10-Q 1 d10q.htm FORM 10-Q Prepared by R.R. Donnelley Financial -- FORM 10-Q
Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of
The Securities Exchange Act of 1934
 
For the Quarter Ended March 31, 2002
 
Commission File Number 0-30881
 
 
CLICK COMMERCE, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
  
36-4088644
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification Number)
 
200 East Randolph Drive, Suite 4900
Chicago, Illinois 60601
(Address of principal executive offices)
 
(312) 482-9006
(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       
On May 13, 2002, 40,297,526 shares of the registrant’s common stock were issued and outstanding.
 

Table of Contents
CLICK COMMERCE, INC.
 
 
           
Page No.
PART I.    FINANCIAL INFORMATION
Item 1.
   
Financial Statements
       
         
1
         
2
         
3
         
4
Item 2.
        
6
Item 3.
        
11
PART II.    OTHER INFORMATION
Item 1.
        
12
Item 2.
        
12
Item 3.
        
12
Item 4.
        
12
Item 5.
        
12
Item 6.
        
12
    
13

Table of Contents
 
PART 1.    FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
CLICK COMMERCE, INC.
 
 
(dollars in thousands)
 
    
March 31, 2002
       
December 31, 2001
  
    
(unaudited)
           
ASSETS
                    
Current assets:
                    
Cash and cash equivalents
   
$
29,802
 
     
$
40,677
 
Short-term investments
   
 
10,000
 
     
 
—  
 
Trade accounts receivable, net
   
 
5,250
 
     
 
6,670
 
Income taxes receivable
   
 
—  
 
     
 
158
 
Other current assets
   
 
1,908
 
     
 
2,534
 
    
    
Total current assets
   
 
46,960
 
     
 
50,039
 
Property and equipment, net
   
 
3,625
 
     
 
3,934
 
Other assets
   
 
659
 
     
 
721
 
    
    
Total assets
   
$
51,244
 
     
$
54,694
 
    
    
LIABILITIES AND SHAREHOLDERS’ EQUITY
                    
Current liabilities:
                    
Accounts payable
   
$
1,045
 
     
$
1,096
 
Billings in excess of revenue earned on contracts in progress
   
 
336
 
     
 
443
 
Deferred revenue
   
 
3,923
 
     
 
2,265
 
Accrued compensation
   
 
1,486
 
     
 
1,686
 
Accrued expenses and other current liabilities
   
 
1,895
 
     
 
2,274
 
Accrued restructuring
   
 
654
 
     
 
950
 
Current portion of capital lease obligations
   
 
816
 
     
 
815
 
    
    
Total current liabilities
   
 
10,155
 
     
 
9,529
 
Capital lease obligations, less current portion
   
 
522
 
     
 
727
 
    
    
Total liabilities
   
 
10,677
 
     
 
10,256
 
Shareholders’ equity:
                    
Preferred stock
   
 
—  
 
     
 
—  
 
Common stock
   
 
40
 
     
 
40
 
Additional paid-in capital
   
 
85,110
 
     
 
85,081
 
Accumulated other comprehensive income—currency translation adjustment
   
 
124
 
     
 
125
 
Deferred compensation
   
 
(2,861
)
     
 
(3,334
)
Accumulated deficit
   
 
(41,846
)
     
 
(37,474
)
    
    
Total shareholders’ equity
   
 
40,567
 
     
 
44,438
 
    
    
Total liabilities and shareholders’ equity
   
$
51,244
 
     
$
54,694
 
    
    
 
See accompanying notes to condensed consolidated financial statements.

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Table of Contents
 
CLICK COMMERCE, INC.
 
 
(dollars in thousands, except per share data)
 
(unaudited)
 
    
Three months ended March 31,
  
    
2002
     
2001
  
Revenues
                  
Product license
   
$
563
 
   
$
6,406
 
Service
   
 
4,774
 
   
 
5,263
 
    
  
Total revenues
   
 
5,337
 
   
 
11,669
 
    
  
Cost of revenues
                  
Product license
   
 
175
 
   
 
171
 
Service (exclusive of $12 and $13 for the three months ended March 31, 2002 and 2001, respectively, reported below as amortization of stock-based compensation)
   
 
2,050
 
   
 
2,997
 
    
  
Total cost of revenues
   
 
2,225
 
   
 
3,168
 
    
  
Gross profit
   
 
3,112
 
   
 
8,501
 
Operating expenses:
                  
Sales and marketing (exclusive of $372 and $557 for the three months ended March 31, 2002 and 2001, respectively, reported below as amortization of stock-based compensation)
   
 
3,986
 
   
 
8,141
 
Research and development (exclusive of $3 and $6 for the three months ended March 31, 2002 and 2001, respectively, reported below as amortization of stock-based compensation)
   
 
1,566
 
   
 
2,607
 
General and administrative (exclusive of $25 and $39 for the three months ended March 31, 2002 and 2001, respectively, reported below as amortization of stock-based compensation)
   
 
1,691
 
   
 
2,828
 
Amortization of stock-based compensation
   
 
412
 
   
 
615
 
    
  
Total operating expenses
   
 
7,655
 
   
 
14,191
 
    
  
Operating loss
   
 
(4,543
)
   
 
(5,690
)
    
  
Interest income
   
 
190
 
   
 
778
 
Interest expense
   
 
(19
)
   
 
(18
)
Other expense
   
 
—  
 
   
 
(100
)
    
  
Other income, net
   
 
171
 
   
 
660
 
    
  
Loss before income taxes
   
 
(4,372
)
   
 
(5,030
)
Income tax benefit
   
 
—  
 
   
 
(1,840
)
    
  
Net loss
   
$
(4,372
)
   
$
(3,190
)
    
  
Basic and diluted loss per share
   
$
(0.11
)
   
$
(0.08
)
    
  
Weighted average shares outstanding—basic and diluted
   
 
40,275,248
 
   
 
38,357,079
 
Comprehensive loss:
                  
Net loss
   
$
(4,372
)
   
$
(3,190
)
Foreign currency translation adjustment
   
 
(1
)
   
 
(80
)
    
  
Comprehensive loss
   
$
(4,373
)
   
$
(3,270
)
    
  
 
See accompanying notes to condensed consolidated financial statements.

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CLICK COMMERCE, INC.
 
 
(dollars in thousands)
 
(unaudited)
 
    
Three Months ended
March 31,
  
    
2002
     
2001
  
Cash flows from operating activities:
                  
Net loss
   
$
(4,372
)
   
$
(3,190
)
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Amortization of stock-based compensation
   
 
412
 
   
 
615
 
Depreciation and amortization
   
 
405
 
   
 
238
 
Provision for doubtful accounts
   
 
30
 
   
 
22
 
Deferred income taxes
   
 
—  
 
   
 
(1,798
)
Amortization of deferred compensation
   
 
61
 
   
 
55
 
Payments related to restructuring charge
   
 
(296
)
   
 
—  
 
Changes in operating assets and liabilities:
                  
Trade accounts receivable
   
 
1,390
 
   
 
2,471
 
Revenue earned on contracts in progress in excess of billings
   
 
—  
 
   
 
441
 
Income taxes receivable
   
 
145
 
   
 
—  
 
Other current assets
   
 
626
 
   
 
(381
)
Accounts payable
   
 
(51
)
   
 
(747
)
Billings in excess of revenues earned on contracts in progress
   
 
(107
)
   
 
(309
)
Deferred revenue
   
 
1,658
 
   
 
653
 
Accrued compensation
   
 
(200
)
   
 
(882
)
Accrued expenses and other current liabilities
   
 
(359
)
   
 
(570
)
Other assets
   
 
62
 
   
 
(132
)
    
  
Net cash used in operating activities
   
 
(596
)
   
 
(3,514
)
Cash flows from investing activities:
                  
Purchases of short-term investments
   
 
(10,000
)
   
 
—  
 
Purchases of property and equipment
   
 
(103
)
   
 
(273
)
    
  
Net cash used in investing activities
   
 
(10,103
)
   
 
(273
)
Cash flows from financing activities:
                  
Proceeds from exercise of stock options
   
 
29
 
   
 
426
 
Principal payments under capital lease obligations
   
 
(204
)
   
 
(104
)
    
  
Net cash (used in) provided by financing activities
   
 
(175
)
   
 
322
 
Effect of foreign exchange rates on cash and cash equivalents
   
 
(1
)
   
 
(80
)
    
  
Net change in cash and cash equivalents
   
 
(10,875
)
   
 
(3,545
)
Cash and cash equivalents at beginning of period
   
 
40,677
 
   
 
51,318
 
    
  
Cash and cash equivalents at end of period
   
$
29,802
 
   
$
47,773
 
    
  
Supplemental disclosures:
                  
Property and equipment acquired under capital leases
   
$
—  
 
   
$
708
 
Interest paid
   
 
19
 
   
 
18
 
Income taxes paid
   
 
9
 
   
 
20
 
 
See accompanying notes to condensed consolidated financial statements.

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CLICK COMMERCE, INC.
 
 
(Dollars in thousands, except per share data)
 
(unaudited)
 
1.    BASIS OF PRESENTATION
 
The unaudited condensed consolidated financial statements include the accounts of Click Commerce, Inc. and its wholly owned subsidiaries (the “Company”) and reflect all adjustments (which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the Securities and Exchange Commission’s rules and regulations. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K and other documents that have been filed with the Securities and Exchange Commission.
 
Certain prior year amounts have been reclassified to conform to 2002 presentation.
 
2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Revenue and Cost Recognition
 
The Company recognizes product license revenue from licensing the rights to use its software. The Company generates service revenues from integrating its software, performing needs analyses for customers and through the sale of maintenance and training services. The Company recognizes revenue in accordance with Statement of Position (“SOP”) No. 97-2 “Software Revenue Recognition” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.” For those contracts that either do not contain a services component or that have services which are not essential to the functionality of any other element of the contract, software license revenue is recognized upon shipment of the Company’s software provided that the fee is fixed and determinable, persuasive evidence of an arrangement exists and collection of the resulting receivable is considered probable. Revenue from service contracts is typically recognized as the services are performed. The revenue to be recognized from multiple-element software contracts is based on the fair value of each element. The Company records deferred revenue on software contracts for which it has billed or collected amounts, but for which the requirements for revenue recognition have not been met.
 
Revenue from contracts in which the Company’s services are essential to the functionality of the other elements of the contract is recognized using the percentage-of-completion method under contract accounting as services are performed or output milestones are reached, as the Company delivers, customizes and installs the software. The percentage completed is measured either by the percentage of labor hours incurred to date in relation to estimated total labor hours or in consideration of achievement of certain output milestones, depending on the specific nature of each contract. For arrangements in which percentage-of-completion accounting is used, the Company records cash receipts from customers and billed amounts due from customers in excess of recognized revenue as billings in excess of revenues earned on contracts in progress. The timing and amount of cash receipts from customers can vary significantly depending on specific contract terms and can therefore have a significant impact on the amount of billings in excess of revenues earned on contracts in progress at the end of any given period.

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Revenue from contracts recognized under the percentage-of-completion method are presented as product revenue to the extent that the underlying milestones are related to software deliveries. To the extent that hours of input are used as the basis for percentage completed or that contract milestones relate to software customization or other professional services, revenues are presented as service revenues.
 
Maintenance service is sold separately under contracts that are renewable annually and is provided only to customers who purchase maintenance. The Company recognizes maintenance service revenue ratably over the contract period, generally one year. Maintenance fees are generally billed annually in advance and are recorded as deferred revenue. As part of the sales process, the Company may perform a needs analysis for the potential customer on a fixed fee basis. Revenue from needs analyses is recognized as the work is performed. Training revenue is recognized as the services are provided.
 
Cost of product license revenue includes production and shipping expenses which are expensed as incurred, as well as costs of licensing third party software incorporated into the Company’s products. These third party license costs are expensed as the products are delivered. Cost of service revenue includes salaries and related expenses for professional services and technical support personnel who provide development, customization and installation services to customers, as well as an allocation of data processing and overhead costs, which are expensed as incurred.
 
Reimbursement of Out-of-Pocket Expenses
 
Effective January 1, 2002, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 01-14, which addresses income statement characterization of reimbursements received for “out-of-pocket” expenses incurred. This EITF requires entities to characterize the reimbursement of out-of-pocket expenses from their customers as revenue, rather than as a reduction of the related expense in the income statement in certain circumstances. Comparative financial statements for prior periods must conform to this presentation. Although adoption of this EITF Issue effects income statement presentation, it does not impact the Company’s earnings or earnings per share. The Company has classified out-of-pocket expenses billed to its customers as service revenue. The current and prior year effect on gross margin percentage was not significant.
 
3.    STOCK-BASED COMPENSATION
 
Prior to its initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4,636. Such deferred compensation is amortized on a straight-line basis over the vesting period of each individual award, resulting in $103 and $306 of stock-based compensation expense for the three months ended March 31, 2002 and 2001, respectively.
 
In April 2000, the Company issued a warrant to Accenture LTD (“Accenture”) to purchase up to 818,226 shares of common stock at $12.22 per share. The warrant vests contingently upon the achievement of certain milestones, primarily the generation of license revenue for the Company, and expires on April 20, 2004. The warrant contains a significant cash penalty for Accenture’s failure to meet the agreed revenue target by the expiration date, and, accordingly, the fair value of the warrant was measured at the date of grant in accordance with EITF Issue No. 96-18 and Statement of Financial Accounting Standards No. 123, resulting in a fair value of approximately $5,000, which was determined using the Black-Scholes option-pricing model. This amount is being amortized to expense on a straight-line basis over the vesting period of the warrant. The Company recognized amortization expense of $309 for each of the three months ended March 31, 2002 and 2001, respectively.
 
4.    RESTRUCTURING
 
In the quarter ended September 30, 2001, the Company determined that, given current economic conditions, it was necessary to lower its overall cost structure. The Company had been experiencing longer sales cycles, delayed purchasing decisions and higher executive level review of all capital projects, particularly on technology and e-commerce projects. These factors, along with the effects of September 11, 2001, caused the Company to

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re-evaluate its near term growth opportunities and take actions to align its cost structure accordingly. As a result, the Company developed a restructuring plan to reduce the Company’s cost structure, which resulted in the Company recording a $1.8 million restructuring charge. As part of the restructuring, the Company terminated approximately 17% of its workforce or approximately 50 personnel across all areas of the Company. As of March 31, 2002, the majority of the Company’s restructuring accrual related to employee severance, benefits and related costs. Due to extended severance arrangements with certain employees, payments against the restructuring charge will be made through December 31, 2002. The following are significant components of the restructuring charge.
 
      
Initial charge at September 30, 2001
     
Cash activity through December 31, 2001
       
Non-cash activity through December 31, 2001
     
2002 Cash Activity
     
Balance at March 31, 2002
Employee severance, benefits and related costs
     
$
1,396
     
$
(547
)
     
$
—  
 
   
$
(255
)
   
$
594
Stock-based compensation
     
 
298
     
 
—  
 
     
 
(298
)
   
 
—  
 
   
 
—  
Facilities related costs
     
 
54
     
 
(13
)
     
 
—  
 
   
 
(18
)
   
 
23
Other
     
 
79
     
 
(19
)
     
 
—  
 
   
 
(23
)
   
 
37
      
    
    
  
  
Total
     
$
1,827
     
$
(579
)
     
$
(298
)
   
$
(296
)
   
$
654
      
    
    
  
  
 
The employee severance and related costs were attributable to personnel who were involuntarily terminated at September 30, 2001. The stock-based compensation charge was a non-cash expense incurred for accelerated vesting under contracts with certain terminated employees. Facilities related costs represent the remaining lease payments for the closing of one office.
 
5.     REVOLVING CREDIT FACILITY
 
On March 31, 2002, the Company renewed its $3.0 million revolving credit facility.
 
6.     SUBSEQUENT EVENT
 
Subsequent to March 31, 2002, the Company completed a review of its operations and began reducing its cost structure to bring costs more in line with expected levels of revenue. As a result, the Company will be reporting a restructuring charge and asset write-off for the quarter ending June 30, 2002, of approximately $1.1 million to $1.3 million. This charge relates primarily to costs associated with employee severance and the write-down of excess fixed assets in connection with the reduction of approximately 25% of the Company’s headcount.
 
 
Overview
 
Click Commerce, Inc. (the “Company”) is a provider of Channel Management software products and integration services that connect large companies with their distribution channel partners. The Company’s software products and integration services enable large companies to effectively manage and engage in collaborative business-to-business electronic commerce throughout all levels of their sell-side channels and processes. The Company develops, implements and supports private marketplaces, which are secure systems that use the Internet to communicate between companies with all participants in the network or chain of distribution who have a password and an Internet browser.
 
The Company commenced operations on August 20, 1996. During the period from inception until early 1998, the Company was primarily engaged in developing software for the Relationship Manager (formerly referred to as the Extranet Manager). In 1996 and 1997, the Company was also engaged in developing Internet Web sites and providing related consulting services. The Company implemented the first Click Commerce Relationship Manager in the second quarter of 1997.

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The Company’s revenue is derived from sales of licenses of its software, comprised of the Relationship Manager and a portfolio of applications, as well as from needs analyses, professional services, training, maintenance and support and out-of-pocket expenses billed to its customers. The Company’s software is generally licensed on a perpetual basis.
 
Operating expenses are classified into four general categories: sales and marketing, research and development, general and administrative and amortization of stock-based compensation. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials. Research and development expenses consist primarily of personnel costs to support product development. General and administrative expenses consist primarily of salaries and other related costs for executive management, finance and administrative employees, legal and accounting services and an allocation of project management overhead. Amortization of stock-based compensation represents the amortization over the related service period of the difference between the exercise price of options granted and the deemed fair market value of the underlying common stock on the date of grant, as well as amortization of the warrant issued in connection with a joint marketing agreement with Accenture LTD (“Accenture”).
 
In April 2000, the Company issued a warrant to Accenture to purchase up to 818,226 shares of common stock at an exercise price of $12.22 per share. The warrant vests contingently upon the achievement of certain milestones, primarily the generation of license revenue for the Company, and expires on April 20, 2004. The warrant contains a significant cash penalty for Accenture’s failure to meet the agreed revenue target by the expiration date, and, accordingly, the fair value of the warrant was determined on the date of grant in accordance with Emerging Issues Task Force Issue No. 96-18 and Statement of Financial Accounting Standards No. 123 to be approximately $5.0 million, which was determined using the Black-Scholes option pricing model. This amount is included in additional paid-in capital and is being amortized to expense over the vesting period of the warrants. For the three months ended March 31, 2002, the Company recognized $0.3 million in amortization expense. The Company expects to recognize future amortization expense of $0.9 million for the remainder of 2002, $1.2 million in 2003 and $0.4 million in 2004.
 
The Company believes that period-to-period comparisons of operating results should not be relied upon as predictive of future performance. The Company’s prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies in new, rapidly evolving markets. The Company may not be successful in addressing such risks and difficulties.

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Results of Operations
 
The following table sets forth selected unaudited financial data for the periods indicated in dollars and as a percentage of total revenue.
 
    
Three Months Ended March 31,
  
    
2002
     
2001
  
    
in 000’s
     
% of Revenue
     
in
000’s
     
% of Revenue
  
Revenues
                              
Product license
   
563
 
   
10.5
%
   
$
6,406
 
   
54.9
%
Service
   
4,774
 
   
89.5
 
   
 
5,263
 
   
45.1
 
    
  
  
  
Total revenues
   
5,337
 
   
100.0
 
   
 
11,669
 
   
100.0
 
Cost of revenues
                              
Product license
   
175
 
   
3.3
 
   
 
171
 
   
1.5
 
Service (a)
   
2,050
 
   
38.4
 
   
 
2,997
 
   
25.7
 
    
  
  
  
Total cost of revenues
   
2,225
 
   
41.7
 
   
 
3,168
 
   
27.1
 
    
  
  
  
Gross profit
   
3,112
 
   
58.3
 
   
 
8,501
 
   
72.9
 
Operating expenses:
                              
Sales and marketing (a)
   
3,986
 
   
74.7
 
   
 
8,141
 
   
69.8
 
Research and development (a)
   
1,566
 
   
29.3
 
   
 
2,607
 
   
22.3
 
General and administrative (a)
   
1,691
 
   
31.7
 
   
 
2,828
 
   
24.2
 
Amortization of stock-based compensation
   
412
 
   
7.7
 
   
 
615
 
   
5.3
 
    
  
  
  
Total operating expenses
   
7,655
 
   
(143.4
)
   
 
14,191
 
   
121.6
 
    
  
  
  
Operating loss
   
(4,543
)
   
(85.1
)%
   
$
(5,690
)
   
(48.8
)%
    
  
  
  
(a)
 
Exclusive of amortization of stock-based compensation presented as a separate caption.
 
Comparison of the three months ended March 31, 2002 to the three months ended March 31, 2001
 
Revenue
 
Total revenue decreased approximately $6.3 million, or 54.3%, to $5.3 million for the three months ended March 31, 2002 from $11.7 million for the three months ended March 31, 2001. Product license revenue, comprised of revenue from separate product-only agreements and from multi-element agreements accounted for under a percentage completed basis using milestones that specifically relate to product deliveries, decreased by $5.8 million, or 91.2%, as a result of a decrease in the number of new contracts due to the economic slowdown and significant decline in information technology spending. Service revenue, comprised of fees related to time and materials service contracts, maintenance, training and needs analyses, reimbursement of out-of-pocket expenses, as well as multi-element agreements accounted for under a percentage completed basis using hours of input or milestones that specifically relate to integration and customization services, decreased by $0.5 million, or 9.3%, over the prior year quarter. This decrease was due to a combined $1.4 million decrease in revenue primarily from needs analyses, contract addenda and from revenue recognized as service revenue under multi-element contracts. This service revenue decrease was offset by a $0.9 million increase in maintenance and support services. Service revenue from time and materials contracts remained flat. In any period, service revenue from time and materials contracts are dependent, among other things, on license transactions closed during the current and preceding quarters and customer decisions regarding implementations of licensed software
 
Cost of Revenue
 
Total cost of revenue decreased approximately $0.9 million, or 29.8%, to $2.2 million for the three months ended March 31, 2002 compared to $3.2 million for the three months ended March 31, 2001. This cost of

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revenue decrease is primarily a result of lower third party contractor costs and employee compensation and related costs due to a reduction in project management personnel. Cost of product revenue remained flat and consisted of royalty fees for licensed third party software that is embedded in the Company’s products or incorporated in the Company’s product offerings, as well as amortization of product packaging costs. Gross profit margins decreased to 58.3% for the three months ended March 31, 2002, compared to 72.9% for the three months ended March 31, 2001. The gross margin decrease is due to a decrease in product revenue as a percent of total revenue.
 
Operating Expenses
 
Sales and Marketing.    Sales and marketing expenses decreased by approximately $4.2 million, or 51.0%, to $4.0 million for the three months ended March 31, 2002 from $8.1 million for the three months ended March 31, 2001. The decrease in sales and marketing expense was primarily attributable to lower employee compensation and related costs due to a reduction in personnel.
 
Research and Development.    Research and development expenses decreased by approximately $1.0 million, or 39.9%, to $1.6 million for the three months ended March 31, 2002, compared to $2.6 million for the prior year three-month period. This decrease was primarily attributable to lower third party contractor costs. To date, all software development costs have been expensed as incurred.
 
General and Administrative.    General and administrative expenses decreased by approximately $1.1 million, or 40.2%, to $1.7 million for the three months ended March 31, 2002 from $2.8 million for the three months ended March 31, 2001. This decrease was primarily attributable to lower employee compensation and related costs due to a reduction in administrative personnel and lower overhead costs.
 
Amortization of stock-based compensation.    Prior to its initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4.6 million. Such deferred compensation is being amortized over the vesting periods of the applicable options, resulting in expense of $0.1 million and $0.3 million for the three months ended March 31, 2002 and 2001, respectively. Additionally, the $5.0 million fair value of the warrant issued to Accenture in April 2000 is being amortized over the vesting period of the warrant. Accordingly, $0.3 million of amortization expense was recognized during each of the three months ended March 31, 2002 and 2001, respectively.
 
Income tax expense.    The Company recorded an income tax benefit of $1.8 million for the three months ended March 31, 2001.|For the three months ended March 31, 2002, the Company’s earnings did not include an income tax benefit, as a full tax valuation allowance against deferred tax assets generated from the Company’s net loss for the three months ended March 31, 2002 was recorded. In the fourth quarter of 2001, the Company established a valuation allowance for deferred tax assets that were previously generated. Although future taxable income of the Company may be sufficient to utilize a substantial amount of the Company’s net operating loss carryforwards and to realize its deferred tax assets, management has concluded that the realization of the Company’s deferred tax assets did not meet the “more likely than not” criteria under SFAS No. 109.
 
Liquidity and Capital Resources
 
At March 31, 2002, the Company had $39.8 million of cash, cash equivalents and short-term investments, consisting primarily of proceeds from its initial public offering. Net cash used in operating activities was $0.6 million and $3.5 million for the three months ended March 31, 2002 and 2001, respectively. The $0.6 million of cash used in the current three month period primarily consisted of a loss before amortization of stock-based compensation and depreciation and amortization totaling approximately $3.6 million offset by an increase in deferred revenue of approximately $1.7 million and a decrease in accounts receivable of $1.4 million.
 
Net cash used by investing activities was $10.1 million for the three months ended March 31, 2002, consisting primarily of a $10.0 million investment of short-term investments. During the first quarter, the Company also purchased $0.1 million of property and equipment.

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Net cash used in financing activities was approximately $0.2 million for the three months ended March 31 2002. The cash used during the current year period reflects $0.2 million in capital lease payments offset by proceeds from the exercise of stock options.
 
On March 31, 2002, the Company renewed its $3.0 million revolving credit facility. In January 2000, the Company obtained a letter of credit under this facility totaling $0.5 million to secure a new office lease. This letter of credit is renewable annually and declines by $0.1 million on the first, second, third and fourth anniversaries of the lease and then declines to $38,130 on the fifth anniversary until the lease expires in August 2005. Accordingly, the letter of credit has declined to $0.3 million.
 
The Company may use cash resources to fund investments in complementary businesses or technologies. The Company believes that working capital will be sufficient to meet its working capital and operating expenditure requirements for at least the next twelve months. The Company has no current plans to raise additional equity during the next twelve months, although such plans are subject to business and market conditions. Thereafter, the Company may find it necessary to obtain additional equity or debt financing, although the Company does not currently foresee a need for additional cash resources for long-term needs. In the event additional financing is required, the Company may not be able to raise it on acceptable terms or at all.
 
Subsequent to March 31, 2002, the Company announced that its Board of Directors had authorized the repurchase of up to $5.0 million of its common stock in the open market. The timing and amount of any repurchase will be at the discretion of the Company’s management. No shares have been purchased as of the date hereof.
 
Recent Accounting Pronouncements
 
In June 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations.” This statement requires that the fair value of a liability for legal obligations associated with the retirement of tangible long-lived assets be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Such legal obligations include obligations a party is required to settle as a result of an existing or enacted law, statute, or ordinance, or written or oral contract. These associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for fiscal years beginning after June 15, 2002. The Company does not expect that the adoption of this statement will have a material impact on the Company.
 
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended:
 
Statements in this Form 10-Q that are not historical facts and refer to the Company’s future prospects are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified by words such as “expect,” “anticipate,” “intend,” “believe,” “hope,” “assume,” “estimate” and other similar words and expressions. The statements are subject to risks and uncertainties and actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including but not limited to, the ability of the Company to execute on its plan to enter into strategic alliances with system integrators and business consultants, the extent of customer acceptance and utilization of the Company’s channel management solutions, the impact of competitive products and services, the Company’s ability to manage growth and to develop new and enhanced versions of its products and services, the effect of economic and business conditions, the volume and timing of customer contracts, the Company’s ability to expand overseas, changes in technology, deployment delays or errors associated with the Company’s products and the Company’s ability to protect its intellectual property rights. For a discussion of these and other risk factors that could affect the Company’s business, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, which is on file with the Securities and Exchange Commission.

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The following discusses the Company’s exposure to market risk related to changes in foreign currency exchange rates and interest rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in Part I of the Company’s Annual Report on Form 10-K under “Risk Factors.”
 
Foreign Currency Exchange Rate Risk
 
To date, predominately all of the Company’s recognized revenues have been denominated in U.S. dollars and primarily from customers in the United States and the exposure to foreign currency exchange rate changes has been immaterial. The Company expects, however, that future product license and professional services revenues may also be derived from international markets and may be denominated in the currency of the applicable market. As a result, operating results may become subject to significant fluctuations based upon changes in the exchange rates of certain currencies in relation to the U.S. dollar. Furthermore, to the extent the Company engages in international sales denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make the Company’s products less competitive in international markets. Although the Company will continue to monitor its exposure to currency fluctuations, and, when appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, there is no assurance that exchange rate fluctuations will not adversely affect financial results in the future.
 
Interest Rate Risk
 
As of March 31, 2002, the Company had cash and cash equivalents of $29.8 million. Declines in interest rates will reduce interest income from short-term investments. Based upon the balance of cash and cash equivalents at March 31, 2002, a change in interest rates of 0.5% would cause a corresponding change in annual interest income of approximately $0.2 million. At March 31, 2002, the Company also had $10.0 million in short-term investments, consisting primarily of short-term bond funds, with an average maturity of three years. A portion of these investments are in fixed rate securities. The fair value of the Company’s fixed rate investments may be adversely impacted by a rise in interest rates.            

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PART II.    OTHER INFORMATION
 
 
On or about December 4, 2001, a putative securities class action, captioned Murphy v. Click Commerce, Inc., et at, Civil Action 01-CV-11234 was filed against the Company, two of the Company’s executive officers and Morgan Stanley & Co., Dain Rauscher Incorporated, Lehman Brothers, Inc., Deutsche Bank Securities, Inc., and U.S. Bancorp Piper Jaffray, Inc., the underwriters of the Company’s initial public offering, in the United States District Court for the Southern District of New York. The complaint alleges violations of Section 11 of the Securities Act of 1933 (the “Securities Act”) against all defendants, a violation of Section 15 of the Securities Act against two of the Company’s executive officers and violations of Section 12(a)(2) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934, including Rule 10b-5 promulgated thereunder, against the underwriters. The complaint seeks unspecified damages on behalf of a purported class of purchasers of common stock between June 26, 2000 and December 6, 2000. As of March 1, 2002, various plaintiffs have filed similar actions asserting virtually identical allegations against approximately 300 other companies. To date, there have been no significant developments in the litigation. The Company intends to defend the lawsuit vigorously.
 
 
On June 26, 2000, the Securities and Exchange Commission declared effective the Company’s Registration Statement on Form S-1, File No. 333-30564, relating to the initial public offering of the Company’s common stock, par value $.001 per share. As of March 31, 2002, the Company had spent approximately $12.0 million of the net proceeds for working capital and general corporate purposes. The remaining proceeds are invested in investment grade, interest-bearing securities.
 
 
Not applicable.
 
 
Not applicable.
 
 
Not applicable.
 
 
(a)    Exhibits:
 
The following exhibit is filed as part of this Form 10-Q:
 
Exhibit Number
   
Description
10.1
   
Release and Severance Agreement between William Conroy and the Company dated as of April 25, 2002.
 
(b)    Reports on Form 8-K
 
None.

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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CLICK COMMERCE, INC.
   
/s/    REBECCA S. MASKEY        
 
   
    Rebecca S. Maskey
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
 
 
Date: May 15, 2001

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