SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a Party other than the Registrant /X/
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14A-6(E)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/X/ Soliciting Material Pursuant to Rule 14a-12
ART TECHNOLOGY GROUP, INC.
(Name of Registrant as Specified In Its Charter)
Mitchell-Wright Technology Group, LLC, SSH Partners I, LP, Mitchell-Wright, LLC,
Arcadia Partners, L.P., Arcadia Capital Management, LLC, James Dennedy and
Richard Rofe
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Attached as Exhibit 1 is an open letter to shareholders of Art Technology Group,
LLC from Mitchell-Wright Technology Group, LLC.
Exhibit 1
[MITCHELL WRIGHT LETTERHEAD]
October 7, 2004
SHAREHOLDERS
Art Technology Group, Inc.
Re: Proposed Merger with Primus Knowledge Solutions, Inc.
---------------------------------------------------------
Dear Shareholders:
Mitchell-Wright Technology Group, LLC ("MWTG") has argued that the merger
agreement between Art Technology Group, Inc. ("ARTG") [NASDAQ: ARTG] and Primus
Knowledge Solutions, Inc. ("Primus") [NASDAQ: PKSI] is dilutive to ARTG
shareholders.
Our principle goal in both acquiring shares of ARTG and asking management to
focus on ARTG as a standalone business is to maximize shareholder value. The
shareholders own ARTG and management must make strategic decisions that are in
the best interest of the owners. We believe the management and the Board of ARTG
made two bad decisions. One is the decision to acquire an ailing company prior
to strengthening ARTG by making it profitable; and two, is the decision to pay a
substantial premium, relative to the value of ARTG, for a company that is in
financial distress and is out of options.
In our opinion, the merger with Primus:
o Would require substantial revenue growth to achieve the stated
economic benefits of the deal;
o Would not be accretive to earnings;
o Would further deplete the net cash balance of ARTG; and
o Would cause dilution to the ARTG shareholders well in excess of the
contribution of the Primus business.
WHAT IS THE COMPANY BUYING - REVENUE ANALYSIS
MWTG has pointed out on several occasions that management of ARTG justified the
economics of the Primus acquisition with forecasts for the combined company
operations. Since the leadership of ARTG has made the forecasts so important in
their justification for the transaction, we have taken the time to evaluate the
Company's ability to meet stated guidance. History has clearly shown that
management consistently missed their stated guidance.
MWTG has also analyzed how management's forecast, particularly that of revenue
growth, compares to the current trends exhibited by ARTG and Primus
independently. The management forecasted the combined company, full fiscal year
2005 revenue at greater than $100 million. However, the combined annualized
revenue run rate of the two companies based on reported revenue for the first
half of 2004 is approximately $86 million. To achieve revenue of greater than
$100 million in 2005, the combined company must exhibit an annual growth rate of
greater than 15%.
10/7/2004
Page 2 of 6
MWTG questions the validity of management's assumption given the historical
performance of both companies. The below chart illustrates the quarterly revenue
for both ARTG and Primus, combined, over the last eleven quarters.
[GRAPHIC OMITTED]
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004
COMBINED
REVENUE
($'000S) 33,350 29,392 30,614 29,079 24,913 25,023 23,068 24,539 22,884 22,087 21,043
NOTES: (1) We have adjusted second quarter 2004 revenue to include the estimated $2 million revenue from
the ARTG government contract which was sold in 2Q04, but not included by ARTG in second quarter
revenue due to a contract award protest. The award protest was resolved in the third quarter of
2004, and, accordingly, ARTG recorded the revenue in the third quarter. For purposes of
illustrating revenue trends, however, we think it is appropriate to view the revenue as earned
in the second quarter, since the revenue would have been recorded then but for the contract
award protest. As a result, our treatment is not in accordance with generally accepted
accounting principles, but it is not intended to be so.
(2) We have adjusted ARTG's third quarter 2004 revenue for the government contract as discussed in
note (1) above. As a result, we estimate ARTG's revenue for the third quarter to be $15
million. We also estimate Primus' revenue for the third quarter based on our assumption of a 5%
increase over second quarter 2004.
10/7/2004
Page 3 of 6
Based on our analysis, the revenue trend is clearly negative, with the two
companies experiencing a 36.9% drop in revenue between the first quarter of 2002
and the third quarter of 2004 on a combined basis. The above data raises serious
doubt regarding the validity of the 15% annual revenue growth rate forecast. The
companies have been unable to generate consistent quarterly revenue growth over
the past eleven quarters. Collectively, the companies have not been able to
produce two consecutive quarters of revenue growth during this period.
Furthermore, ARTG management consistently missed their stated guidance.
Therefore, MWTG believes that the 15% revenue growth forecast is not a
reasonable assumption. In our opinion, a more responsible assumption would
estimate flat to negative revenue growth for the combined companies.
The Company cites significant opportunities for cross-selling each company's
products into the other's customer base. From our analysis, research and
customer diligence we have concluded the following:
1. There will be few, if any, opportunities for ARTG to sell their
products into the Primus customer base
o Primus' product suite typically leverages a base
transactional or eCommerce engine.
o Once the client company installs its base transactional or
eCommerce engine, they build additional processes around it.
o The build up around the base system makes replacing it with
a competing system extremely unattractive and expensive for
the customer.
o Approximately twenty-five of the 225 Primus customers
already use the ATG engine.
o It is unrealistic to expect the other 200 to readily switch
from their current platform to the ATG platform, given the
likely build up around its current platform.
2. A more likely scenario is that the Company may be able to sell the
Primus point products into the ATG installed base, but penetration
rates are likely to be low and it will take some time.
These findings cast further doubt that management has a sensible operating plan
for the merged entities. The analysis indicates that the merger plan will likely
cause the Company to be a net consumer of cash for some time.
WHAT IS THE REAL COST OF THE TRANSACTION - DILUTION ANALYSIS
To evaluate the financial merits of the proposed merger, MWTG evaluated the
Primus business and assets. We also evaluated the total associated cost of the
acquisition.
The revenue analysis demonstrates that based on the first-half 2004 results the
combined annual revenue in 2005 will likely be in the $85 million to $90
million. ARTG has stated that it is targeting a total spend in 2005 in the $86
million to $88 million range. Given the data, we believe that ARTG will likely
not generate positive cash flow in 2005.
10/7/2004
Page 4 of 6
Next, MWTG analyzed the second part of the equation - the associated costs of
the merger. The following table provides the data for the analysis.
------------------ ----------------- ------------------ --------------- ------------------- ----------------
Company Annualized Market Cash Enterprise Value EV/Revenue
Revenue from Capitalization (EV) Multiple
1H04 (10/6/04)
------------------ ----------------- ------------------ --------------- ------------------- ----------------
ARTG $62.3 M $72.46 M $29.7M(1) $42.76 M 0.69
------------------ ----------------- ------------------ --------------- ------------------- ----------------
PKSI $23.7 M $30.00M $0.00M(2) $30.0 M 1.27
------------------ ----------------- ------------------ --------------- ------------------- ----------------
(1) Provided by the Company in its 10/6/04 press release.
(2) Cash requirement mandated by the terms of the merger agreement.
For purposes of our analysis, Enterprise Value (EV) refers to market
capitalization, plus debt, less cash. Neither company has a meaningful amount of
debt, so the calculation reduces to market capitalization less cash.
Accordingly, ARTG has an enterprise value of $42.76 million, and a multiple
enterprise value / revenue of approximately 0.69x, where revenue is an
annualized number based on the first half of 2004 results. Based on ARTG's joint
proxy statement/prospectus and the attached copy of the merger agreement, the
Board approved a merger with Primus valuing their business at approximately $30
million to $33 million, with no commitment of ANY cash coming over in the
transaction. This implies an enterprise value for Primus of at least $30 million
(equal to the proposed sale price), which implies an enterprise value / revenue
multiple of 1.27x, where Primus revenue is an annualized number based on the
first half of 2004 results. The transaction values the Primus business at an 84%
[((1.27-.69)/.69)] premium relative to the ARTG business. In short, the ARTG
Board has asked the ARTG shareholders to pay an 84% premium relative to ARTG for
a company that, in our opinion, is on its last leg, is virtually out of cash,
and had to be sold. Therefore, we believe this transaction would severely dilute
ARTG shareholders.
The impact on the cash balance is equally distressing. The merger agreement
provides for a working capital adjustment. We believe the primary motive behind
the adjustment is to compel Primus to conserve cash and bring as high of a
positive working capital balance as possible. Based on its public filings,
Primus had an $8.3 million cash balance at the end of the second quarter 2004,
and it consumes approximately $2.2 million in cash per quarter. This puts the
cash estimate at the end of October 2004 at approximately $5.0 million. Based on
its public filings, Primus had accounts receivable and accounts payable balances
of $2.7 million and $4.4 million respectively at the end of the second quarter.
Assuming these values have remained relatively constant, Primus will, at most,
have a net positive working capital balance of $3.3 million at the time of the
merger.
The Company has estimated that the cash cost of the integration will likely be
in the range of $5- $7 million. When the Company increased its cost synergy
guidance, clearly it must have included additional severance and other one-time
expenses. The Company has failed to update the shareholders on the true cost of
the merger. MWTG estimates that the cost of the transaction is more likely $7 -
$9 million. Thus, the net working capital, clearly, will not cover the cost of
the transaction. Our analysis indicates that the transaction will likely cause
ARTG to consume $4 - $6 million in cash, approximately 15% of our cash balance,
as reported for the third quarter.
10/7/2004
Page 5 of 6
The negative cash flow from operating activities is troubling. The Company
consumes an average of $4.1 million/quarter in cash flow from operating
activities, as measured by the Company's filings through the second quarter of
2004 and their guidance for the third quarter. Primus consumes an average of
$2.2 million/quarter in cash flow from operating activities, as measured by
Primus' filings through the second quarter of 2004. The cash flow LOSS from
operations for the combined entities averages approximately $6.6
million/quarter. The cost synergies described by the Company fail to account for
how they will make the cash flow from operating activities turn positive.
Consequently, factoring in the likely operating cash burn in the fourth quarter,
we find it hard to reconcile that the Company will enter 2005 with a net cash
balance of "something north of $30 million" as the Company stated on August 12,
2004. The Company will not likely be able to deliver on this commitment; MWTG
estimates the net cash balance entering 2005 will be in the range of $23 - $25
million. Further, continued operations under the combined entities fails to
improve the likelihood of reaching positive cash flow from continued operations,
it likely makes it worse. The Primus merger, if approved, would harm ARTG's
balance sheet. Shareholders must be advised of the true cash cost of the
transaction and require the Company to demonstrate how the company can turn
operating cash flow positive as a result of the merge BEFORE shareholders are
expected to vote on the merger agreement.
CONCLUSIONS
Offering dilution and cash erosion to the shareholders in exchange for a
combined business that is, at best, a break-even proposition, is a bad business
proposition. If the Board would impress on ARTG's management to operate our
company profitably, the implied share price would be higher still.
In our analysis, the merger with Primus:
o would add additional expenses, with only the promise of forecasted revenue
growth;
o would be dilutive to earnings;
o would consume cash; and
o would be dilutive to shareholders well in excess of the value contributed
from acquiring the business.
A profitable, independent operation is a less risky, more stable alternative and
has a clearer path to maximizing shareholder value for ARTG than this proposed
merger. With this better alternative available to it, the Company has a greater
likelihood of enhancing shareholder value with lower operating and financial
risk by not merging with Primus. For these reasons we will vote AGAINST the
merger with Primus, and we urge you to vote AGAINST the merger as well.
MWTG has been and remains committed to working with the Board and Management to
create shareholder value. While we are disappointed with the reticence of the
Board to exchange ideas, we remain eager to engage in a more active dialog with
the Board and Management to build value for all shareholders.
10/7/2004
Page 6 of 6
Thank you for taking the time to review our proposal and for your continued
support of ATG.
Very Respectfully,
/s/ James H. Dennedy
James H. Dennedy
Managing Partner
Mitchell-Wright Technology Group, LLC
cc: Paul Shorthose, Chairman
Bob Burke, Director & CEO
Phyllis Swersky, Director
David Elsbree, Director
Ilene Lang, Director
Mary Makela, Director
John Held, Director
# # #
Mitchell-Wright Technology Group, LLC, Mitchell-Wright, LLC, SSH partners I, LP,
Arcadia Partners, L.P., Arcadia Capital Management, LLC, James Dennedy and
Richard Rofe are participants in a solicitation of proxies from the shareholders
of Art Technology Group, Inc. for use for use at its special meeting scheduled
to be held on October 22, 2004. Information relating to these participants and
certain other persons who may also be deemed to be participants in the
solicitation of proxies is contained in their preliminary proxy statement filed
with the Securities and Exchange Commission on September 28, 2004. A copy of
that preliminary proxy statement is currently available at no charge on the
Securities and Exchange Commission's website at http://www.sec.gov.
Shareholders of Art Technology Group, Inc. are advised to read the proxy
statement and the other documents related to the solicitation of proxies by
Mitchell-Wright Technology Group, LLC and the other participants when they
become available because they will contain important information. When
completed, a definitive proxy statement and a form of proxy will be mailed to
shareholders and will be available at no charge at the Securities and Exchange
Commission's website. In addition, you may also obtain a free copy of the
definitive proxy statement when it is available by contacting Innisfree M&A
Incorporated toll free at (888) 750-5834 (banks and brokers call collect at
(212) 750-5833).