e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 000-26679
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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04-3141918
(I.R.S. Employer Identification Number) |
One Main Street, Cambridge, Massachusetts
(Address of principal executive offices)
02142
(Zip Code)
(617) 386-1000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 2, 2008 there were 128,779,383 shares of the Registrants common stock outstanding.
ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-Q
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(UNAUDITED)
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March 31, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
29,177 |
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$ |
34,419 |
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Marketable securities (including restricted cash of $1,669 at March 31, 2008) |
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15,534 |
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16,460 |
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Accounts receivable, net of reserves of $761 ($958 in 2007) |
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36,850 |
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40,443 |
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Deferred costs, current |
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692 |
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790 |
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Prepaid expenses and other current assets |
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4,288 |
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2,741 |
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Total current assets |
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86,541 |
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94,853 |
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Property and equipment, net |
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8,576 |
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7,208 |
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Deferred costs |
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2,613 |
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2,337 |
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Other assets |
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1,376 |
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1,475 |
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Marketable securities (including restricted cash of $419 at March 31, 2008) |
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2,222 |
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1,062 |
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Intangible assets, net |
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11,021 |
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11,109 |
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Goodwill |
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67,522 |
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59,675 |
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Total Assets |
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$ |
179,871 |
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$ |
177,719 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
4,485 |
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$ |
3,619 |
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Accrued expenses |
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16,711 |
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19,082 |
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Deferred revenue, current portion |
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37,501 |
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35,577 |
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Accrued restructuring, current portion |
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857 |
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855 |
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Total current liabilities |
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59,554 |
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59,133 |
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Accrued restructuring, less current portion |
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225 |
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Other liabilities |
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498 |
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487 |
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Deferred revenue, less current portion |
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10,826 |
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10,777 |
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Commitments and contingencies (Note 6 )
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Stockholders equity: |
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Preferred stock, $0.01 par value; authorized -10,000,000 shares; issued and
outstanding-no shares |
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Common stock, $0.01 par value; authorized-200,000,000 shares;
issued 129,693,848 and 129,293,221 shares at March 31, 2008 and
December 31, 2007, respectively |
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1,297 |
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1,293 |
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Additional paid-in capital |
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307,735 |
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305,151 |
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Accumulated deficit |
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(196,587 |
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(195,745 |
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Treasury stock, at cost (986,960 shares at March 31, 2008 and
December 31, 2007) |
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(2,902 |
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(2,902 |
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Accumulated other comprehensive loss |
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(550 |
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(700 |
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Total stockholders equity |
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108,993 |
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107,097 |
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Total Liabilities and Stockholders Equity |
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$ |
179,871 |
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$ |
177,719 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
3
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
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Three months ended |
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March 31, |
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2008 |
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2007 |
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Revenue: |
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Product licenses |
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$ |
9,257 |
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$ |
6,609 |
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Recurring services |
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20,943 |
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17,470 |
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Professional and education services |
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6,330 |
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5,153 |
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Total revenue |
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36,530 |
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29,232 |
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Cost of Revenue: |
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Product licenses |
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387 |
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540 |
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Recurring services |
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7,606 |
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5,143 |
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Professional and education services |
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6,914 |
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5,598 |
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Total cost of revenue |
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14,907 |
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11,281 |
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Gross Profit |
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21,623 |
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17,951 |
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Operating Expenses: |
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Research and development |
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7,021 |
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5,781 |
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Sales and marketing |
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11,537 |
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9,544 |
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General and administrative |
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4,329 |
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4,603 |
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Restructuring benefit |
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(68 |
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Total operating expenses |
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22,887 |
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19,860 |
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Loss from operations |
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(1,264 |
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(1,909 |
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Interest and other income, net |
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628 |
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448 |
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Loss before provision for income taxes |
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(636 |
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(1,461 |
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Provision for income taxes |
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206 |
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Net loss |
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$ |
(842 |
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$ |
(1,461 |
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Basic and diluted net loss per share |
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$ |
(0.01 |
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$ |
(0.01 |
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Basic and diluted weighted average common
shares outstanding |
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128,435 |
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127,194 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
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Three months ended March 31, |
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2008 |
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2007 |
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Cash Flows from Operating Activities: |
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Net loss |
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$ |
(842 |
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$ |
(1,461 |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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2,028 |
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1,854 |
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Stock-based compensation expense |
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1,830 |
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1,084 |
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Net changes in current assets and liabilities: |
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Accounts receivable |
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3,725 |
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4,605 |
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Prepaid expenses and other current assets |
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(22 |
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(1,834 |
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Deferred costs |
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(178 |
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(284 |
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Accounts payable |
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703 |
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389 |
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Accrued expenses and other liabilities |
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(1,899 |
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(2,171 |
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Deferred revenue |
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1,973 |
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6,223 |
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Accrued restructuring |
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(223 |
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(328 |
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Net cash provided by operating activities |
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7,095 |
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8,077 |
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Cash Flows from Investing Activities: |
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Purchases of marketable securities |
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(9,196 |
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(1,678 |
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Maturities of marketable securities |
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11,050 |
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4,650 |
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Purchases of property and equipment |
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(2,375 |
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(1,399 |
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Collateralization of letters of credit |
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(2,088 |
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Payment of acquisition costs, net of cash acquired |
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(10,673 |
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(793 |
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Increase in other assets |
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9 |
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Net cash (used in) provided by investing activities |
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(13,282 |
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789 |
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Cash Flows from Financing Activities: |
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Proceeds from exercise of stock options |
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509 |
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234 |
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Proceeds from employee stock purchase plan |
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250 |
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202 |
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Payments on capital leases |
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(17 |
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Net cash provided by financing activities |
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759 |
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419 |
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Effect of foreign exchange rate changes on cash and cash equivalents |
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186 |
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(68 |
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Net (decrease) increase in cash and cash equivalents |
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(5,242 |
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9,217 |
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Cash and cash equivalents, beginning of period |
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34,419 |
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17,911 |
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Cash and cash equivalents, end of period |
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$ |
29,177 |
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$ |
27,128 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) 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 unaudited condensed consolidated financial statements of the Company have been
prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on
Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include
all of the information and footnotes required by United States generally accepted accounting
principles, and while the Company believes that the disclosures presented are adequate to make the
information presented not misleading, these financial statements should be read in conjunction with
the audited financial statements and related notes included in the Companys 2007 Annual Report on
Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements and notes contain all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the Companys financial position, results of
operations and cash flows at the dates and for the periods indicated. The operating results for the
three months ended March 31, 2008 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2008.
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.
(b) Use of Estimates
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.
(c) Accounts Receivable
Accounts receivable represents amounts currently due from customers for which revenue has been
recognized or is being recognized ratably in future periods. Accounts receivable also included $1.4
million and $1.6 million of unbilled accounts receivable at March 31, 2008 and December 31, 2007,
respectively. Unbilled receivables consist of future billings for work performed but not yet
invoiced to the customer. Unbilled accounts receivable are generally invoiced within the following
month.
(d) Revenue Recognition
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 AICPA Statement of Position 97-2,
Software Revenue Recognition (SOP 97-2), or Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition (SAB 104) applying the provisions of Emerging Issues
6
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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
7
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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. Total deferred costs were
$3.3 million and $3.1 million as of March 31, 2008 and December 31, 2007, respectively.
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 are 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.
8
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(e) Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income, requires financial statements to include the
reporting of comprehensive income (loss), which for the Company includes net loss, unrealized gains
(losses) on available-for-sale marketable securities, and foreign currency translation adjustments
that have generally been reported in the statement of stockholders equity.
The components of comprehensive loss
for the three months ended March 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Net loss |
|
$ |
(842 |
) |
|
$ |
(1,461 |
) |
Foreign currency translation adjustment |
|
|
150 |
|
|
|
(144 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(692 |
) |
|
$ |
(1,605 |
) |
|
|
|
|
|
|
|
(f)
Classification of Marketable Securities
In the first quarter of 2008, the Company
transferred its held-to-maturity securities to
available-for-sale in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, as amended, due
to selling certain debt securities prior to their maturity dates in
connection with the CleverSet
acquisition. The total transfer was $17.5 million (at amortized
cost) of marketable
securities with an unrealized loss of $1,000. The unrealized loss on the available-for-sale
securities was immaterial at March 31,
2008. Available-for-sale securities are recorded at fair value.
(g) Concentrations of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of marketable securities and accounts receivable. ATG maintains cash, cash equivalents
and marketable securities with high credit quality financial institutions. To reduce its
concentration of credit risk with respect to accounts receivable, the Company routinely assesses
the financial strength of its customers through continuing credit evaluations. The Company
generally does not require collateral.
At March 31, 2008 one customer balance accounted for 10% or more of accounts receivable. No
customer balance accounted for 10% or more of accounts receivable at December 31, 2007. No customer accounted for 10% or more of total revenue
in the three month periods ended March 31, 2008 or 2007.
(h) New Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (Statement) No. 161, Disclosures About Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (Statement 161), which establishes, among
other things, the disclosure requirements for derivative instruments and for hedging activities.
SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. This statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company is not currently involved in hedging
activities. The adoption of this statement is not expected to have any impact to the Companys
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% of the fair
values of acquired assets, including goodwill, and assumed liabilities, with only limited
exceptions, even if the acquirer has not acquired 100% of its target. As a consequence, the current
step acquisition model will be eliminated. Additionally, Statement 14(R) changes current
9
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
(2) Net Loss Per Share
Basic net loss per share is computed by dividing net 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, restricted stock and restricted stock unit awards. This results in the assumed
buyback of additional shares thereby reducing the dilutive impact of stock options, restricted
stock and restricted stock unit awards. The Companys potentially diluted shares have not been
included in the computation of diluted net loss per share for all periods as the result would be
anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per share for the
three month periods ended March 31, 2008 and 2007 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Net loss |
|
$ |
(842 |
) |
|
$ |
(1,461 |
) |
Weighted average common shares outstanding
used in computing basic net loss per share |
|
|
128,435 |
|
|
|
127,194 |
|
Dilutive employee common stock equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common stock and
common stock equivalent shares outstanding
used in computing diluted net loss per
share |
|
|
128,435 |
|
|
|
127,194 |
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents |
|
|
18,679 |
|
|
|
15,484 |
|
|
|
|
|
|
|
|
(3) Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to SFAS 123R, and compensation cost
recognized includes: (a) compensation cost for all share-based payments granted prior to 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
subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R.
10
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Grant-Date Fair Value
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of
stock options. Information pertaining to stock options granted during the three months ended March
31, 2008 and 2007 and related weighted average assumptions is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
Stock Options |
|
2008 |
|
2007 |
Options granted (in thousands) |
|
|
714 |
|
|
|
489 |
|
Weighted-average exercise price |
|
$ |
3.77 |
|
|
$ |
2.36 |
|
Weighted-average grant date fair value |
|
$ |
2.96 |
|
|
$ |
1.95 |
|
Assumptions: |
|
|
|
|
|
|
|
|
Expected volatility |
|
|
76 |
% |
|
|
101 |
% |
Expected term (in years) |
|
|
6.25 |
|
|
|
6.25 |
|
Risk-free interest rate |
|
|
3.31 |
% |
|
|
4.75 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
Expected volatility The Company has determined that the historical volatility of its common
stock is the best indicator of the future volatility of the Companys common stock. As such, the
Company uses historical volatility to estimate the grant-date fair value of stock options.
Historical volatility is calculated for the period that is commensurate with the stock options
expected term.
Expected term Since adopting SFAS 123R the Company has been unable to use historical employee
exercise and option expiration data to estimate the expected term assumption for the Black-Scholes
grant-date valuation. The Company has utilized the safe harbor provision in Staff Accounting
Bulletin No. 107 (as extended by Staff Accounting Bulletin No. 110) to determine the expected term
of its stock options.
Risk-free interest rate The yield on zero-coupon U.S. Treasury securities for a period that is
commensurate with the expected term is used as the risk-free interest rate.
Expected dividend yield The Companys Board of Directors historically has not declared cash
dividends and does not expect to issue cash dividends in the future. As such, the Company uses a 0%
expected dividend yield.
Stock-Based Compensation Expense
The Company generally uses the straight-line attribution method to recognize stock-based
compensation expense. The amount of stock-based compensation expense 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 5% to all unvested options as of March
31, 2008. 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 stock
options that vest.
During the three months ended
March 31, 2008, the Company granted restricted stock units (RSUs) covering an aggregate of 2,345,200 shares of its common stock
with a total fair value of $8.3 million. The fair value of RSU grants is based on the
market price of ATGs common stock on the date of grant. The RSU grants provide the holder with the right to receive shares of ATG common stock
upon vesting.
Stock-based compensation
expense related to RSU grants is generally recognized on a
straight-line basis over the requisite service period. Most of the RSU awards vest based on the
lapse of time (i.e. service period). These time-based RSUs vest 25% annually beginning a year and
thirty days after the date of grant. Some of the RSU
awards are subject to performance criteria. These performance-based RSUs vest 25% annually if a
specified annual adjusted operating profit goal is met and will vest in full, immediately, if a
specified revenue goal is met. At March 31, 2008, the Company deems certain of the performance
criteria in these performance-based RSUs to be probable
11
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of achievement, resulting in stock-based compensation expense being recognized on an accelerated
basis over the requisite service period. The achievement of the performance criteria for the awards
to immediately vest is currently not deemed to be probable by the Company.
RSU
and restricted stock award (RSA) grants to the Companys Board of Directors generally occur in the second quarter of
each fiscal year. RSA grants to members of the Companys Board of Directors vest quarterly over one
year, and the related stock-based compensation expense is recognized ratably over one year. RSU
grants to members of the Companys Board of Directors vest at the end of one year, and the related
stock-based compensation expense is being recognized ratably over one year.
During the three months ended March 31, 2008 and 2007, stock-based compensation expense related to
stock options, restricted stock and restricted stock unit awards was $1.8 million and $1.1 million,
respectively. As of March 31, 2008, there was $15.5 million of total unrecognized compensation cost related to
unvested awards of stock options, RSAs and RSUs. That cost is expected to be recognized over a
weighted-average period of 2.0 years.
Stock Award Activity
A summary of the activity under the Companys stock option plans as of March 31, 2008 and changes
during the three-month period then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
Number of |
|
Exercise |
|
Remaining |
|
Aggregate |
|
|
Options |
|
Price |
|
Contractual |
|
Intrinsic |
|
|
Outstanding |
|
Per Share |
|
Term in Years |
|
Value |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
(in thousands) |
Options outstanding at December 31, 2007 |
|
|
14,147 |
|
|
$ |
2.62 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
714 |
|
|
|
3.77 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(314 |
) |
|
|
1.62 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(404 |
) |
|
|
2.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2008 |
|
|
14,143 |
|
|
|
2.70 |
|
|
|
6.8 |
|
|
$ |
27,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2008 |
|
|
9,587 |
|
|
|
2.75 |
|
|
|
6.0 |
|
|
|
21,140 |
|
Options vested or expected to
vest at March 31, 2008 (1) |
|
|
13,867 |
|
|
$ |
2.71 |
|
|
|
6.7 |
|
|
$ |
26,690 |
|
|
|
|
(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 three months ended March 31, 2008 and 2007, the total intrinsic value of options
exercised (i.e. the difference between the market price at exercise and the price paid by the
employee to exercise the options) was $0.7 million and $0.2 million, respectively, and the total
amount of cash received by the Company from exercise of these options was $0.5 million and $0.2
million, respectively.
A summary of the Companys restricted stock and restricted stock unit award activity as of March
31, 2008 and changes during the period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Weighted |
|
|
Share and |
|
Average Grant |
|
|
Unit Awards |
|
Date Fair Value |
|
|
Outstanding |
|
Per Share |
|
|
(in thousands) |
Non-vested awards outstanding at December 31, 2007 |
|
|
2,359 |
|
|
$ |
2.57 |
|
Awards granted |
|
|
2,345 |
|
|
|
3.55 |
|
Restrictions lapsed |
|
|
(13 |
) |
|
|
2.49 |
|
Awards forfeited |
|
|
(155 |
) |
|
|
3.18 |
|
|
|
|
|
|
|
|
|
|
Non-vested awards outstanding at March 31, 2008 |
|
|
4,536 |
|
|
$ |
3.06 |
|
|
|
|
|
|
|
|
|
|
12
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) Share Repurchase Program
On April 19, 2007 the Companys Board of Directors authorized a stock repurchase program
providing for the repurchase of up to $20.0 million of its outstanding common stock in the open
market or in privately negotiated transactions, at times and prices considered appropriate
depending on the prevailing market conditions. During the three months ended March 31, 2008, the
Company did not repurchase any shares of its common stock. Under the program to date, the Company
has repurchased 986,960 shares of its common stock at a cost of $2.9 million.
(5) Disclosures About Segments of an Enterprise
SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes
standards for reporting information regarding operating segments in annual financial statements.
SFAS No. 131 also requires related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating decision maker in making
decisions on how to allocate resources and assess performance. The Companys chief operating
decision maker is its chief executive officer. To date, the Company has viewed its operations and
manages its business as principally one segment with three product offerings: software licenses,
recurring services and professional and education services. The Company evaluates these product
offerings based on their revenue and gross margins. As a result, the financial information
disclosed in the consolidated financial statements represents all of the material financial
information related to the Companys principal operating segment.
Revenue from sources outside of the United States was approximately $11.6 million and $7.5
million for the three months ended March 31, 2008 and 2007. Revenues from international sources
were primarily generated from customers located in Europe and the Asia/Pacific region. All of the
Companys software sales are delivered from its headquarters located in the United States.
The following table represents the percentage of total revenue by geographic region for the
three months ended March 31, 2008 and March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
United States |
|
|
68 |
% |
|
|
74 |
% |
United Kingdom (UK) |
|
|
11 |
|
|
|
13 |
|
Europe, Middle East and Africa (excluding UK) |
|
|
18 |
|
|
|
11 |
|
Other |
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
(6) Fair Value Measurement
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 clarifies the definition of fair value, prescribes methods for measuring fair value,
establishes a fair value hierarchy based on the inputs used to measure fair value and expands
disclosures about the use of fair value measurements. The adoption of SFAS 157 did not have a
material impact on the Companys fair value measurements.
As defined in SFAS 157, fair value is based on the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. In order to increase consistency and comparability in fair value measurements,
SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs
used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date
for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
13
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for
similar assets and liabilities or market corroborated inputs.
Level 3: Unobservable inputs are used when little or no market data is available and requires the
Company to develop its own assumptions about how market participants would price the assets or
liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible in its
assessment of fair value.
The following table presents the Companys financial assets and liabilities that are carried
at fair value, classified according to the three categories described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2008 |
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
Significant Other |
|
Significant |
|
|
|
|
|
|
Identical Assets |
|
Observable Inputs |
|
Unobservable Inputs |
Assets |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Cash equivalents |
|
$ |
4,936 |
|
|
$ |
2,943 |
|
|
$ |
1,993 |
|
|
|
|
|
Short-term
restricted cash |
|
|
1,669 |
|
|
|
1,669 |
|
|
|
|
|
|
|
|
|
Short-term available-for-
sale securities |
|
|
13,865 |
|
|
|
|
|
|
|
13,865 |
|
|
|
|
|
Long-term
restricted cash |
|
|
419 |
|
|
|
419 |
|
|
|
|
|
|
|
|
|
Long-term available
for-sale securities |
|
|
1,803 |
|
|
|
|
|
|
|
1,803 |
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
22,692 |
|
|
$ |
5,031 |
|
|
$ |
17,661 |
|
|
|
|
|
|
|
|
The Companys marketable securities investments consist of U.S. Treasury and U.S. government
agency securities, certificates of deposit, commercial paper, and corporate debt securities. The
fair value of the Companys marketable securities is based on a market approach utilizing quoted
market prices of identical instruments or other observable market inputs.
(7) Credit
Facility
On January 31, 2008, the Company chose to allow its credit facility to expire in accordance with
its terms. As a result, the Company cash collateralized $2.1 million in outstanding letters of
credit with certificates of deposit. The collateral for the letters of credit is reflected on the
Companys balance sheet as restricted cash within short-term and
long-term marketable securities dependent on the underlying term of the lease. The letters of
credit had been issued in favor of various landlords to secure obligations under ATGs facility
leases pursuant to leases expiring through December 2011.
(8) Acquisitions CleverSet, Inc.
On February 5, 2008, the Company acquired all of the outstanding shares of common stock of
privately held eShopperTools.com, Inc., dba CleverSet (CleverSet) for a purchase price of
approximately $9.3 million, comprised of $9.1 million paid to the shareholders, including the
extinguishment of convertible debt, and acquisition costs of $0.2 million. The purchase of
CleverSet augments 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
14
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
determining the final allocation of the purchase price based on the estimated fair values of the
assets and liabilities acquired as of the acquisition date. In addition, the merger agreement
provides for a working capital adjustment for which the Company has recorded a $1.1 million other
receivable in prepaid expenses and other current assets.
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
CleverSets 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 10% to 40%. The discount rate was determined after consideration of
CleverSets weighted average cost of capital and the risk associated with achieving forecast sales
related to the technology and assets acquired from CleverSet.
The preliminary purchase price has been allocated based on the estimated fair values as of the
acquisition date. The following represents the preliminary allocation of the purchase price (in
thousands):
|
|
|
|
|
Cash |
|
$ |
265 |
|
Accounts receivable |
|
|
133 |
|
Prepaid expenses and other assets |
|
|
330 |
|
Property, plant and equipment |
|
|
56 |
|
Goodwill |
|
|
7,847 |
|
Intangible assets: |
|
|
|
|
Customer relationships (estimated useful life of 3 years) |
|
|
160 |
|
Developed product technology (estimated useful life of 3 years) |
|
|
810 |
|
|
|
|
|
Total intangible assets |
|
|
970 |
|
Accounts payable |
|
|
(162 |
) |
Accrued expenses |
|
|
(139 |
) |
|
|
|
|
Total purchase price |
|
$ |
9,300 |
|
|
|
|
|
The consolidated financial statements include the results of CleverSet from the date of
acquisition. The following unaudited consolidated pro forma financial information, which assumes
the CleverSet acquisition occurred as of January 1, 2007, is presented after giving effect to
certain adjustments, primarily amortization of intangible assets. The unaudited consolidated pro
forma financial information is not necessarily indicative of the results that would have occurred
had the acquisition been in effect for the periods presented or of results that may occur in the
future (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
Pro forma revenue |
|
$ |
36,628 |
|
|
$ |
29,572 |
|
Pro forma net loss |
|
$ |
(1,400 |
) |
|
$ |
(2,242 |
) |
Pro forma net loss per share basic and diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
15
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(9) Commitments and Contingencies
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 its intellectual property rights. The Company believes
such laws and practices, along with its internal development processes and other policies and
practices, limit its exposure related to the indemnification provisions of the software license
agreements. However, in recent years there has been significant litigation in the United States
involving patents and other intellectual property rights. Companies providing Internet-related
products and services are increasingly bringing and becoming subject to suits alleging infringement
of proprietary rights, particularly patent rights. From time to time, the Companys customers have
been subject to third party patent claims, and the Company has agreed to indemnify these customers
from claims to the extent the claims relate to 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.
(10) Restructuring
During the years 2001 through 2005, the Company initiated restructuring actions to realign its
operating expenses and facilities with the requirements of its 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 its employees,
abandonment or disposal of tangible assets and settlement of contractual obligations. In connection
with each of these actions, the Company has recorded restructuring charges based in part upon
estimates of the costs ultimately to be paid for the actions it has taken. When circumstances
result in changes in ATGs estimates relating to accrued restructuring costs, these changes are
recorded as additional charges or benefits in the period in which the change in estimate occurs. In
the first three months of 2007, the Company recorded a net benefit of $0.1 million in connection
with finalizing a contractual obligation with a landlord, which was offset in part by changes in
estimates resulting in additional accruals. As of March 31, 2008, the Company had an accrued
restructuring liability of $0.9 million related to facility related costs.
A summary of the Companys changes in estimates and activity in its restructuring accruals is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
2001 |
|
|
|
|
|
|
Actions |
|
|
Actions |
|
|
Total |
|
Balance December 31, 2007 |
|
$ |
133 |
|
|
$ |
947 |
|
|
$ |
1,080 |
|
Facility related payments |
|
|
(27 |
) |
|
|
(196 |
) |
|
|
(223 |
) |
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2008 |
|
$ |
106 |
|
|
$ |
751 |
|
|
$ |
857 |
|
|
|
|
|
|
|
|
|
|
|
16
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2008, the amounts accrued related to ongoing lease arrangements on two abandoned
facilities. The restructuring accrual is net of the contractual amounts due under executed
sub-lease agreements.
For additional information on the Companys restructuring actions, please see the Companys Annual
Report on
Form 10-K for the year ended December 31, 2007.
(11) Goodwill and Intangible Assets
Goodwill
The Company evaluates goodwill for impairment annually and whenever events or changes in
circumstances suggest that the carrying value of goodwill may not be recoverable. No impairment of
goodwill resulted from the Companys most recent evaluation of goodwill for impairment, which
occurred in the fourth quarter of fiscal 2007, nor in any of the periods presented. The Companys
next annual impairment assessment will be made in the fourth quarter of 2008. The following table
presents the changes in goodwill during fiscal 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Year Ended |
|
|
Ended March 31, |
|
December 31, |
|
|
2008 |
|
2007 |
Balance at the beginning of the year |
|
$ |
59,675 |
|
|
$ |
59,328 |
|
Acquisition of CleverSet |
|
|
7,847 |
|
|
|
|
|
eStara earn-out payment |
|
|
|
|
|
|
621 |
|
Collection of eStara accounts receivable
previously reserved |
|
|
|
|
|
|
(274 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
67,522 |
|
|
$ |
59,675 |
|
|
|
|
|
|
|
|
Intangible Assets
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. Recoverability
of these assets is measured by comparison of their carrying value to future undiscounted cash flows
the assets are expected to generate over their remaining economic lives. If such assets are
considered to be impaired, the impairment to be recognized in the statement of operations equals
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.
Intangible assets, which will continue to be amortized, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Customer relationships |
|
$ |
11,660 |
|
|
$ |
(6,733 |
) |
|
$ |
4,927 |
|
|
$ |
11,500 |
|
|
$ |
(6,196 |
) |
|
$ |
5,304 |
|
Developed technology |
|
|
9,710 |
|
|
|
(4,596 |
) |
|
|
5,114 |
|
|
|
8,900 |
|
|
|
(4,145 |
) |
|
|
4,755 |
|
Trademarks |
|
|
1,400 |
|
|
|
(420 |
) |
|
|
980 |
|
|
|
1,400 |
|
|
|
(350 |
) |
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
22,770 |
|
|
$ |
(11,749 |
) |
|
$ |
11,021 |
|
|
$ |
21,800 |
|
|
$ |
(10,691 |
) |
|
$ |
11,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized based upon the pattern of estimated economic use or on a
straight-line basis over their estimated useful lives, which range from 1 to 5 years. Amortization
expense related to intangibles was $1.1 million and $1.2 million for the three month periods ended
March 31, 2008 and 2007, respectively.
17
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company expects amortization expense for these intangible assets to be (in thousands):
|
|
|
|
|
Remainder of 2008 |
|
$ |
3,253 |
|
2009 |
|
|
3,704 |
|
2010 |
|
|
3,032 |
|
2011 |
|
|
1,032 |
|
|
|
|
|
Total |
|
$ |
11,021 |
|
|
|
|
|
(12) Litigation
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, 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.
18
ART TECHNOLOGY GROUP, INC.
Item 2. 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 condensed consolidated financial statements and the notes
contained in Item 1 of this Quarterly Report on Form 10-Q. 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. For this purpose, any statement that is not a statement of historical fact should be
considered a forward-looking statement. We often use the words believes, anticipates, plans,
expects, intends and similar expressions to help identify forward-looking statements. There
are a number of important factors that could cause our actual results to differ materially from
those indicated or implied by forward-looking statements. Factors that could cause or contribute to
such differences include those referred to in Part II, Item 1A, under the heading Risk Factors,
as well as those discussed elsewhere in this quarterly report.
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 that is more
reflective of our sales cycle. 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.
During
the first quarter of 2008 we recognized approximately
$3.5 million as revenue that was previously deferred in 2007.
This recognition resulted from certain events that occurred in the
quarter that drove accelerated revenue recognition.
19
ART TECHNOLOGY GROUP, INC.
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 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 in 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. |
20
ART TECHNOLOGY GROUP, INC.
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 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.
Recent Events
On February 5, 2008, we acquired CleverSet for approximately $9.3 million in cash. 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 have preliminarily
allocated 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.
21
ART TECHNOLOGY GROUP, INC.
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 goodwill,
income taxes and assumptions for stock-based compensation. Management bases its estimates and
judgments on historical experience, known trends or events and various other factors that are
believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or
conditions.
We define our critical accounting policies as those that require us to make subjective
estimates about matters that are uncertain and are likely to have a material impact on our
financial condition and results of operations or that concern the specific manner in which we apply
GAAP. Our estimates are based upon assumptions and judgments about matters that are highly
uncertain at the time the accounting estimate is made and applied and require us to assess a range
of potential outcomes.
As of March 31, 2008 there has been no
material change in any of the critical accounting policies and
estimates described in our Annual
Report on Form 10-K. For a
description of the critical accounting policies that we consider to be both those most
important to the portrayal of our financial condition and those that require the most subjective
judgment, see our Annual report on Form 10-K for the year ended December 31, 2007, under the
heading Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates.
22
ART TECHNOLOGY GROUP, INC.
Results of Operations
The following table sets forth statement of operations data as a percentage of total revenue for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
Revenue: |
|
|
|
|
|
|
|
|
Product licenses |
|
|
26 |
% |
|
|
23 |
% |
Recurring services |
|
|
57 |
|
|
|
60 |
|
Professional and education services |
|
|
17 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
Cost of Revenue: |
|
|
|
|
|
|
|
|
Product licenses |
|
|
1 |
|
|
|
2 |
|
Recurring services |
|
|
21 |
|
|
|
18 |
|
Professional and education services |
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
41 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
59 |
|
|
|
61 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
19 |
|
|
|
20 |
|
Sales and marketing |
|
|
32 |
|
|
|
32 |
|
General and administrative |
|
|
11 |
|
|
|
16 |
|
Restructuring benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
62 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(3 |
) |
|
|
(7 |
) |
Interest and other income, net |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes |
|
|
(1 |
) |
|
|
(5 |
) |
Provision for income taxes |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(2 |
)% |
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, our cost of our revenue as a percentage
of the related revenue and the related gross margins:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
Cost of product license revenue |
|
|
4 |
% |
|
|
8 |
% |
Gross margin on product license revenue |
|
|
96 |
|
|
|
92 |
|
|
|
|
|
|
Cost of recurring services revenue |
|
|
36 |
|
|
|
29 |
|
Gross margin on recurring services revenue |
|
|
64 |
|
|
|
71 |
|
|
|
|
|
|
Cost of professional and education services revenue |
|
|
109 |
|
|
|
109 |
|
Gross margin on professional and education services revenue |
|
|
(9 |
) |
|
|
(9 |
) |
|
|
|
|
|
23
ART TECHNOLOGY GROUP, INC.
Three months ended March 31, 2008 and 2007
Revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Total revenue |
|
$ |
36,530 |
|
|
$ |
29,232 |
|
Total revenue increased $7.3 million or 25% to $36.5 million for the three months ended March
31, 2008 from $29.2 million for the three months ended March 31, 2007. The increase in revenue for
the three month period ended March 31, 2008 is primarily attributable to growth in the recurring
services revenue and product licenses revenue. Recurring services revenue grew $3.5 million for
the three months ended March 31, 2008, driven by growth in the eStara e-commerce optimization
services solutions and managed application hosting services business. eStara e-commerce
optimization services solutions and managed application hosting services revenue increased $2.9
million, or 38%, for the three months ended March 31. 2008. Product license revenue increased
$2.6 million, or 40%, for the three months ended March 31, 2008. In addition, professional
services revenue increased $1.2 million for the three months ended March 31, 2008.
Revenue generated from international customers increased to $11.6 million, or 32%, of total
revenues, for the three months ended March 31, 2008, from $8.0 million, or 27% of total revenues,
for the three months ended March 31, 2007.
No customer accounted for
10% or more of total revenue in the three month periods ended March 31, 2008 and March 31, 2007.
We expect full year 2008 revenues in the range of $159 million to $165 million.
Product Licenses Revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Product license revenue |
|
$ |
9,257 |
|
|
$ |
6,609 |
|
As a percent of total revenue |
|
|
26 |
% |
|
|
23 |
% |
Product license revenue increased 40% to $9.3 million for the three months ended March 31,
2008 from $6.6 million for the three months ended March 31, 2007. The increase for the three month
period ended March 31, 2008 was due to higher product license bookings compared to the three months
ended March 31, 2007 and the recognition of $3.5 million in product license revenue which had
previously been deferred, partially offset by a $3.2 million increase in product license bookings
that were deferred in the quarter. Product license revenue generated from international customers
was $3.4 million for the three months ended March 31, 2008 compared to $0.8 million for the three
months ended March 31, 2007.
We expect full year 2008 product license revenues to increase approximately 18% to 28% from
2007.
24
ART TECHNOLOGY GROUP, INC.
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 an
indication 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 quarters ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Product license bookings |
|
$ |
11,448 |
|
|
$ |
8,921 |
|
Increase in product license deferred revenue |
|
|
(5,693 |
) |
|
|
(2,426 |
) |
Product license deferred revenue recognized |
|
|
3,502 |
|
|
|
114 |
|
|
|
|
|
|
Product license revenue |
|
$ |
9,257 |
|
|
$ |
6,609 |
|
|
|
|
|
|
We deferred approximately 50% of our bookings for the three months ended March 31, 2008
compared to 27% for the three months ended March 31, 2007 due to the inclusion of eStara e-commerce
optimization services solutions and other elements in our contracts. This deferral will be
recognized in future periods when delivery of the service occurs or as contractual requirements are
met. During the three months ended March
31, 2008 we recognized $3.5 million that was previously deferred of which approximately $1.0 million
was ratably recognized revenue due to the change
in our business model and the remainder related to resolution of contractual elements that
precluded revenue recognition in prior periods.
We expect full year 2008 product license bookings to increase approximately 10% to 20% from
2007.
Recurring services revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Support and maintenance |
|
$ |
10,657 |
|
|
$ |
10,035 |
|
eStara e-commerce optimization services solutions and
managed application hosting services |
|
|
10,286 |
|
|
|
7,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring services revenue |
|
$ |
20,943 |
|
|
$ |
17,470 |
|
|
|
|
|
|
As a percent of total revenue |
|
|
57 |
% |
|
|
60 |
% |
|
|
|
|
|
Our recurring services revenue increased 20% to $20.9 million for the three months ended March
31, 2008 from $17.5 million for the three months ended March 31, 2007, as follows:
|
|
Support and maintenance revenue increased 6% to $10.7 million for the three months ended
March 31, 2008 from $10.0 million for the three months
ended March 31, 2007. 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 the deferral of approximately $0.6 million of revenue due to
arrangements that were sold in conjunction with managed application hosting services or eStara
e-commerce optimization services solutions that remain undelivered as of March 31, 2008. |
|
|
|
eStara e-commerce optimization services solutions and managed application hosting
services revenue increased 38% to $10.3 million in 2008 from $7.4 million in 2007. This is
driven by growth in the number of customers utilizing eStara e-commerce optimization
services solutions and increased utilization by our existing |
25
ART TECHNOLOGY GROUP, INC.
customer base. Included in
eStara e-commerce optimization services solutions revenues for the
three months ended March 31, 2008 is revenue from our commercial
personalization services generated by CleverSet.
We expect full year 2008 recurring services revenues to increase approximately 23% to 24% from
2007, which includes approximately 10% growth in support and maintenance and approximately 35% to
45% growth in eStara e-commerce optimization services solutions and managed application hosting
services.
Professional and education services revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Professional and education services revenue |
|
$ |
6,330 |
|
|
$ |
5,153 |
|
|
|
|
|
|
As a percent of total revenue |
|
|
17 |
% |
|
|
17 |
% |
|
|
|
|
|
Professional and education services revenue increased 23% to $6.3 million for the three months
ended March 31, 2008 from $5.2 million for the three months ended March 31, 2007, and remained 17%
percent of total revenue in 2008 as in 2007. 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 17% to $5.4 million in 2008 from $4.4 million in 2007, due to an increase in
implementation activity associated with growth in our product license bookings in 2008, partially
offset by the deferral of revenue for services related to managed application hosting and eStara
e-commerce optimization services solutions 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 60% to $0.8
million in 2008 from $0.5 million in 2007 due to an increased focus on developing our partner and
consultant practices.
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.
26
ART TECHNOLOGY GROUP, INC.
Cost of product license revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Cost of product license revenue |
|
$ |
387 |
|
|
$ |
540 |
|
As a percent of license revenue |
|
|
4 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
Gross margin on product license revenue |
|
$ |
8,870 |
|
|
$ |
6,069 |
|
As a percent of license revenue |
|
|
96 |
% |
|
|
92 |
% |
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 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 technology.
Cost of product license revenue decreased 28% to $0.4 million for the three months ended March
31, 2008 from $0.5 million for the three months ended March 31, 2007. Gross margin on product
license revenue was 96%, or $8.9 million, for the three months ended March 31, 2008 compared to
92%, or $6.1 million for the three months ended March 31, 2007. The decrease in the cost of product
license revenue and increase in gross margin for 2008 was driven by a decrease in royalty costs due
to the mix of products sold and a decrease in amortization expense related to intangibles assets
acquired in the Primus acquisition due to these assets being fully amortized while product license
revenue increased due to the recognition of previously deferred balances.
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
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Cost of recurring services revenue |
|
$ |
7,606 |
|
|
$ |
5,143 |
|
As a percent of recurring services revenue |
|
|
36 |
% |
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
Gross margin on recurring services revenue |
|
$ |
13,337 |
|
|
$ |
12,327 |
|
As a percent of recurring services revenue |
|
|
64 |
% |
|
|
71 |
% |
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 CleverSet and
eStara acquisitions 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 managed application hosting arrangements, we generally
defer the costs 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 $0.3 million of set-up and implementation costs for the three months ended March
31, 2008 and 2007.
Cost of recurring services revenue increased 48% to $7.6 million for the three months ended
March 31, 2008 from $5.1 million for the three months ended March 31, 2007. Gross margin on
recurring services revenue was 64%, or $13.3 million for the three months ended March 31, 2008
compared to 71%, or $12.3 million for the three months ended March 31, 2007. The increase in cost
of recurring services and the resulting decline in gross margin on recurring services in 2008 was
due to a $1.2 million increase in labor related costs. A significant driver in the
27
ART TECHNOLOGY GROUP, INC.
increase in costs of recurring services revenue was a $1.2 million increase in
telecommunications costs in the eStara e-commerce optimization
services solutions business, because this correlated with increased
recurring services revenue, there was no appreciable impact on gross margin
for recurring services.
|
|
We expect full year 2008 gross margin on recurring services
revenue to be approximately 66% to 68%. |
Cost of professional and education services revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Cost of professional service revenue |
|
$ |
6,914 |
|
|
$ |
5,598 |
|
As a percent of recurring professional service revenue |
|
|
109 |
% |
|
|
109 |
% |
|
|
|
|
|
|
|
|
|
Gross margin on recurring services revenue |
|
$ |
(584 |
) |
|
$ |
(445 |
) |
As a percent of recurring services revenue |
|
|
(9 |
)% |
|
|
(9 |
)% |
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.
Cost of professional and education services revenue increased 24% to $6.9 million for the
three months ended March 31, 2008 from $5.6 million for the three months ended March 31, 2007.
Gross margin on professional and education services revenue was (9)%, or $(0.6) million for the
three months ended March 31, 2008 compared to (9)%, or $(0.4) million for the three months ended
March 31, 2007. The increase in cost of professional and education services in 2008 was driven by a
$1.0 million increase in labor related costs for professional services due to growth in our
professional services organization in response to increased demand for implementation services
resulting from higher product license bookings in 2008 compared to 2007.
We expect full year 2008 gross margin on professional and educational services revenue to be
approximately 5%.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Research and development expenses |
|
$ |
7,021 |
|
|
$ |
5,781 |
|
As a percent of total revenue |
|
|
19 |
% |
|
|
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 21% to $7.0 million for the three months ended
March 31, 2008 from $5.8 million for the three months ended March 31, 2007 and decreased as a
percentage of revenue to 19% from 20%. The increase in research and development spending was
primarily attributable to an increase of $0.8 million in labor related costs due to the acquisition
of CleverSet and an increase in stock-based compensation of $0.2 million due to growth of the
research and development organization.
We expect full year 2008 research and development expenses to be approximately 19% of revenue.
28
ART TECHNOLOGY GROUP, INC.
Sales and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Sales and marketing expenses |
|
$ |
11,537 |
|
|
$ |
9,544 |
|
As a percent of total revenue |
|
|
32 |
% |
|
|
32 |
% |
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 21% to $11.5 million for the three months ended March
31, 2008 from $9.5 million for the three months ended March 31, 2007, and were unchanged as a
percentage of total revenue at 32%. The increase in spending was due to an increase in labor
related cost of $0.9 million as a result of hiring additional sales personnel, increased commission
of $0.7 million due to a 28% increase in product license bookings, increased stock compensation of
$0.3 million, and higher marketing costs of $0.4 million due to our annual sales kick-off event in
January 2008 and preparation for Insight, an industry-wide
ecommerce conference organized by us. These increases were partially offset by a decline in bonus expense and a decline in
amortization expense related to intangible assets acquired in the
Primus acquisition due to these assets being fully amortized.
We expect full year 2008 sales and marketing expenses to be approximately 33% of revenue.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
General and administrative expenses |
|
$ |
4,329 |
|
|
$ |
4,603 |
|
As a percent of total revenue |
|
|
11 |
% |
|
|
16 |
% |
General and administrative expenses consist primarily of salaries, benefits, and stock-based
compensation and other related costs for internal systems, finance, human resources, legal and
executive related functions.
General and administrative expenses decreased 6% to $4.3 million for the three months ended
March 31, 2008 from $4.6 million for the three months ended March 31, 2007, and decreased as a
percentage of total revenue to 11% from 16%.
The decreases in 2008 of $0.3 million was due to a decrease in outside service expense
incurred in the quarter. The first quarter of 2007 included
additional expenses for third party personnel to augment
our internal staffing and perform additional services and activities to
improve and test our internal controls over financial reporting.
We expect full year 2008 general and administrative expenses to be approximately 11% of
revenue.
Stock-Based Compensation Expense
On January 1, 2006, we adopted the Financial Accounting Standards Boards Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, using the
modified prospective transition
method. We are using the straight-line attribution method to recognize stock-based
compensation expense for non-performance-based grants and the accelerated method for
performance-based executive grants. Stock-based compensation cost is calculated on the date of
grant based on the fair value of stock options as determined by the
29
ART TECHNOLOGY GROUP, INC.
Black-Scholes valuation model,
or the fair value of our common stock for issuances of restricted stock and restricted stock units.
Stock-based compensation expense for the three months ended March 31, 2008 and 2007 was $1.8
million and $1.1 million, respectively, and is reflected in our costs and expenses above based on
the function of the relevant personnel.
As of March 31, 2008, the total compensation cost related to unvested awards not yet
recognized in the statement of operations was approximately $15.5 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 March 31, 2008 and
December 31, 2007, we had restructuring accruals of $0.9 and $1.1 million, respectively. We
recorded no net restructuring charges or benefits for the three months ended March 31, 2008 and a
net restructuring benefit of $0.1 million in the three months ended March 31, 2007. For detailed
information about our restructuring activities and related costs and accruals, see Note 10 to the
Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended
December 31, 2007.
Interest and Other Income, Net
Interest and other income net increased to $0.6 million for the three months ended March 31,
2008 from $0.4 million for the three months ended March 31, 2007. 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 Euro.
Cash, cash equivalents and marketable securities increased $9.4 million to $46.9 million at March
31, 2008 from $37.5 million at March 31, 2007.
Provision for Income Taxes
For the three months ended March 31, 2008, we recorded an income tax provision of $0.2
million. This relates to earnings in certain of our foreign subsidiaries as well as interest and
penalties related to certain tax positions. For the three months ended March 31, 2007, we recorded
no tax provision. We recorded no Federal income taxes in the three months ended March 31, 2008 and
2007, respectively, due to taxable operating losses.
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 2008 are the
amortization of capitalized research and development expenses and payments on lease restructuring
reserves, offset by deferred revenue and stock-based compensation expenses.
Liquidity and Capital Resources
Our capital requirements relate primarily to facilities, employee infrastructure and working
capital requirements. Our primary sources of liquidity for the three months ended March 31, 2008
were our cash, cash equivalents, and short and long-term marketable securities of $44.8 million.
Cash provided by operating activities was $7.1 million for the three months ended March 31,
2008.
30
ART TECHNOLOGY GROUP, INC.
|
|
|
Although we incurred a net loss of $0.8 million, it included non-cash expenses for
depreciation and amortization of $2.0 million, and stock-based compensation expense of $1.8
million. |
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|
|
|
Deferred revenue increased $2.0 million during the period. Most of the invoices related
to this deferred revenue were collected during the three months ended March 31, 2008 and
therefore increased our cash flow from operations. Under applicable revenue recognition
criteria, a portion of amounts billed were not recognized as revenue in 2008. |
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|
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|
Accounts receivable decreased $3.7 million, or 9% in 2008. The decrease in accounts
receivable is due to improved collection of outstanding accounts receivable, which resulted
in a decline in days sales outstanding to 91 days at March 31, 2008 compared to 93 days at
December 31, 2007. The decline in the accounts receivable balance was also impacted by a
7.1% decline in revenue due to seasonality in the first quarter of 2008 compared to the
fourth quarter of 2007. |
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|
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|
Accrued expenses and other liabilities decreased $1.9 million in 2008 due to unusually
higher accrued expenses in 2007, notably the eStara earn out payment of $2.0 million paid in
2008 but accrued in 2007. |
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|
We deferred $0.2 million of costs that we incurred in connection with the implementation
of customer websites during 2008. Deferring these costs has the effect of a cash outflow in
2008 that will be recorded as expense in future periods. |
Net cash used in investing activities for the three months ended March 31, 2008 was $13.3
million, which consisted of $2.4 million of capital expenditures, primarily computer equipment and
software for our managed application hosting services business, $2.1 million in purchases of
certificates of deposit to collateralize letters of credit, $10.7 million in payments for the
CleverSet acquisition and $1.4 million and $0.6 million for payments to eStara shareholders of
contingent consideration recorded as additional purchase price and bonus in 2007, respectively,
partially offset by $1.9 million in net sales and maturities of marketable securities.
Net cash provided from financing activities was minimal for the three months ended March 31,
2008. Financing activities consisted primarily of $0.8 million in proceeds from exercised stock
options and the employee stock purchase plan.
On April 19, 2007 our Board of Directors authorized a stock repurchase program providing for
repurchases of our outstanding common stock of up to $20.0 million, in the open market or in
privately negotiated transactions, at times and prices considered appropriate depending on
prevailing market conditions. During the three months ended March 31, 2008 we repurchased no shares
of our common stock. Under the program to date, we repurchased 986,960 of shares of our common
stock at a cost of $2.9 million. We have authorization to expend an additional $17.1 million under
this program as of March 31, 2008.
We believe that our balance of $44.8 million in cash, cash equivalents and marketable
securities, excluding $2.1 million of restricted cash at March 31, 2008, 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.
31
ART TECHNOLOGY GROUP, INC.
Accounts Receivable and Days Sales Outstanding
Our accounts receivable balance and days sales outstanding and modified days sales outstanding
for the quarter ended March 31, 2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of and for the |
|
|
Quarter Ended |
|
|
March 31, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Days sales outstanding |
|
|
91 |
|
|
|
93 |
|
Revenue |
|
$ |
36,530 |
|
|
$ |
39,326 |
|
Accounts receivable, net |
|
$ |
36,850 |
|
|
$ |
40,443 |
|
Modified days sales outstanding (1) |
|
|
79 |
|
|
|
82 |
|
Receivable less than 60 days |
|
|
86 |
% |
|
|
88 |
% |
|
|
|
(1) |
|
Modified days sales outstanding are computed by adjusting total revenue for the change in
deferred revenue, that result is then divided by the days in the period, 90 days each quarter, to
calculate revenue per day; the accounts receivable balance is then divided by revenue per day. |
We evaluate our performance on collections on a quarterly basis. As of March 31, 2008, our
days sales outstanding decreased from December 31, 2007 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
On January 31, 2008, the Company chose to allow its credit facility to expire in accordance
with its terms. As a result, the Company cash collateralized the $2.1 million in outstanding
letters of credit with certificates of deposit. The collateral for the letters of credit is
reflected on the Companys balance sheets as restricted cash within short-term and long-term
marketable securities. The letters of credit had been issued in favor of various landlords to
secure obligations under ATGs facility leases pursuant to leases expiring through December 2011.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (Statement) No. 161, Disclosures About Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (Statement 161), which establishes, among
other things, the disclosure requirements for derivative instruments and for hedging activities.
SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. This statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company is not currently involved in hedging
activities, the adoption of this statement is not expected to have any impact to the Companys
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
32
ART TECHNOLOGY GROUP, INC.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We maintain an investment portfolio consisting mainly of investment grade money market funds,
corporate obligations and government obligations with a weighted average maturity of less than one
year. These held-to-maturity securities are subject to interest rate risk. However, a 10% change in
interest rates would not have a material impact to the fair values of these securities at March 31,
2008 and December 31, 2007 primarily due to their short maturity and our intent to hold the
securities to maturity. There have been no significant changes since March 31, 2008.
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 March 31, 2008 and
December 31, 2007, 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 March 31, 2008 and December 31, 2007, we had no outstanding
derivative instruments. We do not use derivative instruments for trading or speculative purposes.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of ATGs disclosure controls and procedures as of March 31,
2008. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and
other procedures of a company that are designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure controls and procedures
as of March 31, 2008, our Chief Executive Officer and Chief Financial Officer concluded that, as of
such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
33
ART TECHNOLOGY GROUP, INC.
PART II. OTHER INFORMATION
Item 1. 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 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 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 license 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 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2007, which
34
ART TECHNOLOGY GROUP, INC.
could materially affect our business, financial condition or future results. To the best of
our knowledge, as of the date of this report there has been no material change in any of the risk
factors described in that Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
35
ART TECHNOLOGY GROUP, INC.
Item 6. Exhibits
Exhibits
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit
4.1 to our Registration Statement on Form S-8 dated June 12, 2003). |
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|
|
3.2
|
|
Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to our Current
Report on Form 8-K filed on April 23, 2008). |
|
|
|
4.1
|
|
Rights Agreement dated September 26, 2001 with EquiServe Trust Company, N.A. (incorporated
by reference to Exhibit 4.1 to our Current Report on Form 8-K dated October 2, 2001). |
|
|
|
10.1
|
|
Agreement and Plan of Merger dated January 19, 2008 by and among Art
Technology Group, Inc., Einstein Acquisition Corp.,
eShopperTools.com, Inc., Scott Anderson, as stockholder
representative, and the principal stockholders identified on Schedule
I thereto (without exhibits)(incorporated by reference by Exhibit
10.1 to our Current Report on Form 8-K filed on January 25, 2008). |
|
|
|
10.2
|
|
2008 Executive Management Compensation Plan (incorporated by reference to Exhibit 99.1 to our
Current Report on Form 8-K filed on March 6, 2008).* |
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|
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10.3
|
|
Amended and Restated Employment Agreement between Art Technology Group, Inc. and Robert D. Burke, dated April 14, 2008.* |
|
|
|
10.4
|
|
Form of Change in Control Agreement by and among Art
Technology Group, Inc. and Executive Management Team
Members, dated April 14, 2008.* |
|
|
|
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
32.2
|
|
Certification of 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 |
|
|
|
* |
|
Management contract or compensatory plan. |
36
ART TECHNOLOGY GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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|
|
|
ART TECHNOLOGY GROUP, INC.
(Registrant)
|
|
|
By: |
/s/ ROBERT D. BURKE
|
|
|
|
Robert D. Burke |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
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|
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|
|
|
|
|
|
By: |
/s/ JULIE M.B. BRADLEY
|
|
|
|
Julie M.B. Bradley |
|
|
|
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer) |
|
|
Date:
May 12, 2008
37