e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 000-26679
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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04-3141918 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
One Main Street, Cambridge, Massachusetts
(Address of principal executive offices)
02142
(Zip Code)
(617) 386-1000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 1, 2009 there were 126,580,655 shares of the Registrants common stock outstanding.
ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-Q
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(UNAUDITED)
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March 31, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
57,221 |
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$ |
47,413 |
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Marketable securities (including restricted cash of $1,300 at
March 31, 2009 and
$1,669 at December 31, 2008) |
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10,254 |
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13,570 |
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Accounts receivable, net of reserves of $1,218 ($1,234 in 2008) |
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30,582 |
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35,109 |
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Deferred costs, current |
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822 |
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924 |
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Deferred tax asset |
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560 |
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560 |
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Prepaid expenses and other current assets |
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3,563 |
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3,814 |
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Total current assets |
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103,002 |
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101,390 |
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Property and equipment, net |
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10,069 |
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10,098 |
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Deferred costs |
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1,852 |
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1,984 |
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Other assets |
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1,355 |
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1,423 |
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Restricted cash non current |
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419 |
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419 |
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Intangible assets, net |
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6,843 |
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7,770 |
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Goodwill |
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65,683 |
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65,683 |
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Total Assets |
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$ |
189,223 |
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$ |
188,767 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
4,265 |
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$ |
2,958 |
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Accrued expenses |
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15,494 |
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18,875 |
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Deferred revenue, current portion |
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37,899 |
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38,782 |
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Accrued restructuring, current portion |
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146 |
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Total current liabilities |
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57,658 |
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60,761 |
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Deferred revenue, less current portion |
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14,170 |
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15,285 |
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Other liabilities |
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1,775 |
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1,775 |
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Commitments and contingencies (Note 9 ) |
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Stockholders equity: |
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Preferred stock, $0.01 par value; authorized -10,000,000 shares;
issued and outstanding-no shares |
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Common stock, $0.01 par value; authorized-200,000,000 shares;
issued 132,167,557 and 131,572,773 shares at March 31, 2009 and
December 31, 2008, respectively |
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1,323 |
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1,316 |
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Additional paid-in capital |
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317,684 |
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315,730 |
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Accumulated deficit |
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(188,972 |
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(191,946 |
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Treasury stock, at cost (5,605,501 shares at March 31, 2009 and
December 31, 2008) |
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(11,810 |
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(11,810 |
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Accumulated other comprehensive loss |
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(2,605 |
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(2,344 |
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Total stockholders equity |
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115,620 |
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110,946 |
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Total Liabilities and Stockholders Equity |
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$ |
189,223 |
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$ |
188,767 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
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Three months ended |
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March 31, |
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2009 |
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2008 |
Revenue: |
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Product licenses |
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$ |
12,930 |
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$ |
9,257 |
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Recurring services |
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23,103 |
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20,943 |
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Professional and education services |
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5,878 |
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6,330 |
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Total revenue |
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41,911 |
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36,530 |
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Cost of Revenue: |
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Product licenses |
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390 |
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387 |
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Recurring services |
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8,897 |
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7,606 |
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Professional and education services |
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5,302 |
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6,914 |
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Total cost of revenue |
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14,589 |
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14,907 |
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Gross Profit |
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27,322 |
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21,623 |
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Operating Expenses: |
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Research and development |
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7,470 |
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7,021 |
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Sales and marketing |
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12,288 |
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11,537 |
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General and administrative |
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4,489 |
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4,329 |
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Total operating expenses |
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24,247 |
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22,887 |
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Income (loss) from operations |
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3,075 |
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(1,264 |
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Interest and other income, net |
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211 |
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628 |
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Income (loss) before provision for income taxes |
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3,286 |
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(636 |
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Provision for income taxes |
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312 |
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206 |
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Net income (loss) |
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$ |
2,974 |
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$ |
(842 |
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Basic net income (loss) per share |
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$ |
0.02 |
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$ |
(0.01 |
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Diluted net income (loss) per share |
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$ |
0.02 |
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$ |
(0.01 |
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Basic weighted average common shares outstanding |
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126,113 |
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128,435 |
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Diluted weighted average common shares outstanding |
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129,368 |
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128,435 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
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Three months ended March 31, |
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2009 |
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2008 |
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Cash Flows from Operating Activities: |
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Net income (loss) |
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$ |
2,974 |
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$ |
(842 |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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2,263 |
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2,028 |
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Stock-based compensation expense |
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1,955 |
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1,830 |
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Net changes in current assets and liabilities: |
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Accounts receivable |
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4,527 |
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3,725 |
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Prepaid expenses and other current assets |
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319 |
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(22 |
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Deferred costs |
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234 |
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(178 |
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Accounts payable |
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1,345 |
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703 |
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Accrued expenses and other liabilities |
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(3,381 |
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(1,899 |
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Deferred revenue |
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(1,999 |
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1,973 |
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Accrued restructuring |
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(146 |
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(223 |
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Net cash provided by operating activities |
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8,091 |
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7,095 |
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Cash Flows from Investing Activities: |
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Purchases of marketable securities |
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(1,929 |
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(9,196 |
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Maturities of marketable securities |
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5,243 |
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11,050 |
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Purchases of property and equipment |
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(1,329 |
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(2,375 |
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Collateralization of letters of credit |
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(2,088 |
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Payment of acquisition costs, net of cash acquired |
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(10,673 |
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Net cash provided by (used in) investing activities |
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1,985 |
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(13,282 |
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Cash Flows from Financing Activities: |
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Proceeds from exercise of stock options |
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149 |
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509 |
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Proceeds from employee stock purchase plan |
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242 |
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250 |
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Payments of employee restricted stock tax withholdings |
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(383 |
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Net cash provided by financing activities |
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8 |
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759 |
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Effect of foreign exchange rate changes on cash and cash equivalents |
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(276 |
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186 |
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Net increase (decrease) in cash and cash equivalents |
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9,808 |
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(5,242 |
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Cash and cash equivalents, beginning of period |
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47,413 |
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34,419 |
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Cash and cash equivalents, end of period |
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$ |
57,221 |
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$ |
29,177 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization, Business and Summary of Significant Accounting Policies
Art Technology Group, Inc. (ATG or the Company) develops and markets a comprehensive suite of
e-commerce software products, and provides related services, including support and maintenance,
education, application hosting, professional services and proactive conversion solutions for
enhancing online sales and support.
(a) Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports
on Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not
include all of the information and footnotes required by United States generally accepted
accounting principles, and while the Company believes that the disclosures presented are adequate
to make the information presented not misleading, these financial statements should be read in
conjunction with the audited financial statements and related notes included in the Companys 2008
Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements and notes contain all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the Companys financial position, results
of operations and cash flows at the dates and for the periods indicated. The operating results for
the three months ended March 31, 2009 are not necessarily indicative of the results to be expected
for the full year ending December 31, 2009.
The accompanying consolidated financial statements include the accounts of ATG and its wholly
owned subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting period. Such estimates relate to revenue recognition, the allowance for doubtful
accounts, useful lives of fixed assets and identifiable intangible assets, deferred costs, accrued
liabilities, accrued taxes, deferred tax valuation allowances, and assumptions pertaining to
share-based payments. Actual results could differ from those estimates.
(c) Accounts Receivable
Accounts receivable represents amounts currently due from customers for which revenue has been
recognized or is being recognized ratably in future periods. Accounts receivable also included $1.4
million and $1.2 million of unbilled accounts receivable at March 31, 2009 and December 31, 2008,
respectively. Unbilled receivables consist of future billings for work performed but not yet
invoiced to the customer. Unbilled accounts receivable are generally invoiced within the following
month.
ATGs standard payment terms are normally within 90 days. In certain circumstances the Company
may provide to customers with superior credit extended payment terms of up to 12 months. Accounts
receivable due under arrangements involving payment terms of greater than 90 days and less than 12
months were approximately $3.8 million and $0.0 million at March 31, 2009 and December 31, 2008,
respectively.
(d) Revenue Recognition
ATG derives revenue from the following sources: (1) perpetual software licenses, (2) recurring
services, which are comprised of support and maintenance services, application hosting services and e-commerce
optimization services, and (3) professional and education services. ATG sells these product and service
offerings individually or more commonly in multiple element arrangements under various arrangements as follows: 1. Sale of
Perpetual Software Licenses, 2. Sale of Application Hosting Services and Professional and Education Services, and 3. Sale of e-Commerce
Optimization Services.
6
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. ATG makes significant judgments when evaluating if fees are fixed and determinable and in
accessing 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.
ATGs standard payment terms are normally within 90 days. The Company in some circumstances
provides extended payment terms, and in certain cases considers amounts payable beyond 90 days but
less than 12 months to be fixed and determinable. In such cases, judgment is required in evaluating
the creditworthiness of the customer and the likelihood of a concession. In the first quarter of
2009 the Company determined that it has a sufficient history of successfully collecting, without
concessions, accounts receivable involving extended credit terms of up to twelve months granted to
a specific class of customer
to conclude that
the fees under such arrangements may be considered
to be both fixed and determinable and probable of collection.
Consequently, the fees under such arrangements
may be recognized as
revenue assuming other criteria for recognition are met. As a result, ATG recognized approximately $2.9 million
of revenue during the three months ended March 31, 2009 that
previously would have been deferred
until the payments became due. The Company monitors its ability to collect amounts due under the
stated contractual terms of such arrangements and to date has not experienced any concessions from
this class of customer. If in the future the Company experiences adverse changes in its ability to
collect without concession the amounts due under arrangements involving extended payment terms from
this class of customer, it may no longer be able to conclude that such amounts are fixed and
determinable and probable of collection, which could adversely affect the Companys revenue in
future periods.
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.
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
7
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 and Education 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 site-delivered 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 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
8
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
(e) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, requires financial statements to include the
reporting of comprehensive income (loss), which for the Company includes net loss, unrealized gains
(losses) on available-for-sale marketable securities, and foreign currency translation adjustments
that have generally been reported in the statement of stockholders equity.
The components of comprehensive income (loss) at March 31, 2009 and December 31, 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,974 |
|
|
$ |
(842 |
) |
Net changes in: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(312 |
) |
|
|
(150 |
) |
Unrealized gain (loss) on
available-for-sale securities |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
2,713 |
|
|
$ |
(692 |
) |
|
|
|
|
|
|
|
(f) Concentrations of Credit Risk and Major Customers
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 twenty-two 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 March 31, 2009 one customer accounted for 10% or more of accounts receivable. At December
31, 2008, no customer accounted for 10% or more of accounts receivable. No customer accounted for
10% or more of total revenue in the three month period ended March 31, 2009 or March 31, 2008.
(g) New Accounting Pronouncements
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.
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
9
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. With the adoption of Statement 141(R) goodwill is
no longer reduced 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.
(2) Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the period. Diluted net income 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 and restricted stock unit awards. In accordance
with SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), the assumed proceeds under the
treasury stock method include the average unrecognized compensation expense of stock options that
are in-the-money, restricted stock and restricted stock unit awards. This results in the assumed
buyback of additional shares thereby reducing the dilutive impact of stock options and restricted
stock unit awards. The Companys potentially diluted shares have not been included in the
computation of diluted net loss per share for the three months ended March 31, 2008 as the result
would be anti-dilutive.
The following table sets forth the computation of basic and diluted net income (loss) per
share for the three month periods ended March 31, 2009 and 2008 (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Net income (loss) |
|
$ |
2,974 |
|
|
$ |
(842 |
) |
Weighted average common shares outstanding
used in computing basic net income (loss)
per share |
|
|
126,113 |
|
|
|
128,435 |
|
Dilutive employee common stock equivalents |
|
|
3,255 |
|
|
|
|
|
|
|
|
Total weighted average common stock and
common stock equivalent shares outstanding
used in computing diluted net income (loss)
per share |
|
|
129,368 |
|
|
|
128,435 |
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.02 |
|
|
$ |
(0.01 |
) |
|
|
|
Diluted net income (loss) per share |
|
$ |
0.02 |
|
|
$ |
(0.01 |
) |
|
|
|
Anti-dilutive common stock equivalents |
|
|
14,400 |
|
|
|
18,679 |
|
|
|
|
(3) Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to SFAS 123R, and compensation cost
recognized includes: (a) compensation cost for all share-based payments granted prior to but not
yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123, and (b) compensation cost for all share-based payments granted
subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R.
10
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Grant-Date Fair Value
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value
of stock options. Information pertaining to stock options granted during the three months ended
March 31, 2009 and 2008 and related weighted average assumptions is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
Stock Options |
|
2009 |
|
2008 |
Options granted (in thousands) |
|
|
614 |
|
|
|
714 |
|
Weighted-average exercise price |
|
$ |
2.16 |
|
|
$ |
3.77 |
|
Weighted-average grant date fair value |
|
$ |
1.40 |
|
|
$ |
2.96 |
|
Assumptions: |
|
|
|
|
|
|
|
|
Expected volatility |
|
|
71 |
% |
|
|
76 |
% |
Expected term (in years) |
|
|
6.25 |
|
|
|
6.25 |
|
Risk-free interest rate |
|
|
1.98 |
% |
|
|
3.31 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
Expected volatility The Company has determined that the historical volatility of its common
stock is the best indicator of the future volatility of the Companys common stock. As such, the
Company uses historical volatility to estimate the grant-date fair value of stock options.
Historical volatility is calculated for the period that is commensurate with the stock options
expected term.
Expected term Since adopting SFAS 123R the Company has utilized the safe harbor provision of
6.25 years in Staff Accounting Bulletin No. 107 (as extended by Staff Accounting Bulletin No. 110)
to determine the expected term of its stock options.
Risk-free interest rate The yield on zero-coupon U.S. Treasury securities for a period that is
commensurate with the expected term is used as the risk-free interest rate.
Expected dividend yield The Companys Board of Directors historically has not declared cash
dividends and does not expect to issue cash dividends in the future. As such, the Company uses a 0%
expected dividend yield.
Stock-Based Compensation Expense
The Company generally uses the straight-line attribution method to recognize stock-based
compensation expense. The amount of stock-based compensation expense recognized during a period is
based on the value of the portion of the awards that are ultimately expected to vest. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The term forfeitures is distinct from
cancellations or expirations and represents only the unvested portion of the surrendered
option. The Company has applied an annual forfeiture rate of 7.25% to all unvested options as of
March 31, 2009. This analysis is re-evaluated quarterly and the forfeiture rate is adjusted as
necessary. Ultimately, the actual expense recognized over the vesting period will only be for those
stock options that vest.
Stock-based compensation expense related to restricted stock units (RSU or RSUs) is generally
recognized on a straight-line basis over the requisite service period. Most of the RSU awards vest
based on the lapse of time (i.e. service period). These time-based RSUs vest 25% annually beginning
approximately one year after the date of grant. Some of the RSU awards are subject to performance
criteria. These performance-based RSUs vest 25% annually if a specified annual adjusted operating
profit goal is met and will vest in full, immediately, if a specified revenue goal is met. The
Company believes it is probable the annual adjusted operating profit goal will be achieved,
resulting in stock-based compensation expense being recognized over the requisite service period on
an accelerated basis as required by SFAS 123R for performance-based awards. The achievement of the
performance criteria for the awards to immediately vest is currently not deemed to be probable by
the Company.
RSU grants to the Companys Board of Directors generally occur in the second quarter of each
fiscal year. The RSU grants to members of the Companys Board of Directors vest at the end of one
year, and the related stock-based compensation expense is recognized ratably over one year.
11
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the three months ended March 31, 2009, the Company granted RSUs covering an aggregate
of 2,972,600 shares of its common stock with a total fair value of $7.7 million. The fair value of
the RSU grants is based on the market price of ATGs common stock on the date of grant. The RSU
grants provide the holder with the right to receive shares of ATG common stock upon vesting.
As
of March 31, 2009, there was $22.1 million of total unrecognized compensation cost related
to unvested awards of stock options and RSUs. That cost is expected to be recognized over a
weighted-average period of 2.0 years.
During the three months ended March 31, 2009 and 2008, stock-based compensation expense
related to stock options, RSU and in 2008 restricted stock awards was $2.0 million and $1.8
million, respectively.
Stock Award Activity
A summary of the activity under the Companys stock option plans as of March 31, 2009 and
changes during the three-month period then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
Number of |
|
Exercise |
|
Remaining |
|
Aggregate |
|
|
Options |
|
Price |
|
Contractual |
|
Intrinsic |
|
|
Outstanding |
|
Per Share |
|
Term in Years |
|
Value |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
(in thousands) |
Options outstanding at December 31, 2008 |
|
|
13,424 |
|
|
$ |
2.80 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
614 |
|
|
|
2.16 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
96 |
|
|
|
1.55 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
109 |
|
|
|
2.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2009 |
|
|
13,833 |
|
|
|
2.78 |
|
|
|
|
|
|
$ |
10,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2009 |
|
|
10,398 |
|
|
|
2.72 |
|
|
|
|
|
|
$ |
9,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to
vest at March 31, 2009 (1) |
|
|
13,493 |
|
|
|
2.78 |
|
|
|
|
|
|
$ |
10,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the number of vested options as of March 31, 2009, plus the number of
unvested options expected to vest as of March 31, 2009, based on the unvested options
outstanding at March 31, 2009, adjusted for estimated forfeitures. |
During the three months ended March 31, 2009 and 2008, the total intrinsic value of options
exercised (i.e. the difference between the market price at exercise and the price paid by the
employee to exercise the options) was $0.1 million and $0.7 million, respectively, and the total
amount of cash received by the Company from exercise of these options was $0.1 million and $0.5
million, respectively.
A summary of the Companys restricted stock and restricted stock unit award activity for the
three months ended March 31, 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Weighted |
|
|
Share and |
|
Average Grant |
|
|
Unit Awards |
|
Date Fair Value |
|
|
Outstanding |
|
Per Share |
|
|
(in thousands) |
Non-vested awards outstanding at December 31, 2008 |
|
|
3,763 |
|
|
$ |
3.17 |
|
Awards granted |
|
|
2,973 |
|
|
|
2.60 |
|
Restrictions lapsed |
|
|
535 |
|
|
|
2.09 |
|
Awards forfeited |
|
|
60 |
|
|
|
3.60 |
|
|
|
|
|
|
|
|
|
|
Non-vested awards outstanding at March 31, 2009 |
|
|
6,141 |
|
|
$ |
2.98 |
|
|
|
|
|
|
|
|
|
|
12
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) Share Repurchase Program
On April 19, 2007 the Companys Board of Directors authorized a stock repurchase program
providing for the repurchase of up to $20.0 million of its outstanding common stock in the open
market or in privately negotiated transactions, at times and prices considered appropriate
depending on the prevailing market conditions. During the three months ended March 31, 2009, the
Company did not repurchase any shares of its common stock. Under the program to date, the Company
has repurchased 5,605,501 shares of its common stock at a cost of $11.8 million.
(5) Disclosures About Segments of an Enterprise
SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131),
establishes standards for reporting information regarding operating segments in annual financial statements.
SFAS 131 also requires related disclosures about products and services and geographic areas. Operating segments
are identified as components of an enterprise 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 for the three months ended March 31, 2009
and 2008 were approximately $13.6 million and $11.6 million, respectively. Revenues from
international sources were primarily generated from customers located in Europe. All of the
Companys product sales for the three months ended March 31, 2009 and 2008, were delivered from
ATGs headquarters located in the United States.
The following table represents the percentage of total revenue by geographic region for the
three months ended March 31, 2009 and March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
United States |
|
|
68 |
% |
|
|
68 |
% |
United Kingdom (UK) |
|
|
23 |
|
|
|
11 |
|
Europe, Middle East and Africa (excluding UK) |
|
|
8 |
|
|
|
18 |
|
Other |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
(6) Fair Value Measurement
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 clarifies the definition of fair value, prescribes methods for measuring fair value,
establishes a fair value hierarchy based on the inputs used to measure fair value and expands
disclosures about the use of fair value measurements. The adoption of SFAS 157 did not have a
material impact on the Companys fair value measurements.
As defined in SFAS 157, fair value is based on the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. In order to increase consistency and comparability in fair value measurements,
SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs
used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date
for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for
similar assets and liabilities or market corroborated inputs.
13
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Level 3: Unobservable inputs are used when little or no market data is available and requires the
Company to develop its own assumptions about how market participants would price the assets or
liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible in its
assessment of fair value.
The following table presents the Companys financial assets and liabilities that are carried
at fair value, classified according to the three categories described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2009 |
|
|
|
|
|
|
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 |
|
$ |
7,988 |
|
|
$ |
4,790 |
|
|
$ |
3,198 |
|
|
|
|
|
Short-term available-for-sale securities |
|
|
7,510 |
|
|
|
|
|
|
|
7,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
15,498 |
|
|
$ |
4,790 |
|
|
$ |
10,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys marketable securities investments consist of U.S. Treasury and U.S. government
agency securities, certificates of deposit, commercial paper, and corporate debt securities. The
fair value of the Companys marketable securities is based on a market approach utilizing quoted
market prices of identical instruments or other observable market inputs.
(7) Restricted Cash
At March 31, 2009, the Company has collateralized $1.7 million in outstanding letters of
credit with certificates of deposit. The collateral for the letters of credit is reflected on the Companys
balance sheet as restricted cash within short-term and long-term marketable securities dependent on the underlying term of the
lease. The letters of credit were issued in favor of various landlords to secure obligations under
ATGs facility leases pursuant to leases expiring through December 2011.
(8) Acquisitions CleverSet, Inc.
On February 5, 2008, the Company acquired all of the outstanding shares of common stock of
privately held eShopperTools.com, Inc., dba CleverSet (CleverSet) for a purchase price of approximately $9.4
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.
14
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2008, is presented after giving effect to certain
adjustments, primarily amortization of intangible assets. The unaudited consolidated pro forma
financial information is not necessarily indicative of the results that would have occurred had the
acquisition been in effect for the periods presented or of results that may occur in the future (in
thousands, except per share data):
|
|
|
|
|
|
|
For the three |
|
|
months ended |
|
|
March 31, |
|
|
2008 |
|
|
(Unaudited) |
Pro forma revenue |
|
$ |
36,628 |
|
Pro forma net loss |
|
$ |
(1,400 |
) |
Pro forma net loss per share basic and diluted |
|
$ |
(0.01 |
) |
(9) Commitments and Contingencies
Indemnifications
The Company in general agrees to indemnification provisions in its software license agreements
and real estate leases in the ordinary course of its business.
With respect to software license agreements, these indemnifications generally include
provisions indemnifying the customer against losses, expenses, and liabilities from damages that may be awarded against the
customer in the event the Companys software is found to infringe upon the intellectual property rights of others.
The software license agreements generally limit the scope of and remedies for such indemnification obligations
in a variety of industry-standard respects. The Company relies on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect its intellectual property rights. The Company
believes such laws and practices, along with its internal development processes and other policies and practices, limit
its exposure related to the indemnification provisions of the software license agreements. However, in recent years there
has been significant litigation in the United States involving patents and other intellectual property
rights. Companies providing Internet-related products and services are increasingly bringing and becoming subject to
suits alleging infringement of proprietary rights, particularly patent rights. From time to time, the Companys
customers have been subject to third party patent claims, and the Company has agreed to indemnify these customers from
claims to the extent the claims relate to our products.
With respect to real estate lease agreements or settlement agreements with landlords, these
indemnifications typically apply to claims asserted against the landlord relating to personal injury and property
damage at the leased premises or to certain breaches of the Companys contractual obligations or representations and
warranties included in the settlement agreements.
These indemnification provisions generally survive the termination of the respective
agreements, although the provision generally has the most relevance during the contract term and for a short period of time
thereafter. The maximum potential amount of future payments that the Company could be required to make under these
indemnification provisions is unlimited. The Company has purchased insurance that reduces its
monetary exposure for landlord indemnifications, and the Company has not recorded any claims or paid out any amounts
related to indemnification provisions in its real estate lease agreements.
15
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(10) Goodwill and Intangible Assets
Goodwill
The Company evaluates goodwill for impairment annually and whenever events or changes in
circumstances suggest that the carrying value of goodwill may not be recoverable. No impairment of
goodwill resulted from the Companys most recent evaluation of goodwill for impairment, which
occurred in the fourth quarter of fiscal 2008, nor in any of the periods presented. The Companys
next annual impairment assessment will be made in the fourth quarter of 2009. The following table
presents the changes in goodwill during fiscal 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Year Ended |
|
|
|
Ended March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Balance at the beginning of the year |
|
$ |
65,683 |
|
|
$ |
59,675 |
|
Acquisition of CleverSet |
|
|
|
|
|
|
8,138 |
|
Collection of accounts receivable previously reserved |
|
|
|
|
|
|
(121 |
) |
Release of valuation allowance against deferred tax assets related to
NOLs from the Primus acquisition(1) |
|
|
|
|
|
|
(2,009 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
65,683 |
|
|
$ |
65,683 |
|
|
|
|
|
|
|
|
(1) |
|
For further discussion see note 6 of the notes to consolidated financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2008 filed with the United States
Securities and Exchange Commission.
|
Intangible Assets
The Company reviews identified intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability
of these assets is measured by comparison of their carrying value to future undiscounted cash flows
the assets are expected to generate over their remaining economic lives. If such assets are
considered to be impaired, the impairment to be recognized in the statement of operations equals
the amount by which the carrying value of the assets exceeds their fair value determined by either
a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.
Intangible assets, which will continue to be amortized, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Customer relationships |
|
$ |
11,660 |
|
|
$ |
(9,138 |
) |
|
$ |
2,522 |
|
|
$ |
11,660 |
|
|
$ |
(8,600 |
) |
|
$ |
3,060 |
|
Developed technology |
|
|
9,710 |
|
|
|
(6,089 |
) |
|
|
3,621 |
|
|
|
9,710 |
|
|
|
(5,770 |
) |
|
|
3,940 |
|
Trademarks |
|
|
1,400 |
|
|
|
(700 |
) |
|
|
700 |
|
|
|
1,400 |
|
|
|
(630 |
) |
|
|
770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
22,770 |
|
|
$ |
(15,927 |
) |
|
$ |
6,843 |
|
|
$ |
22,770 |
|
|
$ |
(15,000 |
) |
|
$ |
7,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized based upon the pattern of estimated economic use or on a
straight-line basis over their estimated useful lives, which range from 1 to 5 years. Amortization
expense related to intangibles was $0.9 million and $1.1 million for the three month periods ended
March 31, 2009 and 2008, respectively.
The Company expects amortization expense for these intangible assets to be (in thousands):
|
|
|
|
|
Remainder of 2009 |
|
$ |
2,455 |
|
2010 |
|
|
2,709 |
|
2011 |
|
|
1,006 |
|
2012 |
|
|
673 |
|
|
|
|
|
Total |
|
$ |
6,843 |
|
16
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(11) Income Taxes
For the three months ended March 31, 2009, the Company recorded an income tax provision of
$0.3 million. This relates to U.S. federal alternative minimum tax, state and foreign income taxes
as well as interest related to uncertain tax positions. For the three months ended March 31, 2008,
the Company recorded an income tax provision of $0.2 million which related to foreign taxes on
earnings in certain of our foreign subsidiaries as well as interest and penalties related to
uncertain tax positions.
As of December 31, 2008, ATG 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 managements assessment as of December 31, 2008 of the Companys
expected future results of operations. As a result, during the fourth quarter of 2008, the Company
reversed a total of $0.6 million of deferred tax asset valuation allowance. As of March 31, 2009,
there was no change in the valuation allowance compared with that provided for as of December 31,
2008.
The primary differences between book and tax income for 2009 are the amortization of
capitalized research and development expenses for tax purposes offset by increases in taxable
income relating to deferred revenue and stock based compensation deductions.
The Company considers it 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.
(12) Litigation
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. The parties have reached a global
settlement of the litigation. Under the settlement, which remains subject to Court approval, the
insurers would pay the full amount of settlement share allocated to Primus, and Primus would bear
no financial liability. Primus, as well as the officer defendants who were previously dismissed
from the action pursuant to tolling agreements, would receive complete dismissals from the case. It
is uncertain whether the settlement will receive final Court approval. If the settlement does not
receive final Court approval, and litigation continues, 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
17
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
which it is alleged that the patent rights of others are infringed by the Companys products or
services. Any litigation over intellectual property rights, whether brought by the Company or by
others, could result in the expenditure of significant financial resources and the diversion of
managements time and efforts. In addition, litigation in which the Company or its customers are
accused of infringement might cause product shipment or service delivery delays, require the
Company to develop alternative technology or require the Company to enter into royalty or license
agreements, which might not be available on acceptable terms, or at all. ATG could incur
substantial costs in prosecuting or defending any intellectual property litigation. These claims,
whether meritorious or not, could be time consuming, result in costly litigation, require expensive
changes in the Companys methods of doing business or could require the Company to enter into
costly royalty or licensing agreements, if available. As a result, these claims could harm the
Companys business.
The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a material negative impact on the Companys financial position, results of operations, consolidated
balance sheets and cash flows, due to defense costs, diversion of management resources and other factors.
18
ART TECHNOLOGY GROUP, INC.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
This Managements Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with our condensed consolidated financial statements and the notes
contained in Item 1 of this Quarterly Report on Form 10-Q. The following discussion contains
forward-looking statements. See Risk Factors elsewhere in this Quarterly Report on Form 10-Q 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 site-delivered 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 site-delivered 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.
19
ART TECHNOLOGY GROUP, INC.
Key measures that we use to evaluate our performance:
The change to our business model has required our management to re-consider the measures that
we use to evaluate our business results. In addition to the traditional measures of financial performance
that are reflected in our results of operations determined in accordance with GAAP, we also monitor certain non-GAAP
financial measures 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:
|
|
|
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. |
|
|
|
|
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. |
|
|
|
|
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. |
|
|
|
|
We use revenue and gross margins on our various lines of business to measure our success at
meeting cash and non-cash cost and expense targets in relation to revenue earned. |
|
|
|
|
We use days sales outstanding (DSO), calculated by dividing accounts receivable 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.
20
ART TECHNOLOGY GROUP, INC.
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 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 four to 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 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 remained at 32% in 2009, the same percent as in the comparable prior year period. The increase in sales
activity in the United Kingdom drove foreign sales to remain stable as a percent of total revenue.
The impact of sales activity in the United Kingdom was partially offset by the impact of changes in
foreign currency exchange rates. In the second half of 2008 through March 31, 2009, 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 for the remainder of 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
21
ART TECHNOLOGY GROUP, INC.
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.
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.
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, research and development costs, the impairment of long-lived
assets and goodwill, income taxes and assumptions for stock-based compensation. Management bases
its estimates and judgments on historical experience, known trends or events and various other
factors that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We define our critical accounting policies as those that require us to make subjective
estimates about matters that are uncertain and are likely to have a material impact on our
financial condition and results of operations or that concern the specific manner in which we apply
GAAP. Our estimates are based upon assumptions and judgments about matters that are highly
uncertain at the time the accounting estimate is made and applied and require us to assess a range
of potential outcomes.
For a description of the critical accounting policies that we consider to be both those most
important to the portrayal of our financial condition and those that require the most subjective
judgment, see our Annual report on Form 10-K for the year ended December 31, 2008, under the
heading Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates. During the three months ended March 31, 2009, we
determined that we have a sufficient history of successfully collecting, without concessions,
accounts receivable involving extended credit terms of up to twelve months granted to a specific
class of customer to conclude that the fees due under such arrangements may be considered to be both fixed and
determinable and probable of collection. Consequently, the fees under
such arrangements may be recognized as revenue assuming other
criteria for recognition are met. As a
result, ATG recognized approximately $2.9 million in revenue in the first quarter
of 2009 that previously would have been deferred until the payment
became due. As of the date of
this report there has been no other material change in any of the critical accounting policies and
estimates described in our Annual Report on Form 10-K.
22
ART TECHNOLOGY GROUP, INC.
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 unaudited condensed
consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q 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.
Our standard payment terms are normally within 90 days. In some circumstances we provide extended
payment terms, and in certain cases consider amounts payable beyond 90 days but less than 12 months
to be fixed and determinable. Significant judgment is involved in assessing whether a fee is fixed
or determinable. Our experience has been that we are generally able to determine whether a fee is
fixed or determinable.
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.
We have determined that we have a sufficient history of successfully collecting, without
concessions, accounts receivable involving extended credit terms of up to twelve months granted to
a specific class of customer that the fees due under such arrangements may be considered to be both
fixed and determinable and probable of collection, such that they may be recognized as revenue
assuming other criteria for recognition are met. We monitor our ability to collect amounts due
under the stated contractual terms of such arrangements and to date have not experienced any
material concessions from this class of customer. Significant judgment is involved in assessing
whether a contract amendment constitutes a concession. If we no longer were to have a history of
collecting under the original contract terms of such arrangements without providing concessions, we
might be required to recognize revenue from future such arrangements only when cash is received,
assuming the other criteria for recognition have been 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.
23
ART TECHNOLOGY GROUP, INC.
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.
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.
24
ART TECHNOLOGY GROUP, INC.
Results of Operations
The following table sets forth statement of operations data as a percentage of total revenue
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2009 |
|
|
2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
Product licenses |
|
|
31 |
% |
|
|
26 |
% |
Recurring services |
|
|
55 |
|
|
|
57 |
|
Professional and education services |
|
|
14 |
|
|
|
17 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
Cost of Revenue: |
|
|
|
|
|
|
|
|
Product licenses |
|
|
1 |
|
|
|
1 |
|
Recurring services |
|
|
21 |
|
|
|
21 |
|
Professional and education services |
|
|
13 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
35 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
65 |
|
|
|
59 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
18 |
|
|
|
19 |
|
Sales and marketing |
|
|
29 |
|
|
|
32 |
|
General and administrative |
|
|
11 |
|
|
|
12 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
58 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
7 |
|
|
|
(3 |
) |
Interest and other income, net |
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes |
|
|
8 |
|
|
|
(1 |
) |
Provision for income taxes |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
|
7 |
% |
|
|
(2 |
)% |
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, our cost of our revenue as a percentage
of the related revenue and the related gross margins:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2009 |
|
|
2008 |
|
Cost of product license revenue |
|
|
3 |
% |
|
|
4 |
% |
Gross margin on product license revenue |
|
|
97 |
|
|
|
96 |
|
|
|
|
|
|
|
|
Cost of recurring services revenue |
|
|
39 |
|
|
|
36 |
|
Gross margin on recurring services revenue |
|
|
61 |
|
|
|
64 |
|
|
|
|
|
|
|
|
Cost of professional and education services revenue |
|
|
90 |
|
|
|
109 |
|
Gross margin on professional and education services revenue |
|
|
10 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
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
25
ART TECHNOLOGY GROUP, INC.
license business that we added in the period.
The following table summarizes and reconciles to our product licenses revenue, as reported
under US GAAP, our product license bookings for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
Product license bookings |
|
$ |
12,348 |
|
|
$ |
11,448 |
|
Increase in product license deferred revenue |
|
|
(4,686 |
) |
|
|
(5,693 |
) |
Product license deferred revenue recognized |
|
|
5,268 |
|
|
|
3,502 |
|
|
|
|
|
|
|
|
Product license revenue |
|
$ |
12,930 |
|
|
$ |
9,257 |
|
|
|
|
|
|
|
|
Product license bookings increased $0.9 million, or 8%, to 12.3 million in 2009 from $11.4
million in 2008. The increase reflects growth in the demand for our e-commerce solutions and the success of our
sales and marketing initiatives.
Product license bookings deferred was 38%, and 50% of our total product license bookings for
2009 and 2008, respectively. The deferral of bookings is due to the inclusion of e-commerce
optimization services or application hosting for which we do not have VSOE of fair value, or due to
extended payment terms, or other elements in our contracts that preclude recognition of revenue at
the time of booking. Deferred revenue will be recognized in future periods when delivery of the
service commences or as contractual requirements are met.
Product license deferred revenue recognized was $5.3 million and $3.5 million in 2009 and
2008, respectively. The increase in 2009 reflects the ratable revenue recognition of cumulative
additions to deferred product license revenue that have occurred since 2007.
We expect second quarter 2009 product license bookings to be in the range of $15.7 million to $16.9
million.
Revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
Total revenue |
|
$ |
41,911 |
|
|
$ |
36,530 |
|
Total revenue increased $5.4 million, or 15%, to $41.9 million for the three months ended
March 31, 2009 from $36.5 million for the three months ended March 31, 2008. 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 2009 includes an increase of $3.6 million, or 39%, in
product license revenue and a $2.2 million, or 11%, increase in recurring services revenue.
Partially offsetting the increase was a $0.4 million, or 6%, decline in professional and education
services revenue.
Revenue generated from international customers increased to $13.6 million, or 32%, of total
revenues, for the three months ended March 31, 2009, from $11.6 million, or 32% of total revenues,
for the three months ended March 31, 2008.
No customer accounted for 10% or more of total revenue in the three month period ended March
31, 2009 or March 31, 2008.
We expect second quarter 2009 revenues to be in the range of $42.5 million to $45.0 million.
26
ART TECHNOLOGY GROUP, INC.
Product Licenses Revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
Product license revenue |
|
$ |
12,930 |
|
|
$ |
9,257 |
|
|
|
|
|
|
|
|
As a percent of total revenue |
|
|
31 |
% |
|
|
26 |
% |
Product license revenue increased 39% to $12.9 million for the three months ended March 31,
2009 from $9.3 million for the three months ended March 31, 2008. The increase for the three month
period ended March 31, 2009 reflects a $0.9 million increase in product license bookings compared
to the three months ended March 31, 2008 resulting from growth in demand for our e-commerce
solutions and the success of our sales and marketing initiatives. The increase was also
attributable to a $1.8 million increase in the recognition of product license deferred revenue,
reflecting the ratable recognition of cumulative additions to deferred product license revenues
that have occurred since 2007, and a $1.0 million decrease in the amount of product license
bookings that were deferred in the quarter as compared to the first quarter of 2008. Product
license revenue generated from international customers was $6.7 million, or 52%, for the three
months ended March 31, 2009 compared to $3.4 million, or 37%, for the three months ended March 31,
2008.
We expect product license revenues to be in the range of $13.5 million to $14.2 million in the
second quarter of 2009.
Recurring services revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(dollars in thousands) |
Support and maintenance |
|
$ |
11,378 |
|
|
$ |
10,657 |
|
e-Commerce optimization services and
managed application hosting services |
|
|
11,725 |
|
|
|
10,286 |
|
|
|
|
|
|
|
|
Total recurring services revenue |
|
$ |
23,103 |
|
|
$ |
20,943 |
|
|
|
|
|
|
|
|
As a percent of total revenue |
|
|
55 |
% |
|
|
57 |
% |
|
|
|
|
|
|
|
Our recurring services revenue increased 11% to $23.1 million for the three months ended March
31, 2009 from $20.9 million for the three months ended March 31, 2008, as follows:
|
|
|
Support and maintenance revenue increased 7% to $11.4 million for the three months ended
March 31, 2009 from $10.7 million for the three months ended March 31, 2008. The increase is
due to growth in our installed base of ATG e-commerce software partially offset by the
effect of a strengthening dollar as compared to the British Pound and Euro. The change in
currency conversion rates from first quarter 2008 to 2009 reduced our support and
maintenance revenue by approximately $0.3 million. |
|
|
|
|
e-Commerce optimization services and managed application hosting services revenue
increased 14% to $11.7 million in 2009 from $10.3 million in 2008. This is driven by growth
in the average contract size of customers purchasing eStara e-commerce optimization services
and increased utilization by our existing customer base. The change in currency conversion
rates reduced revenue from the first quarter of 2008 to 2009 partially offset our revenue
increase by approximately $0.3 million. |
We expect recurring services revenues to be in the range of $23.0 million to $24.0 million in
the second quarter of 2009.
27
ART TECHNOLOGY GROUP, INC.
Professional and education services revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
Professional and education services revenue |
|
$ |
5,878 |
|
|
$ |
6,330 |
|
|
|
|
As a percent of total revenue |
|
|
14 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
Professional and education services revenue decreased 6% to $5.9 million, or 14% of total
revenue, for the three months ended March 31, 2009 from $6.3 million, or 17% of total revenue, for
the three months ended March 31, 2008. 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 6% in 2009 from 2008. Included in professional and education
services revenue for 2009 and 2008, respectively, was $0.8 million and $0.2 million of revenue
related to government funded research business acquired with CleverSet.
We expect professional and education services revenue to be in the range of $6.0 million to
$7.0 million in second quarter of 2009.
28
ART TECHNOLOGY GROUP, INC.
Cost of product license revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
Cost of product license revenue |
|
$ |
390 |
|
|
$ |
387 |
|
As a percent of license revenue |
|
|
3 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
Gross margin on product license revenue |
|
$ |
12,540 |
|
|
$ |
8,870 |
|
As a percent of license revenue |
|
|
97 |
% |
|
|
96 |
% |
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.
Cost of recurring services revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
Cost of recurring services revenue |
|
$ |
8,897 |
|
|
$ |
7,606 |
|
As a percent of recurring services revenue |
|
|
39 |
% |
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
Gross margin on recurring services revenue |
|
$ |
14,206 |
|
|
$ |
13,337 |
|
As a percent of recurring services revenue |
|
|
61 |
% |
|
|
64 |
% |
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 17% to $8.9 million in 2009 from $7.6 million in
2008. Gross
margin on recurring services revenue was 61%, or $14.2 million for 2009 compared to 64%, or $13.3
million for
2008.
The increase in cost of recurring services and the resulting decline in gross margin
percentage on recurring
services for 2009 was due to a $0.3 million increase in labor related costs from additional
investment in our
application hosting services infrastructure, a $0.3 million increase in outside services and a $0.2
million increase in depreciation expense related to fixed assets acquired to support growth in the
business.
During the three months ended March 31, 2009, we capitalized $0.1 million in certain internal
use software development costs related to our hosting services in accordance with AICPA Statement
of Position 98-1, Accounting for Computer Software Developed or Obtained for Internal Use (SOP
98-1).
29
ART TECHNOLOGY GROUP, INC.
Cost of professional and education services revenue
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
Cost of professional service revenue |
|
$ |
5,302 |
|
|
$ |
6,914 |
|
As a percent of recurring professional service revenue |
|
|
90 |
% |
|
|
109 |
% |
|
|
|
|
|
|
|
|
|
Gross margin on recurring services revenue |
|
$ |
576 |
|
|
$ |
(584 |
) |
As a percent of recurring services revenue |
|
|
10 |
% |
|
|
(9 |
)% |
Cost of professional and education services revenues includes salary, benefits, and
stock-based compensation
and other costs for professional services and technical support staff and third-party contractors.
Cost of professional and education services revenue decreased 23% to $5.3 million for 2009
from $6.9 million
for 2008. The decrease in cost of professional and education services for 2009 was driven by a $2.2
million decrease
in labor related costs. 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 $0.3 million increase in 2009 in the recognition of costs previously deferred compared
with the 2008 period and the increase of of $0.6 million in contract related expenses related to
government funded research.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2009 |
|
March 31, 2008 |
|
|
(dollars in thousands) |
Research and development expenses |
|
$ |
7,470 |
|
|
$ |
7,021 |
|
As a percent of total revenue |
|
|
18 |
% |
|
|
19 |
% |
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 costs in the period incurred.
Research and development expenses increased 7% to $7.5 million in 2009 from $7.0 million in
2008 and
decreased slightly as a percent of revenue to 18% of revenue due to revenue growth in 2009. The
increase in research and development spending was driven by an increase of $0.6 million in labor
related costs from 2008 to develop the capacity of the organization. As a result of the growth in
the research and development organization depreciation and allocated infrastructure costs increased
$0.1 million in 2009 from the prior year driven by capital expenditures in 2009 and 2008.
30
ART TECHNOLOGY GROUP, INC.
Sales and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
Sales and marketing expenses |
|
$ |
12,288 |
|
|
$ |
11,537 |
|
As a percent of total revenue |
|
|
29 |
% |
|
|
32 |
% |
Sales and marketing expenses consist primarily of salaries, commissions, benefits, and
stock-based
compensation and other related costs for sales and marketing personnel, travel, public relations
and marketing
materials and events. 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 7% to $12.3 million for the three months ended March
31, 2009 from $11.5 million for the three months ended March 31, 2008, and declined as a percentage
of total revenue to 29%. The increase in spending was due to an increase in labor related cost of
$0.8 million as a result of hiring additional sales personnel. This increase was partially offset
by a decline in marketing expenses of $0.1 million in 2009.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2009 |
|
March 31, 2008 |
|
|
(dollars in thousands) |
General and administrative expenses |
|
$ |
4,489 |
|
|
$ |
4,329 |
|
As a percent of total revenue |
|
|
11 |
% |
|
|
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 5% to $4.5 million in 2009 from $4.3 million in 2008,
and
decreased as a percentage of total revenue to 11% from 12%. The increase in 2009 of $0.2 million
was due to increased stock-based compensation, outside services, and depreciation, partially offset
by lower salaries and related costs.
We expect total operating expenses to be in the range of $25.0 million to $27.0 million in the
second quarter of 2009.
Stock-Based Compensation Expense
On January 1, 2006, we adopted the Financial Accounting Standards Boards Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, using the
modified prospective transition method. We are using the straight-line attribution method to
recognize stock-based compensation expense for non-performance-based grants and the accelerated
method for performance-based executive grants. Stock-based compensation cost is calculated on the
date of grant based on the fair value of stock options as determined by the Black-Scholes valuation
model, or the fair value of our common stock for issuances of restricted stock and restricted stock
units. Stock-based compensation expense for the three months ended March 31, 2009 and 2008 was $2.0
million and $1.8 million, respectively, and is reflected in our costs and expenses above based on
the function of the relevant personnel.
As of March 31, 2009, the total compensation cost related to unvested awards not yet
recognized in the statement of operations was approximately $22.1 million, which will be recognized
over a weighted average period of approximately 2.0 years.
31
ART TECHNOLOGY GROUP, INC.
Interest and Other Income, Net
Interest and other income net decreased to $0.2 million for the three months ended March 31,
2009 from $0.6 million for the three months ended March 31, 2008. The decrease was primarily due
to lower foreign currency exchange gains on remeasuring foreign currency denominated assets and
liabilities in 2009 than in 2008. Additionally, the decrease included lower net realized income on
foreign currency based transactions. We incurred a foreign currency exchange gain of $20,000 in
2009 compared to gains of $37,000 in 2008. The foreign currency based gains and losses are driven
by the movement of the U.K. Pound Sterling and the Euro compared to the US Dollar. 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 $6.5 million in 2009 to $67.9 million at March 31, 2009 from
$61.4 at December 31, 2008.
Provision for Income Taxes
For the three months ended March 31, 2009, we recorded an income tax provision of $0.3
million. This relates to U.S. federal alternative minimum tax, state and foreign income taxes as
well as interest related to uncertain tax positions. For the three months ended March 31, 2008, we
recorded an income tax provision of $0.2 million which related to foreign taxes on earnings in
certain of our foreign subsidiaries as well as interest and penalties related to uncertain tax
positions.
As of December 31, 2008, we determined that our 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 the our expected future results of
operations. As a result, during the fourth quarter of 2008, we reversed a total of $0.6 million of
deferred tax asset valuation allowance. As of March 31, 2009, there was no change in the
valuation allowance compared with that provided for as of December 31, 2008.
The primary differences between book and tax income for 2009 are the amortization of
capitalized research and development expenses for tax purposes offset by increases in taxable
income relating to deferred revenue and stock based compensation deductions.
We consider it reasonably possible that our 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.
Liquidity and Capital Resources
Our capital requirements relate primarily to facilities, employee infrastructure and working
capital requirements. Our primary sources of liquidity for the three months ended March 31, 2009
were our cash, cash equivalents, and short and long-term marketable securities of $67.9 million.
Cash provided by operating activities was $8.1 million for the three months ended March 31,
2009, an increase of approximately $1.0 million from comparable prior year period.
|
|
|
Our net income of $3.0 million included non-cash expenses for depreciation and
amortization of $2.3 million, and stock-based compensation expense of $2.0 million. |
|
|
|
|
Cash flows from accounts receivable were $4.5 million in 2009 compared to $3.7 million in
2008. This improved cash flow is due to improved collection of outstanding accounts
receivable, which resulted in a decline in days sales outstanding to 66 days at March 31,
2009 compared to 91 days at December 31, 2008. The decline in the accounts receivable
balance was accomplished notwithstanding a 15% increase in sales growth from the comparable
prior year period. |
32
ART TECHNOLOGY GROUP, INC.
|
|
|
Cash outflows due to accrued expenses and accounts payable were $2.0 million in 2009, an
increase in outflows of $0.8 million compared to 2008, due to higher operating expenses in
2009 and more timely vendors payments. |
|
|
|
|
Deferred revenue decreased $2.0 million during the period. 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 March 31, 2009 were subject to our collection process
and, to
the extent collected, are in our cash flow from operations. |
Net cash provided by investing activities for the three months ended March 31, 2009 was $2.0
million, which consisted of $3.3 million in net sales and maturities of marketable securities,
partially offset by $1.3 million of capital expenditures, primarily computer equipment and software
for our managed application hosting services business.
Net cash provided from financing activities was minimal for the three months ended March 31,
2009. Financing activities consisted primarily of proceeds from exercised stock options and the
employee stock purchase plan, net of tax withholding payments made on behalf of employees
participating in the grant of restricted stock units.
On April 19, 2007 our Board of Directors authorized a stock repurchase program providing for
repurchases of our outstanding common stock of up to $20.0 million, in the open market or in
privately negotiated transactions, at times and prices considered appropriate depending on
prevailing market conditions. During the three months ended March 31, 2009 we repurchased no shares
of our common stock. 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 March 31, 2009.
We believe that our balance of $67.9 million in cash, cash equivalents and marketable
securities, including $1.3 million of restricted cash at March 31, 2009, 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.
33
ART TECHNOLOGY GROUP, INC.
Accounts Receivable and Days Sales Outstanding
Information about our accounts receivable balance and days sales outstanding and modified days
sales outstanding for the quarter ended March 31, 2009 and December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of and for the |
|
|
Quarter Ended |
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(Dollar amounts in thousands) |
Days sales outstanding |
|
|
66 |
|
|
|
70 |
|
Revenue |
|
$ |
41,911 |
|
|
$ |
45,397 |
|
Accounts receivable, net |
|
$ |
30,582 |
|
|
$ |
35,109 |
|
Modified days sales outstanding (1) |
|
|
69 |
|
|
|
82 |
|
Accounts receivable less than 60 days |
|
|
91 |
% |
|
|
88 |
% |
|
|
|
(1) |
|
Modified days sales outstanding are computed by adjusting total revenue for the change in
deferred revenue, that result is then divided by the days in the period, 90 days each quarter, to
calculate revenue per day; the accounts receivable balance is then divided by revenue per day. |
We evaluate our performance on collections on a quarterly basis. As of March 31, 2009, our
days sales outstanding decreased from December 31, 2008 due to collections on support and
maintenance renewals as well as the effect of receiving payments on sales that were made during the
current and previous quarter.
Our standard payment terms are
normally within 90 days. In certain circumstances we may provide to customers
with superior credit extended payment terms of up to 12 months. We have concluded that we have a
sufficient history of successfully collecting, without concessions, accounts receivable involving
extended credit terms of up to twelve months granted to a specific class of customer that the fees
due under such arrangements may be considered to be both fixed and determinable and probable of
collection, such that they may be recognized as revenue assuming other criteria for recognition are
met. We monitor our ability to collect amounts due under the stated contractual terms of such
arrangements and to date have not experienced any material concessions from this class of customer.
Accounts receivable due under arrangements involving payment terms of greater than 90 days and less
than 12 months were approximately $3.8 million and $0.0 million at March 31, 2009 and December 31,
2008, respectively.
Restricted Cash
At March 31, 2009, we have collateralized $1.7 million in outstanding letters of credit with
certificates of deposit. The collateral for the letters of credit is reflected on our 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 our facility leases pursuant to leases expiring through December 2011.
Recent Accounting Pronouncements
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.
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.
34
ART TECHNOLOGY GROUP, INC.
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. With the
adoption of Statement 141(R), we no longer reduce goodwill when utilizing net operating loss carry
forwards for which a full valuation allowance, exists as was required under Statement 141. While
there is no expected impact to our consolidated financial statements on the accounting for
acquisitions completed prior to December 31, 2008, the adoption of Statement 141(R) on January 1,
2009 could materially change the accounting for business combinations consummated subsequent to
that date.
Item 3. 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 March 31, 2009 and December 31, 2008 primarily due to their short
maturity and our intent to hold the securities to maturity. There have been no significant changes
since March 31, 2009.
The majority of our operations are based in the U.S., and accordingly, the majority of our
transactions are
denominated in U.S. dollars. However, we have foreign-based operations where transactions are
denominated in
foreign currencies and are subject to market risk with respect to fluctuations in the relative
value of foreign
currencies. Our primary foreign currency exposures relate to our short-term intercompany balances
with our foreign
subsidiaries and accounts receivable valued in the United Kingdom in U.S. dollars. Our primary
foreign subsidiaries
have functional currencies denominated in the British pound and Euro, and foreign denominated
assets and liabilities are remeasured each reporting period with any exchange gains and losses
recorded in our consolidated statements of operations. Based on currency exposures existing at
March 31, 2009 and December 31, 2008, a 10% movement in foreign exchange rates would not expose us
to significant gains or losses in earnings or cash flows. We may use derivative instruments to
manage the risk of exchange rate fluctuations. However, at March 31, 2009, we had no outstanding
derivative instruments. We do not use derivative instruments for trading or speculative purposes.
35
ART TECHNOLOGY GROUP, INC.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of ATGs disclosure controls and procedures as of March 31,
2009. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and
other procedures of a company that are designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure controls and procedures
as of March 31, 2009, our Chief Executive Officer and Chief Financial Officer concluded that, as of
such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
36
ART TECHNOLOGY GROUP, INC.
PART II. OTHER INFORMATION
Item 1. 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. The parties have reached a global settlement of the litigation. Under the settlement, which
remains subject to Court approval, the insurers would pay the full amount of settlement share
allocated to Primus, and Primus would bear no financial liability. Primus, as well as the officer
defendants who were previously dismissed from the action pursuant to tolling agreements, would
receive complete dismissals from the case. It is uncertain whether the settlement will receive
final Court approval. If the settlement does not receive final Court approval, and litigation
continues, we believe we have meritorious defenses and intend to defend the case vigorously. While
we cannot predict the outcome of the litigation, we do not expect any material adverse impact to
our business, or the results of our operations, from this matter.
Our industry is characterized by the existence of a large number of patents, trademarks and
copyrights, and by
increasingly frequent litigation based on allegations of infringement or other violations of
intellectual property rights. Some of our competitors in the market for e-commerce software and
services have filed or may file patent
applications covering aspects of their technology that they may claim our technology infringes.
Such competitors
could make claims of infringement against us with respect to our products and technology.
Additionally, third parties who are not actively engaged in providing e-commerce products or
services but who hold or acquire patents upon which they may allege our current or future products
or services infringe may make claims of infringement against us or our customers. Our agreements
with our customers typically require us to indemnify them against claims of intellectual property
infringement resulting from their use of our products and services. We periodically receive notices
from customers regarding patent license inquiries they have received which may or may not implicate
our indemnity obligations, and we and certain of our customers are currently parties to litigation
in which it is alleged that the patent rights of others are infringed by our products or services.
Any litigation over intellectual property rights, whether brought by us or by others, could result
in the expenditure of significant financial resources and the diversion of managements time and
efforts. In addition, litigation in which we or our customers are accused of infringement might
cause product shipment or service delivery delays, require us to develop alternative technology or
require us to enter into royalty or license agreements, which might not be available on acceptable
terms, or at all. We could incur substantial costs in prosecuting or defending any intellectual
property litigation. These claims, whether meritorious or not, could be time-consuming, result in
costly litigation, require expensive changes in our methods of doing business or could require us
to enter into costly royalty or licensing agreements, if available. As a result, these claims could
harm our business.
The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a
material negative impact on our results of operations, consolidated balance sheets and cash flows,
due to defense
costs, diversion of management resources and other factors.
37
ART TECHNOLOGY GROUP, INC.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2008, which could materially affect our business, financial condition or
future results. To the best of our knowledge, as of the date of this report there has been no
material change in any of the risk factors described in that Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 19, 2007, our Board of Directors authorized a stock repurchase program providing for
repurchases of our outstanding common stock of up to $20.0 million, in the open market or in
privately negotiated transactions, at times and prices considered appropriate depending on the
prevailing market conditions. We made no repurchases of our common stock during the three-month
period ended March 31, 2009.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
38
ART TECHNOLOGY GROUP, INC.
Item 6. Exhibits
|
|
|
Exhibits |
|
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit
4.1 to our Registration Statement on Form S-8 dated June 12, 2003). |
|
|
|
3.2
|
|
Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to our Current
Report on Form 8-K filed on April 23, 2008). |
|
|
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4.1
|
|
Rights Agreement dated September 26, 2001 with EquiServe Trust Company, N.A. (incorporated
by reference to Exhibit 4.1 to our Current Report on Form 8-K dated October 2, 2001). |
|
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10.1
|
|
Agreement and Plan of Merger dated January 19, 2008 by and among Art
Technology Group, Inc., Einstein Acquisition Corp., eShopperTools.com,
Inc., Scott Anderson, as stockholder representative, and the principal
stockholders identified on Schedule I thereto (without
exhibits)(incorporated by reference by Exhibit 10.1 to our Current
Report on Form 8-K filed on January 25, 2008). |
|
|
|
10.2
|
|
2009 Executive Management Compensation Plan
(incorporated by reference to Exhibit 99.1 to our
Current Report on Form 8-K filed on March 30, 2009).* |
|
|
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10.3
|
|
Form of Restricted Stock Unit Agreement with
Performance-Based Vesting entered into on March 27,
2009 with each of the Companys executive officers
(incorporated by reference to Exhibit 99.2 to our
Current Report on Form 8-K filed on March 30, 2009).* |
|
|
|
10.4
|
|
Form of Restricted Stock Unit Agreement with
Time-Based Vesting entered into on March 27, 2009
with each of the Companys executive officers
(incorporated by reference to Exhibit 99.3 to our
Current Report on Form 8-K filed on March 30, 2009).* |
|
|
|
31.1
|
|
Certification of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14 and
15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Principal Financial and Accounting Officer Pursuant to Exchange Act Rules
13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Management contract or compensatory plan. |
39
ART TECHNOLOGY GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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ART TECHNOLOGY GROUP, INC.
(Registrant)
|
|
|
By: |
/s/ ROBERT D. BURKE
|
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Robert D. Burke |
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President and Chief Executive Officer
(Principal Executive Officer) |
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|
By: |
/s/ JULIE M.B. BRADLEY
|
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Julie M.B. Bradley |
|
|
|
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer) |
|
Date:
May 8, 2009
40