ART TECHNOLOGY GROUP INC, 10-Q, 2000-11-06

ART TECHNOLOGY GROUP INC
10-Q, 2000-11-06
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-Q

<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 000-26679

------------------------

ART TECHNOLOGY GROUP, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 04-3141918
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

25 FIRST STREET, CAMBRIDGE, MASSACHUSETTS 02144
(Address of principal executive offices) (zip code)
</TABLE>

(617) 386-1000
(Registrant's telephone number, including area code)

------------------------

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: / /

As of October 30, 2000 there were 67,739,956 shares of the registrant's
common stock outstanding.

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<PAGE>
ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

- Consolidated Condensed Balance Sheets at September 30, 2000 and
December 31, 1999 (unaudited)

- Consolidated Condensed Statements of Operations for the three and nine
months ended September 30, 2000 and 1999 (unaudited)

- Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited)

- Notes to Unaudited Consolidated Condensed Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

Signatures
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ART TECHNOLOGY GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 70,065 $124,711
Marketable securities..................................... 63,965 5,137
Accounts receivable, net of reserve for doubtful accounts
of $2,165 and $460 at
September 30, 2000 and December 31, 1999,
respectively............................................ 33,001 12,539
Unbilled services......................................... 1,074 782
Prepaid expenses and other current assets................. 3,801 1,908
-------- --------
Total current assets.................................. 171,906 145,077
Property and equipment, net................................. 16,404 5,465
Long-term marketable securities............................. 12,412 19,394
Other assets................................................ 15,560 7,799
-------- --------
$216,282 $177,735
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term obligations............... $ 2,250 $ 3,000
Accounts payable.......................................... 11,850 11,285
Accrued expenses.......................................... 18,454 4,728
Deferred revenue.......................................... 17,179 8,337
-------- --------
Total current liabilities............................. 49,733 27,350
Deferred income taxes..................................... 1,015 --
Long-term obligations, less current maturities............ 2,500 4,000

Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value--
Authorized--10,000,000
Issued and outstanding--no shares....................... -- --
Common stock, $.01 par value--
Authorized--500,000,000 shares and 100,000,000 shares at
September 30, 2000 and December 31, 1999, respectively
Issued and outstanding--67,606,654 shares and 65,551,024
shares at
September 30, 2000 and December 31, 1999,
respectively.......................................... 677 656
Additional paid-in capital................................ 186,684 178,218
Deferred compensation..................................... (2,737) (3,628)
Accumulated deficit....................................... (21,590) (28,861)
-------- --------
Total stockholders' equity............................ 163,034 146,385
-------- --------
$216,282 $177,735
======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated condensed
financial statements.

1
<PAGE>
ART TECHNOLOGY GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Product license............................. $34,233 $ 4,461 $74,291 $ 9,372
Services.................................... 12,077 3,679 26,220 9,421
------- ------- ------- -------
Total revenues............................ 46,310 8,140 100,511 18,793
------- ------- ------- -------
COST OF REVENUES:
Product license............................. 908 6 2,481 23
Services.................................... 10,084 2,602 21,973 6,646
------- ------- ------- -------
Total cost of revenues.................... 10,992 2,608 24,454 6,669
------- ------- ------- -------
Gross profit.............................. 35,318 5,532 76,057 12,124
------- ------- ------- -------
OPERATING EXPENSES:
Research and development.................... 4,762 1,710 12,452 4,233
Sales and marketing......................... 20,531 4,097 45,922 8,134
General and administrative.................. 5,836 1,292 14,525 3,150
Stock-based compensation.................... 278 304 886 823
------- ------- ------- -------
Total operating expenses.................. 31,407 7,403 73,785 16,340
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS................. 3,911 (1,871) 2,272 (4,216)
INTEREST INCOME............................... 2,298 561 6,699 682
INTEREST EXPENSE.............................. -- (72) -- (121)
------- ------- ------- -------
Income (loss) before provision for income
taxes................................... 6,209 (1,382) 8,971 (3,655)
PROVISION FOR INCOME TAXES.................... 1,200 -- 1,700 --
------- ------- ------- -------
Net income (loss)......................... 5,009 (1,382) 7,271 (3,655)
ACCRETION OF DIVIDENDS, DISCOUNT AND OFFERING
COSTS ON PREFERRED STOCK.................... -- (3,908) -- (4,395)
------- ------- ------- -------
Net income (loss) available for common
stockholders............................ $ 5,009 $(5,290) $ 7,271 $(8,050)
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE (Note 2):
Basic net income (loss) per share........... $ 0.07 $ (0.10) $ 0.11 $ (0.27)
======= ======= ======= =======
Shares used in computing basic net
income (loss) per share................... 67,254 52,908 67,055 30,354
======= ======= ======= =======
Diluted net income (loss) per share......... $ 0.07 $ (0.10) $ 0.10 $ (0.27)
======= ======= ======= =======
Shares used in computing diluted net
income (loss) per share................... 73,850 52,908 73,361 30,354
======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated condensed
financial statements.

2
<PAGE>
ART TECHNOLOGY GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 7,271 $(3,655)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Stock-based compensation.............................. 886 823
Noncash interest expense related to issuance of
warrants............................................. -- 40
Depreciation and amortization......................... 2,364 438
Compensation expense related to issuance of restricted
shares............................................... 427 --
Deferred income taxes................................. (22) --
Loss on disposition of fixed assets................... 42 --
Changes in current assets and liabilities--
Accounts receivable, net............................ (20,040) (1,998)
Unbilled services................................... (293) (187)
Prepaid expenses and other current assets........... (1,532) (1,981)
Accounts payable.................................... 358 1,589
Accrued expenses.................................... 13,105 2,019
Deferred revenue.................................... 8,807 4,183
-------- -------
Net cash provided by operating activities......... 11,373 1,271
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net................... (51,846) (3,438)
Purchases of property and equipment....................... (12,979) --
Proceeds from sale of fixed assets........................ 15 --
Acquisition of Petronio Technology Group, Inc............. (600) --
Acquisition of The Toronto Technology Group Inc........... (5,191) --
Decrease (increase) in other assets....................... 553 (409)
-------- -------
Net cash used in investing activities............. (70,048) (3,847)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial and follow-on public offerings
of common stock......................................... -- 56,177
Proceeds from exercise of stock options................... 4,529 415
Proceeds from employee stock purchase plan................ 1,883 --
Payments on long-term obligations......................... (2,250) --
Payments on notes payable................................. (128) --
Payments on term loan to a bank........................... -- (320)
Payments on equipment line of credit...................... -- (200)
Payments on capital lease obligations..................... -- (190)
-------- -------
Net cash provided by financing activities......... 4,034 55,882
-------- -------
FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS........ (5) --
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (54,646) 53,306
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 124,711 4,093
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 70,065 $57,399
======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of preferred stock into common stock......... $ -- $13,750
======== =======
Accretion of dividend and discount on series B and
series D redeemable convertible preferred stock........ $ -- $ 4,395
======== =======
Value ascribed to options issued in connection with the
acquisition of The Toronto Technology Group Inc........ $ 2,212 $ --
======== =======

In connection with the acquisition of The Toronto Technology
Group Inc., the following non-cash transaction occurred:
Fair value of tangible assets acquired.................. $ 699 $ --
Intangible assets acquired.............................. 5,124 --
Liabilities assumed..................................... (632) --
-------- -------
Cash paid for acquisition and acquisition costs......... $ 5,191 $ --
======== =======
</TABLE>

The accompanying notes are an integral part of these consolidated condensed
financial statements.

3
<PAGE>
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. OPERATIONS AND BASIS OF PRESENTATION

Art Technology Group, Inc. ("ATG" or the "Company") is a Delaware
corporation which was incorporated on December 31, 1991. The Company offers an
integrated suite of Internet customer relationship management and electronic
commerce software applications, as well as related application development,
integration and support services.

The accompanying unaudited consolidated condensed financial statements of
the Company have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly reports on Form 10-Q and do not include all of
the information and disclosures required by generally accepted accounting
principles. While the Company believes that the disclosures presented are
adequate to make information not misleading, these financial statements should
be read in conjunction with the audited financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. In the opinion of management, the accompanying consolidated
condensed financial statements and notes herein contain all adjustments,
consisting only of those of a normal recurring nature, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows at the dates and for the periods indicated. The operating results for the
three and nine months ended September 30, 2000 are not necessarily indicative of
the results to be expected for the full year ending December 31, 2000.

The accompanying consolidated condensed financial statements include the
accounts of ATG and its wholly owned subsidiaries. All significant intercompany
balances have been eliminated in consolidation.

2. NET INCOME (LOSS) PER SHARE INFORMATION

Net income (loss) per share is computed under Statement of Financial
Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. Basic net income (loss)
per share is computed by dividing net income (loss) available for common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income (loss) per share is computed
by dividing net income (loss) available for common stockholders by the weighted
average number of shares of common stock outstanding, including potential common
shares from conversion of stock options and warrants

4
<PAGE>
2. NET INCOME (LOSS) PER SHARE INFORMATION (CONTINUED)
using the treasury stock method, if dilutive. The following table sets forth
basic and diluted income (loss) per share computational data for the periods
presented (in thousands, except per share amounts):

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 30, 30, 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) available for
common stockholders................................ $5,009 $(5,290) $7,271 $(8,050)
====== ======= ====== =======
Weighted average common shares outstanding used in
computing basic net income (loss) per share........ 67,254 52,908 67,055 30,354
Weighted average common equivalent shares
outstanding:
Employee common stock options...................... 6,596 -- 6,306 --
------ ------- ------ -------
Total weighted average common and common equivalent
shares outstanding used in computing diluted net
income (loss) per share............................ 73,850 52,908 73,361 30,354
====== ======= ====== =======
Basic net income (loss) per share.................... $ 0.07 $ (0.10) $ 0.11 $ (0.27)
====== ======= ====== =======
Diluted net income (loss) per share.................. $ 0.07 $ (0.10) $ 0.10 $ (0.27)
====== ======= ====== =======
</TABLE>

------------------------

(1) Options and warrants to purchase a total of 3,937,221 common shares have
been excluded from the computation of diluted weighted average shares
outstanding for the three and nine months ended September 30, 1999, as the
effect of their inclusion would have been anti-dilutive.

(2) Options to purchase a total of 4,209,904 and 3,621,155 weighted shares of
common stock outstanding for the three and nine months ended September 30,
2000, respectively, were excluded from the calculation of diluted net income
per share because the exercise prices of those options exceeded the average
market price of common stock during the periods.

3. REVENUE RECOGNITION

ATG recognizes product license revenue from licensing the rights to use its
software to end-users. ATG also generates service revenues from integrating its
software with its customers' operating environments, the sale of maintenance
services and the sale of certain other consulting and development services. ATG
generally has separate agreements with its customers, which govern the terms and
conditions of its software license, consulting and support and maintenance
services. These separate agreements, along with ATG's price list, provide the
basis for establishing vendor-specific objective evidence of fair value. This
allows ATG to appropriately allocate fair value among the multiple elements in
an arrangement, as well as allocate discounts ratably over all elements in an
arrangement, except for upgrade rights.

ATG recognizes revenue in accordance with Statement of Position (SOP)
No. 97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-9, MODIFICATION OF 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, ATG uses the residual value method in accordance
with SOP 97-2 and SOP 98-9. Revenues from software maintenance agreements are

5
<PAGE>
3. REVENUE RECOGNITION (CONTINUED)
recognized ratably over the term of the maintenance period, which is typically
one year. ATG enters into reseller arrangements that typically provide for
sublicense fees payable to ATG based upon a percentage of ATG's 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. ATG does not grant its
resellers the right of return or price protection. Revenues from professional
service arrangements are recognized on either a time-and-materials basis as the
services are performed, provided that amounts due from customers are fixed or
determinable and deemed collectible by management. Amounts collected or billed
prior to satisfying the above revenue recognition criteria are reflected as
deferred revenue. Unbilled services represent service revenues that have been
earned by ATG in advance of billings.

4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

ATG accounts for investments under Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. Under SFAS No. 115, investments for which ATG has the positive
intent and the ability to hold to maturity, consisting of cash equivalents, are
reported at amortized cost, which approximates fair market value. Cash
equivalents are highly liquid investments with original maturities of less than
90 days. Marketable securities are investment-grade securities with original
maturities of greater than 90 days. At December 31, 1999 and September 30, 2000,
all of ATG's marketable securities were held in commercial paper and corporate
bonds and were classified as held-to-maturity. The average maturity of ATG's
marketable securities is approximately 13.6 months and 11.1 months at
December 31, 1999 and September 30, 2000, respectively. At December 31, 1999 and
September 30, 2000, the difference between the amortized cost and market value
of ATG's marketable securities was approximately $24,000 and $26,000,
respectively. At December 31, 1998 and 1999 and September 30, 2000, ATG's cash,
cash equivalents and marketable securities consisted of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents--
Cash.............................................. $ 2,968 $ 884
Money market accounts............................. 49,932 123,827
Corporate securities.............................. 17,165 --
------- --------
Total cash and cash equivalents................. $70,065 $124,711
======= ========
Marketable securities--
Corporate securities.............................. $76,377 $ 24,531
------- --------
Total marketable securities......................... $76,377 $ 24,531
======= ========
</TABLE>

5. STOCK-BASED COMPENSATION

In connection with certain stock option grants during the year ended
December 31, 1998 and 1999, the Company recorded deferred compensation of
approximately $4.9 million. Additionally, in July 2000, ATG recorded prepaid
stock-based compensation of $2.0 million for unvested stock options acquired in
connection with the acquisition of The Toronto Technology Group Inc. These
amounts represent the aggregate difference between the exercise price and the
fair market value of common stock as determined for accounting purposes. The
deferred compensation is being recognized as an expense over the vesting period
of the underlying stock options. The Company recorded compensation expense

6
<PAGE>
5. STOCK-BASED COMPENSATION (CONTINUED)
of $146,000 and $304,000 for the three months ended September 30, 2000 and 1999,
respectively, and $754,000 and $823,000 for the nine months ended September 30,
2000 and 1999, respectively, related to the amortization of this deferred
compensation.

6. LONG-TERM OBLIGATIONS

In connection with a settlement of the patent infringement claim by
BroadVision, ATG acquired a perpetual, paid-up license for BroadVision's
patented technology. ATG paid $8,000,000 in February 2000 and will pay the
remaining $7,000,000 over the next three years in quarterly installments of
$750,000 in fiscal year 2000 and $500,000 in fiscal years 2001 and 2002. At
December 31, 1999, these payments are included in the accompanying consolidated
balance sheet as follows: $8,000,000 in accounts payable, $4,000,000 in current
maturities of long-term obligations and $3,000,000 in long-term obligations. At
September 30, 2000, these payments are included in the accompanying consolidated
balance sheet as follows: $2,250,000 in current maturities of long-term
obligations and $2,500,000 in long-term obligations. ATG expensed $8,000,000 of
the settlement as cost of revenues in the year ended December 31, 1999. ATG
expensed $533,000 and $1,750,000 for the three and nine months ended
September 30, 2000, respectively, and has recorded as a prepaid license fee,
which is being amortized over its estimated life of three years. No expense was
recorded for the three or nine months ended September 30, 1999.

7. COMPREHENSIVE INCOME (LOSS)

The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME in 1998.
The Company does not have any components of comprehensive income (loss) other
than its reported net income (loss).

8. SEGMENT INFORMATION

The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision-maker, or decision-making group, in making decisions how to allocate
resources and assess performance. ATG's chief operating decision-makers, as
defined under SFAS No. 131, are the Chief Executive Officer, the Chief Operating
Officer and the Chief Financial Officer. To date, the Company has viewed its
operations and manages its business as principally one operating segment with
two product offerings: software licenses and services. ATG evaluates these
product offerings based on their respective gross margins. As a result, the
financial information disclosed herein represents all of the material financial
information related to ATG's principal operating segment.

7
<PAGE>
8. SEGMENT INFORMATION (CONTINUED)
The following table sets forth total revenues by geographical location:

<TABLE>
<CAPTION>
THREE NINE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER SEPTEMBER
30, 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
North America........................................ 71% 96% 78% 97%
Europe, Middle East and Africa....................... 25 4 20 3
Asia Pacific......................................... 4 -- 2 --
--- --- --- ---
100% 100% 100% 100%
=== === === ===
</TABLE>

9. ACQUISITIONS

On June 1, 2000, ATG completed the acquisition of Petronio Technology Group,
a Boston-based provider of educational training and consulting services. ATG
acquired Petronio Technology Group for $1,200,000, consisting of an initial
payment of $600,000 at the closing and two annual contingent payments of
$300,000 each. The acquisition has been accounted for under the purchase method
of accounting and the results of operations for Petronio Technology Group have
been included in ATG's results beginning of the acquisition date. ATG recorded
$600,000 in goodwill that is being amortized over two years and the Company is
recognizing the contingent payments as compensation expense ratably over the
two-year vesting period.

On July 17, 2000, ATG completed the acquisition of The Toronto Technology
Group Inc., a privately held 30-person consulting and educational services
company based in Toronto, Canada, for $12.0 million in cash, options and shares
of common stock. The acquisition has been accounted for under the purchase
method of accounting. Upon the closing of the transaction, ATG paid
$5.2 million in cash, issued 19,634 employee stock options and also issued
56,237 exchangeable shares of ATG's subsidiary Art Technology Group
(Canada) Inc. The exchangeable shares will become exchangeable for 56,237 shares
of ATG's common stock, subject to a three-year vesting schedule. ATG allocated
$2.75 million of the purchase price to the acquired workforce which is being
amortized over five years. Additionally, ATG will record the value of the stock
options and exchangeable shares of $7.5 million as compensation expense over
three years. The remainder of the purchase has been allocated to goodwill and
will be amortized ratably over five years.

10. LONG-TERM OBLIGATIONS

(a) Line of Credit with a Bank

ATG has a working capital line-of-credit agreement with a bank, under which
ATG may borrow up to the lesser of $12,500,000 or 80% of eligible accounts
receivable, as defined. Borrowings bear interest at the bank's prime rate
(9.5% at September 30, 2000). The working capital line of credit is
collateralized by substantially all assets of ATG and expires in September
2001. The agreement contains certain covenants, including defined levels of
profitability and certain financial ratios. As of September 30, 2000, ATG
was in compliance with all covenants. As of September 30, 2000, there were
no amounts outstanding under the working capital line of credit and
approximately $7,190,000 was available for borrowing. In addition, at
September 30, 2000, ATG had letters of credit outstanding in the amount of
$5,310,000 (see Note 8(a)).

(b) Non-Recourse Receivables Purchase Agreement with a Bank

In September 2000, ATG entered into a Non-Recourse Receivables Purchase
Agreement with a bank (the Receivables Agreement) whereby ATG can sell up to
$10.0 million of its accounts

8
<PAGE>
10. LONG-TERM OBLIGATIONS (CONTINUED)
receivable to the bank. Under the terms of the Receivables Agreement, ATG
can sell certain accounts receivable, subject to acceptance by the bank, on
a non-recourse basis. Upon purchase, the bank assumes the risk of collection
for the acquired accounts receivable except in the event ATG violates the
terms of the Receivables Agreement or the customer asserts a discount,
allowance, warranty claim or right of return. The accounts receivable are
sold at a discount to reflect a minimum of 45 days and a maximum of 135 days
at the bank's prime rate (9.5% at September 30, 2000) plus 1%. In
September 2000, the Company sold $9.6 million of accounts receivable to the
bank under the Receivables Agreement. The Company has applied SFAS Nos. 125
and 140 to the sale of the accounts receivable and has reduced accounts
receivable in the accompanying consolidated balance sheets.

11. FOLLOW-ON PUBLIC OFFERING

On October 26, 2000, the Company filed a registration statement with the
Securities and Exchange Commission in connection with a proposed follow-on
public offering of 4,000,000 shares of common stock to be sold by the Company
and an additional 725,000 shares to be sold by certain stockholders of the
Company.

9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q THAT ARE NOT
PURELY HISTORICAL STATEMENTS ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING STATEMENTS
REGARDING OUR EXPECTATIONS, BELIEFS, HOPES, INTENTIONS OR STRATEGIES REGARDING
THE FUTURE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
FORWARD-LOOKING STATEMENTS.

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 provided a number of customers with a beta version of our new
application suite, Dynamo 5 e-Business Platform, beginning in July 2000 and
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 either on a time and materials basis or on a fixed-price schedule. 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.

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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. 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, the Netherlands and Sweden. Revenues from customers outside North
America accounted for 29% and 4% for the three months ended September 30, 2000
and 1999, respectively, and 22% and 3% for the nine months ended September 30,
2000 and 1999, respectively. 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:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Product license......................... 74% 45% 74% 50%
Services................................ 26 55 26 50
--- ---- --- ----
Total revenues........................ 100 100 100 100
TOTAL COST OF REVENUES.................... 24 32 24 35
--- ---- --- ----
Gross margin.......................... 76 68 76 65
--- ---- --- ----
OPERATING EXPENSES:
Research and development................ 10 21 12 23
Sales and marketing..................... 44 50 46 43
General and administrative.............. 13 16 15 17
Amortization of deferred compensation... 1 4 1 4
--- ---- --- ----
Total operating expenses.............. 68 91 74 87
--- ---- --- ----
INCOME (LOSS) FROM OPERATIONS............. 8 (23) 2 (22)
INTEREST INCOME (EXPENSE), NET............ 5 6 7 3
--- ---- --- ----
Income (loss) before provision for
income taxes.......................... 13 (17) 9 (19)
PROVISION FOR INCOME TAXES................ 2 -- 2 --
--- ---- --- ----
Net income (loss)....................... 11% (17)% 7% (19)%
=== ==== === ====
</TABLE>

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The following table sets forth, for the periods indicated, the cost of
product license revenues as a percentage of product license revenues and the
cost of services revenues as a percentage of services revenues:

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000

REVENUES

Total revenues increased 470% from $8.1 million for the three months ended
September 30, 1999 to $46.3 million for the three months ended September 30,
2000. Total revenues increased 435% from $18.8 million for the nine months ended
September 30, 1999 to $100.5 million for the nine months ended September 30,
2000. The increases were primarily attributable to market acceptance of our
Dynamo suite of products as we continued to cultivate relationships with systems
integrators and train our partner channels to encourage them to support our
products.

PRODUCT LICENSE REVENUES

Product license revenues increased from $4.5 million for the three months
ended September 30, 1999 to $34.2 million for the three months ended
September 30, 2000 and from $9.4 million for the nine months ended
September 30, 1999 to $74.3 million for the nine months ended September 30,
2000. The increases were primarily attributable to the continued rapid growth in
our partner channel, as well as increased sales to larger enterprises and
international customers. We experienced an increase in the number of individual
license arrangements under which the initial license fee was in excess of
$1 million. We anticipate that product license revenues will continue to grow in
absolute dollars, but expect the sequential rate of growth to decrease as
compared to the past several quarters. We expect product license revenues as a
percentage of total revenues will decrease in the foreseeable future until
reaching a level of approximately two-thirds of total revenues.

SERVICES REVENUES

Services revenues increased 230% from $3.7 million for the three months
ended September 30, 1999 to $12.1 million for the three months ended
September 30, 2000 and increased 178% from $9.4 million for the nine months
ended September 30, 1999 to $26.2 million for the nine months ended
September 30, 2000. Professional services revenue increased 90% from
$2.9 million for the three months ended September 30, 1999 to $5.5 million for
the three months ended September 30, 2000 and 68% from $7.6 million for the nine
months ended September 30, 1999 to $12.8 million for the nine months ended
September 30, 2000. The increases in professional services revenues were
primarily attributable to the continued growth of our customer base and an
increase in resources in our professional services group. Software maintenance
and support revenues increased 587% from $728,000 for the three months ended
September 30, 1999 to $5.0 million for the three months ended September 30, 2000
and 471% from $1.7 million for the nine months ended September 30, 1999 to
$9.7 million for the nine months ended September 30, 2000. The increases in
software maintenance and support revenues were the result of continued increases
in product revenues that generated software maintenance and support revenues and
increases in software maintenance and support renewals. Training revenues
increased 388% from $328,000 for the three months ended September 30, 1999 to
$1.6 million for the three months ended September 30, 2000 and 434% from
$693,000 for the nine months ended September 30, 1999 to $3.7 million for the
nine months ended September 30, 2000. The

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increases in training revenues were primarily attributable to our extended
training program offerings. In addition, our acquisition of Petronio Technology
Group on May 17, 2000 provided us with additional Java, J2EE and XML courseware,
as well as strengthened our training capabilities with the addition of seasoned
trainers and curriculum developers. We believe these capabilities will enhance
our selling efforts for product license revenues to end-users, resellers and
partners.

COST OF PRODUCT LICENSE REVENUES

Cost of product license revenues increased from $6,000 for the three months
ended September 30, 1999 to $908,000 for the three months ended September 30,
2000 and from $23,000 for the nine months ended September 30, 1999 to
$2.5 million for the nine months ended September 30, 2000. In February 2000, we
settled a lawsuit filed by BroadVision in December 1998, which alleged that we
were infringing on a patent for a method of conducting e-commerce. 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, which are being accounted for as cost of product
license revenues. An initial payment of $8.0 million in February 2000 was
expensed in the fourth quarter of 1999, and the remaining $7.0 million is being
expensed ratably over a three-year period that began in the first quarter of
2000. We are paying BroadVision $750,000 per quarter in 2000 and will pay
BroadVision $500,000 per quarter in 2001 and 2002. Cost of product license
revenues from the BroadVision settlement was $583,000 for the three months ended
September 30, 2000 and $1.8 million for the nine months ended September 30,
2000. Cost of product license revenues also includes costs associated with
sustaining the current release of the Dynamo suite of products. We do not expect
to incur significant cost of product license revenues in excess of the
BroadVision license fees.

COST OF SERVICES REVENUES

Cost of services revenues includes salary and other related costs for our
professional services and technical support staff, as well as third-party
contractor expenses. Cost of services revenues will vary significantly from
quarter to quarter depending on the level of professional services staffing, the
effective utilization rates of the professional services staff, the mix of
services performed, including product license technical support services, the
extent to which these services are performed by us or by third-party
contractors, and the level of third-party license fees.

Cost of services revenues increased 288% from $2.6 million for the three
months ended September 30, 1999 to $10.1 million for the three months ended
September 30, 2000 and increased 231% from $6.6 million for the nine months
ended September 30, 1999 to $22.0 million for the nine months ended
September 30, 2000. The increases were attributable to the growth of our
resources in our professional services group. Approximately 64% and 57% of the
increases, respectively, for the three and nine months ended September 30, 2000
were related to compensation and benefit costs. Additionally, costs increased
due to third-party contract expense and recruiting, hiring and training.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist primarily of salary and related
costs to support product development. To date, all software development costs
have been expensed as research and development in the period incurred.

Research and development expenses increased 178% from $1.7 million for the
three months ended September 30, 1999 to $4.8 million for the three months ended
September 30, 2000 and increased 194% from $4.2 million for the nine months
ended September 30, 1999 to $12.5 million for the nine months ended
September 30, 2000. The absolute dollar increase was due principally to the
research and

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development expenses associated with our Dynamo 5 e-Business Platform, which was
announced in July 2000 and began shipping in September 2000. Research and
development expenses as a percentage of total revenues were 21% for the three
months ended September 30, 1999 and 10% for the three months ended
September 30, 2000 and were 23% for the nine months ended September 30, 1999 and
12% for the nine months ended September 30, 2000. The percentage decrease
principally reflected growth in the level of our total revenues. We expect that
research and development expenses, in absolute dollars, will increase as we
aggressively expand our research and development hiring efforts subsequent to
the Dynamo 5 general release. We expect that research and development expenses
will represent a greater percentage of total revenues in the forseeable future
than in the nine months ended September 30, 2000. We anticipate, however, that
research and development expenses will fluctuate as a percentage of total
revenues based upon the level of revenue growth.

SALES AND MARKETING EXPENSES

Sales and marketing expenses consist primarily of salaries, commissions and
other related costs for sales and marketing personnel, travel, public relations
and marketing materials and events.

Sales and marketing expenses increased 400% from $4.1 million for the three
months ended September 30, 1999 to $20.5 million for the three months ended
September 30, 2000 and increased 465% from $8.1 million for the nine months
ended September 30, 1999 to $45.9 million for the nine months ended
September 30, 2000. The increases were associated primarily with international
sales and marketing expansion, global hiring and advertising efforts.
Approximately 48% of the increase for the three months ended September 30, 2000
and 43% of the increase for the nine months ended September 30, 2000 were
related to compensation and benefit costs. Additionally, approximately 31% of
the increase, for the three months ended June 30, 2000 and 35% of the increase
for the nine months ended September 30, 2000 were related to marketing and
promotional expenses.

Sales and marketing expenses as a percentage of total revenues were 50% for
the three months ended September 30, 1999 and 44% for the three months ended
September 30, 2000 and were 43% for the nine months ended September 30, 1999 and
46% for the nine months ended September 30, 2000. We expect that sales and
marketing expenses, in absolute dollars, will increase as we continue to execute
our strategy for expansion of our sales and marketing efforts, both domestically
and internationally. We will continue to hire and train new sales personnel,
open additional sales offices, increase marketing and promotional spending, and
execute our global branding initiatives. We expect that sales and marketing
expenses will represent a smaller percentage of total revenues in the
foreseeable future than in the nine months ended September 30, 2000. We
anticipate, however, that sales and marketing expenses will fluctuate as a
percentage of total revenues depending on the level and timing of program
spending, the rate at which newly hired sales personnel become productive and
the level of revenue growth.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses consist primarily of salaries and other
related costs for operations and finance employees and legal and accounting
fees.

General and administrative expenses increased 346% from $1.3 million for the
three months ended September 30, 1999 to $5.8 million for the three months ended
September 30, 2000 and increased 361% from $3.2 million for the nine months
ended September 30, 1999 to $14.5 million for the nine months ended
September 30, 2000. Approximately 49% of the increase for the three months ended
September 30, 2000 and 40% of the increase for the nine months ended
September 30, 2000 were related to increases in personnel and related expenses.
The increase was also the result of recording additional allowances for doubtful
accounts as a result of the significant increases in revenues.

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General and administrative expenses as a percentage of total revenues were
16% for the three months ended September 30, 1999 and 13% for the three months
ended September 30, 2000 and were 17% for the nine months ended September 30,
1999 and 14% for the nine months ended September 30, 2000. We plan to continue
investing in infrastructure and personnel to help support the planned growth of
our company. As a result, we expect an increase, in absolute dollars, in general
and administrative costs for the foreseeable future. We expect that general and
administrative expenses will represent a smaller percentage of total revenues in
the foreseeable future than in the nine months ended September 30, 2000. We
anticipate, however, that general and administrative expenses will fluctuate as
a percentage of total revenues depending upon the rate of growth in expenditures
and total revenues.

STOCK-BASED COMPENSATION

Since the fourth quarter of 1998 we have recorded total deferred stock
compensation of $4.9 million in connection with stock option grants. These
amounts represent the difference between the exercise price of certain stock
option grants and the deemed fair value for accounting purposes of our common
stock at the time of such grants. Additionally, in July 2000, we recorded
prepaid stock-based compensation of $2.0 million for unvested stock options
acquired in connection with the acquisition of The Toronto Technology Group Inc.
We are amortizing these amounts over the vesting periods of the applicable
options.

Stock-based compensation expense decreased 9% from $304,000 for the three
months ended September 30, 1999 to $278,000 for the three months ended
September 30, 2000 and increased 8% from $823,000 for the nine months ended
September 30, 1999 to $886,000 for the nine months ended September 30, 2000.
These changes were due to the timing of our recording of stock-based
compensation and the options acquired in connection with the acquisition of The
Toronto Technology Group Inc.

INTEREST INCOME (EXPENSE)

Interest income increased 310% from $561,000 for the three months ended
September 30, 1999 to $2.3 million for the three months ended September 30, 2000
and increased 882% from $682,000 for the nine months ended September 30, 1999 to
$6.7 million for the nine months ended September 30, 2000. The increases are the
result of our completion of our initial public offering completed in July 1999
and a follow-on public offering completed in November 1999, from which we
received net proceeds of approximately $153.3 million that are invested
primarily in cash, cash equivalents and marketable securities.

Interest expense decreased from $72,000 for the three months ended
September 30, 1999 to zero for the three months ended September 30, 2000 and
decreased from $121,000 for the nine months ended September 30, 1999 to zero for
the nine months ended September 30, 2000. The decreases were due to the
repayment of outstanding indebtedness with the proceeds of our initial public
offering.

PROVISION FOR INCOME TAXES

As a result of achieving profitability in the three and nine months ended
September 30, 2000, we recorded a provision for income taxes of $1.2 million and
$1.7 million, respectively, which represents an effective rate of approximately
19% for the nine months ended September 30, 2000. We incurred losses for the
three and nine months ended September 30, 1999. Accordingly, there were no
provisions for income taxes for those periods.

As of December 31, 1999, we had net operating loss carryforwards of
$17.9 million and research and development tax credit carryforwards of $604,000.
The net operating loss and tax credit carryforwards will expire at various dates
beginning 2011, if not utilized. We expect to utilize our net

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operating loss carryforwards during the year ended December 31, 2000 for
financial statement purposes and, as a result, expect our effective tax rate for
2000 to be approximately 19%. We anticipate that our effective tax rate for 2001
will be in the range of 35% to 38%.

The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" of a corporation. Our ability to utilize net operating
loss and tax credit carryforwards on an annual basis is limited as a result of
"ownership changes," as defined by Section 382 of the Internal Revenue Code,
resulting from our past financings. We do not believe that these ownership
changes will have a material impact on our ability to utilize our net operating
loss and tax credit carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

Our capital requirements relate primarily to facilities, infrastructure for
new hires and working capital requirements. Historically, we have funded our
cash requirements primarily through the public and private sale of equity
securities, commercial credit facilities and capital leases. At September 30,
2000, we had $70.1 million in cash and cash equivalents and $76.4 million in
marketable securities.

Cash provided by operating activities was $11.4 million for the nine months
ended September 30, 2000. This consisted of operating income of $7.3 million and
changes in working capital including cash provided by increases in accrued
expenses of $13.1 million and deferred revenue of $8.8 million. Cash used to
fund an increase in accounts receivable was $20.0 million. Cash used in
operating activities was $2.0 million for 1999. This represented an operating
loss of $13.1 million and changes in working capital items consisting primarily
of cash provided by deferred revenue, accounts payable and accrued expenses,
including the $8.0 million license fee which was paid to BroadVision in February
2000. The cash provided by the change in deferred revenue was primarily the
result of $5.0 million we received from an original equipment manufacturer, of
which $2.9 million was included in deferred revenue as of December 31, 1999.

Our investing activities for the nine months ended September 30, 2000
consisted primarily of capital expenditures of $13.0 million, and net purchases
of marketable securities of $51.8 million and the purchase of The Toronto
Technology Group Inc. and Petronio Technology Group which utilized $5.8 million
of cash. Assets acquired consisted principally of leasehold improvements,
computer hardware and software. In the second quarter of 2000 we acquired
Petronio Technology Group and, pursuant to the acquisition agreement, made an
initial cash payment of $600,000 and may be obligated to make two additional
contingent payments of $300,000 each. In addition, in July 2000 we acquired The
Toronto Technology Group for $12.0 million in cash, options and exchangeable
shares of common stock. We paid $5.2 million in cash upon the closing of this
acquisition and will pay the remainder of the purchase price in options and
exchangeable shares. We expect that our capital expenditures will continue to
increase significantly as our employee base grows. We expect that capital
expenditures will total approximately $12.0 million over the next twelve months.

We have a revolving line of credit with Silicon Valley Bank, which provides
for borrowings of up to the lesser of $12.5 million or 80% of eligible accounts
receivable. The line of credit bears interest at the bank's prime rate. At
September 30, 2000, we had $7.2 million available under the line of credit based
upon our borrowing base and no outstanding borrowings. The line of credit is
secured by all of our tangible and intangible intellectual and personal property
and is subject to financial covenants and restrictions, including minimum
liquidity requirements and a prohibition on the payment of dividends. We
currently are in compliance with all related financial covenants and
restrictions.

In September 2000, we entered into a non-recourse receivables purchase
agreement with Silicon Valley Bank, under which we can sell up to $10.0 million
of our accounts receivable to the bank. Under the terms of the receivables
purchase agreement, we can sell certain accounts receivable, subject to
acceptance by the bank, on a non-recourse basis. Upon purchase, the bank assumes
the risk of

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collection for the acquired accounts receivable except in the event we violate
the terms of the receivables purchase agreement or the customer asserts a
discount, allowance, warranty claim or right of return. The accounts receivable
are sold at a discount to reflect a minimum of 45 days and a maximum of 135 days
at the bank's prime rate plus 1%. During the third quarter, we sold
$9.6 million of accounts receivable to the bank under the receivables purchase
agreement.

Net cash provided by financing activities was $4.0 million for the nine
months ended September 30, 2000, principally representing proceeds from stock
option exercises offset in part by payments on long-term obligations.

We believe that our existing financial resources and commercial credit
facilities, together with cash generated by operations, will be sufficient to
meet our cash requirements for at least the next twelve months. Cash
requirements for periods beyond the next twelve months depend on our
profitability, our ability to manage working capital requirements and our growth
rate. We may seek to raise additional funds through public or private debt or
equity financings, or from other sources for general corporate purposes or for
the acquisitions of businesses, products or technologies. On October 26, 2000,
we filed with the SEC a registration statement covering 4,000,000 shares of
common stock to be offered by us and an additional 725,000 shares to be offered
by certain of our stockholders. There can be no assurance that we will complete
this offering or that additional funds will otherwise be available on terms
favorable to us.

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FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK

OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION COULD BE MATERIALLY
ADVERSELY AFFECTED BY ANY OF THE FOLLOWING FACTORS. YOU SHOULD ALSO REFER TO THE
OTHER INFORMATION SET FORTH IN THIS REPORT, INCLUDING OUR FINANCIAL STATEMENTS
AND THE RELATED NOTES.

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 and third 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 September 30, 2000, we had an
accumulated deficit of $21.6 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.
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.

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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. 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.

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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 704 on September 30, 2000,
and we are seeking to hire over 200 additional employees by 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.

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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 Dynamo 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 $10.3 million had been paid as of October 30, 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.

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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, the Netherlands and Sweden. We derived 22% of our total revenues from
customers outside North America for the nine months ended September 30, 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 our loss of the 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

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<PAGE>
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. If e-commerce does not continue to grow or grows more
slowly than expected, demand for our products and services will be reduced.
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

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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.

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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.

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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The majority of our operations are based in the United States and,
accordingly, the majority of our transactions are denominated in U.S. dollars.
However, we have foreign-based operations where transactions are denominated in
foreign currencies and are subject to market risk with respect to fluctuations
in the relative value of currencies. Currently, we have operations in Australia,
Canada, France, Hong Kong, Germany, the Netherlands, Singapore, Sweden and the
United Kingdom and conduct transactions in the local currency of each location.
The impact of fluctuations in the relative value of other currencies was not
material for the three and nine months ended September 30, 2000. We do not use
derivative financial instruments, which are ineligible investments under our
investment policy guidelines; these guidelines also limit the amount of our
credit exposure to any one issuer or group of issuers.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A patent infringement claim was filed by BroadVision, one of our
competitors, on December 11, 1998. The case was filed in the U.S. District Court
for the Northern District of California. BroadVision alleged that we were
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 the 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On July 17, 2000, we acquired The Toronto Technology Group Inc. for
$12.0 million in cash, options and exchangeable shares. We made an initial cash
payment of $5.2 million and assumed options to purchase 19,634 shares of common
stock. In addition to the initial payment, the stockholders of Toronto
Technology Group received 56,237 exchangeable shares of our subsidiary Art
Technology Group (Canada) Inc. The exchangeable shares may, subject to vesting
requirements, become exchangeable for 56,237 shares of our common stock. The
exchangeable shares owned by each stockholder vest annually in three equal
installments if the stockholder remains employed by Art Technology Group
(Canada) Inc.

(D) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES

On July 26, 1999 we closed our initial public offering of 10,000,000 shares
of common stock at a public offering price of $6.00 per share. Our net proceeds
from the offering were $54.3 million. 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 public offering price of $6.00 per share.
Our net proceeds from the exercise of the over-allotment option were
$1.9 million.

On November 10, 1999 we closed our 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. Our net proceeds from the offering were
$91.4 million. On November 22, 1999, in connection with the exercise of the
underwriters' over-allotment option, we issued an additional 175,840 shares of
common stock at the

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public offering price of $33.75 per share. Our net proceeds from the exercise of
the over-allotment option were $5.7 million.

Through September 30, 2000, we had used $56.8 million of our public offering
proceeds for sales and marketing, $19.2 million for capital expenditures,
$15.8 million for research development, and $500,000 for the repayment of
indebtedness. Additionally, $5.2 million was paid as partial consideration and
for professional fees in connection with our acquisition of The Toronto
Technology Group Inc. in July 2000. As of September 30, 2000, we had
$55.3 million of net proceeds remaining. Pending use of these proceeds, we are
investing the proceeds primarily in high-quality short-term investments.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

4.1 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the registrant, effective June 7, 2000.

10.1 Registration Rights Agreement, dated July 17, 2000, between the
registrant and former stockholders of The Toronto Technology
Group Inc.

(b) Reports on Form 8-K
None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, as of November 6, 2000.

<TABLE>
<S> <C> <C>
ART TECHNOLOGY GROUP, INC.

By: /s/ JEET SINGH
---------------------------------------
Jeet Singh
Chief Executive Officer (Principal
Executive Officer)

By: /s/ ANN C. BRADY
---------------------------------------
Ann C. Brady
Vice President, Finance and Chief
Financial Officer (Principal Financial
Officer)

By: /s/ THOMAS J. QUINN
---------------------------------------
Thomas J. Quinn
Corporate Controller (Principal
Accounting Officer)
</TABLE>