e10vq
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 June 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 000-26679
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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04-3141918 |
(State or other jurisdiction of incorporation or organization)
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(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
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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) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of August 4, 2008 there were 129,049,993 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 data)
(UNAUDITED)
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June 30, |
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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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$ |
36,097 |
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$ |
34,419 |
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Marketable securities (including restricted cash of $1,669 at June 30, 2008) |
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14,476 |
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16,460 |
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Accounts receivable, net of reserves of $1,137 ($958 in 2007) |
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40,501 |
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40,443 |
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Deferred costs, current |
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777 |
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790 |
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Prepaid expenses and other current assets |
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3,705 |
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2,741 |
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Total current assets |
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95,556 |
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94,853 |
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Property and equipment, net |
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8,611 |
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7,208 |
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Deferred costs, non-current |
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2,331 |
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2,337 |
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Other assets |
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1,733 |
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1,475 |
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Marketable securities (including restricted cash of $419 at June 30,
2008) |
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2,124 |
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1,062 |
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Intangible assets, net |
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9,938 |
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11,109 |
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Goodwill |
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67,787 |
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59,675 |
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Total Assets |
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$ |
188,080 |
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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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$ |
3,823 |
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$ |
3,619 |
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Accrued expenses |
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19,182 |
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19,082 |
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Deferred revenue, current |
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42,610 |
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35,577 |
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Accrued restructuring, current |
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646 |
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855 |
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Total current liabilities |
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66,261 |
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59,133 |
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Accrued restructuring, non-current |
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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, non-current |
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11,558 |
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10,777 |
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Commitments and contingencies (Note 9) |
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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, $0.01 par value; authorized-200,000,000 shares; issued
-130,311,628 shares and 129,293,221 shares at June 30, 2008 and December 31,
2007, respectively |
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1,303 |
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1,293 |
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Additional paid-in capital |
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309,669 |
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305,151 |
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Accumulated deficit |
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(196,239 |
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(195,745 |
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Treasury stock, at cost (1,409,142 shares and 986,960 at June 30, 2008 and
December 31, 2007, respectively) |
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(4,381 |
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(2,902 |
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Accumulated other comprehensive loss |
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(589 |
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(700 |
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Total stockholders equity |
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109,763 |
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107,097 |
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Total Liabilities and Stockholders Equity |
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$ |
188,080 |
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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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Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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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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$ |
12,300 |
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$ |
6,515 |
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$ |
21,557 |
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$ |
13,124 |
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Recurring services |
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22,946 |
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18,519 |
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43,889 |
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35,989 |
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Professional and education services |
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6,674 |
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7,582 |
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13,004 |
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12,735 |
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Total revenue |
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41,920 |
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32,616 |
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78,450 |
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61,848 |
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Cost of Revenue: |
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Product licenses |
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519 |
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549 |
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906 |
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1,089 |
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Recurring services |
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9,241 |
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5,379 |
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16,847 |
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10,522 |
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Professional and education services |
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6,495 |
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7,171 |
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13,409 |
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12,769 |
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Total cost of revenue |
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16,255 |
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13,099 |
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31,162 |
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24,380 |
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Gross Profit |
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25,665 |
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19,517 |
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47,288 |
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37,468 |
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Operating Expenses: |
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Research and development |
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7,373 |
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6,270 |
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14,394 |
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12,051 |
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Sales and marketing |
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13,156 |
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11,773 |
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24,693 |
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21,317 |
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General and administrative |
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4,863 |
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4,648 |
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9,192 |
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9,251 |
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Restructuring benefit |
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(68 |
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Total operating expenses |
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25,392 |
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22,691 |
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48,279 |
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42,551 |
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Income (loss) from operations |
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273 |
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(3,174 |
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(991 |
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(5,083 |
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Interest and other income, net |
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240 |
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521 |
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868 |
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969 |
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Income (loss) before provision for income taxes |
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513 |
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(2,653 |
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(123 |
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(4,114 |
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Provision for income taxes |
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165 |
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95 |
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371 |
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95 |
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Net income (loss) |
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$ |
348 |
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$ |
(2,748 |
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$ |
(494 |
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$ |
(4,209 |
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Basic net income (loss) per share |
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$ |
0.00 |
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$ |
(0.02 |
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$ |
(0.00 |
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$ |
(0.03 |
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Diluted net income (loss) per share |
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$ |
0.00 |
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$ |
(0.02 |
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$ |
(0.00 |
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$ |
(0.03 |
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Basic weighted average common shares outstanding |
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128,805 |
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127,388 |
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128,620 |
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127,291 |
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Diluted weighted average common shares outstanding |
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135,010 |
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127,388 |
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128,620 |
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127,291 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
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Six Months Ended June 30, |
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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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$ |
(494 |
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$ |
(4,209 |
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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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4,219 |
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3,779 |
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Non-cash stock-based compensation expense |
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3,831 |
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2,525 |
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Changes in current assets and liabilities: |
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Accounts receivable |
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74 |
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(7 |
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Prepaid expenses and other current assets |
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(1,103 |
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(2,107 |
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Deferred costs |
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19 |
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(954 |
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Increase in other assets |
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(167 |
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(318 |
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Accounts payable |
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42 |
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1,652 |
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Accrued expenses and other liabilities |
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572 |
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(656 |
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Deferred revenue |
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7,814 |
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15,438 |
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Accrued restructuring |
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(434 |
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(616 |
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Net cash provided by operating activities |
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14,373 |
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14,527 |
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Cash Flows from Investing Activities: |
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Purchases of marketable securities |
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(14,613 |
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(5,609 |
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Maturities of marketable securities |
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17,600 |
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9,950 |
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Purchases of property and equipment |
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(3,392 |
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(2,422 |
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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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(9,522 |
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(829 |
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Increase in other assets |
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(22 |
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Net cash (used in) provided by investing activities |
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(12,015 |
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1,068 |
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Cash Flows from Financing Activities: |
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Proceeds from exercise of stock options |
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657 |
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647 |
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Proceeds from employee stock purchase plan |
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516 |
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436 |
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Repurchase of common stock |
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(1,479 |
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(2,190 |
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Payments of employee restricted stock tax withholdings |
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(476 |
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Payments on capital leases |
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(35 |
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Net cash used in financing activities |
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(782 |
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(1,142 |
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Effect of foreign exchange rate changes on cash and cash equivalents |
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102 |
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(138 |
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Net increase in cash and cash equivalents |
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1,678 |
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14,315 |
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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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$ |
36,097 |
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$ |
32,226 |
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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 e-commerce optimization services 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. Certain amounts have been
reclassified to conform to the current period presentation. Such reclassifications were not
material to the consolidated financial statements. The operating results for the three and six
months ended June 30, 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 include $2.6
million and $1.6 million of unbilled accounts receivable at June 30, 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 are comprised of support and maintenance services, application hosting services and
e-commerce optimization services, 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 e-Commerce Optimization Services). 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,
6
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition (SAB 104) applying the provisions of Emerging Issues Task Force (EITF)
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21), depending on the
nature of the arrangement.
Revenue is recognized only when persuasive evidence of an arrangement exists, the fee is fixed
or determinable, the product or service has been delivered, and collectability 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 electronic
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 using the proportional
performance method.
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 (VSOE) 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.
VSOE of fair value 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
7
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
optimization services. In arrangements that do not include application hosting services or
e-commerce optimization services, product license revenue is generally recognized upon delivery of
the software products.
2. Sales of Application Hosting Services and Professional 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 an arrangement 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 (EITF 00-3), 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.
3. Sales of e-Commerce Optimization Services
ATG derives revenue from e-commerce optimization services, which are hosted services that
enable customers to increase their volume of sales. e-commerce optimization services 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 on a monthly basis as the service is provided. Fees are
generally based on monthly minimums and transaction volumes. In certain instances e-commerce
optimization services are bundled with ATG software arrangements, which typically include 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 e-commerce optimization
services, the up-front fees received under the arrangement are deferred and recognized ratably over
the period of providing the e-commerce optimization services provided that the professional
services, if applicable, have commenced.
In certain instances, the Company sells perpetual software licenses with application hosting
services and e-commerce optimization services. 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. 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.
(e) Deferred Costs
The Company defers direct costs incurred for the set-up and implementation of application
hosting services until commencement of the application hosting service. In addition, for
arrangements that require the Company to defer professional services revenue, such as arrangements
in which the Company does not have vendor-specific objective evidence of fair value for an
undelivered element in an arrangement, the Company defers the direct costs related to performing
the professional services. These costs are amortized to cost of revenue ratably over the service
delivery 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 third party costs and specific internal
8
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
direct costs, such as direct salary and benefits, related to the set-up and implementation
services and professional services. Total deferred costs were
$3.1 million at each of June 30, 2008
and December 31, 2007.
(f) Comprehensive Loss
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income, requires financial statements to include the
reporting of comprehensive income (loss), which includes net income (loss) and certain transactions
that have generally been reported in the statement of stockholders equity. ATGs comprehensive
income (loss) consists of net income (loss), foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities. The components of comprehensive
income (loss) at June 30, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net income (loss) |
|
$ |
348 |
|
|
$ |
(2,748 |
) |
|
$ |
(494 |
) |
|
$ |
(4,209 |
) |
Foreign currency translation adjustment |
|
|
(16 |
) |
|
|
(50 |
) |
|
|
134 |
|
|
|
(194 |
) |
Unrealized loss on available-for-sale
securities |
|
|
(23 |
) |
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
309 |
|
|
$ |
(2,798 |
) |
|
$ |
(383 |
) |
|
$ |
(4,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(g) Classification of Marketable Securities
In the first quarter of 2008, the Company transferred its marketable securities classified as
held-to-maturity 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.
Available-for-sale securities are recorded at fair value.
(h) 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 June 30, 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. One
customer in the three month period ended June 30, 2008 accounted for 10% or more of total revenue.
No customer in the six month period ended June 30, 2008 and the three and six month periods ended
June 30, 2007 accounted for 10% or more of total revenue.
(i) New Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133 (SFAS 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 SFAS 141(R), Business Combinations (SFAS 141(R)), a
replacement of FASB SFAS No. 141. SFAS 141(R) is effective for fiscal years beginning on or
after December 15, 2008 and applies to all business combinations. SFAS 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
9
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
exceptions, even if the acquirer has not acquired 100% of its target. As a consequence, the
current step acquisition model will be eliminated. Additionally, SFAS 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 be accounted for in
purchase accounting at fair value; (4) the requirements in FASB
SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, have to be met at the acquisition date to accrue
for a restructuring plan in purchase accounting; 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 SFAS 141(R) on January 1, 2009 could materially change the accounting for business
combinations consummated subsequent to that date.
(2) Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the period. Diluted net income (loss)
per share is computed by dividing net income (loss) by the weighted average number of shares of
common stock outstanding plus the dilutive effect of common stock equivalents using the treasury
stock method. Common stock equivalents consist of stock options, 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 following table sets forth the computation of basic and diluted net loss per share for the
three and six month periods ended June 30, 2008 and 2007 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
348 |
|
|
$ |
(2,748 |
) |
|
$ |
(494 |
) |
|
$ |
(4,209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding used in computing basic net
income per share |
|
|
128,805 |
|
|
|
127,388 |
|
|
|
128,620 |
|
|
|
127,291 |
|
Dilutive employee common stock equivalents |
|
|
6,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common stock and
common stock equivalent shares
outstanding used in computing diluted net
income per share |
|
|
135,010 |
|
|
|
127,388 |
|
|
|
128,620 |
|
|
|
127,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.00 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.00 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents |
|
|
5,838 |
|
|
|
17,142 |
|
|
|
18,081 |
|
|
|
16,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to SFAS 123R. Stock-based
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 six months ended June
30, 2008 and 2007 and related weighted average assumptions is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
Stock Options |
|
2008 |
|
2007 |
Options granted (in thousands) |
|
|
969 |
|
|
|
765 |
|
Weighted-average exercise price |
|
$ |
3.72 |
|
|
$ |
2.43 |
|
Weighted-average grant date fair value |
|
$ |
2.42 |
|
|
$ |
1.96 |
|
Assumptions: |
|
|
|
|
|
|
|
|
Expected volatility |
|
|
73.7 |
% |
|
|
90.3 |
% |
Expected term (in years) |
|
|
6.25 |
|
|
|
6.25 |
|
Risk-free interest rate |
|
|
3.19 |
% |
|
|
4.62 |
% |
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 utilizes 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 7.5% to all unvested options as of
June 30, 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 six months ended June 30, 2008, the Company granted restricted stock units (RSUs)
covering an aggregate of 2,536,200 shares of its common stock with a total fair value of $9.0
million. The fair value of the 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. The Company did not grant any restricted stock awards (RSAs) during the six
months ended June 30, 2008.
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
approximately one year 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. The
Company believes it is probable the annual adjusted operating profit goal will be achieved,
resulting in stock-based compensation expense being recognized over the requisite service period on
an accelerated basis as required by
11
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SFAS 123R for performance-based awards. The achievement of the performance criteria for the
awards to immediately vest is currently not deemed to be probable by the Company.
RSU grants to the Companys Board of Directors generally occur in the second quarter of each
fiscal year. The 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.
As of June 30, 2008, there was $19.3 million of total unrecognized compensation cost related
to unvested awards of stock options and RSUs. That cost is expected to be recognized over a
weighted-average period of 3.0 years.
During the three months ended June 30, 2008 and 2007, stock-based compensation expense related
to stock options, RSA and RSU awards was $2.0 million and $1.4 million, respectively. During the
six months ended June 30, 2008 and 2007, stock-based compensation expense related to stock options,
RSA and RSU awards was $3.8 million and $2.5 million, respectively
Stock Award Activity
A summary of the activity under the Companys stock option plans as of June 30, 2008 and
changes during the six-month period then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
|
|
|
Exercise |
|
Remaining |
|
Aggregate |
|
|
Options |
|
Price |
|
Contractual |
|
Intrinsic |
|
|
Outstanding |
|
Per Share |
|
Term in Years |
|
Value |
Options outstanding at December 31, 2007 |
|
|
14,147 |
|
|
$ |
2.62 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
969 |
|
|
|
3.72 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(417 |
) |
|
|
1.57 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(658 |
) |
|
|
2.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008 |
|
|
14,041 |
|
|
|
2.73 |
|
|
|
6.5 |
|
|
$ |
18,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2008 |
|
|
10,035 |
|
|
|
2.72 |
|
|
|
5.8 |
|
|
|
15,635 |
|
Options vested or expected to vest at
June 30, 2008 (1) |
|
|
13,692 |
|
|
$ |
2.72 |
|
|
|
6.5 |
|
|
$ |
17,384 |
|
|
|
|
(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 is calculated by applying an
estimated forfeiture rate to the unvested options. |
During the six months ended June 30, 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 $0.9 million and $0.6 million and the total amount of cash
received from exercise of these options was $0.7 million and $0.6 million, respectively.
A summary of the Companys RSA and RSU award activity as of June 30, 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 |
|
|
2,536 |
|
|
|
3.54 |
|
Restrictions lapsed |
|
|
(571 |
) |
|
|
2.33 |
|
Awards forfeited |
|
|
(284 |
) |
|
|
3.26 |
|
|
|
|
|
|
|
|
|
|
Non-vested awards outstanding at June 30, 2008 |
|
|
4,040 |
|
|
$ |
3.16 |
|
|
|
|
|
|
|
|
|
|
12
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the six months ended June 30, 2008 and 2007, the total fair value of awards vested was
$1.3 million and $0.2 million, respectively.
(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 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. For the six months ended June 30, 2008, the Company
repurchased 422,182 shares of its common stock at a cost of $1.5 million. For the life of the stock
repurchase program to date, the Company has repurchased 1,409,142 shares of its common stock at a
cost of $4.4 million.
(5) Disclosures About Segments of an Enterprise
SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS
131), establishes standards for reporting information regarding operating segments in annual
financial statements. SFAS 131 also requires related disclosures about products and services and
geographic areas. Operating segments are identified as components of an enterprise 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 $11.7 million and $4.7
million for the three months ended June 30, 2008 and 2007, respectively, and $23.3 million and
$16.8 million for the six months ended June 30, 2007 and 2008, respectively. 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 and six months ended June 30, 2008 and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
United States |
|
|
72 |
% |
|
|
72 |
% |
|
|
70 |
% |
|
|
73 |
% |
United Kingdom (UK) |
|
|
11 |
|
|
|
13 |
|
|
|
11 |
|
|
|
13 |
|
Europe, Middle East and Africa (excluding UK) |
|
|
15 |
|
|
|
13 |
|
|
|
17 |
|
|
|
12 |
|
Other |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
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:
13
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 June 30, 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 |
|
$ |
6,208 |
|
|
$ |
6,208 |
|
|
|
|
|
|
|
|
|
Short-term available-for-
sale securities |
|
|
11,307 |
|
|
|
|
|
|
$ |
11,307 |
|
|
|
|
|
Long-term available-
for-sale securities |
|
|
1,705 |
|
|
|
|
|
|
|
1,705 |
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
19,220 |
|
|
$ |
6,208 |
|
|
$ |
13,012 |
|
|
|
|
|
|
|
|
The Companys available-for-sale securities consist of U.S. Treasury and U.S. government
agency securities, commercial paper, and corporate debt securities.
(7) Restricted Cash
The Company has 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 were issued in favor of various landlords to
secure obligations under ATGs facility leases pursuant to leases expiring through December 2011.
(8) Acquisitions CleverSet
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 $9.4 million, comprised of $9.2 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 service offerings with CleverSets
automated personalization engines, which present e-commerce visitors with relevant recommendations
and information designed to increase conversion rates and order size. The Company is currently
determining the final allocation of the purchase price based on the estimated fair values of the
assets and liabilities acquired as of the acquisition date.
In determining the preliminary 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
14
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 purchase price has been allocated on a preliminary basis 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 |
|
|
8,112 |
|
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 |
|
|
(289 |
) |
|
|
|
|
Total purchase price |
|
$ |
9,415 |
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended June 30, |
|
Six Months Ended June 30, |
|
|
2007 |
|
2008 |
|
2007 |
|
|
(in thousands) |
Pro forma revenue |
|
$ |
33,036 |
|
|
$ |
78,548 |
|
|
$ |
62,608 |
|
Pro forma net loss |
|
|
(3,825 |
) |
|
|
(1,031 |
) |
|
|
(6,013 |
) |
Pro forma net loss per share basic and diluted |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
(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.
15
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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
six 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 June 30, 2008, the Company had an accrued
restructuring liability of $0.6 million consisting of 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 |
|
|
(50 |
) |
|
|
(384 |
) |
|
|
(434 |
) |
|
|
|
Balance June 30, 2008 |
|
$ |
83 |
|
|
$ |
563 |
|
|
$ |
646 |
|
|
|
|
|
|
|
|
|
|
|
At June 30, 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.
16
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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):
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
Year Ended |
|
|
Ended June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
Balance at the beginning of the year |
|
$ |
59,675 |
|
|
$ |
59,328 |
|
Acquisition of CleverSet |
|
|
8,112 |
|
|
|
|
|
eStara earn-out payment |
|
|
|
|
|
|
621 |
|
Collection of eStara accounts receivable
previously reserved |
|
|
|
|
|
|
(274 |
) |
|
|
|
|
|
Total |
|
$ |
67,787 |
|
|
$ |
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Customer relationships |
|
$ |
11,660 |
|
|
$ |
(7,272 |
) |
|
$ |
4,388 |
|
|
$ |
11,500 |
|
|
$ |
(6,196 |
) |
|
$ |
5,304 |
|
Developed technology |
|
|
9,710 |
|
|
|
(5,070 |
) |
|
|
4,640 |
|
|
|
8,900 |
|
|
|
(4,145 |
) |
|
|
4,755 |
|
Trademarks |
|
|
1,400 |
|
|
|
(490 |
) |
|
|
910 |
|
|
|
1,400 |
|
|
|
(350 |
) |
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
22,770 |
|
|
$ |
(12,832 |
) |
|
$ |
9,938 |
|
|
$ |
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 $2.1 million for the three and six month
periods ended June 30, 2008 and $1.2 million and $2.5 million for the three and six month periods
ended June 30, 2007, respectively.
The Company expects amortization expense for these intangible assets to be (in thousands):
|
|
|
|
|
Remainder of 2008 |
|
$ |
2,170 |
|
2009 |
|
|
3,704 |
|
2010 |
|
|
3,032 |
|
2011 |
|
|
1,032 |
|
|
|
|
|
Total |
|
$ |
9,938 |
|
|
|
|
|
17
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 uncertified class 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
Company's favor and dismissed the case on summary judgement. In June 2008, the Company entered into a settlement agreement with the
individual named plaintiffs settling the litigation and the
plaintiffs filed stipulations of dismissal with respect to the other
six actions. In August 2008, the United States Court of
Appeals dismissed the case with prejudice. The settlement is fully funded by the Companys
insurance carrier.
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 counsels 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 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, e-commerce optimization services 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. Our recurring services revenue is comprised of managed application hosting
services, e-commerce optimization services, 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. e-commerce optimization services 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, some of our perpetual software
licenses also included the sale of our managed application hosting services or e-commerce
optimization 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 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 (or VSOE) of fair value. As a result, when we sell e-commerce
optimization services and managed application hosting services in conjunction with e-commerce
software, we defer all up-front fees, such as those for licenses, support and maintenance and
professional services, received prior to the delivery of the managed application hosting services
or e-commerce optimization services. We recognize these 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 addition, when professional services revenue is deferred in connection with these
arrangements and other instances in which there are undelivered elements to a transaction for which
we do not have VSOE of fair value, we defer the direct costs related to performing the professional
services. These amounts are recognized ratably to cost of revenue in the same manner as the
related revenue.
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 earnings.
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 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 and whose recognition
was deferred in the current period less revenue that was recognized from license contracts
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 e-commerce optimization
services 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 e-commerce optimization services, application hosting services and support
and maintenance related to ATG e-commerce platform sales. |
|
|
|
|
We use revenue and gross margins on our various lines of business to measure our success
at meeting cash and non-cash cost and expense targets in relation to revenue earned. |
|
|
|
|
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 optimization services 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 optimization services 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 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. The
market for e-commerce has seen 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 by large competitors with significantly greater resources and installed
customer bases. We expect competition to persist and intensify in the future.
Recent Events
On February 5, 2008, we acquired CleverSet for approximately $9.4 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 expect CleverSet to be accretive to our earnings in 2009.
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.
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. As of the date of this report there has been no
material change in any of the critical accounting policies and estimates described in that Annual
Report on Form 10-K.
22
ART TECHNOLOGY GROUP, INC.
Results of Operations
The following table sets forth statement of operations data as percentages of total revenue for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses |
|
|
29 |
% |
|
|
20 |
% |
|
|
27 |
% |
|
|
21 |
% |
Recurring services |
|
|
55 |
|
|
|
57 |
|
|
|
56 |
|
|
|
58 |
|
Professional and education services |
|
|
16 |
|
|
|
23 |
|
|
|
17 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Cost of Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses |
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
Recurring services |
|
|
22 |
|
|
|
17 |
|
|
|
21 |
|
|
|
17 |
|
Professional and education services |
|
|
15 |
|
|
|
22 |
|
|
|
17 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
39 |
|
|
|
41 |
|
|
|
40 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
61 |
|
|
|
59 |
|
|
|
60 |
|
|
|
60 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
18 |
|
|
|
19 |
|
|
|
18 |
|
|
|
20 |
|
Sales and marketing |
|
|
31 |
|
|
|
36 |
|
|
|
31 |
|
|
|
34 |
|
General and administrative |
|
|
12 |
|
|
|
14 |
|
|
|
12 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
61 |
|
|
|
69 |
|
|
|
60 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1 |
|
|
|
(10 |
) |
|
|
(1 |
) |
|
|
(9 |
) |
Interest and other income, net |
|
|
|
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes |
|
|
1 |
|
|
|
(8 |
) |
|
|
|
|
|
|
(7 |
) |
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1 |
% |
|
|
(8 |
%) |
|
|
(1 |
%) |
|
|
(7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, the cost of product license revenue as a
percentage of product license revenue and the cost of services revenue as a percentage of services
revenue and the related gross margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Cost of product license revenue |
|
|
4 |
% |
|
|
8 |
% |
|
|
4 |
% |
|
|
8 |
% |
Gross margin on product license revenue |
|
|
96 |
% |
|
|
92 |
% |
|
|
96 |
% |
|
|
92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of recurring services revenue |
|
|
40 |
% |
|
|
29 |
% |
|
|
38 |
% |
|
|
29 |
% |
Gross margin on recurring services revenue |
|
|
60 |
% |
|
|
71 |
% |
|
|
62 |
% |
|
|
71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of professional and education services |
|
|
97 |
% |
|
|
95 |
% |
|
|
103 |
% |
|
|
100 |
% |
Gross margin on professional and education services |
|
|
3 |
% |
|
|
5 |
% |
|
|
(3 |
%) |
|
|
0 |
% |
23
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 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 June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Product license bookings |
|
$ |
15,693 |
|
|
$ |
12,166 |
|
|
$ |
27,141 |
|
|
$ |
21,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in product license deferred revenue |
|
|
(9,670 |
) |
|
|
(5,997 |
) |
|
|
(15,363 |
) |
|
|
(8,423 |
) |
Product license deferred revenue recognized |
|
|
6,277 |
|
|
|
346 |
|
|
|
9,779 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license revenue |
|
$ |
12,300 |
|
|
$ |
6,515 |
|
|
$ |
21,557 |
|
|
$ |
13,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We deferred approximately 62% and 57% of our bookings for the three and six months ended June
30, 2008 compared to 49% and 40% for the three and six months ended June 30, 2007 due to the
inclusion of e-commerce optimization services, application hosting and other elements in our
contracts. Deferred revenue will be recognized in future periods when delivery of the service
occurs or as contractual requirements are met. During the three and six months ended June 30, 2008
we recognized $6.3 million and $9.8 million that was previously deferred compared to $0.3 million
and $0.5 million for the three and six months ended June 30, 2007. The product license deferred
revenue recognized in the three and six months ended June 30, 2008 included approximately $1.8
million and $2.8 million that was from 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 15% to 22% from
2007.
Three and Six Months ended June 30, 2008 and 2007
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(in thousands) |
Total revenue |
|
$ |
41,920 |
|
|
$ |
32,616 |
|
|
$ |
78,450 |
|
|
$ |
61,848 |
|
Total revenue increased $9.3 million or 29% to $41.9 million for the three months ended June
30, 2008 from $32.6 million for the three months ended June 30, 2007. Total revenue increased 27%
to $78.5 million for the six months ended June 30, 2008 from $61.8 million for the six moths ended
June 30, 2007. Revenue is derived from (1) perpetual software licenses, (2) recurring services,
which is comprised of support and maintenance services, application hosting services, and
e-commerce optimization services, and (3) professional and education services.
The increase in revenue for the three month period ended June 30, 2008 is primarily
attributable to growth in product license revenue and recurring services revenue. Product license
revenue increased $5.8 million, or 89%, for the three months ended June 30, 2008 and recurring
services revenue grew $4.4 million for the three months ended June 30, 2008.
The increase in revenue for the six month period ended June 30, 2008 is primarily attributable
to growth in the product license revenue and recurring services revenue. Product license revenue
increased $8.4 million, or 64%, for the three months ended June 30, 2008. Recurring services
revenue grew $7.9 million for the six months ended June 30, 2008.
Revenue generated from international customers increased to $11.7 million, or 28%, of total
revenues, and $23.3 million, or 30% of total revenue, for the three and six months ended June 30,
2008, from $8.8 million, or 27% of total revenues, and $16.7 million, or 27% of total revenue, in
the comparable prior year periods.
24
ART TECHNOLOGY GROUP, INC.
One customer in the three-month period ended June 30, 2008 accounted for 10% or more of total
revenue. No customer in the six-month period ended June 30, 2008 and the three and six-month
periods ended June 30, 2007 accounted for 10% or more of total revenue,
We expect full year 2008 revenues in the range of $159 million to $165 million.
Product license revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Product license revenue |
|
$ |
12,300 |
|
|
$ |
6,515 |
|
|
$ |
21,557 |
|
|
$ |
13,124 |
|
As a percent of total revenue |
|
|
29 |
% |
|
|
20 |
% |
|
|
27 |
% |
|
|
21 |
% |
Product license revenue increased 89% to $12.3 million for the three months ended June 30,
2008 from $6.6 million for the three months ended June 30, 2007. Product license revenue increased
64% for the six months ended June 30, 2008 from $13.1 million for the six months ended June 30,
2007. Product license revenue consists of the sale of perpetual license agreements less the
deferred amounts that will be recognized on a ratable basis in the future, plus amounts that have
been recognized in the current period from arrangements that were previously deferred.
We executed contracts for the sale of perpetual software licenses totaling $15.7 million in
the three month period ended June 30, 2008, an increase of $3.5 million or 29% from the
corresponding prior year period. In addition, we recognized $6.3 million of license revenue that
was previously deferred, an increase of $5.9 million from the corresponding prior year period.
Partially offsetting these increases was $9.7 million in deferrals of licenses sold during the
three months ended June 30, 2008, an increase of $3.7 million from the corresponding prior year
period.
We executed contracts for the sale of perpetual software licenses totaling $27.1 million in
the six month period ended June 30, 2008, an increase of $6.1 million or 29% from the corresponding
prior year period. In addition, we recognized $9.8 million of license revenue that was previously
deferred, an increase of $9.3 million from the corresponding prior year period. Partially
offsetting these increases was $15.4 million in deferrals of licenses sold during the six months
ended June 30, 2008, an increase of $6.9 million from the corresponding prior year period.
Product license revenue generated from international customers was $4.5 million and $7.9
million for the three and six months ended June 30, 2008 compared to $1.4 million and $2.2 million
for the three months ended June 30, 2007.
We expect full year 2008 product license revenues to increase approximately 18% to 28% from
2007.
25
ART TECHNOLOGY GROUP, INC.
Recurring services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
Support and maintenance |
|
$ |
11,946 |
|
|
$ |
10,461 |
|
|
$ |
22,603 |
|
|
$ |
20,491 |
|
e-Commerce optimization services and
managed application hosting services |
|
|
11,000 |
|
|
|
8,058 |
|
|
|
21,286 |
|
|
|
15,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring services revenue |
|
$ |
22,946 |
|
|
$ |
18,519 |
|
|
$ |
43,889 |
|
|
$ |
35,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenue |
|
|
55 |
% |
|
|
57 |
% |
|
|
56 |
% |
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our recurring services revenue increased 24% to $22.9 million for the three months ended June
30, 2008 from $18.5 million for the three months ended June 30, 2007, as follows:
|
|
|
Support and maintenance revenue increased 14% to $11.9 million for the three months ended
June 30, 2008 from $10.5 million for the corresponding period of 2007. Support and
maintenance revenue increased 10% to $22.6 million for the six months ended June 30, 2008
from $20.5 million for the corresponding period of 2007. The increase in the three
and six month periods is due to growth in our installed base of ATG e-commerce software,
partially offset by non-renewals of support and maintenance in the installed base. |
|
|
|
|
e-Commerce optimization services and managed application hosting services revenue
increased 37% to $11.0 million in the three months ended June 30, 2008 from $8.1 million in
the corresponding period of 2007. e-Commerce optimization services and managed application
hosting services revenue increased 37% to $21.3 million in six months ended June 30, 2008
from $15.5 million in the corresponding period of 2007. The increased revenue in the three
and six month periods of 2008 is driven by growth in the number of customers utilizing our
e-commerce optimization services and increased utilization by our existing customer base.
Revenue generated by the commercial personalization services technology acquired in the
CleverSet transaction is included in this e-commerce optimization services revenue. |
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 e-commerce optimization services and managed application hosting services.
Professional and education services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
Professional and education services revenue |
|
$ |
6,674 |
|
|
$ |
7,582 |
|
|
$ |
13,004 |
|
|
$ |
12,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenue |
|
|
16 |
% |
|
|
23 |
% |
|
|
17 |
% |
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional and education services revenue decreased 12% to $6.7 million for the three months
ended June 30, 2008 from $7.6 million for the three months ended June 30, 2007, and declined to 16%
percent of total revenue in 2008 from 23% in 2007. Professional and education services revenue
increased 2% for the six months ended June 30, 2008 from $12.7 million for the six months ended
June 30, 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.
The decline in professional and education services revenue for the three months ended June 30,
2008 and low growth in the six months ended June 30, 2008 was due to the net deferral of $0.6
million and $0.1 million of revenue related to arrangements where revenue and costs were deferred
and will be recognized in future periods and the successful shifting of professional services
engagements to our partner network. Included in professional and education services revenue for
the three and six month periods ended June 30, 2008 was $0.6 million and $0.8 million of revenue related to
government funded research business acquired with CleverSet.
26
ART TECHNOLOGY GROUP, INC.
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 professional
services revenue to decline 5% to 10% from 2007 level for the full year of 2008.
Cost of product license revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Cost of product license revenue |
|
$ |
519 |
|
|
$ |
549 |
|
|
$ |
906 |
|
|
$ |
1,089 |
|
As a percent of license revenue |
|
|
4 |
% |
|
|
8 |
% |
|
|
4 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on product license revenue |
|
$ |
11,781 |
|
|
$ |
5,966 |
|
|
$ |
20,651 |
|
|
$ |
12,035 |
|
As a percent of license revenue |
|
|
96 |
% |
|
|
92 |
% |
|
|
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 5% for the three months ended June 30, 2008 from the
three months ended June 30, 2007. Gross margin on product license revenue was 96%, or
$11.8 million, for the three months ended June 30, 2008 compared to 92%, or $6.0 million for the
three months ended June 30, 2007. Cost of product license revenue decreased 17% to $0.9 million
for the six months ended June 30, 2008 from $1.1 million for the six months ended June 30, 2007.
Gross margin on product license revenue was 96% or $20.7 million for the six months ended June 30,
2008 compared to 92%, or $12.0 million for the six months ended June 30, 2007.
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 June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Cost of recurring services revenue |
|
$ |
9,241 |
|
|
$ |
5,379 |
|
|
$ |
16,847 |
|
|
$ |
10,522 |
|
As a percent of recurring services revenue |
|
|
40 |
% |
|
|
29 |
% |
|
|
38 |
% |
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on recurring services revenue |
|
$ |
13,705 |
|
|
$ |
13,140 |
|
|
$ |
27,042 |
|
|
$ |
25,467 |
|
As a percent of recurring services revenue |
|
|
60 |
% |
|
|
71 |
% |
|
|
62 |
% |
|
|
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. When we perform professional consulting and implementation
services in connection with managed application hosting arrangements, and other arrangements in
which professional services revenue is deferred we generally defer the direct costs of these
activities and amortize these to cost of revenue ratably over the estimated life of the arrangement
once the services commence or the actual term of the arrangement depending on the nature of the
arrangement. We deferred a net $0.1 million and $0.4 million of direct costs for the three and six
months ended June 30, 2008.
Cost of recurring services revenue increased 72% to $9.2 million for the three months ended
June 30, 2008 from $5.4 million for the three months ended June 30, 2007. Gross margin on recurring
services revenue was 60%, or $13.7 million for the three months ended June 30, 2008 compared to
71%, or $13.1 million for the three months ended June 30, 2007. Cost of recurring services revenue
increased 60% to $16.8 million for the six months ended June 30, 2008 from $10.5 million for the
six months ended June 30, 2007. Gross margin on recurring services was
27
ART TECHNOLOGY GROUP, INC.
62% or $27.0 million for
the six months ended June 30, 2008 compared to 71% or $25.5 million for the six months ended June
30, 2007.
The increase in cost of recurring services and the resulting decline in gross margin
percentage on recurring services for the three month period ended June 30, 2008 was due to a $1.3
million increase in telecommunications costs in our e-commerce optimization services business
correlating with increased recurring services revenue, a $1.2 million increase in labor related
costs from additional investment in our application hosting services infrastructure, a net $0.6
million increase in recognition of previously deferred implementation costs driven by termination
of customer hosting arrangements, and $0.3 million in depreciation expense related to fixed assets
acquired to support growth in the business and the acquisition of CleverSet.
The increase in cost of recurring services and the resulting decline in gross margin
percentage on recurring services for the six month period ended June 30, 2008 was due to a $2.5
million increase in telecommunications costs related to e-commerce optimization services business
correlating with increased recurring services revenue, $2.9 million increase in labor related costs
from additional investment in our application hosting services infrastructure, a $0.4 million
increase in recognition of costs previously deferred, as a result of termination of customer
hosting arrangements, and $0.5 million in depreciation expense.
We expect full year 2008 gross margin on recurring services revenue to be approximately 60% to
65%.
Cost of professional and education services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Cost of professional services revenue |
|
$ |
6,495 |
|
|
$ |
7,171 |
|
|
$ |
13,409 |
|
|
$ |
12,769 |
|
As a percent of professional services revenue |
|
|
97 |
% |
|
|
95 |
% |
|
|
103 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on professional services revenue |
|
$ |
179 |
|
|
$ |
411 |
|
|
$ |
(405 |
) |
|
$ |
(34 |
) |
As a percent of professional services revenue |
|
|
3 |
% |
|
|
5 |
% |
|
|
(3 |
%) |
|
|
0 |
% |
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 decreased 9% to $6.5 million for the three
months ended June 30, 2008 from $7.2 million for the three months ended June 30, 2007. Gross margin
on professional and education services revenue was 3%, or $0.2 million for the three months ended
June 30, 2008 compared to 5%, or $0.4 million for the three months ended June 30, 2007. Cost of
professional and education services increased 5% to $13.4 million for the six months ended June 30,
2008 from $12.8 million for the six months ended June 30, 2007. Gross margin on professional and
education services revenue was (3%), or ($0.4) million for the six months ended June 30, 2008
compared to 0% or $(34,000) for the six months ended June 30, 2007.
The decrease in cost of professional and education services for the three months ended June
30, 2008 was driven by a $1.3 million decrease in labor related costs for professional services due
to a reduction in the use of contract labor in the delivery of our professional services resulting
from the successful execution of our strategy to develop our partner networks and the deferral of
$0.4 million of labor related costs in connection with services performed on engagements whose
revenue was deferred and will be recognized in future periods. The decreases in expenses were
partially offset by the inclusion of $0.6 million in CleverSet expenses and an increase of $0.6
million in recognition of previously deferred costs.
The increase in cost of professional and education services for the six month ended June 30,
2008 was driven by the inclusion of CleverSet expenses of $0.8 million. In addition, expenses
increased due to the increase of $0.5 million in recognition of costs previously deferred. The
increases were partially offset by a $0.4 million decrease in labor related costs.
28
ART TECHNOLOGY GROUP, INC.
We expect full year 2008 gross margin on professional and educational services revenue to be
approximately zero to 3%.
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Research and development expenses |
|
$ |
7,373 |
|
|
$ |
6,270 |
|
|
$ |
14,394 |
|
|
$ |
12,051 |
|
As a percent of total revenue |
|
|
18 |
% |
|
|
19 |
% |
|
|
18 |
% |
|
|
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 18% to $7.4 million for the three months ended
June 30, 2008 from $6.3 million for the three months ended June 30, 2007 and decreased as a
percentage of revenue to 18% from 19%. Research and development expenses increased 19% for the
six months ended June 30, 2008 from $12.1 million for the six months ended June 30, 2007 and
decreased as percentage of revenue to 18% from 20%. The increase in research and development
spending for the three months ended June 30, 2008 was primarily attributable to an increase of $0.7
million in labor related costs due to the CleverSet acquisition and an increase in amortization
expense for intangible assets of $0.1 million, also related to the CleverSet acquisition. The
increase in research and development spending for the six months ended June 30, 2008 was primarily
attributable to an increase of $1.5 million in labor related costs associated with the acquisition
of CleverSet and an increase in stock-based compensation of $0.2 million due to growth of the
research and development organization, and a $0.1 million increase in amortization expense.
We expect full year 2008 research and development expenses to be approximately 19% of revenue.
Sales and marketing expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Sales and marketing expenses |
|
$ |
13,156 |
|
|
$ |
11,773 |
|
|
$ |
24,693 |
|
|
$ |
21,317 |
|
As a percent of total revenue |
|
|
31 |
% |
|
|
36 |
% |
|
|
31 |
% |
|
|
34 |
% |
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 12% to $13.2 million for the three months ended June
30, 2008 from $11.8 million for the three months ended June 30, 2007, and declined as a percentage
of total revenue to 31% from 36%. Sales and marketing expense increased 16% to $24.7 million for
the six months ended June 30, 2008 from $21.3 million for the six months ended June 30, 2007 and
decreased as a percentage of revenue to 31% from 34%. The increase in spending for the three months
consisted of labor related costs of $0.5 million as a result of hiring additional sales personnel,
increased bonus and commission of $0.6 million because product license bookings increased 29% and
increased stock compensation of $0.2 million. The increase in spending for the six months
consisted of labor related cost of $1.6 million due to hiring additional sales personnel, increased
bonus and commission of $1.0 million driven by a 29% increase in product license bookings, $0.5
increase in stock compensation, and higher marketing costs of $0.2 million due to our annual sales
kick-off event in January 2008 and Insight, an industry-wide ecommerce conference organized by the
Company.
We expect full year 2008 sales and marketing expenses to be approximately 33% of revenue.
29
General and administrative expenses
ART TECHNOLOGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
General and administrative expenses |
|
$ |
4,863 |
|
|
$ |
4,648 |
|
|
$ |
9,192 |
|
|
$ |
9,251 |
|
As a percent of total revenue |
|
|
12 |
% |
|
|
14 |
% |
|
|
12 |
% |
|
|
15 |
% |
General and administrative expenses consist primarily of salaries, benefits, and stock-based
compensation and other related costs for internal systems, finance, human resources, legal and
executive related functions.
General and administrative expenses increased 5% to $4.9 million for the three months ended
June 30, 2008 from $4.6 million for the three months ended June 30, 2007, and decreased as a
percentage of total revenue to 12% from 14%. General and administrative expenses decreased less
than 1% for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 and
decreased as a percentage of revenue to 12% from 15%.
The increase in general and administrative expenses for the three months ended June 30, 2008
of $0.2 million was the result of an increase in bad debt expense of $0.3 million and stock-based
compensation of $0.2 million, partially offset by a decrease in labor related costs of $0.3 million
driven by a decline in the utilization of contract labor. General and administrative expenses were
consistent for the six months ended June 30, 2008.
We expect full year 2008 general and administrative expenses to be approximately 11% of
revenue.
Stock-based Compensation Expense
We use the straight-line attribution method to recognize stock-based compensation expense for
share-based payments unless there are performance-based criteria in which case we use the
accelerated method. Compensation cost is calculated on the date of grant using the fair value of
the options as determined by the Black-Scholes valuation model, or fair value of our common stock
for issuances of restricted stock and restricted stock units. Stock-based compensation expense for
the three months ended June 30, 2008 and 2007 was $2.0 million and $1.4 million, respectively.
Stock-based compensation expense for the six months ended June 30, 2008 and 2007 was $3.8 million
and $2.5 million, respectively.
As of June 30, 2008, the total compensation cost related to unvested awards not yet recognized in
the statement of operations is approximately $19.3 million, which will be recognized over a
weighted average period of 3 years.
Interest and Other Income, Net
Interest and other income net decreased to $0.2 million for the three months ended June 30,
2008 from $0.5 million for the three months ended June 30, 2007. Interest and other income net
decreased to $0.9 million for the six months ended June 30, 2008 from $1.0 million for the six
months ended June 30, 2007. The decrease in the three and six months ended June 30, 2008 was
primarily due to a decrease in gains on foreign currency transactions and lower interest income
during the period driven by the use of marketable securities to fund the CleverSet acquisition and
lower interest rates.
30
ART TECHNOLOGY GROUP, INC.
Provision for Income Taxes
For the three and six months ended June 30 2008, we recorded income tax provisions of $0.2
million and $0.4 million, respectively. The provision primarily relates to earnings in certain of our foreign
subsidiaries as well as interest and penalties related to some of our tax positions.
We recorded tax provisions of $0.1 million for the three and six months ended June 30, 2007.
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 at June 30, 2008 are our cash, cash
equivalents, and short and long-term marketable securities of $50.6 million, excluding $2.1 million
of restricted cash.
Cash provided by operating activities was $14.4 million for the six months ended June 30,
2008.
|
|
|
Although we incurred a net loss of ($0.5) million, it included non-cash expenses for
depreciation and amortization of $4.2 million, and stock-based compensation expense of
$3.8 million. |
|
|
|
|
Deferred revenue increased $7.8 million during the period. We invoice customers as
licenses and services are delivered and pursue collection of these invoices under customary
business practices. Accordingly, the invoices that generated the deferred revenue balance
at June 30, 2008 were subject to our collection process and, to the extent collected, are in
our cash flow from operations. |
|
|
|
|
Prepaid expenses and other current assets increased $1.1 million due to payments for
support and maintenance contracts on internally utilized software, insurance premiums and
foreign sales tax payments which are recoverable. |
|
|
|
|
Accounts receivable increased $0.1 million in 2008. The nominal increase in accounts
receivable despite strong sales is because of improved collection of outstanding accounts
receivable, which resulted in a decline in days sales outstanding to 87 days at June 30,
2008 compared to 93 days at December 31, 2007. The improved collections of receivables more
than offset the deferral of revenue caused by changes in our business model. |
|
|
|
|
Accrued expenses and other liabilities increased $0.6 million in 2008 primarily due to
increased use of outside services in research and development and professional services,
higher telecommunications costs in the e-commerce optimization services business because of
the growth in the business and sales tax accruals attributed to sales growth. |
Net cash used in investing activities for the six months ended June 30, 2008 was
$12.0 million, which consisted of $3.4 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, net payments of $9.5
million for the CleverSet acquisition and $0.6 million for payments to eStara shareholders for
contingent consideration, partially offset by $3.0 million in net sales and maturities of
marketable securities.
Net cash used in financing activities was $0.8 million for the six months ended June 30, 2008.
Financing activities consisted primarily of the $1.5 million repurchase of our common stock and
$0.5 million in payments of employee restricted stock tax withholdings, partially offset by $1.2
million in proceeds from exercised stock options and the employee stock purchase plan.
31
ART TECHNOLOGY GROUP, INC.
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 six months ended June 30, 2008, we repurchased 422,182
shares of our common stock at a cost of $1.5 million. Under the program to date, we repurchased
1,409,142 shares of our common stock at a cost of $4.4 million. We have authorization to expend an
additional $15.6 million under this program as of June 30, 2008.
We believe that our balance of $50.6 million in cash, cash equivalents and marketable
securities, excluding $2.1 million of restricted cash at June 30, 2008, along with other working
capital and cash expected to be generated by 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.
Accounts Receivable and Days Sales Outstanding
Our accounts receivable balance and days sales outstanding and modified days sales
outstanding for the quarter ended June 30, 2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of and for the |
|
|
Quarter Ended |
|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
DSO |
|
|
87 |
|
|
|
93 |
|
Revenue |
|
$ |
41,920 |
|
|
$ |
39,326 |
|
Accounts receivable, net |
|
$ |
40,501 |
|
|
$ |
40,443 |
|
Modified days sales outstanding (1) |
|
|
76 |
|
|
|
82 |
|
Percentage of total net accounts receivable less than 60 days past due |
|
|
91 |
% |
|
|
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 June 30, 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 was required to cash collateralize $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 investments. The letters of credit were 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 (SFAS) No. 161, Disclosures About Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (SFAS 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
32
ART TECHNOLOGY GROUP, INC.
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 SFAS No. 141(R), Business Combinations,
(SFAS 141(R)), a replacement of SFAS No. 141. SFAS 141(R) is effective for fiscal years
beginning on or after December 15, 2008 and applies to all business combinations. SFAS 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, SFAS 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) the requirements in SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, would have to be met at the acquisition date to
accrue for a restructuring plan in purchase accounting; and (5) In-process research and development
charges will no longer be recorded. While there is no expected impact to our consolidated financial
statements on the accounting for acquisitions completed prior to December 31, 2008, the adoption of
SFAS 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 June 30,
2008 and December 31, 2007 primarily due to their short maturity and our intent to hold the
securities to maturity.
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 June 30, 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 June 30, 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 June 30,
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
33
ART TECHNOLOGY GROUP, INC.
relationship of possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of June 30, 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 June 30, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
34
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 uncertified class 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 thereunder. In
October 2006, the court ruled in our favor and dismissed the
case on summary judgment. In June 2008, we entered into a settlement agreement with
the individual named plaintiffs settling the litigation and the
plaintiffs filed stipulations of dismissal with respect to the other
six actions. In August 2008, the United States Court of
Appeals dismissed the case with prejudice. The settlement is fully funded by our insurance
carrier.
As previously disclosed, in December 2001, a purported class action complaint was filed
against our wholly owned subsidiary Primus Knowledge Solutions, Inc., two former officers of Primus
and the underwriters of Primus 1999 initial public offering. The complaints are similar and allege
violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934
primarily based on the allegation that the underwriters received undisclosed compensation in
connection with Primus initial public offering. The litigation has been consolidated in the United
States District Court for the Southern District of New York (SDNY) with claims against
approximately 300 other companies that had initial public offerings during the same general time
period. In February 2005, the court issued an opinion and order granting preliminary approval of a
proposed settlement, subject to certain non-material modifications. However in June 2007, the court
terminated the settlement process due to the parties inability to certify the settlement class.
Plaintiffs counsels 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.
35
ART TECHNOLOGY GROUP, INC.
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 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
On April 19, 2007, our Board of Directors authorized a stock repurchase program providing for
repurchases of our outstanding common stock of up to $20 million, in the open market or in
privately negotiated transactions, at times and prices considered appropriate depending on the
prevailing market conditions. The table below presents information regarding our repurchases of our
common stock during each calendar month with activity in the three-month period ended June 30,
2008.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Approximate dollar |
|
|
|
|
|
|
|
|
|
|
|
(c) Total number of |
|
|
value of shares that may |
|
|
|
|
|
|
|
|
|
|
|
shares purchased as part |
|
|
yet be purchased under |
|
|
|
(a) Total number of shares |
|
|
(b) Average price |
|
|
of publicly announced |
|
|
the plans or programs |
|
Period |
|
purchased |
|
|
paid per share |
|
|
plan |
|
|
(in thousands) |
|
April 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2008 |
|
|
422,182 |
|
|
$ |
3.51 |
|
|
|
422,182 |
|
|
$ |
15,619 |
|
June 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
422,182 |
|
|
$ |
3.51 |
|
|
|
422,182 |
|
|
$ |
15,619 |
|
|
|
|
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|
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Item 3. Defaults Upon Senior Securities
None.
36
ART TECHNOLOGY GROUP, INC.
Item 4. Submission of Matters to a Vote of Security Holders
At our annual meeting of stockholders on May 22, 2008, the following actions were submitted to
a vote of stockholders:
|
(a) |
|
Michael A. Brochu, Robert D. Burke, and Mary E. Makela were elected to serve as
Directors of the Company until the 2011 Annual Meeting of Stockholders and until their
successors are duly elected and qualified. The specific tallies of the applicable votes are
detailed below. Each of David B. Elsbree, John R. Held, Ilene Lang, Daniel C. Regis and
Phyllis S. Swersky, whose terms did not expire at the annual meeting, continued in office
following the meeting. |
|
|
|
|
|
|
|
|
|
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Name of Nominee |
|
|
FOR |
|
WITHHELD |
Michael A. Brochu |
|
|
|
58,914,470 |
|
|
|
53,033,053 |
|
Robert D. Burke |
|
|
|
104,160,287 |
|
|
|
7,787,236 |
|
Mary E. Makela |
|
|
|
102,339,188 |
|
|
|
9,608,335 |
|
|
|
|
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(b) |
|
The stockholders approved the further amendment and restatement of the Amended and
Restated 1996 Stock Option Plan. |
|
|
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|
|
|
|
|
|
|
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FOR |
|
|
|
AGAINST |
|
ABSTAINING |
|
BROKER NON-VOTES |
|
71,465,497 |
|
|
|
|
|
12,517,763 |
|
|
|
50,874 |
|
|
|
27,913,389 |
|
|
|
|
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(c) |
|
The stockholders approved the ratification of appointment of our independent registered
public accounting firm. |
|
|
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|
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|
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|
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|
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|
|
|
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FOR |
|
|
|
AGAINST |
|
ABSTAINING |
|
BROKER NON-VOTES |
|
111,606,247 |
|
|
|
|
|
278,278 |
|
|
|
62,998 |
|
|
|
0 |
|
Item 5. Other Information
None
37
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). |
|
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 |
|
Amended and Restated Non-Employee Director Compensation Plan, as amended on May 22, 2008.* |
|
10.2 |
|
Agreement and Release between Clifford Conneighton and Art Technology Group, Inc. dated July 16, 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. |
38
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.
|
|
|
|
|
|
ART TECHNOLOGY GROUP, INC.
(Registrant)
|
|
|
|
By: |
/s/ ROBERT D. BURKE
|
|
|
|
Robert D. Burke |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
By: |
/s/ JULIE M.B. BRADLEY
|
|
|
|
Julie M.B. Bradley |
|
|
|
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer) |
|
|
Date: August 8, 2008 |
|
|
|
39