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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / 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)
Delaware 04-3141918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 First Street, Cambridge, Massachusetts 02141
Jeet Singh
Chief Executive Officer
Art Technology Group, Inc.
25 First Street
Cambridge, Massachusetts 02141
(617) 386-1000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: |X| No: |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any attachment to
this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $ based on the closing price of the Common Stock on
the NASDAQ National Market on March , 2001.
The number of shares of the registrant's Common Stock outstanding as of
March , 2001, was .
Documents Incorporated by Reference
DOCUMENT DESCRIPTION 10-K PART
-------------------- ---------
Portions of the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held May 14, 2001................. III
ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-K
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
Signatures
PART I
Item 1 BUSINESS
Overview
We offer an integrated suite of Internet customer relationship management and
e-commerce software applications, as well as related application development,
integration and support services. Our solution enables businesses to understand,
manage and build online customer relationships and to market, sell and support
products and services over the Internet more effectively. Our Dynamo product
suite includes an application server that is specifically designed to enable and
support Web applications, as well as e-commerce and Internet customer management
applications. An application server is a software program that facilitates the
development, deployment and management of other software programs. Our solution
is designed to provide businesses with the core application platform and
software tools required to develop and deploy personalized, reliable,
large-scale Web sites for conducting e-commerce.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The emergence of the Internet as a global medium for interactive communications
and commerce is fundamentally changing the way business is conducted. The
Internet is enabling businesses to attract and retain customers, conduct
e-commerce with those customers, and communicate with employees, suppliers and
strategic partners. The Internet is providing the opportunity for businesses to
establish new revenue streams, create a new distribution channel, reduce costs
and increase customer retention. This opportunity has driven the growth in
online marketing and e-commerce initiatives. International Data Corporation
estimates that more than $2.6 trillion worth of goods and services will be sold
over the Internet by 2004, which represents a compounded annual growth rate of
82% for the period between 1999 and 2004.
As the growth and acceptance of online marketing and e-commerce have increased,
the World Wide Web has become a highly competitive business environment where
customers have a large number of easily accessible choices. For a company to
succeed in this environment, its Web site must present content and provide an
overall visitor experience that captures the visitor's interest and satisfies
their informational and transactional needs. To accomplish this, companies are
investing in Internet-based customer relationship management and e-commerce
solutions, such as:
- online marketing and selling systems to target, attract and retain
customers;
- transaction and distribution management systems to reduce the costs
of delivering products and services to customers and distribution
partners; and
- customer support and relationship management systems to better
understand and serve the ongoing needs of their customers.
EMERGING E-COMMERCE REQUIREMENTS
Many commercial Web sites present only a static collection of non-interactive
content. These sites offer basic content, such as corporate information, product
literature and banner advertisements, which are passively viewed by Web
visitors. While this information is useful, many Web visitors prefer dynamic
content, which is continually updated and enhanced, as well as interactive
content, which responds and changes based on the user's input. Many Web visitors
also prefer Web sites that personalize their experience and present more
relevant content based on their existing relationship with the business, stated
or implied preferences and needs, Web navigation behavior and other factors. To
attract, serve and retain customers online, businesses must engage visitors with
dynamic, relevant and targeted experiences, which often lead to transactional
opportunities.
Businesses are seeking Web-based systems that can be dynamically updated and
integrated, sharing data among Web applications and across their entire
enterprises in order to present users with a personalized, consistent and
unified customer experience. The desired result is a customer-driven Web site
that takes into account the particular customer's profile, Web behavior and
relationship with the company. Customer-driven Web sites can provide
businesses with an efficient means to manage and maximize customer
relationships online. In order to accomplish this, businesses require
solutions that incorporate a number of features:
- EFFECTIVE CONTROL OF E-COMMERCE SYSTEMS AND STRATEGIES. Business
managers responsible for Internet customer relationship management
need easy-to-use tools to give them direct control over their
e-commerce systems and strategies without requiring the
time-consuming intervention of information technology specialists.
With the appropriate tools, business managers can better manage
their Internet customer relationships through improved customer
segmentation and delivery of targeted content, promotions and
advertising campaigns, and personalized pricing and account
information.
- INTEGRATION WITH EXISTING INFORMATION SYSTEMS. In order to present
the customer with a unified and personalized e-commerce experience,
companies must address the difficult challenge of integrating Web
applications with their existing content management, customer
database, transaction and customer support systems.
- COMMON PLATFORM UPON WHICH TO BUILD FUTURE APPLICATIONS. Businesses
implementing sophisticated Web-based applications desire an
expandable Web platform to enable them to build new applications and
add third-party functionality to their e-commerce initiatives on a
rapid and ongoing basis.
- SCALABILITY, PERFORMANCE AND RELIABILITY. The increasing
significance of Web-based commerce requires that e-commerce systems
be highly scalable in order to accommodate rapid user growth and
increased Web site complexity, content and functionality.
Scalability refers to the ability of a computer system to handle
greater load by adding additional hardware. Further, companies need
high performance and highly reliable systems because if online
systems fail or cause unsatisfactory delays, even for a short period
of time, businesses could miss revenue opportunities and lose
customers.
CURRENT SOLUTIONS
In response to these emerging business requirements, various applications have
been developed that address discrete aspects of the enterprise e-commerce
infrastructure. A number of vendors offer stand-alone solutions for Web content
management, advertising management, transaction processing, e-commerce
storefront development, personalization and recommendation engines, and
application development tools. By implementing a collection of these stand-alone
solutions, companies can attempt to deliver dynamic, personalized content to Web
site visitors and manage their e-commerce efforts. However, these stand-alone
solutions may not provide a satisfactory solution for many businesses:
- LACK OF INTEGRATED FUNCTIONALITY. Disparate stand-alone applications
generally do not easily integrate and communicate with each
other, lack a common user interface and lack a common platform
for integrating with existing information systems. As a result, a
collection of stand-alone applications often does not present the
Web visitor with a unified customer experience and may sacrifice
functionality and performance.
- HIGH COST. It is frequently difficult and expensive for companies to
implement a solution consisting of a collection of disparate
stand-alone solutions from
multiple vendors, and these implementations frequently fail to
meet requirements. In addition, businesses often incur higher
costs of ownership over time as it is difficult for them to
manage the uncoordinated product upgrade cycles and new
application development efforts of multiple vendors.
Today, businesses increasingly seek an integrated package of applications,
platforms and tools that addresses all aspects of their enterprise e-commerce
infrastructure, rather than just stand-alone solutions. Some software providers
have developed more comprehensive solutions incorporating a number of e-commerce
functions. However, these solutions may be inadequate for a number of reasons:
- LIMITED FUNCTIONALITY. The functionality may be insufficient to
serve all of a company's e-commerce requirements, resulting in
the need to buy, build or adapt additional applications.
- LACK OF A MODULAR, APPLICATION SERVER-BASED ARCHITECTURE. These
solutions are typically not built with separate software modules
and lack the expandability that an application server-based
platform provides. This limits the ability of businesses to
customize their implementations, integrate their solutions with
existing applications and extend their e-commerce initiatives by
building future applications or incorporating third-party
technology.
- POOR SCALABILITY AND RELIABILITY. Most of today's computer systems
are unable to scale to meet the growing performance demands of
large-scale, e-commerce Web sites. Solutions that do not scale
well can be unreliable and subject to system failures, which may
result in frustrated customers, lost revenue opportunities and
potential financial losses.
To address the limitations of most commercially available solutions, some
companies have built custom Internet customer relationship management solutions
with application development tools. While these solutions can provide the
required functionality and integration, they typically require lengthy
implementation periods and are expensive to build and maintain. In addition,
they require a comprehensive understanding of market segmentation, content
targeting and advertising, as well as extensive technical expertise in Web
application development and systems integration. Most companies, and many
third-party systems integrators and application developers, do not have the
expertise and experience to address all of these requirements.
As a result, businesses are increasingly seeking Web application software
providers offering products and professional services that enable them to
rapidly deploy comprehensive, effective Internet customer relationship
management solutions. Businesses prefer solutions that are modular and flexible
with an open, application server-based architecture. They desire solutions that
are easy to integrate with existing systems and third-party applications and
that enable them to extend their Web infrastructures with new applications and
functionality to meet their continually evolving e-commerce needs. Businesses
also need to leverage their existing business systems, strategies and expertise
to manage their customer relationships effectively. Finally, businesses are
seeking solutions that meet the demanding scalability, reliability and
performance requirements of large-scale Web sites that conduct e-commerce.
OUR SOLUTION
We offer a suite of Internet customer relationship management and e-commerce
software applications, as well as related application development, integration
and support services. Our solution enables businesses to understand, manage and
build their online customer relationships more effectively and to market, sell
and support their products and services over the Internet.
Our product suite includes Dynamo Application Server, an application server
specifically designed to enable and support Web applications. Dynamo Application
Server is designed to provide businesses with the core application platform and
software tools required to develop and deploy personalized, effective e-commerce
Web sites. Our product suite also includes Dynamo Personalization Server, Dynamo
Scenario Server and Dynamo Commerce Server. Dynamo Personalization Server is an
expandable personalization platform that enables companies to target specific
content and data to particular customers or visitors on the Web. Dynamo Scenario
Server allows non-technical business managers to define e-business scenarios,
which are scripted sequences of customer interactions that manage ongoing
business relationaships. Dynamo Commerce Server manages and delivers product
catalog content and personalized, scenario-based merchandising programs and
provides transaction processing capabilities for large-scale e-commerce
storefronts.
Our solution incorporates the following distinguishing characteristics:
AN INTEGRATED AND MODULAR PRODUCT SUITE BASED ON A COMMON PLATFORM. Our product
suite includes a comprehensive range of functionality that allows businesses to
quickly develop and deploy personalized Web-based e-commerce applications. Our
application server-based platform enables our Dynamo applications to share data
and work together more efficiently than would a collection of discrete Web
applications from different vendors using various technologies. An integrated
product suite based on a common platform also ensures that new products and
releases will be compatible with each other as well as with other applications
built on Dynamo Application Server. The modularity of our product suite allows
customers to purchase applications that fit their particular needs and allows
them to quickly expand their implementations as required.
RULES-BASED PERSONALIZATION IMPLEMENTED BY BUSINESS MANAGERS. Our products allow
business managers to apply new and pre-existing business rules to profile and
segment users and dynamically deliver personalized content and data to online
visitors. For example, businesses can present different prices, products and
promotional offers to different visitors or they can deliver customer-specific
information such as account detail and purchase history. Business managers can
review the behavior of visitors and quickly adjust their business rules to
manage their online marketing communications and e-commerce strategies.
E-BUSINESS SCENARIO-BASED CUSTOMER INTERACTION. Our products allow non-technical
business managers to define, manage and analyze customer interactions that take
place across both Web and non-Web based communication channels. For example, a
business manager can use a point-and-click visual interface to create an
e-business scenario that reacts to a new customer visit by offering an incentive
to sign up as a registered user. If the user takes advantage of the offer by
registering, the scenario might pause for several weeks and send a personalized
e-mail reminding the user to return. Finally, the scenario might be configured
to trigger a follow-up phone call after several repeat visits to enable a
customer care representative to build a more personal relationship with a highly
qualified customer.
HIGH SCALABILITY, RELIABILITY AND PERFORMANCE. Our Dynamo Application Server
employs a Java-based architecture that is highly scalable. It has a dynamic load
management system which allows applications to be distributed across multiple
server computers. This means that as a Web site becomes more heavily utilized,
additional computing resources can be added to handle the additional load. The
load management system provides redundant fail-over, a feature that transfers
users on a failed server to another server without interruption. Dynamo
Application Server has been designed to meet the performance requirements of
high-capacity, highly personalized e-commerce Web sites.
OPEN AND EXPANDABLE APPLICATION SERVER ARCHITECTURE. Our Dynamo Application
Server provides customers with an expandable platform that allows them to
rapidly integrate our products with their existing systems and to deploy new
applications, both internally developed and from third parties. The ability to
integrate multiple applications and information systems with our common platform
enables businesses to incorporate organization-wide customer data and support
systems to provide a unified customer experience. In addition,
our open, application server-based platform and the modularity of our product
suite enable systems integrators and technology partners to develop their own
proprietary applications on Dynamo for reuse or resale.
PROFESSIONAL SERVICES CAPABILITIES. We have been designing and deploying
network-based applications for over eight years and Web sites for over five
years. We have two primary service offerings, Innovation Solutions and Express
Services. Our Innovation Solutions team provides customized application design,
development and integration services to clients who desire advanced solutions
that are not commercially available. We provide Innovation Solutions services
for a limited number of projects that we believe will provide us with an
understanding of emerging technical and business needs for our future products.
Our Express Services team provides strategic consulting and integration support
services to customers and systems integrators to facilitate the deployment of
our products. Express Services provides system architecture design, project
management, Web design and technical training and support.
Our solution provides our customers with:
EFFECTIVE, HIGH-PERFORMANCE E-COMMERCE WEB SITES THAT ARE:
- dynamically generated and personalized on a real-time basis
- highly functional with comprehensive e-commerce features
- able to personalize content based on easily modifiable business rules
- able to increase customer satisfaction and retention
- able to present a unified, customer-centric experience by integrating
various sources of customer data and content and leveraging existing
information systems
- designed by business managers to further their overall business
strategies
THE ABILITY TO ACHIEVE RAPID TIME TO MARKET BY:
- deploying our comprehensive suite of integrated applications
- enabling rapid integration with existing information systems
- taking advantage of our intuitive user interfaces for business managers
and application developers
- utilizing our experienced consulting services professionals
THE ABILITY TO ACHIEVE A COMPETITIVE ADVANTAGE AND A HIGHER RETURN ON INVESTMENT
BY:
- increasing e-commerce and advertising revenues
- improving marketing effectiveness
- reducing marketing, transaction and customer support costs
- increasing customer satisfaction and retention
STRATEGY
Our objective is to be a leading provider of Internet customer relationship
management solutions. To achieve this objective, we have adopted the following
strategies:
MAINTAIN AND EXTEND PRODUCT AND TECHNOLOGY LEADERSHIP. We believe we are a
technology leader in providing Internet customer relationship management
solutions. We offer a comprehensive suite of software applications that we
believe are based on an advanced technologies. We were one of the first
companies to market a high-performance dynamic Web page generation engine to
both generate and deliver Web pages on a real-time basis, and shipped our
first Java-based Web application server shortly after Sun Microsystem's first
commercial shipment of Java 1.0. In September 2000 we began shipping Dynamo 5
E-Business Platform, which we believe was the first fully certified J2EE
customer management solution to be commercially available. We intend to
extend our product and technology leadership by:
- extending Dynamo's personalization capabilities and building new
Internet customer relationship management applications
- continuing to increase the scalability, reliability and performance of
our Dynamo applications
- continuing to develop new connector modules to allow our products to
easily integrate with third-party Internet customer relationship
management products, databases and information systems
- providing Dynamo Application Server support for emerging industry
standards, such as XML,for formatting data and other information, and
WML, for serving content to wireless devices;and
- using our Innovation Solutions services to identify emerging market
needs.
GROW AND LEVERAGE PROFESSIONAL SERVICE CAPABILITIES. We have extensive
experience in Web application development and integration services. Through our
Express Services, we provide enabling services to train our systems integrators
and technology partners in the use of our products as well as consulting
services to assist with customer implementations. We plan to create additional
opportunities to increase revenues from product sales by continuing to expand
our base of partners trained in the implementation and application of Dynamo. We
intend to hire additional professional services personnel to increase our
services revenues and to enable and support product license sales through
systems integrators.
CONTINUE TO BUILD DIRECT SALES CAPABILITIES AND LEVERAGE CO-SELLING EFFORTS WITH
SYSTEMS INTEGRATORS AND WEB DEVELOPERS. We sell our products directly to
end-users and through co-selling efforts with systems integrators and Web
developers. We currently have more than 250 system integrators and technology
partners, including Adobe Systems, Cap Gemini Ernst & Young, CSC, Deloitte
Consulting, E.piphany, E-Tree, Fort Point Partners, PricewaterhouseCoopers and
Sun Microsystems. Our objective is to establish close relationships directly
with our customers and to motivate systems integrators to implement the Dynamo
technology and product suite on Internet and Web-based projects for their
customers. We intend to expand our sales by hiring additional direct sales
personnel, domestically and internationally, both to sell directly to end-users
and to expand our co-selling efforts. We plan to leverage our current
relationships and develop additional co-selling relationships with leading
systems integrators. In addition, many of our systems integrators are global
enterprises, which we believe provides us with an opportunity to expand our
international business.
EXPAND TECHNOLOGY PARTNER AND ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
AS A DISTRIBUTION CHANNEL. Our technology partners include Adobe Systems,
Documentum, E.piphany, Interwoven and Sun Microsystems. We work with some of our
technology partners to develop modules that enable our software products to
operate with their software products. We also work with original equipment
manufacturers to enable them to combine our software products with their
products to form a single software application product. Some of our customers
have requirements that can be met by a combination of our products and
those of one or more of our partners. We sell in conjunction with these vendors
in a variety of ways:
- co-marketing with a technology partner to promote the fact that our
products operate together;
- co-selling with a partner in an arrangement where sales and service
personnel from both organizations approach a customer in a coordinated
sales process
- selling to reseller partners; and
- selling to original equipment manufacturers that sell and support the
combined product.
Many of our current and potential partners are looking to extend their current
offerings to include Web-enablement, personalization and e-commerce features. We
believe these relationships will provide us the opportunity to establish our
platform in additional markets.
EXPAND MARKET PRESENCE. We intend to increase our domestic and international
market presence through a variety of marketing and sales programs designed to
generate market awareness, penetrate target markets and help establish us as the
leading provider of Internet customer relationship management solutions. We plan
to increase spending on advertising, trade shows, seminars, industry events and
direct marketing efforts. We also plan to devote marketing resources to
expanding our channel relationships with systems integrators and technology
partners. We intend to develop and promote the Dynamo brand alongside our
partners' brands in all co-marketing relationships.
PURSUE STRATEGIC ACQUISITIONS. We intend to pursue acquisitions of, or,
investments in, complementary businesses and technologies. In particular, we
will seek to identify opportunities to acquire personnel that will help us
increase the breadth of our solution, provide us with additional technological
expertise and expand our geographical presence.
PRODUCTS
We offer an integrated suite of Internet customer relationship management
applications. Our core product is Dynamo Application Server, a dynamic Web page
generation engine and application server specifically designed to enable and
support Web applications, that provides businesses with the platform and
software tools to develop and deploy personalized, effective e-commerce Web
sites. Our product suite also includes Dynamo Personalization Server, Dynamo
Scenario Server, and Dynamo Commerce Server. Each of the applications in our
product suite can be purchased separately; however, the Dynamo Application
Server is required to run each of our other applications. Dynamo Personalization
Server is required to run Dynamo Scenario Server, and Dynamo Scenario Server is
required to run Dynamo Commerce Server. We also sell software tools to enable
rapid application development, as well as adaptor modules to integrate dynamo
products with content management systems. Our product suite is designed to meet
the performance and scalability requirements of large-scale e-commerce Web
sites. All of our products are based on Java.
The following table briefly describes the product included in our Dynamo 5
e-Business Platform, including list prices and system requirements.
PRODUCT DESCRIPTION LIST PRICE AND REQUIREMENTS
APPLICATION SUITE
Dynamo Application Server An open and expandable Java-based platform $15,000 per CPU.
designed for the development and
deployment of high-performance, dynamic
Web applications.
Dynamo Personalization Server A platform designed to allow businesses to $20,000 per CPU; requires Dynamo
manage customer profiling and dynamic Application Server.
content targeting. Ensures that the right
content gets to the right users at the
right time.
Dynamo Scenario Server A platform for defining, delivering and $30,000 per CPU; requires Dynamo
analyzing E-business scenarios, which Application Server and Dynamo
are customized sequences of targeted Personalization Server.
interactions that allow businesses to
create customer relationships across
the entire lifecycle.
Dynamo Commerce Server A complete storefront solution for $35,000 per CPU; requires Dynamo
business-to-consumer and Application Server, Dynamo Personalization
business-to-business e-commerce. Enables Server and Dynamo Scenario Server.
businesses to create personalized shopping
experiences within a complete, rapidly
deployable online selling environment.
TOOLS AND INTEGRATION MODULES
Dynamo Control Center An integrated interface to the Single-seat licenses are included with the
administrative, development and business servers listed above. $4,000 per seat for
tools in the Dynamo E-Business Platform. additional users.
Dynamo Connectors Adaptors that provide direct integration $10,000 per CPU.
with leading content management systems
and other enterprise applications.
DYNAMO APPLICATION SERVER. The Dynamo Application Server is designed to provide
businesses with the core application platform and software tools required to
develop, deploy and manage personalized, effective Web sites for conducting
business on the Internet. The Dynamo Application Server provides a common
application platform for:
- dynamically generating Web pages and managing user sessions;
- supplying a framework of shared application services to connect and
integrate each of the applications in our product suite;
- managing the distribution of applications across multiple computers and
providing an automatic recovery management system to prevent system
failures; and
- efficiently connecting to enterprise systems and third-party
applications.
Dynamo Application Server connects to Dynamo Control Center, a Web
application development tool that allows developers and Web designers to
build new applications and integrate third-party technologies.
DYNAMO PERSONALIZATION SERVER. Dynamo Personalization Server coordinates,
manages and centralizes the personalization functions of the Dynamo product
suite. Dynamo Personalization Server enables business managers to segment
users and target content based on new and pre-existing business rules. It
adjusts and personalizes Web content on a real-time basis by combining
explicit user data from existing customer management and marketing databases
with implicit information gathered on Web navigation behavior.
Dynamo Personalization Server performs the following functions:
- PROFILE GATHERING. When a visitor first arrives at a Web site, a
profile is created automatically for that visitor. If the visitor
registers or logs in, the visitor's identity is added to the
profile, preserving any profile information that was gathered up to
that point. Dynamo Personalization Server tracks both explicit user
profile data supplied by the user as well as implicit profile
attributes derived from the user's behavior on the Web site. This
information is combined with any existing information about the
visitor from the company's internal databases.
- SEGMENTATION AND CONTENT TARGETING. Dynamo Personalization Server
enables business managers to segment visitors based on their profile
data. Using business rules, content can be personalized and targeted
to these groups of users. These business rules are created using the
Dynamo Control Center.
- CONTENT MANAGEMENT AND INTEGRATION. In addition to using Dynamo
Personalization Server to target content residing on internal file
systems, customers may purchase Dynamo Connectors to integrate
Dynamo with leading content management systems and other enterprise
applications. The Dynamo Connectors provide direct integration to
leading content management systems such as those from Documentum and
OpenText.
- PERSONALIZED MESSAGING. Dynamo Targeted E-mail can be used with the
Dynamo Personalization Server to send personalized messages to
selected groups and individual Web site users.
DYNAMO SCENARIO SERVER. Dynamo Scenario Server provides a platform for
non-technical business managers to define, manage and analyze e-business
scenarios, which are planned sequences of interactions with a specific customer
or customer segment that enable businesses to manage long-term customer
relationships. E-business scenarios can span a wide variety of customer
interactions across multiple channels including customer acquisition and
retention, product discounts and promotions, cross-sell and up-sell incentives,
product fulfillment, and customer support functions. Dynamo Scenario Server
features include:
- "POINT-AND-CLICK" VISUAL INTERFACE. Dynamo Scenario Server features
a point-and-click visual interface, integrated in the Dynamo Control
Center, which enables non-technical business managers to define and
manage e-business scenarios by manipulating graphical scenario
elements. These elements include people, time, events, conditions
and actions. This visual interface allows the managers to create and
manage e-business initiatives without requiring skilled computer
programming personnel.
- TIGHT INTEGRATION WITH DYNAMO PERSONALIZATION AND COMMERCE SERVERS.
Dynamo Scenario Server is tightly integrated with the Dynamo
Personalization Server and Dynamo Commerce Server products, so that
e-business scenarios can automatically take advantage of information
and configurations in those products. For example, e-business
scenarios can be defined to only apply to customer segments that are
identified through the Dynamo Personalization Server. When used in
conjunction with Dynamo Commerce Server, e-business scenarios
automatically present commerce related events and actions such
as purchasing events and shopping cart discounts, integrated
reporting and graphing.
- SCENARIO TEMPLATES. Dynamo Scenario Server allows the creation and
use of Scenario Templates, which are reusable, pre-built e-business
scenarios that omit a small number of parameters. When a Scenario
Template is re-used, the business manager is asked for the omitted
parameters and the scenario is created. Scenario Templates enable
business managers to quickly initiate commonly used scenarios and to
simplify the creation of scenarios for less sophisticated users.
DYNAMO COMMERCE SERVER. Dynamo Commerce Server is a flexible solution enabling
businesses to deploy and manage large-scale, personalized, e-commerce
storefronts. Dynamo Commerce Server delivers product catalog content and
scenario-based, promotional merchandising programs to manage the online shopping
experience. It is designed to integrate with existing customer database,
inventory, order processing, payment and fulfillment systems operated by many
large organizations. In addition, Dynamo Commerce Server provides administration
features that allow e-commerce storefronts to be operated independently by
various managers throughout an organization. The Dynamo 5 version of Dynamo
Commerce Server offers gift registries, coupons, carts and shipping addresses,
support for multiple currencies and an improved administration interface. The
Dynamo Commerce Server is also tightly integrated with Dynamo Scenario Server so
that commerce transactions and merchandising features can interact effectively
with e-business scenarios. Dynamo Commerce Server features also include:
- COMPLETE E-COMMERCE STOREFRONT SOLUTION. Dynamo Commerce Server
provides a comprehensive set of e-commerce storefront functions
including catalog, shopping cart, order processing, built-in search
capabilities and user registration. Business managers can customize
the layout, look and feel, navigation and functionality of their
storefronts through point and click interfaces and through
customized Web page templates. Dynamo Commerce Server supports both
business-to-business and business-to-consumer e-commerce.
- ENVIRONMENT FOR PERSONALIZED SELLING. Web sites built on Dynamo
Commerce Server can be designed to deliver targeted merchandising
campaigns based on user profiles gathered through Dynamo
Personalization Server and driven by e-business scenarios defined
through Dynamo Scenario Server. Since Dynamo Commerce Server uses
both implicit and explicit profiles, content can be targeted to both
anonymous and recognized visitors. Reporting functionality allows
marketing personnel to gather real-time feedback on the
effectiveness of various targeting and merchandising strategies.
- FLEXIBLE ORDER PROCESSING. Dynamo Commerce Server provides core
order processing functionality that can be integrated with a wide
variety of transaction models and existing business processes.
Through the use of our integration modules, customers can
incorporate business systems into the order processing flow at a
number of stages as products are browsed, selected and purchased.
- CUSTOMIZATION, MAINTAINABILITY AND DAY-TO-DAY MANAGEMENT. Dynamo
Commerce Server allows business managers, designers and programmers
to independently maintain and manage the various aspects of the Web
site relating to their particular expertise. Dynamo Commerce Server
has an administrative interface, integrated into the Dynamo Control
Center, so business managers can control product presentation,
pricing and promotions. Designers can directly customize Web site
templates upon which the site is built. The open, modular
architecture makes it easy for programmers to extend and modify
functionality. This separation simplifies deployment and ongoing
maintenance.
SERVICES
We provide a variety of consulting, design, application development,
integration and training and support services in conjunction with our
products through our Innovation Solutions and Express Services offerings.
INNOVATION SOLUTIONS. Innovation Solutions services consist of customized
application design, development and integration services and are ordinarily
provided on a fixed-price basis. We have extensive experience in developing,
designing and deploying large-scale Web applications. Our Innovation Solutions
services are provided to clients with complex requirements that seek advanced
solutions that are not commercially available to extend the capabilities and
features of their systems. As well as being a core component of our business,
Innovation Solutions projects provide us with an understanding of emerging
customer requirements and insights for new product developments. We typically
select projects that we believe may provide the technical and functional
foundation for our future products and services.
EXPRESS SERVICES. Express Services consist of high level consulting and enabling
support services such as system architectural design, project management, Web
site design, and technical training and support. Express Services are ordinarily
provided on a time and materials basis. Our Express Services are provided to
assist systems integrators, development partners and customers to rapidly
develop and deploy Dynamo-based applications and systems. Our objective is to
deploy our Express Services quickly and efficiently to reduce the time and
effort required by our partners and customers to successfully deploy Dynamo
applications. Our Express Services are priced on a per day basis.
CUSTOMER SUPPORT AND MAINTENANCE. We offer five levels of customer support
ranging from our evaluation support program, which is available for 30 days,
to our Premier Support Program, which includes telephone support 24 hours a
day, seven days per week, for customers deploying mission critical
applications. Customers are entitled to receive software updates, maintenance
releases and technical support for an annual maintenance fee of 20% to 30% of
the then-current list price of the licensed product.
TRAINING. We provide a broad selection of training for customers and partners,
including programming classes covering all of the components of our product
suite. Training is priced on a per day basis. Fees vary for standard public
training classes and on-site private training classes.
CUSTOMERS
We have delivered e-business solutions to more than 660 companies worldwide.
Our principal target markets are Global 2000 companies, as published by
Forbes, as well as leading companies using the Internet as a primary business
channel. Our customers represent a broad spectrum of enterprises within
diverse industry sectors. The following is a partial list of customers that
have purchased licenses and/or professional services from us:
CONSUMER RETAIL MANUFACTURING
BlueLight.com 3M
CareSoft Abbott Laboratories
J.Crew Eastman Kodak
Target Procter & Gamble
Walgreens TECHNOLOGY
FINANCIAL SERVICES BellSouth
John Hancock Funds, Inc. Informix
KeyBank Network Solutions
Scudder Kemper Investments Newbridge Networks
INTERNATIONAL Sun Microsystems
Direckt Analge Bank TRAVEL, MEDIA AND ENTERTAINMENT
Gameplay BMG Direct
Kingfisher Hilton Hotels
INTERNET MTVi
Loudcloud Sony Online Entertainment
TechRepublic
TheStreet.com
TECHNOLOGY
We believe we are a technology leader in providing Internet customer
relationship management solutions. Our technology leadership has been
evidenced by product awards and recognition by industry commentators. We
believe our technology enables our customers to create, deploy and maintain
large-scale, personalized e-commerce Web applications in less time and at a
lower cost than existing alternatives. We believe that our products have the
following technological advantages:
JAVA FOUNDATION
Our products are written entirely in Java and support Java programming for
customization and extension, except for a few integration and installation
modules that can be implemented only in conventional programming languages.
We have performed internal tests to certify that our Dynamo 5 e- Business
Platform supports the J2EE standards established by Sun Microsystems.
We believe that our Java implementation results in the following benefits:
- STRONG COMPONENT MODEL. Java provides a component standard known as
"JavaBeans," which enables developers to segment their code into
discrete, well-defined units which can be assembled in a "building
block" fashion to create new applications. JavaBeans' modularity
makes it easier to create reusable software as well as maintain
existing systems.
- PLATFORM NEUTRALITY. Java's portability allows our applications to
be run on virtually any major computer system without modification.
This portability eliminates porting costs normally required to
support multiple platforms or to change platforms, while allowing us
to release products on major platforms simultaneously.
- ENTERPRISE INTEGRATION. We believe that Java's portability and
direct support for distributed applications are helping Java to
become the de facto standard language for enterprise system
integration. We expect that Sun Microsystems' establishment of J2EE
standards will make integration even easier for those enterprise
systems that support J2EE specifications.
- FEWER PROGRAMMING ERRORS. Java's automatic memory management reduces
memory corruption errors, which typically represent the most costly
and difficult software "bugs" in conventional compiled languages
such as C or C++.
- ACCELERATED DEVELOPMENT. We believe that the above features,
combined with the broad availability of high-quality Java
development tools, result in faster development time.
MODULAR, STANDARDS-BASED COMPONENT ARCHITECTURE
One of the key features of our product architecture is its high degree of
modularity, achieved by building additional functionality on top of the
JavaBeans component technology. Customizations and extensions built by our
customers or partners using industry standard JavaBean components can be
managed by Dynamo Application Server. Dynamo Application Server enhances the
naming, configuration and lifecycle of each component, allowing components to
be added, extended, duplicated or replaced without recompilation of the rest
of the system. The modularity of our component technology allows our products
to be adapted to meet future business needs. In contrast, producers of
non-modular products must try to anticipate and develop additional
functionality at the time that they market their products.
One of the most powerful uses of our component technology is to integrate our
software with external enterprise systems. We provide reference
implementations of integration components while enabling our customers and
partners to easily replace our reference components with new components that
provide the same function but integrate with their existing systems. We
adhere to industry standards to enable our products to leverage technologies
produced by third parties and to protect the development investments of our
partners and customers.
PERFORMANCE, SCALABILITY AND RELIABILITY
Our products have a layered architecture. Dynamo Personalization Server is
built on top of Dynamo Application Server, Dynamo Scenario Server is built on
top of Dynamo Personalization Server, and Dynamo Commerce Server is built on
top of Dynamo Scenario Server. We believe that the integration of Dynamo
Application Server with our other products yields significant benefits,
particularly in performance, scalability and reliability.
Dynamo Application Server uses page compilation technology to enhance the
performance of Web page generation. In most dynamic page generation servers,
a Web page is generated from an HTML template, a Web page that is mostly
standard HTML content with special embedded instructions to generate the
dynamic portions of the page. We utilize this basic page template model, but
unlike most other servers, Dynamo Application Server converts the HTML
template into Java source code and compiles it into executable binary
classes. This page compilation technology improves the speed at which Dynamo
Application Server can generate and serve dynamic Web pages.
Scalability is a term used to describe the ability of an application to
handle greater load when additional hardware is added to a system.
Scalability is particularly important for e-commerce applications where
demand can grow dramatically and unpredictably. Dynamo handles scalability
across computers through a dynamic session-based load management system in
which multiple copies of the application are run on multiple computers. This
load distribution scheme has the advantage of accommodating additional users
by adding more computers. Our load management technology also enables our
applications to handle computer hardware failures automatically and without
interrupting the user's experience. If a computer fails, users are
automatically reassigned to another running computer.
RESEARCH AND DEVELOPMENT
Our research and development group is responsible for product management,
core technology, product architecture, product development, quality
assurance, documentation and third-party software integration. This group
also assists with pre-sale and customer support activities referred from the
Express Services group and quality assurance tasks supporting the Innovation
Solutions group.
Since we began focusing on selling software products in 1996, the majority of
our research and development activities have been directed towards creating
new versions of our products which extend and enhance competitive product
features, particularly in the areas of integrating our products with external
enterprise systems, supporting emerging industry standards and creating more
powerful user interfaces to our products. The systems we integrate with
include relational databases, content management systems and credit card
payment servers. The industry standards we support include Java Servlets, a
standard for constructing Web pages using the Java programming language; J2EE
standards for developing modular Java programs that can be accessed over a
network; and Simple Network Management Protocol, a standard for remotely
monitoring the operation of a system.
SALES AND MARKETING
Our principal target markets are Global 2000 companies and leading companies
using the Internet as a primary business channel. We target these potential
customers through our direct sales force and through arrangements with
systems integrators, Web developers, original equipment manufacturers and
other technology partners. We currently have more than 250 system integrators
and technology partners.
We employ one group of sales professionals who are compensated based on
product sales made directly to end-users, a second group of regional service
account managers who are compensated based on service sales made directly to
end-users and a third group of sales professionals who are compensated based
on sales made through co-selling efforts with our systems integrator
partners. We train and assist systems integrators in promoting, selling,
deploying, extending and supporting our products. The objective of this
strategy is to establish close product relationships directly with our
customers and to motivate systems integrators to adopt the Dynamo technology
and suite of products on Internet and Web-based projects for their clients.
In addition, we have initiated a strategy to co-market our products with
technology partners and to sell our products through original equipment
manufacturers. We intend to increase sales of our products by entering into
similar relationships with additional technology partners and original
equipment manufacturers.
Our co-marketing relationships are with major systems integrators that serve
the market for information system products and services. The objective of
this co-marketing strategy is to motivate systems integrators to adopt the
Dynamo technology and suite of products on Web-based projects for their
clients. We train and assist our systems integration partners to enable them
to deploy, extend and support our products.
Set forth below is a partial list of organizations with which we have selling
and marketing relationships:
NORTH AMERICA Luminant
Adobe Systems marchFIRST
Cap Gemini Ernst & Young Modem Media
Centrifusion Organic
Context Integration PricewaterhouseCoopers
CSC Sapient
Deloitte Consulting Sun Microsystems
Documentum INTERNATIONAL
E.piphany Digital Channel Partners
Fort Point Partners E-TREE
Informix Fi SYSTEM
Inventa Icon Medialab
Interwoven MATERNA
iXL Quidnunc
KPMG
As of December 31, 2000, we had sales personnel located at our offices in
Australia, Canada, England, France, Germany, Hong Kong, Italy, the
Netherlands, Singapore and Sweden. During the past year, we have established
relationships with new international partners and have added key
international accounts. We intend to continue our international expansion by
working with additional global and local partners and by creating additional
local infrastructure to provide direct sales, service and marketing. While we
will continue to focus our international sales efforts principally on Europe,
we also will seek to expand our presence in the Asia/Pacific region,
including Japan and Singapore.
COMPETITION
The market for Internet customer relationship management solutions is
intensely competitive, subject to rapid technological change and
significantly affected by new product introductions and other market
activities of industry participants. We expect competition to persist and
intensify in the future. We have three primary sources of competition:
- in-house development efforts by potential customers or partners;
- Internet applications software vendors, such as Blue Martini,
BroadVision and Vignette; and
- platform application server products and vendors, such as BEA
Systems, IBM's Websphere products, and Microsoft, among others.
We also compete in the platform application server market with the Netscape/Sun
Alliance iPlanet Application Server product, which is partially controlled by
Sun Microsystems. Sun is one of our customers and co-marketing partners.
We believe the primary factors upon which we compete are the functionality
and expandability of our products, the extent to which our products integrate
with other systems, our prices and our ability to provide quality services to
assist our customers and partners. We believe that we have competitive
advantages that differentiate our products and services from those of our
competitors. Our application suite provides improved time-to-market and lower
cost of ownership in comparison to in-house development efforts. We believe
the expandability and scalability of our application server-based platform,
as well as our product features, provide us an advantage over other Internet
application software vendors. We believe the functionality provided by the
personalization and e-commerce components of the Dynamo application suite gives
us a competitive advantage over platform application server vendors.
Despite these advantages, many of our competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do. As a result, they may be able to undertake more
extensive promotional activities, offer more attractive pricing and purchase
terms, and bundle their products in a manner that would put us at a
competitive disadvantage.
Competition could materially and adversely affect our ability to obtain
revenues from license fees from new or existing customers and professional
services revenues from existing customers. Further, competitive pressures
could require us to reduce the price of our software products. In either
case, our business, operating results and financial condition would be
materially and adversely affected.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete depend on our ability to develop and
protect the proprietary aspects of our technology and to operate without
infringing on the proprietary rights of others. We rely on a combination of
trademark, trade secret and copyright law and contractual restrictions to
protect our proprietary technology. These legal protections afford only
limited protection for our technology. We seek to protect our source code for
our software, documentation and other written materials under trade secret
and copyright laws. We license our software pursuant to signed license,
"click through" or "shrink wrap" agreements, which impose restrictions on the
licensee's ability to use the software, such as prohibiting reverse
engineering and limiting the use of copies. We also seek to avoid disclosure
of our intellectual property by requiring employees and consultants with
access to our proprietary information to execute confidentiality agreements
and by restricting access to our source code. Due to rapid technological
change, we believe that factors such as the technological and creative skills
of our personnel, new product developments and enhancements to existing
products are more important than legal protections to establish and maintain
a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of
our software exists, software piracy can be expected to be a persistent
problem. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. However, the laws of many countries do
not protect proprietary rights to as great an extent as the laws of the
United States. Any such resulting litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
our business, operating results and financial condition. There can be no
assurance that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop similar
technology. Any failure by us to meaningfully protect our property could have
a material adverse effect on our business, operating results and financial
condition.
In addition, our software is written in the Java programming language
developed by Sun Microsystems and we incorporate J2EE, Java Runtime
Environment, Java Naming and Directory Interface, Java Servlet Development
Kit, Java Foundation Classes, JavaMail and JavaBeans Activation Framework
into our products under licenses granted to us by Sun. Our Dynamo 5 e
- -Business Platform has been designed to support Sun's J2EE standards. If Sun
were to decline to continue to allow us to use these technologies for any
reason, we would be required to (a) license the equivalent technology from
another source, (b) rewrite the technology ourselves, or (c) rewrite portions
of our software to accommodate the change or no longer use the technology.
EMPLOYEES
As of December 31, 2000, we had a total of 943 employees. Of our employees,
176 were in research and development, 324 in sales and marketing, 309 in
professional services and 134 in finance and administration. Our future
success will depend in part on our ability to attract, retain and motivate
highly qualified technical and management personnel, for whom competition is
intense. From time to time, we also employ independent contractors to support
our professional services, product development, sales, marketing and business
development organizations. Our employees are not represented by any
collective bargaining unit, and we have never experienced a work stoppage. We
believe our relations with our employees are good.
FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND STOCK PRICE
A NUMBER OF RISKS AND UNCERTAINTIES EXIST THAT COULD AFFECT OUR FUTURE
OPERATING RESULTS, INCLUDING THE FOLLOWING:
RISKS RELATED TO OUR BUSINESS
WE DO NOT BELIEVE WE WILL BE ABLE TO SUSTAIN OUR CURRENT REVENUE GROWTH RATE,
AND WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO SUSTAIN OR INCREASE
PROFITABILITY ON A QUARTERLY OR ANNUAL BASIS.
The second, third and fourth quarters of 2000 were our first profitable
quarters since inception. We have incurred substantial costs to develop and
enhance our technology and products, to recruit and train a marketing and
sales group, and to establish an administrative organization. As of December
31, 2000, we had an accumulated deficit of $14.4 million. We anticipate that
our operating expenses will increase as we continue to develop our
technology, increase our sales and marketing activities, create and expand
our distribution channels, expand our services capabilities and improve our
operational and financial systems. Although our revenues have grown
significantly in recent quarters, they have grown from a relatively small
base and, as a result, we do not believe that we will be able to sustain the
growth rates we have achieved in recent quarters. In addition, we believe the
current United States economic downturn will have an adverse effect on demand
for our products and services, and therefore adversely affect our revenues as
well. Because we have a limited operating history, particularly as a company
that sells software products, we have difficulty predicting our future
operating results and we cannot be certain that our revenues will grow at a
rate that will allow us to maintain profitability. In addition, we cannot be
certain that we will be able to sustain or increase profitability on a
quarterly or annual basis.
WE EXPECT OUR REVENUES AND OPERATING RESULTS TO FLUCTUATE, AND THE PRICE OF OUR
COMMON STOCK COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF
SECURITIES ANALYSTS.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. If our quarterly results fall below the expectations of
securities analysts, the price of our common stock could fall. A number of
factors are likely to cause variations in our operating results, including:
- demand for our products and services;
- the timing of sales of our products and services;
- the timing of customer orders and product implementations;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, product
development or administration;
- changes in the rapidly evolving market for Internet customer
relationship management solutions;
- the mix of revenues derived from products and services;
- timing of hiring and utilization of services personnel;
- cost overruns related to fixed-price services projects;
- the mix of domestic and international sales; and
- costs related to possible acquisitions of technologies or
businesses.
Accordingly, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. The results of one or a series of
quarters should not be relied upon as an indication of our future performance.
We plan to increase our operating expenses to expand our sales and marketing
operations, develop new distribution channels, fund greater levels of
research and development, broaden professional services and support and
improve our operational and financial systems. If our revenues do not
increase as quickly as these expenses, our operating results may suffer and
our stock price may decline.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS.
Our long sales cycle, which can range from several weeks to several months or
more, makes it difficult to predict the quarter in which sales may occur. We
have a long sales cycle because we generally need to educate potential
customers regarding the use and benefits of our products and services. Our
sales cycle varies depending on the size and type of customer contemplating a
purchase and whether we have conducted business with a potential customer in
the past. In addition, we believe the current economic downturn in the United
States has increased the average length of our sales cycle as customers have
deferred implementing new e-commerce solutions. We may incur significant
sales and marketing expenses in anticipation of licensing our products, and
if we do not achieve the level of revenues we expected, our operating results
will suffer and our stock price may decline. These potential customers
frequently need to obtain approvals from multiple decision makers prior to
making purchase decisions. Delays in sales could cause significant
variability in our revenues and operating results for any particular period.
THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS NEW AND
RAPIDLY EVOLVING AND WE CANNOT BE CERTAIN THAT A VIABLE MARKET FOR OUR PRODUCTS
WILL CONTINUE TO DEVELOP.
The market for Internet customer relationship management solutions is new and
rapidly evolving. We expect that we will continue to need intensive marketing
and sales efforts to educate prospective customers and partners about the
uses and benefits of our products and services. Accordingly, we cannot be
certain that a viable market for our products is sustainable. Organizations
that have already invested substantial resources in other methods of
conducting business may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing systems.
THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS INTENSELY
COMPETITIVE, AND WE EXPECT COMPETITION TO INTENSIFY IN THE FUTURE.
The market for Internet customer relationship management solutions is
intensely competitive and we expect competition to intensify in the future as
revenues generated from Internet commerce increase. This level of competition
could reduce our revenues and result in increased losses or reduced profits.
Our primary competition currently comes from in-house development efforts by
potential customers or partners, as well as from other vendors of Web-based
application software. We currently compete with Internet application software
vendors such as Blue Martini, BroadVision and Vignette. We also compete with
platform application server products and vendors such as BEA Systems, IBM's
Websphere products, Microsoft, and the Netscape/Sun Microsystems Alliance,
among others. Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources
than we do, and may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Also, many current and
potential competitors have greater name recognition and more extensive
customer bases that they can use to gain market share. These competitors may
be able to undertake more extensive promotional activities, adopt more
aggressive pricing policies and offer more attractive terms to purchasers
than we can. Moreover, our current and potential competitors, such as
Microsoft and the Netscape/Sun Microsystems Alliance, may bundle their
products in a manner that may discourage users from purchasing our products.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products and expand their markets. Accordingly, new competitors
or alliances among competitors may emerge and rapidly acquire significant
market share.
WE DEPEND ON OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS.
Since our potential customers often rely on third-party systems integrators
to develop, deploy and manage Web sites for conducting commerce on the
Internet, we cultivate relationships with systems integrators in order to
encourage them to support our products. If we do not adequately train a
sufficient number of systems integrators or if systems integrators were to
devote their efforts to integrating or co-selling different products, our
revenues could be reduced and our operating results could be harmed.
WE WILL NEED TO IMPLEMENT AND IMPROVE OUR OPERATIONAL SYSTEMS AND HIRE
ADDITIONAL SERVICE PROFESSIONALS ON A TIMELY BASIS IN ORDER TO MANAGE GROWTH.
We have expanded our operations rapidly in recent years. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities and to support our growing customer base. The number of
our employees increased from 324 on January 1, 2000 to 943 on December 31,
2000. Rapid growth places a significant demand on our management and
operational resources. In order to manage growth effectively, we must
implement and improve our operational systems, procedures and controls on a
timely basis. We plan in particular to expand our professional services
capabilities to support increased product license sales. However, we cannot
be certain that we will be able to attract a sufficient number of highly
qualified service personnel. In addition, new service personnel will require
training and it will take time for them to become productive. If we fail to
improve our operational systems or to expand our professional service
capabilities in a timely manner, we could experience customer
dissatisfaction, cost inefficiencies and lost revenue opportunities, which
could harm our operating results.
COMPETITION WITH OUR RESELLER PARTNERS COULD LIMIT OUR SALES OPPORTUNITIES AND
JEOPARDIZE THESE RELATIONSHIPS.
We sell products through resellers and original equipment manufacturers. In
some instances, we target our direct selling efforts toward markets that are
also served by some of these partners. This competition may limit our ability
to sell our products and services directly in these markets and may
jeopardize, or result in the termination of, these relationships.
OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF EITHER JEET SINGH OR
JOSEPH CHUNG, OUR CO-FOUNDERS, OR IF WE ARE UNABLE TO ATTRACT AND RETAIN OTHER
KEY PERSONNEL.
Our success depends largely on the skills, experience and performance of some
key members of our management, particularly our co-founders Jeet Singh and
Joseph Chung. If we lose one or more of our key employees, our business could
be harmed. We have purchased, and are the beneficiaries of, insurance
policies on the lives of Mr. Singh and Mr. Chung, each in the amount of
$1,000,000. Proceeds under this insurance may not cover our losses. In
addition, our future success will depend in large part on our ability to
continue attracting and retaining highly skilled personnel. Like other
software companies, we face intense competition for qualified personnel. We
may not be successful in attracting, assimilating and retaining qualified
personnel in the future.
WE NEED TO EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES IN ORDER TO INCREASE
MARKET AWARENESS OF OUR PRODUCTS AND INCREASE OUR REVENUES.
We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenues. We may not be
successful in these efforts. We have recently expanded our direct sales force
and plan to hire additional sales personnel. Our products and services
require a sophisticated sales effort targeted at the senior management of our
prospective customers. Newly hired employees will require training and it
will take time for them to achieve full productivity. We may be unable to
hire enough qualified individuals in the future, and newly hired employees
may not achieve necessary levels of productivity.
WE COULD INCUR SUBSTANTIAL COSTS PROTECTING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR DEFENDING AGAINST A CLAIM OF INFRINGEMENT.
Our Innovation Solutions services often involve the development of custom
software applications for specific customers. In some cases, customers retain
ownership or impose restrictions on our ability to use the technologies
developed from these projects. Issues relating to the ownership of software
can be complicated, and disputes could arise that affect our ability to
resell or reuse applications we develop for customers.
We seek to protect the source code for our proprietary software both as a
trade secret and as a copyrighted work. However, because we make the source
code available to some customers, third parties may be more likely to
misappropriate it. Our policy is to enter into confidentiality agreements
with our employees, consultants, vendors and customers and to control access
to our software, documentation and other proprietary information. Despite
these precautions, it may be possible for someone to copy our software or
other proprietary information without authorization or to develop similar
software independently.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We could incur
substantial costs to prosecute or defend any intellectual property
litigation. If we sue to enforce our rights, the litigation would be
expensive, would divert management resources and may not prevent other
parties from using our intellectual property without our permission. In
February 2000, we settled a lawsuit filed by BroadVision, which alleged that
we were infringing on a patent for a method of conducting e-commerce. As part
of the settlement, we agreed to pay BroadVision a total of $15.0 million in
license fees over a three-year period, of which $11 million had been paid as
of December 31, 2000.
In addition, we have agreed to indemnify customers against claims that our
products infringe the intellectual property rights of third parties. The
results of any intellectual property litigation to which we might become a
party may force us to do one or more of the following:
- cease selling or using products or services that incorporate the
challenged intellectual property;
- obtain a license, which may not be available on reasonable terms, to
sell or use the relevant technology; or
- redesign those products or services to avoid infringement.
IF WE FAIL TO ADAPT TO RAPID CHANGES IN THE MARKET FOR INTERNET CUSTOMER
RELATIONSHIP MANAGEMENT SOFTWARE, OUR EXISTING PRODUCTS COULD BECOME OBSOLETE.
The market for our products is marked by rapid technological change, frequent
new product introductions and Internet-related technology enhancements,
uncertain product life cycles, changes in customer demands and evolving
industry standards. We may not be able to develop and market new products or
product enhancements that comply with present or emerging Internet technology
standards. New products based on new technologies or new industry standards
could render our existing products obsolete and unmarketable. To succeed, we
will need to enhance our current products and develop new products on a
timely basis to keep pace with developments related to Internet technology
and to satisfy the increasingly sophisticated requirements of customers.
E-commerce technology is complex and new products and product enhancements
can require long
development and testing periods. Any delays in developing and releasing new or
enhanced products could cause us to lose revenue opportunities and customers.
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADDRESS THE CHALLENGES ASSOCIATED WITH
INTERNATIONAL OPERATIONS.
We have recently begun to invest significant financial and managerial
resources to expand our sales and marketing operations in international
markets. We currently maintain offices in Australia, Canada, England, France,
Germany, Hong Kong, Japan, the Netherlands, Singapore and Sweden. We derived
21% of our total revenues from customers outside North America for the year
ended December 31, 2000. We anticipate that revenues from customers outside
North America will account for an increased portion of our total revenues for
the foreseeable future. To date, however, we have limited experience in
international operations and may not be able to compete successfully in
international markets. Our operations outside North America are subject to
additional risks, including:
- unexpected changes in regulatory requirements, exchange rates,
tariffs and other barriers;
- longer payment cycles and problems in collecting accounts
receivable;
- political and economic instability;
- difficulties in managing system integrators and technology partners;
- difficulties in staffing and managing foreign subsidiary operations;
- differing technology standards;
- difficulties and delays in translating products and product
documentation into foreign languages;
- reduced protection for intellectual property rights in some of the
countries in which we operate or plan to operate;
- problems associated with the conversion of various European
currencies into a single currency, the euro; and
- potentially adverse tax consequences.
The impact of future exchange rate fluctuations on our operating results
cannot be accurately predicted. We may increase the extent to which we
denominate arrangements with international customers in the currencies of the
countries in which the software or services are provided. From time to time
we may engage in hedges of a significant portion of contracts denominated in
foreign currencies. Any hedging policies implemented by us may not be
successful, and the cost of these hedging techniques may have a significant
negative impact on our operating results.
WE USE THE JAVA PROGRAMMING LANGUAGE TO DEVELOP OUR PRODUCTS, AND OUR BUSINESS
COULD BE HARMED IF JAVA LOSES MARKET ACCEPTANCE OR IF WE ARE NOT ABLE TO
CONTINUE USING JAVA OR JAVA-RELATED TECHNOLOGIES.
We write our software in the Java computer programming language developed by
Sun Microsystems. While a number of companies have introduced Web
applications based on Java, Java could fall out of favor, and support by Sun
Microsystems or other companies could decline. Moreover, our new Dynamo 5
e-Business Platform is designed to support Sun's Java 2 Platform, Enterprise
Edition, or J2EE, standards for developing modular Java programs that can be
accessed over a network. We have licensed the J2EE brand and certification
tests from Sun. There can be no assurance that these standards will be widely
adopted, that we can continue to support J2EE standards established by Sun
from time to time or that the J2EE brand will continue to be made available
to us on commercially reasonable terms. If Java or J2EE support decreased or
we could not continue to use Java or related Java technologies or to support
J2EE standards, we might have to rewrite the source code for our entire
product line to enable our products to run on other computer platforms. Also,
changes to Java or J2EE standards or the loss of our license to the J2EE
brand could require us to change our products and adversely affect the
perception of our products by our customers. If we were unable to develop or
implement appropriate modifications to our products on a timely basis, we
could lose revenue opportunities and our business could be harmed.
OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE, OR PRODUCT LIABILITY CLAIMS WITH
SUBSTANTIAL LITIGATION COSTS.
Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. We began shipping our new application suite, Dynamo 5 e-Business
Platform, in September 2000. Despite internal testing and testing by
customers, our current and future products may contain serious defects.
Serious defects or errors could result in lost revenues or a delay in market
acceptance.
Since our customers use our products for critical business applications such
as e-commerce, errors, defects or other performance problems could result in
damage to our customers. They could seek significant compensation from us for
the losses they suffer. Although our license agreements typically contain
provisions designed to limit our exposure to product liability claims,
existing or future laws or unfavorable judicial decisions could negate these
limitations. Even if not successful, a product liability claim brought
against us would likely be time-consuming and costly.
IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT
COULD HURT OUR BUSINESS.
We acquired Petronio Technology Group in May 2000 for consideration of
approximately $1.2 million and The Toronto Technology Group in July 2000 for
consideration of approximately $12.0 million. In the future, we may pursue
additional acquisitions to obtain complementary businesses, products,
services or technologies. An acquisition may not produce the revenues,
earnings or business synergies that we anticipated, and an acquired business,
product, service or technology might not perform as we expected. If we pursue
an acquisition, our management could spend a significant amount of time and
effort in identifying and completing the acquisition. If we complete an
acquisition, we may encounter significant difficulties and incur substantial
expenses in integrating the operations and personnel of the acquired company
into our operations while preserving the goodwill of the acquired company. In
particular, we may lose the services of key employees of the acquired company
and we may make changes in management that impair the acquired company's
relationships with employees and customers.
Any of these outcomes could prevent us from realizing the anticipated
benefits of our acquisitions. To pay for an acquisition, we might use stock
or cash. Alternatively, we might borrow money from a bank or other lender. If
we use our stock, our stockholders would experience dilution of their
ownership interests. If we use
cash or debt financing, our financial liquidity would be reduced. Finally, if we
are unable to account for our acquisitions under the "pooling-of-interests"
method of accounting, which may be eliminated, we may be required to capitalize
a significant amount of intangibles, including goodwill, which may lead to
significant amortization charges. In addition, we may incur significant,
one-time write-offs and amortization charges. These amortization charges and
write-offs could decrease our future earnings or increase our future losses.
RISKS RELATED TO THE INTERNET INDUSTRY
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF E-COMMERCE.
Our success will depend heavily on the acceptance and wide use of the
Internet for e-commerce. The current United States economic downturn will
reduce demand for our products if customers and potential customers delay or
cancel the implementation of customer relationship management solutions.
Consumers and businesses may reject the Internet as a viable commercial
medium for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet infrastructure may not
be able to support the demands placed on it by increased usage. In addition,
delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity, or increased government
regulation, could cause the Internet to lose its viability as a commercial
medium. Even if the required infrastructure, standards, protocols and
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our solutions to changing or emerging
technologies.
REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS OR
INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF E-COMMERCE.
As e-commerce evolves, federal, state and foreign agencies could adopt
regulations covering issues such as user privacy, content and taxation of
products and services. If enacted, government regulations could limit the
market for our products and services or could impose burdensome requirements
that render our business unprofitable. Although many regulations might not
apply to our business directly, we expect that laws regulating the
solicitation, collection or processing of personal and consumer information
could indirectly affect our business. The Telecommunications Act of 1996
prohibits certain types of information and content from being transmitted
over the Internet. The prohibition's scope and the liability associated with
a violation are currently unsettled. In addition, although substantial
portions of the Communications Decency Act were held to be unconstitutional,
we cannot be certain that similar legislation will not be enacted and upheld
in the future. It is possible that legislation could expose companies
involved in e-commerce to liability, which could limit the growth of
e-commerce generally. Legislation like the Telecommunications Act and the
Communications Decency Act could dampen the growth in Web usage and decrease
its acceptance as a medium of communications and commerce.
THE INTERNET IS GENERATING PRIVACY CONCERNS THAT COULD RESULT IN LEGISLATION OR
MARKET PERCEPTIONS THAT COULD HARM OUR BUSINESS OR RESULT IN REDUCED SALES OF
OUR PRODUCTS, OR BOTH.
Businesses use our Dynamo Personalization Server product to develop and
maintain profiles to tailor the content to be provided to Web site visitors.
When a visitor first arrives at a Web site, our software creates a profile
for that visitor. If the visitor registers or logs in, the visitor's identity
is added to the profile, preserving any profile information that was gathered
up to that point. Dynamo Personalization Server tracks both explicit user
profile data supplied by the user as well as implicit profile attributes
derived from the user's behavior on the Web site. Privacy concerns may cause
visitors to resist providing the personal data or avoid Web sites tracking
the Web behavioral information necessary to support this profiling
capability. More importantly, even the perception of security and privacy
concerns, whether or not valid, may indirectly inhibit market acceptance of
our products. In addition, legislative or regulatory requirements may
heighten these concerns if businesses must notify Web site users that the
data captured after visiting Web sites may be used to direct product
promotion and advertising to that user. Other countries and political entities,
such as the European Economic Community, have adopted such legislation or
regulatory requirements. The United States may adopt similar legislation or
regulatory requirements. If privacy legislation is enacted or consumer privacy
concerns are not adequately addressed, our business, financial condition and
operating results could be harmed.
Our products use "cookies" to track demographic information and user
preferences. A "cookie" is information keyed to a specific user that is
stored on a computer's hard drive, typically without the user's knowledge.
Cookies are generally removable by the user, although removal could affect
the content available on a particular site. Germany has imposed laws limiting
the use of cookies, and a number of Internet commentators and governmental
bodies in the United States and other countries have urged passage of laws
limiting or abolishing the use of cookies. If such laws are passed or if
users begin to delete or refuse cookies as a common practice, demand for our
personalization products could be reduced.
PROJECTIONS INCLUDED IN THIS ANNUAL REPORT RELATING TO THE GROWTH OF
E-COMMERCE AND THE INTERNET ARE BASED ON ASSUMPTIONS THAT COULD TURN OUT TO
BE INCORRECT AND ACTUAL RESULTS COULD BE MATERIALLY DIFFERENT FROM THE
PROJECTIONS.
This annual report contains various data and projections related to revenues
generated by electronic commerce and the size of the worldwide Internet
commerce application software market. These data and projections are
inherently imprecise, and investors are cautioned not to place undue reliance
on them. These data and projections have been included in studies prepared by
International Data Corporation, an independent market research firm, and the
projections are based on surveys, financial reports and models used by IDC to
measure license revenues and associated maintenance fees derived from sales
to e-commerce sites. These projections include assumptions regarding business
and home use of the Internet, including assumptions as to growth in the
percentage of Web users making online purchases, increases in the amount of
time people spend using the Web, changing attitudes toward Web usage and
purchasing, levels of business saturation for Web use and increases in the
level of software spending by businesses, as well as various assumptions
regarding the rate of growth of Web use in countries outside the United
States. Actual results or circumstances may be materially different from the
projections.
RISKS RELATED TO THE SECURITIES MARKETS
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.
The market price of our common stock has fluctuated in the past and is likely
to continue to be highly volatile. For example, the market price of our
common stock has ranged from $5.13 per share to $126.88 per share since our
initial public offering in July 1999. Fluctuations in market price and volume
are particularly common among securities of Internet and software companies.
The market price of our common stock may fluctuate significantly in response
to the following factors, some of which are beyond our control:
- variations in our quarterly operating results;
- changes in market valuations of Internet and software companies;
- our announcements of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- our failure to complete significant sales;
- additions or departures of our key personnel;
- future sales of our common stock; or
- changes in financial estimates by securities analysts.
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's
attention and resources.
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL BE ABLE TO INFLUENCE MATTERS
REQUIRING STOCKHOLDER APPROVAL AND COULD DELAY OR PREVENT SOMEONE FROM
ACQUIRING OR MERGING WITH US ON TERMS FAVORED BY A MAJORITY OF OUR
INDEPENDENT STOCKHOLDERS.
Our executive officers and directors beneficially owned approximately 20% of
our common stock as of February 28, 2001. As a result, these stockholders may
be able to influence matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
This could delay or prevent someone from acquiring or merging with us.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY.
Certain provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable, which could reduce the market price of our common stock.
These provisions include:
- authorizing the issuance of "blank check" preferred stock;
- providing for a classified board of directors with staggered,
three-year terms;
- providing that directors may only be removed for cause by a
two-thirds vote of stockholders;
- limiting the persons who may call special meetings of stockholders
prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that can
be acted on by stockholders at stockholder meetings.
Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us.
Item 2. PROPERTIES
Our headquarters are currently located in a leased facility in Cambridge,
Massachusetts, consisting of approximately 60,000 square feet. In August 2000
we entered into a lease for approximately 30,000 square feet in another
facility in Cambridge, Massachusetts, and in June 2000 we entered into a
lease for approximately 42,000 square feet in Waltham, Massachusetts. We also
have offices for sales and support personnel in eight additional domestic
locations as well as in ten foreign countries.
Item 3. LEGAL PROCEEDINGS
A patent infringement claim was filed by BroadVision, one of our competitors,
against us on December 11, 1998. The case was filed in the U.S. District Court
for the Northern District of California. BroadVision alleged that we are
infringing on a patent for a method of conducting e-commerce. We settled the
lawsuit in February 2000. As part of the settlement, we, in return for cash
payments, received a non-exclusive, worldwide, perpetual, paid-up license to
make, use and sell products arguably covered by the patent and any other patents
that may be issued in the future that are related to the original patent. We
agreed to pay BroadVision a total of $15.0 million in license fees over a
three-year period.
On October 31, 2000, Aron Rosenberg, one of our stockholders, filed a lawsuit in
the United States District Court for the District of Delaware, ROSENBERG V.
TUDOR INVESTMENT CORP., TUDOR PRIVATE EQUITY FUND L.P., THE RAPTOR GLOBAL FUND
L.P., THE RAPTOR GLOBAL FUND LTD., TUDOR GLOBAL TRADING LLC AND ART TECHNOLOGY
GROUP, INC., Civil Action No. 00-925. Mr. Rosenberg's complaint alleges that the
Tudor and Raptor entities violated Section 16(b) of the Securities Exchange Act
of 1934 in connection with their sales of our common stock after our initial
public offering on July 20, 1999. Those entities received shares of our common
stock immediately before our closing of our initial public offering, upon the
conversion of Series D preferred stock that they had acquired more than six
months before our initial public offering. The complaint alleges that those
entities should be deemed to have purchased shares of our common stock shortly
before the closing of our initial public offering, as the result of changes
effected through a charter amendment relating to the preferred stock. The
complaint also alleges that the entities obtained profits of more than $70
million from sales of our common stock within six months after the date on which
such purchase should be deemed to have occurred and that those profits should be
paid to our company in accordance with Section 16(b). Although we are a nominal
defendant in the suit, Mr. Rosenberg is not seeking any damages from us. We
cannot assure you that we will receive any payment as a result of this lawsuit.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock began trading on the Nasdaq National Market under the symbol
"ARTG" on July 21, 1999. Prior to that time, there was no established public
trading market for our common stock. The following table sets forth the high
and low reported sales prices of our common stock for the periods indicated
as reported by the Nasdaq National Market.
HIGH LOW
Year ending December 31, 1999
Third quarter (commencing July 21, 1999) .......... $ 19.06 $ 5.13
Fourth quarter .................................... 66.00 17.56
Year ending December 31, 2000
First quarter ..................................... 106.50 43.81
Second quarter .................................... 101.94 28.63
Third quarter ..................................... 126.88 76.00
Fourth quarter .................................... 96.50 20.50
On March 26, 2001 the last reported sale price on the Nasdaq National Market
for our common stock was $20.00 per share. On March 26, 2001, there were
16,740 holders of record of our common stock.
We currently intend to retain future earnings, if any, to finance our growth. We
do not anticipate paying cash dividends on our common stock in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs,
restrictions in financing agreements and plans for expansion.
On July 26, 1999, we completed our initial public offering of 10,000,000
shares of common stock at a public offering price of $6.00 per share (SEC
registration number 333-78333). Our net proceeds from the offering were
approximately $54,302,000. On July 30, 1999, in connection with the exercise
of the underwriters' over-allotment option, we issued an additional 336,000
shares of common stock at the initial public offering price of $6.00 per
share. Our net proceeds from the exercise of the over-allotment option were
approximately $1,875,000. In connection with our initial public offering in
July 1999, all shares of our preferred stock were converted into 31,419,278
shares of common stock.
On November 10, 1999, we completed a follow-on public offering of 9,000,000
shares of common stock, of which 2,850,000 shares were sold by us at a public
offering price of $33.75 (SEC registration number 333-89577). Our net
proceeds from the offering were approximately $91,428,000. On November 22,
1999, in connection with the exercies of the underwriters' over-allotment
option, we issued an additional 175,840 shares of common stock at the public
offering price of $33.75 per share. Our net proceeds from the exercise of the
over-allotment option were approximately $5,671,000.
Through December 31, 2000, we used approximately $84.1 million of our
proceeds from the public offerings for sales and marketing, approximately
$27.9 million for capital expenditures, approximately $22.3 million for
research development, and approximately $500,000 for the repayment of
indebtedness. Additionally, we paid $5.2 million as partial consideration and
for professional fees in connection with our acquisition of The Toronto
Technology Group Inc. in July 2000. As of December 31, 2000, we had
approximately $12.8 million of net proceeds remaining, and pending use of
these proceeds, we intend to invest these net proceeds primarily in
high-quality short-term investments.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1999 and 2000 and for each of the years ended December 31, 1998, 1999 and
2000 are derived from consolidated financial statements audited by Arthur
Andersen LLP, independent public accountants, which are included in this
annual report. The selected consolidated financial data as of December 31,
1996, 1997 and 1998 and for each of the years ended December 31, 1996 and
1997 are derived from audited consolidated financial statements not included
in this annual report. Additional information regarding basic and diluted net
income (loss) per share is described in note 1(e) to the consolidated
financial statements included elsewhere in this annual report. The following
data should be read in conjunction with the consolidated financial statements
and related notes included elsewhere in this annual report and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Year Ended December 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------- --------
(in thousands, except per share data)
Revenues:
Product license $ 53 $1,866 $4,059 $18,590 $121,525
Services 3,849 4,592 8,078 13,487 41,817
------ ------ ------ ------- --------
Total revenues 3,902 6,458 12,137 32,077 163,342
------ ------ ------ ------- --------
Cost of Revenues:
Product license -- 64 30 8,160 3,426
Services 1,985 3,133 5,020 10,232 34,739
------ ------ ------ ------- --------
Total cost of revenues 1,985 3,197 5,050 18,392 38,165
------ ------ ------ ------- --------
Gross profit 1,917 3,261 7,087 13,685 125,177
------- -------- ------- -------- -------
Operating Expenses:
Research and development 1,117 3,661 3,355 6,343 18,966
Sales and marketing 1,152 2,287 4,074 15,921 73,261
General and administrative 1,060 1,418 2,291 5,323 22,791
Amortization of deferred compensation -- -- 107 1,127 1,273
------- -------- ------- -------- -------
Total operating expenses 3,329 7,366 9,827 28,714 116,291
------- -------- ------- -------- -------
Income (Loss) from Operations (1,412) (4,105) (2,740) (15,029) 8,886
Interest income -- 6 54 2,018 8,979
Interest expense (30) (129) (165) (121) --
------- -------- ------- -------- -------
Net income (loss) before provision for
income taxes (1,442) (4,228) (2,851) (13,132) 17,865
Provision for income taxes -- -- -- -- 3,378
------- -------- ------- -------- -------
Net income (loss) (1,442) (4,228) (2,851) (13,132) 14,487
Accretion of Dividends,
Discount and Offering Costs
on Preferred Stock (206) (214) (1,594) (4,395) --
------- -------- ------- -------- -------
Net income (loss) available for common
stockholders $(1,648) $ (4,442) $(4,445) $(17,527) $14,487
======= ======== ======= ======== =======
Net income (loss) per share:
Basic $ (0.09) $ (0.25) $ (0.25) $ (0.45) $ 0.22
======= ======== ======= ======== =======
Diluted $ (0.09) $ (0.25) $ (0.25) $ (0.45) $ 0.20
======= ======== ======= ======== =======
Weighted average common shares outstanding:
Basic 17,698 17,744 17,394 38,777 66,932
======= ======== ======= ======== =======
Diluted 17,698 17,744 17,394 38,777 73,138
======= ======== ======= ======== =======
CONSOLIDATED BALANCE SHEET DATA (at period
end): 1996 1997 1998 1999 2000
------ ------ ------ ------ ------
Cash, cash equivalents and short term
marketable securities $2,358 $ 187 $ 4,093 $129,848 $126,473
Working capital (deficit) 902 (1,328) 3,649 117,727 122,422
Long-term marketable securities -- -- -- 19,394 17,734
Total assets 3,038 1,672 7,766 177,735 259,515
Long-term obligations, less current maturities 24 122 322 4,000 2,000
Redeemable convertible preferred stock 3,000 3,153 8,313 -- --
Total stockholders' equity (deficit) (1,648) (4,060) (4,034) 146,385 191,973
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS ANNUAL REPORT.
THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "ITEM 1.
BUSINESS--FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND STOCK PRICE" AND
ELSEWHERE IN THIS ANNUAL REPORT.
OVERVIEW
We were founded in December 1991. From 1991 through 1995, we devoted our
efforts principally to building, marketing and selling our professional
services capabilities and to research and development activities related to
our software products. Beginning in 1996, we began to focus on selling our
software products. To date, we have enhanced and released several versions of
our Dynamo Application Server product and have completed development of our
current product suite. We began shipping the commercial version of Dynamo 5 e
- -Business Platform in September 2000. We market and sell our products
worldwide through our direct sales force, systems integrators, technology
partners and original equipment manufacturers.
We derive our revenues from the sale of software product licenses and related
services. Product license revenues are derived from the sale of software
licenses of our Dynamo products. Our software licenses are priced based on
either the size of the customer implementation or site license terms.
Services revenues are derived from fees for professional services, training
and software maintenance and support. Professional services include custom
application development and project and technical consulting. We bill
professional service fees primarily on a time and materials basis or in some
cases, on a fixed-price schedule defined specifically in our contracts.
Software maintenance and support arrangements are priced based on the level
of services provided. Generally, customers are entitled to receive software
updates, maintenance releases and technical support for an annual maintenance
fee of 20% to 30% of the list price of the licensed product. Customers that
purchase maintenance and support generally receive all product updates and
upgrades of software modules purchased as well as Web-based and telephone
technical support. Training is billed as services are provided.
We recognize revenue in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION and SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE
REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. Revenues from
software product license agreements are recognized upon execution of a
license agreement and delivery of the software, provided that the fee is
fixed or determinable and deemed collectible by management. If conditions for
acceptance are required subsequent to delivery, revenues are recognized upon
customer acceptance if such acceptance is not deemed to be perfunctory. In
multiple element arrangements, we use the residual value method in accordance
with SOP 97-2 and SOP 98-9. Revenues from software maintenance agreements are
recognized ratably over the term of the maintenance period, which is
typically one year. We enter into reseller arrangements that typically
provide for sublicense fees payable to us based upon a percentage of our list
price. Revenues are recognized under reseller agreements as earned which is
generally ratably over the life of the reseller agreement for guaranteed
minimum royalties or based upon unit sales by the resellers. We do not grant
our resellers the right of return or price protection. Revenues from
professional service arrangements are recognized on either a time and
materials or percentage-of-completion basis as the services are performed,
provided that amounts due from customers are fixed or determinable and deemed
collectible by management. Amounts collected prior to satisfying the above
revenue recognition criteria are reflected as deferred revenue. Unbilled
services represent service revenues that have been earned by us in advance of
billings.
Services revenues have increased primarily due to the expansion of our
service capabilities by hiring additional service personnel and the increase
in the number of customers using our Dynamo products. Sales of Dynamo
products often lead to sales of consulting services and software maintenance
and support. To date, substantially all of our Dynamo customers have entered
into annual software maintenance and support agreements at the time of
purchase and have renewed such maintenance and support contracts in
subsequent periods. We believe that growth of our product license sales
depends on our ability to provide customers with support, training,
consulting and implementation services and to educate systems integrators and
resellers on how to use and install our products. We have invested
significantly and expect to continue to invest in expanding our services
organization.
We have recently begun to invest significant financial and managerial
resources to expand our sales and marketing operations in international
markets. We currently maintain offices in Australia, Canada, England, France,
Germany, Hong Kong, Japan, the Netherlands, Singapore and Sweden. Revenues
from customers outside the United States accounted for 7% of our total
revenues in 1998, 7% in 1999 and 23% in 2000. We have not entered into
contracts denominated in foreign currencies to date, but may in the future.
We currently do not have hedging or similar arrangements to protect us
against foreign currency fluctuations. We, therefore, increasingly may become
subject to currency fluctuations, which could harm our operating results in
future periods.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as percentages of
total revenues for the periods indicated:
YEAR ENDED
DECEMBER 31,
---------------------
1998 1999 2000
---- ---- ----
Revenues:
Product license ............................... 33% 58% 74%
Services ...................................... 67 42 26
---- ---- ----
Total revenues ............................. 100 100 100
Total cost of revenues ........................... 42 57 23
---- ---- ----
Gross margin................................... 58 43 77
---- ---- ----
Operating expenses:
Research and development ...................... 27 20 12
Sales and marketing ........................... 34 50 45
General and administrative .................... 19 17 14
Stock-based compensation ...................... 1 3 1
---- ---- ----
Total operating expenses ................... 81 90 72
---- ---- ----
Income (loss) from operations .................... (23) (47) 5
Interest income (expense), net ................... (1) 6 6
---- ---- ----
Income (loss) before provision for income taxes (24) (41) 11
Provis