**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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Form 10-Q

| **(Mark One)**                                                                                                                                     | ** ** | ** **                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                              | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                         | ** ** | ** **                                                                                                             |
| **For the  Quarterly Period Ended September 30, 2004**                                                                                        |
| ** **                                                                                                                                         | ** ** | ** **                                                                                                             |
| **o**                                                                                                                                              | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                         | ** ** | ** **                                                                                                             |
| **For the  transition period  from         to         ** |
| ** **                                                                                                                                         | ** ** | ** **                                                                                                             |

 

**Commission File Number0-30881**

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**CLICK COMMERCE, INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                                                     | ** ** | **36-4088644**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |

 

**200 East Randolph Drive,52 Floor**

**Chicago, Illinois 60601**

(Address of principalexecutive offices)

**(312) 482-9006**

(Registrant’s telephone number, including area code)

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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 preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

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

As of November 12, 2004, there were 9,730,010 shares of the registrant’scommon shares outstanding.

 

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**CLICKCOMMERCE, INC.INDEX**
|               | ** ** | ** **                                                                                                                                                         | ** ** | **Page No.** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| PART I.  |       | FINANCIAL  INFORMATION                                                                                                                                             |       |              |   |   |
| Item 1.       |       | Financial Statements                                                                                                                                               |       |              |   |   |
|          |       | Condensed  Consolidated Balance Sheets as of September 30, 2004 and  December 31, 2003 (unaudited)                                                       |       |              | 3 |   |
|          |       | Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss) for the  three and nine months ended September 30, 2004 and 2003 (unaudited) |       |              | 4 |   |
|          |       | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2004 and 2003 (unaudited)                                           |       |              | 5 |   |
|          |       | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                                                                  |       |              | 6 |   |
| Item  2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                        |       |              | 15 |   |
| Item  3.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                        |       |              | 24 |   |
| Item 4.       |       | Controls and  Procedures                                                                                                                                           |       |              | 24 |   |
| PART II. |       | OTHER INFORMATION                                                                                                                                                  |       |              |   |   |
| Item  6.      |       | Exhibits  and Reports on Form 8-K                                                                                                                             |       |              | 26 |   |
| SIGNATURES    |       |                                                                                                                                                               | 27         |              |

 

 

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**PART I.**   FINANCIALINFORMATION

**Item 1.   Financial Statements**

**CLICK COMMERCE, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Dollars in thousands, except share andper share data)(unaudited)**
| ** **                                                                                                                                                                                                                                                                                                   | ** ** | **September 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Current assets:                                                                                                                                                                                                                                                                                              |       |                             |       |                            |       |   |   |   |   |
| Cash, and cash  equivalents                                                                                                                                                                                                                                                                                  |       |                             | $          | 11,520                          |       |   |   | $ | 11,863 |   |   |
| Trade accounts receivable, net                                                                                                                                                                                                                                                                               |       |                             | 6,637      |                            |       |   | 4,628 |   |   |
| Revenues earned on contracts in progress in excess  of billings.                                                                                                                                                                                                                                             |       |                             | 272        |                            |       |   | — |   |   |
| Prepaids and other current assets                                                                                                                                                                                                                                                                            |       |                             | 1,294      |                            |       |   | 820 |   |   |
| Total current assets                                                                                                                                                                                                                                                                                         |       |                             | 19,723     |                            |       |   | 17,311 |   |   |
| Property and  equipment, net                                                                                                                                                                                                                                                                                 |       |                             | 886        |                            |       |   | 865 |   |   |
| Intangible  assets, net                                                                                                                                                                                                                                                                                      |       |                             | 3,166      |                            |       |   | 359 |   |   |
| Goodwill                                                                                                                                                                                                                                                                                                     |       |                             | 6,739      |                            |       |   | — |   |   |
| Other assets                                                                                                                                                                                                                                                                                                 |       |                             | 454        |                            |       |   | 659 |   |   |
| Total assets                                                                                                                                                                                                                                                                                                 |       |                             | $          | 30,968                          |       |   |   | $ | 19,194 |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                |       |                             |       |                            |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                             |       |                             | $          | 598                             |       |   |   | $ | 400 |   |   |
| Billings in excess of revenues earned on contracts  in progress                                                                                                                                                                                                                                              |       |                             | 92         |                            |       |   | 33 |   |   |
| Deferred revenue                                                                                                                                                                                                                                                                                             |       |                             | 5,110      |                            |       |   | 4,785 |   |   |
| Accrued compensation                                                                                                                                                                                                                                                                                         |       |                             | 1,612      |                            |       |   | 1,016 |   |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                                                                                               |       |                             | 2,053      |                            |       |   | 1,832 |   |   |
| Total current liabilities                                                                                                                                                                                                                                                                                    |       |                             | 9,465      |                            |       |   | 8,066 |   |   |
| Other liabilities                                                                                                                                                                                                                                                                                            |       |                             | 24         |                            |       |   | 79 |   |   |
| Total liabilities                                                                                                                                                                                                                                                                                            |       |                             | 9,489      |                            |       |   | 8,145 |   |   |
| 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; 9,755,199 and  8,390,432 shares issued as of September 30, 2004 and  December 31, 2003, respectively; 9,726,135 and 8,361,368 shares  outstanding as of September 30, 2004 and December 31, 2003,  respectively |       |                             | 10         |                            |       |   | 8 |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                                                  |       |                             | 69,491     |                            |       |   | 62,498 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                                                                                      |       |                             | 152        |                            |       |   | 136 |   |   |
| Deferred  compensation                                                                                                                                                                                                                                                                                       |       |                             | —     |                            |       |   | (21 | ) |   |
| Treasury stock,  at cost—29,064 shares                                                                                                                                                                                                                                                                  |       |                             | (117       | )                               |       |   | (117 | ) |   |
| Accumulated  deficit                                                                                                                                                                                                                                                                                         |       |                             | (48,057    | )                               |       |   | (51,455 | ) |   |
| Total shareholders’ equity                                                                                                                                                                                                                                                                              |       |                             | 21,479     |                            |       |   | 11,049 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                                                                             |       |                             | $          | 30,968                          |       |   |   | $ | 19,194 |   |   |

 

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

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**CLICKCOMMERCE, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME (LOSS)(Dollars in thousands, except per share data)(Unaudited)**
| ** **                                               | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                             | ** ** | **2003**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Product:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Product license                                          |       | $                                                    | 1,221      |                                                | $          | 584 |   | $ | 3,081 |   | $ | 1,452 |   |
| Subscription                                             |       | 714                                                  |       | 571                                                 |       | 1,501 |   | 1,515 |   |
| Total product                                            |       | 1,935                                                |       | 1,155                                               |       | 4,582 |   | 2,967 |   |
| Service:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Maintenance and hosting                                  |       | 2,682                                                |       | 1,692                                               |       | 6,397 |   | 4,868 |   |
| Consulting and  implementation services                  |       | 2,419                                                |       | 2,194                                               |       | 7,537 |   | 5,209 |   |
| Total service                                            |       | 5,101                                                |       | 3,886                                               |       | 13,934 |   | 10,077 |   |
| Total revenues                                           |       | 7,036                                                |       | 5,041                                               |       | 18,516 |   | 13,044 |   |
| Cost of revenues:                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Product                                                  |       | 35                                                   |       | 69                                                  |       | 121 |   | 295 |   |
| Service                                                  |       | 2,526                                                |       | 2,197                                               |       | 7,208 |   | 6,310 |   |
| Total cost of revenues                                   |       | 2,561                                                |       | 2,266                                               |       | 7,329 |   | 6,605 |   |
| Gross profit                                             |       | 4,475                                                |       | 2,775                                               |       | 11,187 |   | 6,439 |   |
| Operating expenses:                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Sales and marketing                                      |       | 1,084                                                |       | 676                                                 |       | 2,362 |   | 2,508 |   |
| Research and development                                 |       | 1,007                                                |       | 587                                                 |       | 2,072 |   | 1,928 |   |
| General and administrative                               |       | 856                                                  |       | 891                                                 |       | 2,971 |   | 3,737 |   |
| Amortization of stock-based  compensation                |       | —                                               |       | 8                                                   |       | 21 |   | 51 |   |
| Amortization of  intangible assets                       |       | 262                                                  |       | 40                                                  |       | 431 |   | 68 |   |
| Restructuring and other  charges (recoveries)            |       | —                                               |       | (983                                                | )          | — |   | 2,959 |   |
| Total operating expenses                                 |       | 3,209                                                |       | 1,219                                               |       | 7,857 |   | 11,251 |   |
| Operating income (loss)                                  |       | 1,266                                                |       | 1,556                                               |       | 3,330 |   | (4,812 | ) |
| Other income, net                                        |       | 104                                                  |       | 19                                                  |       | 68 |   | 319 |   |
| Income (loss) before  income taxes                       |       | 1,370                                                |       | 1,575                                               |       | 3,398 |   | (4,493 | ) |
| Income tax expense                                       |       | —                                               |       | —                                              |       | — |   | — |   |
| Net income (loss)                                        |       | $                                                    | 1,370      |                                                | $          | 1,575 |   | $ | 3,398 |   | $ | (4,493 | ) |
| Basic net income (loss)  per common share                |       | $                                                    | 0.14       |                                                | $          | 0.19 |   | $ | 0.38 |   | $ | (0.55 | ) |
| Diluted net income (loss)  per common share.             |       | $                                                    | 0.14       |                                                | $          | 0.19 |   | $ | 0.36 |   | $ | (0.55 | ) |
| Weighted average common  shares outstanding—basic   |       | 9,719,083                                            |       | 8,136,643                                           |       | 8,991,067 |   | 8,117,148 |   |
| Weighted average common  shares outstanding—diluted |       | 10,074,352                                           |       | 8,186,102                                           |       | 9,403,505 |   | 8,117,148 |   |
| Comprehensive income  (loss):                            |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss)                                        |       | $                                                    | 1,370      |                                                | $          | 1,575 |   | $ | 3,398 |   | $ | (4,493 | ) |
| Unrecognized loss on  marketable securities              |       | —                                               |       | —                                              |       | (5 | ) | — |   |
| Foreign currency  translation adjustment                 |       | 6                                                    |       | (9                                                  | )          | 21 |   | (13 | ) |
| Comprehensive income (loss)                              |       | $                                                    | 1,376      |                                                | $          | 1,566 |   | $ | 3,414 |   | $ | (4,506 | ) |

 

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)**
| ** **                                                                                          | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                                            | ** ** | **2003** | ** ** |
| **Cash flows from operating  activities:**                                                          |       |                                                |       |   |   |
| Net income (loss)                                                                                   |       | $                                                   | 3,398      |   | $ | (4,493 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |                                                |       |   |   |
| Amortization of stock-based compensation                                                            |       | 21                                                  |       | 51 |   |
| Depreciation and amortization                                                                       |       | 776                                                 |       | 909 |   |
| Provision for doubtful accounts                                                                     |       | 180                                                 |       | 89 |   |
| Restructuring and other charges, net of payments                                                    |       | —                                              |       | 1,192 |   |
| Changes in operating  assets and liabilities, net of effect of acquisitions:                        |       |                                                |       |   |   |
| Trade accounts receivable                                                                           |       | (1,330                                              | )          | 2,313 |   |
| Prepaids and other current assets                                                                   |       | 89                                                  |       | 547 |   |
| Accounts payable                                                                                    |       | (74                                                 | )          | (491 | ) |
| Deferred revenue                                                                                    |       | (1,354                                              | )          | (970 | ) |
| Accrued compensation                                                                                |       | 266                                                 |       | (992 | ) |
| Accrued expenses and other current liabilities                                                      |       | (330                                                | )          | (79 | ) |
| Other, net                                                                                          |       | 68                                                  |       | 75 |   |
| Net cash provided by (used in) operating activities                                                 |       | 1,710                                               |       | (1,849 | ) |
| **Cash flows from investing  activities:**                                                          |       |                                                |       |   |   |
| Purchases of property and equipment                                                                 |       | (206                                                | )          | (46 | ) |
| Acquisition of Allegis’ cash, net of deal costs                                                |       | —                                              |       | 176 |   |
| Acquisition of Webridge, net of deal costs.                                                         |       | (186                                                | )          | — |   |
| Acquisition of bTrade, net of deal costs and cash acquired                                          |       | (1,619                                              | )          | — |   |
| Redemptions of short-term investments, net                                                          |       | —                                              |       | 10,367 |   |
| Net  additions to long term investments                                                             |       | (70                                                 | )          | (200 | ) |
| Net cash provided by (used in) investing activities                                                 |       | (2,081                                              | )          | 10,297 |   |
| **Cash flows from financing  activities:**                                                          |       |                                                |       |   |   |
| Proceeds from exercise of stock options                                                             |       | 96                                                  |       | 62 |   |
| Payment of special dividend, return of capital                                                      |       | —                                              |       | (20,342 | ) |
| Payments under capital lease obligations                                                            |       | (69                                                 | )          | (429 | ) |
| Net cash provided by (used in) financing activities                                                 |       | 27                                                  |       | (20,709 | ) |
| Effect of foreign  exchange rates on cash and cash equivalents                                      |       | 1                                                   |       | (13 | ) |
| Net decrease in  cash and cash equivalents                                                          |       | (343                                                | )          | (12,274 | ) |
| Cash and cash  equivalents at beginning of period                                                   |       | 11,863                                              |       | 23,646 |   |
| Cash and cash  equivalents at end of period                                                         |       | $                                                   | 11,520     |   | $ | 11,372 |   |
| **Supplemental disclosures:**                                                                       |       |                                                |       |   |   |
| Cash paid in the period  for:                                                                       |       |                                                |       |   |   |
| Interest                                                                                            |       | $                                                   | 13         |   | $ | 14 |   |
| Income taxes                                                                                        |       | $                                                   | —     |   | $ | — |   |
| Noncash investing activities:                                                                       |       |                                                |       |   |   |
| Common stock issued for acquisition activities                                                      |       | $                                                   | 6,897      |   | $ | — |   |

 

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

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

**1. BASIS OFPRESENTATION**

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 nine months ended September 30,2004 include the results of operations of Webridge, Inc. (see note 4) fromApril 21, 2004 through the end of the period and the results of operationsof bTrade, Inc. (see note 4) from July 1, 2004 through the end of theperiod. The results of operations for the interim periods presented are notnecessarily indicative of the results to be expected for any subsequent quarteror for the entire fiscal year ending December 31, 2004. 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. SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**Revenue and Cost Recognition**

The Company recognizes product license revenue from licensingthe rights to use its software on a perpetual basis. Software licenses that arelimited in duration to typically 12-24 months are recognized as subscriptionsas they are required to be included with a hosting arrangement which generally has the same term as the softwarelicense. The Company generates consulting and implementationservice revenues from integrating its software, performing needs analyses forcustomers and providing training services. Maintenance and hosting revenues aregenerated under contracts that provide customers with maintenance, productsupport and hosting services.

The Company recognizessoftware license and other related revenue, including revenue associated withmultiple element contracts that contain software elements, in accordance withStatement of Position (“SOP”) No. 97-2 “*SoftwareRevenue Recognition*” as amended by SOP 98-9, “*Modification of SOP 97-2, Software RevenueRecognition, with Respect to Certain Transactions.*” For thosecontracts that either do not contain a services component or that have serviceswhich are not essential to the functionality of any other element of thecontract, software license revenue is recognized upon delivery of the Company’ssoftware provided that the fee is fixed and determinable, persuasive evidenceof an arrangement exists and collection of the resulting receivable isconsidered probable. Revenue from service contracts is typically recognized asthe services are performed. Revenue to be recognized from software arrangementsinvolving multiple elements is allocated to each element based on the residualvalue method in accordance with SOP 98-9. Under the residual method,if vendor-specific objective evidence (“VSOE”) of fair value exists for allundelivered elements, but does not exist for the delivered elements, revenue isallocated to the undelivered elements based on VSOE of fair market value andthe residual is allocated to the delivered elements. The Company determines VSOE foreach element by assessing the price charged when the same element is soldseparately. The Company has analyzed all of the elements included in itsmultiple-element arrangements containingsoftware elements and determined that it has sufficient VSOEto allocate 

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revenue to maintenanceservices, consulting and implementation services and training elements of itsperpetual license arrangements. The Company sells its professional services andtraining separately, and has established VSOE on this basis. VSOE formaintenance is determined based upon the customer’s annual renewal rates.Accordingly, revenue from perpetual licenses is typically recognized upondelivery using the residual method, assuming all other requirements of SOP 97-2are met. The Company records deferred revenue on software contracts for whichit has billed or collected amounts, but for which the requirements for revenuerecognition have not been met. The Company’s software is generally licensed oneither a perpetual basis or through a subscription. Revenues related toarrangements with multiple elements but that do not contain software elementsare allocated to the individual elements in accordance with EITF Issue No. 00-21,*“Revenue Arrangements with Multiple Elements,” (“EITF00-21”)* based upon verifiable, objective evidence of the fair valuesof each accounting unit.

Revenue from contracts withsoftware elements in which the Company’s services areessential to the functionality of the other elements of the contract isrecognized using the percentage-of-completion method under contract accounting asservices are performed, as the Company delivers, configures and installs thesoftware. The percentage completed is measured as the percentage of labor hoursincurred to date in relation to estimated total labor hours. For arrangementsin which the percentage-of-completionaccounting method isused, the Company records the total of cashreceipts from customers and additional billed amounts due fromcustomers in excess of recognized revenue as billings in excess of revenuesearned on contracts in progress. The timing and amount of cash receipts fromcustomers can vary significantly depending on specific contract terms and can,therefore, have a significant impact on the amount of billings in excess ofrevenues earnedon contracts in progress at the end of any given period. When thecurrent estimates of total contract revenue and contract cost indicate a loss,a provision for the entire loss on the contract is made at the time such lossesbecome evident.

Revenue from contracts recognized under thepercentage-of-completion method is presented as product revenue based oncontract value of software and are presented as services revenue based on thelevel of service hours at contracted prices contained in the contract.

For software subscriptions, theCompany applies revenue recognition principles inaccordance with EITF 00-21 and Staff Accounting Bulletin (“SAB’’) No. 104,*“RevenueRecognition’’*.  The feerelated to multiple element arrangements isallocated to the individual elements in accordance with EITF 00-21 basedupon verifiable, objective evidence of the fair values of each accounting unit.The Company’s arrangements with customers generally include several elements,including (1) strategic consulting services, (2) set-up and softwaresubscription services, and (3) hosting services. Set-up and subscriptionservices are presented as subscription revenues. If the arrangement includesconsulting or hosting services, those elements are presented as service andhosting revenue, respectively, based on the individual contracts. Totalarrangement revenues and direct costs are deferred until customer acceptancehas occurred and the software subscription service begins.  Costs associated with the set-up andimplementation of the subscriptions are deferred based on their actual costs. Ifsuch costs exceed the underlying revenue, the excess cost would be expensedimmediately. Revenues and direct costs arethen amortized ratably to revenue and expense over the non-cancelablecontractual term, which typically is 18 to 24 months.

Maintenance service issold separately under contracts that are renewable annually and is providedonly to customers who purchase maintenance. The Company recognizes maintenanceservice revenue ratably over the contract period, which is generally one yearin length. Maintenance fees are generally billed annually in advance and arerecorded as deferred revenue upon billing. The Company also provides hostingservices to its customers under separate contracts with terms that aretypically 12 to 18 months. The Company recognizes hosting servicesrevenues inaccordance with the guidance provided by EITF Issue No. 00-3, *“Applicationof AICPA Statement of Position 97-2 to Arrangements That Include the Right toUse Software Stored on Another Entity’s Hardware.”*  Hosting revenue is recognized ratablyover the contract period as the amounts become billable, comprising a monthlyhosting fee and amortization of a one-time initial 

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hosting services set-upfee that is required at the beginning of a new hosting contract. For softwarelicense sales with bundled maintenance and hosting services, the Companyapplies revenue recognition principles using the residual method. Under theresidual method, revenue is recognized for delivered elements when acontractually stipulated annual renewal rate for maintenance is provided in thecontract with the customer; provided, however, that collection is deemedprobable and the fee is fixed and determinable.

As part of the salesprocess, the Company may perform a needs analysis for the potential customer ona fixed fee basis. Revenue from needs analyses is recognized as the work isperformed. Training revenue is recognized as the services are provided.

In accordance with EITF No. 01-14“*Income Statement Characterization ofReimbursements Received**forOut-of-Pocket Expenses Incurred*,” the Company characterizes thereimbursement of out-of-pocket expenses from its customers as revenue, ratherthan as a reduction of the related expense in the statement of operations.

Cost of product license revenueincludes production and shipping expenses, which are expensed as incurred, aswell as costs of licensing third party software incorporated into the Company’sproducts. These third party license costs are expensed as the products aredelivered.

Cost of service revenueincludes salaries and related expenses for professional services and technicalsupport personnel who provide development, implementation and installationservices to customers, as well as an allocation of data processing and overheadcosts. Service costs under contracts for which the related services areaccounted for as separate accounting elements under the accounting rules areexpensed as incurred. In situations where the services and software licensescannot be accounted for as separate accounting elements, cost of services arerecognized on the percentage-of-completion basis along with the underlyingsoftware license. When services are provided for subscription arrangements, thecost of such services are deferred and recognized ratably over the same periodas the subscription revenues. The Company does not have any arrangements inwhich the deferred costs exceed the related deferred revenue.

**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. Short-term investments are classified asavailable-for-sale securities and are adjusted to 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 $600,000 has been contributed todate for a pro rata ownership interest of less than 2%. During the secondquarter of 2004, the Company learned that part of the amount of cash investedin the fund since the second quarter of 2003 related to management fees. As aresult, the Company recorded an expense in the second quarter to reduce thevalue of the investment by 101,000 which isthe amount of the management fee that had been incurred since inception. Aportion of this charge related to 2003. The Company wasassessed an additional $22,304 in management fees for the three months ended September 30,2004.

**Stock-BasedCompensation**

TheCompany accounts for its stock options in accordance with the provisions ofStatement 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, SFASNo. 123 also allows entities to continue to apply the provisions ofAccounting Principles Board Opinion No. 25, *“Accounting for Stock Issued to Employees”* (“APB 25”) andrelated interpretations. The Company continues to apply the provisions of APB25 and provides the pro 

forma disclosures requiredby SFAS No. 123, as amended by SFAS No. 148, *“Accounting for Stock-Based Compensation—Transitionand Disclosure, an amendment of FASB Statement No. 123.”*  As such, 

8

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compensation expense would be recorded only if thefair value of the underlying stock exceeded the exercise price on the grantdate.

 

TheCompany has applied APB No. 25 and related interpretations in accountingfor the Employee Plan and the Directors’ Plan. Accordingly, no compensationcost has been recognized on stock options for which the exercise price equaledthe fair value at the date of grant. Had the Company determined compensationcost based on the method required by SFAS No. 123, the Company’s netincome (loss)and net income (loss) per commonshare for the three and nine months ended September 30, 2004 and 2003would approximate the pro forma amounts below.

 

Prior to its IPO, the Company granted certain stockoptions at exercise prices less than their deemed fair value; accordingly, theCompany recorded deferred compensation of $4,636,000. Such deferredcompensation was amortized on a straight-line basis over the vesting period ofeach individual award, resulting in $8,000 of stock-based compensationexpense for the three months ended September 30, 2003, and $21,000 and$51,000 for the nine months ended September 30, 2004 and 2003,respectively. The following table contains the amortization expenseattributable to each noted expense caption, as applicable on the CondensedConsolidated Statements of Operations.
| ** **                                                  | ** ** | **Three months ended**September 30, | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **   2004   **       | ** ** | **   2003   **        | ** ** | **   2004   ** | ** ** | **   2003   ** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**                            | ** ** |
| Stock-based employee compensation expense  attributable to: |       |                                               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                            |       |                                               | —     |                                                |       |   | 2 |   |   |   | 13 |   |   |   | 5 |   |   |
| Sales and marketing                                         |       |                                               | —     |                                                |       |   | 6 |   |   |   | 8 |   |   |   | 44 |   |   |
| Research and development                                    |       |                                               | —     |                                                |       |   | — |   |   |   | — |   |   |   | 2 |   |   |
| Total                                                       |       |                                               | $          | —                                              |       |   |   | $ | 8 |   |   |   | $ | 21 |   |   |   | $ | 51 |   |   |
|                                                             |            |                                                    |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefair value of each stock option granted is estimated on the date of grant usingthe Black-Scholes option-pricing model, with the following weightedaverage assumptions for the three and nine months ended September 30, 2004and the three and nine months ended September 30, 2003, respectively:expected life of 4.25 years for each period; expected volatility of 147%and 99%; risk-free interest rate of 2.7% for each period; and 0% dividend yieldfor each period.
| ** **                                                                                                                             | ** ** | **Three months ended  September 30,**               | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **2004**                                                           | ** ** | **2003**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                             | ** ** | **(in thousands, except per share data)** | ** ** |
| Net income (loss), as  reported                                                                                                        |       | $                                                                  | 1,370      |                                                | $          | 1,575 |   | $ | 3,398 |   | $ | (4,493 | ) |
| Stock-based  employee compensation expense included in the determination of net income  (loss) as reported, net of related tax effects |       | —                                                             |       | 8                                                   |       | 21 |   | 51 |   |
| Total fair value method  employee stock-based compensation expense, net of related tax effects                                         |       | (354                                                               | )          | (462                                                | )          | (885 | ) | (880 | ) |
| Pro forma net income  (loss)                                                                                                           |       | $                                                                  | 1,016      |                                                | $          | 1,121 |   | $ | 2,534 |   | $ | (5,322 | ) |
| Basic income (loss) per share:                                                                                                         |       |                                                               |       |                                                |       |   |   |   |   |
| As reported                                                                                                                            |       | $                                                                  | 0.14       |                                                | $          | 0.19 |   | $ | 0.38 |   | $ | (0.55 | ) |
| Pro forma                                                                                                                              |       | $                                                                  | 0.10       |                                                | $          | 0.14 |   | $ | 0.28 |   | $ | (0.66 | ) |
| Diluted income (loss) per share:                                                                                                       |       |                                                               |       |                                                |       |   |   |   |   |
| As reported                                                                                                                            |       | $                                                                  | 0.14       |                                                | $          | 0.19 |   | $ | 0.36 |   | $ | (0.55 | ) |
| Pro forma                                                                                                                              |       | $                                                                  | 0.10       |                                                | $          | 0.14 |   | $ | 0.27 |   | $ | (0.66 | ) |

 

9

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**3. NET INCOME (LOSS) PER SHARE**

Netincome (loss) per share was computed as follows:
| ** **                                            | ** ** | **Three months ended  September 30,**                  | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                                              | ** ** | **2003**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Basic  income (loss) per share:**                   |       |                                                                  |       |                                                |       |   |   |   |   |
| Net income (loss)                                     |       | $                                                                     | 1,370      |                                                | $          | 1,575 |   | $ | 3,398 |   | $ | (4,493 | ) |
| Weighted average common shares outstanding            |       | 9,719                                                                 |       | 8,137                                               |       | 8,991 |   | 8,117 |   |
| Per share amount                                      |       | $                                                                     | 0.14       |                                                | $          | 0.19 |   | $ | 0.38 |   | $ | (0.55 | ) |
| **Diluted income (loss) per share:**                  |       |                                                                  |       |                                                |       |   |   |   |   |
| Net income (loss)                                     |       | $                                                                     | 1,370      |                                                | $          | 1,575 |   | $ | 3,398 |   | $ | (4,493 | ) |
| Weighted average common shares outstanding            |       | 9,719                                                                 |       | 8,137                                               |       | 8,991 |   | 8,117 |   |
| Add: Effect of dilutive securities—stock options |       | 355                                                                   |       | 49                                                  |       | 413 |   | — |   |
| Diluted weighted average shares outstanding           |       | 10,074                                                                |       | 8,186                                               |       | 9,404 |   | 8,117 |   |
| Per share amount                                      |       | $                                                                     | 0.14       |                                                | $          | 0.19 |   | $ | 0.36 |   | $ | (0.55 | ) |

 

For the three months endedSeptember 30, 2004 and 2003, 351,351 and 230,343 shares, respectively,attributable to outstanding stock options were excluded from the calculation ofdiluted earnings per share because their effect was antidilutive.  For the nine months ended September 30,2004, 245,237 sharesattributable to outstanding stock options were excluded from the calculation ofdiluted earnings per share because their effect was antidilutive. For the ninemonths ended September 30, 2003, all potentially dilutive securities wereexcluded from the loss per share calculation as their inclusion would beantidilutive.

**4. BUSINESS COMBINATIONS**

Effective March 24,2003, the Company completed its acquisition of all of the capital stock ofAllegis Corporation (“Allegis”), a privately-held California corporationengaged in licensing partner relationship management software and providingprofessional implementation services, hosting, and maintenance services relatedto its software. Results of Allegis’ operations have been included in theCompany’s consolidated financial statements since March 24, 2003. Underthe terms and conditions of the Agreement and Plan of Merger,****Allegisbecame a wholly-owned subsidiary of the Company, and the holders ofAllegis’ preferred stock received cash consideration in an aggregate amount ofapproximately $10,200. The Company funded the acquisition using available cashon hand.

Effective April 21,2004, the Company completed its acquisition of substantially all the operatingassets of Webridge, Inc. (“Webridge”), a privately-held Delawarecorporation based in Beaverton, Oregon. Pursuant to the Asset PurchaseAgreement, dated as of March 17, 2004 and amended March 30, 2004,Click-Webridge, Inc., awholly-owned subsidiary of the Company, purchased substantially all of theoperating assets of Webridge. The Company acquired the operating assets ofWebridge, Inc., based on a valuation of Webridge as a going-concern, forconsideration consisting of 615,303 shares of Click Commerce, Inc.common stock, valued at $5.766 per share, including shares issued for workingcapital adjustments.

On July 1, 2004,Click Commerce, Inc. acquired bTrade, Inc. (“bTrade”), aprivately-held Texas corporation based in Irving, Texas. Pursuant to anAgreement and Plan of Merger, dated as of June 17, 2004, bTrade became awholly-owned indirect subsidiary of the Company. The Company acquired bTrade,based on a valuation of bTrade as a going-concern, for consideration consistingof approximately 698,398 shares, valued at $4.795 per share, of Company commonstock, $0.2 million of cash, and the repayment of approximately $1.3 million ofexisting bTrade indebtedness. The 698,398 shares of the Company’s stock 

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includes10% of the shares being held in escrow subject to potential working capitaladjustments, which may result in fewer shares being issued.

Thefollowing table summarizes the estimated fair values of the assets acquired andthe liabilities assumed on the effective date of the Webridge and bTradeacquisitions. The Company incurred approximately $186,000 and $200,000 ofdirect expenses related to the closing of the Webridge and bTrade 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.
| ** **                                       | ** ** | **Webridge  April 21, 2004** | ** ** | **bTrade**July 1, 2004 | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**                | ** ** |
| Assets:                                          |       |                                   |       |                             |       |   |   |   |   |
| Cash and cash  equivalents                       |       |                                   | $          | —                           |       |   |   | $ | 9 |   |   |
| Trade accounts  receivable, net                  |       |                                   | 488        |                             |       |   | 637 |   |   |
| Other current assest                             |       |                                   | —     |                             |       |   | 41 |   |   |
| Total current assets                             |       |                                   | 488        |                             |       |   | 687 |   |   |
| Property and equipment                           |       |                                   | 70         |                             |       |   | 90 |   |   |
| Intangible assets, including  in-process R&D |       |                                   | 1,620      |                             |       |   | 1,618 |   |   |
| Goodwill                                         |       |                                   | 1,869      |                             |       |   | 4,870 |   |   |
| Other assets                                     |       |                                   | 300        |                             |       |   | — |   |   |
| Total assets                                     |       |                                   | 4,347      |                             |       |   | 7,265 |   |   |
| Liabilities:                                     |       |                                   |       |                             |       |   |   |   |   |
| Accounts payable                                 |       |                                   | —     |                             |       |   | 332 |   |   |
| Accrued liabilities                              |       |                                   | 422        |                             |       |   | 764 |   |   |
| Short term debt  obligations(1)             |       |                                   | —     |                             |       |   | 1,306 |   |   |
| Deferred revenue                                 |       |                                   | 377        |                             |       |   | 1,316 |   |   |
| Total liabilities                                |       |                                   | 799        |                             |       |   | 3,718 |   |   |
| Net assets acquired                              |       |                                   | $          | 3,548                            |       |   |   | $ | 3,547 |   |   |

----

(1)          Theacquired debt was paid immediately upon the closing of the acquisition ofbTrade.

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The following table sets forth the allocation, to date, ofintangible assets tocustomer relationships, developed technology, trade names, order backlog aswell as the in-process R&D charge recorded from the acquisition of bTrade. Theseintangible assets, as well as the goodwill recorded by the Company, will beevaluated, as required, todetermine that the fair value of such assets do not exceed their recordedvalues. If an impairment exists, the carrying values of such assets will be reducedto their fair value.
| ** **                                               | ** ** | **Customer  Relationships(1)** | ** ** | **Developed  Technology(2)** | ** ** | **Trade  Names(3)** | ** ** | **Order  Backlog(4)** | ** ** | **In process  R&D(5)** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------------------|------------|-----------|------------|
| 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          |       |                           | 2,221      |                         |       |                | 1,184      |                  |       |                            | 150        |      |       |   | 143 |   |   |   | 6 |   |   | 3,704 |   |
| Accumulated amortization  to date                        |       |                           | (356       | )                            |       |                | (119       | )                     |       |                            | (22        | )         |       |   | (35 | ) |   |   | (6 | ) |   | (538 | ) |
| Balance at September 30,  2004                      |       |                           | $          | 1,865                        |       |                |       | $                     | 1,065      |                            |       |      | $          | 128 |   |   |   | $ | 108 |   |   |   | $ | — |   |   | $ | 3,166 |   |
| Amortization expense                                     |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Nine months ended  September 30, 2004               |       |                           | $          | 249                          |       |                |       | $                     | 119        |                            |       |      | $          | 22 |   |   |   | $ | 35 |   |   |   | $ | 6 |   |   | $ | 431 |   |
| Nine months ended  September 30, 2003               |       |                           | 68         |                         |       |                | —     |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 68 |   |
| Estimated amortization expense for the 12 months  ended: |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| December 31, 2004                                   |       |                           | $          | 396                          |       |                |       | $                     | 195        |                            |       |      | $          | 35 |   |   |   | $ | 72 |   |   |   | $ | — |   |   | $ | 698 |   |
| December 31, 2005                                   |       |                           | 590        |                         |       |                | 301        |                  |       |                            | 50         |      |       |   | 71 |   |   |   | — |   |   | 1,012 |   |
| December 31, 2006                                   |       |                           | 471        |                         |       |                | 301        |                  |       |                            | 50         |      |       |   | — |   |   |   | — |   |   | 822 |   |
| December 31, 2007                                        |       |                           | 431        |                         |       |                | 301        |                  |       |                            | 15         |      |       |   | — |   |   |   | — |   |   | 747 |   |
| December 31, 2008                                        |       |                           | 292        |                         |       |                | 88         |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 280 |   |

----

(1)          Customerrelationships are amortized over 5 years for bTrade and Webridge, and over 3years for Allegis

(2)          Developed technology isamortized over 5 years for bTrade and 4 years for Webridge

(3)          Trade names are beingamortized over 3 years

(4)          Order backlog is beingamortized over 1 year

(5)          In-process R&D is charged immediately to amortization of intangible assets on thestatement of operations and comprehensive income (loss)

Thefollowing unaudited pro forma financial information for the three months ended September 30,2003, and nine months ended September 30, 2004 and 2003 presents theconsolidated operations of the Company as if all of the acquisitions had beenmade on January 1, 2003, after giving effect to certain adjustments forthe pro forma acquisition as of the assumed January 1, 2003 acquisitiondate. As bTrade was acquired on July 1, 2004, the first day of the threemonths ended September 30, 2004, and Webridge was acquired in Q2, 2004,there is no need for pro forma statements for thethree month ended September 30, 2004. Under theprovisions of SFAS No. 142, goodwill acquired in transactions completedafter June 30, 2001 is not amortized. As the acquisition of Allegis,Webridge and bTrade occurred 

12

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subsequent to that date, these pro forma results donot reflect any goodwill amortization expense. The unaudited pro formafinancial information is provided for informational purposes only, should notbe construed to be indicative of the Company’s consolidated results ofoperations had the acquisition of Allegis, Webridge and bTrade been consummatedon these earlier dates, and do not project the Company’s results of operationsfor any future period:
| ** **                           | ** ** | **Three months ended  September 30,**               | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                                           | ** ** | **2003**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenues                             |       | NA                                                                 |       | $                                                   | 7,124      |   | $ | 22,523 |   | $ | 22,631 |   |
| Net income (loss)                    |       | NA                                                                 |       | 445                                                 |       | 2,785 |   | (11,329 | ) |
| Basic net income  (loss) per share   |       | NA                                                                 |       | $                                                   | 0.05       |   | $ | 0.27 |   | $ | (1.20 | ) |
| Diluted net income  (loss) per share |       | NA                                                                 |       | $                                                   | 0.05       |   | $ | 0.26 |   | $ | (1.20 | ) |

 

**5. RESTRUCTURING**

During the second quarter of 2003, the Companycontinued to execute its restructuring plan following the Allegis acquisition.As part of this plan, certain redundant costs were eliminated. These actionsresulted in the termination of approximately 15 employees primarily from the professional services,support and research and development departments. All of these employees wereterminated in the second quarter of 2003. The Company also consolidated officespace and included an additional restructuring charge for the remaining lease obligations on the Company’sexcess office space inChicago and Boston. In the third quarter of 2003, the Company reached asettlement with the Chicago landlordwhich involvedthe cancellation of the Company’s original lease obligation in exchange for a$900,000 cash payment. As of June 30, 2003, the total remaining leaseobligation had been estimated at $1,865,000and was included in the restructuring charge and accrual recorded during thesecond quarter. Accordingly, the Company reversed $965,000 of the restructuringaccrual in the quarter ended September 30, 2003. In addition, recoveries in excess of carryingvalues of restructured assets were taken into income as a restructuring reversal in thequarter ended September 30, 2003.

In conjunction with a review of its cost structure, the Company also recorded a$1,586,000 asset impairment charge during the quarter ended June 30, 2003.This charge related to leasehold improvements associated with the excess officespace, a redundant computer system and excess equipment totaling $1,004,000 in the aggregate and the write-offof certain third party software licenses related to products that had noprojected sales and no plans for further development in the amount of $582,000.

13

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As of September 30,2004, the Company’s restructuring accrual covered obligations for final wagetax settlements and related professional fees in Europe and remaining leasecommitments on excess office space in Boston.Due to the length ofthese lease agreements, payments against the restructuring accrual will be madethrough the quarter ending December 31, 2005. The following table containsthe significant components of the restructuring charge and current year-to-dateactivity relating to those components. 
| ** **                                      | ** ** | **Accrual at  December 31,  2003** | ** ** | **2004 YTD  cash  payments** | ** ** | **Balance at  September 30,  2004** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|
| Employee severance,  benefits and related costs |       |                                         | $          | 121                               |       |                                          |       | $ | (111 | ) |   |   | $ | 10 |   |   |
| Facilities related costs                        |       |                                         | 152        |                              |       |                                          | (55        | ) |   |   | 97 |   |   |
| Legal costs and other                           |       |                                         | 30         |                              |       |                                          | —     |   |   |   | 30 |   |   |
| Total                                           |       |                                         | $          | 303                               |       |                                          |       | $ | (166 | ) |   |   | $ | 137 |   |   |

 

**6. SPECIAL DIVIDEND**

On May 1, 2003, theCompany announced that its Board of Directors had declared a special cashdividend in the amount of $2.50 per share of common stock (“Special Dividend”). The SpecialDividend was paid on June 4, 2003 to stockholders of record as of May 20,2003. For Federal income tax purposes, the Special Dividend isto be treated as a non-taxable return of capital or taxable inpart as a capitalgain, to the extent the Special Dividend exceeds thestockholder’s tax basis in the stock. Theoutstanding shares as of May 20, 2003 were 8,136,643 shares resulting in atotal special dividend payment of $20,342,000.

**7.  COMMITMENTS AND CONTINGENCIES**

In November 2002, the FASB issued FIN 45, “*Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees 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 indemnificationis contingent upon  (a) the customerproviding 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 with claimsasserted under these provisions, and accordingly, the Company has not recordeda liability relating to such provisions.

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**Item 2. Management’s Discussion and Analysis ofFinancial 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. (“Click Commerce” or the “Company”)provides collaborative extranet solutions that optimize business relationshipsfor companies in the manufacturing, high-technology, retail, financialservices, health care, and higher education markets. The Company’s secure,Internet-based software products, along with supplemental integration, hosting,and business consulting services assist our customers in managing theircollaborative commerce, channel management, and compliance automation businessinitiatives.  The Company commenced operations on August 20, 1996.

Effective as of March 24, 2003, the Companyacquired Allegis Corporation (“Allegis”), a privately-held Californiacorporation engaged in licensing partner relationship management software andproviding professional implementation services, hosting, and maintenanceservices related to its software. Results of Allegis’ operations have beenincluded in the Company’s consolidated financial statements since March 24,2003. Allegis, a wholly-owned subsidiary of the Company, broadened theCompany’s installed base and product offerings and expanded its market sharewithin the partner relationship management area especially in the hightechnology and financial services verticals. Allegis contributed revenuesrelated to hosting and license subscriptions as well as adding additionalsoftware license, maintenance and professional services revenues to theconsolidated results. Prior to the Allegis acquisition, the Company did notsell hosting and license subscriptions..

Effective April 21, 2004, the Company completedits acquisition of substantially all the operating assets of Webridge, Inc.(“Webridge”), a privately-held Delaware corporation based in Beaverton, Oregon.Pursuant to the Asset Purchase Agreement, dated as of March 17, 2004 andamended March 30, 2004, Click-Webridge, Inc.purchased substantially all of the operating assets of Webridge. The Companyacquired the operating assets of Webridge, Inc., based on a valuation ofWebridge as a going-concern, for consideration consisting of615,303 shares of Click Commerce, Inc. common stock, valued at $5.766per share, including certain shares used for working capital adjustments.  The acquisition of Webridge has broadened the Company’s position in theareas of compliance automation and grant management within the higher educationand healthcare markets as well as expand its market share within partnercollaborative commerce.

On July 1, 2004, Click Commerce, Inc.acquired bTrade, Inc. (“bTrade”), a privately-held Texas corporation basedin Irving, Texas. Pursuant to an Agreement and Plan of Merger, dated as of June 17,2004, 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 698,398shares, valued at $4.795 per share, of Company common stock, $0.2 million ofcash, and the repayment of approximately $1.3 million of existing bTradeindebtedness. The 698,398 shares of the Company’s stock includes 10% of theshares being held in escrow subject to potential working capital adjustments,which may result in fewer shares being issued. The Company plans to use itssynchronization products, which are an important reference technology for radiofrequency identification (RFID), to increase its product offerings in the RFIDmarket to serve multi-tier and retail channels***.***

As a result of the integration of the acquired companies’ personnel and products,the common business problems the Company solves and the common management team,the Company has presented the business overview and results of Click Commerceand the acquired companies on a consolidated basis.

The Company focusedits efforts in 2003 on achieving profitability. In the nine months ended September 30,2004, the Company’s focus has been on maintaining and increasing itsprofitability. The 

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Company plans to continueinvesting in new and improved product offerings and in increasing the exposureof the Company’s products and services through its targeted marketing programs.The Company believes that each investment must be prudently made and justifiedby the expected return on such investment.

The Company offers several licensing and service optionsfor its software products. Customers can either purchase a perpetual softwarelicense or enter into a subscription license contract. Customers may alsochoose to use the Company’s hosting services for their software license orinstall the software on servers within their own internal environments. Subscription licenses are onlyavailable to customers who also use the Company’s hosting services.

Perpetual license revenues and professional servicesare typically recognized as the software or service is delivered and do notprovide a contractual, predictable future revenue stream. Recurring revenue opportunitiescome from subscriptions or maintenance and hosting services. While the Companymay have better visibility of future revenue from subscription licenses, itscustomers make the final decision on the form of their software license. TheCompany encourages all of its customers to use its hosting services.

The Company depends on several factors to increaserevenue and maintain profitability including adding new customers, maintainingits current base of subscription, hosting and maintenance revenues, andimproving the gross margins of its professional services. Adding new customersis the primary responsibility of the sales department. Maintaining the otherrevenue streams is the responsibility of the professional services department.The Company has developed compensation structures for these departments that itbelieves provideappropriate incentives for achievement of their respective goals.

The Company’s revenue is principally derived fromsales of perpetual licenses for, or subscriptions to, its software. The ClickCommerce software suite consists of extranets and related applications tomanage collaborative commerce and compliance automation. The Company alsorecognizes revenue from services, including business consulting,implementation, maintenance, training andhosting services.

Cost of product license revenues includes productionand shipping expenses, which are expensed as incurred, as well as costs oflicensing third party software incorporated into or required by the Company’sproducts. These third party license costs are expensed as the products aredelivered on perpetual licenses or subscriptions or as maintenance to theextent that the third party license costs related to those product offerings.Cost of service revenues includessalaries and related expenses for professional services and technical supportpersonnel who provide implementation services, maintenance and hosting services,as well as an allocation of data processing and overhead costs which areexpensed as incurred.

Operating expenses are classified into five generalcategories: sales and marketing, research and development, general andadministrative, amortization of stock-based compensation and amortizationof intangible assets. Sales and marketing expenses consist primarily ofsalaries and other related costs for sales and marketing personnel, salescommissions, travel, public relations and marketing materials. Research anddevelopment expenses consist primarily of personnel costs to support productdevelopment. General and administrative expenses consist primarily of salariesand other related costs for executive management, finance and administrativeemployees, legal and accounting services, and corporate liability insurance.Amortization of stock-based compensation represents the amortization overthe related service period of the difference between the exercise price ofoptions granted and the deemed fair market value of the underlying common stockon the date of grant. Amortization of intangible assets represents amortizationexpense for certain customer relationships, acquired technologies, trade namesand order backlog with finite useful lives. These intangible assets wererecorded in connection with the acquisitions of Allegis Corporation during thefirst quarter of 2003, Webridge Inc. during the second quarter of 2004,and bTrade, Inc. on July 1, 2004,and are amortized over their useful lives, which range from one to five years.

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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 companies at anearly stage of development, particularly companies in new, rapidly evolvingmarkets. The Company may not be successful in addressing such risks anddifficulties.

**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,judgments and assumptions that it believes are reasonable based upon theinformation available. These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the periods presented. TheCompany’s critical accounting policies include revenue recognition and anyresulting deferral of revenues and related costs, the estimation of creditlosses on accounts receivable, the application of purchase accounting and thevaluation of deferred tax assets. There hasbeen no change to these policies. For a discussion of thesecritical accounting policies, see “Critical Accounting Policies and Estimates”in the Company’s Annual Report on Form 10-K for the year ended December 31,2003, filed with the Securities and Exchange Commission.

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****

**Results of Operations**

Thefollowing table sets forth selected unaudited financial data for the periodsindicated in dollars and as a percentage of totalrevenue.
|            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2004**                                                 | ** ** | **2003**                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** ** | ** ** | **(in 000’s)**                                 | ** ** | **% of  Revenue**                                  | ** ** | **(in 000’s)** | ** ** | **% of  Revenue** | ** ** | **(in 000’s)** | ** ** | **% of  Revenue** | ** ** | **(in 000’s)** | ** ** | **% of  Revenue** | ** ** |
| Revenues:  |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|            |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Product license                              |   |   | $      | 1,221  |   |   |   | 17.4   | %      |   |   | $      | 584    |   |   |   | 11.6   | %      |   |   | $      | 3,081  |   |   |   | 16.6   | %      |   |   | $      | 1,452  |   |   |   | 11.1  | %  |   |
|----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------|----|--------|
| Subscription                                 |   |   | 714    |   |   |   | 10.1   | %      |   |   | 571    |   |   |   | 11.3   | %      |   |   | 1,501  |   |   |   | 8.1    | %      |   |   | 1,515  |   |   |   | 11.6   | %      |   |
| Total product                                |   |   | 1,935  |   |   |   | 27.5   | %      |   |   | 1,155  |   |   |   | 22.9   | %      |   |   | 4,582  |   |   |   | 24.7   | %      |   |   | 2,967  |   |   |   | 22.7   | %      |   |
| Maintenance and  hosting                     |   |   | 2,682  |   |   |   | 38.1   | %      |   |   | 1,692  |   |   |   | 33.6   | %      |   |   | 6,397  |   |   |   | 34.5   | %      |   |   | 4,868  |   |   |   | 37.3   | %      |   |
| Consulting and implementation  services      |   |   | 2,419  |   |   |   | 34.4   | %      |   |   | 2,194  |   |   |   | 43.6   | %      |   |   | 7,537  |   |   |   | 40.7   | %      |   |   | 5,209  |   |   |   | 39.9   | %      |   |
| Total service                                |   |   | 5,101  |   |   |   | 72.5   | %      |   |   | 3,886  |   |   |   | 77.1   | %      |   |   | 13,934 |   |   |   | 75.3   | %      |   |   | 10,077 |   |   |   | 77.3   | %      |   |
| Total                                        |   |   | 7,036  |   |   |   | 100.0  | %      |   |   | 5,041  |   |   |   | 100    | %      |   |   | 18,516 |   |   |   | 100    | %      |   |   | 13,044 |   |   |   | 100    | %      |   |
| Cost of revenues:                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product                                      |   |   | 35     |   |   |   | 0.5    | %      |   |   | 69     |   |   |   | 1.4    | %      |   |   | 121    |   |   |   | 0.7    | %      |   |   | 295    |   |   |   | 2.3    | %      |   |
| Consulting and implementation  service.      |   |   | 2,526  |   |   |   | 35.9   | %      |   |   | 2,197  |   |   |   | 43.6   | %      |   |   | 7,208  |   |   |   | 38.9   | %      |   |   | 6,310  |   |   |   | 48.4   | %      |   |
| Total cost of revenues                       |   |   | 2,561  |   |   |   | 36.4   | %      |   |   | 2,266  |   |   |   | 45.0   | %      |   |   | 7,329  |   |   |   | 39.6   | %      |   |   | 6,605  |   |   |   | 50.6   | %      |   |
| Gross profit                                 |   |   | 4,475  |   |   |   | 63.6   | %      |   |   | 2,775  |   |   |   | 55.0   | %      |   |   | 11,187 |   |   |   | 60.4   | %      |   |   | 6,439  |   |   |   | 49.4   | %      |   |
| Operating  expenses:                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                          |   |   | 1,084  |   |   |   | 15.4   | %      |   |   | 676    |   |   |   | 13.4   | %      |   |   | 2,362  |   |   |   | 12.8   | %      |   |   | 2,508  |   |   |   | 19.2   | %      |   |
| Research and  development                    |   |   | 1,007  |   |   |   | 14.3   | %      |   |   | 587    |   |   |   | 11.6   | %      |   |   | 2,072  |   |   |   | 11.2   | %      |   |   | 1,928  |   |   |   | 14.8   | %      |   |
| General and administrative                   |   |   | 856    |   |   |   | 12.2   | %      |   |   | 891    |   |   |   | 17.7   | %      |   |   | 2,971  |   |   |   | 16.0   | %      |   |   | 3,737  |   |   |   | 28.6   | %      |   |
| Amortization of stock-based compensation     |   |   | — |   |   |   | — |        |   |   | 8      |   |   |   | 0.2    | %      |   |   | 21     |   |   |   | 0.1    | %      |   |   | 51     |   |   |   | 0.4    | %      |   |
| Amortization of intangibles assets           |   |   | 262    |   |   |   | 3.7    | %      |   |   | 40     |   |   |   | 0.8    | %      |   |   | 431    |   |   |   | 2.3    | %      |   |   | 68     |   |   |   | 0.5    | %      |   |
| Restructuring and other charges (recoveries) |   |   | — |   |   |   | — |   |   |   | (983   | )      |   |   | (19.5  | )%     |   |   | — |   |   |   | — |   |   |   | 2,959  |   |   |   | 22.7   | %      |   |
| Total operating  expenses                    |   |   | 3,209  |   |   |   | 45.6   | %      |   |   | 1,219  |   |   |   | 24.2   | %      |   |   | 7,857  |   |   |   | 42.4   | %      |   |   | 11,251 |   |   |   | 86.3   | %      |   |
| Operating income (loss)                      |   |   | $      | 1,266  |   |   |   | 18.0   | %      |   |   | $      | 1,556  |   |   |   | 30.8   | %      |   |   | $      | 3,330  |   |   |   | 18.0   | %      |   |   | $      | (4,812 | )      |   |   | (36.9 | )% |   |

 

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**Comparison of the three months ended September 30,2004 to the three months ended September 30, 2003**

*Revenue*

Total revenue increasedapproximately $2.0 million, or 39.7%, to $7.0 million for the three monthsended September 30, 2004 from $5.0 million for the three months ended September 30,2003. Product license revenue consists of revenue from separate product-onlyagreements 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. Product license revenueincreased by $0.6 million, or 109.1%, as a result of the acquisition ofWebridge and bTrade. These acquisitions accounted for 51% of license revenue. Subscriptionrevenue increased by $0.1 million or 25.0%.  This increase is a direct resultof the bTrade acquisition. Maintenance and hosting revenues increased by $1.0million or 58.5% to $2.7 million for the three months ended September 30,2004. The increase is attributable to the acquisitions of Webridge and bTradeas well as a 10% increase in the Company’s existing business maintenancerevenue. Consulting and implementation service revenue is comprised of feesrelated to time and materials, and 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 services revenues increased by $0.2 million, or 10.3%, over theprior year quarter arising from Webridge and bTrade consulting andimplementation service revenues. Webridge and bTrade made up 35% ofconsulting and implementation servicesrevenue for the three months ended September 30, 2004. Consulting andimplementation services revenueincreases 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.

*Cost of Revenue*

Total cost of revenueincreased by $0.3 million to $2.6 million for the three months ended September 30,2004. This cost of revenue increase is a result of an increase in employeecompensation. The increase in employee compensation is directly related to theacquisition of bTrade and Webridge. Cost of product revenue decreased by $0.03million, or 49.3%, due to lower royalty fees for licensed third party softwarethat is embedded in the Company’s products or incorporated in the Company’sproduct offerings. Gross profit margins increased to 63.6% for the three monthsended September 30, 2004, compared to 55.0% for the three months ended September 30,2003. The gross margin increase of 8.6% is due to an improvement in the utilization rate ofprofessional service staff, and the increase in higher margin subscription andlicense revenue. Product revenue represented 27.5% of total revenues for thethree months ended September 30, 2004 versus 22.9% for the three monthsended September 30, 2003.

*Operating Expenses*

*Salesand Marketing.**  *Salesand marketing expenses increasedby approximately $0.4 million, or 60.4%, to $1.1 million for the three monthsended September 30, 2004 from $0.7 million for the three months ended September 30,2003. The increase in sales and marketing expense was directly attributable to the acquisition of bTrade and Webridge. The acquisitions ofWebridge and bTrade increased the Company’s sales force headcount byapproximately 100%.

*Researchand Development.**  *Researchand development expenses increased by approximately $0.4 million, or 71.6%, to$1.0 million for the three months ended September 30, 2004, compared to$0.6 million for the comparable prior year three-month period. This increasewas almost entirely attributable to an increase in employee compensation andrelated costs. The Webridge and bTrade acquisitions resulted 

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in an increase in the Company’s employeecompensation expense by $0.3 million. To date, all software development costshave been expensed as incurred.

*Generaland Administrative.**  *Generaland administrative expenses decreased by approximately $0.04 million, or 3.9%,to $0.86 million  for the three monthsended September 30, 2004 from $0.89 million for the three months ended September 30,2003.  The decrease is attributable to a 4% decrease in employeecompensation and related costs. The bTrade acquisition hadno significant impact on general andadministrative expenses as the Company immediately eliminated substantially all such expenses.

*Amortizationof Intangible Assets*.*  *Theincrease in amortization of intangibles relates to the intangible assetsacquired in the acquisitions of bTrade and the operating assetsof Webridge.These intangible assetshave useful lives that range from one to five years and accounted for theentire $0.2 million increase in amortization expense for the quarter ended September 30,2004.

*Restructuring and othercharges.*   In the quarter ended September 30,2003, the Company continued to execute its plan of reorganization following theAllegis acquisition. As part of this plan, certain redundant costs wereeliminated and a restructuring charge was recorded in the second quarter of 2003 forexcess lease costs and severance and other benefit costs involving the termination of 15employees. In the third quarter of 2003, the Company reached a settlement withthe landlord for its vacant office space in Chicago that resulted from itsconsolidation efforts in the second quarter. This agreement resulted in thecancellation of the Company’s original lease obligation in exchange for a $0.9million cash payment. As of June 30, 2003, the total cost of this lease had been estimated at $1.9 millionand was included in the restructuring charge and accrual recorded during thesecond quarter. Accordingly, the Company reversed $1.0 million of therestructuring accrual in the quarter ended September 30, 2003 as a resultof the lease settlement. The Company also recorded a recovery of $18,000 duringthe third quarter of 2003 related to the sale of impaired assets that were nolonger recorded on the Company’s books.

**Comparison of the nine months ended September 30,2004 to the nine months ended September 30, 2003**

*Revenue*

Total revenue increased by approximately $5.5 million,or 42.0%, to $18.5 million for the nine months ended September 30, 2004from $13.0 million for the nine months ended September 30, 2003. Productlicense revenue consists of revenue from separate product-only agreements andfrom multiple element agreements accountedfor under a percentage-of-completion basis using hours of input in relation tothe estimate of total hours tocomplete the engagements.  Product license revenue increased by $1.6million, or 112.2%, as a result of an increase in the number of new contractsin the nine months ended September 30, 2004. The increase in the number oflicenses sold isrelated to the three acquisitions made by the Company over the last 18 months. Webridgeand bTrade accounted for 36% of license revenue for the nine months ended September 30,2004. Maintenance and hosting revenues increased by $1.5 million, or 31.4% forthe nine months ended September 30, 2004 to $6.4 million. The increase canbe attributed to the inclusion of a full nine months of Allegis’s operations in2004 compared to only six months of Allegis’s operations included in theCompany’s results of operations for the nine months ended September 30,2003. Allegis contributed an additional $1.5 million in maintenance and hostingrevenue for the nine months ended September 30, 2004. The acquisition ofbTrade also contributed to the increase in maintenance and hosting revenues. Consultingand implementation service revenue, comprised of fees related to time andmaterials service contracts, training and needs analyses, as well as multiple elementagreements accounted for under the percentage of completion method using hoursof input in relation to the estimate of total hours tocomplete the engagements, increased by $2.3million, or 44.7%, over the prior nine month period. The increase in consultingand implementation services revenueis generally related to new license transactions or as follow on servicecontracts. Webridge and bTrade contributed 21% of consulting and 

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implementation services revenue for the nine monthsended September 30, 2004. Allegis had a 41% increase in consulting andimplementation service revenue for the nine months ended September 30,2004.

The results for the first nine months of 2004 and 2003include the revenues and costs for Allegis Corporation beginning on the March 24,2003 acquisition date through the period ended September 30, 2004. Webridgewas acquired by the Company on April 21, 2004.Therefore,160 days of Webridge’s operations are included in the Company’s revenues andexpenses. bTrade was acquired on July 1,2004.  Therefore 92 days of bTrade’soperations are included the Company’s results of operations for the nine monthsended September 30, 2004.

*Cost of Revenue*

Total cost of revenue increased approximately $0.7million, or 11.0% to $7.3 million for the nine months ended September 30,2004 compared to $6.6 million for the nine months ended September 30,2003. This cost of revenue increase is primarily a result of direct costsassociated with increased revenues. The increase in direct cost ispredominately made up of higher employee compensation and related costs as aresult of the Webridge and bTrade acquisitions.   Cost of product revenue decreased by $0.2million or 60.0% due to lower royalty fees for licensed third party softwarethat is embedded in the Company’s products or incorporated in the Company’sproduct offerings. The Company’s gross profit margin increased to 60.4% for thenine months ended September 30, 2004, compared to 49.4% for the ninemonths ended September 30, 2003. The increase in the gross profit marginis principally due to the increase inproduct revenue as a percentage of total revenue. Product revenue made up 24.7%of total revenues for the nine months ended September 30, 2004 versus only22.7%for the same period in 2003. In addition, the increase can be attributed to betterutilization on theservice side. Gross margins related to consulting and implementation revenuesincreased by 10.9%.

*Operating Expenses*

*Sales and Marketing.**  *Sales and marketing expensesdecreased by approximately $0.1 million, or 5.8%, to $2.4 million for the ninemonths ended September 30, 2004 from $2.5 million for the nine monthsended September 30, 2003. The $0.1 million decrease in sales and marketingexpense is related to a $0.9 million decrease in the Company’s pre-existing operations partiallyoffset by a $0.8 million increase in compensation attributable to the acquisition ofWebridge and bTrade.

*Research and Development.**  *Research and development expensesincreased by $0.1 million or 7.5%, to $2.1 million for the nine months ended September 30,2004, compared to $1.9 million for the prior year nine-month period. Thisincrease is due to a $0.3 million or 20.4% increase in personnel costs partiallyoffset by lowerthird party contractor costs, and lower discretionary spending.  The increase in personnel costs relates to $0.5 million in additionalcosts relating to the Webridge and bTrade acquisitions, slightly offset by a $0.4million decrease in the Company’s existing personnel costs. To date, allsoftware development costs have been expensed as incurred.

*General and Administrative.**  *General and administrative expensesdecreased by approximately $0.8 million, or 20.5%, to $3.0 million for the ninemonths ended September 30, 2004 from $3.7 million for the nine monthsended September 30, 2003.  Thedecrease in 2004 is primarily attributable to $0.7 million of non-recurringlegal and consulting expenses related tothe Company’sconsideration of an unsolicited acquisition proposal and thecosts incurred in connection with the payment of the June 4, 2003, $2.50 per share special dividendin the prior year nine month period.

*Amortization ofIntangible Assets.**  *Theincrease in amortization of intangibles relates to the intangible assetsacquired with the acquisitions of Allegis, and bTrade and theoperating assets of Webridge. The amortization of these assetsranges from one to five years and accounted for the $0.4 million increase inamortization expense for the nine months ended September 30, 2004.

*Restructuring and othercharges.*   In the quarter ended September 30,2003, the Company continued to execute its plan of reorganization following theAllegis acquisition. As part of this plan, certain redundant 

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costswere eliminated and a restructuring charge of $2.3 million was recorded in the second quarter of 2003.The restructuring charge primarily related to $2.1 million of excess leasecosts in two locations and severance and other benefit costs of $0.2 millionfor the termination of 15 employees. In the third quarter of 2003, theCompany reached a settlement with the landlord for its vacant office space inChicago that resulted from its consolidation efforts in the second quarter. Thisagreement resulted in the cancellation of the Company’s original leaseobligation in exchange for a $0.9 million cash payment. As of June 30, 2003, thetotal cost of this lease had been estimated at $1.9 millionand was included in the restructuring charge and accrual recorded during thesecond quarter. Accordingly, the Company reversed $1.0** **million of the restructuringaccrual in the quarter ended September 30, 2003 as a result of the leasesettlement. The Company also recorded a recovery of $18,000 during the thirdquarter of 2003 related to the sale of impaired assets that were no longerrecorded on the Company’s books.

The Company also recorded a $1.6 million assetimpairment charge in the second quarter of2003. This charge related to leasehold improvements associatedwith excess office space, a redundant computer system and excess equipmenttotaling $1.0 million and the write-off of certain third party softwarelicenses related to products that had no projected sales and no plans forfurther development in the amount of $0.6 million.

**Liquidityand Capital Resources**

At September 30,2004, the Company had $11.5 million of cash  andcash equivalents,consisting primarily of the remaining proceeds from its initial public offeringin 2000 and after the payment of the $20.3 million special dividend. Thespecial dividend of $2.50 per share was declared on May 1, 2003 payable onJune 4, 2003 to shareholders of record as of May 20, 2003.

Netcash provided by operating activities was $1.7 million for the nine monthsended September 30, 2004. The $1.7 million was theproduct of net income and adjustments for depreciation,amortization and bad debt expense, as partiallyoffset by increases resulting from changesin working capital and other accounts. Sources of cash from operations include$3.4 million in net income, $0.8 million in depreciation and amortization, $0.2 million in provision for doubtfulaccounts and an increase in the compensation accruals of $0.3. The increase inthe compensation accrual is directly related to the Company havingapproximately 60 additional employees at September 30, 2004 versus December 31,2003. These amounts were partially offset by increases to accounts receivable of$1.3 million, and decreases of deferredrevenue of $1.4 million and accrued expenses of $0.3 million. The increase inreceivables, net of receivables acquired (see Note 4)was a result of an increase in sales in the third quarter of 2004. The decrease in deferredrevenue, net of deferred revenue acquired (see Note 4),results from a significant portion of the Company’s maintenance contracts thatare renewed in the first quarter of the calendar year, and then amortized overthe following quarters. The decrease in accrued liabilities, net of accruedliabilities acquired (see Note 4), resulted mainly from paymentsof $0.2 million of restructuring accruals.

Netcash used in investing activities was $2.1 million for the nine months ended September 30,2004, consisting mainly of cash used in the acquisition of bTrade of $1.6million, net of cash acquired, and cash used in theacquisition of Webridge of $186,000. In addition, the Company used $0.2 millionto purchase property and equipment.

Netcash provided by financing activities was approximately $27,000 for the ninemonths ended September 30, 2004, reflecting  cash proceeds received from the exercise ofstock options, partially offset by payments made under capital leaseobligations totaling $69,000.

Aspart of the Allegis acquisition, the Company assumed a letter of creditsecuring an office lease in San Francisco. The letter of credit expires on September 30,2005 and currently has a balance of $0.2 million. The Company has a letter ofcredit in the amount of $0.3 million securing an office lease in Beaverton,Oregon as a result of the Webridge asset purchase. The Company also has anoutstanding letter of credit in an original amount of approximately $0.8million in connection with an insurance premium finance agreement. Theinsurance premium letter of credit declines on a monthly basis, beginning in November 2004,until it expires on November 1,2005. This letterof credit is secured by a line of credit that 

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expires on June 30, 2005.  The Company has also secured letters ofcredit, relating to the Allegis and Webridge leases, with cash deposits whichare classified in other current assets on the September 30, 2004 balancesheet. These assets wereclassified in other current assets because the letters of credit expire withinthe next 12 months.

As aresult of larger than anticipated restructuring and asset impairment charges inthe second quarter of 2003 and the payment of the $2.50 per share special dividend on June 4,2003, the Company fell below the $10 million minimum stockholders’ equityrequirement to maintain listing on the NASDAQ National Market (“NNM”). NASDAQ formallynotified the Company in the third quarter of 2003 that unless the Company coulddemonstrate compliance with the minimum shareholders’ equity requirement, theCompany’s shares would either be delisted, or, upon request of the Company,transferred to the NASDAQ Small Cap Market. In October of 2003, theCompany presented a plan to achieve compliance with NNM requirements throughthe achievement of profitability in the second half of 2003 and the exercise ofstock options by the Company’s CEO. Subject to the successful implementation ofthis compliance plan, the Company was released from all delisting actions andallowed to remain in good standing with the NNM. The Company is currently incompliance with all listing requirements of the NNM.

On April 21,2004, the Company completed its acquisition of substantially all the operatingassets of Webridge. The acquisition was completed in exchange for615,303 shares of Company stock valued at $5.766 per share, which was theaverage closing price of the Company’s stock two days prior to through two daysafter March 17, 2004.

On July 1,2004, Click Commerce, Inc. acquired bTrade, Inc. (“bTrade”), aprivately-held Texas corporation based in Irving, Texas. Pursuant to anAgreement and Plan of Merger, dated as of June 17, 2004, bTrade became awholly-owned indirect subsidiary of the Company. The Company acquired bTrade,based on a valuation of bTrade as a going-concern, for consideration consistingof 698,398 shares,valued at $4.795 per share, which was the average closing price of the Company’sstock two days priorto May 21, 2004, through the twodays following May 21, 2004, of Company common stock, $0.2 million incash, and the repayment of approximately $1.3 million of existing bTradeindebtedness. The 698,398 shares of the Company’s stock includes 10% of theshares being held in escrow subject to potential working capital adjustments,which may result in fewer shares being issued

TheCompany continues to evaluate strategic alternatives, including opportunitiesto strategically grow the business, enter into strategic relationships, makeacquisitions, or enter into business combinations. The Company can provide noassurance that any such strategicalternatives will come to fruition andmay elect to terminate such evaluationsat any time.

The Company may use cash resources to fund investmentsin complementary businesses or technologies but believes that its workingcapital will be sufficient for at least the next twelve months. The Company hasno current plans to raise additional equity to finance existing operationsduring the next twelve months, although such plans are subject to change due to business and marketconditions. Thereafter, the Company may find it necessary to obtain additionalequity or debt financing, although the Company does not currently foresee aneed for additional cash resources for long-term needs. In the event additionalfinancing is required, the Company may not be able to raise it on acceptableterms or at all.

**Safe Harbor Statement under the Private SecuritiesLitigation Reform Act of 1995 within the meaning of Section 21E of theSecurities 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 similarwords and expressions. The statements are subject to risks and uncertaintiesand actual results 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 

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competitiveproducts and services, the Company’s ability to develop new and enhancedversions of its products and services, the effect of economic and business conditions,the volume and timing of 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, 2003, 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 all of the Company’srecognized revenues have been denominated in U.S. dollars and primarily fromcustomers in the United States and the exposure to foreign currency exchangerate changes has been immaterial. The Company expects, however, that futureproduct license and professional services revenues may also be derived frominternational markets and may be denominated in the currency of the applicablemarket. As a result, operating results may become subject to significant fluctuationsbased upon changes in the exchange rates of certain currencies in relation tothe U.S. dollar. Furthermore, to the extent the Company engages ininternational sales denominated in U.S. dollars, an increase in the value ofthe U.S. dollar relative to foreign currencies could make the Company’sproducts less competitive in international markets. Although the Company willcontinue to monitor its exposure to currency fluctuations, and, whenappropriate, may use financial hedging techniques in the future to minimize theeffect of these fluctuations, there is no assurance that exchange ratefluctuations will not adversely affect financial results in the future.

*Interest Rate Risk*

As of September 30,2004, the Company had cash and cash equivalents of $11.5 million. Risinginterest rates will increase interest income from short-term investments. Basedupon the balance of cash and cash equivalents at September 30, 2004, achange in interest rates of 0.5% would cause a corresponding change in annualinterest income of less than $0.1 million.

**Item 4.*  *Controlsand Procedures**

The Company’s Chief Executive Officer and ChiefFinancial Officer have reviewed and evaluated the effectiveness of theCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) promulgated under the Securities Exchange Actof 1934 (the “Exchange Act”) as of the end of the period covered by thisquarterly report. Based on that evaluation, the Chief Executive Officer and theChief Financial Officer have concluded that the Company’s disclosure controlsand procedures, modified as described below, are effective to ensure that information required to be disclosed inthe reports that the Company files or submits under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Subsequent to the end ofthe period covered by this quarterly report, the Company, in conjunction withthe Company’s independent public accountants, KPMG LLP (“KPMG”), determined that the 

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revenue from two customer contracts should berecognized on a pro rata basis over the likely term of those contracts (4quarters in one case and 8 quarters in the other), rather than being recognizedin full during the third quarter. As a result, the Company’s financial resultsfor the third quarter of 2004 contained in this Form 10-Q report differ from the Company’s financialresults announced in the Company’s October 26, 2004 press release, quarterlyearnings conference call and related Form 8-K report as follows:  the Company’s revenues and net income eachhave been reduced by $94,000 (from $7,130,000to $7,036,000 for revenues and from $1,464,000 to $1,370,000 for net income). TheCompany’s previously-announced diluted earnings per share of $0.14 for thethird quarter was not affected by this change.

In connection with performing a review of theCompany’s interim financialinformation, KPMG issued a letter to the Company to communicate the controldeficiencies that were considered to be a material weakness. KPMGindicated, and the Company agreedthat, the Company’squarter-end reporting schedule is toocompressed, allowing insufficient time for the Company to perform adequatereviews of its accounting records and prepare appropriate support for theaccounting positions taken by the Company, and for its independent publicaccountants to complete its review of the Company’s financial statements, priorto the Company’s release of its financial results. Consequently,the Company has determined that, for future periods, it will release itsquarterly financial results to the public on a date closer to the due date forthe filing of its Form 10-Q, thereby increasing the time available for itsinternal review of accounting issues and for its independent publicaccountants’ review of the Company’s financial statements. The Company believesthat this modification to its operating procedures will rectify the material weakness in its internal controls identified byKPMG. This change may alsoresult in the Company scheduling its earning release and related conferencecall with somewhat less prior notice than it has historically provided toinvestors.

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**PART II.   OTHER INFORMATION**

**Item 6.   Exhibits and Reports on Form 8-K**

(a)   **Exhibits:**

Thefollowing exhibits are filed as part of this Form 10-Q.
| Exhibit  Number | ** **                                                                                                                                           | ** ** | **Description** |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.3*            | Plan of Merger Agreement, dated as of July 1,  2004, between Click Commerce Inc. and bTrade, Inc. (“bTrade Purchase  Agreement”) |
| 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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*                    Incorporatedby reference to the Company’s Current Report on Form 8-K, dated July 6,2004

(b)   **Reports on Form 8-K**

The Company filed a Current Report on Form 8-K/Adated July 2, 2004 to amend Item 7 of the Original Filing dated April 21,2004, to include the financial statements of Webridge Inc., required by Items 7(a) and7(b).

The Company filed a Current Report on Form 8-Kon July 6, 2004, to report the Plan of Merger Agreement between ClickCommerce Inc. and bTrade, Inc..

The Company filed a Current Report on Form 8-Kon July 29, 2004, to report the issuance of a press release setting forththe Company’s second quarter 2004 earnings.

The Company filed a Current Report on Form 8-K/Aon September 13, 2004 , to amend Item 7 of the Form 8-K dated July 6,2004, to include the financial statements of bTrade Inc., required by Items 7(a) and7(b)

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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*Vice President, Chief Financial Officer and  Treasurer  (Principal Financial and Accounting Officer)* |

 

Date: November 15, 2004

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