased
spending on marketing programs.
We generally recognize commission expense upon contract
execution. This policy has the effect of increasing sales and
marketing expense as a percentage of total revenue when revenue
is deferred and recognized ratably. As a
33
result, another consequence of our change in business model is
that in the near term our sales and marketing expenses are
likely to grow at a rate that exceeds the rate of growth in our
product license revenue.
Sales and marketing expenses increased 5% to $30.9 million
in 2006 from $29.4 million in 2005, and decreased as a
percentage of total revenue to 30% from 33%. The increase in
sales and marketing expense was due to the inclusion of eStara
expenses of $2.0 million, including amortization of
acquired intangibles for customer relationships and stock-based
compensation expense related to the adoption of SFAS 123R
in 2006. The decrease as a percentage of total revenue was due
to faster growth in revenue than in sales and marketing expenses
driven by a $1.9 million decline in outside marketing
services.
We expect that full year 2008 sales and marketing expense will
be approximately 33% of total revenue.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
General and administrative expenses
|
|
$
|
18,211
|
|
|
$
|
12,952
|
|
|
$
|
11,231
|
|
As a percent of total revenue
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
General and administrative expenses consist primarily of
salaries, benefits, and stock-based compensation and other
related costs for internal systems, finance, human resources,
legal and executive related functions.
General and administrative expenses increased 41% to
$18.2 million in 2007 from $13.0 million in 2006, and
increased as a percentage of total revenue to 13% from 12%.
General and administrative expenses increased 15% to
$13.0 million in 2006 from $11.2 million in 2005, and
represented 12% of total revenue in 2006 compared to 12% in 2005.
The increases in 2007 of $5.2 million was attributable to
the inclusion of a full years results for eStara in 2007.
eStara contributed $3.3 million of general and
administrative expenses to 2007 compared to $0.7 million in
2006. Salaries and other related costs, including stock-based
compensation, in general and administrative expenses increased
$2.3 million in 2007, which includes $1.8 million
related to eStara. In 2007 we incurred $1.4 million in
general and administrative expenses related to remedial actions
taken to correct two material weaknesses in our internal control
over financial reporting identified at December 31, 2006,
including outside service fees and other one-time costs. This
increase in general and administrative expenses included
$0.3 million for one-time projects that we do not expect to
recur in 2008.
The increase in 2006 of $1.7 million was attributable to
the acquisition of eStara in the fourth quarter of 2006. eStara
contributed $0.7 million of general and administrative
expenses to 2006. In addition, the increase in 2006 is also due
to stock-based compensation expense of $1.1 million in 2006
related to our adoption of SFAS 123R in 2006.
For 2007, 2006 and 2005, general and administrative expenses as
a percentage of total revenue were 13%, 12% and 12%,
respectively. The increase is primarily attributable to an
increase in external professional services.
We expect that full year 2008 general and administrative
expenses will be approximately 11% of total revenue.
Stock-Based
Compensation Expense
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment,
or SFAS 123R, using the modified prospective transition
method. Compensation cost is calculated on the date of grant
using the fair value of the options as calculated by the
Black-Scholes option pricing model and is recognized ratably
over the employees service period.
The adoption of SFAS 123R on January 1, 2006 had the
following impact on the years ended December 31:
|
|
|
|
|
2007 operating loss before taxes and net loss were higher by
$4.2 million and basic and diluted loss per share were
higher by $0.03, respectively;
|
34
|
|
|
|
|
2006 operating profit before taxes and net income were lower by
$3.6 million and basic and diluted earnings per share were
lower by $0.04 and $0.03, respectively;
|
than if we had continued to account for share based compensation
under APB 25. In 2007, we issued 2.4 million shares of
restricted stock and restricted stock units to our employees and
board members. We expect to use restricted stock and restricted
stock units regularly in the future. Stock compensation expense
related to restricted stock and restricted stock unit awards
made to employees and non-employee directors was
$1.6 million, $0.2 million and $0.0 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
As of December 31, 2007, the total compensation cost
related to unvested awards not yet recognized in the statement
of operations was approximately $12.9 million, which will
be recognized over a weighted average period of approximately
2.0 years.
Restructuring
In 2005 and prior years, we implemented restructuring actions to
realign our operating expenses and facilities with the
requirements of our business and current market conditions and
recorded adjustments to prior restructuring charges. 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 these actions we
have recorded restructuring charges, based in part upon our
estimates of the costs ultimately to be paid for the actions we
took. When 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. As of December 31, 2007, we
had restructuring accruals of $1.1 million. We recorded net
restructuring benefits of $0.1 million in each of 2007 and
2006 and net restructuring charges of $0.9 million in 2005.
For detailed information about our restructuring activities and
related costs and accruals, see Note 10 to the Consolidated
Financial Statements contained in Item 8 of this Annual
Report on
Form 10-K.
Interest
and Other Income, Net
Interest and other income, net increased to $2.2 million in
2007 from $1.7 million in 2006. The increase was primarily
due to an increase in interest income resulting from our higher
average cash and investment balances and foreign currency
exchange gains due to continuing weakness in the
U.S. dollar versus the U.K. Pound Sterling and the Euro.
Cash, cash equivalents and marketable securities increased
$20.9 million in 2007 to $51.9 million at
December 31, 2007.
Interest and other income, net increased to $1.7 million in
2006 from $0.2 million in 2005. The increase is primarily
due to foreign exchange gains in 2006 compared to losses in
2005, together with higher interest income in 2006 compared to
2005.
Provision
(Benefit) for Income Taxes
For the year ended December 31, 2007, we recorded an income
tax provision of $0.4 million. This relates to earnings in
certain of our foreign subsidiaries as well as interest and
penalties related to certain tax positions. In 2006, we recorded
a tax benefit of $2.6 million related to reversing certain
tax reserves in foreign locations that were no longer required
due to closed tax years under audit and the expiration of the
statute of limitations at certain foreign jurisdictions.
We recorded minimal Federal income taxes in 2007 and no Federal
income taxes in 2006 and 2005 due to taxable operating losses
and the use of net operating loss carryforwards. In addition, we
had no foreign income taxes in 2006 due to taxable operating
losses in certain foreign locations in 2006 and the use of net
operating loss carryforwards.
As a result of historical net operating losses incurred and
after evaluating our anticipated performance over our normal
planning horizon, we have provided a full valuation allowance
against our net operating loss carryforwards, research and
development credit carryforwards and other net deferred tax
assets. The primary differences between book and tax income for
2006 are the amortization of capitalized research and
development expenses and payments on lease restructuring
reserves, partially offset by SFAS 123R stock compensation
expenses. We adopted
35
FIN No. 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007 without a material impact to
the financial statements.
eStara
Acquisition
In October 2006, we acquired all of the outstanding shares of
common stock of eStara, Inc. (eStara). The aggregate
purchase price was approximately $49.8 million, which
consisted of $39.2 million of our common stock,
$2.2 million of transaction costs, which primarily
consisted of fees paid for financial advisory, legal and
accounting services and a transaction bonus to eStara employees
of $4.8 million, and $3.6 million in cash paid lieu of
issuing ATG common stock to non accredited investors. We issued
approximately 14.6 million shares of our 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. In addition, we issued 0.3 million shares of
restricted stock, which is being recognized as stock-based
compensation expense over the vesting term. In the preliminary
allocation of the purchase price the excess of the purchase
price over the net assets acquired resulted in goodwill of
$32.1 million.
As required by the merger agreement, in 2007 we recorded
contingent consideration of $2.0 million for earn-out
payments to eStara stockholders and employees as a result of
eStara generating revenue in excess of $25 million but less
than $30 million in 2007. The earn-out payments were made
in cash in March 2008 and consisted of $0.6 million for
stockholders and $1.4 million for employees. The payments
to stockholders were recorded as additional purchase price, and
the amounts paid to employees were accounted for as compensation
expense as it relates to amounts paid to eStara employee
stockholders in excess of that paid to non-employee stockholders.
Liquidity
and Capital Resources
Our capital requirements relate primarily to facilities,
employee infrastructure and working capital requirements. Our
primary sources of liquidity at December 31, 2007 were our
cash, cash equivalents, and short and long-term marketable
securities of $51.9 million.
Cash provided by operating activities was $26.3 million in
2007.
|
|
|
|
|
Although we incurred a net loss of $4.2 million, it
included non-cash expenses for depreciation and amortization of
$7.9 million, and stock-based compensation expense of
$5.8 million.
|
|
|
|
Deferred revenue increased $22.1 million during the year.
Most of the invoices related to this deferred revenue were
collected in 2007 and therefore increased our cash flow from
operations. Under applicable revenue recognition rules, a
portion of this amount was not recognized as revenue in 2007 as
discussed earlier, thereby lowering our net income.
|
|
|
|
Accounts receivable increased $5.6 million, or 17.0% in
2007. The increase in accounts receivable is due to a 33%, or
$33.8 million, increase in revenue and a $12.9 million
increase in product license deferred revenue partially offset by
collections of outstanding accounts receivable balances.
|
|
|
|
Accrued expenses increased $4.1 million in 2007 due to
higher operating expenses in 2007. We will be required to pay
cash in future periods for these expenses that were recorded in
2007.
|
|
|
|
We deferred $3.1 million of costs related to the
implementation of customer websites during 2007. Deferring these
costs has the effect of a cash outflow in 2007 that will be
recorded as expense in future periods.
|
Net cash used in investing activities in 2007 was
$9.9 million, which consisted of $4.8 million of
capital expenditures, primarily computer equipment and software
for the on demand business, $4.2 million in net purchases
of marketable securities, and $0.8 million in payments for
the eStara acquisition.
Net cash used in financing activities was minimal in 2007.
Financing activities consisted primarily of $2.9 million in
proceeds from exercised stock options and the employee stock
purchase plan, offset by $2.9 million in repurchases of our
common stock. On April 19, 2007 our Board of Directors
authorized a stock repurchase program providing for repurchases
of our outstanding common stock of up to $20 million, in
the open market or in privately negotiated transactions, at
times and prices considered appropriate depending on prevailing
market conditions. During the year ended December 31, 2007,
we repurchased 986,960 of shares of our common stock at a
36
cost of $2.9 million. We have authorization to expend an
additional $17.1 million under this program as of
December 31, 2007.
We believe that our balance of $51.9 million in cash, cash
equivalents and marketable securities at December 31, 2007,
along with other working capital and cash expected to be
generated by our operations, will allow us to meet our liquidity
requirements over at least the next twelve months and for the
foreseeable future. However, our actual cash requirements will
depend on many factors, including particularly, overall economic
conditions both domestically and abroad. We may find it
necessary or advisable to seek additional external funds through
public or private securities offerings, strategic alliances or
other financing sources. There can be no assurance that if we
seek external funding, it will be available on favorable terms,
if at all.
We have made the following disbursements in 2008 related to
current and prior business acquisitions: we paid approximately
$9 million in February 2008 in connection with the
CleverSet acquisition and we paid $2 million in March 2008
in contingent consideration related to the eStara acquisition.
Accounts
Receivable and Days Sales Outstanding
Our accounts receivable balance and days sales outstanding and
modified days sales outstanding for the fourth quarter ended
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Days sales outstanding
|
|
|
93
|
|
|
|
97
|
|
Revenue
|
|
$
|
39,326
|
|
|
$
|
32,207
|
|
Accounts receivable, net
|
|
$
|
40,443
|
|
|
$
|
34,554
|
|
Modified days sales outstanding
|
|
|
82
|
|
|
|
89
|
|
Percent of accounts receivable less than 60 days
|
|
|
88
|
%
|
|
|
86
|
%
|
We evaluate our performance on collections on a quarterly basis.
As of December 31, 2007, our days sales outstanding
decreased from December 31, 2006 due to collections on
support and maintenance renewals as well as the effect of
receiving payments on sales that were made during the current
and previous quarter.
Credit
Facility
At December 31, 2007, we maintained a $20.0 million
revolving line of credit with Silicon Valley Bank (the
Bank), pursuant to an Amended and Restated Loan and
Security Agreement (the Loan Agreement) dated as of
June 13, 2002, which provides for borrowings of up to the
lesser of $20.0 million or 80% of eligible accounts
receivable. The line of credit bears interest at the Banks
prime rate (7.25% at December 31, 2007). The line of credit
is secured by all of our tangible and intangible intellectual
and personal property and is subject to financial covenants
including profitability and liquidity coverage. As of
December 31, 2007, we were in compliance with all covenants
in the Loan Agreement, as amended.
While there were no outstanding borrowings under the facility at
December 31, 2007, the bank had previously issued letters
of credit totaling $2.6 million on our behalf, which were
supported by this facility. The letters of credit were issued in
favor of various landlords to secure obligations under facility
leases pursuant to leases expiring through December 2011. As a
result, at December 31, 2007, approximately
$17.4 million was available under the facility.
On January 31, 2008, we allowed the credit facility to
expire and accordingly, we cash collateralized the
$2.6 million in letters of credit with certificates of
deposit, which will be reflected on subsequent balance sheets as
restricted cash.
37
Contractual
Obligations
On December 31, 2007, our contractual cash obligations,
which consist of operating leases and tax obligations, were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Operating Leases
|
|
$
|
12,427
|
|
|
$
|
4,668
|
|
|
$
|
4,811
|
|
|
$
|
2,119
|
|
|
$
|
829
|
|
Tax obligations
|
|
|
1,968
|
|
|
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,395
|
|
|
$
|
6,149
|
|
|
$
|
4,811
|
|
|
$
|
2,119
|
|
|
$
|
1,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (Statement 157).
Statement 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting
principles and establishes a hierarchy that categorizes and
prioritizes the sources to be used to estimate fair value.
Statement 157 also expands financial statement disclosures
about fair value measurements. On February 6, 2008, the
FASB issued FASB Staff Position
(FSP) 157-b,
which delays the effective date of Statement 157 for one
year for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least
annually). Statement 157 and
FSP 157-b
are effective for financial statements issued for fiscal years
beginning after November 15, 2007. We have elected a
partial deferral of Statement 157 under the provisions of
FSP 157-b
related to the measurement of fair value used when evaluating
goodwill, intangible assets and long-lived assets for impairment
and valuing liabilities for exit or disposal activities. The
impact of partially adopting Statement 157 effective
January 1, 2008 is not expected to be material to our
consolidated financial statements.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
SFAS 115 (Statement 159), which
permits but does not require us to measure financial instruments
and certain other items at fair value. Unrealized gains and
losses on items for which the fair value option has not been
elected are reported in earnings. This statement is effective
for financial statements issued for fiscal years beginning after
November 15, 2007. As we have not elected to fair value any
of our financial instruments under the provisions of
Statement 159, the adoption of this statement will not have
any impact to our consolidated financial statements.
In December 2007, the FASB issued
Statement No. 141(R), Business Combinations,
(Statement 141(R)), a replacement of FASB
Statement No. 141. Statement 141(R) is effective for
fiscal years beginning on or after December 15, 2008 and
applies to all business combinations. Statement 141(R)
provides that, upon initially obtaining control, an acquirer
shall recognize 100 percent of the fair values of acquired
assets, including goodwill, and assumed liabilities, with only
limited exceptions, even if the acquirer has not acquired
100 percent of its target. As a consequence, the current
step acquisition model will be eliminated. Additionally,
Statement 141(R) changes current practice, in part, as
follows: (1) contingent consideration arrangements will be
fair valued at the acquisition date and included on that basis
in the purchase price consideration; (2) transaction costs
will be expensed as incurred, rather than capitalized as part of
the purchase price; (3) pre-acquisition contingencies, such
as legal issues, will generally have to be accounted for in
purchase accounting at fair value; (4) in order to accrue
for a restructuring plan in purchase accounting, the
requirements in FASB Statement No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, would
have to be met at the acquisition date; and (5) In-process
research and development charges will no longer be recorded.
While there is no expected impact to our consolidated financial
statements on the accounting for acquisitions completed prior to
December 31, 2008, the adoption of Statement 141(R) on
January 1, 2009 could materially change the accounting for
business combinations consummated subsequent to that date.
In December 2007, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 110
(SAB 110). SAB 110 amends and replaces
Question 6 of Section D.2 of Topic 14,
Share-Based Payment. SAB 110 expresses the views of
the staff regarding the use of the simplified method
in developing an estimate of expected term of plain
vanilla share options in accordance with FASB Statement
No. 123(R), Share Based Payment. The
38
use of the simplified method was scheduled to expire
on December 31, 2007. SAB 110 extends the use of the
simplified method for plain vanilla
awards in certain situations. We currently use the
simplified method to estimate the expected term for
share option grants and we will continue to use the
simplified method until we have sufficient data to
provide a reasonable estimate of expected term in accordance
with SAB 110.
|
|
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 at December 31, 2007 and
2006 primarily due to their short maturity and our intent to
hold the securities to maturity. There have been no significant
changes since December 31, 2007.
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, 2007 and 2006, 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, 2007, we had no outstanding
derivative instruments. We do not use derivative instruments for
trading or speculative purposes.
39
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
Report of
Independent Registered Public Accounting Firm
The Board of
Directors and Stockholders
Art Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of
Art Technology Group, Inc. as of December 31, 2007 and
2006, 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, 2007. 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, 2007 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1(m) to the financial statements,
effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123(R), Share-Based
Payment, using the modified-prospective transition method.
Additionally, as discussed in Note 1(l) to the financial
statement, effective January 1, 2007, the Company adopted
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Art
Technology Group, Inc.s internal control over financial
reporting as of December 31, 2007, 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 11, 2008 expressed an
unqualified opinion thereon.
Boston, Massachusetts
March 11, 2008
40
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,419
|
|
|
$
|
17,911
|
|
Marketable securities
|
|
|
16,460
|
|
|
|
13,312
|
|
Accounts receivable, net of reserves of $958 ($447 in 2006)
|
|
|
40,443
|
|
|
|
34,554
|
|
Deferred costs, current
|
|
|
790
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
2,741
|
|
|
|
2,501
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
94,853
|
|
|
|
68,278
|
|
Property and equipment, net
|
|
|
7,208
|
|
|
|
5,326
|
|
Deferred costs, less current portion
|
|
|
2,337
|
|
|
|
|
|
Marketable securities
|
|
|
1,062
|
|
|
|
|
|
Other assets
|
|
|
1,475
|
|
|
|
1,036
|
|
Intangible assets, net
|
|
|
11,109
|
|
|
|
16,013
|
|
Goodwill
|
|
|
59,675
|
|
|
|
59,328
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
177,719
|
|
|
$
|
149,981
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,619
|
|
|
$
|
2,607
|
|
Accrued expenses
|
|
|
19,082
|
|
|
|
15,791
|
|
Deferred revenue, current portion
|
|
|
35,577
|
|
|
|
23,708
|
|
Accrued restructuring, current portion
|
|
|
855
|
|
|
|
1,213
|
|
Capital lease obligations
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
59,133
|
|
|
|
43,375
|
|
Accrued restructuring, less current portion
|
|
|
225
|
|
|
|
1,031
|
|
Deferred revenue, less current portion
|
|
|
10,777
|
|
|
|
501
|
|
Other liabilities
|
|
|
487
|
|
|
|
|
|
Commitments and contingencies (Note 7 and 11)
|
|
|
|
|
|
|
|
|
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
129,293,221 shares and 127,055,373 shares at
December 31, 2007 and 2006, respectively
|
|
|
1,293
|
|
|
|
1,270
|
|
Additional paid-in capital
|
|
|
305,151
|
|
|
|
296,291
|
|
Accumulated deficit
|
|
|
(195,745
|
)
|
|
|
(191,558
|
)
|
Treasury stock, at cost (986,960 shares at
December 31, 2007)
|
|
|
(2,902
|
)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(700
|
)
|
|
|
(929
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
107,097
|
|
|
|
105,074
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
177,719
|
|
|
$
|
149,981
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
$
|
30,529
|
|
|
$
|
32,784
|
|
|
$
|
29,821
|
|
Recurring services
|
|
|
76,672
|
|
|
|
51,113
|
|
|
|
44,258
|
|
Professional and education services
|
|
|
29,859
|
|
|
|
19,335
|
|
|
|
16,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
137,060
|
|
|
|
103,232
|
|
|
|
90,646
|
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
2,197
|
|
|
|
1,751
|
|
|
|
1,816
|
|
Recurring services
|
|
|
24,119
|
|
|
|
11,239
|
|
|
|
6,575
|
|
Professional and education services
|
|
|
29,223
|
|
|
|
19,560
|
|
|
|
16,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
55,539
|
|
|
|
32,550
|
|
|
|
25,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
81,521
|
|
|
|
70,682
|
|
|
|
65,575
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
24,963
|
|
|
|
21,517
|
|
|
|
18,481
|
|
Sales and marketing
|
|
|
44,397
|
|
|
|
30,909
|
|
|
|
29,396
|
|
General and administrative
|
|
|
18,211
|
|
|
|
12,952
|
|
|
|
11,231
|
|
Restructuring charge (benefit)
|
|
|
(59
|
)
|
|
|
(62
|
)
|
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
87,512
|
|
|
|
65,316
|
|
|
|
59,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,991
|
)
|
|
|
5,366
|
|
|
|
5,582
|
|
Interest and other income, net
|
|
|
2,237
|
|
|
|
1,712
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
(3,754
|
)
|
|
|
7,078
|
|
|
|
5,801
|
|
Provision (benefit) for income taxes
|
|
|
433
|
|
|
|
(2,617
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,187
|
)
|
|
$
|
9,695
|
|
|
$
|
5,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
127,528
|
|
|
|
115,280
|
|
|
|
109,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
127,528
|
|
|
|
120,096
|
|
|
|
111,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Comprehensive
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Income
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Loss
|
|
|
Equity
|
|
|
(Loss)
|
|
Balance, December 31, 2004
|
|
|
108,141,966
|
|
|
$
|
1,081
|
|
|
$
|
249,465
|
|
|
$
|
(207,022
|
)
|
|
$
|
|
|
|
$
|
(1,339
|
)
|
|
$
|
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
|
|
|
|
(201,253
|
)
|
|
|
|
|
|
|
(1,147
|
)
|
|
|
50,160
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,474,897
|
|
|
|
15
|
|
|
|
1,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,550
|
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
327,643
|
|
|
|
3
|
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
661
|
|
|
|
|
|
Issuance of common stock and valuation of options related to
eStara acquisition
|
|
|
14,523,386
|
|
|
|
145
|
|
|
|
38,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,039
|
|
|
|
|
|
Vesting of restricted stock related to the eStara acquisition
|
|
|
45,284
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
Vesting of restricted stock issued under the non-employee
director plan
|
|
|
46,557
|
|
|
|
1
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
Stock based compensation expense related to employee stock awards
|
|
|
|
|
|
|
|
|
|
|
3,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,575
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,695
|
|
|
|
|
|
|
|
|
|
|
|
9,695
|
|
|
$
|
9,695
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
218
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
127,055,373
|
|
|
|
1,270
|
|
|
|
296,291
|
|
|
|
(191,558
|
)
|
|
|
|
|
|
|
(929
|
)
|
|
|
105,074
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,622,028
|
|
|
|
16
|
|
|
|
2,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,047
|
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
410,720
|
|
|
|
4
|
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
901
|
|
|
|
|
|
Vesting of restricted stock related to the eStara acquisition
|
|
|
198,646
|
|
|
|
2
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530
|
|
|
|
|
|
Vesting of restricted stock issued under the non-employee
director plan
|
|
|
6,454
|
|
|
|
1
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(986,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,902
|
)
|
|
|
|
|
|
|
(2,902
|
)
|
|
|
|
|
Stock based compensation expense related to employee stock awards
|
|
|
|
|
|
|
|
|
|
|
5,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,173
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,187
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,187
|
)
|
|
$
|
(4,187
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
229
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
128,306,261
|
|
|
$
|
1,293
|
|
|
$
|
305,151
|
|
|
$
|
(195,745
|
)
|
|
$
|
(2,902
|
)
|
|
$
|
(700
|
)
|
|
$
|
107,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,187
|
)
|
|
|
9,695
|
|
|
$
|
5,769
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,862
|
|
|
|
5,141
|
|
|
|
4,180
|
|
Stock-based compensation expense
|
|
|
5,843
|
|
|
|
3,751
|
|
|
|
|
|
Non-cash impairment charges
|
|
|
|
|
|
|
|
|
|
|
1,167
|
|
Net changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(5,584
|
)
|
|
|
(9,424
|
)
|
|
|
2,940
|
|
Prepaid expense and other current assets
|
|
|
(657
|
)
|
|
|
(1,183
|
)
|
|
|
434
|
|
Deferred costs
|
|
|
(3,127
|
)
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
|
|
|
|
562
|
|
|
|
664
|
|
Accounts payable
|
|
|
1,012
|
|
|
|
(629
|
)
|
|
|
(1,428
|
)
|
Accrued expenses and other liabilities
|
|
|
4,118
|
|
|
|
(169
|
)
|
|
|
310
|
|
Deferred revenue
|
|
|
22,145
|
|
|
|
2,417
|
|
|
|
(4,067
|
)
|
Accrued restructuring
|
|
|
(1,164
|
)
|
|
|
(2,536
|
)
|
|
|
(6,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
26,261
|
|
|
|
7,625
|
|
|
|
3,908
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(21,779
|
)
|
|
|
(18,904
|
)
|
|
|
(14,115
|
)
|
Maturities of marketable securities
|
|
|
17,569
|
|
|
|
15,101
|
|
|
|
13,804
|
|
Purchases of property and equipment
|
|
|
(4,840
|
)
|
|
|
(4,459
|
)
|
|
|
(1,924
|
)
|
Payment of acquisition costs
|
|
|
(829
|
)
|
|
|
(7,153
|
)
|
|
|
(1,010
|
)
|
(Increase) decrease in other assets
|
|
|
(22
|
)
|
|
|
(155
|
)
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,901
|
)
|
|
|
(15,570
|
)
|
|
|
(2,932
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payment on notes payable
|
|
|
|
|
|
|
(198
|
)
|
|
|
(413
|
)
|
Proceeds from the exercise of stock options
|
|
|
2,047
|
|
|
|
1,537
|
|
|
|
1,360
|
|
Proceeds from employee stock purchase plan
|
|
|
901
|
|
|
|
661
|
|
|
|
654
|
|
Repurchase of common stock
|
|
|
(2,902
|
)
|
|
|
|
|
|
|
|
|
Payments on capital leases
|
|
|
(56
|
)
|
|
|
(63
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(10
|
)
|
|
|
1,937
|
|
|
|
1,546
|
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
|
|
158
|
|
|
|
(141
|
)
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
16,508
|
|
|
|
(6,149
|
)
|
|
|
2,750
|
|
Cash and cash equivalents, beginning of period
|
|
|
17,911
|
|
|
|
24,060
|
|
|
|
21,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
34,419
|
|
|
$
|
17,911
|
|
|
$
|
24,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest expense
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
18
|
|
Cash paid for income taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
39
|
|
Supplemental Disclosure of Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock and options related to acquisitions
|
|
$
|
|
|
|
$
|
39,039
|
|
|
$
|
|
|
44
|
|
(1)
|
Organization,
Business and Summary of Significant Accounting
Policies
|
Art Technology Group, Inc. (ATG or the Company) develops and
markets a comprehensive suite of
e-commerce
software products, and provides related services including
support and maintenance, education, application hosting,
professional services and eStara
e-commerce
optimization service solutions for enhancing online sales and
support.
|
|
(a)
|
Principles
of Consolidation
|
The accompanying consolidated financial statements include the
accounts of ATG and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts have been reclassified to conform
to the current period presentation. Such reclasses were not
material to the consolidated financial statements.
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Such estimates relate
to revenue recognition, the allowance for doubtful accounts,
useful lives of fixed assets and identifiable intangible assets,
deferred costs, accrued liabilities, accrued taxes, deferred tax
valuation allowances, and assumptions pertaining to share-based
payments. Actual results could differ from those estimates.
ATG derives revenue from the following sources:
(1) perpetual software licenses, (2) recurring
services, which is comprised of support and maintenance
services, application hosting services and eStara
e-commerce
optimization service solutions, and (3) professional and
education services. ATG sells these product and service
offerings individually or more commonly in multiple element
arrangements under various arrangements as discussed below
(1. Sale of Perpetual Software Licenses, 2. Sale of
Application Hosting Agreements, and 3. Sale of eStara
e-Commerce
Optimization Service Solutions). The Company recognizes revenue
in accordance with Statement of Position
97-2,
Software Revenue Recognition
(SOP 97-2),
or Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition
(SAB 104) applying the provisions of
Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21),
depending on the nature of the arrangement.
Revenue is recognized only when persuasive evidence of an
arrangement exists, the fee is fixed or determinable, the
product or service has been delivered, and collectibility of the
resulting receivable is probable. One of the significant
judgments ATG makes related to revenue recognition is evaluating
the customers ability to pay for the products or services
provided. This judgment is based on a combination of factors,
including the completion of a credit check or financial review,
payment history with the customer and other forms of payment
assurance. Upon the completion of these steps and provided all
other revenue recognition criteria are met, ATG recognizes
revenue consistent with its revenue recognition policies
provided below.
1. Sales
of Perpetual Software Licenses
ATG licenses software under perpetual license agreements and
applies the provisions of
SOP 97-2,
as amended by
SOP 98-9,
Modifications of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions. In accordance with
SOP 97-2
and
SOP 98-9,
revenue from software license agreements is recognized when the
following criteria are met: (1) execution of a legally
binding license agreement, (2) delivery of the software
which is generally through license keys for the software,
(3) the fee is fixed or determinable, as determined by the
Companys customary payment terms, and free of
contingencies or significant uncertainties as to payment, and
(4) collection is deemed probable by management based on a
credit evaluation of the customer. In addition, under multiple
element arrangements, to recognize software license revenue
up-front, the Company must have vendor-specific objective
evidence of fair value of the undelivered elements in the
transaction. Substantially all of the
45
Companys software license arrangements do not include
acceptance provisions. However, if conditions for acceptance
subsequent to delivery are required, revenue is recognized upon
customer acceptance if such acceptance is not deemed to be
perfunctory.
In connection with the sale of its software licenses, ATG sells
support and maintenance services, which are recognized ratably
over the term of the arrangement, typically one year. Under
support and maintenance services, customers receive unspecified
software product upgrades, maintenance and patch releases during
the term, and internet and telephone access to technical support
personnel. Support and maintenance is priced as a percent of the
net software license fee and is based on the contracted level of
support.
Many of the Companys software arrangements also include
professional services for consulting implementation services
sold separately under consulting engagement contracts.
Professional services revenue from these arrangements is
generally accounted for separately from the software license
because the services qualify as a separate element under
SOP 97-2.
The more significant factors considered in determining whether
professional services revenue should be accounted for separately
include the nature of services (i.e., consideration of whether
the services are essential to the functionality of the licensed
product), degree of risk, availability of services from other
vendors, timing of payments and impact of milestones or
acceptance criteria on the realizability of the software license
fee. Professional services revenue under these arrangements is
recognized as the services are performed on a time and materials
basis.
Education revenue, which is recognized as the training is
provided to customers, is derived from instructor led training
classes either at ATG or the customer location.
For software arrangements with multiple elements, the Company
applies the residual method in accordance with
SOP 98-9.
The residual method requires that the portion of the total
arrangement fee attributable to the undelivered elements be
deferred based on its vendor specific objective evidence of fair
value and subsequently recognized over the period as the service
is delivered. The difference between the total arrangement fee
and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements, which
is generally the software license. Vendor specific objective
evidence of fair value for all elements in an arrangement is
based upon the normal pricing for those products and services
when sold separately and for support and maintenance services is
additionally determined by the renewal rate in customer
contracts. The Company has established VSOE of fair value for
support and maintenance services, professional services, and
education. The Company has not established VSOE for its software
licenses, application hosting services or
e-commerce
optimization service solutions. In arrangements that do not
include application hosting services or
e-commerce
optimization service solutions, product license revenue is
generally recognized upon delivery of the software products.
2. Sales
of Application Hosting Services:
ATG derives revenue from application hosting services either
from hosting ATG perpetual software licenses purchased by the
customer or by providing software as a service solution to the
customer in which the customer does not have the rights to the
software license itself but can use the software for the
contracted term. In both situations, ATG recognizes application
hosting revenue in accordance with EITF Issue
No. 00-3,
Application of AICPA Statement of Position
97-2 to
Arrangements that include the Right to Use Software Stored on
Another Entitys Hardware, SAB 104 and
EITF 00-21.
In accordance with
EITF 00-3,
these arrangements are not within the scope of
SOP 97-2,
and as such, ATG applies the provisions of SAB 104 and
EITF 00-21
and accounts for the arrangement as a service contract. Pursuant
to
EITF 00-21,
all elements of the arrangement are considered to be one unit of
accounting. The elements in these arrangements generally include
set-up and
implementation services, support and maintenance services, the
monthly hosting service and in certain instances a perpetual
software license. All fees received up-front under these
arrangements, regardless of the nature of the element, are
deferred until the application hosting service commences, which
is referred to as the go live date. Upon go live,
the up-front fees are recognized ratably over the hosting period
or estimated life of the customer arrangement, whichever is
longer. ATG currently estimates the life of the customer
arrangement to be four years. In addition, the monthly
application hosting service fee is recognized as the application
hosting service is provided.
46
In connection with these arrangements, the costs incurred for
the set-up
and implementation of the application hosting environment and
software are deferred until commencement of the application
hosting service. These costs are amortized to cost of recurring
services revenue ratably over the application hosting period, or
estimated life of the customer arrangement consistent with the
period of recognizing the related revenue under the customer
arrangement. Deferred costs include incremental direct costs
with third parties and certain internal direct costs, such as
direct salary and benefits, related to the
set-up and
implementation services. The Company deferred total costs of
$3.1 million for the year ended December 31, 2007. No
such costs were deferred in 2006 or 2005.
3. Sales
of eStara
e-Commerce
Optimization Services Solutions
ATG derives revenue from
e-commerce
optimization services solutions, which are hosted services that
enable customers to increase their volume of sales. eStara
e-commerce
optimization services solutions are site-independent and are not
required to be used in conjunction with ATGs software
products. These services are a stand-alone independent service
solution that is typically contracted for a one year term. The
Company recognizes revenue in accordance with SAB 104, and
recognizes revenue on a monthly basis as the service is
provided. Fees are generally based on monthly minimums and
transaction volumes. In certain instances eStara
e-commerce
optimization services solutions is bundled with ATG software
arrangements, which typically includes support and maintenance
services and professional services for the perpetual software
license. Since the Company does not have vendor specific
objective evidence of fair value for eStara
e-commerce
optimization services solutions, the up-front fees received
under the arrangement are deferred and recognized ratably over
the period of providing the eStara
e-commerce
optimization services solutions.
In certain instances, the Company sells perpetual software
licenses with application hosting services and eStara
e-commerce
optimization services solutions. As noted above, in these
situations all elements in the arrangement, for which the
Company receives up-front fees, are recognized as revenue
ratably over the period of providing the related service. The
Company allocates and classifies revenue in its statement of
operations based on its evaluation of vendor specific objective
evidence of fair value, or a proxy of fair value thereof,
available for each applicable element of the transaction:
professional services, support and maintenance services,
application hosting services, and or
e-commerce
optimization services solutions. ATG uses the residual method to
determine the amount of revenue to allocate to product license
revenue. As noted, the fee for each element is recognized
ratably, and as such, a portion of software license revenue
recorded in the statement of operations is from these ratably
recognized arrangements.
|
|
(d)
|
Accounts
Receivable and Allowances for Accounts Receivable
|
Accounts receivable represents amounts currently due from
customers. Accounts receivable also include $1.6 million of
unbilled accounts receivable at December 31, 2007 and no
unbilled accounts receivable at December 31, 2006. Unbilled
accounts receivable consist of estimated future billings for
work performed but not yet invoiced to the customer. Unbilled
accounts receivable are generally invoiced within the following
month.
ATG records allowances for accounts receivable based upon a
specific review of all outstanding invoices and unbilled
accounts receivable, known collection issues and historical
experience. ATG also records a provision for estimated sales
returns and allowances on professional service 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,
as a reduction to revenue. These estimates are based on
historical sales returns, analysis of credit memo data and other
known factors and are generally recorded as a reduction in
revenue.
The following is a rollforward of the Companys allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
|
|
|
Deductions/
|
|
|
Balance at End
|
|
|
|
Period
|
|
|
Additions
|
|
|
Write-Offs
|
|
|
of Period
|
|
|
|
(In thousands)
|
|
|
Year Ended December 31, 2005
|
|
$
|
680
|
|
|
$
|
677
|
|
|
$
|
(579
|
)
|
|
$
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
$
|
778
|
|
|
$
|
323
|
|
|
$
|
(654
|
)
|
|
$
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
$
|
447
|
|
|
$
|
1,670
|
|
|
$
|
(1,159
|
)
|
|
$
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
(e)
|
Cost
of Product License Revenues
|
Cost of product license revenues includes salary, benefits, and
stock-based compensation for engineering staff and outsourced
developers dedicated to the maintenance of products that are in
general release, costs of fulfillment, external shipping costs,
the amortization of technology acquired 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 and services.
|
|
(f)
|
Cost
of Recurring Services Revenues
|
Cost of recurring services revenues includes salary, benefits,
and stock-based compensation and other costs for recurring
services support staff, costs associated with the hosting
centers, third-party contractors, amortization of technology
acquired in connection with the eStara acquisition and royalties
paid to vendors whose technology is incorporated into recurring
service products.
|
|
(g)
|
Cost
of Professional and Educational Services Revenues
|
Cost of professional and educational services revenues includes
salary, benefits, and stock-based compensation and other costs
for professional services and technical support staff, and
third-party contractors.
|
|
(h)
|
Net
Income (Loss) Per Share
|
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding during the period. Diluted net income per
share is computed by dividing net income by the weighted average
number of shares of common stock outstanding plus the dilutive
effect of common stock equivalents using the treasury stock
method. Common stock equivalents consist of stock options,
restricted stock and restricted stock unit awards. In accordance
with SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), the assumed proceeds
under the treasury stock method include the average unrecognized
compensation expense of stock options that are
in-the-money
and restricted stock awards. This results in the
assumed buyback of additional shares thereby
reducing the dilutive impact of stock options and restricted
stock awards.
The following table sets forth the computation of basic and
diluted net income (loss) per share for the years ended
December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income (loss)
|
|
$
|
(4,187
|
)
|
|
$
|
9,695
|
|
|
$
|
5,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
basic net income per share
|
|
|
127,528
|
|
|
|
115,280
|
|
|
|
109,446
|
|
Dilutive employee common stock equivalents
|
|
|
|
|
|
|
4,816
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common stock and common stock equivalent
shares outstanding used in computing diluted net income per
share
|
|
|
127,528
|
|
|
|
120,096
|
|
|
|
111,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents
|
|
|
16,506
|
|
|
|
5,237
|
|
|
|
7,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Cash,
Cash Equivalents and Marketable Securities
|
ATG accounts for investments in marketable securities under
SFAS No. 115 (SFAS 115), Accounting for
Certain Investments in Debt and Equity Securities. Under
SFAS 115, investments consisting of cash equivalents and
marketable securities for which the Company has the positive
intent and the ability to hold to maturity are reported at
amortized cost, which approximates fair market value.
48
Cash equivalents are highly liquid investments with maturities
at the date of acquisition of less than 90 days. The
Companys marketable securities are investment grade debt
securities with maturities at the date of acquisition of greater
than 90 days and less than one year. The Companys
long term marketable securities are investment grade debt
securities with a maturity at the date of acquisition in excess
of one year. At December 31, 2007 and 2006, all marketable
securities were classified as
held-to-maturity.
At December 31, 2007 and 2006, the difference between the
carrying value and market value of ATGs marketable
securities was a gross unrealized gain of approximately $7,000
and $2,000, and a gross unrealized loss of $8,000 and $1,000,
respectively. At December 31, 2007 and 2006, the Company
held no mortgage-backed or auction rate securities in its cash,
cash equivalents and marketable security portfolio.
At December 31, 2007 and 2006, cash, cash equivalents and
marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
21,678
|
|
|
$
|
16,750
|
|
Money market accounts
|
|
|
4,453
|
|
|
|
262
|
|
Commercial paper
|
|
|
7,288
|
|
|
|
899
|
|
Certificates of deposit
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
34,419
|
|
|
$
|
17,911
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Maturities within 1 year:
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. Government Agency securities
|
|
$
|
|
|
|
$
|
996
|
|
Certificates of deposit
|
|
|
902
|
|
|
|
1,775
|
|
Commercial paper
|
|
|
9,794
|
|
|
|
4,792
|
|
Corporate debt securities
|
|
|
5,764
|
|
|
|
5,749
|
|
Maturities within 1 to 3 years:
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
1,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
17,522
|
|
|
$
|
13,312
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Property and
equipment at December 31, 2007 and 2006 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Asset Classification
|
|
Estimated Useful Life
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(In thousands)
|
|
|
Computer equipment
|
|
3 years
|
|
$
|
8,729
|
|
|
$
|
5,839
|
|
Leasehold improvements
|
|
Lesser of useful life or life of lease
|
|
|
2,443
|
|
|
|
2,309
|
|
Furniture and fixtures
|
|
5 years
|
|
|
536
|
|
|
|
1,512
|
|
Computer software
|
|
3 years
|
|
|
2,128
|
|
|
|
4,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,836
|
|
|
|
14,535
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(6,628
|
)
|
|
|
(9,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,208
|
|
|
$
|
5,326
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and
equipment was $3.0 million, $2.3 million and
$1.9 million for the years ended December 31, 2007,
2006 and 2005, respectively.
49
During 2007, in connection with the Companys annual
evaluation of its property and equipment for impairment, the
Company identified $5.6 million of fully depreciated assets
that were disposed of or no longer in use. As a result, the
Company wrote off the cost basis and related accumulated
depreciation for these fully depreciated assets with no impact
to the statement of operations.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, ATG reviews the
carrying value of its long-lived assets, including intangible
assets subject to amortization, for impairment whenever events
and circumstances indicate that the carrying value of the assets
may not be recoverable. Recoverability of these assets is
measured by comparing the carrying value of the assets to the
undiscounted cash flows estimated to be generated by those
assets over their remaining economic life. If the undiscounted
cash flows are not sufficient to recover the carrying value of
the assets, the assets are considered impaired. The impairment
loss is measured by comparing the fair value of the assets to
their carrying value. Fair value is determined by either a
quoted market price or a value determined by a discounted cash
flow technique, whichever is more appropriate under the
circumstances involved. There were no impairment charges related
to property and equipment in 2007 and 2006. However, the Company
recorded impairment charges related to property and equipment in
2005, as discussed in Note 10.
|
|
(k)
|
Research
and Development Expenses for Software Products
|
The Company accounts for research and development costs for
software products that are licensed to its customers in
accordance with 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. The Company believes
that the time period from reaching technological feasibility
until the time of general product release is very short. Costs
incurred after technological feasibility is reached are not
material, and accordingly, all such costs are charged to
research and development expense as incurred.
Costs incurred to develop software applications used in the
Companys eStara e-commerce optimization services solutions
are accounted for in accordance with AICPA Statement of Position
98-1, Accounting for Computer Software Developed or Obtained
for Internal Use (SOP 98-1). Capitalizable costs
consists of (a) certain external direct costs of materials
and services incurred in developing or obtaining internal-use
computer software and (b) payroll and payroll-related costs
for employees who are directly associated with, and who devote
time to, the project. These costs generally consist of internal
labor during configuration, coding and testing activities.
Research and development costs incurred during the preliminary
project stage or costs incurred for data conversion activities,
training, maintenance and general and administrative or overhead
costs are expensed as incurred. Costs that cannot be separated
between maintenance of, and relatively minor upgrades and
enhancements to, internal-use software are also expensed as
incurred. Capitalization begins when the preliminary project
stage is complete, management with the relevant authority
authorizes and commits to the funding of the software project,
it is probable the project will be completed, the software will
be used to perform the functions intended and certain functional
and quality standards have been met.
The Companys research and development efforts during 2007
related to its eStara ecommerce optimization services solutions
product were primarily maintenance and data conversion costs. As
such the Company did not capitalize any research and development
costs during 2007.
ATG accounts for income taxes in accordance with the provisions
of SFAS No. 109, Accounting for Income Taxes.
SFAS 109 requires companies to recognize deferred tax
assets and liabilities based on the differences between
financial reporting and tax bases of assets and liabilities and
these differences are measured using the enacted tax rates and
laws that are expected to be in effect when the temporary
differences are expected to reverse. A valuation allowance is
established against net deferred tax assets, if based on the
weighted available evidence, it is
50
more likely than not that all or a portion of the deferred tax
assets will not be realized (see Note 4). As a result of
historical net operating losses incurred, and after evaluating
ATGs anticipated performance over its normal planning
horizon, ATG has provided for a full valuation allowance for its
net operating loss carryforwards, research and development
credit carryforwards and other net deferred tax assets. On
January 1, 2007, the Company adopted FIN 48, which did
not result in an adjustment to its tax contingencies. The total
amount of net unrecognized tax benefits that would favorably
affect the effective income tax rate, if ever recognized in the
financial statements in future periods, is $0.5 million.
|
|
(m)
|
Stock-Based
Compensation
|
In 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R). SFAS 123R supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees,
and amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS 123R is similar
to the approach described in SFAS 123. However,
SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, restricted shares
and restricted share units, 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. On January 1,
2006, ATG adopted SFAS 123R using the modified prospective
transition method as permitted under SFAS 123R. Under this
transition method, compensation cost recognized in 2007 and 2006
includes: (a) compensation cost for all share-based
payments granted before but not yet vested as of
December 31, 2005 based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123,
and (b) compensation cost for all share-based payments
granted after December 31, 2005 based on the grant-date
fair value estimated in accordance with the provisions of
SFAS 123R. In accordance with the modified prospective
method of adoption, results of operations and financial position
for prior periods have not been restated. See Note 5 for
further information relating to stock-based compensation.
|
|
(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. ATGs
comprehensive income consists of net income (loss) and foreign
currency translation adjustments.
|
|
(o)
|
Fair
Value of Financial Instruments
|
Financial instruments mainly consist of cash, cash equivalents
and marketable securities. The carrying amounts of these
instruments approximate their fair values.
|
|
(p)
|
Concentrations
of Credit Risk
|
Financial instruments that potentially subject ATG 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.
The Company sells its products and services to customers in a
variety of industries, including consumer retail, financial
services, manufacturing, communications and technology, travel,
media and entertainment. The Company has credit policies and
standards and routinely assesses the financial strength of its
customers through continuing credit evaluations. The Company
generally does not require collateral or letters of credit from
its customers.
At December 31, 2007 and 2006, no customer accounted for
more than 10% of accounts receivable. No single customer
accounted for more than 10% of total revenues during the years
ended December 31, 2007, 2006 and 2005.
Goodwill represents the excess of the purchase price in a
business combination over the fair value of net tangible and
intangible assets acquired. In accordance with
SFAS No. 142, Goodwill and Other Intangible Assets
51
(SFAS 142), the Company annually evaluates goodwill for
impairment in December, as well as whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Because the Company has one reporting segment under
SFAS 142, it utilizes the entity-wide approach for
assessing goodwill for impairment and compares the
Companys market value to its net book value to determine
if impairment exists. No impairment of goodwill resulted from
this evaluation of goodwill in any of the fiscal years
presented. The following table presents the changes in goodwill
during 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
As of, and For
|
|
|
|
The Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
59,328
|
|
|
$
|
27,347
|
|
Acquisition of eStara
|
|
|
|
|
|
|
32,071
|
|
eStara earn-out payment
|
|
|
621
|
|
|
|
|
|
Collection of accounts receivable previously reserved
|
|
|
(274
|
)
|
|
|
|
|
Reversal of accruals related to Primus acquisition
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59,675
|
|
|
$
|
59,328
|
|
|
|
|
|
|
|
|
|
|
See Note 6 for additional information on the Companys
acquisitions.
The Company reviews identified intangible assets for impairment
whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. The Company
evaluates recoverability of these assets by comparing the
carrying value of the assets to the undiscounted cash flows
estimated to be generated by those assets over their remaining
economic life. If the undiscounted cash flows are not sufficient
to recover the carrying value of the assets, the assets are
considered impaired. The impairment loss is measured by
comparing the fair value of the assets to their carrying values.
Fair value is determined by either a quoted market price or a
value determined by a discounted cash flow technique, whichever
is more appropriate under the circumstances involved.
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.
During 2006, the Company acquired all of the shares of eStara,
Inc. As a result of this acquisition, the Company recorded
$14.0 million of additional intangible assets. See
Note 6 for additional information on this acquisition.
Total intangible assets, which are being amortized, consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Customer relationships
|
|
$
|
11,500
|
|
|
$
|
(6,196
|
)
|
|
$
|
5,304
|
|
|
$
|
11,500
|
|
|
$
|
(3,492
|
)
|
|
$
|
8,008
|
|
Purchased technology
|
|
|
8,900
|
|
|
|
(4,145
|
)
|
|
|
4,755
|
|
|
|
8,900
|
|
|
|
(2,336
|
)
|
|
|
6,564
|
|
Trademarks
|
|
|
1,400
|
|
|
|
(350
|
)
|
|
|
1,050
|
|
|
|
1,400
|
|
|
|
(70
|
)
|
|
|
1,330
|
|
Non-compete agreements
|
|
|
400
|
|
|
|
(400
|
)
|
|
|
|
|
|
|
400
|
|
|
|
(289
|
)
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
22,200
|
|
|
$
|
(11,091
|
)
|
|
$
|
11,109
|
|
|
$
|
22,200
|
|
|
$
|
(6,187
|
)
|
|
$
|
16,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was
$4.9 million, $2.8 million and $2.3 million for
the years ended December 31, 2007, 2006 and 2005,
respectively. The remaining amortization expense will be
recognized
52
over a weighted average period of approximately 2.1 years.
At December 31, 2007, annual amortization expense for
intangible assets is expected to be as follows:
|
|
|
|
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2008
|
|
$
|
4,013
|
|
2009
|
|
|
3,381
|
|
2010
|
|
|
2,709
|
|
2011
|
|
|
1,006
|
|
|
|
|
|
|
Total
|
|
$
|
11,109
|
|
|
|
|
|
|
|
|
(s)
|
Foreign
Currency Translation
|
The financial statements of the Companys foreign
subsidiaries are translated in accordance with
SFAS No. 52, Foreign Currency Translation
(SFAS 52). The functional currency of the
Companys foreign subsidiaries has generally been
determined to be the local currency. ATG translates the assets
and liabilities of its foreign subsidiaries at the exchange
rates in effect at year-end. Before translation, the Company
re-measures foreign currency denominated assets and liabilities
into the functional currency of the respective ATG entity,
resulting in unrealized gains or losses recorded in interest and
other income, net in the accompanying consolidated statements of
operations. Revenues and expenses are translated using average
exchange rates in effect during the year. Gains and losses from
foreign currency translation are recorded to accumulated other
comprehensive loss included in stockholders equity. During
the years ended December 31, 2007, 2006 and 2005, the
Company recorded net gains (losses) of approximately $742,000,
$739,000 and $(402,000), 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.
|
|
(t)
|
Recent
Accounting Pronouncements
|
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (Statement 157).
Statement 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles
and establishes a hierarchy that categorizes and prioritizes the
sources to be used to estimate fair value. Statement 157 also
expands financial statement disclosures about fair value
measurements. On February 6, 2008, the FASB issued FASB
Staff Position (FSP) 157-b, which delays the effective date of
Statement 157 for one year for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually). Statement 157 and
FSP 157-b are effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company
has elected a partial deferral of Statement 157 under the
provisions of FSP 157-b related to the measurement of fair
value used when evaluating goodwill, intangible assets and
long-lived assets for impairment and valuing asset retirement
obligations and liabilities for exit or disposal activities. The
impact of partially adopting Statement 157 effective
January 1, 2008 is not expected to be material to the
Companys consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
SFAS 115 (Statement 159), which
permits but does not require the Company to measure financial
instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has
been elected are reported in earnings. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007. As the Company has not
elected to fair value any of its financial instruments under the
provisions of Statement 159, the adoption of this statement
will not have any impact to its consolidated financial
statements.
In December 2007, the FASB issued Statement No. 141(R),
Business Combinations
(Statement 141(R)), a replacement of FASB
Statement No. 141. Statement 141(R) is effective for
fiscal years beginning on or after December 15, 2008 and
applies to all business combinations. Statement 141(R)
provides that, upon initially obtaining control, an acquirer
shall recognize 100 percent of the fair values of acquired
assets, including goodwill,
53
and assumed liabilities, with only limited exceptions, even if
the acquirer has not acquired 100 percent of its target. As
a consequence, the current step acquisition model will be
eliminated. Additionally, Statement 14(R) changes current
practice, in part, as follows: (1) contingent consideration
arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration;
(2) transaction costs will be expensed as incurred, rather
than capitalized as part of the purchase price;
(3) pre-acquisition contingencies, such as legal issues,
will generally have to be accounted for in purchase accounting
at fair value; (4) in order to accrue for a restructuring
plan in purchase accounting, the requirements in FASB Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, would have to be met at the acquisition
date; and (5) In-process research and development charges
will no longer be recorded. While there is no expected impact to
the Companys consolidated financial statements on the
accounting for acquisitions completed prior to December 31,
2008, the adoption of Statement 141(R) on January 1,
2009 could materially change the accounting for business
combinations consummated subsequent to that date.
In December 2007, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 110 (SAB 110).
SAB 110 amends and replaces Question 6 of Section D.2
of Topic 14, Share-Based Payment. SAB 110
expresses the views of the staff regarding the use of the
simplified method in developing an estimate of
expected term of plain vanilla share options in
accordance with FASB Statement No. 123(R), Share Based
Payment. The use of the simplified method was
scheduled to expire on December 31, 2007. SAB 110
extends the use of the simplified method for
plain vanilla awards in certain situations. The
Company currently uses the simplified method to
estimate the expected term for share option grants, and will
continue to use the simplified method until it has
sufficient data to provide a reasonable estimate of expected
term in accordance with SAB 110.
|
|
(2)
|
Disclosures
About Segments of an Enterprise
|
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information (SFAS 131),
establishes standards for reporting information regarding
operating segments in annual financial statements. SFAS 131
also requires related disclosures about products and services
and geographic areas. Operating segments are identified as
components of an enterprise for which separate discrete
financial information is available for evaluation by the
chief operating decision-maker in making decisions on how to
allocate resources and assess performance. The Companys
chief operating decision-maker is its chief executive officer.
ATG views its operations and managed its business as one segment
with three product offerings: software licenses, recurring
services, and professional and education services. ATG evaluates
these product offerings based on their respective gross margins.
As a result, the financial information disclosed in the
consolidated financial statements represents all of the material
financial information related to our principal operating segment.
Revenues from sources outside of the United States were
approximately $43.4 million, $26.2 million, and
$21.6 million in 2007, 2006 and 2005, respectively.
Revenues from international sources were primarily generated
from customers located in Europe and the Asia/Pacific region.
All of the Companys product sales for the years ended
December 31, 2007, 2006 and 2005, were delivered from
ATGs headquarters located in the United States.
The following table represents the percentage of total revenues
by geographic region from customers for 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
|
68
|
%
|
|
|
75
|
%
|
|
|
76
|
%
|
Europe, Middle East, Africa (excluding UK)
|
|
|
16
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
United Kingdom (UK)
|
|
|
14
|
%
|
|
|
14
|
%
|
|
|
14
|
%
|
Other
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
(3)
|
Credit
Facility and Notes Payable
|
Credit
Facility
At December 31, 2007, the Company maintained a
$20.0 million revolving line of credit with Silicon Valley
Bank (the Bank), pursuant to an Amended and Restated
Loan and Security Agreement (the Loan Agreement)
dated as of June 13, 2002, and amended most recently on
September 25, 2007, which provides for borrowings of up to
the lesser of $20.0 million or 80% of eligible accounts
receivable. The line of credit bears interest at the Banks
prime rate (7.25% at December 31, 2007). 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 profitability and liquidity coverage.
Under the Loan Agreement and Twelfth Loan Modification Agreement
executed on September 25, 2007, the Company is required to
not exceed quarterly net losses of $2.0 million for each
quarter. Additionally, ATG is required to maintain, at all
times, unrestricted cash, which includes cash equivalents and
marketable securities, at the Bank of at least
$20.0 million. As of December 31, 2007, the Company
was in compliance with all covenants in the Loan Agreement, as
amended.
In the event ATG does not comply with the financial covenants
within the line of credit or defaults on any of its provisions,
then the Banks significant remedies include:
(1) declaring all obligations immediately due and payable,
which could include requiring the Company 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 of ATGs account; and (4) putting a
hold on any deposit account held as collateral.
While there were no outstanding borrowings under the facility at
December 31, 2007, the Bank has issued letters of credit
totaling $2.6 million on ATGs behalf, which are
supported by this facility. The letters of credit have been
issued in favor of various landlords to secure obligations under
ATGs facility leases pursuant to leases expiring through
December 2011. As of December 31, 2007, approximately
$17.4 million was available under the facility.
On January 31, 2008, the Company chose to allow the credit
facility to expire. As a result, the Company cash collateralized
the $2.6 million in letters of credit with certificates of
deposit, which will be reflected on subsequent balance sheets as
restricted cash.
Income
Taxes
Income (loss) before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Domestic
|
|
$
|
(7,280
|
)
|
|
$
|
3,176
|
|
|
$
|
5,777
|
|
|
|
|
|
Foreign
|
|
|
3,526
|
|
|
|
3,902
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,754
|
)
|
|
$
|
7,078
|
|
|
$
|
5,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
The provision (benefit) for income taxes shown in the
accompanying consolidated statements of operations is comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
424
|
|
|
|
(2,629
|
)
|
|
|
32
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
433
|
|
|
$
|
(2,617
|
)
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes differs from the
federal statutory rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal tax at statutory rate
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
(4.7
|
)
|
|
|
0.1
|
|
|
|
0.9
|
|
Stock-based compensation
|
|
|
2.8
|
|
|
|
18.7
|
|
|
|
|
|
Meals and entertainment
|
|
|
3.4
|
|
|
|
2.1
|
|
|
|
2.5
|
|
Reversal of previously accrued taxes
|
|
|
|
|
|
|
(36.8
|
)
|
|
|
|
|
Research and development
|
|
|
(13.6
|
)
|
|
|
(34.6
|
)
|
|
|
|
|
Other
|
|
|
1.3
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision before valuation allowance
|
|
|
(45.8
|
)
|
|
|
(8.7
|
)
|
|
|
38.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (use) of fully reserved net operating losses
|
|
|
57.3
|
|
|
|
(28.0
|
)
|
|
|
(37.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
%
|
|
|
(36.7
|
)%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The approximate tax effect of each type of temporary difference
and carryforward is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Restructuring
|
|
$
|
381
|
|
|
$
|
1,025
|
|
Depreciation and amortization
|
|
|
708
|
|
|
|
1,348
|
|
Reserves and accruals
|
|
|
3,903
|
|
|
|
72
|
|
Capitalized expenses
|
|
|
16,781
|
|
|
|
20,450
|
|
US income tax credits
|
|
|
8,164
|
|
|
|
7,643
|
|
Net operating losses
|
|
|
87,717
|
|
|
|
93,218
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
117,654
|
|
|
|
123,756
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(113,245
|
)
|
|
|
(117,797
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,409
|
|
|
|
5,959
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(4,409
|
)
|
|
|
(5,959
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, 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 decreased by $4.6 million primarily
as a result of the reduction of the Companys net operating
loss carryforwards in connection with the liquidation of certain
foreign subsidiaries.
As of December 31, 2007, the Company had net operating loss
carryforwards of approximately $219.1 million for federal
income tax purposes, $173.6 million for state income tax
purposes and approximately $20.8 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 excess compensation deductions for federal and
state income tax purposes, the benefit of which will be recorded
to additional paid-in capital when realized. The Company also
has available federal tax credit carryforwards of approximately
$8.2 million. If not utilized, these carryforwards will
expire at various dates beginning 2011 through 2027. If
substantial changes in the Companys ownership have
occurred or should occur, as defined by Section 382 of the
U.S. Internal Revenue Code (the Code), there could
be annual limitations on the amount of carryforwards that can be
realized in future periods. The Company has completed several
refinancings since its inception and has incurred ownership
changes, as defined under the Code, which could have an impact
on its ability to utilize these tax credit and operating loss
carryforwards.
During the year ended December 31, 2005, the Company
amended its income tax returns for 2001 through 2003 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 $49.1 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 before its acquisition by ATG, limitations imposed under
Section 382 of the Code could have an impact on the
Companys ability to utilize these net operating loss
carryforwards. 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
under current accounting principles.
57
Included in the total net operating loss carryforwards is
approximately $16.7 million acquired as a result of the
acquisition of eStara. This amount includes net operating losses
which may be subject to limitation pursuant to Section 382
of the Code as a result of the acquisition. If eStara incurred
any ownership changes before its acquisition by ATG, limitations
imposed under Section 382 of the Code could have an impact
on our ability to utilize these net operating loss
carryforwards. To the extent that any eStara 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 eStara
under current accounting principles.
In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement
No. 109 (the Interpretation) (FIN 48).
The Interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with SFAS No. 109. The
Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. The Interpretation also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The
Interpretation is effective for fiscal years beginning after
December 15, 2006. The Company has applied the provisions
of the Interpretation effective January 1, 2007 and
accordingly, the adoption of the Interpretation did not have a
material effect on the Companys financial condition,
results of operations or cash flows.
In accordance with FIN 48, the Company recognizes any
interest and penalties related to unrecognized tax benefits in
income tax expense.
During the twelve month period ended December 31, 2007, the
Company recorded an increase to its liability for unrecognized
tax benefits of $313,000 and $20,000 of interest expense, which
relates to positions taken during a prior period. At
December 31, 2007 the Company has accrued $93,000 for
potential interest and penalties. The Company also recorded a
decrease to its liability for unrecognized tax benefits of
$618,000, which relates to positions taken during the current
period. If the Uncertain Tax Positions are ultimately
recognized, the effective tax rates in any future periods would
be favorably affected by approximately $351,000, the balance
will have no impact to the Companys effective tax rate as
a result of the full valuation allowance and amounts accrued as
part of a business combination that would reverse to goodwill.
The Company does not anticipate that its liability for
unrecognized tax benefits will increase or decrease
significantly over the next twelve month period.
A reconciliation of the gross allowance for uncertain tax
positions is as follows (in thousands):
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
4,599
|
|
Increases for tax positions taken during a prior period
|
|
|
313
|
|
Decreases for tax positions taken during the current period
|
|
|
(618
|
)
|
Decreases relating to settlements
|
|
|
|
|
Decreases resulting from the expiration of the statute of
limitations
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
4,294
|
|
|
|
|
|
|
Of this amount, $3.2 million represents various uncertain
positions in the Companys tax net operating loss
carryforward for which the Company has provided a full valuation
allowance.
We file income tax returns in the U.S. federal, various
state and foreign jurisdictions and are generally subject to
examinations by those authorities for all tax years from 2001 to
the present. In addition the Company has historically generated
federal and state tax losses and tax credits since inception
which if utilized in future periods may subject some or all
periods since inception in 1991 to examination.
During 2006, the Company reversed previously accrued taxes of
$2.6 million due to the closure of tax years under audit
and the expiration of the statute of limitations in foreign
locations.
58
|
|
(5)
|
Stock-Based
Compensation and Stockholders Equity
|
Equity
Compensation Plans
The Company grants, or has granted, stock options and other
stock and stock-based awards under the following equity
compensation plans:
1996
Stock Option Plan
In April 1996, the Companys Board of Directors and
stockholders adopted and approved the 1996 Stock Option Plan
(the 1996 Plan). Stock options granted under the
1996 Plan may be either incentive stock options or nonqualified
stock options. In 2004, the Companys stockholders approved
the amendment and restatement of 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 the extension of the
term of the 1996 Plan to December 31, 2013. In May 2007, at
the Companys annual meeting, the stockholders approved the
amendment and restatement of the 1996 Plan to limit the duration
of stock appreciation rights to be exercisable no more than
10 years after the date on which they are granted, remove
the boards discretion as to the transferability of awards
in order to clarify that options are not transferable, remove
the boards ability to substitute another award of the same
or different type for an outstanding award under the plan and
clarify that the effect of an amendment to the plan has the same
impact as to awards under the plan as an amendment and
restatement.
At December 31, 2007, there were 25,600,000 shares
authorized for issuance under the 1996 Plan. The Board of
Directors administers the 1996 Plan and has the authority to
designate participants, determine the number and type of awards
to be granted, the time at which awards are exercisable, the
method of payment and any other terms or conditions of the
awards. Options generally vest quarterly over a two to four-year
period and expire 10 years from the date of grant. As of
December 31, 2007, there were 3,952,130 shares
available for future grant under the 1996 Plan.
1999
Outside Director Stock Option Plan
In May 1999, the Board of Directors and stockholders adopted and
approved the 1999 Outside Director Stock Option Plan
(Director Plan). Under the terms of the Director
Plan, non-employee directors of ATG receive nonqualified options
to purchase shares of ATGs common stock. In 2004, the
stockholders approved the amendment and restatement of 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 the extension of the term of the Director Plan to
December 31, 2013.
On April 4, 2006, the Company amended its Non-Employee
Director Compensation Plan. The changes to the plan provide that
(i) the vesting of the annual stock option awards to the
Companys non-employee directors under the plan change from
quarterly vesting over one year to quarterly vesting over two
years, with full acceleration of vesting upon a change of
control of the Company; and (ii) the amount of the
Companys annual restricted stock awards to the
Companys non-employee directors under the plan increase
from shares of the Companys common stock valued at $2,500
to shares of the Companys common stock valued at $4,500.
On May 17, 2007, at the Companys annual meeting, the
stockholders approved the amendment and restatement of the
Director Plan which (1) clarified that either an amendment
to the Director Plan or an amendment and restatement of the
Director Plan has the same impact as to awards under the
Director Plan and (2) removed the Board of Directors
discretion as to the transferability of awards in order to
clarify that options are not transferable.
As of December 31, 2007, there were 1,101,604 shares
available for future grant under the Director Plan.
Primus
Stock Option Plans
In connection with the acquisition of Primus Knowledge
Solutions, Inc. in 2004, ATG assumed certain options issued
under the Primus Solutions 1999 Stock Incentive Compensation
Plan (the Primus 1999 Plan) and the Primus Solutions
1999 Non-Officer Employee Stock Compensation Plan (Primus
1999 NESC Plan) (together the Primus Stock Option
Plans) subject to the same terms and conditions as set
forth in the Primus Stock Option Plans, adjusted to give effect
to the conversion under the terms of the merger agreement. All
options that ATG
59
assumed pursuant to the Primus Stock Option Plans were fully
vested upon the closing of the acquisition and converted into
options to acquire ATG common stock. Options granted under the
Primus Stock Option Plans typically vested over four years and
have a contractual term of ten years. No additional options will
be granted under the Primus 1999 NESC Plan.
In April 2007, ATGs Board of Directors voted to amend the
Primus Knowledge Solutions, Inc. 1999 Stock Incentive
Compensation Plan. The amendments reduced the number of shares
issuable under the plan; clarified that options may only be
issued at fair market value; clarified that no option may have a
term longer than a 10 years; allowed for the payment of an
option exercise by net exercise; and prohibited loans to
directors or executive officers.
As of December 31, 2007 there were 1,186,917 shares
available for future option grants under the Primus
1999 Plan.
1999
Employee Stock Purchase Plan
In May 1999, the Board of Directors and stockholders adopted and
approved the 1999 Employee Stock Purchase Plan (the Stock
Purchase Plan). The Stock Purchase Plan, as amended,
authorizes the issuance of up to a total of
6,500,000 shares of ATGs common stock to
participating employees. All of the Companys employees,
including directors who are also employees, are eligible to
participate in the Stock Purchase Plan. During each designated
quarterly offering period, each eligible employee may deduct
between 1% and 10% of base pay to purchase shares of our common
stock. The purchase price is 85% of the closing market price of
our common stock on either: (1) the first business day of
the offering period or (2) the last business day of the
offering period, whichever is lower. As of December 31,
2007, there were 875,782 shares available for future
issuance under the Stock Purchase Plan.
Grant-Date
Fair Value
The Company uses the Black-Scholes option pricing model to
calculate the grant-date fair value of an award. Information
pertaining to stock options granted during the years ended
December, 31, 2007, 2006 and 2005 and related assumptions are
noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Stock Options
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Options granted (in thousands)
|
|
|
1,478
|
|
|
|
4,540
|
|
|
|
3,839
|
|
Weighted-average exercise price
|
|
$
|
2.86
|
|
|
$
|
2.64
|
|
|
$
|
1.22
|
|
Weighted average grant date fair value
|
|
$
|
2.25
|
|
|
$
|
2.28
|
|
|
$
|
0.83
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
95.3
|
%
|
|
|
113.2
|
%
|
|
|
93.5
|
%
|
Expected term (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
4.11
|
|
Risk-free interest rate
|
|
|
4.33
|
%
|
|
|
4.68
|
%
|
|
|
3.71
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility The Company has determined that
the historical volatility of its common stock is the best
indicator of the future volatility of its common stock, and
therefore uses historical volatility to estimate the grant-date
fair value of stock options. Historical volatility is calculated
for a period that is commensurate with the stock options
expected term.
Expected term In fiscal 2007 and 2006, the Company
was unable to use historical employee exercise and option
expiration data to estimate the expected term assumption for the
Black-Scholes grant-date fair value calculation. As such, the
Company has utilized the safe harbor provision in SEC Staff
Accounting Bulletin No. 107 to determine the expected
term of its stock options. With respect to options granted on or
before December 31, 2005, the Company was able to use
employee exercise and option expiration data to estimate the
expected term assumption for the Black-Scholes grant-date
valuation.
Risk-free interest rate The yield on zero-coupon
U.S. Treasury securities with a maturity that is
commensurate with the expected term of the option is used as the
risk-free interest rate.
Expected dividend yield The Companys Board of
Directors has never declared dividends nor does it expect to
issue dividends.
60
Stock-Based
Compensation Expense
The Company uses the straight-line attribution method to
recognize stock-based compensation expense for stock options.
The amount of stock-based compensation recognized during a
period is based on the value of the portion of the awards that
are ultimately expected to vest. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. The term forfeitures is
distinct from cancellations or
expirations and represents only the unvested portion
of the surrendered option. The Company has applied an annual
forfeiture rate of 7.0% to all unvested options as of
December 31, 2007. This analysis is re-evaluated quarterly
and the forfeiture rate is adjusted as necessary. Ultimately,
the actual expense recognized over the vesting period will only
be for those shares that vest.
The adoption of SFAS 123R on January 1, 2006 had the
following impact on the year ended December 31:
|
|
|
|
|
2007 operating loss before taxes and net loss were higher by
$4.2 million and basic and diluted loss per share were
higher by $0.03, respectively;
|
|
|
|
2006 operating profit before taxes and net income were lower by
$3.6 million and basic and diluted earnings per share were
lower by $0.04 and $0.03, respectively;
|
than if the Company had continued to account for share based
compensation under APB 25.
The following table details the effect on net income and net
income per share had stock-based compensation expense been
recorded for the year ended December 31, 2005 based on the
fair-value method under SFAS 123.
|
|
|
|
|
|
|
Year Ending
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net income as reported
|
|
$
|
5,769
|
|
Add: Stock-based compensation expense included in reported net
income
|
|
|
|
|
Deduct: Total stock-based compensation expense determined under
fair value method for all awards
|
|
|
(2,553
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
3,216
|
|
|
|
|
|
|
Basic and diluted net income per share:
|
|
|
|
|
As reported
|
|
$
|
0.05
|
|
|
|
|
|
|
Pro forma basic and diluted net income per share:
|
|
$
|
0.03
|
|
|
|
|
|
|
Stock-Based
Compensation Activity
A summary of the activity under the Companys stock option
plans as of December 31, 2007 and changes during the year
then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Aggregate
|
|
|
|
of Options
|
|
|
Per Share
|
|
|
in Years
|
|
|
Intrinsic Value
|
|
|
|
(In thousands, except weighted average exercise price and
|
|
|
|
weighted average remaining contractual term in years)
|
|
|
Outstanding, December 31, 2006
|
|
|
15,229
|
|
|
$
|
2.55
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,487
|
|
|
|
2.87
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,622
|
)
|
|
|
1.27
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(947
|
)
|
|
|
4.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2007
|
|
|
14,147
|
|
|
$
|
2.62
|
|
|
|
6.8
|
|
|
$
|
34,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2007
|
|
|
9,223
|
|
|
$
|
2.77
|
|
|
|
6.1
|
|
|
$
|
24,347
|
|
Options vested or expected to vest
at December 31, 2007
|
|
|
13,748
|
|
|
$
|
2.64
|
|
|
|
6.5
|
|
|
$
|
33,374
|
|
61
|
|
|
(1) |
|
In addition to the vested options, the Company expects a portion
of the unvested options to vest at some point in the future.
Options expected to vest are calculated by applying an estimated
forfeiture rate to the unvested options. |
During the years ended December 31, 2007, 2006 and 2005,
the total intrinsic value of options exercised (i.e. the
difference between the market price at exercise and the price
paid by the employee to exercise the options) was
$3.3 million, $2.5 million, $1.2 million,
respectively. The total amount of cash received from exercise
was $2.0 million, $1.5 million and $1.4 million
in 2007, 2006 and 2005, respectively.
A summary of the Companys restricted share and restricted
share unit (RSU) award activity as of December 31, 2007 and
changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
|
and RSUs
|
|
|
Per Share
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Non-Vested shares outstanding at December 31, 2006
|
|
|
354
|
|
|
$
|
2.52
|
|
Awards granted
|
|
|
2,436
|
|
|
$
|
2.55
|
|
Restrictions lapsed
|
|
|
(209
|
)
|
|
$
|
2.52
|
|
Awards forfeited
|
|
|
(222
|
)
|
|
$
|
2.37
|
|
|
|
|
|
|
|
|
|
|
Non-Vested shares outstanding at December 31, 2007
|
|
|
2,359
|
|
|
$
|
2.57
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2007, the Company
granted 2,435,608 restricted stock shares and restricted stock
units (RSUs) to employees and Board of Directors.
The fair value of the restricted stock and RSUs is based on the
market value of ATGs common stock price on the date of
grant. Stock-based compensation expense related to restricted
stock shares and RSUs is being recognized on a straight-line
basis over the requisite service period. The restricted stock
grants provide the holder with shares of ATG common stock,
which are restricted as to sale until vesting. The RSUs provide
the holder with the right to receive shares of ATG common
stock upon vesting. In 2007, the Company granted
12,908 shares of restricted stock to non-employee members
of the Companys Board of Directors. The Board of
Directors restricted stock grant vests quarterly over one
year. In 2007, the Company granted 140,000 units of RSUs to
non-employee members of the Companys Board of Directors.
The Board of Directors RSU grant vests over one year.
During 2007, the Company granted 2,282,700 RSUs to
employees, which will vest over a four year period. A portion of
the RSU awards granted to executives were subject to performance
criteria, which were deemed probable of achievement at the date
of issuance and were ultimately met in 2007. The fair value of
these performance based awards is being recognized over the
requisite service period under the accelerated method pursuant
to FAS 123R. The RSU performance awards contain additional
provisions which could accelerate vesting if achieved. At
December 31, 2007, the achievement of these additional
provisions is not deemed probable by the Company. As of
December 31, 2007, the unrecognized compensation expense
related to restricted shares and RSUs is $4.9 million.
Stock compensation expense related to restricted stock and
restricted stock unit awards made to employees and non-employee
directors was $1.6 million, $0.2 million and
$0.0 million for the years ended December 31, 2007,
2006 and 2005, respectively.
As of December 31, 2007, there was $12.9 million of
total unrecognized compensation cost related to unvested awards
of stock options, restricted stock and restricted stock units.
That cost is expected to be recognized over a weighted-average
period of approximately 2.0 years.
Adoption
of Shareholders Rights Plan
On September 26, 2001, the Company Board of Directors
adopted a Shareholder Rights Plan (the Shareholder Rights
Plan) pursuant to which preferred stock purchase rights
(Rights) were distributed to stockholders as a
dividend at the rate of one Right for each share of common stock
held of record as of the close of business on
62
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 stockholders.
When exercisable, each Right will entitle stockholders to buy
one one-thousandth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $15.00 per
Right. Subject to certain exceptions, the Rights will be
exercisable after a person or group (except for certain excluded
persons) acquires beneficial ownership of 15% or more of the
Company outstanding common stock or undertakes a tender or
exchange offer which, if consummated, would result in that
person or group beneficially owning 15% or more of the
Companys outstanding common stock. The Rights will be
redeemable by the Board at any time before a person or group
acquires 15% or more of the Companys outstanding common
stock and under certain other circumstances at a redemption
price of $.001 per Right.
Acquisition
of eStara, Inc.
On October 2, 2006, the Company acquired all of the
outstanding shares of common stock of privately held eStara,
Inc., a provider of
e-commerce
optimization service solutions for enhancing online sales and
support initiatives. The aggregate purchase price was
approximately $49.8 million, which consisted of
$39.2 million of ATGs common stock, $2.2 million
of transaction costs, which primarily consisted of fees paid for
financial advisory, legal and accounting services, a transaction
bonus to eStara employees of $4.8 million, and
$3.6 million in cash in lieu of issuing ATG common stock to
non accredited investors. The Company issued approximately
14.6 million shares of its 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. In addition, the Company issued 0.3 million
shares of restricted stock, which is being recognized as
stock-based compensation expense over the vesting term. The
excess of the purchase price over the net assets acquired
resulted in goodwill of $32.1 million at October 2,
2006. Currently, the goodwill associated with the eStara
acquisition will not be deductible for tax purposes.
As required by the merger agreement, in 2007 the Company
recorded contingent consideration of $2 million for
earn-out payments to eStara stockholders and employees as a
result of eStara generating revenue in excess of
$25 million but less than $30 million in 2007. The
earn-out payments were paid in cash in March 2008 and
consisted of $0.6 million to the stockholders and
$1.4 million to employees. The payments to stockholders
were recorded as additional purchase price and added to
goodwill, and the amounts paid to employees were accounted for
as compensation expense as it relates to amounts paid to eStara
employee stockholders in excess of that paid to non-employee
stockholders.
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 eStaras 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 14% to 16%. The discount rate was determined after
consideration of eStaras weighted average cost of capital
and the risk associated with achieving forecast sales related to
the technology and assets acquired from eStara.
63
The purchase price was allocated based on estimated fair values
as of the acquisition date. The following represents the
allocation of the purchase price prior to any subsequent
adjustments in 2007, which related to collection of previously
reserved accounts receivable (See Note 1(q)) (in thousands):
|
|
|
|
|
Cash
|
|
$
|
2,699
|
|
Accounts receivable
|
|
|
3,671
|
|
Other current assets
|
|
|
188
|
|
Property, plant and equipment
|
|
|
167
|
|
Goodwill
|
|
|
32,071
|
|
Intangible assets:
|
|
|
|
|
Customer relationships (estimated useful life of 4 years)
|
|
|
7,300
|
|
Developed product technology (estimated useful life of
5 years)
|
|
|
5,300
|
|
Trademarks (estimated life of 5 years)
|
|
|
1,400
|
|
|
|
|
|
|
Total intangible assets
|
|
|
14,000
|
|
Other long-term assets
|
|
|
37
|
|
Accounts payable
|
|
|
(517
|
)
|
Deferred revenue
|
|
|
(679
|
)
|
Accrued and other expenses
|
|
|
(1,821
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
49,816
|
|
|
|
|
|
|
The consolidated financial statements include the results of
eStara from the date of acquisition. The following pro forma
information assumes the eStara acquisition occurred as of the
beginning of the year presented after giving effect to certain
adjustments, primarily amortization of intangible assets and
reduction of revenues for the fair market value adjustment to
eStaras deferred revenue balance. The pro forma results
are not necessarily indicative of what actually would have
occurred had the acquisition been in effect for the periods
presented or of results that may occur in the future (in
thousands, except per share data):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
|
$
|
113,935
|
|
Net income
|
|
$
|
7,111
|
|
Net income per share basic
|
|
$
|
0.06
|
|
Net income per share assuming dilution
|
|
$
|
0.05
|
|
Acquisition
of CleverSet, Inc.
On February 5, 2008, the Company acquired all the
outstanding shares of common stock of eShopperTools.com, Inc.,
(CleverSet) for a purchase price of approximately
$10 million before adjustments. The purchase of CleverSet
will augment the Companys
e-commerce
optimization solution offerings with CleverSets automated
personalization engines, which present
e-commerce
visitors with relevant recommendations and information designed
to increase conversion rates and order size. The Company is
currently determining the allocation of the purchase price based
on the estimated fair values of the assets and liabilities
acquired as of the acquisition date.
|
|
(7)
|
Commitments
and Contingencies
|
Leases
ATG has offices, primarily for sales and support personnel, in
five domestic locations as well as five foreign countries. At
December 31, 2007, ATGs bank had issued
$2.6 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 through
64
2017. In addition, the Company has operating leases related to
equipment, some of which include purchase options at the end of
the lease term.
The future minimum payments under operating leases as of
December 31, 2007, were as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
4,668
|
|
2009
|
|
|
2,717
|
|
2010
|
|
|
2,094
|
|
2011
|
|
|
1,914
|
|
2012
|
|
|
205
|
|
Thereafter
|
|
|
829
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
12,427
|
|
|
|
|
|
|
Of the $12.4 million in future minimum lease payments,
$2.4 million is included in accrued restructuring charges.
The $2.4 million is reduced to $1.1 million after
taking into consideration contracted sublease income and
estimated operating costs of the various subleased properties
(see Note 10).
The Company recorded rent expense of $3.4 million,
$2.7 million and $3.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Indemnifications
The Company in general agrees to indemnification provisions in
its software license agreements and real estate leases in the
ordinary course of its business.
With respect to software license agreements, these
indemnifications generally include provisions indemnifying the
customer against losses, expenses, and liabilities from damages
that may be awarded against the customer in the event the
Companys software is found to infringe upon the
intellectual property rights of others. The software license
agreements generally limit the scope of and remedies for such
indemnification obligations in a variety of industry-standard
respects. The Company relies on a combination of patent,
copyright, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. The
Company believes such laws and practices, along with its
internal development processes and other policies and practices
limit its exposure related to the indemnification provisions of
the software license agreements. However, in recent years there
has been significant litigation in the United States involving
patents and other intellectual property rights. Companies
providing Internet-related products and services are
increasingly bringing and becoming subject to suits alleging
infringement of proprietary rights, particularly patent rights.
From time to time, the Companys customers have been
subject to third party patent claims, and the Company has agreed
to indemnify these customers from claims to the extent the
claims relate to our products.
With respect to real estate lease agreements or settlement
agreements with landlords, these indemnifications typically
apply to claims asserted against the landlord relating to
personal injury and property damage at the leased premises or to
certain breaches of the Companys contractual obligations
or representations and warranties included in the settlement
agreements. These indemnification provisions generally survive
the termination of the respective agreements, although the
provision generally has the most relevance during the contract
term and for a short period of time thereafter. The maximum
potential amount of future payments that the Company could be
required to make under these indemnification provisions is
unlimited. The Company has purchased insurance that reduces its
monetary exposure for landlord indemnifications, and the Company
has not recorded any claims or paid out any amounts related to
indemnification provisions in its real estate lease agreements.
|
|
(8)
|
Employee
Benefit Plan
|
The Company sponsors a 401(k) Plan covering substantially all
employees. The 401(k) Plan allows eligible employees to make
salary-deferred contributions subject to certain U.S. Internal
Revenue Service limitations. The
65
Company may contribute to the 401(k) Plan at its discretion. The
Company contributed $1.0 million in 2007 and
$0.8 million in 2006 as matching payments under the plan.
However, no contributions were made in 2005.
Accrued expenses at December 31, 2007 and 2006 consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
9,348
|
|
|
$
|
6,609
|
|
Income taxes
|
|
|
1,887
|
|
|
|
1,560
|
|
Professional Fees
|
|
|
3,475
|
|
|
|
1,985
|
|
Other
|
|
|
4,372
|
|
|
|
5,637
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,082
|
|
|
$
|
15,791
|
|
|
|
|
|
|
|
|
|
|
During the years ended 2007, 2006, 2005, 2004, 2003, 2002 and
2001, the Company recorded net restructuring charges/(benefits)
of $(0.1) million, $(0.1) million, $0.9 million,
$3.6 million, $(10.3) million, $18.9 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 Companys
restructuring was to align workforce and facilities needs. The
net benefit recorded in 2006 was related to adjustments to
charges recorded in 2001 and 2003. The net benefit recorded in
2007 was related to adjustments to charges recorded in 2001,
2003 and 2005. 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. During the years 2001 through 2007, the Company
has recorded adjustments to previously recorded restructuring
charges to reflect changes in estimates and assumptions.
As of December 31, 2007, the Company had an accrued
restructuring liability of $1.1 million related to facility
closure costs for net lease obligations. The long-term portion
of the accrued restructuring liability was $0.2 million.
66
A summary of the Companys charges and activity in its
restructuring accruals is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charge (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Facility-rated costs and impairments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,817
|
|
|
$
|
1,488
|
|
|
$
|
1,464
|
|
|
$
|
14,634
|
|
|
$
|
59,418
|
|
|
$
|
78,821
|
|
Employee severance and benefit costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,461
|
|
|
|
1,236
|
|
|
|
3,553
|
|
|
|
7,938
|
|
|
|
15,188
|
|
Asset impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,205
|
|
|
|
4,205
|
|
Exchangeable share settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263
|
|
|
|
1,263
|
|
Marketing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
851
|
|
|
|
851
|
|
Legal and accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charge
|
|
|
|
|
|
|
|
|
|
|
1,817
|
|
|
|
3,949
|
|
|
|
2,700
|
|
|
|
18,187
|
|
|
|
74,080
|
|
|
|
100,733
|
|
Changes in estimates reducing other accruals
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
Adjustments to 2001 action, net
|
|
|
61
|
|
|
|
545
|
|
|
|
(792
|
)
|
|
|
(60
|
)
|
|
|
(8,338
|
)
|
|
|
688
|
|
|
|
1,500
|
|
|
|
(6,396
|
)
|
Adjustments to 2002 action, net
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
(242
|
)
|
|
|
(5,118
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,317
|
)
|
Adjustments to 2003 action, net
|
|
|
71
|
|
|
|
(607
|
)
|
|
|
74
|
|
|
|
(77
|
)
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
Adjustments to 2004 action, net
|
|
|
|
|
|
|
|
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257
|
)
|
Adjustments to 2005 action, net
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to prior actions, net
|
|
|
(59
|
)
|
|
|
(62
|
)
|
|
|
(932
|
)
|
|
|
(379
|
)
|
|
|
(13,046
|
)
|
|
|
688
|
|
|
|
1,500
|
|
|
|
(12,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charge (benefit)
|
|
$
|
(59
|
)
|
|
$
|
(62
|
)
|
|
$
|
885
|
|
|
$
|
3,570
|
|
|
$
|
(10,346
|
)
|
|
$
|
18,875
|
|
|
$
|
75,580
|
|
|
$
|
88,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Adjustments
In 2007, the Company recorded a net benefit of $59,000 based on
adjustments to previously recorded restructuring charges. The
adjustments are in connection with finalizing a contractual
obligation with a landlord, which was offset in part by changes
in estimates resulting in immaterial additional accruals.
2006
Adjustments
In 2006, the Company recorded a net benefit of $62,000 based on
recording adjustments to previously recorded restructuring
charges. The adjustments primarily pertained to adjusting the
estimates of
sub-lease
income and vacancy periods for two leases. The Company recorded
a reversal of $607,000 due to executing
sub-lease
agreements for one location offset by additional charges of
$692,000 for another location to adjust its estimates of
sub-lease
income. In addition, the Company reversed $147,000 of other
accruals no longer needed.
Regarding the additional charges for one lease obligation of
$692,000, in the second quarter of 2006, the Company received
notification from its
sub-tenant
at the Waltham premises that it could no longer fulfill its full
payment obligation. The Company originally recorded the Waltham
facility charge in connection with its 2001 restructuring
action. The Company entered into a settlement agreement with the
Waltham subtenant and received $710,000 in lease cancellation
fees. As a result of this event, the Company re-evaluated its
net lease obligation and adjusted its assumptions for
sub-lease
income and vacancy periods based on current market data,
resulting in a charge of $509,000 in the second quarter of 2006.
In addition, the Company assumed the subtenants obligation
to restore the Waltham facility to the facilitys original
condition. The subtenant had previously issued a
$1.0 million letter of credit to the Companys
landlord to secure the restoration of the facilities to the
original condition. As part of the settlement agreement with the
subtenant and Landlord, the Company received the proceeds from
this $1 million letter of credit. This amount was recorded
in accrued expenses at December 31, 2006. In the fourth
quarter of 2006, the Company updated its assumptions based on
agreeing to terms with a
sub-tenant,
although the agreement has not yet been executed. As a result,
the Company recorded an additional charge in the fourth quarter
of $183,000.
In 2007, the Company settled its obligation with the Waltham
facilitys landlord related to the $1.0 million letter
of credit and returned $0.8 million to the landlord. The
Company was discharged from its obligation related to this
facility, and the remaining $0.2 million was recorded as a
benefit to restructuring charges.
2005
Adjustments
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.
67
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 based on an executed sublease agreement. In accordance
with SFAS 146, the Company recorded the net present value
of the net lease obligation.
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. The Company also re-evaluated its accruals related to
the 2002 action resulting in a reversal of $48,000 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. In addition, the Company recorded
an additional charge of $98,000 for a lease included in the 2003
action pertaining to its estimate of sublease income offset by a
reversal of $24,000 for employee severance.
For additional information pertaining to the Companys
2001, 2002, 2003 and 2004 restructuring actions, refer to the
Companys 2006 Annual Report on
Form 10-K.
The Company has recorded adjustments to its charges based on
changes in estimates and executing contractual arrangements. In
addition, the Company has paid down it obligations related to
these restructuring actions. As noted below, the Company has
provided a rollforward of more current activities of its
restructuring accruals because the historical activity is no
longer relevant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Accrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in estimates reducing accruals
|
|
|
|
|
|
|
|
|
|
$
|
(607
|
)
|
|
|
|
|
|
$
|
(147
|
)
|
|
$
|
(754
|
)
|
Facility related payments
|
|
|
(123
|
)
|
|
|
(143
|
)
|
|
|
(223
|
)
|
|
|
(333
|
)
|
|
|
(1,596
|
)
|
|
|
(2,418
|
)
|
Foreign Currency exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317
|
)
|
|
|
|
|
|
|
(317
|
)
|
Employee related payments
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
Changes in estimates resulting in additional accruals/charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
692
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
$
|
263
|
|
|
$
|
|
|
|
$
|
189
|
|
|
$
|
|
|
|
$
|
1,792
|
|
|
$
|
2,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in estimate reducing accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility related payments
|
|
$
|
(272
|
)
|
|
|
|
|
|
$
|
(131
|
)
|
|
|
|
|
|
$
|
(906
|
)
|
|
$
|
(1,309
|
)
|
Foreign Currency exchange
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Employee related payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in estimates resulting in additional accruals/charges
|
|
|
9
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
61
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
$
|
|
|
|
$
|
|
|
|
$
|
133
|
|
|
$
|
|
|
|
$
|
947
|
|
|
$
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned
Facilities Obligations
At December 31, 2007, the Company had lease arrangements
related to two abandoned facilities whose lease agreements are
ongoing. The restructuring accrual for both locations includes
estimated operating costs offset by
68
sub-lease
income under executed
sub-lease
agreements. A summary of the remaining facility locations and
the timing of the remaining cash payments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Locations
|
|
2008
|
|
|
2009
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Waltham, MA
|
|
$
|
1,384
|
|
|
$
|
346
|
|
|
$
|
1,730
|
|
Reading, UK
|
|
|
537
|
|
|
|
89
|
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility obligations, gross
|
|
|
1,921
|
|
|
|
435
|
|
|
|
2,356
|
|
Contracted sublet income
|
|
|
(1,055
|
)
|
|
|
(192
|
)
|
|
|
(1,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash obligations
|
|
$
|
866
|
|
|
$
|
243
|
|
|
$
|
1,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously disclosed, in 2001, the Company was named as a
defendant in seven purported class action suits that were
consolidated into one action in the United States District Court
for the District of Massachusetts under the caption In re Art
Technology Group, Inc. Securities Litigation. The case alleges
that the Company, and certain of its former officers, violated
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC
Rule 10b-5
promulgated thereunder. In October 2006, the court ruled in the
Companys favor and dismissed the case on summary judgment.
The plaintiffs have appealed the decision. The parties have
filed appeal briefs and it is expected that oral arguments will
be presented in 2008. Management believes that none of the
claims that the plaintiffs have asserted has merit, and the
Company intends to continue to defend the action vigorously.
While the Company cannot predict with certainty the outcome of
the litigation or the appeal, the Company does not expect any
material adverse impact to its business, or the results of its
operations, from this matter.
As previously disclosed, in December 2001, a purported class
action complaint was filed against the Companys wholly
owned subsidiary Primus Knowledge Solutions, Inc., two former
officers of Primus and the underwriters of Primus 1999
initial public offering. The complaints are similar and allege
violations of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934 primarily based on the
allegation that the underwriters received undisclosed
compensation in connection with Primus initial public
offering. The litigation has been consolidated in the United
States District Court for the Southern District of New York
(SDNY) with claims against approximately 300 other
companies that had initial public offerings during the same
general time period. In February 2005, the court issued an
opinion and order granting preliminary approval of a proposed
settlement, subject to certain non-material modifications.
However in June 2007, the court terminated the settlement
process due to the parties inability to certify the
settlement class. Plaintiffs counsel are seeking
certification of a narrower class of plaintiffs and filed
amended complaints in September 2007. The Company believes that
it has meritorious defenses and intends to defend the case
vigorously. While the Company cannot predict the outcome of the
litigation, it does not expect any material adverse impact to
its business, or the results of its operations, from this matter.
The Companys industry is characterized by the existence of
a large number of patents, trademarks and copyrights, and by
increasingly frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. Some of the Companys competitors in the
e-commerce
software and services market have filed or may file patent
applications covering aspects of their technology that they may
claim the Companys technology infringes. Such competitors
could make claims of infringement against the Company with
respect to our products and technology. Additionally, third
parties who are not actively engaged in providing
e-commerce
products or services but who hold or acquire patents upon which
they may allege the Companys current or future products or
services infringe may make claims of infringement against the
Company or the Companys customers. The Companys
agreements with its customers typically require it to indemnify
them against claims of intellectual property infringement
resulting from their use of the Companys products and
services. The Company periodically receives notices from
customers regarding patent license inquiries they have received
which may or may not implicate the Companys indemnity
obligations, and the Company and certain of its customers are
currently parties to litigation in which it is alleged that the
patent rights of others are infringed by the Companys
products or services. Any litigation over intellectual property
rights, whether brought by the Company or by others, could
result in the expenditure of significant financial resources and
the diversion of managements time and efforts. In
addition,
69
litigation in which the Company or its customers are accused of
infringement might cause product shipment or service delivery
delays, require the Company to develop alternative technology or
require the Company to enter into royalty or license agreements,
which might not be available on acceptable terms, or at all. ATG
could incur substantial costs in prosecuting or defending any
intellectual property litigation. These claims, whether
meritorious or not, could be time-consuming, result in costly
litigation, require expensive changes in the Companys
methods of doing business or could require the Company to enter
into costly royalty or licensing agreements, if available. As a
result, these claims could harm the Companys business.
The ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative
impact on the Companys financial position, results of
operations, consolidated balance sheets and cash flows, due to
defense costs, diversion of management resources and other
factors.
(12) Quarterly
Results of Operations (Unaudited)
The following table presents a condensed summary of quarterly
results of operations for the years ended December 31, 2007
and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Total revenues
|
|
$
|
29,232
|
|
|
$
|
32,616
|
|
|
$
|
35,886
|
|
|
$
|
39,326
|
|
Gross profit
|
|
|
17,951
|
|
|
|
19,517
|
|
|
|
21,577
|
|
|
|
22,476
|
|
Net income (loss)
|
|
|
(1,461
|
)
|
|
|
(2,748
|
)
|
|
|
(760
|
)
|
|
|
782
|
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Total revenues
|
|
$
|
23,956
|
|
|
$
|
25,229
|
|
|
$
|
21,840
|
|
|
$
|
32,207
|
|
Gross profit
|
|
|
16,793
|
|
|
|
17,808
|
|
|
|
14,173
|
|
|
|
21,908
|
|
Net income (loss)
|
|
|
2,641
|
|
|
|
2,275
|
|
|
|
(285
|
)
|
|
|
5,064
|
|
Basic and diluted net income (loss) per share
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.04
|
|
70
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
1.
|
Managements
Report on Disclosure Controls and Procedures
|
As of December 31, 2007, we carried out an evaluation,
under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934
Rules 13a-15(e)
and
15d-15(e)).
Our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and
Exchange Commission and that such information is accumulated and
communicated to our management (including our Chief Executive
Officer and Chief Financial Officer) to allow timely decisions
regarding required disclosures. Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are
effective and that we are in compliance with
Rule 13a-15(e)
of the Exchange Act.
|
|
2.
|
Internal
Control over Financial Reporting
|
|
|
(a)
|
Managements
Annual Report on Internal Control Over Financial
Reporting
|
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting and for the
assessment of the effectiveness of internal control over
financial reporting. As defined by the Securities and Exchange
Commission, internal control over financial reporting is a
process designed by, or under the supervision of our principal
executive and principal financial officers and effected by our
Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the consolidated financial
statements in accordance with U.S. generally accepted
accounting principles.
Our internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect our transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of the consolidated
financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our
management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our annual consolidated
financial statements, management has undertaken an assessment of
the effectiveness of our internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or the COSO Framework. Managements
assessment included an evaluation of the design of our internal
control over financial reporting and testing of the operational
effectiveness of those controls. Based on this evaluation,
management has concluded that our internal control over
financial reporting is effective as of December 31, 2007
based on those criteria.
Ernst & Young LLP, our independent registered public
accounting firm, has issued its report on the effectiveness of
internal control over financial reporting as of
December 31, 2007. This report appears below.
71
Report of
Independent Registered Public Accounting Firm
The Board of
Directors and Stockholders
Art Technology Group, Inc.
We have audited Art Technology Group, Inc.s internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Art Technology Group, Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Art Technology Group, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, 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, 2007 and 2006, 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, 2007 of Art
Technology Group, Inc. and our report dated March 11, 2008
expressed an unqualified opinion thereon.
Boston, Massachusetts
March 11, 2008
72
|
|
4.
|
Changes
in internal control over financial reporting.
|
Throughout 2007, we have taken a number of steps to remediate
the material weaknesses in our internal control over financial
reporting that were reported in our Annual Report on
Form 10-K
for the year ended December 31, 2006. These steps, which
were completed during the fourth quarter of 2007, have included
the following:
|
|
|
|
|
Hiring of key leadership accounting personnel to focus on our
technical accounting issues and management of the monthly close
and SEC reporting processes; and
|
|
|
|
Improvement of our documentation and training related to
policies, procedures and controls related to our significant
accounts and processes;
|
|
|
|
Steps to reduce the complexity of our consolidation processes;
and
|
|
|
|
Enhancement of our policies and procedures for accounting review
of our:
|
|
|
|
|
|
Month-end close;
|
|
|
|
Account reconciliation processes;
|
|
|
|
Journal entries; and
|
|
|
|
Write-offs, restructuring-related and purchase
accounting-related entries, and impairment reviews.
|
Except as set forth above, there have been no changes in our
internal control over financial reporting during the fiscal
quarter ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
|
|
Item 9B.
|
Other
information
|
Not applicable
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement pursuant to
Regulation 14A, with respect to our annual meeting of
stockholders to be held on May 22, 2008, to be filed with
the Securities and Exchange Commission (SEC) not later than
April 25, 2008 (the Definitive Proxy Statement
under the headings Election of Class III
Directors, Background Information About Directors
Continuing in Office. Information About Executive
Officers, Compliance with Section 16(a) of The
Exchange Act and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics that
applies to all of our directors, officers and employees,
including our principal executive officer and principal
financial officer. The Code of Business Conduct and Ethics is
posted on our website at
http://www.atg.com/About
ATG/Investors/Corporate Governance/Conduct.
We intend to satisfy the disclosure requirement under
Item 5.05 of
Form 8-K
regarding an amendment to, or waiver from, a provision of this
Code of Business Conduct and Ethics by posting such information
on our website, at the address and location specified above and,
to the extent required by the listing standards of The NASDAQ
Stock Market, by filing a Current Report on
Form 8-K
with the SEC, disclosing such information.
|
|
Item 11.
|
Executive
Compensation
|
The information required under this Item is incorporated herein
by reference to our Definitive Proxy Statement under the
headings Executive Compensation, Director
Compensation, Compensation Committee Interlocks and
Insider Participation, and Compensation Committee
Report.
73
|
|
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 under the
headings Information About Stock Ownership and
Securities Authorized for Issuance under Equity
Compensation Plans.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information, if any, required under this Item is
incorporated herein by reference to our Definitive Proxy
Statement under the headings Related Party
Transactions and Corporate Governance.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required under this Item is incorporated herein
by reference to our Definitive Proxy Statement under the caption
Principal Accountant Fees and Services.
74
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1) Financial
Statements
The following are included in Item 8:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated Balance Sheets as of December 31, 2007 and 2006
|
|
|
|
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005
|
|
|
|
Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss) for the years ended
December 31, 2007, 2006 and 2005
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005
|
|
|
|
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.
We are filing as part of this Report the Exhibits listed in the
Exhibit Index following the signature page to this Report.
75
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 17, 2008.
ART TECHNOLOGY GROUP, INC.
(Registrant)
Robert D. Burke
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities as of
March 17, 2008.
|
|
|
|
|
Name
|
|
Title
|
|
|
|
|
/s/ ROBERT
D. BURKE
Robert
D. Burke
|
|
Chief Executive Officer and President
(Principal Executive Officer)
|
|
|
|
/s/ JULIE
M.B. BRADLEY
Julie
M.B. Bradley
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ MICHAEL
A. BROCHU
Michael
A. Brochu
|
|
Director
|
|
|
|
/s/ DAVID
B. ELSBREE
David
B. Elsbree
|
|
Director
|
|
|
|
/s/ JOHN
R. HELD
John
R. Held
|
|
Director
|
|
|
|
/s/ ILENE
H. LANG
Ilene
H. Lang
|
|
Director
|
|
|
|
/s/ MARY
E. MAKELA
Mary
E. Makela
|
|
Director
|
|
|
|
/s/ DANIEL
C. REGIS
Daniel
C. Regis
|
|
Chairman of the Board
|
|
|
|
/s/ PHYLLIS
S. SWERSKY
Phyllis
S. Swersky
|
|
Director
|
76
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
|
|
|
|
|
|
|
|
This
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Form
|
|
|
|
|
|
Exhibit
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger dated as of January 19, 2008
among ATG, Einstein Acquisition Corp., eShopperTools.com, Inc.,
and the stockholder representative and principal stockholders of
eShopperTools.com, Inc., named therein
|
|
|
|
8-K
|
|
January 25, 2008
|
|
|
10.1
|
|
|
2
|
.2
|
|
Agreement and Plan of Merger dated as of September 18, 2006
among ATG, eStara, Inc., Arlington Acquisition Corp., Storrow
Acquisition Corp., and the stockholder representative and
principal stockholders of eStara named therein
|
|
|
|
8-K
|
|
September 22, 2006
|
|
|
10.1
|
|
|
2
|
.3
|
|
Amendment No. 1 to Agreement and Plan of Merger dated as of
October 2, 2006 among ATG, eStara, Inc. and the stockholder
representative named therein
|
|
|
|
8-K
|
|
October 6, 2006
|
|
|
2.2
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation
|
|
|
|
S-8
|
|
June 12, 2003
|
|
|
4.1
|
|
|
3
|
.2
|
|
Amended and Restated By-Laws
|
|
|
|
S-3
|
|
July 6, 2001
|
|
|
4.2
|
|
|
4
|
.1
|
|
Rights Agreement dated September 26, 2001 with EquiServe
Trust Company, N.A.
(SEC file
no. 000-26679)
|
|
|
|
8-K
|
|
October 2, 2001
|
|
|
4.1
|
|
|
10
|
.1*
|
|
Amended and Restated 1996 Stock Option Plan (including forms of
agreements)
|
|
|
|
10-Q
|
|
August 7, 2007
|
|
|
10.1
|
|
|
10
|
.2*
|
|
Amended and Restated 1999 Outside Director Stock Option Plan
(including forms of agreements)
|
|
|
|
10-Q
|
|
August 7, 2007
|
|
|
10.2
|
|
|
10
|
.3*
|
|
1999 Employee Stock Purchase Plan
|
|
|
|
DEF14A
(proxy
statement)
|
|
April 10, 2006
|
|
|
Annex A
|
|
|
10
|
.4
|
|
Primus 1999 Non-Officer Stock Option Plan
|
|
|
|
10-K
|
|
March 16, 2005
|
|
|
10.4
|
|
|
10
|
.5
|
|
Primus 1999 Stock Incentive Compensation Plan, as amended
|
|
|
|
8-K
|
|
April 25, 2007
|
|
|
99.3
|
|
|
10
|
.6*
|
|
General
Change-in-Control
Policy for Employees
|
|
|
|
10-Q
|
|
November 9, 2004
|
|
|
10.21
|
|
|
10
|
.7*
|
|
Amended and Restated Employment Agreement dated November 8,
2004 with Robert Burke
|
|
|
|
10-Q
|
|
November 9, 2004
|
|
|
10.22
|
|
|
10
|
.8*
|
|
Offer letter with Julie M.B. Bradley dated July 6, 2005
|
|
|
|
10-Q
|
|
November 8, 2005
|
|
|
10.1
|
|
|
10
|
.9*
|
|
Offer letter with John Federman dated September 15, 2006
|
|
X
|
|
|
|
|
|
|
|
|
|
10
|
.10*
|
|
Offer Letter with Andrew Reynolds dated July 23, 2007
|
|
X
|
|
|
|
|
|
|
|
|
|
10
|
.11*
|
|
Resignation Agreement between John Federman and Company, dated
October 9, 2007
|
|
X
|
|
|
|
|
|
|
|
|
|
10
|
.12*
|
|
2007 Executive Management Compensation Plan, as amended,
July 23, 2007
|
|
|
|
10-Q
|
|
November 5, 2007
|
|
|
10.2
|
|
|
10
|
.13*
|
|
Amended and Restated Non-Employee Director Compensation Plan, as
amended
|
|
|
|
10-Q
|
|
August 7, 2007
|
|
|
10.4
|
|
|
10
|
.14
|
|
Lease agreement dated May 6, 2006 with RREEF America REIT
II Corp. PPP
|
|
|
|
10-Q
|
|
May 10, 2006
|
|
|
10.33
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
|
|
|
|
|
|
|
|
This
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Form
|
|
|
|
|
|
Exhibit
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
10
|
.15
|
|
Lease dated October 6, 1999 with Pine Street
Investors I, LLC
|
|
|
|
10-K
|
|
March 28, 2003
|
|
|
10.5
|
|
|
10
|
.16
|
|
First Amendment to Lease dated December 30, 1999 with Pine
Street Investors I, LLC
|
|
|
|
10-K
|
|
March 28, 2003
|
|
|
10.6
|
|
|
10
|
.17
|
|
Second Amendment to Lease dated August 20, 2000 with Pine
Street Investors I, LLC
|
|
|
|
10-K
|
|
March 28, 2003
|
|
|
10.7
|
|
|
10
|
.18
|
|
Third Amendment to Lease dated December 22, 2000 with Pine
Street Investors I, LLC
|
|
|
|
10-K
|
|
March 28, 2003
|
|
|
10.8
|
|
|
10
|
.19
|
|
Fourth Amendment to Lease dated July 15, 2001 with Pine
Street Investors I, LLC
|
|
|
|
10-K
|
|
March 15, 2004
|
|
|
10.10
|
|
|
10
|
.20
|
|
Fifth Amendment to Lease dated March 31, 2003 with Pine
Street Investors I, LLC
|
|
|
|
10-K
|
|
March 15, 2004
|
|
|
10.11
|
|
|
10
|
.21
|
|
Amended and Restated Loan and Security Agreement dated
June 13, 2002 with Silicon Valley Bank
|
|
|
|
10-Q
|
|
August 14, 2002
|
|
|
10.1
|
|
|
10
|
.22
|
|
First Loan Modification Agreement dated September 30, 2002
with Silicon Valley Bank
|
|
|
|
10-Q
|
|
November 14, 2002
|
|
|
10.1
|
|
|
10
|
.23
|
|
Amendment Agreement dated October 4, 2002 with Silicon
Valley Bank
|
|
|
|
10-Q
|
|
November 14, 2002
|
|
|
10.2
|
|
|
10
|
.24
|
|
Second Loan Modification Agreement dated December 20, 2002
with Silicon Valley Bank
|
|
|
|
10-K
|
|
March 28, 2003
|
|
|
10.21
|
|
|
10
|
.25
|
|
Fourth Loan Modification Agreement dated November 26, 2003
with Silicon Valley Bank
|
|
|
|
10-K
|
|
March 15, 2004
|
|
|
10.25
|
|
|
10
|
.26
|
|
Fifth Loan Modification Agreement dated June 2004 with Silicon
Valley Bank
|
|
|
|
10-Q
|
|
August 9, 2004
|
|
|
10.26
|
|
|
10
|
.27
|
|
Letter Agreement re: Loan Arrangement with Silicon Valley Bank
dated June 16, 2004
|
|
|
|
10-Q
|
|
August 9, 2004
|
|
|
10.25
|
|
|
10
|
.28
|
|
Sixth Loan Modification Agreement dated November 24, 2004
with Silicon Valley Bank
|
|
|
|
10-K
|
|
March 16, 2005
|
|
|
10.28
|
|
|
10
|
.29
|
|
Seventh Loan Modification Agreement dated December 21, 2004
with Silicon Valley Bank
|
|
|
|
10-K
|
|
March 16, 2005
|
|
|
10.29
|
|
|
10
|
.30
|
|
Eighth Loan Modification Agreement dated December 30, 2005
with Silicon Valley Bank
|
|
|
|
10-K
|
|
March 16, 2006
|
|
|
10.31
|
|
|
10
|
.31
|
|
Ninth Loan Modification Agreement dated February 10, 2006
with Silicon Valley Bank
|
|
|
|
10-Q
|
|
May 10, 2006
|
|
|
10.32
|
|
|
10
|
.32
|
|
Tenth Loan Modification Agreement dated October 4, 2006
with Silicon Valley Bank
|
|
|
|
8-K
|
|
October 5, 2006
|
|
|
10.1
|
|
|
10
|
.33
|
|
Eleventh Loan Modification Agreement dated May 7, 2007 with
Silicon Valley Bank
|
|
|
|
10-Q
|
|
August 7, 2007
|
|
|
10.5
|
|
|
10
|
.34
|
|
Twelfth Loan Modification Agreement dated September 5, 2007
with Silicon Valley Bank
|
|
|
|
10-Q
|
|
November 5, 2007
|
|
|
10.1
|
|
|
10
|
.35
|
|
Securities Account Control Agreement dated December 20,
2002 with Silicon Valley Bank
|
|
|
|
10-K
|
|
March 28, 2003
|
|
|
10.20
|
|
|
21
|
.1
|
|
Subsidiaries
|
|
X
|
|
|
|
|
|
|
|
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
X
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
|
|
|
|
|
|
|
|
This
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Form
|
|
|
|
|
|
Exhibit
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
31
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
Exchange Act Rules
13a-14 and
15d-14, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
31
|
.2
|
|
Certification of Principal Financial and Accounting Officer
Pursuant to Exchange Act Rules
13a-14 and
15d-14, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
32
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
32
|
.2
|
|
Certification of the Principal Financial and Accounting Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
* Management contract or compensatory plan.
79