e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-26679
Art Technology Group,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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04-3141918
(I.R.S. Employer
Identification No.)
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One Main Street
Cambridge, Massachusetts
(Address of principal
executive offices)
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02142
(Zip Code)
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(617) 386-1000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value with Associated Preferred
Stock Purchase Rights
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The Nasdaq Stock Market, LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As June 30, 2008 (the last business day of the
registrants most recently completed second fiscal
quarter), the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $412,487,955.
As of February 20, 2009, the number of shares of the
registrants common stock outstanding was 126,041,851.
Documents
Incorporated by Reference
Portions of the registrants definitive proxy statement for
its annual meeting of stockholders to be held on May 20,
2009 are incorporated by reference in Items 10, 11, 12, 13
and 14 of Part III.
ART
TECHNOLOGY GROUP, INC.
INDEX TO
FORM 10-K
References in this Report to we, us,
our and ATG refer to Art Technology
Group, Inc. and its subsidiaries. ATG and Art Technology Group
are our registered trademarks. This Report also includes
trademarks and trade names of other companies.
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PART I
Some of the information contained in this Report consists of
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Use of words
such as believes, expects,
anticipates, intends, plans,
estimates, should, likely or
similar expressions indicate a forward-looking statement. These
statements are subject to risks and uncertainties and are based
on the beliefs and assumptions of our management based on
information currently available to our management. Important
factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited
to, those set forth below under the heading Risk
Factors. We assume no obligation to update any
forward-looking statements.
Our
Business
We develop and market a comprehensive suite of
e-commerce
software products and software-as-a-service (SaaS)
solutions as well as provide related services, including support
and maintenance, professional services, application hosting,
e-commerce
optimization services for enhancing online sales, and education.
Our customers use our products and services to power their
e-commerce
websites, attract prospects, convert sales, increase order size,
and offer ongoing customer care services. Our solutions are
designed to provide a scalable, reliable and sophisticated
e-commerce
website for our customers to create a satisfied, loyal and
profitable online customer base.
Corporate
Information
We were incorporated in 1991 in the Commonwealth of
Massachusetts and reincorporated in 1997 in the State of
Delaware, and have been a publicly traded corporation since
1999. Our corporate headquarters are at One Main Street,
Cambridge, Massachusetts 02142. We have domestic offices in
Chicago, Illinois; New York, New York; Washington D.C.; Reston,
Virginia; San Francisco, California; and Seattle,
Washington; and international offices in Canada; France;
Northern Ireland; and the United Kingdom. As of
December 31, 2008, we had a total of 502 employees and
approximately 700 customers. Our Internet web site address is
www.atg.com.
Overview
We provide software and services that help online businesses
increase their revenues. We seek to differentiate ourselves by
offering solutions that enable our customers to provide a
richer, more personalized and more compelling online shopping
experience. We provide merchandisers and marketers more control
over the online channel, and enable customer service agents to
provide consumers more consistent, personalized and relevant
assistance. Our solutions deliver better consistency and
relevancy by capturing and maintaining information about
customers personal preferences, online activity, and
transaction history, and by using this information to deliver
more personalized and contextual content.
Our ATG Commerce Suite consists of solutions delivered through
perpetual software licenses or delivered as recurring SAAS
solutions. Our ATG
e-Commerce
Optimization Services interoperate with any
e-commerce
platform, and are delivered as recurring SaaS solutions. Our
e-commerce
optimization services include Click-to-Call, Click-to-Chat, Call
Tracking services and Recommendation services.
We market our products and services primarily to Global
2000 companies and other businesses that have large numbers
of online users and utilize the Internet as an important
business channel. We focus primarily on businesses in the
retail, consumer products, manufacturing, media and
entertainment, telecommunications, financial services, travel
and insurance industries. We have approximately 700 customers,
including more of the Top 500 Internet retailers than any other
e-commerce
solution vendor. Amazon, American Eagle Outfitters, American
Express, AOL, AT&T, Best Buy, B&Q, Cabelas,
Carrefour, Cingular, Coca Cola, Collective Brands, Conde Nast,
Continental Airlines, Dell, DirecTV, El Corte Ingles, Expedia,
France Telecom, Harvard Business School Publishing,
Hewlett-Packard, Intuit, Hilton, HSBC, L.L Bean, Lexmark,
Macys, Meredith, Microsoft, Neiman Marcus, New
York & Company, Nokia, Nutrisystem, OfficeMax,
Overstock.com, PayPal, Philips, Procter & Gamble,
Sears, Shop Direct Group, Sony, Sprint, Symantec, T Mobile,
Target, Urban Outfitters, Verizon, Viacom, Vodafone, Walgreens,
and Williams Sonoma.
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Our business has evolved significantly since our incorporation
in 1991:
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Until 1995, we functioned primarily as a professional services
organization in the Internet commerce market.
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In 1996, we began offering Internet commerce and software
solutions, initially focusing on infrastructure products.
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In 2004, we began to concentrate on developing application
products, having concluded that the market for infrastructure
products had become increasingly standards driven and that we
could best differentiate ourselves by offering our clients
advanced applications functionality.
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In November 2004, we acquired Primus Knowledge Solutions, Inc.
(Primus), a provider of software solutions for
customer service designed to help companies deliver a superior
customer experience via contact centers,
e-mail and
web self-service. The Primus solution extended our offerings
beyond commerce and marketing and into customer service.
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In 2004, we also began to offer our clients hosted SaaS services
as an alternative delivery model for our application solutions,
having concluded that hosted services could provide significant
advantages for our clients, and provide us with a substantial
opportunity for growth.
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In 2005, we completed the integration of Primus applications
into the ATG platform.
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In October 2006, we acquired eStara, Inc. (eStara),
a provider of
e-commerce
optimization service solutions for enhancing online sales and
support initiatives. The eStara solutions provided us with a new
channel to help our clients convert web browsing activities into
sales, as well as business opportunities independent of
ATG-powered websites.
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In 2007, we initiated a strategy to offer our
e-commerce
platform solutions in combination with our site-independent SaaS
services. One result of this strategy is that we recognize
revenue from more of our transactions on a ratable basis.
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In February 2008, we acquired CleverSet, a provider of automated
personalization engines, used to optimize
e-commerce
experiences by presenting visitors with relevant recommendations
and information. CleverSets next-generation technology has
been shown to significantly lift
e-commerce
revenue by increasing conversion rates and order size. We offer
these services as ATG Recommendations within the optimization
services product line.
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Online retailers periodically upgrade or replace the network and
enterprise applications software and the related hardware
systems that they use to run their
e-commerce
operations in order to take advantage of advances in computing
power, system architectures and enterprise software
functionality that enable them to increase the capabilities of
their
e-commerce
systems while simplifying operation and maintenance of these
systems and reducing their cost of ownership. We refer to these
major system upgrades or replacements as
replatforming.
We believe that a companys replatforming is a significant
event that often leads to a sale of an
e-commerce
platform software license. We believe that on average, customers
in our market replatform or refresh their
e-commerce
software approximately every five years.
Our
Strategy
Our objective is to be the industry leader in helping businesses
do more business on the Internet. We intend to achieve this
objective by implementing the following key components of our
strategy:
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Deliver an e-commerce platform with leadership functionality,
suitable for the most demanding enterprises. Our clients
tell us that, in some cases, our platform handles over 100,000
orders per day in peak periods. Leading industry analysts rank
the ATG Commerce Suite as a leader among commerce platforms for
business-to-consumer sites on criteria including company
strategy, product strategy, solution architecture,
e-commerce
features, customer management and service, financial resources,
and market presence. It is our objective to continue to provide
leadership in
e-commerce
functionality and operational excellence.
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Through our
e-commerce
optimization services offerings, deliver solutions independent
of the underlying commerce platform to increase on-line
revenue. Our
e-commerce
optimization services can be delivered to clients running web
sites on any
e-commerce
platform, or custom-built websites, across all industries. This
increases the size of our market opportunity and customer
penetration.
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Through our hosting services, make our industry-leading
e-commerce
functionality available to mid-tier companies and others who opt
to outsource their
e-commerce
operations. By leveraging our experience with
OnDemand offerings, our Professional Services organization
assists our clients with their ATG implementations, thus helping
our clients quickly and economically manage their
e-commerce
and service projects.
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Differentiate by providing a more personalized, more
relevant, more consistent shopping experience. We
give merchandisers and marketers the power and analytics to
define offers and cross-sells, to follow up on abandoned
shopping carts, to perform multivariate split tests and to
create multi-channel, multi-stage web and
e-mail
campaigns that match a companys selling strategy with
information about a visitors browsing behavior, purchase
and interaction history, preferences and profile. This increases
basket size and the number of website visitors who go on to
purchase items from that website, resulting in increased
revenue. We use this same information to extend the consistent
customer experience to the customer service agent in the call
center, which can result in a more satisfied, loyal and
profitable customer.
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Leverage existing sales channels. We sell our
products primarily through our direct sales organization. In
addition, a significant portion of our product revenue is
co-sold or influenced by a variety of business partners,
including systems integrators, solution providers and other
technology partners. We currently have a broad range of business
alliances throughout the world, which include global systems
integrators such as Accenture, Capgemini, CGI, Deloitte
Consulting, Infosys, Sapient and Tata Consulting Services as
well as regional integrators and interactive agencies such as
Razorfish, BlastRadius, LBi Group, McFadyen Consulting,
Professional Access, Resource Interactive, and Aaxis Group. In
most geographies and situations, our goal is to maintain close
relationships directly with our clients while also motivating
systems integrators and other channel partners to implement our
applications in their projects and solution sets.
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Leverage and expand our service
capabilities. We have extensive experience in web
application development and integration services, as well as
knowledge management design and call-center systems deployment.
Through our Professional and Education Services organizations,
we provide services to train our systems integrators, value
added resellers, and complementary software vendors in the use
of our products; and we offer consulting services to assist with
customer implementations. We seek to motivate our business
partners to provide joint implementation services to our end
user customers. We intend to continue to seek additional
opportunities to increase revenues from product sales by
expanding our base of business partners trained in the
implementation and application of our products.
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International expansion. We have seen an
increase in sales and pipeline growth in Europe and Asia
Pacific. We seek to invest resources into further developing our
reach internationally. In support of this initiative we have
entered into partnership agreements abroad that will support our
continued growth. As the international market opportunity
continues to develop we will adjust our strategy.
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ATG
Licensed Software Products
We provide a comprehensive
e-commerce
product suite designed to enable our clients to attract
visitors, convert them to buyers, deliver customer service and
analyze the results. The products that comprise our
comprehensive
e-commerce
product suite are as follows:
The ATG Commerce Suite is a comprehensive, highly
scalable
e-commerce
platform and application suite. Its flexible, component-based
architecture enables our clients to personalize the online
buying experience for their customers, so that customers can
more easily find desired products, comparison shop, register for
gifts, pre-order products, redeem coupons and execute other
useful features. ATG Commerces functionality includes
catalogs, product management, shopping carts, checkout, pricing
management, merchandising, promotions, inventory management and
business-to-business order management.
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The ATG Adaptive Scenario Engine is the platform
component of the ATG Commerce Suite. It provides the enabling
technology and core functionality to allow our clients to
develop and manage robust, adaptable, scalable and personalized
e-commerce
applications across channels and through the complete customer
lifecycle. The ATG platform is designed to allow our clients to
easily integrate these applications across their
marketing/merchandising,
e-commerce
and customer care organizations.
ATG Commerce Search is a dynamic, integrated search
solution that incorporates natural language technology into our
clients online storefronts. ATG Commerce Search is
designed to enable shoppers to navigate our clients
e-commerce
sites quickly and efficiently to find merchandise they want and
discover new items, as well as make purchases directly from the
search results page.
ATG Merchandising enables our clients merchandising
professionals to directly manage their online
storefronts including catalogs, products, search
facets, promotions, pricing, coupons and special
offers to help quickly connect shoppers with the
items most likely to interest them.
ATG Content Administration is a comprehensive web content
management solution to support personalized websites throughout
the entire content process, including creation, version
tracking, preview, editing, revision, approval and site
deployment.
ATG Outreach is an
e-marketing
solution that leverages customer information gained through web
interactions, preferences and behaviors to enable our clients to
create relevant, personalized outbound marketing and service
campaigns.
ATG Self-Service offers consumers access to personalized
answers to questions and helps the customer answer his or her
questions without telephoning for help. ATG Self-Service
combines an answer repository with multi-lingual natural
language search and navigation capabilities. The application
also offers comprehensive business reporting that helps clients
better understand customers needs and preferences.
ATG Commerce Service Center provides complete
e-commerce
support for call center agents to create and manage orders in a
unified browser based application for the web and call-center
environments.
ATG Knowledge is a knowledge management solution that
call center agents who provide customers with assisted service
can use to find the answers to customer inquiries and resolve
problems. ATG Knowledge enables our clients agents to
fulfill a wide range of customer needs by unifying customer
management, knowledge management and incident management into a
single solution.
ATG Campaign Optimizer assists marketing professionals in
defining comparative tests of different offers, promotions and
product representations through a multivariate split testing
solution. The product puts those tests into production,
specifying the segments of website visitors to be tested, and
finally writes reports on the test results. ATG Campaign
Optimizer is designed to allow non-technical marketing
professionals to create and execute comparative tests that can
be used to increase the effectiveness of online marketing
activities without the need for expert programming or
infrastructure modifications.
ATG Customer Intelligence is an integrated set of data
mart and reporting capabilities to monitor and analyze commerce
and customer care performance. It is designed to combine key
data from the ATG product suite, such as purchases, searches,
escalations and click-throughs, with behavioral data from web
traffic analysis and demographic data, such as age, gender and
geography.
Our products allow companies to present a single view of
themselves to their customers through our repository
integration. This integration technology is designed to allow
companies to easily access and utilize data in the enterprise
regardless of the data storage format or location. The data can
be leveraged in native form without having to move, duplicate or
convert the data. By enabling these capabilities in a
cost-effective manner, we believe our products can help
companies protect their brands and improve customer shopping
experiences, all of which positively impact customer
satisfaction and loyalty.
We support the adoption of open application server
infrastructure by our existing and new clients and work closely
with other application server, operating system and database
vendors to increase the value customers receive from our
products on a variety of popular infrastructure components.
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Recurring
Revenue
Both the ATG Commerce Suite and ATG
e-Commerce
Optimization Services deliver OnDemand Services that generate
recurring revenue.
e-Commerce
Optimization Services Offerings
e-Commerce
optimization services are hosted on our servers and are platform
neutral so a client can benefit from
e-commerce
optimization services whether it elects to run its online
environment on an ATG-powered
e-commerce
platform, another
e-commerce
platform or a custom built website.
Click to Call is designed to allow online prospects and
customers to transition seamlessly within the context of their
online session into immediate telephone or PC-based voice
contact with businesses. Web site visitors,
e-mail
recipients or viewers of a banner ad simply click a Click to
Call button and select PC-to-phone or phone-to-phone to connect
in real-time with our clients sales or customer service
agents.
Click to Chat allows online prospects and customers to
initiate a text chat session online with our clients sales
or customer service agents by simply clicking a Click to Chat
button.
Call Tracking is designed to allow our clients to
accurately track every inbound telephone response to their print
and online promotional campaigns.
ATG Recommendations is an automated personalized
recommendation engine, used to optimize
e-commerce
experiences by presenting visitors with relevant recommendations
and information. This next-generation technology has been shown
to significantly lift
e-commerce
revenue by increasing conversion rates and order size.
ATG
Commerce OnDemand
For clients that do not wish to expend resources on running
e-commerce
applications in-house, we offer managed application hosting
services for the full spectrum of ATG software applications,
which we call ATG Commerce OnDemand. Under this model, clients
can license our software or receive the software as a service
and pay a monthly subscription fee. We host the solutions inside
a managed data center and provide all additional software,
hardware, network and full technical operational and support
services. These services include the provisioning, management
and monitoring of the application infrastructure including
bandwidth, network, security, servers, operating systems,
enabling software and ATG applications. We support our ATG
Commerce OnDemand clients on a 24/7 basis and provide problem
resolution services, application change management services, and
service level agreements related to application availability.
There are several advantages for organizations to choose an ATG
Commerce OnDemand managed services model, which makes this a
potential growth area for us. These include:
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leveraging our experience to accelerate growth of the
clients online business and allowing clients to focus on
their core competencies;
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shifting the clients technology risks to us;
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shortening the time to market (vs. in-house development,
deployment and maintenance); and
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avoiding upfront and ongoing expenditures required to purchase
and maintain software and hardware.
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Customer
Support and Maintenance Services
We offer four levels of customer support and maintenance
including our Premium Support Program, which consists of access
to technical support engineers 24/7, for customers deploying
mission critical applications. For an annual support and
maintenance fee, customers are entitled to receive software
upgrades and updates, maintenance releases, online documentation
and eServices including bug reports and unlimited technical
support.
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Professional
and Education Services Revenue
Our professional services organization provides a variety of
consulting, design, application development, deployment,
integration, training, and support services in conjunction with
our products. We provide these services through our Professional
Services and Education Services groups.
Professional Services. The primary goal of our
Professional Services organization is to ensure customer
satisfaction and the successful implementation of our
application solutions. ATG Professional Services has developed
an Adaptive Delivery Framework (ADF) to ensure
consistent, high-quality service delivery throughout all our
project engagements. The ADF is used to create repeatable
delivery processes from project to project in order to provide a
consistent look and feel for all ATG project deliverables. Our
Professional Services include four primary service offerings:
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OnDemand Offerings. By leveraging our
experience with the pre-built OnDemand offerings, our
Professional Services organization assists our clients with
their implementations, thus helping our clients quickly and
economically launch their
e-commerce
and service projects.
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Full-lifecycle Solutions. We work with our
clients from the earliest stages of their projects. The
full-lifecycle approach encompasses everything from working with
our clients end users and technical staff to define
project requirements to solution design, implementation,
usability testing, staging and deployment.
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Custom Solutions. We can also manage specific
areas of our clients projects, such as designing a
solution to meet a clients requirements, implementing
scenarios or integrating our solutions with a third-party
application.
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Structured Enablement. In this model, we give
our clients the guidance they need while maximizing the skills
of the clients own personnel. Depending on a clients
project goals and the expertise of its team, appropriate ATG
personnel (such as architects or engineers) work onsite as
advisors to aid the clients personnel in areas such as
reviewing completed work or advising on a particular project
area.
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Education Services. We provide a broad
selection of education programs designed to train clients and
partners on our applications. This curriculum addresses the
educational needs of developers, technical managers, business
managers, and system administrators. ATG Education Services also
offers an online learning program that complements our
instructor-led training. Developers can become certified on our
base product or our commerce product by taking a certification
exam in a proctored environment. We also measure partner quality
using a partner accreditation program that ensures ATG partners
have the skills necessary to effectively assist our clients with
implementations. We provide a full range of instructor-led
solutions to assist clients with these key initiatives.
Markets
Our principal target markets are Global 2000 companies and
other businesses that have large numbers of online users and
utilize the Internet as an important business channel. Our
clients represent a broad spectrum of enterprises within diverse
industry sectors, and include some of the worlds leading
corporations. As of December 31, 2008, we had approximately
700 customers.
Research
and Development
Our research and development group is responsible for core
technology, product architecture, product development, quality
assurance, documentation and third-party software integration.
This group also assists with pre-sale, customer support
activities and quality assurance tasks supporting the services
and sales organizations.
Our research and development activities are primarily directed
towards creating new versions of our products, which extend and
enhance competitive product features. Our 2008 research and
development efforts related to our ecommerce optimization
services products consisted primarily of maintenance and data
conversion activities. As a result, we did not capitalize any
research and development costs during 2008. In 2009, as we focus
on developing new and innovative applications, integrating and
improving our
e-commerce
optimization services and developing and enhancing our managed
application hosting offerings, we expect to capitalize
qualifying research and development costs.
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Sales and
Marketing
We market and sell our products and services primarily through
our direct sales force, which is compensated based on product
and services sales made to our clients, directly or through
business partners. We also sell products and services through
channel partners, including systems integrators and other
technology partners. The majority of our revenue is from direct
sales.
Our sales and service organization includes employees in direct
and channel sales, system engineers and account management. As
of December 31, 2008, we had approximately
133 employees in our sales, marketing and sales support
organization, including 68 direct sales representatives whose
performance is measured on the basis of achievement of quota
objectives. Our direct sales team is organized in two teams, to
address each of our product lines: ATG Commerce Suite sales and
ATG
e-Commerce
Optimization Services sales. Of our 68 direct sales
representatives, 16 are located outside the United States.
To support our sales efforts and promote ATG, we conduct
comprehensive marketing programs. These programs include
industry and partner events, market research, public relations
activities, seminars, webinars, advertisements, direct mailings
and the development of our website. Our marketing organization
supports the sales process and helps identify potential sales
and other opportunities. They prepare product research, product
planning, manage press coverage and other public relations.
As of December 31, 2008, in addition to offices throughout
the United States, we had sales offices located in the United
Kingdom, France, and Canada.
Strategic
Alliances
We have established strategic alliances with system integrators,
technology partners and resellers to augment our direct sales
activities. We provide our systems integrators, technology
partners and resellers with sales and technical training in
order to encourage them to create demand for our products and
services and to extend our presence globally and regionally. In
addition, we encourage our channel partners to enroll in our
accreditation and certification programs. Our ATG Certified
Professional Program is a training program for developers to
learn more about our products and services, and our ATG
Accredited Partner Program is intended to identify our most
qualified partners.
Competition
The market for online sales, marketing and customer service
software is intensely competitive, subject to rapid
technological change, and significantly affected by new product
introductions and other market activities. We expect competition
to persist and intensify in the future. We currently have the
following primary sources of competition:
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in-house development efforts by potential clients or partners;
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e-commerce
application vendors, such as Escalate Retail and IBM;
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e-commerce
business process outsourcers, such as Digital River and GSI
Commerce;
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providers of hosted managed service offerings, such as
Accenture, EDS and IBM;
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providers of hosted on-demand subscription services, such as
Demandware, Digital River, MarketLive and Venda;
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vendors of marketing and customer-service applications,
including natural language, self-service and traditional
customer relationship management application vendors; and
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commerce optimization vendors, such as Avail Intelligence,
Baynote and LivePerson.
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We strive to compete against these alternatives by providing
products and services that are richer, offer a more flexible set
of capabilities and features and are more reliable and scalable.
Our
e-commerce
products are consistently reviewed as the most feature-rich by
the leading industry analysts. Many commerce sites known
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for their unique and aggressive merchandising are built on our
platform. Commerce sites in industries as diverse as fashion,
industrial distribution, satellite TV, professional publishing,
office supplies and travel are deployed on our commerce
platform. Our
e-commerce
platform is used successfully by several of the highest volume
online retailers, powers the highest volume telecommunications
site, and has performed for many of our high-volume customers
with 100% uptime during peak holiday periods. We believe that
our Click to Call services are more suitable for
enterprise-class corporations, and used by more of them, than
competitive products. Our Recommendations service uses more data
in its algorithms and is regarded by industry analysts as having
more advanced technology than the recommendation solutions
offered by our competitors.
Proprietary
Rights and Licensing
Our success and ability to compete depends on our ability to
develop and protect the proprietary aspects of our technology
and to operate without infringing on the proprietary rights of
others. We rely on a combination of patent, trademark, trade
secret and copyright law and contractual restrictions to protect
our proprietary technology. At December 31, 2008, we had 17
issued United States patents, 15 pending United States patents,
and numerous foreign issued and pending patents. In addition, we
have several trademarks that are registered or pending
registration in the U.S. or abroad. We seek to protect the
source code for our software, documentation and other written
materials under trade secret and copyright laws. These legal
protections afford only limited protection for our technology,
however.
We license our software pursuant to signed master license
agreements, as well as click through or shrink
wrap agreements, which impose restrictions on the
licensees ability to use the software, such as prohibiting
reverse engineering and limiting the use of copies. We also seek
to avoid disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary
information to execute confidentiality agreements and by
restricting access to our source code. Due to rapid
technological change, we believe that factors such as the
technological and creative skills of our personnel, new product
developments and enhancements to existing products are more
important than legal protections to establish and maintain a
technology leadership position.
Employees
As of December 31, 2008, we had a total of
502 employees. Our success depends on our ability to
attract, retain and motivate highly qualified technical and
management personnel, for whom competition is intense. Our
employees are not represented by any collective bargaining unit,
and we have never experienced a work stoppage. We believe our
relations with our employees are good.
Internet
Address and SEC Reports
We are registered as a reporting company under the Securities
Exchange Act of 1934, as amended, which we refer to as the
Exchange Act. Accordingly, we file or furnish with the
Securities and Exchange Commission, or the Commission, annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
as required by the Exchange Act and the rules and regulations of
the Commission. We refer to these reports as Periodic Reports.
The public may read and copy any Periodic Reports or other
materials we file with the Commission at the Commissions
Public Reference Room at 100 F Street, NE, Washington,
DC 20549. Information on the operation of the Public Reference
Room is available by calling
1-800-SEC-0330.
In addition, the Commission maintains an Internet website that
contains reports, proxy and other information regarding issuers,
such as Art Technology Group, that file electronically with the
Commission. The address of this website is
http://www.sec.gov.
Our Internet website is www.atg.com. We make available,
free of charge, on or through our Internet website our Period
Reports and amendments to those Periodic Reports as soon as
reasonably practicable after we electronically file them with
the Commission. We are not, however, including the information
contained on our website, or information that may be accessed
through links on our website, as part of, or incorporating it by
reference into, this annual report on
Form 10-K.
8
The following are certain of the important factors that could
cause our actual operating results to differ materially from
those indicated or suggested by forward-looking statements made
in this annual report on
Form 10-K
or presented elsewhere by management from time to time.
The
current global recession and related credit crisis are likely to
adversely affect our business and results of
operations.
The U.S. and other global economies are currently
experiencing a recession that has affected all sectors of the
economy and that has continued to deepen, resulting in declines
in economic growth and consumer confidence, increases in
unemployment rates and uncertainty about economic stability.
Global credit and financial markets have also experienced
extreme disruptions, including diminished liquidity and credit
availability and rapid fluctuations in market valuations. Our
business has been affected by these conditions, and there is no
certainty that economic conditions will not deteriorate further.
These uncertainties affect businesses such as ours in a number
of ways, making it difficult to accurately forecast and plan our
future business activities. Deteriorating economic conditions
may lead consumers and businesses to continue to postpone
spending, which may cause our customers to decrease or delay
their purchases of our products and services. In addition, the
inability of customers to obtain credit could negatively affect
our revenues and our ability to collect receivables. In
addition, financial difficulties experienced by our strategic
partners could result in a reduction in the revenues we derive
from license sales originated by them or detract from the
quality or timeliness of the consulting, implementation or other
professional services they provide to our customers, which could
adversely affect our reputation and relationships with our
customers. If the current uncertain economic conditions continue
or further deteriorate, we could be required to record charges
relating to restructuring costs or the impairment of assets, and
our business and results of operations could be materially
adversely affected. These trends could have a material adverse
impact on our business, our ability to achieve targeted results
of operations and our financial condition as a result of, among
other things.
We
expect our revenues and operating results to continue to
fluctuate for the foreseeable future. If our quarterly or annual
results are lower than the expectations of securities analysts,
then the price of our common stock is likely to
fall.
Our revenues and operating results have varied from quarter to
quarter in the past and will probably continue to vary
significantly from quarter to quarter in the foreseeable future.
A number of factors are likely to cause variations in our
operating results, including:
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fluctuating economic conditions, particularly as they affect our
customers willingness to implement new
e-commerce
solutions and their ability to pay for our products and services;
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the timing of recognition of revenue from our products and
services, which is affected by the mix of product license
revenue and services provided;
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the timing of customer orders, especially larger transactions,
and product implementations;
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our ability to cultivate and maintain strategic alliances;
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delays in introducing new products and services;
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price discounting and concessions that we may offer in response
to competitive conditions;
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changes in the mix of revenues derived from higher and
lower-margin products and services;
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timing of hiring and utilization of personnel;
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cost overruns related to fixed-price services projects;
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the mix of domestic and international sales;
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variation in our actual costs from our cost estimates related to
long term hosting contracts;
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increased expenses, whether related to sales and marketing,
product development or administration; and
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costs related to possible acquisitions of technologies or
businesses.
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In any given quarter, we often depend on several relatively
large license transactions to meet expected revenues for that
quarter. If we expect to complete a large sale to a specific
customer in a particular quarter and the sale is not completed
in that quarter, then we are not likely to be able to generate
revenue from alternate sources in time to compensate for the
shortfall. In addition, as is the case with many software
companies, a significant number of our sales transactions are
concentrated near the end of each fiscal quarter. If we are
unable to close or recognize revenues on even a relatively small
number of license deals at quarter-end, then we may not be able
to meet expected revenues for that quarter. Because of this
concentration of sales at quarter end, customers may seek to
obtain higher price discounts than we might otherwise provide by
waiting until quarter-end to complete their transactions with us.
We may
not be able to sustain or increase our revenue or profitability
on a quarterly or annual basis.
We operate in a rapidly evolving industry, which makes it more
difficult to predict our future operating results and current
macro-economic conditions compound this difficulty. We cannot be
certain that our revenues will grow or our expenses will
decrease at rates that will allow us to achieve profitability on
a quarterly or annual basis. Additionally, we expect to
recognize an increasing portion of our revenue ratably over a
period of time rather than at the time invoiced. This may vary
from quarter to quarter and may have an adverse effect on our
revenue and net income, which could result in a decline in the
price of our common stock.
Our
lengthy sales cycle makes it difficult to predict our quarterly
results and causes variability in our operating
results.
We have a long sales cycle, often several months or quarters,
because our clients often need to make large expenditures and
invest substantial resources in order to take advantage of our
products and services and also because we generally need to
educate potential customers about the use and benefits of our
products and services. This long sales cycle makes it difficult
to predict the quarter in which sales may occur. We may incur
significant sales and marketing expenses in anticipation of
selling our products, and if we do not achieve the level of
revenues we expected, our operating results will suffer and our
stock price may decline. Further, our potential customers
frequently need to obtain approvals from multiple decision
makers before making purchase decisions. Delays in sales could
cause significant variability in our revenues and operating
results for any particular period.
If the
market for
e-commerce
does not continue to grow, then demand for our products and
services may decrease.
Our success depends heavily on the continued use of the Internet
for
e-commerce.
Many companies continue to rely primarily or exclusively on
traditional means of commerce and may be reluctant to change
their patterns of commerce. For our customers and potential
customers to be willing to invest in our electronic commerce and
online marketing, sales and service applications, the Internet
must continue to be accepted and widely used for commerce and
communication. If Internet commerce does not grow or grows more
slowly than expected, then our future revenues and profits may
not meet our expectations or those of analysts.
If we
fail to adapt to rapid changes in the market for online business
applications, then our products and services could become
obsolete.
The market for our products is constantly and rapidly evolving,
as we and our competitors introduce new and enhanced products,
retire older ones, and react to changes in Internet-related
technology and customer demands, coalescence of product
differentiators, product commoditization and evolving industry
standards. We may not be able to develop or acquire new products
or product enhancements that comply with present or emerging
Internet technology standards or differentiate our products
based on functionality and performance. In addition, we may not
be able to establish or maintain strategic alliances with
operating system and infrastructure vendors that will permit
migration or upgrade opportunities for our current user base.
New products based on new technologies or new industry standards
could render our existing products obsolete and unmarketable.
To succeed, we need to enhance our current products and develop
new products on a timely basis to keep pace with market needs,
satisfy the increasingly sophisticated requirements of customers
and leverage strategic alliances
10
with third parties in the
e-commerce
field who have complementary or competing products.
E-commerce
technology is complex, and new products and product enhancements
can require long development and testing periods. Any delays in
developing and releasing new or enhanced products could cause us
to lose revenue opportunities and customers.
We
face intense competition in the market for online commerce
applications and services, and we expect competition to
intensify in the future. If we fail to remain competitive, then
our revenues may decline, which could adversely affect our
future operating results and our ability to grow our
business.
A number of competitive factors could cause us to lose potential
sales or to sell our products and services at lower prices or at
reduced margins, including, among others:
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Potential clients or partners may choose to develop
e-commerce
applications in-house, rather than paying for our products or
services.
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Some of our current and potential competitors have greater
financial, marketing and technical resources than we do,
allowing them to leverage a larger installed customer base and
distribution network, adopt more aggressive pricing policies and
offer more attractive sales terms, adapt more quickly to new
technologies and changes in customer requirements, and devote
greater resources to the promotion and sale of their products
and services than we can.
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Our suite of service products competes against various
vendors software tools designed to address a specific
element or elements of the complete set of eService processes,
including
e-mail
management, support, knowledge management, and web-based
customer self-service and assisted service.
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Current and potential competitors have established or may
establish cooperative relationships among themselves or with
third parties to enhance their products and expand their
markets, and consolidation in our industry is likely to
intensify. Accordingly, new competitors or alliances among
competitors may emerge and rapidly acquire significant market
share.
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Some of our current and potential competitors, especially our
larger competitors like IBM that offer broad suites of computer
and software applications, may offer free or low-cost
e-commerce
applications and functionality bundled with their own computer
and software products. Potential customers may not see the need
to buy our products and services separately when they can use
the bundled applications and functionality in our
competitors product suites for little or no additional
cost.
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If the
market for our OnDemand service offerings does not develop or
develops more slowly than we expect, then our business could be
negatively affected.
Our OnDemand hosted service and subscription offerings are at an
early stage of development, and we may not achieve or sustain
demand for these offerings. Our success in this effort will
depend in part on the price, performance and availability of our
products and services in comparison with competing products and
services and on the willingness of companies to increase their
use of hosting applications. While we will continue to market
and sell traditional licenses for our software solutions, we
believe that the widespread market acceptance of our hosting
software solutions is important to the success of our business
because of the growth opportunities.
If our
clients experience interruptions, delays or failures in our
hosted services, then we could incur significant costs and lose
revenue opportunities.
Our OnDemand hosted services and our
e-commerce
optimization services are still at a relatively early stage of
development. Any equipment failures, mechanical errors, spikes
in usage volume or failure to follow system protocols and
procedures could cause our systems to fail or malfunction,
resulting in interruptions in our clients service to their
customers. Any such interruptions or delays in our hosting
services, whether as a result of third-party error, our own
error, natural disasters or accidental or willful security
breaches, could harm our relationships with clients and our
reputation. This in turn could reduce our revenue, subject us to
liability, cause us to issue credits or pay penalties or cause
our clients to decide not to renew their hosting agreements, any
of which could adversely affect our business, financial
condition and results of operations.
11
We
depend heavily on key employees in a competitive labor
market.
Our success depends on our ability to attract, motivate and
retain skilled personnel, especially in the areas of management,
finance, sales, marketing and research and development, and we
compete with other companies for a small pool of highly
qualified employees. Members of our management team, including
executives with significant responsibilities in these areas,
have left us during the past few years for a variety of reasons,
and there may be additional departures in the future. These
historical and potential future changes in personnel may be
disruptive to our operations or affect our ability to maintain
effective internal controls over financial reporting. In
addition, equity incentives such as stock options constitute an
important part of our total compensation program for employees,
and as a result of recent declines in our stock price a
substantial number of our outstanding stock options are out of
the money. Continued volatility or lack of positive performance
of our stock price may adversely affect our ability to retain
our employees or hire replacements.
We
could incur substantial costs defending against a claim of
infringement or protecting our intellectual property from
infringement.
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. Companies providing Internet-related products and
services are increasingly bringing and becoming subject to suits
alleging infringement of proprietary rights, particularly patent
rights. We could incur substantial costs in prosecuting or
defending any intellectual property litigation. If we sue to
enforce our rights or are sued by a third party that claims that
our technology infringes its rights, the litigation could be
expensive and could divert our management resources. For
example, both we and our Primus subsidiary have been subject to
claims and litigation alleging that we have infringed United
States patents owned by third parties. We may be required to
incur substantial costs in defending infringement litigation in
the future, which could have a material adverse effect on our
operating results and financial condition.
In addition, we have agreed to indemnify customers against
claims that our products infringe the intellectual property
rights of third parties. From time to time, our customers have
been subject to third party patent claims and we have agreed to
indemnify these customers to the extent the claims related to
our products. The results of any intellectual property
litigation to which we might become a party may force us to do
one or more of the following:
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cease selling or using products or services that incorporate the
challenged intellectual property;
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obtain a license, which may not be available on reasonable
terms, to sell or use the relevant technology; or
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redesign those products or services to avoid infringement.
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We seek to protect the source code for our proprietary software
under a combination of patent, copyright and trade secrets law.
However, because we make the source code available to some
customers, third parties may be more likely to misappropriate
it. Our policy is to enter into confidentiality agreements with
our employees, consultants, vendors and customers and to control
access to our software, documentation and other proprietary
information. Despite these precautions, it may be possible for
someone to copy our software or other proprietary information
without authorization or to develop similar software
independently.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult, and
while we are unable to determine the extent to which piracy of
our software exists, we expect software piracy to be a
persistent problem. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect
proprietary rights to as great an extent as the laws of the
United States. Any such resulting litigation could result in
substantial costs and diversion of resources and could have a
material adverse effect on our business, operating results and
financial condition. There can be no assurance that our means of
protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology.
If we fail to meaningfully protect our intellectual property,
then our business, operating results and financial condition
could be materially harmed.
12
Finally, our professional services may involve the development
of custom software applications for specific customers. In some
cases, customers retain ownership or impose restrictions on our
ability to use the technologies developed from these projects.
Issues relating to the ownership of software can be complicated,
and disputes could arise that affect our ability to resell or
reuse applications we develop for customers.
If we
fail to maintain our existing customer base, then our ability to
generate revenues will be harmed.
Historically, we have derived a significant portion of our
revenues from existing customers that purchase our support and
maintenance services and license enhanced versions of our
products. If we are unable to continue to obtain significant
revenues from our existing customer base, then our ability to
grow our business would be harmed, and our competitors could
achieve greater market share. The current trend toward
e-commerce
replatforming may increase this risk. When existing ATG
customers re-evaluate their
e-commerce
platforms and solutions, they may elect to replace our
e-commerce
solutions with those of other vendors. If they do, these
customers, as well as other prospective customers who choose
e-commerce
solutions other than ours in connection with their
replatforming, are likely to commit substantial expenditures and
investments of time and resources to the implementation of the
e-commerce
solution included in their new chosen platforms, reducing the
probability that we will be able to penetrate those accounts in
the near future.
If we
fail to address the challenges associated with our international
operations, then revenues from our products and services may
decline, and the costs of providing our products or services may
increase.
At December 31, 2008, we had offices in the United Kingdom,
France, Northern Ireland, and Canada. We derived 29% of our
total revenues in 2008 and 32% of our total revenues in 2007
from customers outside the United States. Our operations
outside the United States are subject to additional risks,
including:
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changes in exchange rates may increase volatility of foreign
based revenue;
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changes in regulatory requirements, tariffs and other barriers;
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longer payment cycles and problems in collecting accounts
receivable in Western Europe and Asia;
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difficulties in managing systems integrators and technology
partners;
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difficulties in staffing and managing foreign subsidiary
operations;
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differing technology standards;
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difficulties and delays in translating products and product
documentation into foreign languages for countries in which
English is not the primary language;
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reduced protection for intellectual property rights in some of
the countries in which we operate or plan to operate;
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difficulties related to entering into legal contracts under
local laws and in foreign languages;
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fluctuations in the exchange rates between foreign and United
States currency;
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potentially adverse tax consequences; and
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political and economic instability.
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We may
need financing in the future, and any additional financing may
result in restrictions on our operations or substantial dilution
to our stockholders.
We may need to raise funds in the future, for example, to
develop new technologies, expand our business, respond to
competitive pressures, acquire complementary businesses or
respond to unanticipated situations. We may try to raise
additional funds through public or private financings, strategic
relationships or other arrangements. Our ability to obtain debt
or equity funding will depend on a number of factors, including
market conditions, our operating performance and investor
interest. Additional funding may not be available to us on
acceptable terms or at all. If adequate funds are not available,
we may be required to reduce expenditures, including curtailing
our growth
13
strategies, foregoing acquisitions or reducing our product
development efforts. If we succeed in raising additional funds
through the issuance of equity or convertible securities, then
the issuance could result in substantial dilution to existing
stockholders. If we raise additional funds through the issuance
of debt securities or preferred stock, these new securities
would have rights, preferences and privileges senior to those of
the holders of our common stock. The terms of these securities,
as well as any borrowings under our credit agreement, could
impose restrictions on our operations.
If
systems integrators or value added resellers reduce their
support and implementation of our products, then our revenues
may fail to meet expectations and our operating results would
suffer.
Since our potential customers often rely on third-party systems
integrators to develop, deploy and manage websites for
conducting commerce on the Internet, we cultivate relationships
with systems integrators to encourage them to support our
products. We do not, however, generally have written agreements
with our systems integrators, and they are not required to
implement solutions that include our products or to maintain
minimum sales levels of our products. Our revenues would be
reduced if we fail to train a sufficient number of systems
integrators adequately or if systems integrators devote their
efforts to integrating or co-selling products of other
companies. Any such reduction in revenue would not be
accompanied by a significant offset in our expenses. As a
result, our operating results would suffer, and the price of our
common stock would probably fall.
If our
software products contain serious errors or defects, then we may
lose revenues and market acceptance and may incur costs to
defend or settle product liability claims.
Complex software products such as ours often contain errors or
defects, particularly when first introduced or when new versions
or enhancements are released. Despite internal testing and
testing by our customers, our current and future products may
contain serious defects, which could result in lost revenues or
a delay in market acceptance.
Since our customers use our products for critical business
applications such as
e-commerce,
errors, defects or other performance problems could result in
damage to our customers. They could seek significant
compensation from us for the losses they suffer. Although our
license agreements typically contain provisions designed to
limit our exposure to product liability claims, existing or
future laws or unfavorable judicial decisions could negate these
limitations. Even if not successful, a product liability claim
brought against us would likely be time consuming and costly and
could seriously damage our reputation in the marketplace, making
it harder for us to sell our products.
Government
or industry regulations could directly restrict our business or
indirectly affect our business by limiting the growth of
e-commerce.
As
e-commerce
evolves, federal, state and foreign agencies have adopted and
could in the future adopt regulations covering issues such as
user privacy, content and taxation of products and services.
Government regulations could limit the market for our products
and services or impose burdensome requirements that render our
business unprofitable. Although many regulations might not apply
to our business directly, we expect that laws regulating the
solicitation, collection or processing of personal and consumer
information could indirectly affect our business. The
Telecommunications Act of 1996 prohibits certain types of
information and content from being transmitted over the
Internet. The prohibitions scope and the liability
associated with a violation are currently unsettled. In
addition, although substantial portions of the Communications
Decency Act were held to be unconstitutional, we cannot be
certain that similar legislation will not be enacted and upheld
in the future. It is possible that legislation could expose
companies involved in
e-commerce
to liability, which could limit the growth of
e-commerce
generally. Legislation like the Telecommunications Act and the
Communications Decency Act could dampen the growth in web usage
and decrease its acceptance as a medium of communications and
commerce.
The
Internet has generated privacy concerns that could result in
legislation or market perceptions that could result in reduced
sales of our products and harm our business.
Businesses use our ATG Adaptive Scenario Engine product to
develop and maintain profiles to tailor the content to be
provided to website visitors. When a visitor first arrives at a
website, our software creates a profile for that visitor. If the
visitor registers or logs in, the visitors identity is
added to the profile, preserving any profile
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information that was gathered up to that point. ATG Adaptive
Scenario Engine product tracks both explicit user profile data
supplied by the user as well as implicit profile attributes
derived from the users behavior on the website. Privacy
concerns may cause visitors to resist providing the personal
data or to avoid websites that track the web behavioral
information necessary to support our profiling capability. More
importantly, even the perception of security and privacy
concerns, whether or not valid, may indirectly inhibit market
acceptance of our products. In addition, legislative or
regulatory requirements may heighten these concerns if
businesses must notify website users that the data captured
after visiting websites may be used to direct product promotion
and advertising to that user. Other countries and political
entities, such as the European Economic Community, have adopted
such legislation or regulatory requirements, and the United
States may follow suit. Privacy legislation and consumer privacy
concerns could make it harder for us to sell our products and
services, resulting in reduced revenues.
Our products use cookies to track demographic
information and user preferences. A cookie is
information keyed to a specific user that is stored on a
computers hard drive, typically without the users
knowledge. The user can generally remove the cookies, although
removal could affect the content available on a particular site.
Germany has imposed laws limiting the use of cookies, and a
number of Internet commentators and governmental bodies in the
United States and other countries have urged passage of laws
limiting or abolishing the use of cookies. If such laws are
passed or if users begin to delete or refuse cookies as a common
practice, then demand for our personalization products could be
reduced.
Anti-takeover
provisions in our charter documents and Delaware law could
prevent or delay a change in control of our
company.
Certain provisions of our charter and by-laws may discourage,
delay or prevent a merger or acquisition that some of our
stockholders may consider favorable, which could reduce the
market price of our common stock. These provisions include:
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authorizing the issuance of blank check preferred
stock;
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providing for a classified board of directors with staggered,
three-year terms;
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providing that directors may only be removed for cause by a
two-thirds vote of stockholders;
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limiting the persons who may call special meetings of
stockholders and prohibiting stockholder action by written
consent;
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establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted on by stockholders at stockholder meetings; and
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authorizing anti-takeover provisions.
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In addition, we adopted a shareholder rights plan in 2001. The
existence of our shareholder rights plan, as well as certain
provision of Delaware law may further discourage, delay or
prevent someone from acquiring or merging with us.
Continued
compliance with regulatory and accounting requirements will be
challenging and will require significant
resources.
We are spending a significant amount of management time and
external resources to comply with changing laws, regulations and
standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new
Securities and Exchange Commission rules and regulations and
NASDAQ Global Market rules. In particular, Section 404 of
the Sarbanes-Oxley Act of 2002 requires managements annual
review and evaluation of internal control over financial
reporting. The process of documenting and testing internal
control over financial reporting has required that we hire
additional personnel and outside services and has resulted in
higher accounting and legal expenses. While we invested
significant time and money in our effort to evaluate and test
our internal control over financial reporting, a material
weakness was identified in our internal control over financial
reporting in 2006. Although the material weakness was remediated
in 2007, there are inherent limitations to the effectiveness of
any system of internal controls and procedures, including cost
limitations, the possibility of human error, judgments and
assumptions regarding the likelihood of future events, and the
circumvention or overriding of
15
the controls and procedures. Accordingly, even effective
controls and procedures can provide only reasonable assurance of
achieving their control objectives.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
Our headquarters are located in 45,000 square feet of
leased office space in Cambridge, Massachusetts. In addition, we
have facilities in Seattle, Washington (approximately
9,000 square feet); Chicago, Illinois (approximately
6,000 square feet); San Francisco, California
(approximately 3,000 square feet); Reston, Virginia
(approximately 10,000 square feet), Washington, D.C.
(approximately 7,000 square feet), and Corvallis, Oregon
(approximately 3,000 square feet). Our European
headquarters are located in Apex Plaza, Reading,
United Kingdom where we lease approximately
4,000 square feet. We also maintain offices in Northern
Ireland (approximately 6,000 square feet) and France
(approximately 1,000 square feet). All of our facilities
are leased. We believe our facilities are sufficient to meet our
needs for the foreseeable future and, if needed, additional
space will be available at a reasonable cost.
|
|
Item 3.
|
Legal
Proceedings
|
As previously disclosed, in 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.
16
The ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative
impact on our results of operations, consolidated balance sheets
and cash flows, due to defense costs, diversion of management
resources and other factors.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Our common stock trades on The NASDAQ Global Market under the
symbol ARTG. The following table sets forth the high
and low reported market close prices of our common stock for the
periods indicated as reported by The NASDAQ Global Market.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
2.67
|
|
|
$
|
2.04
|
|
Second quarter
|
|
|
2.88
|
|
|
|
2.19
|
|
Third quarter
|
|
|
3.33
|
|
|
|
2.69
|
|
Fourth quarter
|
|
|
4.75
|
|
|
|
3.10
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
4.45
|
|
|
$
|
2.80
|
|
Second quarter
|
|
|
4.06
|
|
|
|
2.98
|
|
Third quarter
|
|
|
4.48
|
|
|
|
3.10
|
|
Fourth quarter
|
|
|
3.44
|
|
|
|
1.23
|
|
On February 20, 2009, the last reported sale price on The
NASDAQ Global Market for our common stock was $2.22 per share.
On February 20, 2009, there were approximately 487 holders
of record of our common stock. This number does not include
stockholders for whom our shares were held in a
nominee or street name.
We have never paid or declared any cash dividends on shares of
our common stock or other securities and do not anticipate
paying any cash dividends in the foreseeable future. We
currently intend to retain all future earnings, if any, for use
in the operation of our business.
17
The following graph compares the cumulative total stockholder
return on our common stock during the period December 31,
2003 to December 31, 2008 with the cumulative total return
of the NASDAQ Market Index and a peer group index over the same
period. This comparison assumed the investment of $100 on
December 31, 2003 in our common stock, the NASDAQ Market
Index and the peer group index and assumes dividends, if any,
are reinvested. The peer group index that we used is Hemscott
Industry Group 852 (Internet Software and Services), which
reflects the stock performance of 70 publicly traded companies
in the Internet software and services marketplace.
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG ART TECHNOLOGY GROUP, INC.,
NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
ASSUMES
$100 INVESTED ON DECEMBER 31, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Investment($)
|
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Art Technology Group Inc.
|
|
$
|
100.00
|
|
|
$
|
98.04
|
|
|
$
|
128.10
|
|
|
$
|
152.29
|
|
|
$
|
282.35
|
|
|
$
|
126.14
|
|
Hemscott Industry Group 852 Index
|
|
$
|
100.00
|
|
|
$
|
126.04
|
|
|
$
|
109.07
|
|
|
$
|
103.53
|
|
|
$
|
110.68
|
|
|
$
|
71.06
|
|
NASDAQ Market Index
|
|
$
|
100.00
|
|
|
$
|
108.41
|
|
|
$
|
110.79
|
|
|
$
|
122.16
|
|
|
$
|
134.29
|
|
|
$
|
79.25
|
|
18
Stock
Repurchase Program
On April 19, 2007 our Board of Directors authorized a stock
repurchase program providing for repurchases of our outstanding
common stock of up to $20 million, in the open market or in
privately negotiated transactions, at times and prices
considered appropriate depending on prevailing market
conditions. During the years ended December 31, 2008 and
2007, we repurchased 4,618,541 shares and
986,960 shares of our common stock at a cost of
$8.9 million and $2.9 million, respectively. For the
life of the stock repurchase program to date, the Company has
repurchased 5,605,501 shares of its common stock at a cost
of $11.8 million.
Our stock repurchase authorization does not have an expiration
date and the pace of our repurchase activity will depend on
factors such as our working capital needs, our cash requirements
for acquisitions, any debt repayment obligations which may
arise, our stock price, and economic and market conditions. Our
stock repurchases may be effected from time to time through open
market purchases or pursuant to a
Rule 10b5-1
plan. Our stock repurchase program may be accelerated,
suspended, delayed or discontinued at any time.
The table below presents information regarding our repurchases
of our common stock during the three months ended
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Total number of
|
|
|
Approximate dollar
|
|
|
|
(a)
|
|
|
(b)
|
|
|
shares purchased
|
|
|
value of shares that may
|
|
|
|
Total number of
|
|
|
Average price
|
|
|
as part of publicly
|
|
|
yet be purchased under
|
|
Period
|
|
shares purchased
|
|
|
paid per share
|
|
|
announced plan
|
|
|
the plans or programs
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
October 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2008
|
|
|
4,196,359
|
|
|
$
|
1.77
|
|
|
|
4,196,359
|
|
|
$
|
8,190
|
|
December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,196,359
|
|
|
$
|
1.77
|
|
|
|
4,196,359
|
|
|
$
|
8,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and related notes and with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and other financial data included elsewhere in
this Annual Report on
Form 10-K.
Except as set forth below, the consolidated statement of
operations data and balance sheet data for all periods presented
are derived from audited consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K
or in Annual Reports on
Form 10-K
for prior years on file with the United States Securities and
Exchange Commission.
On January 1, 2006, we adopted the provisions of
SFAS No. 123(R) using the modified prospective
transition method, which requires us to record stock-based
compensation expense for employee stock awards at fair value at
the time of grant. Stock-based compensation expense was
$7.9 million, $5.8 million and $3.8 million for
the years ended December 31, 2008, 2007, and 2006,
respectively.
19
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
$
|
47,429
|
|
|
$
|
30,529
|
|
|
$
|
32,784
|
|
|
$
|
29,821
|
|
|
$
|
23,345
|
|
Recurring services
|
|
|
91,039
|
|
|
|
76,672
|
|
|
|
51,113
|
|
|
|
44,258
|
|
|
|
29,359
|
|
Professional and education services
|
|
|
26,173
|
|
|
|
29,859
|
|
|
|
19,335
|
|
|
|
16,567
|
|
|
|
16,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
164,641
|
|
|
|
137,060
|
|
|
|
103,232
|
|
|
|
90,646
|
|
|
|
69,219
|
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
2,186
|
|
|
|
2,197
|
|
|
|
1,751
|
|
|
|
1,816
|
|
|
|
2,206
|
|
Recurring services
|
|
|
34,077
|
|
|
|
24,119
|
|
|
|
11,239
|
|
|
|
6,575
|
|
|
|
3,884
|
|
Professional and education services
|
|
|
25,619
|
|
|
|
29,223
|
|
|
|
19,560
|
|
|
|
16,680
|
|
|
|
15,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
61,882
|
|
|
|
55,539
|
|
|
|
32,550
|
|
|
|
25,071
|
|
|
|
22,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
102,759
|
|
|
|
81,521
|
|
|
|
70,682
|
|
|
|
65,575
|
|
|
|
47,134
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
29,329
|
|
|
|
24,963
|
|
|
|
21,517
|
|
|
|
18,481
|
|
|
|
16,209
|
|
Sales and marketing
|
|
|
49,569
|
|
|
|
44,397
|
|
|
|
30,909
|
|
|
|
29,396
|
|
|
|
29,602
|
|
General and administrative
|
|
|
19,432
|
|
|
|
18,211
|
|
|
|
12,952
|
|
|
|
11,231
|
|
|
|
7,742
|
|
Restructuring charge (benefit)
|
|
|
|
|
|
|
(59
|
)
|
|
|
(62
|
)
|
|
|
885
|
|
|
|
3,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
98,330
|
|
|
|
87,512
|
|
|
|
65,316
|
|
|
|
59,993
|
|
|
|
57,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
4,429
|
|
|
|
(5,991
|
)
|
|
|
5,366
|
|
|
|
5,582
|
|
|
|
(9,989
|
)
|
Interest and other income, net
|
|
|
960
|
|
|
|
2,237
|
|
|
|
1,712
|
|
|
|
219
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
5,389
|
|
|
|
(3,754
|
)
|
|
|
7,078
|
|
|
|
5,801
|
|
|
|
(9,594
|
)
|
Provision (benefit) for income taxes
|
|
|
1,590
|
|
|
|
433
|
|
|
|
(2,617
|
)
|
|
|
32
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,799
|
|
|
$
|
(4,187
|
)
|
|
$
|
9,695
|
|
|
$
|
5,769
|
|
|
$
|
(9,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
128,534
|
|
|
|
127,528
|
|
|
|
115,280
|
|
|
|
109,446
|
|
|
|
79,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
133,916
|
|
|
|
127,528
|
|
|
|
120,096
|
|
|
|
111,345
|
|
|
|
79,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash, cash equivalents and short-term marketable securities
(including restricted marketable securities of $1,669 at
December 31, 2008)
|
|
$
|
60,983
|
|
|
$
|
50,879
|
|
|
$
|
31,223
|
|
|
$
|
33,569
|
|
|
$
|
26,507
|
|
Long-term marketable securities (including restricted marketable
securities of $419 at December 31, 2008)
|
|
|
419
|
|
|
|
1,062
|
|
|
|
|
|
|
|
|
|
|
|
4,001
|
|
Total assets
|
|
|
188,767
|
|
|
|
177,719
|
|
|
|
149,981
|
|
|
|
92,765
|
|
|
|
97,803
|
|
Total deferred revenue
|
|
|
54,067
|
|
|
|
46,354
|
|
|
|
24,209
|
|
|
|
21,113
|
|
|
|
25,355
|
|
Long-term obligations, less current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
112
|
|
Total stockholders equity
|
|
$
|
110,946
|
|
|
$
|
107,097
|
|
|
$
|
105,074
|
|
|
$
|
50,160
|
|
|
$
|
42,185
|
|
20
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
This Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with our consolidated financial statements and notes
thereto which appear elsewhere in this Annual Report on
Form 10-K.
The following discussion contains forward-looking statements.
See Risk Factors elsewhere in this Annual Report on
Form 10-K
for a discussion of important factors and risks associated with
our business that could cause our actual results to differ
materially from these forward-looking statements. The
forward-looking statements do not include the potential impact
of any mergers, acquisitions, or divestitures of business
combinations that may be announced after the date hereof.
We develop and market a comprehensive suite of
e-commerce
software products, as well as provide related services in
conjunction with our products, including support and
maintenance, professional services, managed application hosting
services, and
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 services.
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
education services revenue includes implementation, technical
consulting and education 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 in most circumstances was recognized at the time
the license agreement was executed and the software was
delivered. Beginning in the first quarter of 2007, an increasing
number of our perpetual software license arrangements have 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 these arrangements is recognized on a ratable basis over
the estimated term of the contract or arrangement, commencing
with the go-live date for providing the managed
application hosting services or
e-commerce
optimization services.
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 revenue from these fees
ratably over either the term of the contract or estimated life
of the arrangement depending on the specific facts of the
arrangement, commencing with the go-live date for
providing the managed application hosting services or
e-commerce
optimization services. 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 prior to delivery of the element related to these
services. These amounts are recognized ratably to cost of
revenue in the same manner as the related revenue.
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
21
our results of operations determined in accordance with GAAP, we
also monitor certain non-GAAP financial measures related to 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:
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|
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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 under GAAP 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 and
deferred in prior periods. When considering the contract value
of licenses executed during the period we use our judgment in
assessing collectability and likelihood of granting future
concessions. Factors that we consider include the financial
condition of the customer and contractual provisions included in
the contract.
|
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.
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We use cash flow from operations as an indicator of the success
of the business. Because a 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.
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|
We use recurring services revenue, as reported under GAAP, to
evaluate the success of our strategy to deliver site-independent
online services and the growth of our recurring revenue sources.
Recurring services revenue includes
e-commerce
optimization services, application hosting services and support
and maintenance related to ATG
e-commerce
platform sales.
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|
|
|
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.
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We use days sales outstanding (DSO), calculated by
dividing accounts receivable at period end by revenue and
multiplying the result by the number of days in the period. We
also use a modified DSO that adjusts our revenue by the change
in deferred revenue during the period to provide us with a more
accurate picture of the strength of our accounts receivables and
related collection efforts. The percentage of accounts
receivable that are less than 60 days old is an important
factor that our management uses to understand the strength of
our accounts receivable portfolio. This measure is important
because a disproportionate percentage of our product license
bookings often occurs late in the quarter, which has the effect
of increasing our DSO and modified DSO.
|
Trends in
On-Line Sales and our Business
Set forth below is a discussion of recent developments in our
industry that we believe offer us significant opportunities,
present us with significant challenges, and have the potential
to significantly influence our results of operations.
Impact of weakening economy. The global
recession that currently is affecting all sectors of the
U.S. and most foreign economies creates substantial
uncertainty for our business. Weakening economic conditions have
led to delays or reductions in capital spending, including
purchases of information technology across industries and
markets, and some customers in markets that we serve, such as
luxury retailers, have been particularly affected. We cannot
accurately predict the duration or severity of the current
adverse economic conditions or their impact on our
customers demand for our products and services. As a
result, it is difficult for us to reliably forecast our
longer-term
22
revenues or results of operations, and we have recently
announced that until macro-economic conditions have stabilized,
we will no longer provide annual guidance. Instead, we will only
issue forward-looking information about our expected operating
results on a
quarter-by-quarter
basis. Also, in light of these uncertainties, we are monitoring
our operating expenses closely and have implemented expense
control measures, including constraints on new hiring and
discretionary spending.
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. We believe that in the current
environment, the on-line channel is growing in importance for
many of our customers, as
e-commerce
may offer more opportunities for revenue growth as well as
significant cost savings and operational benefits such as
improved inventory control and purchasing processes compared
with retailers
bricks-and-mortar
operations.
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. As a result of these
factors, we have experienced a period of increased replatforming
activity over the last several years, with increased corporate
spending on
e-commerce
optimization services across many of our markets. The extent to
which this trend will continue in light of current adverse
economic conditions is unknown. However, we are cautiously
optimistic that in the near term spending on
e-commerce
technology will continue at levels comparable to those we have
recently experienced, and that it may even increase as a
priority for some of our customers and prospects, due to the
growing importance and cost benefits of the on-line channel.
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 diminishing product differentiators, increasing 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. Revenues derived from
foreign sales as a percentage of our total revenues declined to
29% in 2008 from 32% in 2007. This decrease is attributable in
part to the impact of changes in foreign currency exchange
rates. In the second half of 2008, the value of the
US Dollar (USD) increased compared to the British Pound
(GBP) and the Euro, which are the two currencies in which the
majority of our foreign sales arise. Continued strength of the
USD in relation to the GBP and Euro in 2009 could result in
lower foreign revenue in 2009. 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.
23
Virtualization. The trend towards
virtualization could challenge our current software license
pricing structure. Virtualization is an approach to computing
wherein the actual, physical hardware resources of a computer
system are configured to simulate the operations of one or more
abstract computers, known as virtual machines, on
which software can be executed. The introduction of
virtualization technologies may lead us to consider alternative
pricing strategies.
Development of ATGs partner
ecosystem. As we train and develop our ATG
partner ecosystem we will see a larger number of implementations
outsourced to these partners resulting in stable or potentially
lower, professional services revenue.
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.
However, an increasing percent of our sales are influenced by
our partner ecosystem.
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, deferral of costs, the allowance for
accounts receivable, software 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.
We believe the following critical accounting policies to be both
those most important to the portrayal of our financial condition
and those that require the most subjective judgment.
Revenue
Recognition
We generate revenue through the sale of perpetual software
licenses, recurring services, which are comprised of support and
maintenance services, application hosting services and
e-commerce
optimization services, and professional and education services.
Please refer to the footnotes to the consolidated financial
statements contained in Item 8 of this Annual Report on
Form 10-K
for a more comprehensive discussion of our revenue recognition
policy. Our policy is to recognize revenue when the applicable
revenue recognition criteria have been met, which generally
include the following:
Persuasive evidence of an arrangement We use
a legally binding contract signed by the customer as evidence of
an arrangement. We consider the signed contract to be the most
persuasive evidence of the arrangement.
Delivery has occurred or services rendered
Software and the corresponding access keys are generally
delivered to customers electronically. Electronic delivery
occurs when we provide the customer access to the software. Our
software license agreements generally do not contain conditions
for acceptance. Our
e-commerce
optimization services and application hosting services are
delivered on a monthly basis. Professional services are
generally delivered on a time and material basis.
Fee is fixed or determinable We assess
whether the fee is fixed or determinable at the outset of the
arrangement, primarily based on the payment terms associated
with the transaction. We have established a
24
history of collecting under the terms of the original contract
without providing concessions on payments, products or services.
Our standard payment terms are primarily net 30 days.
Significant judgment is involved in assessing whether a fee is
fixed or determinable. We must also make judgments when
assessing whether a contract amendment constitutes a concession.
Our experience has been that we are able to determine whether a
fee is fixed or determinable. While we do not expect that
experience to change, if we no longer were to have a history of
collecting under the original contract terms without providing
concessions on licenses, revenue from licenses would be required
to be recognized when cash is received. Such a change could have
a material impact on our results of operations.
Collection is probable We assess the
probability of collection from each customer at the outset of
the arrangement based on a number of factors, including the
customers payment history and its current
creditworthiness. If in our judgment collection of a fee is not
probable, we do not record revenue until the uncertainty is
removed, which generally means revenue is recognized upon our
receipt of the cash payment. Our experience has been that we are
generally able to estimate whether collection is probable. While
we do not expect that experience to change, if we were to
determine that collection is not probable for any arrangement,
revenue from the elements of an arrangement would be recognized
upon the receipt of cash payment unless other revenue
recognition criteria are not met. Such a change could have a
material impact on our results of operations.
Generally we enter into arrangements that include multiple
elements. Such arrangements may include sales of software
licenses and related support and maintenance services in
conjunction with application hosting services,
e-commerce
optimization services or professional services. In these
situations we must determine whether the various elements meet
the applicable criteria to be accounted for as separate
elements. If the elements cannot be separated, revenue is
recognized once the revenue recognition criteria for the entire
arrangement have been met or over the period that our
obligations to the customer are fulfilled, as appropriate. If
the elements are determined to be separable, revenue is
allocated to the separate elements based on vendor specific
objective evidence (VSOE) of fair value and
recognized separately for each element when the applicable
revenue recognition criteria for each element have been met. In
accounting for these multiple element arrangements, we must make
determinations about whether elements can be accounted for
separately and make estimates regarding their relative fair
values.
Recording revenue from arrangements that include application
hosting services requires us to estimate the estimated life of
the customer arrangement. Pursuant to the application of
relevant GAAP literature, EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or
EITF 00-21,
our arrangements with application hosting services are accounted
for as one unit of accounting. In such situations, we recognize
the entire arrangement fee ratably over the term of the
estimated life of the customer arrangement. Based on our
historical experience with our customers, we estimate the life
of the typical customer arrangement to be approximately four
years.
Our VSOE of fair value for certain elements of an arrangement is
based upon the pricing in comparable transactions when the
element is sold separately. VSOE of fair value for support and
maintenance is based upon our history of charging our customers
stated annual renewal rates. VSOE of fair value for professional
services and education is based on the price charged when the
services are sold separately. Annually, we evaluate whether or
not we have maintained VSOE of fair value for support and
maintenance services and professional services. We have
concluded that we have maintained VSOE of fair value for both
support and maintenance services and professional services
because the majority of our support and maintenance contract
renewal rates and professional service rates per personnel level
fall in a narrow range of variability within each service
offering.
For multiple element arrangements, VSOE of fair value must exist
to allocate the total arrangement fee among all delivered and
undelivered elements of a perpetual license arrangement. If VSOE
of fair value does not exist for all elements to support the
allocation of the total fee among all delivered and undelivered
elements of the arrangement, revenue is deferred until such
evidence does exist for the undelivered elements, or until all
elements are delivered, whichever is earlier. If VSOE of fair
value of all undelivered elements exists but VSOE of fair value
does not exist for one or more delivered elements, revenue is
recognized using the residual method. Under the residual method,
the VSOE of fair value of the undelivered elements is deferred,
and the remaining portion of the arrangement fee is recognized
as revenue as the elements are delivered.
25
In certain instances, we sell perpetual software licenses with
application hosting services and
e-commerce
optimization services. We do not have VSOE of fair value for
either of these services. In these situations all elements in
the arrangement for which we receive up-front fees, which
typically include perpetual software fees, support and
maintenance fees and
set-up and
implementation fees, are recognized as revenue ratably over the
period of providing the application hosting service or
e-commerce
optimization services. We allocate and classify revenue in our
statement of operations based on our evaluation of VSOE of fair
value, or a proxy of fair value thereof, available for each
applicable element of the transaction. We generally base our
proxy of fair value on arms-length negotiations for the
contracted elements. This allocation methodology requires
judgment and is based on our analysis of our sales transactions.
Allowances
for Accounts Receivable
We maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. We perform
credit reviews of each customer, monitor collections and
payments from our customers and determine the allowance based
upon historical experience and specific customer collection
issues. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required. In addition,
we record allowances to revenue based on past credit memo
history in the professional services business.
Research
and Development Costs
We account for research and development costs for our software
products that we license to our customers in accordance with
SFAS No. 2, Accounting for Research and Development
Costs, and SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, which specifies that costs incurred internally to
develop computer software products should be charged to expense
as incurred until technological feasibility is reached for the
product. Once technological feasibility is reached, all software
costs should be capitalized until the product is made available
for general release to customers. Judgment is required in
determining when technological feasibility is established. We
believe that the time period from reaching technological
feasibility until the time of general product release is very
short. Costs incurred after technological feasibility is reached
are not material, and accordingly, all such costs are charged to
research and development expense as incurred.
Costs incurred to develop software applications used in our
e-commerce
optimization services are accounted for in accordance with AICPA
Statement of Position
98-1,
Accounting for Computer Software Developed or Obtained for
Internal Use
(SOP 98-1).
Capitalizable costs consist of (a) certain external direct
costs of materials and services incurred in developing or
obtaining internal-use computer software and (b) payroll
and payroll-related costs for employees who are directly
associated with, and who devote time to, the project. These
costs generally consist of internal labor during configuration,
coding and testing activities. Research and development costs
incurred during the preliminary project stage or costs incurred
for data conversion activities, training, maintenance and
general and administrative or overhead costs are expenses as
incurred. Costs that cannot be separated between maintenance of,
and relatively minor upgrades and enhancements to, internal-use
software are also expensed as incurred. Capitalization begins
when the preliminary project stage is complete, management with
the relevant authority authorizes and commits to the funding of
the software project, it is probable the project will be
completed, the software will be used to perform the functions
intended and certain functional and quality standards have been
met.
Our research and development efforts during 2008 and 2007
related to our
e-commerce
optimization services were primarily maintenance and data
conversion activities. As a result, we did not capitalize any
research and development costs during 2008 or 2007. We expect
that during 2009 we will capitalize certain internal use
software development costs under
SOP 98-1
for planned product enhancements for ATG
e-commerce
optimization services.
Impairment
or Disposal of Long Lived Assets, including Intangible
Assets
We review our long-lived assets, including intangible assets
subject to amortization, whenever events or changes in
circumstances indicate that the carrying amount of such an asset
may not be recoverable. Recoverability
26
of these assets is measured by comparison of their carrying
amount to the future undiscounted cash flows the assets are
expected to generate. If such assets are considered impaired,
the impairment to be recognized is equal to the amount by which
the carrying value of the assets exceeds their fair value
determined by either a quoted market price, if any, or a value
determined by utilizing a discounted cash flow technique. In
assessing recoverability, we must make assumptions regarding
estimated future cash flows and discount factors. If these
estimates or related assumptions change in the future, we may be
required to record impairment charges. Intangible assets with
determinable lives are amortized over their estimated useful
lives, based upon the pattern in which the expected benefits
will be realized, or on a straight-line basis, whichever is
greater. We did not record any impairment charges in any of the
years presented.
Goodwill
Goodwill represents the excess of the purchase price over the
fair value of net tangible and intangible assets acquired in a
business combination. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, we evaluate
goodwill for impairment annually on December 1, as well as
whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. Because we have one
reporting segment under SFAS 142, we utilize the
entity-wide approach for assessing goodwill for impairment and
compare our market value to our net book value to determine if
impairment exists. No impairment of goodwill resulted from our
evaluation of goodwill in any of the years presented, however in
the future these impairment tests may result in impairment
losses that could have a material adverse impact on our results
of operations.
Accounting
for Income Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes,
which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets
and liabilities. SFAS 109 also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax assets
will not be realized. We evaluate the realizability of our
deferred tax assets quarterly and adjust the amount of such
allowance, if necessary. As of December 31, 2007, we
recorded a full valuation allowance against our deferred tax
assets due to the uncertainty surrounding the realizability of
these assets. As of December 31, 2008, we determined that
the deferred tax assets in certain foreign jurisdictions would
more likely than not be realized. As a result, during the fourth
quarter of 2008, we reversed a total of $0.6 million of the
deferred tax valuation allowance.
On January 1, 2007 we adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, or FIN 48, which did not
result in a material adjustment in the liability for
unrecognized income tax contingencies. The total net liability
for uncertain tax positions was $1.8 million and
$0.5 million as of December 31, 2008 and 2007,
respectively. If these tax positions were settled in our favor
these liabilities would be reversed and lower our effective tax
rate in the period recorded.
Stock-Based
Compensation Expense
Since January 1, 2006, we have accounted for stock-based
compensation in accordance with SFAS No. 123(R). Under
the fair value recognition provisions of
SFAS No. 123(R), stock-based compensation cost is
measured at the grant date based on the fair value of the award
and is recognized as expense over the vesting period. We use the
Black-Scholes option pricing model to determine the fair value
of our stock option awards. Determining the fair value of
stock-based awards at the grant date requires judgment,
including estimating the expected life of the stock awards and
the volatility of our underlying common stock. Changes to the
assumptions may have a significant impact on the fair value of
stock options, which could have a material impact on our
financial statements. In addition, judgment is also required in
estimating the amount of stock-based awards that are expected to
be forfeited. Should our actual forfeiture rates differ
significantly from our estimates, our stock-based compensation
expense and results of operations could be materially impacted.
27
Results
of Operations
The following table sets forth statement of operations data as a
percentage of total revenue for the periods indicated:
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Year Ended December 31,
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2008
|
|
|
2007
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|
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2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
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|
|
29
|
%
|
|
|
22
|
%
|
|
|
32
|
%
|
Recurring services
|
|
|
55
|
%
|
|
|
56
|
%
|
|
|
50
|
%
|
Professional and education services
|
|
|
16
|
%
|
|
|
22
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of Revenue:
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|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Recurring services
|
|
|
21
|
%
|
|
|
18
|
%
|
|
|
11
|
%
|
Professional and education services
|
|
|
16
|
%
|
|
|
21
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
38
|
%
|
|
|
41
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
62
|
%
|
|
|
59
|
%
|
|
|
68
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
21
|
%
|
Sales and marketing
|
|
|
30
|
%
|
|
|
33
|
%
|
|
|
30
|
%
|
General and administrative
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60
|
%
|
|
|
64
|
%
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2
|
%
|
|
|
(5
|
)%
|
|
|
5
|
%
|
Interest and other income, net
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
3
|
%
|
|
|
(3
|
)%
|
|
|
7
|
%
|
Provision (benefit) for income taxes
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2
|
%
|
|
|
(3
|
)%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth gross margin on product license
revenue, recurring services revenue and professional and
education services revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of product license revenue
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
5
|
%
|
Gross margin on product license revenue
|
|
|
95
|
%
|
|
|
93
|
%
|
|
|
95
|
%
|
Cost of recurring services revenue
|
|
|
37
|
%
|
|
|
31
|
%
|
|
|
22
|
%
|
Gross margin on recurring services revenue
|
|
|
63
|
%
|
|
|
69
|
%
|
|
|
78
|
%
|
Cost of professional and education services revenue
|
|
|
98
|
%
|
|
|
98
|
%
|
|
|
101
|
%
|
Gross margin on professional and education services revenue
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
(1
|
)%
|
Product
license bookings
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 under GAAP 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 and
deferred 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.
28
The following table summarizes and reconciles to our product
licenses revenue, as reported under US GAAP, our product license
bookings for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Product license bookings
|
|
$
|
52,782
|
|
|
$
|
43,412
|
|
|
$
|
32,812
|
|
Product license bookings deferred
|
|
|
(25,546
|
)
|
|
|
(14,166
|
)
|
|
|
(505
|
)
|
Product license deferred revenue recognized
|
|
|
20,193
|
|
|
|
1,283
|
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license revenue
|
|
$
|
47,429
|
|
|
$
|
30,529
|
|
|
$
|
32,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license bookings increased $9.4 million, or 22%, to
$52.8 million in 2008 from $43.4 million in 2007 and
increased $10.6 million or 32% to $43.4 million in
2007 from $32.8 million in 2006. These increases reflect
growth in the
e-commerce
market and the success of our sales and marketing initiatives.
Product license bookings deferred was 48%, 33% and 2% of our
total product license bookings for 2008, 2007 and 2006,
respectively. The increase in deferral of bookings is due to the
inclusion of
e-commerce
optimization services, application hosting and other elements in
an increasing number of our contracts. Deferred revenue will be
recognized in future periods when delivery of the service occurs
or as contractual requirements are met.
Product license deferred revenue recognized was
$20.2 million, $1.3 million, and $0.5 million in
2008, 2007 and 2006. The increases, particularly in 2008,
reflects the cumulative additions to deferred product revenue
that have ocurred since 2006.
We expect first quarter 2009 product license bookings to be in
the range of equal to the first quarter of 2008 or up 8%.
Years
ended December 31, 2008, 2007 and 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Total revenue
|
|
$
|
164,641
|
|
|
$
|
137,060
|
|
|
$
|
103,232
|
|
Total revenue increased $27.6 million, or 20%, to
$164.6 million for 2008 from $137.1 million for 2007.
Revenue is derived from perpetual software licenses, recurring
services, which is comprised of support and maintenance
services, application hosting services, and
e-commerce
optimization services, and professional and education services.
The revenue growth in 2008 is due to an increase of
$16.9 million, or 55%, in product license revenue and an
increase of $14.4 million, or 19%, in recurring services
revenue. Partially offsetting the increase was a decrease in
professional and education services of $3.7 million, or 12%.
Total revenue increased $33.8 million, or 33%, to
$137.1 million for 2007 from $103.2 million for 2006,
as a result of the acquisition of eStara in October 2006 which
contributed revenue of $26.0 million in 2007 and to growth
in professional and education services revenue of
$10.5 million. Partially offsetting the increase was a
decrease in product license revenue of $2.3 million that
was directly a result of the change in our business model
requiring us to defer all revenue recognition for fees received
up front when software licenses are sold in conjunction with
managed application hosting services and or
e-commerce
optimization services.
Revenue generated from international customers increased to
$48.4 million, but declined as a percent of total revenue
to 29% compared to 32% and 25% of total revenue in the years
ended December 31, 2007 and 2006, respectively. The
fluctuation in international revenue as a percent of total
revenue is largely attributable to the strength of the US dollar
(USD) relative to the British Pound Sterling (GBP) and the Euro.
In 2007, the USD lost value relative to the GBP and Euro making
our goods and services cheaper to foreign customers. In the
second half of 2008, the USD gained value relative to the GBP
and Euro making our goods and services more expensive to foreign
customers.
29
We expect first quarter 2009 revenues in the range of
$39 million to $42 million.
Product
License Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Product license revenue
|
|
$
|
47,429
|
|
|
$
|
30,529
|
|
|
$
|
32,784
|
|
As a percent of total revenue
|
|
|
29
|
%
|
|
|
22
|
%
|
|
|
32
|
%
|
Product license revenue increased 55% to $47.4 million for
2008 from $30.5 million in 2007. Product license revenue
decreased 7% to $30.5 million for 2007 from
$32.8 million in 2006. The increase for 2008 is driven by
significant growth in sales of software licenses recognized in
2008, an $18.9 million increase in revenue recognized from
deferred revenue, partially offset by an $11.4 million
increase in deferred product license revenue in 2008. In 2008,
we recognized $20.2 million, or 43%, of our product license
revenue from balances deferred in prior periods. Revenue
generated and deferred in prior periods is recognized when
delivery of the service occurs or as contractual requirements
are met. Product license revenue generated from international
customers increased 42% to $17.5 million for 2008 from
$12.3 million in 2007.
Product license revenue decreased 7%, to $30.5 million, for
2007 from $32.8 million in 2006. The decrease for 2007 is
due to deferrals of license revenue related to multiple element
transactions in which we are hosting the software or providing
e-commerce
optimization services. Deferred revenue is recognized in future
periods when delivery of the service occurs or as contractual
requirements are met. Partially offsetting this impact is the
recognition of $1.3 million in product license revenue
which was deferred in prior periods. Product license revenue
generated from international customers increased 37% to
$12.3 million for 2007 from $9.0 million in 2006.
Product license revenue as a percentage of our total revenue
increased to 29% in 2008 from 22% in 2007 while it was 32% in
2006. This fluctuation in revenue mix is due in part to the
introduction in late 2006 of new services, such as our
e-commerce
optimization services, that are included in our recurring
services revenue. The change in revenue mix is also a result of
the change in our business model described above, that has
resulted in an increased percentage of our software license
revenue being recognized in future periods when delivery of the
service occurs or as contractual requirements are met.
Recurring
services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Support and maintenance
|
|
$
|
45,716
|
|
|
$
|
41,923
|
|
|
$
|
39,303
|
|
e-Commerce
optimization services and managed application hosting services
|
|
|
45,323
|
|
|
|
34,749
|
|
|
|
11,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring services revenue
|
|
$
|
91,039
|
|
|
$
|
76,672
|
|
|
$
|
51,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenue
|
|
|
55
|
%
|
|
|
56
|
%
|
|
|
50
|
%
|
Our recurring services revenue increased 19% to
$91.0 million in 2008 from $76.7 million in 2007, as
follows:
|
|
|
|
|
Support and maintenance revenue increased 9% to
$45.7 million in 2008 from $41.9 million in 2007. The
increase is due to growth in our installed base of ATG
e-commerce
software.
|
|
|
|
e-Commerce
optimization services and managed application hosting services
revenue increased 30% to $45.3 million in 2008 from
$34.7 million in 2007. The increased revenue in 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 ATG Recommendations
acquired in the CleverSet transaction in February 2008 is
included in this
e-commerce
optimization services revenue.
|
30
Our recurring services revenue increased 50% to
$76.7 million in 2007 from $51.1 million in 2006, as
follows:
|
|
|
|
|
Support and maintenance revenue increased 7% to
$41.9 million in 2007 from $39.3 million in 2006. The
increase is due to growth in our installed base of ATG
e-commerce
software. partially offset by approximately $1.1 million of
revenue that was deferred due to arrangements that were sold in
conjunction with application hosting services or
e-commerce
optimization services.
|
|
|
|
e-Commerce
optimization services and managed application hosting services
revenue increased to $34.7 million in 2007 from
$11.8 million in 2006. Revenues in 2007 included the full
years results of eStara, which we acquired in October
2006, and represented 45% of total recurring service revenue for
2007 compared with 23% in 2006.
|
We expect first quarter 2009 recurring services revenue to be in
the range of $22 million to $24 million.
Professional
and education services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Professional and education services revenue
|
|
$
|
26,173
|
|
|
$
|
29,859
|
|
|
$
|
19,335
|
|
As a percent of total revenue
|
|
|
16
|
%
|
|
|
22
|
%
|
|
|
18
|
%
|
Professional and education services revenue declined 12% to
$26.2 million in 2008 from $29.8 million in 2007, and
declined as a percentage of total revenue to 16% in 2008 from
22% in 2007. Professional and education 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. 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. As a
result of this change in our strategy, professional services
revenue declined 13% in 2008 from 2007. Included in professional
and education services revenue in 2008 was $1.7 million of
revenue related to government funded research business acquired
with CleverSet.
Professional and education services revenue increased 54% to
$29.9 million in 2007 from $19.3 million in 2006, and
increased as a percentage of total revenue to 22% in 2007 from
18% in 2006, due to an increase in implementation activity
associated with growth in our product license bookings in 2007,
partially offset by the deferral of revenue for services related
to managed application hosting and
e-commerce
optimization arrangements that will be recognized ratably once
the hosted services commence.
International professional and education service revenue
declined to $5.6 million in 2008 from $7.8 million in
2007 and $3.8 million in 2006.
We expect first quarter professional and education services
revenue to be in the range of $6 million to $7 million.
Cost of
Product License Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of product license revenue
|
|
$
|
2,186
|
|
|
$
|
2,197
|
|
|
$
|
1,751
|
|
As a percent of license revenue
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
5
|
%
|
Gross margin on product license revenue
|
|
$
|
45,243
|
|
|
$
|
28,332
|
|
|
$
|
31,033
|
|
As a percent of license revenue
|
|
|
95
|
%
|
|
|
93
|
%
|
|
|
95
|
%
|
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 developed technology. Variations in
our cost of product license revenue did not materially influence
our results of operations in the periods presented.
31
Cost of
Recurring Services Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of recurring services revenue
|
|
$
|
34,077
|
|
|
$
|
24,119
|
|
|
$
|
11,239
|
|
As a percent of recurring services revenue
|
|
|
37
|
%
|
|
|
31
|
%
|
|
|
22
|
%
|
Gross margin on recurring services revenue
|
|
$
|
56,962
|
|
|
$
|
52,553
|
|
|
$
|
39,874
|
|
As a percent of recurring services revenue
|
|
|
63
|
%
|
|
|
69
|
%
|
|
|
78
|
%
|
Cost of recurring services revenues includes salary, benefits,
and stock-based compensation and other costs for recurring
services support staff, costs associated with the hosting
centers, third-party contractors, amortization of technology
acquired in connection with the eStara and CleverSet
acquisitions and royalties.
When we perform professional consulting and implementation
services in connection with managed application hosting
arrangements we generally defer the direct costs incurred prior
to delivery of the element related to the performance of these
services. Deferred costs are amortized to cost of revenue
ratably over the term or the estimated life of the arrangement
once services commence.
Cost of recurring services revenue increased 41% to
$34.1 million in 2008 from $24.1 million in 2007.
Gross margin on recurring services revenue was 63%, or
$57.0 million for 2008 compared to 69%, or
$52.6 million for 2007. Cost of recurring services revenue
increased 115% to $24.1 million for 2007 from
$11.2 million for 2006. Gross margin on recurring services
was 69% or $52.6 million for 2007 compared to 78% or
$39.9 million for 2006.
The increase in cost of recurring services and the resulting
decline in gross margin percentage on recurring services for
2008 was due to a $3.2 million increase in
telecommunications costs in our
e-commerce
optimization services business correlating with increased call
traffic resulting from growth in customer utilization of these
services. In addition, we experienced a $2.7 million
increase in labor related costs from additional investment in
our application hosting services infrastructure, a net
$1.6 million increase in recognition of previously deferred
implementation costs and $1.3 million in depreciation
expense related to fixed assets acquired to support growth in
the business and the acquisition of CleverSet. In addition,
costs of hosted services increased $0.8 million in 2008 as
a result of non-recurring costs related to transitioning hosting
services to a new hosting services provider.
The gross margin on recurring services revenue declined to 63%
in 2008 from 69% in 2007. The $3.2 million increase in
telecommunications cost was a significant driver to the decline
in margin. Telecommunications cost increased to 23% of
e-commerce optimization services revenue in 2008 from 20% in
2007. In addition, we incurred costs associated with the
integration of CleverSet.
Cost of recurring services revenue increased 114% to
$24.1 million in 2007 from $11.2 million in 2006.
Gross margin on recurring services revenue was 69%, or
$52.6 million, in 2007 compared to 78%, or
$39.9 million, in 2006. The increase in cost of recurring
services and the resulting decline in gross margin on recurring
services in 2007 was due to direct costs associated with
business acquired with eStara for a full year and to the
amortization of intangible assets associated with the
acquisition of eStara in the fourth quarter of 2006.
We expect first quarter 2009 recurring services gross margin to
be in the mid-60 percent range.
Cost of
Professional and Education Services Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of professional and education services revenue
|
|
$
|
25,619
|
|
|
$
|
29,223
|
|
|
$
|
19,560
|
|
As a percent of professional and education services revenue
|
|
|
98
|
%
|
|
|
98
|
%
|
|
|
101
|
%
|
Gross margin on professional and education services revenue
|
|
$
|
554
|
|
|
$
|
636
|
|
|
$
|
(225
|
)
|
As a percent of professional and education services revenue
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
(1
|
)%
|
32
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
12% to $25.6 million for 2008 from $29.2 million for
2007. The decrease in cost of professional and education
services for 2008 was driven by a $5.7 million decrease in
labor related costs and a decrease of $1.2 million in
travel related costs for professional services. These decreases
were attributable to a reduction in the use of contract labor in
the delivery of our professional services and less travel,
resulting from the successful execution of our strategy to
develop our partner networks. The decreases in expenses were
partially offset by $1.7 million decrease in the amount of
costs deferred in 2008 compared with the 2007 period and the
inclusion in 2008 of $1.6 million in CleverSet expenses.
Cost of professional and education services revenue increased
49% to $29.2 million in 2007 from $19.6 million in
2006. Gross margin on professional and education services
revenue was 2%, or $0.7 million in 2007 compared to (1)%,
or $(0.2) million in 2006. The increase in cost of
professional and education services in 2007 was driven by an
increase in labor related costs for professional services as a
result of growth in our professional services organization in
2007 due to increased demand for implementation services.
We expect first quarter 2009 professional and educational
services gross margin to be 5% to 10%.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Research and development expenses
|
|
$
|
29,329
|
|
|
$
|
24,963
|
|
|
$
|
21,517
|
|
As a percent of total revenue
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
21
|
%
|
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 17% to
$29.3 million in 2008 from $25.0 million in 2007 and
remained 18% of revenue due to revenue growth in 2008. The
increase in research and development spending was driven by
increases of $3.4 million in labor related costs from 2007
to develop the capacity of the organization to further drive
creative product development. As part of the growth in the
research and development organization depreciation and allocated
infrastructure costs increased $0.7 million in 2008 from
the prior year driven by increased capital expenditures in 2008
and 2007.
Research and development expenses increased 16% to
$25.0 million in 2007 from $21.5 million in 2006 and
decreased as a percentage of revenue to 18% from 21%. The
increase in research and development spending was due to a full
year of expenses related to eStara which was acquired in the
fourth quarter of 2006.
Our research and development efforts during 2008 and 2007
related to our
e-commerce
optimization services were primarily maintenance and data
conversion costs. We did not capitalize any research and
development costs during 2008 and 2007. We expect that during
2009 we will capitalize certain internal use software
development costs under
SOP 98-1
for planned product enhancements for ATG
e-commerce
optimization services.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Sales and marketing expenses
|
|
$
|
49,569
|
|
|
$
|
44,397
|
|
|
$
|
30,909
|
|
As a percent of total revenue
|
|
|
30
|
%
|
|
|
33
|
%
|
|
|
30
|
%
|
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. We generally
recognize commission expense upon contract execution with the
result that commission expense may be recognized earlier than
the related revenue.
Sales and marketing expenses increased 12% to $49.6 million
in 2008 from $44.4 million in 2007, and decreased as a
percentage of total revenue to 30% from 33% due to revenue
growth in 2008. The increase was due to
33
an increase in cost of $3.4 million in labor related costs,
including a $1.4 million increase in commissions related to
higher product license bookings, a $0.7 million increase in
stock-based compensation and a $0.4 million increase in
travel costs. In addition, we had a $0.4 million increase
in spending on marketing programs.
Sales and marketing expenses increased 44% to $44.4 million
in 2007 from $30.9 million in 2006, and increased as a
percentage of total revenue to 33% from 30%. The increase was
due to an increase in cost of $8.9 million related to the
eStara acquisition, a $2.4 million increase in commission
expense related to higher product license bookings and increased
spending on marketing programs.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
General and administrative expenses
|
|
$
|
19,432
|
|
|
$
|
18,211
|
|
|
$
|
12,952
|
|
As a percent of total revenue
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
12
|
%
|
General and administrative expenses consist primarily of
salaries, benefits, and stock-based compensation and other
related costs for internal systems, finance, human resources,
legal and executive related functions.
General and administrative expenses increased 7% to
$19.4 million in 2008 from $18.2 million in 2007, and
decreased as a percentage of total revenue to 12% from 13%.
The increase in 2008 of $1.2 million was due to additional
salaries and other related costs, including stock-based
compensation, and $0.6 million related to additional
outside professional services, legal and accounting and tax
services.
General and administrative expenses increased 41% to
$18.2 million in 2007 from $13.0 million in 2006, and
increased as a percentage of total revenue to 13% from 12%.
The increase in 2007 of $5.2 million was attributable to
the inclusion of a full years results for eStara. eStara
contributed $3.3 million of general and administrative
expenses to 2007 compared to $0.7 million in 2006. Salaries
and other related costs, including stock-based compensation
increased $2.3 million in 2007, which includes
$1.8 million related to eStara. In 2007, we incurred
$1.4 million in general and administrative expenses related
to remedial actions taken to correct material weaknesses in our
internal control over financial reporting identified at
December 31, 2006, including outside service fees and other
one-time costs.
We expect first quarter 2009 total operating expenses, which
include research and development, sales and marketing and
general and administrative expenses, to be in the range of
$24 million to $26 million.
Stock-Based
Compensation Expense
The Company records stock-based compensation expense in
accordance with Statement of Financial Accounting Standards
No. 123, Share-Based Payment
(SFAS 123R). The Company recorded
$7.9 million, $5.8 million and $3.8 million in
stock-based compensation expense for the years ended
December 31, 2008, 2007 and 2006, respectively. The
increase in stock-based compensation expense is due to granting
restricted stock units in 2008 and 2007 at higher values
compared to the fair value of stock options in past years. We
expect to use restricted stock units and stock options regularly
in the future.
As of December 31, 2008, the total compensation cost
related to unvested awards not yet recognized in the statement
of operations was approximately $16.8 million, which will
be recognized over a weighted average period of approximately
2.7 years.
Interest
and Other Income, Net
Interest and other income, net decreased to $1.0 million in
2008 from $2.2 million in 2007. The decrease was primarily
due to foreign currency exchange losses on remeasuring foreign
currency denominated assets and
34
liabilities. Additionally, the decrease included net realized
losses on foreign currency based transactions. We incurred a
foreign currency exchange loss of $40,000 in 2008 compared to
gains of $742,000 in 2007. The foreign currency based losses
were driven by the movement of the U.K. Pound Sterling and the
Euro compared to the US Dollar in 2008, compared to 2007 in
which net gains were recorded. In addition, we experienced a
decrease in interest income resulting from lower prevailing
interest rates despite our higher ending cash and investment
balances. Cash, cash equivalents and marketable securities,
including restricted cash, increased $9.5 million in 2008
to $61.4 million at December 31, 2008.
Interest and other income, net increased to $2.2 million in
2007 from $1.7 million in 2006. The increase was primarily
due to an increase in interest income resulting from our higher
average cash and investment balances and foreign currency
exchange gains due to continuing weakness in the
U.S. dollar versus the U.K. Pound Sterling and the Euro.
Provision
(Benefit) for Income Taxes
For the year ended December 31, 2008, we recorded an income
tax provision of $1.6 million. This relates to earnings in
certain of our foreign subsidiaries as well as a reduction in
our valuation allowance recorded as a decrease to goodwill of
$2.0 million, discussed further below. In 2007, we recorded
tax expense of $0.4 million primarily related to earnings
in certain of our foreign subsidiaries as well as interest and
penalties related to certain tax positions. We recorded minimal
Federal income taxes in 2007 due to taxable operating losses in
2007. The primary differences between book income and tax
income for 2007 were the amortization of capitalized research
and development expenses and payments on accrued expenses,
partially offset by SFAS 123R stock compensation expenses
and income from deferred revenue.
As of December 31, 2007, we recorded a full valuation
allowance against our deferred tax assets due to the uncertainty
surrounding the realizability of these assets. As of
December 31, 2008, we determined that the deferred tax
assets in certain foreign jurisdictions would more likely than
not be realized. This assessment was based upon our cumulative
history of earnings before taxes for financial reporting
purposes over a three year period in those jurisdictions and our
assessment as of December 31, 2008 of our expected future
results of operations. As a result, during the fourth quarter of
2008, we reversed a total of $0.6 million of our deferred
tax asset valuation allowance. The valuation allowance decreased
overall by $16.5 million primarily as a result of the
utilization of previously unbenefited losses and the elimination
net operating losses generated from excess stock option
deductions in accordance with SFAS No. 123(R).
$2.0 million of the reversal of the valuation allowance was
recorded as a decrease to goodwill in accordance with
SFAS No. 109 and SFAS No. 141, as the
reduction relates to the utilization of Primus pre-acquisition
tax assets. Future reductions in the valuation allowance in
connection with the utilization of the remaining acquired tax
assets will be recorded as an increase to income from continuing
operations in accordance with SFAS No. 141(R),
effective January 1, 2009.
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 U.S. net operating loss carryforwards, research
and development credit carryforwards and other net deferred tax
assets.
Acquisitions
CleverSet
Acquisition
On February 5, 2008, we 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 our
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.
35
eStara
Acquisition
In October 2006, we acquired all of the outstanding shares of
common stock of eStara, Inc. (eStara). The aggregate
purchase price was approximately $49.8 million, which
consisted of $39.2 million of our common stock,
$2.2 million of transaction costs, which primarily
consisted of fees paid for financial advisory, legal and
accounting services and a transaction bonus to eStara employees
of $4.8 million, and $3.6 million in cash paid in lieu
of issuing ATG common stock to non accredited investors. We
issued approximately 14.6 million shares of our common
stock, the fair value of which was based upon a
five-day
average of the closing price two days before and two days after
the terms of the acquisition were agreed to and publicly
announced. In addition, we issued 0.3 million shares of
restricted stock, which is being recognized as stock-based
compensation expense over the vesting term. In the preliminary
allocation of the purchase price the excess of the purchase
price over the net assets acquired resulted in goodwill of
$32.1 million.
As required by the merger agreement, in 2007 we recorded
contingent consideration of $2.0 million for earn-out
payments to eStara stockholders and employees as a result of
eStara generating revenue in excess of $25 million but less
than $30 million in 2007. The earn-out payments were made
in March 2008 and consisted of $0.6 million for
stockholders and $1.4 million for employees. The payments
to stockholders were recorded as additional purchase price, and
the amounts paid to employees were accounted for as compensation
expense as it relates to amounts paid to eStara employee
stockholders in excess of that paid to non-employee stockholders.
For detailed information about our acquisitions, see Note 6
to the Consolidated Financial Statements contained in
Item 8 of this Annual Report on
Form 10-K.
Liquidity
and Capital Resources
Our capital requirements relate primarily to labor costs,
facilities, employee and customer infrastructure and working
capital requirements. Our primary sources of liquidity at
December 31, 2008 were our cash, cash equivalents, and
short and long-term marketable securities of $61.4 million,
including $2.1 million of restricted cash.
Cash provided by operating activities was $34.1 million in
2008 and the primary movements are as follows:
|
|
|
|
|
Net income for the 2008 of $3.8 million included non-cash
expenses for depreciation and amortization of $8.9 million,
stock-based compensation expense of $7.9 million and
non-cash tax expense of $2.0 million.
|
|
|
|
Deferred revenue increased $7.7 million during the year. We
invoice customers as licenses and services are delivered and
collect these invoices under customary business practices.
Accordingly, the invoices that generated the deferred revenue
balance at December 31, 2008 were subject to our collection
process and, to the extent collected, are in our cash flow from
operations.
|
|
|
|
Cash flows from accounts receivable increased $5.6 million
in 2008, due to improved collection of outstanding accounts
receivable, which resulted in a decline in days sales
outstanding to 70 days at December 31, 2008 compared
to 93 days at December 31, 2007.
|
|
|
|
Cash flows due to accrued expenses and accounts payable
increased $0.2 million in 2008 due to higher operating
expenses in 2008 partially offset by our focus to pay our
vendors timely. We will be required to pay cash in future
periods for these expenses that were recorded in 2008.
|
|
|
|
Cash flows from prepaid expenses and other assets decreased
$0.7 million in 2008 due to payments for rent paid in
advance in the United Kingdom, support and maintenance contract
on internally utilized software, and health insurance premiums.
|
Net cash used in investing activities in 2008 was
$13.3 million, which consisted of net payments
$9.8 million for the CleverSet acquisition and eStara
shareholder contingent consideration, $7.0 million of
capital expenditures, primarily computer equipment and software
for the managed application hosting business, and
$2.1 million in purchases of certificates of deposit to
collateralize letters of credit, partially offset by
$5.5 million in net maturities of marketable securities.
36
Net cash used in financing activities in 2008 was
$6.2 million. Financing activities consisted primarily of
$8.9 million repurchases of our common stock and the
payment of $0.5 million for tax withholdings due on the
vesting of restricted stock units, partially offset by
$3.2 million in proceeds from exercised stock options and
the employee stock purchase plan.
On April 19, 2007 our Board of Directors authorized a stock
repurchase program providing for repurchases of our outstanding
common stock of up to $20 million, in the open market or in
privately negotiated transactions, at times and prices
considered appropriate depending on prevailing market
conditions. During the year ended December 31, 2008, we
repurchased 4,618,541 shares of our common stock at a cost
of $8.9 million. Under the program to date, we have
repurchased 5,605,501 shares of our common stock at a cost
of $11.8 million. We have authorization to expend an
additional $8.2 million under this program as of
December 31, 2008. Our stock repurchase program may be
accelerated, suspended, delayed or discontinued at any time.
We believe that our balance of $61.4 million in cash, cash
equivalents and marketable securities at December 31, 2008,
including $2.1 million of restricted cash, along with other
working capital and cash expected to be generated by our
operations, will allow us to meet our liquidity requirements
over at least the next twelve months and for the foreseeable
future. However, our actual cash requirements will depend on
many factors, including particularly, overall economic
conditions both domestically and abroad. We may find it
necessary or advisable to seek additional external funds through
public or private securities offerings, strategic alliances or
other financing sources. There can be no assurance that if we
seek external funding, it will be available on favorable terms,
if at all.
Accounts
Receivable and Days Sales Outstanding
Our accounts receivable balance and days sales outstanding and
modified days sales outstanding for the fourth quarter ended
December 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Days sales outstanding
|
|
|
70
|
|
|
|
93
|
|
Revenue
|
|
$
|
45,397
|
|
|
$
|
39,326
|
|
Accounts receivable, net
|
|
$
|
35,109
|
|
|
$
|
40,443
|
|
Modified days sales outstanding
|
|
|
67
|
|
|
|
82
|
|
Percent of accounts receivable less than 60 days
|
|
|
92
|
%
|
|
|
88
|
%
|
We evaluate our performance on collections on a quarterly basis.
As of December 31, 2008, our days sales outstanding
decreased from December 31, 2007 due to collections on
support and maintenance renewals as well as the effect of
receiving payments on sales that were made during the current
and previous quarters.
Contractual
Obligations
On December 31, 2008, our contractual cash obligations,
which consist of operating leases and long-term tax obligations,
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Operating leases
|
|
$
|
15,460
|
|
|
$
|
3,894
|
|
|
$
|
6,059
|
|
|
$
|
1,946
|
|
|
$
|
3,561
|
|
Long-term tax obligations
|
|
|
1,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,235
|
|
|
$
|
3,894
|
|
|
$
|
6,059
|
|
|
$
|
1,946
|
|
|
$
|
5,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In December 2007, the FASB issued Statement No. 141(R)
Business Combinations, (Statement 141(R)), a
replacement of FASB Statement No. 141. Statement 141(R) is
effective for fiscal years beginning on or after
37
December 15, 2008 and applies to all business combinations.
Statement 141(R) provides that, upon initially obtaining
control, an acquirer shall recognize 100 percent of the
fair values of acquired assets, including goodwill, and assumed
liabilities, with only limited exceptions, even if the acquirer
has not acquired 100 percent of its target. As a
consequence, the current step acquisition model will be
eliminated. Additionally, Statement 141(R) changes current
practice, in part, as follows: (1) contingent consideration
arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration;
(2) transaction costs will be expensed as incurred, rather
than capitalized as part of the purchase price;
(3) pre-acquisition contingencies, such as legal issues,
will generally have to be accounted for in purchase accounting
at fair value; (4) in order to accrue for a restructuring
plan in purchase accounting, the requirements in FASB Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, would have to be met at the acquisition
date; and (5) In-process research and development charges
will no longer be recorded. Upon adoption of
Statement 141(R) we will no longer reduce goodwill when
utilizing net operating loss carry forwards for which a full
valuation allowance exists as was required under
Statement 141. The adoption of Statement 141(R) on
January 1, 2009 could materially change the accounting for
business combinations consummated subsequent to that date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
(SFAS 160), which amends ARB 51 to establish
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51s
consolidation procedures for consistency with the requirements
of SFAS 141( R), Business Combinations. This
Statement will be effective for financial statements issued for
fiscal years and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption
is prohibited. The adoption of this statement is not expected to
have a material impact to our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS No. 162). SFAS No. 162
identifies the sources of generally accepted accounting
principles in the United States. SFAS No. 162 is
effective sixty days following the SECs approval of the
Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. The adoption
of SFAS No. 162 is not expected to have a material
effect on our consolidated financial position and results of
operations.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We maintain an investment portfolio consisting mainly of money
market funds, corporate obligations and government obligations
with a weighted average maturity of less than one year. These
available-for-sale securities are subject to interest rate risk.
However, a 10% change in interest rates would not have a
material impact to the fair values of these securities at
December 31, 2008 and 2007 primarily due to their short
maturity and our intent to hold the securities to maturity.
There have been no significant changes since December 31,
2008.
The majority of our operations are based in the U.S., and
accordingly, the majority of our transactions are denominated in
U.S. dollars. However, we have foreign-based operations
where transactions are denominated in foreign currencies and are
subject to market risk with respect to fluctuations in the
relative value of foreign currencies. Our primary foreign
currency exposures relate to our short-term intercompany
balances with our foreign subsidiaries and accounts receivable
valued in the United Kingdom in U.S. dollars. Our primary
foreign subsidiaries have functional currencies denominated in
the British pound and Euro, and foreign denominated assets and
liabilities are remeasured each reporting period with any
exchange gains and losses recorded in our consolidated
statements of operations. Based on currency exposures existing
at December 31, 2008 and 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 December 31, 2008, we had no outstanding
derivative instruments. We do not use derivative instruments for
trading or speculative purposes.
38
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
Report of
Independent Registered Public Accounting Firm
The Board of
Directors and Stockholders
Art Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of
Art Technology Group, Inc. as of December 31, 2008 and
2007, and the related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Art Technology Group, Inc. at
December 31, 2008 and 2007, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1(o) to the consolidated financial
statements, effective January 1, 2007, the Company adopted
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Art
Technology Group, Inc.s internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 26, 2009 expressed
an unqualified opinion thereon.
Boston, Massachusetts
February 26, 2009
39
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,413
|
|
|
$
|
34,419
|
|
Marketable securities (including restricted securities of $1,669
at December 31, 2008)
|
|
|
13,570
|
|
|
|
16,460
|
|
Accounts receivable, net of reserves of $1,234 ($958 in 2007)
|
|
|
35,109
|
|
|
|
40,443
|
|
Deferred costs, current
|
|
|
924
|
|
|
|
790
|
|
Deferred tax assets
|
|
|
560
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
3,814
|
|
|
|
2,741
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
101,390
|
|
|
|
94,853
|
|
Property and equipment, net
|
|
|
10,098
|
|
|
|
7,208
|
|
Deferred costs, less current portion
|
|
|
1,984
|
|
|
|
2,337
|
|
Marketable securities (including restricted securities of $419
at December 2008)
|
|
|
419
|
|
|
|
1,062
|
|
Other assets
|
|
|
1,423
|
|
|
|
1,475
|
|
Intangible assets, net
|
|
|
7,770
|
|
|
|
11,109
|
|
Goodwill
|
|
|
65,683
|
|
|
|
59,675
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
188,767
|
|
|
$
|
177,719
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,958
|
|
|
$
|
3,619
|
|
Accrued expenses
|
|
|
18,875
|
|
|
|
19,082
|
|
Deferred revenue, current portion
|
|
|
38,782
|
|
|
|
35,577
|
|
Accrued restructuring, current portion
|
|
|
146
|
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
60,761
|
|
|
|
59,133
|
|
Accrued restructuring, less current portion
|
|
|
|
|
|
|
225
|
|
Deferred revenue, less current portion
|
|
|
15,285
|
|
|
|
10,777
|
|
Other liabilities
|
|
|
1,775
|
|
|
|
487
|
|
Commitments and contingencies (Notes 7 and 10)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; authorized
10,000,000 shares; issued and outstanding no
shares
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; authorized
200,000,000 shares; issued
131,572,773 shares and 129,293,221 shares at
December 31, 2008 and 2007, respectively
|
|
|
1,316
|
|
|
|
1,293
|
|
Additional paid-in capital
|
|
|
315,730
|
|
|
|
305,151
|
|
Accumulated deficit
|
|
|
(191,946
|
)
|
|
|
(195,745
|
)
|
Treasury stock, at cost (5,605,501 shares and
986,960 shares at December 31, 2008 and 2007,
respectively)
|
|
|
(11,810
|
)
|
|
|
(2,902
|
)
|
Accumulated other comprehensive loss
|
|
|
(2,344
|
)
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
110,946
|
|
|
|
107,097
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
188,767
|
|
|
$
|
177,719
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
$
|
47,429
|
|
|
$
|
30,529
|
|
|
$
|
32,784
|
|
Recurring services
|
|
|
91,039
|
|
|
|
76,672
|
|
|
|
51,113
|
|
Professional and education services
|
|
|
26,173
|
|
|
|
29,859
|
|
|
|
19,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
164,641
|
|
|
|
137,060
|
|
|
|
103,232
|
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses
|
|
|
2,186
|
|
|
|
2,197
|
|
|
|
1,751
|
|
Recurring services
|
|
|
34,077
|
|
|
|
24,119
|
|
|
|
11,239
|
|
Professional and education services
|
|
|
25,619
|
|
|
|
29,223
|
|
|
|
19,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
61,882
|
|
|
|
55,539
|
|
|
|
32,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
102,759
|
|
|
|
81,521
|
|
|
|
70,682
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
29,329
|
|
|
|
24,963
|
|
|
|
21,517
|
|
Sales and marketing
|
|
|
49,569
|
|
|
|
44,397
|
|
|
|
30,909
|
|
General and administrative
|
|
|
19,432
|
|
|
|
18,211
|
|
|
|
12,952
|
|
Restructuring benefit
|
|
|
|
|
|
|
(59
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
98,330
|
|
|
|
87,512
|
|
|
|
65,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
4,429
|
|
|
|
(5,991
|
)
|
|
|
5,366
|
|
Interest and other income, net
|
|
|
960
|
|
|
|
2,237
|
|
|
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
5,389
|
|
|
|
(3,754
|
)
|
|
|
7,078
|
|
Provision (benefit) for income taxes
|
|
|
1,590
|
|
|
|
433
|
|
|
|
(2,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,799
|
|
|
$
|
(4,187
|
)
|
|
$
|
9,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
128,534
|
|
|
|
127,528
|
|
|
|
115,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
133,916
|
|
|
|
127,528
|
|
|
|
120,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Comprehensive
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Income
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Loss
|
|
|
Equity
|
|
|
(Loss)
|
|
|
Balance, December 31, 2005
|
|
|
110,637,606
|
|
|
$
|
1,106
|
|
|
$
|
251,454
|
|
|
$
|
(201,253
|
)
|
|
|
|
|
|
$
|
(1,147
|
)
|
|
$
|
50,160
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,474,897
|
|
|
|
15
|
|
|
|
1,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,550
|
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
327,643
|
|
|
|
3
|
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
661
|
|
|
|
|
|
Issuance of common stock and valuation of options related to
eStara acquisition
|
|
|
14,523,386
|
|
|
|
145
|
|
|
|
38,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,039
|
|
|
|
|
|
Vesting of restricted stock related to the eStara acquisition
|
|
|
45,284
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
Vesting of restricted stock issued under the non-employee
director plan
|
|
|
46,557
|
|
|
|
1
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
Stock based compensation expense related to employee stock awards
|
|
|
|
|
|
|
|
|
|
|
3,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,575
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,695
|
|
|
|
|
|
|
|
|
|
|
|
9,695
|
|
|
$
|
9,695
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
218
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
127,055,373
|
|
|
|
1,270
|
|
|
|
296,291
|
|
|
|
(191,558
|
)
|
|
|
|
|
|
|
(929
|
)
|
|
|
105,074
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,622,028
|
|
|
|
16
|
|
|
|
2,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,047
|
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
410,720
|
|
|
|
4
|
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
901
|
|
|
|
|
|
Vesting of restricted stock related to the eStara acquisition
|
|
|
198,646
|
|
|
|
2
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530
|
|
|
|
|
|
Vesting of restricted stock issued under the non-employee
director plan
|
|
|
6,454
|
|
|
|
1
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(986,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,902
|
)
|
|
|
|
|
|
|
(2,902
|
)
|
|
|
|
|
Stock based compensation expense related to employee stock awards
|
|
|
|
|
|
|
|
|
|
|
5,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,173
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,187
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,187
|
)
|
|
$
|
(4,187
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
229
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
128,306,261
|
|
|
|
1,293
|
|
|
|
305,151
|
|
|
|
(195,745
|
)
|
|
|
(2,902
|
)
|
|
|
(700
|
)
|
|
|
107,097
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,393,479
|
|
|
|
14
|
|
|
|
2,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,252
|
|
|
|
|
|
Issuance of common stock in connection with employee stock
purchase plan
|
|
|
398,071
|
|
|
|
4
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
978
|
|
|
|
|
|
Vesting of restricted stock related to the eStara acquisition
|
|
|
14,182
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
Vesting of restricted stock issued under the non-employee
director plan
|
|
|
146,454
|
|
|
|
1
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(4,618,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,908
|
)
|
|
|
|
|
|
|
(8,908
|
)
|
|
|
|
|
Stock based compensation expense related to employee stock awards
|
|
|
|
|
|
|
|
|
|
|
4,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,304
|
|
|
|
|
|
Vesting of restricted stock issued to employees
|
|
|
327,366
|
|
|
|
4
|
|
|
|
3,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,039
|
|
|
|
|
|
Tax withholding on restricted stock
|
|
|
|
|
|
|
|
|
|
|
(529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(529
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,799
|
|
|
|
|
|
|
|
|
|
|
|
3,799
|
|
|
$
|
3,799
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,540
|
)
|
|
|
(1,540
|
)
|
|
|
(1,540
|
)
|
Unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104
|
)
|
|
|
(104
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
125,967,272
|
|
|
$
|
1,316
|
|
|
$
|
315,730
|
|
|
$
|
(191,946
|
)
|
|
$
|
(11,810
|
)
|
|
$
|
(2,344
|
)
|
|
$
|
110,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
ART
TECHNOLOGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,799
|
|
|
$
|
(4,187
|
)
|
|
|
9,695
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,895
|
|
|
|
7,862
|
|
|
|
5,141
|
|
Stock-based compensation expense
|
|
|
7,896
|
|
|
|
5,843
|
|
|
|
3,751
|
|
Non-cash tax expense
|
|
|
2,009
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
Net changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
5,586
|
|
|
|
(5,584
|
)
|
|
|
(9,424
|
)
|
Prepaid expense and other assets
|
|
|
(745
|
)
|
|
|
(657
|
)
|
|
|
(621
|
)
|
Deferred costs
|
|
|
219
|
|
|
|
(3,127
|
)
|
|
|
|
|
Accounts payable
|
|
|
(1,208
|
)
|
|
|
1,012
|
|
|
|
(629
|
)
|
Accrued expenses and other liabilities
|
|
|
1,413
|
|
|
|
4,118
|
|
|
|
(169
|
)
|
Deferred revenue
|
|
|
7,713
|
|
|
|
22,145
|
|
|
|
2,417
|
|
Accrued restructuring
|
|
|
(934
|
)
|
|
|
(1,164
|
)
|
|
|
(2,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
34,083
|
|
|
|
26,261
|
|
|
|
7,625
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(19,771
|
)
|
|
|
(21,779
|
)
|
|
|
(18,904
|
)
|
Maturities of marketable securities
|
|
|
25,288
|
|
|
|
17,569
|
|
|
|
15,101
|
|
Purchases of property and equipment
|
|
|
(7,010
|
)
|
|
|
(4,840
|
)
|
|
|
(4,459
|
)
|
Payments for acquisitions, net of cash acquired
|
|
|
(9,766
|
)
|
|
|
(829
|
)
|
|
|
(7,153
|
)
|
Collateralization of letters of credit
|
|
|
(2,088
|
)
|
|
|
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
|
|
|
|
(22
|
)
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(13,347
|
)
|
|
|
(9,901
|
)
|
|
|
(15,570
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
2,252
|
|
|
|
2,047
|
|
|
|
1,537
|
|
Proceeds from employee stock purchase plan
|
|
|
978
|
|
|
|
901
|
|
|
|
661
|
|
Repurchase of common stock
|
|
|
(8,908
|
)
|
|
|
(2,902
|
)
|
|
|
|
|
Payment of employee restricted stock tax withholdings
|
|
|
(529
|
)
|
|
|
|
|
|
|
|
|
Payments on capital leases
|
|
|
|
|
|
|
(56
|
)
|
|
|
(63
|
)
|
Principal payments on notes payable
|
|
|
|
|
|
|
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(6,207
|
)
|
|
|
(10
|
)
|
|
|
1,937
|
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
|
|
(1,535
|
)
|
|
|
158
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
12,994
|
|
|
|
16,508
|
|
|
|
(6,149
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
34,419
|
|
|
|
17,911
|
|
|
|
24,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
47,413
|
|
|
$
|
34,419
|
|
|
$
|
17,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11
|
|
Cash paid for income taxes
|
|
$
|
520
|
|
|
$
|
|
|
|
$
|
|
|
Supplemental Disclosure of Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock and options related to acquisitions
|
|
$
|
|
|
|
$
|
|
|
|
$
|
39,039
|
|
43
|
|
(1)
|
Organization,
Business and Summary of Significant Accounting
Policies
|
Art Technology Group, Inc. (ATG or the Company) develops and
markets a comprehensive suite of
e-commerce
software products, and provides related services including
support and maintenance, education, application hosting,
professional services and eStara
e-commerce
optimization service solutions for enhancing online sales and
support.
|
|
(a)
|
Principles
of Consolidation
|
The accompanying consolidated financial statements include the
accounts of ATG and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
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, software development costs, accrued liabilities,
accrued taxes, deferred tax valuation allowances, and
assumptions pertaining to share-based payments. Actual results
could differ from those estimates.
ATG derives revenue from the following sources:
(1) perpetual software licenses, (2) recurring
services, which 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 follows: 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, 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 (VSOE) 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.
44
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 separate agreements. 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 onsite at 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 VSOE of fair value and subsequently
recognized 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.
VSOE 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
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 the 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 providing
ATGs customers with click-to-call and click-to-chat
services.
e-commerce
optimization services are site-independent and
45
are not required to be used in conjunction with ATGs
software products. These services are a stand-alone independent
service solution, which are typically contracted for a one-year
term. The Company recognizes revenue on a monthly basis as the
services are 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 perpetual software
licenses, support and maintenance services and professional
services for the perpetual software license. Since the Company
does not have VSOE of fair value for
e-commerce
optimization services, the up-front fees received under the
arrangement regardless of the nature of the element 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 VSOE 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.
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 VSOE of fair value for an undelivered element in an
arrangement, the Company defers the direct costs incurred prior
to delivery of the element related to performing the
professional services. Deferred costs are amortized to cost of
revenue ratably over the period of recognizing the related
revenue under the customer arrangement. Deferred costs include
incremental direct third party costs and specific internal
direct costs, such as direct salary and benefits, related to the
set-up and
implementation services and professional services. Total
deferred costs were $2.9 million and $3.1 million at
December 31, 2008 and 2007, respectively.
|
|
(e)
|
Accounts
Receivable and Allowances for Accounts Receivable
|
Accounts receivable represents amounts currently due from
customers. Accounts receivable also include $1.2 million
and $1.6 million of unbilled accounts receivable at
December 31, 2008 and 2007, respectively. Unbilled accounts
receivable consist of estimated future billings for professional
services performed but not yet invoiced to the customer.
Unbilled accounts receivable are generally invoiced the
following month.
ATG records allowances for accounts receivable based upon a
specific review of all outstanding invoices and unbilled
accounts receivable, known collection issues and historical
experience. ATG also records a provision for estimated sales
returns and allowances on professional service fees in the same
period the related revenues are recorded in accordance with
Statement of Financial Accounting Standards (SFAS) No. 48,
Revenue Recognition When Right of Return Exists, as a
reduction to revenue. These estimates are based on historical
sales returns, analysis of credit memo data and other known
factors and are generally recorded as a reduction in revenue.
46
The following is a rollforward of the Companys allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
|
|
|
Deductions/
|
|
|
Balance at End
|
|
|
|
Period
|
|
|
Additions
|
|
|
Write-Offs
|
|
|
of Period
|
|
|
|
(In thousands)
|
|
|
Year Ended December 31, 2006
|
|
$
|
778
|
|
|
$
|
323
|
|
|
$
|
(654
|
)
|
|
$
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
$
|
447
|
|
|
$
|
1,670
|
|
|
$
|
(1,159
|
)
|
|
$
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
$
|
958
|
|
|
$
|
677
|
|
|
$
|
(401
|
)
|
|
$
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
Cost
of Product License Revenues
|
Cost of product license revenues includes salary, benefits, and
stock-based compensation for engineering staff and outsourced
developers dedicated to the maintenance of products that are in
general release, costs of fulfillment, external shipping costs,
the amortization of technology acquired in connection with the
Primus acquisition and licenses purchased in support of and used
in the Companys products and royalties paid to vendors
whose technology is incorporated into the Companys
products and services.
|
|
(g)
|
Cost
of Recurring Services Revenues
|
Cost of recurring services revenues includes salary, benefits,
and stock-based compensation and other costs for recurring
services support staff, costs associated with the hosting
centers, third-party contractors, amortization of technology
acquired in connection with the eStara and CleverSet
acquisitions and royalties paid to vendors whose technology is
incorporated into recurring service products.
|
|
(h)
|
Cost
of Professional and Education Services Revenues
|
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.
|
|
(i)
|
Net
Income (Loss) Per Share
|
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding during the period. Diluted net income per
share is computed by dividing net income by the weighted average
number of shares of common stock outstanding plus the dilutive
effect of common stock equivalents using the treasury stock
method. Common stock equivalents consist of stock options,
restricted stock and restricted stock unit awards. In accordance
with Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment
(SFAS 123R), the assumed proceeds under the
treasury stock method include the average unrecognized
compensation expense of stock options that are in-the-money and
restricted stock awards. This results in the assumed
buyback of additional shares thereby reducing the dilutive
impact of stock options and restricted stock awards.
47
The following table sets forth the computation of basic and
diluted net income (loss) per share for the years ended
December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income (loss)
|
|
$
|
3,799
|
|
|
$
|
(4,187
|
)
|
|
$
|
9,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
basic net income (loss) per share
|
|
|
128,534
|
|
|
|
127,528
|
|
|
|
115,280
|
|
Dilutive employee common stock equivalents
|
|
|
5,382
|
|
|
|
|
|
|
|
4,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common stock and common stock equivalent
shares outstanding used in computing diluted net income (loss)
per share
|
|
|
133,916
|
|
|
|
127,528
|
|
|
|
120,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents
|
|
|
7,995
|
|
|
|
16,506
|
|
|
|
5,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(j)
|
Cash,
Cash Equivalents and Marketable Securities
|
ATG accounts for investments in marketable securities under
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115). The Company
classifies its investments in readily marketable debt and equity
securities as held-to-maturity,
available-for-sale or trading at the
time of purchase. Cash equivalents are investments with
maturities at the date of acquisition of less than 90 days.
Cash, cash equivalents, and marketable securities consist
primarily of corporate obligations such as commercial paper and
corporate bonds and institutional money market funds. They also
include bank certificates of deposit and U.S. Government
Treasury securities.
Prior to 2008, the Company classified all of its cash
equivalents and marketable securities as held-to-maturity. In
the first quarter of 2008, the Company transferred its
marketable securities, except for bank certificates of deposit,
as available-for-sale in accordance with SFAS 115 due to
having sold certain debt securities prior to their maturity
dates in order to finance the CleverSet acquisition. The total
transfer was $17.5 million (at amortized cost) of
marketable securities with an unrealized loss of $1,000. The
Company continues to classify bank certificates of deposit as
held-to-maturity securities, which are carried at amortized
cost, as the Company has the positive intent and ability to hold
them to maturity. The Companys other readily marketable
cash equivalents and marketable securities are classified as
available-for-sale. Available-for-sale securities are carried at
fair value with unrealized gains and losses reported in
accumulated other comprehensive income (loss). No securities
were classified as trading.
Realized gains and losses, as well as interest, and dividends on
all securities, are included in earnings. No realized gains or
losses were recorded during any of the years presented.
The Company periodically evaluates its investments for
impairment in accordance with EITF Issue
No. 03-01,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. When a decline in fair
value is deemed to be other-than-temporary, the Company records
an impairment loss in the consolidated statement of operations.
There were no other-than-temporary impairments of marketable
securities in any of the years presented.
Unrealized gains and losses on available-for-sale securities
classified at December 31, 2008 consisted of a gross
unrealized gain of $13,000 offset by gross unrealized loss of
$117,000.
48
At December 31, 2008 and 2007, cash, cash equivalents and
marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
42,894
|
|
|
$
|
21,678
|
|
Money market accounts
|
|
|
4,519
|
|
|
|
4,453
|
|
Commercial paper
|
|
|
|
|
|
|
7,288
|
|
Certificates of deposit
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
47,413
|
|
|
$
|
34,419
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Maturities within 1 year:
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
1,000
|
|
|
$
|
|
|
Certificates of deposit
|
|
|
2,744
|
|
|
|
902
|
|
Commercial paper
|
|
|
1,597
|
|
|
|
9,794
|
|
Corporate debt securities
|
|
|
8,229
|
|
|
|
5,764
|
|
Maturities within 1 to 3 years:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
13,989
|
|
|
$
|
17,522
|
|
|
|
|
|
|
|
|
|
|
|
|
(k)
|
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 financial
statements.
As defined in SFAS 157, fair value is based on the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. In order to increase consistency and
comparability in fair value measurements, SFAS 157
establishes a fair value hierarchy that prioritizes observable
and unobservable inputs used to measure fair value into three
broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that
are accessible at the measurement date for assets or
liabilities. The fair value hierarchy gives the highest priority
to Level 1 inputs.
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, which requires the Company to develop
its own assumptions about how market participants would value
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.
49
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 December 31, 2008
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Assets
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash equivalents
|
|
$
|
4,519
|
|
|
$
|
4,519
|
|
|
|
|
|
|
|
|
|
Short-term available-for- sale securities
|
|
|
10,826
|
|
|
|
1,000
|
|
|
$
|
9,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
15,345
|
|
|
$
|
5,519
|
|
|
$
|
9,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, 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.
|
|
(m)
|
Property
and Equipment
|
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. ATG records depreciation and
amortization using the straight-line method. Property and
equipment at December 31, 2008 and 2007 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Asset Classification
|
|
Estimated Useful Life
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
|
Computer equipment
|
|
3 years
|
|
$
|
11,711
|
|
|
$
|
8,729
|
|
Leasehold improvements
|
|
Lesser of useful life or life of lease
|
|
|
2,618
|
|
|
|
2,443
|
|
Furniture and fixtures
|
|
5 years
|
|
|
686
|
|
|
|
536
|
|
Computer software
|
|
3 years
|
|
|
3,895
|
|
|
|
2,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,910
|
|
|
|
13,836
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(8,812
|
)
|
|
|
(6,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,098
|
|
|
$
|
7,208
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and
equipment was $4.6 million, $3.0 million and
$2.3 million for the years ended December 31, 2008,
2007 and 2006, respectively.
During 2008 and 2007, in connection with the Companys
annual evaluation of its property and equipment for impairment,
the Company identified $2.1 million and $5.6 million,
respectively, of fully depreciated assets that were disposed of
or no longer in use. As a result, the Company wrote off the cost
basis and related accumulated depreciation for these fully
depreciated assets with no impact to the statement of operations.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, ATG reviews the
carrying value of its long-lived assets, including intangible
assets subject to amortization, for impairment whenever events
and circumstances indicate that the carrying value of the assets
may not be recoverable. Recoverability of these assets is
measured by comparing the carrying value of the assets to the
undiscounted cash flows estimated to be generated by those
assets over their remaining economic life. If the undiscounted
cash flows are not sufficient to recover the carrying value of
the assets, the assets are considered impaired. The impairment
loss is measured by comparing the fair value of the assets to
their carrying value. Fair value is determined by either a
quoted market price or a value determined by a discounted cash
flow technique,
50
whichever is more appropriate under the circumstances involved.
There were no impairment charges related to property and
equipment in 2008, 2007 and 2006.
|
|
(n)
|
Research
and Development Expenses for Software Products
|
The Company accounts for research and development costs for
software products that are licensed to its customers in
accordance with SFAS No. 2, Accounting for Research
and Development Costs, and SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, which specifies that costs
incurred internally to develop computer software products should
be charged to expense as incurred until technological
feasibility is reached for the product. Once technological
feasibility is reached, all software costs should be capitalized
until the product is made available for general release to
customers. Judgment is required in determining when
technological feasibility is established. The Company believes
that the time period from reaching technological feasibility
until the time of general product release is very short. Costs
incurred after technological feasibility is reached are not
material, and accordingly, all such costs are charged to
research and development expense as incurred.
Costs incurred to develop software applications used in the
Companys
e-commerce
optimization services are accounted for in accordance with AICPA
Statement of Position
98-1,
Accounting for Computer Software Developed or Obtained for
Internal Use
(SOP 98-1).
Capitalizable costs consists of (a) certain external direct
costs of materials and services incurred in developing or
obtaining internal-use computer software and (b) payroll
and payroll-related costs for employees who are directly
associated with, and who devote time to, the project. These
costs generally consist of internal labor during configuration,
coding and testing activities. Research and development costs
incurred during the preliminary project stage or costs incurred
for data conversion activities, training, maintenance and
general and administrative or overhead costs are expensed as
incurred. Costs that cannot be separated between maintenance of,
and relatively minor upgrades and enhancements to, internal-use
software are also expensed as incurred. Capitalization begins
when the preliminary project stage is complete, management with
the relevant authority authorizes and commits to the funding of
the software project, it is probable the project will be
completed, the software will be used to perform the functions
intended and certain functional and quality standards have been
met.
The Companys research and development efforts during 2008
and 2007 related to its
e-commerce
optimization services product were primarily maintenance and
data conversion activities. As such the Company did not
capitalize any research and development costs during 2008 and
2007.
ATG accounts for income taxes in accordance with the provisions
of SFAS No. 109, Accounting for Income Taxes.
SFAS 109 requires companies to recognize deferred tax
assets and liabilities based on the differences between
financial reporting and tax bases of assets and liabilities.
These differences are measured using the enacted tax rates and
laws that are expected to be in effect when the temporary
differences are expected to reverse. A valuation allowance is
established against net deferred tax assets, if based on the
weighted available evidence, it is more likely than not that all
or a portion of the deferred tax assets will not be realized
(see Note 4). On January 1, 2007, the Company adopted
FIN 48, which did not result in an adjustment to its tax
contingencies.
|
|
(p)
|
Stock-Based
Compensation
|
The Company accounts for share-based payments in accordance with
SFAS 123R. As such, all share-based payments to employees,
including grants of employee stock options, restricted shares
and restricted share units, are recognized in the income
statement based on their fair values at the date of grant. On
January 1, 2006, ATG adopted SFAS 123R using the
modified prospective transition method as permitted under
SFAS 123R. Under this transition method, compensation cost
for the years ended December 31, 2008, 2007 and 2006
includes: (a) compensation cost for all share-based
payments granted before but not yet vested as of
December 31, 2005 based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123,
and (b) compensation cost for all share-based payments
granted after December 31, 2005 based on the grant-date
fair value estimated in accordance with the provisions of
SFAS 123R. In accordance with the modified prospective
method of adoption, results of operations
51
and financial position for prior periods were not restated. See
Note 5 for further information relating to stock-based
compensation.
(q) Comprehensive
Income (Loss)
SFAS No. 130, Reporting Comprehensive Income,
requires financial statements to include the reporting of
comprehensive income (loss), which includes net income (loss)
and certain transactions that have generally been reported in
the statement of stockholders equity. ATGs
comprehensive income (loss) consists of net income (loss),
foreign currency translation adjustments and unrealized gains
and losses on available-for-sale securities.
The components of accumulated other comprehensive income (loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Foreign currency translation adjustment
|
|
$
|
(2,240
|
)
|
|
$
|
(700
|
)
|
Unrealized loss on available-for-sale securities
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,344
|
)
|
|
$
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(r)
|
Concentrations
of Credit Risk
|
Financial instruments that potentially subject ATG to
concentrations of credit risk consist principally of marketable
securities and accounts receivable. ATG maintains cash, cash
equivalents and marketable securities with durations of thirteen
months or less.
The Company sells its products and services to customers in a
variety of industries, including consumer retail, financial
services, manufacturing, communications and technology, travel,
media and entertainment. The Company has credit policies and
standards and routinely assesses the financial strength of its
customers through continuing credit evaluations. The Company
generally does not require collateral or letters of credit from
its customers.
At December 31, 2008 and 2007, no customer accounted for
more than 10% of accounts receivable. No single customer
accounted for more than 10% of total revenues during the years
ended December 31, 2008, 2007 and 2006.
Goodwill represents the excess of the purchase price in a
business combination over the fair value of net tangible and
intangible assets acquired. During 2008, the Company acquired
all of the outstanding shares of common stock of privately held
eShopperTools.com, Inc., dba CleverSet
(CleverSet). As a result of this acquisition, the
Company recorded $8.1 million of additional goodwill.
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), the Company annually
evaluates goodwill for impairment at December 1, and
throughout the reporting period whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Because the Company has one reporting segment under
SFAS 142, it utilizes the entity-wide approach for
assessing goodwill for impairment and compares the
Companys market value to its net book value to determine
if impairment exists. No impairment of goodwill resulted from
this evaluation of goodwill in any of the fiscal years presented.
52
The following table presents the changes in goodwill during 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
As of, and For
|
|
|
|
The Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
59,675
|
|
|
$
|
59,328
|
|
Acquisition of CleverSet
|
|
|
8,138
|
|
|
|
|
|
eStara earn-out payment
|
|
|
|
|
|
|
621
|
|
Collection of accounts receivable previously reserved
|
|
|
(121
|
)
|
|
|
(274
|
)
|
Release of valuation allowance on deferred tax assets related to
NOLs from the Primus acquisition (Note 4)
|
|
|
(2,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,683
|
|
|
$
|
59,675
|
|
|
|
|
|
|
|
|
|
|
See Note 6 for additional information on the Companys
acquisitions.
The Company reviews identified intangible assets for impairment
under SFAS 144 whenever events or changes in circumstances
indicate that the carrying value of the assets may not be
recoverable. The Company evaluates recoverability of these
assets by comparing the carrying value of the assets to the
undiscounted cash flows estimated to be generated by those
assets over their remaining economic life. If the undiscounted
cash flows are not sufficient to recover the carrying value of
the assets, the assets are considered impaired. The impairment
loss is measured by comparing the fair value of the assets to
their carrying values. Fair value is determined by either a
quoted market price or a value determined by a discounted cash
flow technique, whichever is more appropriate under the
circumstances involved. No impairment of intangible assets
resulted from this evaluation in any of the years presented.
Intangible assets with determinable lives are amortized over
their estimated useful lives, based upon the pattern in which
the expected benefits will be realized, or on a straight-line
basis.
As a result of the CleverSet acquisition in 2008, the Company
recorded $1.0 million of additional intangible assets.
During 2006, the Company acquired all of the shares of eStara,
Inc. As a result of this acquisition, the Company recorded
$14.0 million of additional intangible assets. See
Note 6 for additional information on these acquisitions.
Total intangible assets, which are being amortized, consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Customer relationships
|
|
$
|
11,660
|
|
|
$
|
(8,600
|
)
|
|
$
|
3,060
|
|
|
$
|
11,500
|
|
|
$
|
(6,196
|
)
|
|
$
|
5,304
|
|
Purchased technology
|
|
|
9,710
|
|
|
|
(5,770
|
)
|
|
|
3,940
|
|
|
|
8,900
|
|
|
|
(4,145
|
)
|
|
|
4,755
|
|
Trademarks
|
|
|
1,400
|
|
|
|
(630
|
)
|
|
|
770
|
|
|
|
1,400
|
|
|
|
(350
|
)
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
22,770
|
|
|
$
|
(15,000
|
)
|
|
$
|
7,770
|
|
|
$
|
21,800
|
|
|
$
|
(10,691
|
)
|
|
$
|
11,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Amortization expense related to intangible assets was
$4.3 million, $4.9 million and $2.8 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. The remaining amortization expense will be
recognized over a weighted average period of approximately
1.7 years. At December 31, 2008, annual amortization
expense for intangible assets is expected to be as follows:
|
|
|
|
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
3,704
|
|
2010
|
|
|
3,032
|
|
2011
|
|
|
1,034
|
|
|
|
|
|
|
Total
|
|
$
|
7,770
|
|
|
|
|
|
|
|
|
(u)
|
Foreign
Currency Translation
|
The financial statements of the Companys foreign
subsidiaries are translated in accordance with
SFAS No. 52, Foreign Currency Translation
(SFAS 52). The functional currency of the
Companys foreign subsidiaries has generally been
determined to be the local currency. ATG translates the assets
and liabilities of its foreign subsidiaries at the exchange
rates in effect at year-end. Before translation, the Company
re-measures foreign currency denominated assets and liabilities
into the functional currency of the respective ATG entity,
resulting in unrealized gains or losses recorded in interest and
other income, net in the accompanying consolidated statements of
operations. Revenues and expenses are translated using average
exchange rates in effect during the year. Gains and losses from
foreign currency translation are recorded to accumulated other
comprehensive income (loss) included in stockholders
equity. During the years ended December 31, 2008, 2007 and
2006, the Company recorded net gains (losses) of approximately
($40,000), $742,000 and $739,000, respectively, from realized
foreign currency transactions gains and losses and the
re-measurement of foreign currency denominated assets and
liabilities.
|
|
(v)
|
Recent
Accounting Pronouncements
|
In December 2007, the FASB issued Statement No. 141(R),
Business Combinations (Statement 141(R)), a
replacement of FASB Statement No. 141. Statement 141(R) is
effective for fiscal years beginning on or after
December 15, 2008 and applies to all business combinations.
Statement 141(R) provides that, upon initially obtaining
control, an acquirer shall recognize 100 percent of the
fair values of acquired assets, including goodwill, and assumed
liabilities, with only limited exceptions, even if the acquirer
has not acquired 100 percent of its target. As a
consequence, the current step acquisition model will be
eliminated. Additionally, Statement 14(R) changes current
practice, in part, as follows: (1) contingent consideration
arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration;
(2) transaction costs will be expensed as incurred, rather
than capitalized as part of the purchase price;
(3) pre-acquisition contingencies, such as legal issues,
will generally have to be accounted for in purchase accounting
at fair value; (4) in order to accrue for a restructuring
plan in purchase accounting, the requirements in FASB Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, would have to be met at the acquisition
date; and (5) In-process research and development charges
will no longer be recorded. Upon adoption of
Statement 141(R) we will no longer reduce goodwill when
utilizing net operating loss carry forwards for which a full
valuation allowance exists as was required under
Statement 141. The adoption of Statement 141(R) on
January 1, 2009 could materially change the accounting for
business combinations consummated subsequent to that date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
(SFAS 160), which amends ARB 51 to establish
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51s
consolidation procedures for consistency with the requirements
of SFAS 141( R), Business Combinations. This
Statement will be effective for financial statements issued for
fiscal years and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption
is prohibited. The adoption of this statement is not expected to
have a material impact to the Companys consolidated
financial statements.
54
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS No. 162). SFAS No. 162
identifies the sources of generally accepted accounting
principles in the United States. SFAS No. 162 is
effective sixty days following the SECs approval of the
Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. The adoption
of SFAS No. 162 is not expected to have a material
effect on the Companys consolidated financial position and
results of operations.
|
|
(2)
|
Disclosures
About Segments of an Enterprise
|
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information (SFAS 131),
establishes standards for reporting information regarding
operating segments in annual financial statements. SFAS 131
also requires related disclosures about products and services
and geographic areas. Operating segments are identified as
components of an enterprise for which separate discrete
financial information is available for evaluation by the chief
operating decision-maker in making decisions on how to allocate
resources and assess performance. The Companys chief
operating decision-maker is its chief executive officer. ATG
views its operations and manages its business as one segment
with three product offerings: software licenses, recurring
services, and professional and education services. ATG evaluates
these product offerings based on their respective revenues and
gross margins. As a result, the financial information disclosed
in the consolidated financial statements represents the material
financial information related to our principal operating segment.
Revenues from sources outside of the United States were
approximately $48.4 million, $43.4 million, and
$26.2 million in 2008, 2007 and 2006, respectively.
Revenues from international sources were primarily generated
from customers located in Europe and the Asia/Pacific region.
All of the Companys product sales for the years ended
December 31, 2008, 2007 and 2006, were delivered from
ATGs headquarters located in the United States.
The following table represents the percentage of total revenues
by geographic region from customers for 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
|
71
|
%
|
|
|
68
|
%
|
|
|
75
|
%
|
Europe, Middle East, Africa (excluding UK)
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
9
|
%
|
United Kingdom (UK)
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
14
|
%
|
Other
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
Income (loss) before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
3,097
|
|
|
$
|
(7,280
|
)
|
|
$
|
3,176
|
|
Foreign
|
|
|
2,292
|
|
|
|
3,526
|
|
|
|
3,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,389
|
|
|
$
|
(3,754
|
)
|
|
$
|
7,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
The provision (benefit) for income taxes shown in the
accompanying consolidated statements of operations is comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(102
|
)
|
|
$
|
9
|
|
|
$
|
|
|
Deferred
|
|
|
2,009
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
59
|
|
|
|
|
|
|
|
12
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
184
|
|
|
|
424
|
|
|
|
(2,629
|
)
|
Deferred
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,590
|
|
|
$
|
433
|
|
|
$
|
(2,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes differs from the
federal statutory rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal tax at statutory rate
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
4.7
|
|
|
|
(4.7
|
)
|
|
|
0.1
|
|
Stock-based compensation
|
|
|
23.4
|
|
|
|
2.8
|
|
|
|
18.7
|
|
Meals and entertainment
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
2.1
|
|
Reversal of previously accrued taxes
|
|
|
|
|
|
|
|
|
|
|
(36.8
|
)
|
Tax credits
|
|
|
(33.5
|
)
|
|
|
(13.6
|
)
|
|
|
(34.6
|
)
|
Other
|
|
|
(2.6
|
)
|
|
|
1.3
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision before valuation allowance
|
|
|
30.5
|
|
|
|
(45.8
|
)
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (use) of fully reserved net operating losses
|
|
|
(1.0
|
)
|
|
|
57.3
|
|
|
|
(28.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.5
|
%
|
|
|
11.5
|
%
|
|
|
(36.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The approximate tax effect of each type of temporary difference
and carryforward is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Restructuring
|
|
$
|
51
|
|
|
$
|
381
|
|
Depreciation and amortization
|
|
|
980
|
|
|
|
708
|
|
Deferred revenue
|
|
|
2,188
|
|
|
|
|
|
Reserves and accruals
|
|
|
686
|
|
|
|
991
|
|
Stock-based compensation
|
|
|
2,674
|
|
|
|
2,912
|
|
Capitalized expenses
|
|
|
13,112
|
|
|
|
16,781
|
|
Federal income tax credits
|
|
|
9,969
|
|
|
|
8,164
|
|
Net operating losses
|
|
|
70,691
|
|
|
|
87,717
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
100,351
|
|
|
|
117,654
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(96,706
|
)
|
|
|
(113,245
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,645
|
|
|
|
4,409
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(3,085
|
)
|
|
|
(4,409
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
560
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company recorded a full
valuation allowance against its deferred tax assets due to the
uncertainty surrounding the realizability of these assets. As of
December 31, 2008, the Company determined that the deferred
tax assets in certain foreign jurisdictions would more likely
than not be realized. This assessment was based upon the
Companys cumulative history of earnings before taxes for
financial reporting purposes over a three year period in those
jurisdictions and an assessment as of December 31, 2008 of
the Companys expected future results of operations related
to its foreign operations. As a result, during the fourth
quarter of 2008 the Company reversed a total of
$0.6 million of its deferred tax asset valuation allowance.
The valuation allowance decreased overall by $16.5 million
primarily as a result of the utilization of previously
unbenefited losses and the elimination of net operating losses
generated from excess stock option deductions discussed further
below. $2.0 million of the reversal of the valuation
allowance was recorded as a decrease to goodwill in accordance
with SFAS No. 109 and SFAS No. 141, as the
reduction relates to the utilization of Primus pre-acquisition
tax assets. The use of the acquired net operating losses does
not require any payment by the Company, but is recorded as
income tax expense. Future reductions in the valuation allowance
in connection with the utilization of the remaining acquired tax
assets will be recorded as an increase to income from continuing
operations in accordance with SFAS No. 141(R),
effective January 1, 2009.
As of December 31, 2008, the Company had net operating loss
carryforwards of approximately $172.9 million for federal
income tax purposes, $165.5 million for state income tax
purposes and approximately $15.9 million for non-US income
tax purposes. The Company has an additional $37.3 million
of federal net operating losses not reflected above, that are
attributable to stock option exercises which will be recorded as
an increase in additional paid in capital on the balance sheet
once they are realized in accordance with
SFAS No. 123R. The Company also has available federal
tax credit carryforwards of approximately $9.9 million. If
not utilized, these carryforwards will expire at various dates
beginning 2011 through 2028. If substantial changes in the
Companys ownership have occurred or should occur, as
defined by Section 382 of the U.S. Internal Revenue
Code (the Code), there could be annual limitations
on the amount of carryforwards that can be realized in future
periods. The Company has completed several refinancings since
its inception and has incurred ownership changes, as defined
under the Code, which could have an impact on its ability to
utilize these tax credit and operating loss carryforwards.
In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
57
accordance with SFAS No. 109. FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company has applied the
provisions of FIN 48 effective January 1, 2007, and
its the adoption did not have a material effect on the
Companys financial condition, results of operations or
cash flows. The Company recognizes any interest and penalties
related to unrecognized tax benefits in income tax expense.
During the year ended December 31, 2008, the Company
recorded a decrease to its liability for unrecognized tax
benefits of $0.6 million and an increase of
$0.8 million of interest expense, the majority of which was
accrued prior to 2008 but based on new facts, was reclassified
within the statement of financial position as a liability for
uncertain tax positions. At December 31, 2008 the Company
has accrued $0.9 million of potential interest and
penalties in its statement of financial position. If the
uncertain tax positions are ultimately resolved in the
Companys favor, the effective tax rates in any future
periods would be favorably affected by approximately
$1.8 million.
A reconciliation of the gross allowance for uncertain tax
positions is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
4,294
|
|
|
$
|
4,599
|
|
Increases for tax positions taken during a prior period
|
|
|
|
|
|
|
313
|
|
Decreases for tax positions taken during the current period
|
|
|
(39
|
)
|
|
|
(618
|
)
|
Decreases relating to settlements
|
|
|
(582
|
)
|
|
|
|
|
Decreases resulting from the expiration of the statute of
limitations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
3,673
|
|
|
$
|
4,294
|
|
|
|
|
|
|
|
|
|
|
The Company believes that it is reasonably possible that its
gross allowance for uncertain tax positions will decrease by up
to $3.3 million over the next twelve month period as a
result of the expiration of the statutes of limitations within
certain tax jurisdictions. Of the gross allowance for uncertain
tax positions, $2.8 million relates to various uncertain
positions in the Companys tax net operating loss
carryforward.
The Company files income tax returns in the U.S. and
various state and foreign jurisdictions. The Company is
generally subject to examinations by U.S. federal and state
tax authorities from 1992 to the present as the
U.S. Company has historically generated federal and state
tax losses and tax credits since inception which, if utilized in
future periods, may subject some or all periods to examination.
The Company is generally subject to examinations by foreign tax
authorities from 2001 to the present.
|
|
(5)
|
Stock-Based
Compensation and Stockholders Equity
|
Equity
Compensation Plans
The Company grants, or has granted, stock options and other
stock and stock-based awards under the following equity
compensation plans:
1996
Stock Option Plan
In April 1996, the Companys Board of Directors and
stockholders adopted and approved the 1996 Stock Option Plan
(the 1996 Plan). Stock options granted under the
1996 Plan may be either incentive stock options or nonqualified
stock options. In 2004, the Companys stockholders approved
the amendment and restatement of the 1996 Plan to allow for the
grant of restricted stock awards, performance share awards and
other forms of equity based compensation that were not
previously provided for in the plan and the extension of the
term of the 1996 Plan to December 31, 2013. In May 2007, at
the Companys annual meeting, the stockholders approved the
amendment and restatement of the 1996 Plan to limit the duration
of stock appreciation rights to be exercisable no more than
10 years after the date on which they are granted, remove
the boards discretion as to the transferability of awards
in
58
order to clarify that options are not transferable, remove the
boards ability to substitute another award of the same or
different type for an outstanding award under the plan and
clarify that the effect of an amendment to the plan has the same
impact as to awards under the plan as an amendment and
restatement.
At December 31, 2008, there were 32,000,000 shares
authorized for issuance under the 1996 Plan. The Board of
Directors administers the 1996 Plan and has the authority to
designate participants, determine the number and type of awards
to be granted, the time at which awards are exercisable, the
method of payment and any other terms or conditions of the
awards. Options generally vest quarterly over a two to four-year
period and expire 10 years from the date of grant. As of
December 31, 2008, there were 8,226,467 shares
available for future grant under the 1996 Plan.
1999
Outside Director Stock Option Plan
In May 1999, the Board of Directors and stockholders adopted and
approved the 1999 Outside Director Stock Option Plan
(Director Plan). Under the terms of the Director
Plan, as amended, non-employee directors of ATG receive
nonqualified options to purchase shares of ATGs common
stock restricted stock awards, and restricted stock unit awards.
The Director Plan terminates December 31, 2013 if not
otherwise extended.
As of December 31, 2008, there were 884,604 shares
available for future grant under the Director Plan.
Primus
Stock Option Plans
In connection with the acquisition of Primus Knowledge
Solutions, Inc. in 2004, ATG assumed certain options issued
under the Primus Solutions 1999 Stock Incentive Compensation
Plan (the Primus 1999 Plan) and the Primus Solutions
1999 Non-Officer Employee Stock Compensation Plan (Primus
1999 NESC Plan) (together the Primus Stock Option
Plans) subject to the same terms and conditions as set
forth in the Primus Stock Option Plans, adjusted to give effect
to the conversion under the terms of the merger agreement. All
options that ATG assumed pursuant to the Primus Stock Option
Plans were fully vested upon the closing of the acquisition and
converted into options to acquire ATG common stock. Options
granted under the Primus Stock Option Plans typically vested
over four years and have a contractual term of ten years. No
additional options will be granted under the Primus 1999 NESC
Plan.
In April 2007, ATGs Board of Directors voted to amend the
Primus 1999 Plan. The amendments reduced the number of shares
issuable under the plan; clarified that options may only be
issued at fair market value; clarified that no option may have a
term longer than a 10 years; allowed for the payment of an
option exercise by net exercise; and prohibited loans to
directors or executive officers.
As of December 31, 2008 there were 249,936 shares
available for future option grants under the Primus
1999 Plan.
1999
Employee Stock Purchase Plan
In May 1999, the Board of Directors and stockholders adopted and
approved the 1999 Employee Stock Purchase Plan (the Stock
Purchase Plan). The Stock Purchase Plan, as amended,
authorizes the issuance of up to a total of
6,500,000 shares of ATGs common stock to
participating employees. All of the Companys employees,
including directors who are also employees, are eligible to
participate in the Stock Purchase Plan. During each designated
quarterly offering period, each eligible employee may deduct
between 1% and 10% of base pay to purchase shares of our common
stock. The purchase price is 85% of the closing market price of
our common stock on either: (1) the first business day of
the offering period or (2) the last business day of the
offering period, whichever is lower. As of December 31,
2008, there were 477,711 shares available for future
issuance under the Stock Purchase Plan.
59
Grant-Date
Fair Value
The Company uses the Black-Scholes option pricing model to
calculate the grant-date fair value of an award. Information
pertaining to stock options granted during the years ended
December, 31, 2008, 2007 and 2006 and related assumptions are
noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Stock Options
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Options granted (in thousands)
|
|
|
1,639
|
|
|
|
1,478
|
|
|
|
4,540
|
|
Weighted-average exercise price
|
|
$
|
3.63
|
|
|
$
|
2.86
|
|
|
$
|
2.64
|
|
Weighted average grant date fair value
|
|
$
|
2.46
|
|
|
$
|
2.25
|
|
|
$
|
2.28
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
73.9
|
%
|
|
|
95.3
|
%
|
|
|
113.2
|
%
|
Expected term (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
3.19
|
%
|
|
|
4.33
|
%
|
|
|
4.68
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility The Company has determined that
the historical volatility of its common stock is the best
indicator of the future volatility of its common stock, and
therefore uses historical volatility to estimate the grant-date
fair value of stock options. Historical volatility is calculated
for a period that is commensurate with the stock options
expected term.
Expected term 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 fair value calculation. As such, the Company has
utilized the safe harbor provision in SEC 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 with a maturity that is
commensurate with the expected term of the option is used as the
risk-free interest rate.
Expected dividend yield The Companys Board of
Directors has never declared dividends nor does it expect to
issue dividends.
Stock-Based
Compensation Expense
The Company uses the straight-line attribution method to
recognize stock-based compensation expense for stock options.
The amount of stock-based compensation recognized during a
period is based on the value of the portion of the awards that
are ultimately expected to vest. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. The term forfeitures is
distinct from cancellations or
expirations and represents only the unvested portion
of the surrendered option. The Company has applied an annual
forfeiture rate of 6.3% to all unvested options as of
December 31, 2008. This analysis is re-evaluated quarterly
and the forfeiture rate is adjusted as necessary. Ultimately,
the actual expense recognized over the vesting period will only
be for those shares that vest. The Company recorded
$7.9 million, $5.8 million and $3.8 million in
stock-based compensation expense for the years ended
December 31, 2008, 2007 and 2006, respectively.
60
Stock-Based
Compensation Activity
A summary of the activity under the Companys stock option
plans as of December 31, 2008 and changes during the year
then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Aggregate
|
|
|
|
of Options
|
|
|
Per Share
|
|
|
in Years
|
|
|
Intrinsic Value
|
|
|
|
(In thousands, except weighted average exercise price and
|
|
|
|
weighted average remaining contractual term in years)
|
|
|
Outstanding, December 31, 2007
|
|
|
14,147
|
|
|
$
|
2.62
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,639
|
|
|
|
3.63
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,393
|
)
|
|
|
1.62
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(969
|
)
|
|
|
3.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
13,424
|
|
|
$
|
2.80
|
|
|
|
|
|
|
$
|
5,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2008
|
|
|
10,036
|
|
|
$
|
2.72
|
|
|
|
|
|
|
$
|
5,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest at December 31, 2008(1)
|
|
|
13,170
|
|
|
$
|
2.79
|
|
|
|
|
|
|
$
|
4,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In addition to the vested options, the Company expects a portion
of the unvested options to vest at some point in the future.
Options expected to vest are calculated by applying an estimated
forfeiture rate to the unvested options. |
During the years ended December 31, 2008, 2007 and 2006,
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
$2.3 million, $3.3 million, $2.5 million,
respectively. The total amount of cash received from exercise
was $2.3 million, $2.0 million and $1.5 million
in 2008, 2007 and 2006, respectively.
A summary of the Companys restricted share and restricted
share unit (RSU) award activity as of December 31, 2008 and
changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
|
and RSUs
|
|
|
Per Share
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Non-Vested shares outstanding at December 31, 2007
|
|
|
2,359
|
|
|
$
|
2.57
|
|
Awards granted
|
|
|
2,601
|
|
|
$
|
3.54
|
|
Restrictions lapsed
|
|
|
(655
|
)
|
|
$
|
2.47
|
|
Awards forfeited
|
|
|
(542
|
)
|
|
$
|
3.21
|
|
|
|
|
|
|
|
|
|
|
Non-Vested shares outstanding at December 31, 2008
|
|
|
3,763
|
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
In 2007, the Company began granting restricted stock units
(RSUs) to executives, employees and members of the
Board of Directors. During the years ended December 31,
2008 and 2007, the Company granted 2.6 million and
2.4 million RSUs, respectively, to employees and members of
the Board of Directors. The fair value of the RSUs is based on
the market value of ATGs common stock price on the date of
grant. Stock-based compensation expense related to RSUs is
recognized on a straight-line basis over the requisite service
period provided there are no performance-based measures. The
RSUs provide the holder with the right to receive shares of ATG
common stock upon vesting.
RSUs granted to employees generally vest over four years. A
majority of the RSUs vest based on the lapsing of time. A
portion of the RSUs granted to executives are subject to
performance criteria. For the year ended December 31, 2008,
the Company achieved a certain level of the performance
measures, and as a result the executives will receive 89% of the
shares subject to the RSUs granted in 2008 subject to
employment with the
61
Company for the remaining service period. The fair value of
these performance based awards is being recognized over the
requisite service period under the accelerated method pursuant
to FAS 123R. The performance-based RSUs granted in 2008 and
2007 contain additional provisions which, if achieved, would
result in the immediate vesting of the awards. At
December 31, 2008, the achievement of these additional
provisions is not deemed probable by the Company. As of
December 31, 2008, the unrecognized compensation expense
related to restricted shares and RSUs is $9.3 million.
Stock compensation expense related to restricted stock unit
awards made to employees and non-employee directors was
$3.6 million, $1.6 million and $0.2 million for
the years ended December 31, 2008, 2007 and 2006,
respectively.
During the years ended December 31, 2008, 2007 and 2006,
the total fair value of RSUs vested was $1.6 million,
$0.5 million, and $0.0 million, respectively.
As of December 31, 2008, there was $16.8 million of
total unrecognized compensation cost related to unvested awards
of stock options, restricted stock and restricted stock units.
That cost is expected to be recognized over a weighted-average
period of approximately 2.7 years.
Shareholders
Rights Plan
On September 26, 2001, the Company Board of Directors
adopted a Shareholder Rights Plan (the Shareholder Rights
Plan) pursuant to which preferred stock purchase rights
(Rights) were distributed to stockholders as a
dividend at the rate of one Right for each share of common stock
held of record as of the close of business on October 9,
2001. The Shareholder Rights Plan was adopted to enable the
Board of Directors to protect the interests of stockholders in
the event of a takeover attempt that is coercive or the Board
otherwise considers not to be in the best interests of
stockholders.
When exercisable, each Right will entitle stockholders to buy
one one-thousandth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $15.00 per
Right. Subject to certain exceptions, the Rights will be
exercisable after a person or group (except for certain excluded
persons) acquires beneficial ownership of 15% or more of the
Company outstanding common stock or undertakes a tender or
exchange offer which, if consummated, would result in that
person or group beneficially owning 15% or more of the
Companys outstanding common stock. The Rights will be
redeemable by the Board at any time before a person or group
acquires 15% or more of the Companys outstanding common
stock and under certain other circumstances at a redemption
price of $.001 per Right.
Acquisition
of 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.
In determining the purchase price allocation, the Company
considered, among other factors, the expected use of the
acquired assets, historical demand and estimates of future
demand of CleverSets products and services. The fair value
of intangible assets was primarily determined using the income
approach, which is based upon a forecast of the expected future
net cash flows associated with the assets. These net cash flows
were then discounted to a present value by applying a discount
rate of 10% to 40%. The discount rate was determined after
consideration of CleverSets weighted average cost of
capital and the risk associated with achieving forecast sales
related to the technology and assets acquired from CleverSet.
62
The purchase price has been allocated on a basis based on the
estimated fair values as of the acquisition date. The following
represents the allocation of the purchase price (in thousands):
|
|
|
|
|
Cash
|
|
$
|
270
|
|
Accounts receivable
|
|
|
131
|
|
Prepaid expenses and other assets
|
|
|
330
|
|
Property, plant and equipment
|
|
|
56
|
|
Goodwill
|
|
|
8,138
|
|
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
|
|
|
(191
|
)
|
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):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Pro forma revenue
|
|
$
|
164,739
|
|
|
$
|
138,733
|
|
Pro forma net income (loss)
|
|
|
3,262
|
|
|
|
(7,416
|
)
|
Pro forma net income (loss) per Share basic and
diluted
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
Acquisition
of eStara, Inc.
On October 2, 2006, the Company acquired all of the
outstanding shares of common stock of privately held eStara,
Inc., a provider of
e-commerce
optimization service solutions for enhancing online sales and
support initiatives. The aggregate purchase price was
approximately $49.8 million, which consisted of
$39.2 million of ATGs common stock, $2.2 million
of transaction costs, which primarily consisted of fees paid for
financial advisory, legal and accounting services, a transaction
bonus to eStara employees of $4.8 million, and
$3.6 million in cash in lieu of issuing ATG common stock to
non accredited investors. The Company issued approximately
14.6 million shares of its common stock, the fair value of
which was based upon a
five-day
average of the closing price two days before and two days after
the terms of the acquisition were agreed to and publicly
announced. In addition, the Company issued 0.3 million
shares of restricted stock, which is being recognized as
stock-based compensation expense over the vesting term. The
excess of the purchase price over the net assets acquired
resulted in goodwill of $32.1 million at October 2,
2006. Currently, the goodwill associated with the eStara
acquisition will not be deductible for tax purposes.
As required by the merger agreement, in 2007 the Company
recorded contingent consideration of $2 million for
earn-out payments to eStara stockholders and employees as a
result of eStara generating revenue in excess of
$25 million but less than $30 million in 2007. The
earn-out payments were paid in March 2008 and consisted of
$0.6 million to the stockholders and $1.4 million to
employees. The payments to stockholders were recorded as
additional purchase price and added to goodwill, and the amounts
paid to employees were accounted for as compensation expense as
it relates to amounts paid to eStara employee stockholders in
excess of that paid to non-employee stockholders.
63
In determining the purchase price allocation, the Company
considered, among other factors, the expected use of the
acquired assets, historical demand and estimates of future
demand of eStaras products and services. The fair value of
intangible assets was primarily determined using the income
approach, which is based upon a forecast of the expected future
net cash flows associated with the assets. These net cash flows
were then discounted to a present value by applying a discount
rate of 14% to 16%. The discount rate was determined after
consideration of eStaras weighted average cost of capital
and the risk associated with achieving forecast sales related to
the technology and assets acquired from eStara.
The purchase price was allocated based on estimated fair values
as of the acquisition date. The following represents the
allocation of the purchase price prior to any subsequent
adjustments in 2007, which related to collection of previously
reserved accounts receivable (See Note 1(s)) (in thousands):
|
|
|
|
|
Cash
|
|
$
|
2,699
|
|
Accounts receivable
|
|
|
3,671
|
|
Other current assets
|
|
|
188
|
|
Property, plant and equipment
|
|
|
167
|
|
Goodwill
|
|
|
32,071
|
|
Intangible assets:
|
|
|
|
|
Customer relationships (estimated useful life of 4 years)
|
|
|
7,300
|
|
Developed product technology (estimated useful life of
5 years)
|
|
|
5,300
|
|
Trademarks (estimated life of 5 years)
|
|
|
1,400
|
|
|
|
|
|
|
Total intangible assets
|
|
|
14,000
|
|
Other long-term assets
|
|
|
37
|
|
Accounts payable
|
|
|
(517
|
)
|
Deferred revenue
|
|
|
(679
|
)
|
Accrued and other expenses
|
|
|
(1,821
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
49,816
|
|
|
|
|
|
|
|
|
(7)
|
Commitments
and Contingencies
|
Leases
ATG has offices, primarily for sales and support personnel, in
seven domestic locations as well as four foreign countries. At
December 31, 2008, ATGs bank had issued
$2.1 million of letters of credit in favor of various
landlords to secure obligations under its leases, which expire
through 2011. In addition, the Company has operating leases
related to equipment, some of which include purchase options at
the end of the lease term.
The future minimum payments under operating leases as of
December 31, 2008, were as follows (in thousands):
|
|
|
|
|
2009
|
|
$
|
3,894
|
|
2010
|
|
|
3,224
|
|
2011
|
|
|
2,835
|
|
2012
|
|
|
971
|
|
2013
|
|
|
975
|
|
Thereafter
|
|
|
3,561
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
15,460
|
|
|
|
|
|
|
The Company recorded rent expense of $4.4 million,
$3.4 million and $2.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
64
Indemnifications
The Company in general agrees to indemnification provisions in
its software license agreements and real estate leases in the
ordinary course of its business.
With respect to software license agreements, these
indemnifications generally include provisions indemnifying the
customer against losses, expenses, and liabilities from damages
that may be awarded against the customer in the event the
Companys software is found to infringe upon the
intellectual property rights of others. The software license
agreements generally limit the scope of and remedies for such
indemnification obligations in a variety of industry-standard
respects. The Company relies on a combination of patent,
copyright, trademark and trade secret laws and restrictions on
disclosure to protect its intellectual property rights. The
Company believes such laws and practices, along with its
internal development processes and other policies and practices,
limit its exposure related to the indemnification provisions of
the software license agreements. However, in recent years there
has been significant litigation in the United States involving
patents and other intellectual property rights. Companies
providing Internet-related products and services are
increasingly bringing and becoming subject to suits alleging
infringement of proprietary rights, particularly patent rights.
From time to time, the Companys customers have been
subject to third party patent claims, and the Company has agreed
to indemnify these customers from claims to the extent the
claims relate to our products.
With respect to real estate lease agreements or settlement
agreements with landlords, these indemnifications typically
apply to claims asserted against the landlord relating to
personal injury and property damage at the leased premises or to
certain breaches of the Companys contractual obligations
or representations and warranties included in the settlement
agreements.
These indemnification provisions generally survive the
termination of the respective agreements, although the provision
generally has the most relevance during the contract term and
for a short period of time thereafter. The maximum potential
amount of future payments that the Company could be required to
make under these indemnification provisions is unlimited. The
Company has purchased insurance that reduces its monetary
exposure for landlord indemnifications, and the Company has not
recorded any claims or paid out any amounts related to
indemnification provisions in its real estate lease agreements.
|
|
(8)
|
Employee
Benefit Plan
|
The Company sponsors a 401(k) Plan covering substantially all
employees. The 401(k) Plan allows eligible employees to make
salary-deferred contributions subject to certain
U.S. Internal Revenue Service limitations. The Company may
contribute to the 401(k) Plan at its discretion. The Company
contributed $1.1 million in 2008, $1.0 million in 2007
and $0.8 million in 2006 as matching payments under the
plan.
Accrued expenses at December 31, 2008 and 2007 consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
8,358
|
|
|
$
|
9,348
|
|
Income taxes
|
|
|
209
|
|
|
|
1,887
|
|
Outside contractor and professional fees
|
|
|
3,391
|
|
|
|
3,475
|
|
VAT and sales and use taxes
|
|
|
3,298
|
|
|
|
1,579
|
|
Other
|
|
|
3,619
|
|
|
|
2,793
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,875
|
|
|
$
|
19,082
|
|
|
|
|
|
|
|
|
|
|
65
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 with
claims against approximately 300 other companies that had
initial public offerings during the same general time period. In
February 2005, the court issued an opinion and order granting
preliminary approval of a proposed settlement, subject to
certain non-material modifications. However in June 2007, the
court terminated the settlement process due to the parties
inability to certify the settlement class. Plaintiffs
counsel are seeking certification of a narrower class of
plaintiffs and filed amended complaints in September 2007. The
Company believes that it has meritorious defenses and intends to
defend the case vigorously. While the Company cannot predict the
outcome of the litigation, it does not expect any material
adverse impact to its business, or the results of its
operations, from this matter.
The Companys industry is characterized by the existence of
a large number of patents, trademarks and copyrights, and by
increasingly frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. Some of the Companys competitors in the
e-commerce
software and services market have filed or may file patent
applications covering aspects of their technology that they may
claim the Companys technology infringes. Such competitors
could make claims of infringement against the Company with
respect to our products and technology. Additionally, third
parties who are not actively engaged in providing
e-commerce
products or services but who hold or acquire patents upon which
they may allege the Companys current or future products or
services infringe may make claims of infringement against the
Company or the Companys customers. The Companys
agreements with its customers typically require it to indemnify
them against claims of intellectual property infringement
resulting from their use of the Companys products and
services. The Company periodically receives notices from
customers regarding patent license inquiries they have received
which may or may not implicate the Companys indemnity
obligations, and 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.
66
|
|
(11)
|
Quarterly
Results of Operations (Unaudited)
|
The following table presents a condensed summary of quarterly
results of operations for the years ended December 31, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Total revenues
|
|
$
|
36,530
|
|
|
$
|
41,920
|
|
|
$
|
40,794
|
|
|
$
|
45,397
|
|
Gross profit
|
|
|
21,623
|
|
|
|
25,665
|
|
|
|
25,251
|
|
|
|
30,220
|
|
Net income (loss)
|
|
|
(842
|
)
|
|
|
348
|
|
|
|
786
|
|
|
|
3,507
|
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
Diluted net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Total revenues
|
|
$
|
29,232
|
|
|
$
|
32,616
|
|
|
$
|
35,886
|
|
|
$
|
39,326
|
|
Gross profit
|
|
|
17,951
|
|
|
|
19,517
|
|
|
|
21,577
|
|
|
|
22,476
|
|
Net income (loss)
|
|
|
(1,461
|
)
|
|
|
(2,748
|
)
|
|
|
(760
|
)
|
|
|
782
|
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
67
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
1.
|
Managements
Report on Disclosure Controls and Procedures
|
As of December 31, 2008, we carried out an evaluation,
under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act)). Our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and
procedures are effective to ensure that information required to
be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that such information is
accumulated and communicated to our management (including our
Chief Executive Officer and Chief Financial Officer) to allow
timely decisions regarding required disclosures. Based on such
evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and
procedures are effective.
|
|
2.
|
Internal
Control over Financial Reporting
|
|
|
(a)
|
Managements
Annual Report on Internal Control Over Financial
Reporting
|
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting and for the
assessment of the effectiveness of internal control over
financial reporting. As defined by the Securities and Exchange
Commission, internal control over financial reporting is a
process designed by, or under the supervision of our principal
executive and principal financial officers and effected by our
Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the consolidated financial
statements in accordance with U.S. generally accepted
accounting principles.
Our internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect our transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of the consolidated
financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our
management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our annual consolidated
financial statements, management has undertaken an assessment of
the effectiveness of our internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or the COSO Framework. Managements
assessment included an evaluation of the design of our internal
control over financial reporting and testing of the operational
effectiveness of those controls. Based on this evaluation,
management has concluded that our internal control over
financial reporting is effective as of December 31, 2008
based on those criteria.
Ernst & Young LLP, our independent registered public
accounting firm, has issued its report on the effectiveness of
our internal control over financial reporting as of
December 31, 2008. This report appears below.
68
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Art Technology Group, Inc.
We have audited Art Technology Group, Inc.s internal
control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Art Technology Group, Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Art Technology Group, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Art Technology Group, Inc. as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss), and cash flows for each of the
three years in the period ended December 31, 2008 of Art
Technology Group, Inc. and our report dated February 26,
2009 expressed an unqualified opinion thereon.
Boston, Massachusetts
February 26, 2009
69
|
|
3.
|
Changes
in internal control over financial reporting.
|
There have been no changes in our internal control over
financial reporting during the fiscal quarter ended
December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
information
|
Not applicable
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement for our 2009
annual meeting of stockholders, to be filed with the Securities
and Exchange Commission (SEC) not later than April 30, 2009
(the Definitive Proxy Statement, including under the
headings Election of Class I Directors,
Background Information About Directors Continuing in
Office. Information About Executive Officers,
Compliance with Section 16(a) of The Exchange
Act and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics that
applies to all of our directors, officers and employees,
including our principal executive officer and principal
financial officer. The Code of Business Conduct and Ethics is
posted on our website at
http://www.atg.com/About
ATG/Investors/Corporate Governance/Conduct.
We intend to satisfy the disclosure requirement under
Item 5.05 of
Form 8-K
regarding an amendment to, or waiver from, a provision of this
Code of Business Conduct and Ethics by posting such information
on our website, at the address and location specified above and,
to the extent required by the listing standards of The NASDAQ
Stock Market, by filing a Current Report on
Form 8-K
with the SEC, disclosing such information.
|
|
Item 11.
|
Executive
Compensation
|
The information required under this Item is incorporated herein
by reference to our Definitive Proxy Statement, including under
the headings Executive Compensation, Director
Compensation, Compensation Committee Interlocks and
Insider Participation, and Compensation Committee
Report.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required under this Item is incorporated herein
by reference to our Definitive Proxy Statement, including under
the headings Information About Stock Ownership and
Securities Authorized for Issuance under Equity
Compensation Plans.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information, if any, required under this Item is
incorporated herein by reference to our Definitive Proxy
Statement, including under the headings Related Party
Transactions and Corporate Governance.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required under this Item is incorporated herein
by reference to our Definitive Proxy Statement, including under
the caption Principal Accountant Fees and Services.
70
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1) Financial
Statements
The following are included in Item 8:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated Balance Sheets as of December 31, 2008 and 2007
|
|
|
|
Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 and 2006
|
|
|
|
Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss) for the years ended
December 31, 2008, 2007 and 2006
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006
|
|
|
|
Notes to Consolidated Financial Statements
|
(a) (2) Financial
Statement Schedule
The information required by Schedule II, Valuation and
Qualifying Accounts is contained in Item 8 in the Notes to
the Consolidated Financial Statements. All other schedules have
been omitted since the required information is not present, or
not present in amounts sufficient to require submission of the
schedule or because information required is included in the
consolidated financial statements or the notes thereto.
(a) (3) Exhibits
We are filing as part of this Report the Exhibits listed in the
Exhibit Index following the signature page to this Report.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of February 27, 2009.
ART TECHNOLOGY GROUP, INC.
(Registrant)
Robert D. Burke
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities as of
February 27, 2009.
|
|
|
|
|
Name
|
|
Title
|
|
|
|
|
/s/ ROBERT
D. BURKE
Robert
D. Burke
|
|
Chief Executive Officer and President
(Principal Executive Officer)
|
|
|
|
/s/ JULIE
M.B. BRADLEY
Julie
M.B. Bradley
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ MICHAEL
A. BROCHU
Michael
A. Brochu
|
|
Director
|
|
|
|
/s/ DAVID
B. ELSBREE
David
B. Elsbree
|
|
Director
|
|
|
|
/s/ JOHN
R. HELD
John
R. Held
|
|
Director
|
|
|
|
/s/ ILENE
H. LANG
Ilene
H. Lang
|
|
Director
|
|
|
|
/s/ MARY
E. MAKELA
Mary
E. Makela
|
|
Director
|
|
|
|
/s/ DANIEL
C. REGIS
Daniel
C. Regis
|
|
Chairman of the Board
|
|
|
|
/s/ PHYLLIS
S. SWERSKY
Phyllis
S. Swersky
|
|
Director
|
72
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
|
|
|
|
|
|
|
|
This
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Form
|
|
|
|
|
|
Exhibit
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger dated as of January 19, 2008
among Art Technology Group, Inc., Einstein Acquisition Corp.,
eShopperTools.com, Inc., and the stockholder representative and
principal stockholders of eShopperTools.com, Inc., named therein
|
|
|
|
8-K
|
|
January 25, 2008
|
|
|
10.1
|
|
|
|
2
|
.2
|
|
Agreement and Plan of Merger dated as of September 18, 2006
among Art Technology Group, Inc., eStara, Inc., Arlington
Acquisition Corp., Storrow Acquisition Corp., and the
stockholder representative and principal stockholders of eStara
named therein
|
|
|
|
8-K
|
|
September 22, 2006
|
|
|
10.1
|
|
|
|
2
|
.3
|
|
Amendment No. 1 to Agreement and Plan of Merger dated as of
October 2, 2006 among Art Technology Group, Inc.,
eStara, Inc. and the stockholder representative named therein
|
|
|
|
8-K
|
|
October 6, 2006
|
|
|
2.2
|
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation
|
|
|
|
S-8
|
|
June 12, 2003
|
|
|
4.1
|
|
|
|
3
|
.2
|
|
Amended and Restated By-Laws of Art Technology Group, Inc.
(as further amended and adopted April 17, 2008)
|
|
|
|
8-K
|
|
April 23, 2008
|
|
|
3.1
|
|
|
|
4
|
.1
|
|
Rights Agreement dated September 26, 2001 with EquiServe
Trust Company, N.A. (SEC
file no. 000-26679)
|
|
|
|
8-K
|
|
October 2, 2001
|
|
|
4.1
|
|
|
|
10
|
.1*
|
|
Amended and Restated 1996 Stock Option Plan (including forms of
agreements)
|
|
X
|
|
|
|
|
|
|
|
|
|
|
10
|
.2*
|
|
Amended and Restated 1999 Outside Director Stock Option Plan
(including forms of agreements)
|
|
|
|
10-Q
|
|
August 7, 2007
|
|
|
10.2
|
|
|
|
10
|
.3*
|
|
1999 Employee Stock Purchase Plan
|
|
|
|
DEF14A
(proxy
statement)
|
|
April 10, 2006
|
|
|
Annex A
|
|
|
|
10
|
.4
|
|
Primus 1999 Non-Officer Stock Option Plan
|
|
|
|
10-K
|
|
March 16, 2005
|
|
|
10.4
|
|
|
|
10
|
.5
|
|
Primus 1999 Stock Incentive Compensation Plan, as amended
|
|
|
|
8-K
|
|
April 25, 2007
|
|
|
99.3
|
|
|
|
10
|
.6*
|
|
General
Change-in-Control
Policy for Employees
|
|
|
|
10-Q
|
|
November 9, 2004
|
|
|
10.21
|
|
|
|
10
|
.7*
|
|
Amended and Restated Employment Agreement dated April 14,
2008 with Robert Burke
|
|
|
|
10-Q
|
|
May 12, 2008
|
|
|
10.3
|
|
|
|
10
|
.8*
|
|
Offer letter with Julie M.B. Bradley dated July 6, 2005
|
|
|
|
10-Q
|
|
November 8, 2005
|
|
|
10.9
|
|
|
|
10
|
.9
|
|
Offer letter with Andrew Reynolds dated July 23, 2007
|
|
|
|
10-K
|
|
March 17, 2008
|
|
|
10.10
|
|
|
|
10
|
.10*
|
|
Offer letter with Nina P. McIntyre dated January 27, 2009
|
|
X
|
|
|
|
|
|
|
|
|
|
|
10
|
.11*
|
|
Form of Change in Control Agreement by and among Art Technology
Group, Inc. and Executive Management Team Members, dated
April 14, 2008
|
|
|
|
10-Q
|
|
May 12, 2008
|
|
|
10.4
|
|
|
|
10
|
.12*
|
|
2008 Executive Management Compensation Plan, as amended, dated
March 3, 2008
|
|
|
|
8-K
|
|
March 6, 2008
|
|
|
99.1
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Filed with
|
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|
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This
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Incorporated by Reference
|
Exhibit
|
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Form
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Exhibit
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No.
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Description
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10-K
|
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Form
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Filing Date
|
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No.
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10
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.13*
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Amended and Restated Non-Employee Director Compensation Plan, as
amended on September 16, 2008
|
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10-Q
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November 7, 2008
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10.1
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10
|
.14
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Lease agreement dated May 6, 2006 with RREEF America REIT
II Corp. PPP
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10-Q
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May 10, 2006
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10.33
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10
|
.15
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Amended and Restated Loan and Security Agreement dated
June 13, 2002 with Silicon Valley Bank
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10-Q
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August 14, 2002
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10.1
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10
|
.16
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First Loan Modification Agreement dated September 30, 2002
with Silicon Valley Bank
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10-Q
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November 14, 2002
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10.1
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|
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10
|
.17
|
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Amendment Agreement dated October 4, 2002 with Silicon
Valley Bank
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10-Q
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November 14, 2002
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10.2
|
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10
|
.18
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Second Loan Modification Agreement dated December 20, 2002
with Silicon Valley Bank
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10-K
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March 28, 2003
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10.21
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10
|
.19
|
|
Fourth Loan Modification Agreement dated November 26, 2003
with Silicon Valley Bank
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10-K
|
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March 15, 2004
|
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10.25
|
|
|
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10
|
.20
|
|
Fifth Loan Modification Agreement dated June 2004 with Silicon
Valley Bank
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10-Q
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August 9, 2004
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10.26
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10
|
.21
|
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Letter Agreement re: Loan Arrangement with Silicon Valley Bank
dated June 16, 2004
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10-Q
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August 9, 2004
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10.25
|
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10
|
.22
|
|
Sixth Loan Modification Agreement dated November 24, 2004
with Silicon Valley Bank
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10-K
|
|
March 16, 2005
|
|
|
10.28
|
|
|
|
10
|
.23
|
|
Seventh Loan Modification Agreement dated December 21, 2004
with Silicon Valley Bank
|
|
|
|
10-K
|
|
March 16, 2005
|
|
|
10.29
|
|
|
|
10
|
.24
|
|
Eighth Loan Modification Agreement dated December 30, 2005
with Silicon Valley Bank
|
|
|
|
10-K
|
|
March 16, 2006
|
|
|
10.31
|
|
|
|
10
|
.25
|
|
Ninth Loan Modification Agreement dated February 10, 2006
with Silicon Valley Bank
|
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10-Q
|
|
May 10, 2006
|
|
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10.32
|
|
|
|
10
|
.26
|
|
Tenth Loan Modification Agreement dated October 4, 2006
with Silicon Valley Bank
|
|
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|
8-K
|
|
October 5, 2006
|
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10.1
|
|
|
|
10
|
.27
|
|
Eleventh Loan Modification Agreement dated May 7, 2007 with
Silicon Valley Bank
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10-Q
|
|
August 7, 2007
|
|
|
10.5
|
|
|
|
10
|
.28
|
|
Twelfth Loan Modification Agreement dated September 5, 2007
with Silicon Valley Bank
|
|
|
|
10-Q
|
|
November 5, 2007
|
|
|
10.1
|
|
|
|
10
|
.28
|
|
Securities Account Control Agreement dated December 20,
2002 with Silicon Valley Bank
|
|
|
|
10-K
|
|
March 28, 2003
|
|
|
10.20
|
|
|
|
10
|
.28
|
|
Agreement and Release between Clifford Conneighton and Art
Technology Group, Inc., dated July 16, 2008
|
|
|
|
10-Q
|
|
August 8, 2008
|
|
|
10.2
|
|
|
|
21
|
.1
|
|
Subsidiaries
|
|
X
|
|
|
|
|
|
|
|
|
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
X
|
|
|
|
|
|
|
|
|
|
|
31
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
Exchange Act
Rules 13a-14
and 15d-14,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
|
|
|
|
|
|
|
|
This
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Form
|
|
|
|
|
|
Exhibit
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
31
|
.2
|
|
Certification of Principal Financial and Accounting Officer
Pursuant to Exchange Act
Rules 13a-14
and 15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
32
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
32
|
.2
|
|
Certification of the Principal Financial and Accounting Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Management contract or compensatory plan. |
75