**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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Form 10-Q

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Quarterly Period Ended June 30, 2005**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition periodfrom                        to                        **

**CommissionFile Number 0-30881**

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CLICK COMMERCE, INC.

(Exact name of registrantas 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,52 FloorChicago, Illinois 60601**

(Address of principalexecutive offices)

**(312) 482-9006**

(Registrant’s telephonenumber, including area code)

**Securitiesregistered pursuant to Section 12(b) of the Act: None**

**Securitiesregistered pursuant to Section 12(g) of the Act:Common Stock, par value $0.001 per share**

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Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o  No x

As of August 12,2005, there were 11,799,764 shares of the registrant’s common sharesoutstanding.

 

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**CLICK COMMERCE,INC.**

**INDEX**
|                             | ** ** | ** **                                                                                                                                                      | ** ** | **Page No**. |
|-----------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| PART I.      |       | FINANCIAL  INFORMATION                                                                                                                                          |       |              |   |   |
| Item 1.                     |       | Financial  Statements                                                                                                                                           |       |              | 3 |   |
|                        |       | Condensed Consolidated Balance Sheets as of  June 30, 2005 (unaudited) and December 31, 2004                                                          |       |              | 3 |   |
|                        |       | Condensed Consolidated Statements of Income and  Comprehensive Income for the three and six months ended June 30, 2005  and June 30, 2004 (unaudited) |       |              | 4 |   |
|                        |       | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2005 and 2004 (unaudited)                                               |       |              | 5 |   |
|                        |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                                               |       |              | 7 |   |
| Item 2.                     |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                     |       |              | 16 |   |
| Item 3.                     |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                                     |       |              | 23 |   |
| Item 4.                     |       | Controls and Procedures                                                                                                                                         |       |              | 24 |   |
| PART II.     |       | OTHER  INFORMATION                                                                                                                                              |       |              | 25 |   |
| Item 4.                     |       | Submission of Matters to a Vote of Security Holders                                                                                                             |       |              | 25 |   |
| Item 6.                     |       | Exhibits                                                                                                                                                        |       |              | 25 |   |
| SIGNATURES                  |       |                                                                                                                                                            | 26         |              |
| CERTIFICATIONS              |       |                                                                                                                                                            |       |              |

 

2

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**PART I.   FINANCIALINFORMATION**

**Item1.   Financial Statements**

**CLICKCOMMERCE, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Dollarsin thousands, except per share data)**
| ** **                                                                                                                                                                                                                                                                                | ** ** | **June 30, 2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                | ** ** | **(unaudited)**             | ** ** | ** **                            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                |       |                        |       |                                  |       |   |   |   |   |
| Current assets:                                                                                                                                                                                                                                                                           |       |                        |       |                                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                 |       |                        | $          | 11,828                                |       |   |   | $ | 13,382 |   |   |
| Trade accounts receivable, less allowance for  doubtful accounts of $574 and $514, respectively                                                                                                                                                                                           |       |                        | 15,828     |                                  |       |   | 7,264 |   |   |
| Revenues received on contracts in progress in excess of  billings                                                                                                                                                                                                                         |       |                        | —     |                                  |       |   | 276 |   |   |
| Prepaids and other current assets                                                                                                                                                                                                                                                         |       |                        | 1,399      |                                  |       |   | 389 |   |   |
| Total current assets                                                                                                                                                                                                                                                                      |       |                        | 29,055     |                                  |       |   | 21,311 |   |   |
| Property and  equipment, net                                                                                                                                                                                                                                                              |       |                        | 3,148      |                                  |       |   | 870 |   |   |
| Intangible assets,  net                                                                                                                                                                                                                                                                   |       |                        | 21,272     |                                  |       |   | 2,944 |   |   |
| Goodwill                                                                                                                                                                                                                                                                                  |       |                        | 35,885     |                                  |       |   | 6,874 |   |   |
| Other assets                                                                                                                                                                                                                                                                              |       |                        | 1,430      |                                  |       |   | 738 |   |   |
| Total assets                                                                                                                                                                                                                                                                              |       |                        | $          | 90,790                                |       |   |   | $ | 32,737 |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                             |       |                        |       |                                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                      |       |                        |       |                                  |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                                                                                                          |       |                        | $          | 1,692                                 |       |   |   | $ | 573 |   |   |
| Billings in excess of revenues earned on contracts in  progress                                                                                                                                                                                                                           |       |                        | 795        |                                  |       |   | 68 |   |   |
| Deferred revenue                                                                                                                                                                                                                                                                          |       |                        | 12,013     |                                  |       |   | 5,174 |   |   |
| Accrued compensation                                                                                                                                                                                                                                                                      |       |                        | 1,939      |                                  |       |   | 1,585 |   |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                                                                            |       |                        | 7,056      |                                  |       |   | 2,177 |   |   |
| Short-term notes payable                                                                                                                                                                                                                                                                  |       |                        | 1,288      |                                  |       |   | — |   |   |
| Total current liabilities                                                                                                                                                                                                                                                                 |       |                        | 24,783     |                                  |       |   | 9,577 |   |   |
| Long-term debt                                                                                                                                                                                                                                                                            |       |                        | 6,368      |                                  |       |   | — |   |   |
| Other liabilities                                                                                                                                                                                                                                                                         |       |                        | 13         |                                  |       |   | 6 |   |   |
| Total liabilities                                                                                                                                                                                                                                                                         |       |                        | 31,164     |                                  |       |   | 9,583 |   |   |
| Shareholders’ equity:                                                                                                                                                                                                                                                                |       |                        |       |                                  |       |   |   |   |   |
| Preferred stock,  $0.001 par value, 5,000,000 shares authorized, no shares issued and  outstanding                                                                                                                                                                                        |       |                        | —     |                                  |       |   | — |   |   |
| Common stock,  $0.001 par value, 75,000,000 shares authorized; 11,427,578 and 9,742,401  shares issued as of June 30, 2005 and December 31, 2004,  respectively; 11,398,514 and 9,713,337 shares outstanding as of June 30,  2005 and December 31, 2004, respectively |       |                        | 11         |                                  |       |   | 10 |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                               |       |                        | 100,007    |                                  |       |   | 69,386 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                                                                   |       |                        | 161        |                                  |       |   | 153 |   |   |
| Treasury stock, at  cost—29,064 shares                                                                                                                                                                                                                                               |       |                        | (117       | )                                     |       |   | (117 | ) |   |
| Accumulated  deficit                                                                                                                                                                                                                                                                      |       |                        | (40,436    | )                                     |       |   | (46,278 | ) |   |
| Total shareholders’ equity                                                                                                                                                                                                                                                           |       |                        | 59,626     |                                  |       |   | 23, 154 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                                                          |       |                        | $          | 90,790                                |       |   |   | $ | 32,737 |   |   |

 

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

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**CLICK COMMERCE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME**

**(Dollars inthousands, except per share data)**

**(Unaudited)**
| ** **                                                    | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                             | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                      |       |                                 |       |                                    |       |   |   |   |   |
| Product license                                               |       | $                                    | 1,841      |                                    | $          | 1,215 |   | $ | 3,804 |   | $ | 1,859 |   |
| Service:                                                      |       |                                 |       |                                    |       |   |   |   |   |
| Maintenance and hosting                                       |       | 5,729                                |       | 1,987                                   |       | 9,543 |   | 3,715 |   |
| Consulting and implementation services                        |       | 3,849                                |       | 2,786                                   |       | 7,346 |   | 5,118 |   |
| Subscription                                                  |       | 1,930                                |       | 220                                     |       | 3,581 |   | 788 |   |
| Total service                                                 |       | 11,508                               |       | 4,993                                   |       | 20,470 |   | 9,621 |   |
| Total revenues                                                |       | 13,349                               |       | 6,208                                   |       | 24,274 |   | 11,480 |   |
| Cost of revenues:                                             |       |                                 |       |                                    |       |   |   |   |   |
| Product license                                               |       | 344                                  |       | 85                                      |       | 542 |   | 129 |   |
| Service                                                       |       | 4,827                                |       | 2,258                                   |       | 8,816 |   | 4,682 |   |
| Total cost of revenues                                        |       | 5,171                                |       | 2,343                                   |       | 9,358 |   | 4,811 |   |
| Gross profit                                                  |       | 8,178                                |       | 3,865                                   |       | 14,916 |   | 6,669 |   |
| Operating expenses:                                           |       |                                 |       |                                    |       |   |   |   |   |
| Sales and marketing                                           |       | 1,602                                |       | 680                                     |       | 2,748 |   | 1,278 |   |
| Research and development                                      |       | 1,666                                |       | 654                                     |       | 2,875 |   | 1,065 |   |
| General and administrative                                    |       | 1,282                                |       | 1,200                                   |       | 2,288 |   | 2,115 |   |
| Amortization of stock-based compensation                      |       | —                               |       | 13                                      |       | — |   | 21 |   |
| Amortization of intangible assets                             |       | 505                                  |       | 86                                      |       | 1,225 |   | 126 |   |
| Total operating expenses                                      |       | 5,055                                |       | 2,633                                   |       | 9,136 |   | 4,605 |   |
| Operating income                                              |       | 3,123                                |       | 1,232                                   |       | 5,780 |   | 2,064 |   |
| Other income  (expense), net                                  |       | 89                                   |       | (54                                     | )          | 62 |   | (36 | ) |
| Income before  income taxes                                   |       | 3,212                                |       | 1,178                                   |       | 5,842 |   | 2,028 |   |
| Income tax expense                                            |       | —                               |       | —                                  |       | — |   | — |   |
| Net income                                                    |       | $                                    | 3,212      |                                    | $          | 1,178 |   | $ | 5,842 |   | $ | 2,028 |   |
| Basic net income  per common share                            |       | $                                    | 0.28       |                                    | $          | 0.13 |   | $ | 0.53 |   | $ | 0.24 |   |
| Diluted net income  per common share                          |       | $                                    | 0.27       |                                    | $          | 0.13 |   | $ | 0.50 |   | $ | 0.22 |   |
| Weighted average common shares outstanding—basic         |       | 11,383,737                           |       | 8,866,268                               |       | 11,043,155 |   | 8,623,056 |   |
| Weighted average common shares outstanding—diluted  |       | 12,116,806                           |       | 9,276,191                               |       | 11,766,721 |   | 9,046,789 |   |
| Comprehensive income:                                         |       |                                 |       |                                    |       |   |   |   |   |
| Net income                                                    |       | $                                    | 3,212      |                                    | $          | 1,178 |   | $ | 5,842 |   | $ | 2,028 |   |
| Unrealized loss on marketable securities                      |       | —                               |       | (5                                      | )          | — |   | (5 | ) |
| Foreign currency translation adjustment                       |       | 8                                    |       | 10                                      |       | 8 |   | 15 |   |
| Comprehensive  income                                         |       | $                                    | 3,220      |                                    | $          | 1,183 |   | $ | 5,850 |   | $ | 2,038 |   |

 

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

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**CLICKCOMMERCE, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands)(Unaudited)**
| ** **                                                                                   | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| **Cash flows from operating  activities:**                                                   |       |                                          |       |   |   |
| Net income                                                                                   |       | $                                             | 5,842      |   | $ | 2,028 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                          |       |   |   |
| Amortization of stock-based compensation                                                     |       | —                                        |       | 21 |   |
| Depreciation                                                                                 |       | 470                                           |       | 241 |   |
| Amortization of Intangibles                                                                  |       | 1,706                                         |       | 169 |   |
| Provision for doubtful accounts                                                              |       | 60                                            |       | 120 |   |
| Changes in  operating assets and liabilities, net of effect of acquisitions:                 |       |                                          |       |   |   |
| Trade accounts receivable                                                                    |       | (1,033                                        | )          | (1,591 | ) |
| Prepaids and other current assets                                                            |       | 673                                           |       | 257 |   |
| Accounts payable                                                                             |       | (1,726                                        | )          | 54 |   |
| Billings in excess of revenues earned on contracts in  progress                              |       | 276                                           |       | — |   |
| Deferred revenue                                                                             |       | (3,374                                        | )          | (885 | ) |
| Accrued compensation                                                                         |       | (3,922                                        | )          | 258 |   |
| Accrued expenses and other current liabilities                                               |       | (284                                          | )          | 187 |   |
| Other, net                                                                                   |       | 465                                           |       | 144 |   |
| Net cash (used in) provided by operating activities                                          |       | (847                                          | )          | 1,003 |   |
| **Cash  flows from investing activities:**                                                   |       |                                          |       |   |   |
| Purchases of property and equipment                                                          |       | (247                                          | )          | (136 | ) |
| Acquisition of Xelus, net of cash acquired and deal  costs(a)                                |       | 317                                           |       | — |   |
| Deal costs, Webridge acquisition                                                             |       | —                                        |       | (186 | ) |
| Acquisition of Optum, net of cash acquired and deal  costs(a)                                |       | (1,016                                        | )          | — |   |
| Acquisition of ChannelWave, net of deal costs(a)                                             |       | (1,075                                        | )          | — |   |
| Change in long-term investments, net                                                         |       | —                                        |       | (80 | ) |
| Net cash used in investing activities                                                        |       | (2,021                                        | )          | (402 | ) |
| **Cash  flows from financing activities:**                                                   |       |                                          |       |   |   |
| Proceeds from exercise of stock options                                                      |       | 219                                           |       | 62 |   |
| Proceeds from long-term debt                                                                 |       | 6,368                                         |       | — |   |
| Payments on long-term and short-term debt                                                    |       | (5,270                                        | )          | — |   |
| Payments under capital lease obligations                                                     |       | (3                                            | )          | (69 | ) |
| Net cash provided by (used in) financing activities                                          |       | 1,314                                         |       | (7 | ) |
| Effect of foreign exchange rates on cash and cash  equivalents                               |       | —                                        |       | 1 |   |
| Net increase (decrease) in cash and cash equivalents                                         |       | (1,554                                        | )          | 595 |   |
| Cash and cash equivalents at beginning of period                                             |       | 13,382                                        |       | 11,863 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                             | 11,828     |   | $ | 12,458 |   |
| **Supplemental disclosures:**                                                                |       |                                          |       |   |   |
| Interest paid                                                                                |       | $                                             | 59         |   | $ | 10 |   |
| Income taxes paid                                                                            |       | $                                             | —     |   | $ | — |   |
| Common stock issued for acquisition activities                                               |       | $                                             | 30,404     |   | $ | 3,548 |   |

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(a)              Assets and liabilities were recorded as follows inconnection with the cash payments (cash acquired) for the ChannelWave, Inc.,Optum, Inc., and Xelus, Inc. acquisitions

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

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**CLICKCOMMERCE, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)(Dollars in thousands)(Unaudited)**
| ** **                                   | ** ** | **Channel Wave, Inc.** | ** ** | **Optum, Inc.** | ** ** | **Xelus, Inc.** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|----------------------|------------|----------------------|------------|
| Intangible assets  acquired                  |       |                             | 3,272      |                 |       |                 | 13,726     |   |   |   | 3,036 |   |   |
| Goodwill                                     |       |                             | 2,941      |                 |       |                 | 23,943     |   |   |   | 2,127 |   |   |
| Other assets  aquired                        |       |                             | 471        |                 |       |                 | 6,927      |   |   |   | 4,803 |   |   |
| Total assets  acquired                       |       |                             | 6,684      |                 |       |                 | 44,596     |   |   |   | 9,966 |   |   |
| Less: Liabilities acquired                   |       |                             | 1,404      |                 |       |                 | 17,500     |   |   |   | 10,283 |   |   |
| Net assets acquired exclusive of cash        |       |                             | 5,280      |                 |       |                 | 27,096     |   |   |   | (317 | ) |   |
| Less:Value of  shares issued for acquisition |       |                             | 4,280      |                 |       |                 | 26,124     |   |   |   | — |   |   |
| Plus: Acquisition  costs paid                |       |                             | 75         |                 |       |                 | 44         |   |   |   | — |   |   |
| Total cash paid  (acquired)                  |       |                             | 1,075      |                 |       |                 | 1,016      |   |   |   | (317 | ) |   |

 

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**CLICKCOMMERCE, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1. BASIS OF PRESENTATION**

The unaudited condensedconsolidated 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. Theresults of operations for the three and six months ended June 30, 2005include the results of operations of ChannelWave, Inc. (see note 4) from February 3,2005 through the end of the period, the results of operations of Optum, Inc.(see note 4) from February 8, 2005 through the end of the period, and theresults of Xelus, Inc. (see note 4) from May 28, 2005 through the endof the period. The results of operations for the interim periods presented arenot necessarily indicative of the results to be expected for any subsequentquarter or for the entire fiscal year ending December 31, 2005. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted in accordance with theSecurities and Exchange Commission’s rules and regulations. The unauditedcondensed consolidated financial statements and notes included herein should beread in conjunction with the Company’s audited consolidated financialstatements and notes included in the Company’s Annual Report on Form 10-Kand other documents that have been filed with the Securities and ExchangeCommission.

**2. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

**Revenue Recognition**

Substantially all of the Company’s revenues arederived from four primary sources: (i) licensing software, (ii) providingtechnical support and product updates, otherwise known as maintenance, (iii) applicationhosting, and (iv) providing professional services, including consulting,implementation and training services. The Company’s software is generally soldthrough a perpetual license or a limited term license (a subscription). TheCompany typically licenses its software in multiple-element arrangements inwhich the customer purchases a combination of: (i) software products, (ii) amaintenance arrangement, which is generally priced as a percentage of thesoftware license fees and provides for technical support and updates over aperiod of generally one year, (iii) hosting services, and/or (iv) aprofessional services arrangement.

The Company recognizes revenue using the residualmethod pursuant to the requirements of Statement of Position No. 97-2 “SoftwareRevenue Recognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9,“Software Revenue Recognition with Respect to Certain Arrangements.” Under theresidual method, revenue is recognized in a multiple-element arrangement whencompany-specific objective evidence of fair value exists for all of theundelivered elements in the arrangement, but does not exist for one or more ofthe delivered elements in the arrangement. The Company allocates revenue toeach element in a multiple-element arrangement based on its respective fairvalue, with the fair value determined by the price charged when that element issold separately. The Company defers revenue for the fair value of itsundelivered elements (e.g. professional services and maintenance) andrecognizes revenue for the remainder of the arrangement fee attributable to thedelivered elements (i.e. software product) when the criteria in SOP 97-2have been met. If evidence of fair value of the undelivered elements of thearrangement does not exist, all revenue from the arrangement is deferred untilsuch time evidence of fair value does exist, or until all elements of thearrangement are delivered.

7

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License revenue from contracts in which the Company’sservices are not considered essential to the functionality of the software arerecognized upon delivery, assuming the above criteria for revenue recognitionare met under SOP 97-2. Services are not considered essential if thesoftware is ready for use by the customer upon receipt and, therefore,implementation services do not involve significant customization to, ormodification or development of, the underlying software code.

Revenue from contracts in which the Company’s servicesare essential to the functionality of the other elements of the contract isrecognized using the percentage-of-completion method under contract accountingas services are performed as the Company delivers, customizes and installs thesoftware. The percentage completed is measured by the percentage of labor hoursincurred to date in relation to estimated total labor hours required to fulfillthe contract. In contracts with revenue recognized under thepercentage-of-completion method, revenues are presented as product licenserevenue to the extent that the underlying contracts are for software licensesbased on equal application of discounts across all elements of the largerarrangement. When percentage-of-completion accounting is used, the Companyrecords cash receipts from customers and billed amounts due from customers inexcess of recognized revenue as billings in excess of revenues earned oncontracts in progress. The timing and amount of cash receipts from customerscan vary significantly depending on specific contract terms and can, therefore,have a significant impact on the amount of billings in excess of revenuesearned on contracts in progress at the end of any given period.

The Company provides hosting services to customersthat have licensed the Company’s software under a limited-term software license(a subscription). Revenue from software subscriptions have been accounted forin accordance with the guidance provided by Staff Accounting Bulletin (“SAB”) No. 104,“*Revenue Recognition.”* The feesrelated to multiple-element arrangements are allocated to the individualelements in accordance with Emerging Issues Task Force (“EITF”) 00-21 “*Revenue Arrangements with Multiple Deliverables,”*based upon verifiable, objective evidence of the fair values of each accountingunit. The Company’s subscription arrangements with customers generally includeseveral elements, including (1) a limited-term software license (asubscription), (2) strategic consulting services, (3) set-up andsoftware subscription services, and (4) hosting services. The Companyrequires customers in these limited term arrangements to use its hostingservices, which in accordance with EITF 00-3, “*Application of AICPA Statement of Position 97-2 to ArrangementsThat Include the Right to Use Software Stored on Another Entity’s Hardware,”*results in all arrangement revenue being deferred and recognized ratably overthe term of the limited-term license agreement. If the arrangement includesconsulting services, these services are presented as consulting andimplementation service revenues and are deferred and recognized ratably overthe term of the arrangement, which is normally 12-24 months. Under SAB No. 104,costs associated with set-up and implementation of the subscriptions may beexpensed as incurred or deferred and recognized over the term of the relatedarrangement. The Company has elected to defer such costs. The softwaresubscription service typically begins upon customer acceptance.

The Company also provides hosting services tocustomers that have licensed the Company’s software on a perpetual basis. Insuch cases and in accordance with EITF 00-3, the hosting revenue isconsidered a separate contractual element of the arrangement and is recognizedaccording to SOP 97-2. Fair value of the hosting services is typicallybased on the stated renewal rate of the hosting services, which is deemedsubstantive by management.

The Company determines the fair value of themaintenance portion of the arrangement based on the stated renewal rate foradditional maintenance terms based on renewal rates charged separately to othercompanies. The Company’s customers typically prepay maintenance for the firstyear in connection with new software licenses and the related revenue isdeferred and recognized ratably over the term of the initial maintenancecontract. Maintenance is renewable by the customer on an annual basisthereafter. Rates for maintenance, including subsequent renewal rates, are typicallyestablished based upon a 

8

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specified percentage ofnet license fees as set forth in the arrangement and are deemed to besubstantive by management.

Professional service revenues primarily consists ofimplementation services related to the installation of the Company’s softwareproducts and training revenues. The fair value of the professional servicesportion of the arrangement is based on the daily rates the Company charges forthese services when sold independently from a software license.

In accordance with EITF No. 01-14,the Company classifies the reimbursement of out-of-pocket expenses from itscustomers as consulting and implementation revenue in the statement of income.

**Cash,Cash Equivalents and Short-Term Investments**

The Company considers allhighly liquid investments with original maturity dates of three months or lessto be cash equivalents. Cash equivalents are carried at cost, whichapproximates fair market value.

**Long-term Investments**

The Company has investedin a long-term investment fund. Under terms of the investment, the Company hasa total commitment of $2.0 million of which $920,000 has been contributed todate for a pro rata ownership interest of less than 2%.

**Stock-Based Compensation**

The Company accounts for its stock options in accordancewith the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,*“Accounting for Stock-Based Compensation,”*which permits entities to recognize as expense over the vesting period the fairvalue of all stock-based awards on the date of grant. Alternatively, SFAS No. 123also allows entities to continue to apply the provisions of AccountingPrinciples Board Opinion No. 25,*“Accountingfor Stock Issued to Employees”* (“APB 25”) and relatedinterpretations. The Company continues to apply the provisions of APB 25 andprovides the pro forma disclosures required by SFAS No. 123, as amended bySFAS No. 148,*“Accounting forStock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123.”* As such, compensation expense would berecorded only if the fair value of the underlying stock exceeded the exerciseprice on the grant date.

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TheCompany has applied APB No. 25 and related interpretations in accountingfor the Employee Stock Option Plan and the Directors’ Stock Option Plan.Accordingly, no compensation expense has been recognized on stock options forwhich the exercise price equaled the fair value at the date of grant. Had theCompany determined compensation expense based on the method required by SFAS No. 123,the Company’s net income and net income per common share for the three and sixmonths ended June 30, 2005 and 2004 would approximate the pro formaamounts below.
| ** **                                                                                                                     | ** ** | **Three months ended  June 30,**                    | ** ** | **Six months ended  June 30,** | ** ** | ** ** |       |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                                                                                                     | ** ** | **2005**                                                           | ** ** | **2004**                                      | ** ** | **2005**   | ** ** | **2004** | ** ** | ** ** |
| ** **                                                                                                                     | ** ** | **(in thousands, except per share data)** | ** ** | ** **                                    |
| Net income, as  reported                                                                                                       |       | $                                                                  | 3,212      |                                          | $          | 1,178      |       | $ | 5,842 |   | $ | 2,028 |   |   |   |
| Stock-based employee compensation expense included  in the determination of net income as reported, net of related tax effects |       | —                                                             |       | 13                                            |       | —     |       | 21 |   |   |   |
| Total fair value method employee stock-based  compensation expense, net of related tax effects                                 |       | (1,598                                                             | )          | (305                                          | )          | (1,797     | )          | (539 | ) |   |   |
| Pro forma net income                                                                                                           |       | $                                                                  | 1,614      |                                          | $          | 886        |       | $ | 4,045 |   | $ | 1,510 |   |   |   |
| Basic income per share:                                                                                                        |       |                                                               |       |                                          |       |       |       |   |   |   |   |
| As reported                                                                                                                    |       | $                                                                  | 0.28       |                                          | $          | 0.13       |       | $ | 0.53 |   | $ | 0.24 |   |   |   |
| Pro forma                                                                                                                      |       | $                                                                  | 0.14       |                                          | $          | 0.10       |       | $ | 0.37 |   | $ | 0.18 |   |   |   |
| Diluted income per  share:                                                                                                     |       |                                                               |       |                                          |       |       |       |   |   |   |   |
| As reported                                                                                                                    |       | $                                                                  | 0.27       |                                          | $          | 0.13       |       | $ | 0.50 |   | $ | 0.22 |   |   |   |
| Pro forma                                                                                                                      |       | $                                                                  | 0.13       |                                          | $          | 0.10       |       | $ | 0.34 |   | $ | 0.17 |   |   |   |
|                                                                                                                                |            |                                                                    |            |                                               |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The fair value of eachstock option granted is estimated on the date of grant using the Black-Scholesoption-pricing model, with the following weighted average assumptions for thethree months and six months ended June 30, 2005, respectively: expectedlife of 4 years; expected volatility of between 79% and 91%; risk-freeinterest rate of 4%, and 0% dividend yield.

Priorto its IPO, the Company granted certain stock options at exercise prices lessthan their deemed fair value. Such deferred compensation was amortized on astraight-line basis over the vesting period of each individual award, resultingin $13,000 and $21,000 of stock-based compensation expense for the three andsix months ended June 30, 2004. The deferred compensation was fully amortizedat June 30, 2004. The following table contains the amortization expenseattributable to each noted expense caption, as applicable on the CondensedConsolidated Statements of Operations.
| ** **                                                  | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                        | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**                         | ** ** |
| Stock-based  employee compensation expense attributable to: |       |                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                            |       |                                            | —     |                                     |       |   | 11 |   |   |   | — |   |   |   | 13 |   |   |
| Sales and marketing                                         |       |                                            | —     |                                     |       |   | 2 |   |   |   | — |   |   |   | 8 |   |   |
| Total                                                       |       |                                            | $          | —                                   |       |   |   | $ | 13 |   |   |   | $ | — |   |   |   | $ | 21 |   |   |
|                                                             |            |                                                 |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In the fourth quarter of2004, the FASB issued Statement No. 123 (revised 2004), or SFAS No. 123R,“Share-Based Payment,” which replaces Statement No. 123 “*Accounting for Stock-Based Compensation*,”and supersedes APB Opinion No. 25, “*Accountingfor Stock Issued to Employees*.” SFAS No. 123R eliminates theintrinsic value method of accounting option that was provided in the originalStatement No. 123. Under Statement No. 123R, pro forma disclosurewill no longer be allowed after a phase-in period. In the first quarter of 2005,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107which provided further clarification on the implementation of SFAS No. 123R.

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**3. NET INCOME PERSHARE**

Netincome per share was computed as follows:
| ** **                                            | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **(in thouasnds, except per share amounts)**    | ** ** |
| **Basic  income per share:**                          |       |                                            |       |                                          |       |   |   |   |   |
| Net income                                            |       | $                                               | 3,212      |                                          | $          | 1,178 |   | $ | 5,842 |   | $ | 2,028 |   |
| Weighted average common shares outstanding            |       | 11,384                                          |       | 8,866                                         |       | 11,043 |   | 8,623 |   |
| Per share amount                                      |       | $                                               | 0.28       |                                          | $          | 0.13 |   | $ | 0.53 |   | $ | 0.24 |   |
| **Diluted income (loss) per share:**                  | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                            |       | $                                               | 3,217      |                                          | $          | 1,178 |   | $ | 5,839 |   | $ | 2,028 |   |
| Weighted average common shares outstanding            |       | 11,384                                          |       | 8,866                                         |       | 11,043 |   | 8,623 |   |
| Add: Effect of dilutive securities—stock options |       | 733                                             |       | 410                                           |       | 724 |   | 424 |   |
| Diluted weighted average shares outstanding           |       | 12,117                                          |       | 9,276                                         |       | 11,767 |   | 9,047 |   |
| Per share amount                                      |       | $                                               | 0.27       |                                          | $          | 0.13 |   | $ | 0.50 |   | $ | 0.22 |   |

 

For the three months endedJune 30, 2005 and 2004, 60,935 and 366,177 shares, respectively,attributable to outstanding stock options were excluded from the calculation ofdiluted earnings per share because their effect was antidilutive. For the sixmonths ended June 30, 2005 and 2004, 125,767 and 283,183 shares,respectively, attributable to outstanding stock options were excluded from thecalculation of diluted earnings per share because their effect wasantidilutive.

**4. BUSINESSCOMBINATIONS**

On April 21, 2004,the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”)with Webridge, Inc. (“Webridge”), a privately held Delaware corporationbased in Beaverton, Oregon. Pursuant to the Purchase Agreement, dated as of March 17,2004 and amended March 30, 2004, Click-Webridge, Inc., a wholly ownedsubsidiary of the Company, purchased substantially all of the operating assetsof Webridge. Click-Webridge, Inc. acquired the operating assets ofWebridge based on a valuation of Webridge as a going-concern, for considerationconsisting of 615,303 shares of Click Commerce, Inc. common stock,valued at $5.766 per share, including shares issued for working capitaladjustments.

On July 1, 2004, TheCompany entered into an Agreement and Plan of Merger dated as of June 17,2004 to acquire bTrade, Inc. (“bTrade”), a privately held Texascorporation based in Irving, Texas. Pursuant to this Agreement and Plan ofMerger, bTrade became a wholly owned indirect subsidiary of the Company. TheCompany acquired bTrade, based on a valuation of bTrade as a going-concern, forconsideration consisting of approximately 669,367 shares (adjusted for workingcapital settlements), valued at $4.795 per share, of Company common stock, $0.2million of cash, and the repayment of approximately $1.3 million of existingbTrade indebtedness.

On February 2, 2005,the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”)with ChannelWave, Inc. (“ChannelWave”). Pursuant to the PurchaseAgreement, the Company acquired certain assets from ChannelWave, including substantiallyall assets relating to ChannelWave’s Partner Relationship Management System andService Information System businesses, for consideration comprised of$1.0 million of cash and 225,807 shares valued at $18.954 per share of theCompany’s common stock (of which 29,033 shares are being held by the Company inescrow for certain potential additional liabilities of ChannelWave pursuant tothe Purchase Agreement). The shares of the Company’s common stock are expectedto be registered for resale on a Registration Statement on Form S-3.

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On February 7, 2005, the Company entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc. (“Optum”)and its stockholders, pursuant to which the Company acquired Optum. Inconsideration for the merger, the Company paid $325,467 in cash, issued1,405,780 shares valued at $18.583 per share of the Company’s common stockto the stockholders of Optum (of which $65,093 in cash and 281,156 sharesof the Company’s common stock are being held by an escrow agent for certainpotential additional liabilities of Optum pursuant to the Merger Agreement),assumed approximately $4.3 million of Optum indebtedness, and incurredvarious transaction-related expenses. The shares of the Company’s common stockare expected to be registered for resale on a Registration Statement on Form S-3.

On May 27, 2005, the Company entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Xelus, Inc. (“Xelus”)and its stockholders, pursuant to which the Company acquired Xelus. Inconsideration for the merger, the Company paid $1 in cash, assumedapproximately $2.2 million of Xelus indebtedness, settled a long-termlease liability for $543,000 and incurred various transaction-related expenses.No shares of Company stock were issued in connection with the Xelusacquisition.

Thefollowing table summarizes the estimated fair values of the assets acquired andthe liabilities assumed on the effective dates of the ChannelWave, Optum andXelus acquisitions. The Company incurred approximately $75,000, $250,000 and$125,000 of direct expenses related to the closing of the ChannelWave, Optumand Xelus acquisitions, respectively. Due to the timing of the acquisitions,the final allocations of the purchase prices are subject to change as theCompany completes the valuation of the acquired assets and assumed liabilities.
| ** **                                      | ** ** | **ChannelWave**                | ** ** | **Optum**                      | ** ** | **Xelus**                  | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **February 2, 2005** | ** ** | **February 7, 2005** | ** ** | **May 27, 2005** | ** ** |
| ** **                                      | ** ** | **(in thousands)**        | ** ** |
| Assets:                                         |       |                           |       |                           |       |                       |       |   |   |   |   |   |   |
| Cash and cash equivalents                       |       |                           | $          | —                         |       |                       |       | $ | 817 |   |   |   | $ | 844 |   |   |
| Trade accounts receivable, net                  |       |                           | 421        |                           |       |                       | 3,769      |   |   |   | 2,935 |   |   |
| Other current assets                            |       |                           | —     |                           |       |                       | 1,094      |   |   |   | 1,061 |   |   |
| Total current assets                            |       |                           | 421        |                           |       |                       | 5,680      |   |   |   | 4,840 |   |   |
| Property and equipment                          |       |                           | 50         |                           |       |                       | 1,644      |   |   |   | 807 |   |   |
| Intangible assets, including in-process R&D |       |                           | 3,272      |                           |       |                       | 13,726     |   |   |   | 3,036 |   |   |
| Goodwill                                        |       |                           | 2,941      |                           |       |                       | 23,943     |   |   |   | 2,127 |   |   |
| Other assets                                    |       |                           | —     |                           |       |                       | 421        |   |   |   | — |   |   |
| Total assets                                    |       |                           | $          | 6,684                          |       |                       |       | $ | 45,414 |   |   |   | $ | 10,810 |   |   |
| Liabilities:                                    |       |                           |       |                           |       |                       |       |   |   |   |   |   |   |
| Accounts payable                                |       |                           | $          | —                         |       |                       |       | $ | 1,705 |   |   |   | $ | 1,141 |   |   |
| Accrued liabilities                             |       |                           | 75         |                           |       |                       | 4,363      |   |   |   | 648 |   |   |
| Accrued compensation                            |       |                           | —     |                           |       |                       | 3,411      |   |   |   | 907 |   |   |
| Deferred revenue                                |       |                           | 1,329      |                           |       |                       | 3,571      |   |   |   | 5,314 |   |   |
| Short-term lease obligation                     |       |                           | —     |                           |       |                       | 165        |   |   |   | — |   |   |
| Short-term debt obligation                      |       |                           | —     |                           |       |                       | 1,761      |   |   |   | 2,204 |   |   |
| Long-term debt obligation                       |       |                           | —     |                           |       |                       | 2,524      |   |   |   | 69 |   |   |
| Total liabilities                               |       |                           | 1,404      |                           |       |                       | 17,500     |   |   |   | 10,283 |   |   |
| Stockholders’ equity:                      |       |                           |       |                           |       |                       |       |   |   |   |   |   |   |
| Net assets acquired                             |       |                           | $          | 5,280                          |       |                       |       | $ | 27,914 |   |   |   | $ | 527 |   |   |
|                                                 |            |                                |            |                                |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table sets forth the allocation, to date, of intangible assets tocustomer relationships, developed technology, trade names and order backlog, aswell as the in-process R&D charge recorded 

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from the acquisition of bTrade. These intangibleassets, as well as the goodwill recorded by the Company, will be evaluated, as required,to determine that the fair values of such assets do not exceed their recordedvalues. If an impairment exists, the carrying values of such assets will bereduced to their fair value.
| ** **                                               | ** ** | **Customer  Relationships(1)** | ** ** | **Developed  Technology(2)** | ** ** | **Trade  Names(3)** | ** ** | **Order  Backlog(4)** | ** ** | **In process  R&D(5)** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------------------|------------|-----------|------------|
| Xelus(6)                                                 |       |                           | 2,684      |                         |       |                | 283        |                  |       |                            | —     |      |       |   | 69 |   |   |   | — |   |   | 3,036 |   |
| Optum(6)                                                 |       |                           | 9,850      |                         |       |                | 3,573      |                  |       |                            | —     |      |       |   | 303 |   |   |   | — |   |   | 13,726 |   |
| ChannelWave(6)                                           |       |                           | 2,758      |                         |       |                | 514        |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 3,272 |   |
| bTrade                                                   |       |                           | 1,195      |                         |       |                | 274        |                  |       |                            | —     |      |       |   | 143 |   |   |   | 6 |   |   | 1,618 |   |
| Webridge                                                 |       |                           | 560        |                         |       |                | 910        |                  |       |                            | 150        |      |       |   | — |   |   |   | — |   |   | 1,620 |   |
| Allegis                                                  |       |                           | 466        |                         |       |                | —     |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 466 |   |
| Gross intangible  assets and in-process R&D          |       |                           | 17,513     |                         |       |                | 5,554      |                  |       |                            | 150        |      |       |   | 515 |   |   |   | 6 |   |   | 23,738 |   |
| Accumulated  amortization to date                        |       |                           | (1,475     | )                            |       |                | (654       | )                     |       |                            | (60        | )         |       |   | (271 | ) |   |   | (6 | ) |   | (2,466 | ) |
| Balance at  June 30, 2005                           |       |                           | $          | 16,038                       |       |                |       | $                     | 4,900      |                            |       |      | $          | 90 |   |   |   | $ | 244 |   |   |   | $ | — |   |   | $ | 21,272 |   |
| Amortization  expense                                    |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Six months ended  June 30, 2005                     |       |                           | 1,001      |                         |       |                | 481        |                  |       |                            | 25         |      |       |   | 199 |   |   |   |   |   |   | 1,706 |   |
| Six months ended  June 30, 2004                     |       |                           | 116        |                         |       |                | 43         |                  |       |                            | 10         |      |       |   | — |   |   |   |   |   |   | 169 |   |
| Estimated  amortization expense for the 12 months ended: |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| December 31,  2005                                  |       |                           | 2,345      |                         |       |                | 1,035      |                  |       |                            | 50         |      |       |   | 385 |   |   |   |   |   |   | 3,815 |   |
| December 31,  2006                                  |       |                           | 2,536      |                         |       |                | 1,194      |                  |       |                            | 50         |      |       |   | 58 |   |   |   |   |   |   | 3,838 |   |
| December 31,  2007                                  |       |                           | 2,536      |                         |       |                | 1,194      |                  |       |                            | 15         |      |       |   |   |   |   |   |   |   |   | 3,745 |   |
| December 31,  2008                                  |       |                           | 2,536      |                         |       |                | 910        |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   | 3,446 |   |
| December 31, 2009                                   |       |                           | 2,416      |                         |       |                | 844        |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   | 3,260 |   |
|                                                          |            |                                |            |                              |            |                     |            |                       |            |                                 |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)   Customerrelationships are amortized over 7 years for Optum and Xelus, 6 years forChannelWave, 5 years for bTrade and Webridge, and 3 years for Allegis.

(2)          Developed technology isamortized over 5 years for bTrade, ChannelWave and Optum and 4 years forWebridge and 3 years for Xelus and is reflected in the cost of product licenserevenue on the consolidated statement of income and comprehensive income(loss).

(3)          Trade names areamortized over 3 years.

(4)          Order backlogs areamortized over 1 year for bTrade, Optum and Xelus.

(5)          In-process R&D ischarged immediately to amortization of intangible assets on the statement ofincome and comprehensive income.

(6)          Pending final valuationby independent firm.

Thefollowing unaudited pro forma financial information for the three and sixmonths ended June 30, 2005 and 2004 presents the consolidated operationsof the Company as if all of the acquisitions had been made on January 1,2004, after giving effect to certain adjustments for the pro forma acquisitionas of the assumed January 1, 2004 acquisition date. Under the provisionsof SFAS No. 142, goodwill acquired in transactions completed after June 30,2001 is not amortized. As all of the Company’s acquisitions occurred subsequentto that date, these pro forma results do not reflect any goodwill amortizationexpense. The 

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unaudited pro forma financial information is providedfor informational purposes only. It should not be construed to be indicative ofthe Company’s consolidated results of operations had the acquisitions beenconsummated on these earlier dates and do not project the Company’s results ofoperations for any future period:
| ** **                           | ** ** | **Three months ended  June 30,**                    | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                                           | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenues                             |       | $                                                                  | 14,352     |                                          | $          | 16,243 |   | $ | 30,606 |   | $ | 37,439 |   |
| Net income (loss)                    |       | 2,290                                                              |       | 65                                            |       | 4,444 |   | (3,066 | ) |
| Basic net income  (loss) per share   |       | $                                                                  | 0.20       |                                          | $          | 0.01 |   | $ | 0.38 |   | $ | (0.27 | ) |
| Diluted net income  (loss) per share |       | $                                                                  | 0.19       |                                          | $          | 0.01 |   | $ | 0.35 |   | $ | N/A |   |

 

**5. RESTRUCTURING**

In the second quarter of 2003, the Company implementeda restructuring plan following the acquisition of Allegis. As part of thisplan, certain redundant costs were eliminated including rents for excess officespace in Chicago and Boston.

As of June 30,2005, the Company’s restructuring accrual covered remaining lease commitmentson excess office space in Boston. Due to the length of this lease agreement,payments against the restructuring accrual will be made through the quarterending December 31, 2005. The following table contains the significantcomponents of the restructuring charge and current year-to-date activityrelating to those components.
| ** **                | ** ** | **Accrual at  December 31,  2004** | ** ** | **2005 YTD  cash  payments** | ** ** | **Balance at  June 30,  2005** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|-----------------------------------|------------|------------------------------------------|------------|
| Facilities  related costs |       |                                         | $          | 79                                |       |                                     |       | $ | (42 | ) |   |   | $ | 37 |   |   |
|                           |            |                                              |            |                                   |            |                                          |            |  |  |  |  |  |  |  |  |  |

 

**6. FINANCING ARRANGEMENTS**

On March 31, 2005,the Company entered into a $10.0 million revolving line of credit agreementmaturing on April 1, 2008. The borrowing under the line of credit carriesan interest rate based on the LIBOR average rate with a weighted averageinterest rate of 4.6% in the quarter ended June 30, 2005. The unusedportion is subject to a fee of 0.3%. As of June 30, 2005, the Company hadborrowed $6.4 million to pay off the debt and certain liabilities assumed in theOptum and Xelus acquisitions. Of the remaining $3.6 million, up to $2.0 millionmay be used for the Company’s letters of credit. The line of credit containsterms that, among other provisions, require the Company to maintain certainminimum net worth and other financial ratios and specific limits orrestrictions on additional indebtedness, liens and continuity of business.Provisions under this line of credit are not considered restrictive to normaloperations.

**7. COMMITMENTS AND CONTINGENCIES**

In November 2002, the FASB issued FIN 45, “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.”Under the Company’s standard software license agreements, the Company agrees toindemnify, defend and hold harmless its licensees’ use of Company software fromand against certain losses, damages and costs arising from claims alleging thelicensees’ use of Company software infringes on the intellectual propertyrights of a third party. The indemnification is contingent upon (a) thecustomer providing the Company with prompt written notice of such claims; (b) thecustomer providing reasonable cooperation to the Company in the defense andsettlement of such claim, at the Company’s expense; and (c) the Companyhaving sole authority to defend or settle the claim. Historically, the Companyhas not been required to pay material amounts in connection 

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with claims asserted underthese provisions, and accordingly, the Company has not recorded a liabilityrelating to such provisions.

In the fourth quarter of 2004, the Company received aletter from the tax authorities in the Netherlands that proposed taxdeficiencies, penalties and interest based on audits of the years 2000, 2001and 2002 in the amount of €2.3 million,or approximately $2.8 million. The asserted tax deficiencies relate tocertain wage tax amounts, including amounts related to vested employee stockoptions that the tax inspector believes should have been withheld by theCompany on behalf of several employees. The Company believes that it hasmeritorious legal defenses to a significant portion of these allegeddeficiencies. The Company recorded an accrual of $650,000 in the fourth quarterof the year ended December 31, 2004 for its assessment of the mostprobable outcome of this matter. This reserve is recorded in accrued expensesand other current liabilities on the June 30, 2005 and December 31,2004 consolidated balance sheets.

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**Item2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following discussionshould be read in conjunction with the Company’s consolidated condensedfinancial statements and notes elsewhere in this quarterly report.

**Overview**

Click Commerce, Inc. (the “Company”) providessoftware designed to help companies streamline their trading partnerinteractions and automate compliance-related activities. We believe thatcompanies using our software, companies can optimize business processes,improve financial performance, lower costs for partners and customers, increasebrand loyalty, improve customer service and reduce risk. The Company’scollaborative commerce and supply chain solutions are designed to enablecompanies to streamline their trading partner interactions to drive businessvalue and competitive advantage. The Company’s compliance automation solutions aredesigned to enable institutions to automate their regulatory complianceprocesses and manage research project approvals. Each of the company’s productlines applies similar underlying technology to effect secure Internetcommunications as a replacement for handwritten forms, telephone and faxcommunications and other electronic data systems. The Company commenced operationson August 20, 1996.

Effective March 24, 2003, the Company completedits acquisition of all of the capital stock of Allegis Corporation (“Allegis”),a privately-held California corporation engaged in licensing partnerrelationship management software and providing professional implementationservices, hosting and maintenance services related to its software. Results ofAllegis’ operations have been included in the Company’s consolidated financialstatements since March 24, 2003. Under the terms and conditions of theAgreement and Plan of Merger, Allegis became a wholly owned subsidiary of theCompany, and the holders of Allegis’ preferred stock received cashconsideration in an aggregate amount of approximately $10,200. The Companyfunded the acquisition using available cash on hand.

Effective April 21, 2004, the Company enteredinto an Asset Purchase Agreement (the “Purchase Agreement”) with Webridge, Inc.(“Webridge”), a privately held Delaware corporation based in Beaverton, Oregon.Pursuant to the Purchase Agreement, dated as of March 17, 2004 and amendedMarch 30, 2004, Click-Webridge, Inc., a wholly owned subsidiary ofthe Company, purchased substantially all of the operating assets of Webridge.Click-Webridge, Inc. acquired the operating assets of Webridge based on avaluation of Webridge as a going-concern, for consideration consisting of615,303 shares of Click Commerce, Inc. common stock, valued at $5.766per share, including shares issued for working capital adjustments. The Companyincurred $0.2 million of transaction costs.

Effective July 1, 2004, the Company entered intoan Agreement and Plan of Merger dated as of June 17, 2004 to acquire allof the capital stock of bTrade, Inc. (“bTrade”), a privately-held Texascorporation based in Irving, Texas. Pursuant to this Agreement and Plan ofMerger, bTrade became a wholly owned indirect subsidiary of the Company. TheCompany acquired bTrade, based on a valuation of bTrade as a going-concern, forconsideration consisting of approximately 669,367 shares (adjusted for workingcapital settlements), valued at $4.795 per share, of Company common stock, $0.2million of cash, and the assumption of and repayment of approximately $1.3million of existing bTrade indebtedness. The Company incurred $0.2 million oftransaction costs.

Effective February 2, 2005, the Company enteredinto an Asset Purchase Agreement (the “Purchase Agreement”) with ChannelWave, Inc.(“ChannelWave”), pursuant to which the Company acquired certain assets fromChannelWave, including substantially all assets relating to ChannelWave’sPartner Relationship Management System and Service Information Systembusinesses, for consideration comprising $1.0 million of cash and 225,807shares valued at $18.954 per share of the Company’s common stock (of which29,033 shares are being held by the Company in escrow for certain potentialadditional 

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liabilities of ChannelWavepursuant to the Purchase Agreement). The shares of the Company’s common stockare expected to be registered for resale on a Registration Statement on Form S-3.

Effective February 7, 2005, the Company enteredinto an Agreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc.(“Optum”) and its stockholders, pursuant to which the Company acquired Optum.In consideration for the merger, the Company paid $325,467 in cash, and issued1,405,780 shares valued at $18.583 per share of the Company’s common stockto the stockholders of Optum (of which $65,093 in cash and 281,156 sharesof the Company’s common stock are being held by an escrow agent for certainpotential additional liabilities of Optum pursuant to the Merger Agreement),assumed approximately $4.3 million of Optum indebtedness. The shares ofthe Company’s common stock are expected to be registered for resale on aRegistration Statement on Form S-3.

Effective May 27, 2005, the Company entered intoan Agreement and Plan of Merger (the “Merger Agreement”) with Xelus, Inc.(“Xelus”) and its stockholders, pursuant to which the Company acquired Xelus.In consideration for the merger, the Company paid $1 in cash to shareholders,assumed approximately $2.2 million of Xelus indebtedness, settled along-term lease liability for $543,000 and incurred various transaction-relatedexpenses. No shares of Company stock were issued in connection with the Xelusacquisition.

The Company focused its efforts in 2004 and the firsthalf of 2005 on maintaining and improving profitability. In 2004 and throughthe first half of 2005, the Company reported increasing profits. Managementplans to continue investing in new and improved product offerings and inincreasing the exposure of the Company’s products and services through itstargeted marketing programs. Management further believes that each investmentmust be prudently made and justified by the expected return on such investment.

The Company offers several licensing and serviceoptions for its software products. Customers can either purchase a perpetualsoftware license or enter into a limited-term software license, also called asubscription contract. Customers may also choose to use the Company’s hostingservices for their perpetual software license or install the software onservers within their own internal environment. Subscription licenses are onlyavailable to customers who also use our hosting services.

Perpetual license revenues and professional servicesare typically recognized as the software or service is delivered, assuming allother revenue recognition criteria are met and do not provide a contractual,predictable future revenue stream. The recurring revenue opportunities comefrom subscriptions or maintenance and hosting services. While the Company mayhave better visibility of future revenue from subscription licenses, customersmake the final decision on the form of their software license. The Companyencourages all of its customers to use its hosting services.

The Company depends on several factors to increaserevenue and maintain profitability: adding new customers, maintaining itscurrent base of subscriptions, increasing hosting and maintenance revenues, andimproving the gross margin on professional services. Adding new customers isthe primary responsibility of the sales department. Maintaining the otherrevenue streams is the responsibility of the Company’s professional servicesand hosting departments. The Company has developed compensation structures forthese departments that it believes provides appropriate incentives forachievement of their respective goals.

The Company’s revenue is principally derived fromsales of perpetual licenses or subscriptions to its software, and the relatedservices surrounding those products. The Click Commerce software suite consistsof the Partner Portal platform and framework and its applications provide thebasis for controlling workflow, reporting, opportunity management, productinformation management, sales order management, after sales service management,supply chain management, and parts optimization. The 

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Company also recognizesrevenue from services, including business consulting, implementation,maintenance, training and managed hosting services.

Cost of product license revenues includes productionand shipping expenses, which are expensed as incurred, amortization ofdeveloped technology (acquired in the Webridge, bTrade, ChannelWave and Optumacquisitions), and the costs of licensing third party software incorporatedinto or required by the Company’s products. These third party license costs areexpensed as the products are delivered under perpetual licenses andsubscriptions or over the maintenance period to the extent that the third partylicense costs relate to those product offerings. Cost of service revenuesinclude salaries and related expenses for professional services and technicalsupport personnel who provide consulting and implementation services,maintenance and hosting services, as well as an allocation of data processingand direct overhead costs which are expensed as incurred.

Operating expenses are classified into five generalcategories: sales and marketing, research and development, general andadministrative, amortization of stock-based compensation and amortization ofintangible assets. Sales and marketing expenses consist primarily of salariesand other related costs for sales and marketing personnel, sales commissions,travel, public relations and marketing materials. Research and developmentexpenses consist primarily of personnel costs to support product development.General and administrative expenses consist primarily of salaries and otherrelated costs for executive management, finance and administrative employees,legal and accounting services, and corporate liability insurance. Amortizationof stock-based compensation represents the amortization over the relatedservice period of the difference between the exercise price of options grantedand the deemed fair market value of the underlying common stock on the date ofgrant. Amortization of intangible assets represents amortization expense forcertain intangible assets with finite useful lives, which were recorded inconnection with the acquisitions of Allegis Corporation during the firstquarter of 2003, Webridge on April 21, 2004, bTrade on July 1, 2004,ChannelWave, on February 2, 2005, Optum, on February 7, 2005 andXelus on May 27, 2005. The intangible assets are identified, valued andclassified into separate categories. The categories are customer relationships,developed technologies, order backlog, trade names and in-process research anddevelopment. The amortization of developed technologies is recorded in the costof product license line item on the consolidated statement of income andcomprehensive income.

The Company believes thatperiod-to-period comparisons of operating results should not be relied upon aspredictive of future performance. The Company’s prospects must be considered inlight of the risks, expenses and difficulties encountered by similarly sizedsoftware and technology companies, particularly companies in new, rapidlyevolving markets. The Company may not be successful in addressing such risksand difficulties.

**Critical Accounting Policies**

The Company’s consolidated financial statements areprepared in accordance with accounting principles generally accepted in theUnited States of America. As such, the Company makes certain estimates, judgmentsand assumptions that it believes are reasonable based upon the informationavailable. These estimates and assumptions affect the reported amounts ofassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the periods presented. The Company’scritical accounting policies include revenue recognition and any resultingdeferral of revenues and related costs, the estimation of credit losses onaccounts receivable, the application of purchase accounting and the valuationof deferred tax assets. There has been no change to these policies. For adiscussion of these critical accounting policies, see “Critical AccountingPolicies and Estimates” in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004, filed with the Securities andExchange Commission.

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**Results of Operations**

The following table sets forth selected unauditedfinancial data for the periods indicated in dollars and as a percentage oftotal revenue.
| ** **                               | ** ** | **Three Months Ended June 30,** | ** **   | **Six Months Ended June 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|--------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                            | ** **   | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(in 000’s)**                            | ** **   | **% of  Revenue**                            | ** ** | **(in 000’s)** | ** ** | **% of  Revenue** | ** ** | **(in 000’s)** | ** ** | **% of  Revenue** | ** ** | **(in 000’s)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                                 |       |                                                |         |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product license                          |       |                                                | $ 1,841 |                                              |       |   | 13.8 | % |   |   | $ 1,215 |   |   |   | 19.6 | % |   |   | $ 3,804 |   |   |   | 15.7 | % |   |   | $ 1,859 |   |   |   | 16.2 | % |   |
| Service                                  |       |                                                |         |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Maintenance and hosting                  |       |                                                | 5,729        |                                              |       |   | 42.9 | % |   |   | 1,987 |   |   |   | 32.0 | % |   |   | 9,543 |   |   |   | 39.3 | % |   |   | 3,715 |   |   |   | 32.4 | % |   |
| Consulting and implementation service    |       |                                                | 3,849        |                                              |       |   | 28.8 | % |   |   | 2,786 |   |   |   | 44.9 | % |   |   | 7,346 |   |   |   | 30.3 | % |   |   | 5,118 |   |   |   | 44.6 | % |   |
| Subscription                             |       |                                                | 1,930        |                                              |       |   | 14.5 | % |   |   | 220 |   |   |   | 3.5 | % |   |   | 3,581 |   |   |   | 14.8 | % |   |   | 788 |   |   |   | 6.9 | % |   |
| Total Service                            |       |                                                | 11,508       |                                              |       |   | 86.2 | % |   |   | 4,993 |   |   |   | 80.4 | % |   |   | 20,470 |   |   |   | 84.3 | % |   |   | 9,621 |   |   |   | 83.8 | % |   |
| Total Revenues                           |       |                                                | 13,349       |                                              |       |   | 100.0 | % |   |   | 6,208 |   |   |   | 100.0 | % |   |   | 24,274 |   |   |   | 100.0 | % |   |   | 11,480 |   |   |   | 100.0 | % |   |
| Cost of Revenues                         |       |                                                |         |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product license                          |       |                                                | 344          |                                              |       |   | 2.6 | % |   |   | 85 |   |   |   | 1.4 | % |   |   | 542 |   |   |   | 2.2 | % |   |   | 129 |   |   |   | 1.1 | % |   |
| Consulting and implementation service    |       |                                                | 4,827        |                                              |       |   | 36.2 | % |   |   | 2,258 |   |   |   | 36.4 | % |   |   | 8,816 |   |   |   | 36.3 | % |   |   | 4,682 |   |   |   | 40.8 | % |   |
| Total cost of revenues                   |       |                                                | 5,171        |                                              |       |   | 38.7 | % |   |   | 2,343 |   |   |   | 37.7 | % |   |   | 9,358 |   |   |   | 38.6 | % |   |   | 4,811 |   |   |   | 41.9 | % |   |
| Gross profit                             |       |                                                | 8,178        |                                              |       |   | 61.3 | % |   |   | 3,865 |   |   |   | 62.3 | % |   |   | 14,916 |   |   |   | 61.4 | % |   |   | 6,669 |   |   |   | 58.1 | % |   |
| Operating  Expenses:                     |       |                                                |         |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                      |       |                                                | 1,602        |                                              |       |   | 12.0 | % |   |   | 680 |   |   |   | 11.0 | % |   |   | 2,748 |   |   |   | 11.3 | % |   |   | 1,278 |   |   |   | 11.1 | % |   |
| Research and development                 |       |                                                | 1,666        |                                              |       |   | 12.5 | % |   |   | 654 |   |   |   | 10.5 | % |   |   | 2,875 |   |   |   | 11.8 | % |   |   | 1,065 |   |   |   | 9.3 | % |   |
| General and administrative               |       |                                                | 1,282        |                                              |       |   | 9.6 | % |   |   | 1,200 |   |   |   | 19.3 | % |   |   | 2,288 |   |   |   | 9.4 | % |   |   | 2,115 |   |   |   | 18.4 | % |   |
| Amortization of stock-based compensation |       |                                                | —       |                                              |       |   | 0.0 | % |   |   | 13 |   |   |   | 0.2 | % |   |   | — |   |   |   | 0.0 | % |   |   | 21 |   |   |   | 0.2 | % |   |
| Amortization of intangibles assets       |       |                                                | 505          |                                              |       |   | 3.8 | % |   |   | 86 |   |   |   | 1.4 | % |   |   | 1,225 |   |   |   | 5.0 | % |   |   | 126 |   |   |   | 1.1 | % |   |
| Total operating expenses                 |       |                                                | 5,055        |                                              |       |   | 37.9 | % |   |   | 2,633 |   |   |   | 42.4 | % |   |   | 9,136 |   |   |   | 37.6 | % |   |   | 4,605 |   |   |   | 40.1 | % |   |
| Operating income                         |       |                                                | $ 3,123 |                                              |       |   | 23.4 | % |   |   | $ 1,232 |   |   |   | 19.8 | % |   |   | $ 5,780 |   |   |   | 23.8 | % |   |   | $ 2,064 |   |   |   | 18.0 | % |   |

 

**Comparisonof the three months ended June 30, 2005 to the three months ended June 30,2004**

*Revenue*

Total revenue increased$7.1 million, or 115.0%, to $13.3 million for the three months ended June 30,2005 from $6.2 million for the three months ended June 30, 2004. Productlicense revenue consists of revenue from separate product-only agreements andfrom multiple element agreements accounted for under thepercentage-of-completion method using hours of input in relation to theestimate of total hours to complete the engagements. Product license revenueincreased by $0.6 million, or 51.5%, to $1.8 million, as a result of theacquisitions of Xelus, ChannelWave bTrade and Optum. These acquisitionsaccounted for 89.6% of license revenue. Maintenance and hosting revenuesincreased by $3.7 million or 188.3% to $5.7 million for the three months ended June 30,2005. The increase is primarily attributable to the acquisitions of Xelus,Webridge, bTrade and Optum, which made up 72.4% of the Company’s maintenanceand hosting revenue for the three months ended June 30, 2005. Consultingand implementation service revenues are largely comprised of fees related totime and materials projects, other service agreements, maintenance, hosting,training and needs analyses, as well as multiple element agreements accountedfor under the percentage-of-completion method using hours of input in relationto the estimate of total hours to complete the engagements. Consulting andimplementation service revenues increased by $1.1 million, or 38.2%, to $3.8million, over the prior year quarter arising from the Xelus, Webridge, bTradeand Optum consulting and implementation service revenues. Webridge, bTrade and 

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Optummade up 76.0% of consulting and implementation service revenues for the threemonths ended June 30, 2005. Consulting and implementation service revenuesincreases are generally related to new license transactions or as follow-onservice contracts. Service revenues are generated in situations when a customerpurchases a license from the Company and uses the Company’s service staff toinstall and integrate the licensed software. Subscription revenue increased by$1.7 million or 777.3%, to $1.9 million. This increase is a direct result ofthe bTrade, ChannelWave and Optum acquisitions.

*Cost of Revenue*

Total cost of revenueincreased by $2.8 million, or 120.7% to $5.2 million for the three months endedJune 30, 2005. This cost of revenue increase is a result of an increase inemployee compensation directly related to the acquisitions of Xelus, Webridge,bTrade, ChannelWave and Optum. Cost of product revenue increased by $0.3million, or 304.7%, to $0.3 million, due to the amortization of developedtechnology. The amortization of developed technology results from theallocation of purchase price to developed technologies in the acquisitions ofXelus, bTrade, Optum and Webridge. Gross profit margins were 61.3% for thethree months ended June 30, 2005, compared to 62.3% for the three monthsended June 30, 2004. The gross margin percentage remained flat due to theCompany’s ability to maintain utilization rates for the professional servicestaff. Product revenue represented 13.8% of total revenues for the three monthsended June 30, 2005 versus 19.6% for the three months ended June 30,2004.

*Operating Expenses*

*Sales and Marketing  *Salesand marketing expenses increased by approximately $0.9 million, or 135.6%, to$1.6 million for the three months ended June 30, 2005 from $0.7 millionfor the three months ended June 30, 2004. The increase in sales andmarketing expense was directly attributable to the acquisition of Xelus,bTrade, Webridge, and Optum, which increased the Company’s sales forceheadcount by approximately 250%.

*Research and Development  *Researchand development expenses increased by approximately $1.0 million, or154.7%, to $1.7 million for the three months ended June 30, 2005, comparedto $0.7 million for the comparable prior year three-month period. Thisincrease was almost entirely attributable to an increase in employeecompensation and related costs. The Xelus and Optum acquisitions resulted in anincrease in the Company’s employee compensation expense by $0.8 million or50.0% of the total expenses. To date, all software development costs have beenexpensed as incurred.

*General and Administrative  *Generaland administrative expenses increased by approximately $0.1 million, or6.8%, to $1.3 million for the three months ended June 30, 2005 from $1.2million for the three months ended June 30, 2004. The increase isattributable to the costs associated with the Company’s Sarbanes Oxley Act complianceinitiative. The acquisitions had no significant impact on general andadministrative expenses as the Company promptly eliminated substantially allsuch expenses of the acquired companies.

*Amortizationof Intangible Assets  *The increase in amortization ofintangibles relates to the intangible assets acquired in the acquisitions ofXelus, Webridge, bTrade, ChannelWave and Optum. These intangible assets haveuseful lives that range from one to seven years and accounted for the $0.4million increase in amortization expense for the quarter ended June 30,2005.

**Comparisonof the six months ended June 30, 2005 to the six months ended June 30,2004**

*Revenue*

Total revenue increased$12.8 million, or 111.4%, to $24.3 million for the six months ended June 30,2005 from $11.5 million for the six months ended June 30, 2004. Productlicense revenue consists of 

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revenuefrom separate product-only agreements and from multiple element agreementsaccounted for under the percentage-of-completion method using hours of input inrelation to the estimate of total hours to complete the engagements. Productlicense revenue increased by $1.9 million, or 104.6%, to $3.8 million, as aresult of the acquisitions of Xelus, Webridge, bTrade, ChannelWave and Optum.These acquisitions accounted for 88.4% of license revenue. Maintenance andhosting revenues increased by $5.8 million or 156.9% to $9.5 million for thesix months ended June 30, 2005. The increase is primarily attributable tothe acquisitions of Xelus, bTrade and Optum, which made up 57.5% of the Company’smaintenance and hosting revenue for the six months ended June 30, 2005.Consulting and implementation service revenues are largely comprised of feesrelated to time and materials projects, other service agreements, maintenance,hosting, training and needs analyses, as well as multiple element agreementsaccounted for under the percentage-of-completion method using hours of input inrelation to the estimate of total hours to complete the engagements. Consultingand implementation service revenues increased by $2.2 million, or 43.5%, to$7.3 million, over the comparable prior year six month period arising from theWebridge, bTrade and Optum consulting and implementation service revenues. Webridge,bTrade and Optum made up 75.8% of consulting and implementation servicerevenues for the six months ended June 30, 2005. Consulting andimplementation service revenues increases are generally related to new licensetransactions or as follow-on service contracts. Service revenues are generatedin situations when a customer purchases a license from the Company and uses theCompany’s service staff to install and integrate the licensed software.Subscription revenue increased by $2.8 million or 354.4%, to $3.6 million forthe six months ended June 30, 2005 from $0.8 million for the six monthsended June 30, 2004 . This increase is a direct result of the bTrade,ChannelWave and Optum acquisitions, which accounted for $3.1 million of thetotal increase.

*Cost of Revenue*

Total cost of revenueincreased by $4.5 million, or 94.4% to $9.4 million for the six months ended June 30,2005. This cost of revenue increase is a result of an increase in employeecompensation directly related to the acquisitions of Xelus, Webridge, bTrade,ChannelWave and Optum. Cost of product revenue increased by $0.4 million, or 320.2%,to $0.5 million, due to the amortization of developed technology. Theamortization of developed technology results from the allocation of purchase priceto developed technologies in the acquisitions of Xelus, bTrade, Optum andWebridge. Gross profit margins increased to 61.4% for the six months ended June 30,2005, compared to 58.1% for the six months ended June 30, 2004. The grossmargin percentage increase is due to an improvement in the utilization rate ofprofessional service staff and the increase in higher margin subscription andlicense revenue. The increase in the gross margin percentage was partiallyoffset by a decrease in license revenue as a percentage of total revenue. Productrevenue represented 15.7% of total revenues for the six months ended June 30,2005 versus 16.2% for the six months ended June 30, 2004.

*Operating Expenses*

*Sales and Marketing  *Salesand marketing expenses increased by approximately $1.4 million, or 115.0%, to$2.7 million for the six months ended June 30, 2005 from $1.3 million forthe six months ended June 30, 2004. The increase in sales and marketingexpense was directly attributable to the acquisitions of bTrade, and Optum,which increased the Company’s sales force headcount by approximately 272%.

*Research and Development  *Researchand development expenses increased by approximately $1.8 million, or170.0%, to $2.9 million for the six months ended June 30, 2005, comparedto $1.1 million for the comparable prior year six-month period. Thisincrease was almost entirely attributable to an increase in employeecompensation and related costs. The Xelus and Optum acquisitions resulted in anincrease in the Company’s research and development expenses by $1.2 million or42.8% of the total expenses. To date, all software development costs have beenexpensed as incurred.

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*General and Administrative  *Generaland administrative expenses increased by approximately $0.2 million, or8.2%, to $2.3 million for the six months ended June 30, 2005 from $2.1million for the six months ended June 30, 2004. The increase can beattributed to special projects such as the Sarbanes Oxley compliance initiative.There was also a 3% increase in employee compensation expense. The acquisitionshad no significant impact on general and administrative expenses as the Companypromptly eliminated substantially all such expenses of the acquired companies.

*Amortizationof Intangible Assets  *The increase in amortization ofintangibles relates to the intangible assets acquired in the acquisitions ofXelus, Webridge, bTrade, ChannelWave and Optum. These intangible assets haveuseful lives that range from one to seven years and accounted for the $1.1million increase in amortization expense for the six months ended June 30,2005.

**Liquidity and Capital Resources**

At June 30, 2005, the Company had$11.8 million of cash and cash equivalents. Net cash used by operatingactivities was $0.8 million for the six months ended June 30, 2005.Sources of cash from operations include $5.8 million of net income, $2.2million of depreciation and amortization, a $0.7 million decrease in prepaidsand other current working capital accounts of $0.5 million. Cash sources wereoffset by uses of cash of $3.9 million relating to decreases in compensationaccruals, resulting from payouts of severances and bonuses of the acquiredcompanies coupled with the payout of $1.7 million in fiscal year 2004 bonusesto the existing Click employees in February 2005. Deferred revenuesdecreased over the six months resulting in a cash use of $3.4 million, net of$10.2 million of acquired deferred revenue. In addition, another $1.0 millionin cash was used as receivables increased from December 31, 2004 (net of$6.4 million of receivables acquired). In addition, there was a cash use of$1.7 million relating to a decrease of accounts payable, net of $2.8 million ofaccounts payable acquired with the Xelus and Optum mergers.

The Company used $2.0 million in cash for investingactivities in the first six months ended June 30, 2005. Of the $2.0million, $2.0 million was used for the acquisitions of ChannelWave and Optum.An additional amount $0.2 million was used to purchase fixed assets, this wasoffset by the net cash of $0.3 acquired in the Xelus transaction.

Net cash provided by financing activities was $1.3million. The Company drew $6.4 million against its newly created revolvingcredit facility with a bank to pay off $5.3 million of debt ($2.8 million ofshort-term debt and $2.5 million of long-term debt) assumed in the acquisitionof Optum and Xelus. The Company also generated a source of cash of $0.2 millionfrom stock options that were exercised in the first quarter of 2005.

On March 31, 2005, the Company entered into a$10.0 million revolving line of credit agreement maturing on April 1,2008. The borrowing under the line of credit carries an interest rate based onthe LIBOR average rate with a weighted average interest rate of 4.6% for thequarter ended June 30, 2005. The unused portion is subject to a fee of0.3%. On June 30, 2005, the Company had $6.4 million outstanding under therevolving line of credit comprised of which, $4.5 million was used to pay offdebt and certain liabilities assumed in the Optum acquisition and $1.4 millionthat was used to the purchase of a secured note and settlement of an officelease related to the Xelus acquisition. Of the remaining $3.6 million availableunder the line of credit, up to $2.0 million may be used for the Company’sletters of credit. The line of credit contains terms that, among otherprovisions, require maintaining certain minimum net worth and other financialratios and specific limits or restrictions on additional indebtedness, liensand continuity of business. Provisions under this line of credit are notconsidered restrictive to normal operations.

The Company continues to evaluate strategicalternatives, including opportunities to strategically grow the business, enterinto strategic relationships, make acquisitions or enter into businesscombinations. 

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The Company can provide noassurance that any such strategic alternatives will come to fruition and mayelect to terminate such evaluations at any time.

The Company believes thatits cash resources are sufficient for the long-term operation of its existingbusiness and, therefore, has no current plans to raise additional equityfinancing during the next twelve months related to its existing businesses. TheCompany may, however, require additional cash to fund investments incomplementary businesses or technologies. The Company’s cash needs could alsobe affected by changes in business or market conditions. If the Company findsit necessary to obtain additional equity or debt financing, there can be noassurance that the Company will be able to raise it on acceptable terms or atall.

**SafeHarbor Statement under the Private Securities Litigation Reform Act of 1995within the meaning of Section 21E of the Securities Exchange Act of 1934,as amended:**

Statements in this Form 10-Qthat are not historical facts and refer to the Company’s future prospects are “forward-lookingstatements” under the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are generally identified by words such as “expect,” “anticipate,”“intend,” “believe,” “hope,” “assume,” “estimate” and other similar words andexpressions. The statements are subject to risks and uncertainties and actualresults may differ materially from those indicated by these forward-lookingstatements as a result of various factors, including but not limited to theextent of customer acceptance and utilization of the Company’s channelmanagement solutions, the impact of competitive products and services, theCompany’s ability to develop new and enhanced versions of its products andservices, the effect of economic and business conditions, the volume and timingof customer contracts and related approval processes, capital and intellectualproperty spending of the Company’s target customers, changes in technology,deployment delays or errors associated with the Company’s products, the abilityof the Company to integrate acquired businesses or products and the Company’sability to protect its intellectual property rights. For a discussion of theseand other risk factors that could affect the Company’s business, see “RiskFactors” in the Company’s Annual Report on Form 10-K for the yearended December 31, 2004, which is on file with the Securities and ExchangeCommission.

**Item 3.**                        Qualitativeand Quantitative Disclosures About Market Risk

The following discussesthe Company’s exposure to market risk related to changes in foreign currencyexchange rates and interest rates. This discussion contains forward-lookingstatements that are subject to risks and uncertainties. Actual results couldvary materially as a result of a number of factors including those set forth inPart I of the Company’s Annual Report on Form 10-K under “RiskFactors.”

*Foreign CurrencyExchange Rate Risk*

To date, substantially allof the Company’s recognized revenues have been denominated in U.S. dollars andprimarily from customers in the United States and the exposure to foreigncurrency exchange rate changes has been immaterial. The Company expects,however, that future product license and professional service revenues may alsobe derived from international markets and may be denominated in the currency ofthe applicable market. As a result, operating results may become subject tosignificant fluctuations based upon changes in the exchange rates of certaincurrencies in relation to the U.S. dollar. Furthermore, to the extent theCompany engages in international sales denominated in U.S. dollars, an increasein the value of the U.S. dollar relative to foreign currencies could make theCompany’s products less competitive in international markets. Although theCompany will continue to monitor its exposure to currency fluctuations, and,when appropriate, may use financial hedging techniques in the future tominimize the effect of these fluctuations, there is no assurance that exchangerate fluctuations will not adversely affect financial results in the future.

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*Interest Rate Risk*

As of June 30, 2005,the Company had cash and cash equivalents of $11.8 million and debt of$7.4 million. Rising interest rates will increase interest income fromshort-term investments and interest expense on the Company’s debt. Based uponthe balance of cash and cash equivalents at June 30, 2005, a change ininterest rates of 0.5% would cause a corresponding change in annual interestincome of less than $0.1 million. Based on the Company’s long-term debt atJune 30, 2005, at change in interest rates of 1.0% would cause acorresponding change in interest expense of less than $0.1 million.

**Item 4.**                        Controlsand Procedures

The Company carried out an evaluation, under thesupervision and with the participation of management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the disclosure controls and procedures pursuant to Rule 13a-15under the Exchange Act of 1934 as of the end of the second quarter of 2005.Based on that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective as of such date to ensure that information required to be disclosedin the reports that it files or submits under the Securities Exchange Act of1934 (i) is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and formsand (ii) is accumulated and communicated to the Company’s management,including the Chief Executive Officer and the Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

There was no change in internal control over financialreporting that occurred during the second quarter of 2005 that has materiallyaffected or is reasonably likely to materially affect the Company’s internalcontrol over financial reporting.

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**PART II.   OTHER INFORMATION.**

Items 1, 2, 3 and 5 areinapplicable and have been omitted from this report.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

(a)       The annual meeting of stockholders of Click Commerce Inc. washeld on May 5, 2005.

(b)      Pursuant to Instruction 3 to Item 4, no response is required tothis item.

(c)       At theAnnual Meeting conducted on May 5, 2005, the shareholders voted theelections of directors and the approval of the 2005 Employee Stock PurchasePlan. A summary of the votes is as follows:
| **Nominee**                  | ** ** | ** ** | ** ** | **Votes for** | ** ** | **Votes withheld** | ** ** |
|------------------------------|------------|------------|------------|--------------------|------------|-------------------------|------------|
| Andrew J. McKenna            |       | 8,675,543  |       |               | 48,973     |                    |       |
| William J.  Devers, Jr. |       | 8,696,382  |       |               | 28,134     |                    |       |
| Jack F. Sandner              |       | 8,696,582  |       |               | 27,934     |                    |       |
| June E. Drewery         |       | 4,744,303  |       |               | 431,634    |                    |       |

 
| ** **                | ** ** | **Votes for** | ** ** | **Votes against** | ** ** | **Votes withheld** | ** ** | **Broker non-votes** | ** ** |
|---------------------------|------------|--------------------|------------|------------------------|------------|-------------------------|------------|---------------------------|------------|
| 2005 Stock  Purchase Plan |       | 4,744,303          |       |                   | 45,399     |                    |       |                      |       |   | 3,929,580 |   |   |
|                           |            |                    |            |                        |            |                         |            |                           |            |  |  |  |  |

 

**Item 6.**                        Exhibits.

Thefollowing exhibits are included herein:
| **Exhibit  Number** | ** ** | **Description**                                                                                         |
|---------------------|------------|---------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of Michael W. Ferro, Jr. pursuant  to section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2                |       | Certification of Michael W. Nelson pursuant to  section 302 of the Sarbanes-Oxley Act of 2002.          |
| 32.1                |       | Certification of Michael W. Ferro, Jr. pursuant  to section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2                |       | Certification of Michael W. Nelson pursuant to  section 906 of the Sarbanes-Oxley Act of 2002.          |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|          | Click Commerce, Inc. |
|----------|---------------------------|
|     | By:                       | /s/  MICHAEL W. NELSON |
| * * | * *                  | Michael W. Nelson*Chief Financial Officer and Treasurer  (Principal Financial and Accounting Officer)* |

 

Date: August 15, 2005

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