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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




Form 10-Q


Quarterly Report Under Section 13 or 15(d)


of


The Securities Exchange
Act of 1934





For the Quarter Ended March 31, 2002





Commission File Number 0-30881





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CLICK COMMERCE, INC.


(Exact name of registrant as specified in its charter)





Delaware

36-4088644(State or other jurisdiction ofincorporation or organization)

(I.R.S. EmployerIdentification Number)





200 East Randolph Drive, Suite 4900


Chicago, Illinois 60601


(Address of principal executive offices)





(312) 482-9006


(Registrants telephone number, including area code)





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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.





Yes X     No


On May 13, 2002, 40,297,526 shares of the registrants common stock were issued and outstanding.





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CLICK COMMERCE, INC.





INDEX





Page No.PART I.    FINANCIAL INFORMATIONItem 1.

Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2002 (unaudited) and December 31, 2001

1Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2002 and March 31, 2001 (unaudited)

2Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (unaudited)

3Notes to Condensed Consolidated Financial Statements (unaudited)

4Item 2.

Managements Discussion and Analysis of Financial Condition and Results ofOperations

6Item 3.

Quantitative and Qualitative Disclosures About Market Risk

11PART II.    OTHER INFORMATIONItem 1.

Legal Proceedings

12Item 2.

Changes in Securities and Use of Proceeds

12Item 3.

Defaults Upon Senior Securities

12Item 4.

Submission of Matters to a Vote of Security Holders

12Item 5.

Other Information

12Item 6.

Exhibits and Reports on Form 8-K

12SIGNATURES

13






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PART 1.    FINANCIAL INFORMATION





Item 1.    Financial Statements





CLICK COMMERCE, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS





(dollars in thousands)





March 31, 2002


December 31, 2001(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
29,802


$
40,677Short-term investments


10,000



Trade accounts receivable, net


5,250



6,670Income taxes receivable






158Other current assets


1,908



2,534Total current assets


46,960



50,039Property and equipment, net


3,625



3,934Other assets


659



721Total assets

$
51,244


$
54,694LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,045


$
1,096Billings in excess of revenue earned on contracts in progress


336



443Deferred revenue


3,923



2,265Accrued compensation


1,486



1,686Accrued expenses and other current liabilities


1,895



2,274Accrued restructuring


654



950Current portion of capital lease obligations


816



815Total current liabilities


10,155



9,529Capital lease obligations, less current portion


522



727Total liabilities


10,677



10,256Shareholders equity:Preferred stock






Common stock


40



40Additional paid-in capital


85,110



85,081Accumulated other comprehensive incomecurrency translation adjustment


124



125Deferred compensation


(2,861
)


(3,334
)Accumulated deficit


(41,846
)


(37,474
)Total shareholders equity


40,567



44,438Total liabilities and shareholders equity

$
51,244


$
54,694





See accompanying notes to condensed consolidated financial statements.




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CLICK COMMERCE, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND  COMPREHENSIVE LOSS





(dollars in thousands, except
per share data)





(unaudited)





Three months ended March 31,2002


2001RevenuesProduct license

$
563


$
6,406Service


4,774



5,263Total revenues


5,337



11,669Cost of revenuesProduct license


175



171Service (exclusive of $12 and $13 for the three months ended March 31, 2002 and 2001, respectively, reported below as amortization
of stock-based compensation)


2,050



2,997Total cost of revenues


2,225



3,168Gross profit


3,112



8,501Operating expenses:Sales and marketing (exclusive of $372 and $557 for the three months ended March 31, 2002 and 2001, respectively, reported below as
amortization of stock-based compensation)


3,986



8,141Research and development (exclusive of $3 and $6 for the three months ended March 31, 2002 and 2001, respectively, reported below as
amortization of stock-based compensation)


1,566



2,607General and administrative (exclusive of $25 and $39 for the three months ended March 31, 2002 and 2001, respectively, reported
below as amortization of stock-based compensation)


1,691



2,828Amortization of stock-based compensation


412



615Total operating expenses


7,655



14,191Operating loss


(4,543
)


(5,690
)Interest income


190



778Interest expense


(19
)


(18
)Other expense






(100
)Other income, net


171



660Loss before income taxes


(4,372
)


(5,030
)Income tax benefit






(1,840
)Net loss

$
(4,372
)

$
(3,190
)Basic and diluted loss per share

$
(0.11
)

$
(0.08
)Weighted average shares outstandingbasic and diluted


40,275,248



38,357,079Comprehensive loss:Net loss

$
(4,372
)

$
(3,190
)Foreign currency translation adjustment


(1
)


(80
)Comprehensive loss

$
(4,373
)

$
(3,270
)





See accompanying notes to condensed consolidated financial statements.




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CLICK COMMERCE, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





(dollars in thousands)





(unaudited)





Three Months ended March 31,2002


2001Cash flows from operating activities:Net loss

$
(4,372
)

$
(3,190
)Adjustments to reconcile net loss to net cash used in operating activities:Amortization of stock-based compensation


412



615Depreciation and amortization


405



238Provision for doubtful accounts


30



22Deferred income taxes






(1,798
)Amortization of deferred compensation


61



55Payments related to restructuring charge


(296
)


Changes in operating assets and liabilities:Trade accounts receivable


1,390



2,471Revenue earned on contracts in progress in excess of billings






441Income taxes receivable


145



Other current assets


626



(381
)Accounts payable


(51
)


(747
)Billings in excess of revenues earned on contracts in progress


(107
)


(309
)Deferred revenue


1,658



653Accrued compensation


(200
)


(882
)Accrued expenses and other current liabilities


(359
)


(570
)Other assets


62



(132
)Net cash used in operating activities


(596
)


(3,514
)Cash flows from investing activities:Purchases of short-term investments


(10,000
)


Purchases of property and equipment


(103
)


(273
)Net cash used in investing activities


(10,103
)


(273
)Cash flows from financing activities:Proceeds from exercise of stock options


29



426Principal payments under capital lease obligations


(204
)


(104
)Net cash (used in) provided by financing activities


(175
)


322Effect of foreign exchange rates on cash and cash equivalents


(1
)


(80
)Net change in cash and cash equivalents


(10,875
)


(3,545
)Cash and cash equivalents at beginning of period


40,677



51,318Cash and cash equivalents at end of period

$
29,802


$
47,773Supplemental disclosures:Property and equipment acquired under capital leases

$



$
708Interest paid


19



18Income taxes paid


9



20





See accompanying notes to condensed consolidated financial statements.




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CLICK COMMERCE, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(Dollars in thousands, except per share data)





(unaudited)





1.    BASIS OF PRESENTATION





The unaudited condensed consolidated financial statements
include the accounts of Click Commerce, Inc. and its wholly owned subsidiaries (the Company) and reflect all adjustments (which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation
of the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2002. Certain
information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the Securities and
Exchange Commissions rules and regulations. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Companys audited consolidated financial statements and notes included
in the Companys Annual Report on Form 10-K and other documents that have been filed with the Securities and Exchange Commission.





Certain prior year amounts have been reclassified to conform to 2002 presentation.





2.    SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES





Revenue and Cost Recognition





The Company recognizes product license revenue from licensing the rights to use its software. The Company generates service revenues from integrating its software, performing needs analyses for customers and through
the sale of maintenance and training services. The Company recognizes revenue in accordance with Statement of Position (SOP) No. 97-2 Software Revenue Recognition as amended by SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions. For those contracts that either do not contain a services component or that have services which are not essential to the functionality of any other element of the
contract, software license revenue is recognized upon shipment of the Companys software provided that the fee is fixed and determinable, persuasive evidence of an arrangement exists and collection of the resulting receivable is considered
probable. Revenue from service contracts is typically recognized as the services are performed. The revenue to be recognized from multiple-element software contracts is based on the fair value of each element. The Company records deferred revenue on
software contracts for which it has billed or collected amounts, but for which the requirements for revenue recognition have not been met.





Revenue from contracts in which the Companys services are essential to the functionality of the other elements of the contract is recognized using the percentage-of-completion method under contract accounting as
services are performed or output milestones are reached, as the Company delivers, customizes and installs the software. The percentage completed is measured either by the percentage of labor hours incurred to date in relation to estimated total
labor hours or in consideration of achievement of certain output milestones, depending on the specific nature of each contract. For arrangements in which percentage-of-completion accounting is used, the Company records cash receipts from customers
and billed amounts due from customers in excess of recognized revenue as billings in excess of revenues earned on contracts in progress. The timing and amount of cash receipts from customers can vary significantly depending on specific contract
terms and can therefore have a significant impact on the amount of billings in excess of revenues earned on contracts in progress at the end of any given period.




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Revenue from contracts recognized under the percentage-of-completion method are presented as
product revenue to the extent that the underlying milestones are related to software deliveries. To the extent that hours of input are used as the basis for percentage completed or that contract milestones relate to software customization or other
professional services, revenues are presented as service revenues.





Maintenance service is sold separately under contracts that
are renewable annually and is provided only to customers who purchase maintenance. The Company recognizes maintenance service revenue ratably over the contract period, generally one year. Maintenance fees are generally billed annually in advance and
are recorded as deferred revenue. As part of the sales process, the Company may perform a needs analysis for the potential customer on a fixed fee basis. Revenue from needs analyses is recognized as the work is performed. Training revenue is
recognized as the services are provided.





Cost of product license revenue includes production and shipping expenses which are
expensed as incurred, as well as costs of licensing third party software incorporated into the Companys products. These third party license costs are expensed as the products are delivered. Cost of service revenue includes salaries and related
expenses for professional services and technical support personnel who provide development, customization and installation services to customers, as well as an allocation of data processing and overhead costs, which are expensed as incurred.





Reimbursement of Out-of-Pocket Expenses





Effective January 1, 2002, the Company adopted Emerging Issues Task Force (EITF) Issue No. 01-14, which addresses income statement characterization of reimbursements received for out-of-pocket
expenses incurred. This EITF requires entities to characterize the reimbursement of out-of-pocket expenses from their customers as revenue, rather than as a reduction of the related expense in the income statement in certain circumstances.
Comparative financial statements for prior periods must conform to this presentation. Although adoption of this EITF Issue effects income statement presentation, it does not impact the Companys earnings or earnings per share. The Company has
classified out-of-pocket expenses billed to its customers as service revenue. The current and prior year effect on gross margin percentage was not significant.





3.    STOCK-BASED COMPENSATION





Prior to its initial public offering, the Company granted
certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4,636. Such deferred compensation is amortized on a straight-line basis over the vesting period of each
individual award, resulting in $103 and $306 of stock-based compensation expense for the three months ended March 31, 2002 and 2001, respectively.





In April 2000, the Company issued a warrant to Accenture LTD (Accenture) to purchase up to 818,226 shares of common stock at $12.22 per share. The warrant vests contingently upon the achievement of certain
milestones, primarily the generation of license revenue for the Company, and expires on April 20, 2004. The warrant contains a significant cash penalty for Accentures failure to meet the agreed revenue target by the expiration date, and,
accordingly, the fair value of the warrant was measured at the date of grant in accordance with EITF Issue No. 96-18 and Statement of Financial Accounting Standards No. 123, resulting in a fair value of approximately $5,000, which was determined
using the Black-Scholes option-pricing model. This amount is being amortized to expense on a straight-line basis over the vesting period of the warrant. The Company recognized amortization expense of $309 for each of the three months ended March 31,
2002 and 2001, respectively.





4.    RESTRUCTURING





In the quarter ended September 30, 2001, the Company determined that, given current economic conditions, it was necessary to lower its overall cost structure. The Company had been
experiencing longer sales cycles, delayed purchasing decisions and higher executive level review of all capital projects, particularly on technology and e-commerce projects. These factors, along with the effects of September 11, 2001, caused the
Company to




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re-evaluate its near term growth opportunities and take actions to align its cost structure accordingly. As a result, the Company developed a restructuring plan to reduce the Companys cost
structure, which resulted in the Company recording a $1.8 million restructuring charge. As part of the restructuring, the Company terminated approximately 17% of its workforce or approximately 50 personnel across all areas of the Company. As of
March 31, 2002, the majority of the Companys restructuring accrual related to employee severance, benefits and related costs. Due to extended severance arrangements with certain employees, payments against the restructuring charge will be made
through December 31, 2002. The following are significant components of the restructuring charge.





Initial charge at September 30, 2001

Cash activity through December 31, 2001


Non-cash activity through December 31, 2001


2002 Cash Activity


Balance at March 31, 2002Employee severance, benefits and related costs

$
1,396

$
(547
)

$



$
(255
)

$
594Stock-based compensation


298






(298
)






Facilities related costs


54


(13
)






(18
)


23Other


79


(19
)






(23
)


37Total

$
1,827

$
(579
)

$
(298
)

$
(296
)

$
654





The employee severance and related costs were attributable to personnel who were
involuntarily terminated at September 30, 2001. The stock-based compensation charge was a non-cash expense incurred for accelerated vesting under contracts with certain terminated employees. Facilities related costs represent the remaining lease
payments for the closing of one office.





5.     REVOLVING CREDIT FACILITY





On March 31, 2002, the Company renewed its $3.0 million revolving credit facility.





6.     SUBSEQUENT EVENT





Subsequent to March 31, 2002, the Company
completed a review of its operations and began reducing its cost structure to bring costs more in line with expected levels of revenue. As a result, the Company will be reporting a restructuring charge and asset write-off for the quarter ending June
30, 2002, of approximately $1.1 million to $1.3 million. This charge relates primarily to costs associated with employee severance and the write-down of excess fixed assets in connection with the reduction of approximately 25% of the Companys
headcount.





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





Overview





Click Commerce, Inc. (the Company) is a provider of Channel Management software products
and integration services that connect large companies with their distribution channel partners. The Companys software products and integration services enable large companies to effectively manage and engage in collaborative
business-to-business electronic commerce throughout all levels of their sell-side channels and processes. The Company develops, implements and supports private marketplaces, which are secure systems that use the Internet to communicate between
companies with all participants in the network or chain of distribution who have a password and an Internet browser.





The
Company commenced operations on August 20, 1996. During the period from inception until early 1998, the Company was primarily engaged in developing software for the Relationship Manager (formerly referred to as the Extranet Manager). In 1996 and
1997, the Company was also engaged in developing Internet Web sites and providing related consulting services. The Company implemented the first Click Commerce Relationship Manager in the second quarter of 1997.




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The Companys revenue is derived from sales of licenses of its software, comprised of the
Relationship Manager and a portfolio of applications, as well as from needs analyses, professional services, training, maintenance and support and out-of-pocket expenses billed to its customers. The Companys software is generally licensed on a
perpetual basis.





Operating expenses are classified into four general categories: sales and marketing, research and development,
general and administrative and amortization of stock-based compensation. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing
materials. Research and development expenses consist primarily of personnel costs to support product development. General and administrative expenses consist primarily of salaries and other related costs for executive management, finance and
administrative employees, legal and accounting services and an allocation of project management overhead. Amortization of stock-based compensation represents the amortization over the related service period of the difference between the exercise
price of options granted and the deemed fair market value of the underlying common stock on the date of grant, as well as amortization of the warrant issued in connection with a joint marketing agreement with Accenture LTD (Accenture).





In April 2000, the Company issued a warrant to Accenture to purchase up to 818,226 shares of common stock at an exercise price
of $12.22 per share. The warrant vests contingently upon the achievement of certain milestones, primarily the generation of license revenue for the Company, and expires on April 20, 2004. The warrant contains a significant cash penalty for
Accentures failure to meet the agreed revenue target by the expiration date, and, accordingly, the fair value of the warrant was determined on the date of grant in accordance with Emerging Issues Task Force Issue No. 96-18 and Statement of
Financial Accounting Standards No. 123 to be approximately $5.0 million, which was determined using the Black-Scholes option pricing model. This amount is included in additional paid-in capital and is being amortized to expense over the vesting
period of the warrants. For the three months ended March 31, 2002, the Company recognized $0.3 million in amortization expense. The Company expects to recognize future amortization expense of $0.9 million for the remainder of 2002, $1.2 million in
2003 and $0.4 million in 2004.





The Company believes that period-to-period comparisons of operating results should not be relied
upon as predictive of future performance. The Companys prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies in new, rapidly evolving
markets. The Company may not be successful in addressing such risks and difficulties.




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Results of Operations





The following table sets forth selected unaudited financial data for the periods indicated in dollars and as a percentage of total revenue.





Three Months Ended March 31,2002


2001in 000s


% of Revenue


in 000s


% of RevenueRevenuesProduct license

563


10.5
%

$
6,406


54.9
%Service

4,774


89.5



5,263


45.1Total revenues

5,337


100.0



11,669


100.0Cost of revenuesProduct license

175


3.3



171


1.5Service (a)

2,050


38.4



2,997


25.7Total cost of revenues

2,225


41.7



3,168


27.1Gross profit

3,112


58.3



8,501


72.9Operating expenses:Sales and marketing (a)

3,986


74.7



8,141


69.8Research and development (a)

1,566


29.3



2,607


22.3General and administrative (a)

1,691


31.7



2,828


24.2Amortization of stock-based compensation

412


7.7



615


5.3Total operating expenses

7,655


(143.4
)


14,191


121.6Operating loss

(4,543
)

(85.1
)%

$
(5,690
)

(48.8
)%


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|(a) |  | Exclusive of amortization of stock-based compensation presented as a separate caption.
|--- |  | --------------------------------------------------------------------------------------




Comparison of the three months ended March 31, 2002 to the three months ended March 31, 2001





Revenue





Total revenue decreased approximately $6.3 million, or 54.3%, to $5.3 million for the three months
ended March 31, 2002 from $11.7 million for the three months ended March 31, 2001. Product license revenue, comprised of revenue from separate product-only agreements and from multi-element agreements accounted for under a percentage completed basis
using milestones that specifically relate to product deliveries, decreased by $5.8 million, or 91.2%, as a result of a decrease in the number of new contracts due to the economic slowdown and significant decline in information technology spending.
Service revenue, comprised of fees related to time and materials service contracts, maintenance, training and needs analyses, reimbursement of out-of-pocket expenses, as well as multi-element agreements accounted for under a percentage completed
basis using hours of input or milestones that specifically relate to integration and customization services, decreased by $0.5 million, or 9.3%, over the prior year quarter. This decrease was due to a combined $1.4 million decrease in revenue
primarily from needs analyses, contract addenda and from revenue recognized as service revenue under multi-element contracts. This service revenue decrease was offset by a $0.9 million increase in maintenance and support services. Service revenue
from time and materials contracts remained flat. In any period, service revenue from time and materials contracts are dependent, among other things, on license transactions closed during the current and preceding quarters and customer decisions
regarding implementations of licensed software





Cost of Revenue





Total cost of revenue decreased approximately $0.9 million, or 29.8%, to $2.2 million for the three months ended March 31, 2002 compared to $3.2 million for the three months ended
March 31, 2001. This cost of




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revenue decrease is primarily a result of lower third party contractor costs and employee compensation and related costs due to a reduction in project management personnel. Cost of product
revenue remained flat and consisted of royalty fees for licensed third party software that is embedded in the Companys products or incorporated in the Companys product offerings, as well as amortization of product packaging costs. Gross
profit margins decreased to 58.3% for the three months ended March 31, 2002, compared to 72.9% for the three months ended March 31, 2001. The gross margin decrease is due to a decrease in product revenue as a percent of total revenue.





Operating Expenses





Sales and Marketing.    Sales and marketing expenses decreased by approximately $4.2 million, or 51.0%, to $4.0 million for the three months ended March 31, 2002 from $8.1 million for the three months ended March
31, 2001. The decrease in sales and marketing expense was primarily attributable to lower employee compensation and related costs due to a reduction in personnel.





Research and Development.    Research and development expenses decreased by approximately $1.0 million, or 39.9%, to $1.6 million for the three months ended
March 31, 2002, compared to $2.6 million for the prior year three-month period. This decrease was primarily attributable to lower third party contractor costs. To date, all software development costs have been expensed as incurred.





General and Administrative.    General and administrative expenses decreased by approximately $1.1 million, or
40.2%, to $1.7 million for the three months ended March 31, 2002 from $2.8 million for the three months ended March 31, 2001. This decrease was primarily attributable to lower employee compensation and related costs due to a reduction in
administrative personnel and lower overhead costs.





Amortization of stock-based
compensation.    Prior to its initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4.6 million.
Such deferred compensation is being amortized over the vesting periods of the applicable options, resulting in expense of $0.1 million and $0.3 million for the three months ended March 31, 2002 and 2001, respectively. Additionally, the $5.0 million
fair value of the warrant issued to Accenture in April 2000 is being amortized over the vesting period of the warrant. Accordingly, $0.3 million of amortization expense was recognized during each of the three months ended March 31, 2002 and 2001,
respectively.





Income tax expense.    The Company recorded an income tax benefit of $1.8 million for
the three months ended March 31, 2001.|For the three months ended March 31, 2002, the Companys earnings did not include an income tax benefit, as a full tax valuation allowance against deferred tax assets generated from the Companys net
loss for the three months ended March 31, 2002 was recorded. In the fourth quarter of 2001, the Company established a valuation allowance for deferred tax assets that were previously generated. Although future taxable income of the Company may be
sufficient to utilize a substantial amount of the Companys net operating loss carryforwards and to realize its deferred tax assets, management has concluded that the realization of the Companys deferred tax assets did not meet the
more likely than not criteria under SFAS No. 109.





Liquidity and Capital Resources





At March 31, 2002, the Company had $39.8 million of cash, cash equivalents and short-term investments, consisting primarily of proceeds from its initial
public offering. Net cash used in operating activities was $0.6 million and $3.5 million for the three months ended March 31, 2002 and 2001, respectively. The $0.6 million of cash used in the current three month period primarily consisted of a loss
before amortization of stock-based compensation and depreciation and amortization totaling approximately $3.6 million offset by an increase in deferred revenue of approximately $1.7 million and a decrease in accounts receivable of $1.4 million.





Net cash used by investing activities was $10.1 million for the three months ended March 31, 2002, consisting primarily of a
$10.0 million investment of short-term investments. During the first quarter, the Company also purchased $0.1 million of property and equipment.




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Net cash used in financing activities was approximately $0.2 million for the three months ended
March 31 2002. The cash used during the current year period reflects $0.2 million in capital lease payments offset by proceeds from the exercise of stock options.





On March 31, 2002, the Company renewed its $3.0 million revolving credit facility. In January 2000, the Company obtained a letter of credit under this facility totaling $0.5 million to
secure a new office lease. This letter of credit is renewable annually and declines by $0.1 million on the first, second, third and fourth anniversaries of the lease and then declines to $38,130 on the fifth anniversary until the lease expires in
August 2005. Accordingly, the letter of credit has declined to $0.3 million.





The Company may use cash resources to fund
investments in complementary businesses or technologies. The Company believes that working capital will be sufficient to meet its working capital and operating expenditure requirements for at least the next twelve months. The Company has no current
plans to raise additional equity during the next twelve months, although such plans are subject to business and market conditions. Thereafter, the Company may find it necessary to obtain additional equity or debt financing, although the Company does
not currently foresee a need for additional cash resources for long-term needs. In the event additional financing is required, the Company may not be able to raise it on acceptable terms or at all.





Subsequent to March 31, 2002, the Company announced that its Board of Directors had authorized the repurchase of up to $5.0 million of its common stock
in the open market. The timing and amount of any repurchase will be at the discretion of the Companys management. No shares have been purchased as of the date hereof.





Recent Accounting Pronouncements





In June 2001, the FASB issued Statement No. 143,
Accounting for Asset Retirement Obligations. This statement requires that the fair value of a liability for legal obligations associated with the retirement of tangible long-lived assets be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. Such legal obligations include obligations a party is required to settle as a result of an existing or enacted law, statute, or ordinance, or written or oral contract. These associated
asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for fiscal years beginning after June 15, 2002. The Company does not expect that the adoption of this statement will have a
material impact on the Company.





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





Statements in this Form 10-Q that are not historical facts and refer to
the Companys future prospects are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified by words such as expect,
anticipate, intend, believe, hope, assume, estimate and other similar words and expressions. The statements are subject to risks and uncertainties and actual results may differ
materially from those indicated by these forward-looking statements as a result of various factors, including but not limited to, the ability of the Company to execute on its plan to enter into strategic alliances with system integrators and
business consultants, the extent of customer acceptance and utilization of the Companys channel management solutions, the impact of competitive products and services, the Companys ability to manage growth and to develop new and enhanced
versions of its products and services, the effect of economic and business conditions, the volume and timing of customer contracts, the Companys ability to expand overseas, changes in technology, deployment delays or errors associated with the
Companys products and the Companys ability to protect its intellectual property rights. For a discussion of these and other risk factors that could affect the Companys business, see Risk Factors in the Companys
Annual Report on Form 10-K for the year ended December 31, 2001, which is on file with the Securities and Exchange Commission.




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Item 3.    Qualitative and Quantitative Disclosures About Market Risk





The
following discusses the Companys exposure to market risk related to changes in foreign currency exchange rates and interest rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results
could vary materially as a result of a number of factors including those set forth in Part I of the Companys Annual Report on Form 10-K under Risk Factors.





Foreign Currency Exchange Rate Risk





To date,
predominately all of the Companys recognized revenues have been denominated in U.S. dollars and primarily from customers in the United States and the exposure to foreign currency exchange rate changes has been immaterial. The Company expects,
however, that future product license and professional services revenues may also be derived from international markets and may be denominated in the currency of the applicable market. As a result, operating results may become subject to significant
fluctuations based upon changes in the exchange rates of certain currencies in relation to the U.S. dollar. Furthermore, to the extent the Company engages in international sales denominated in U.S. dollars, an increase in the value of the U.S.
dollar relative to foreign currencies could make the Companys products less competitive in international markets. Although the Company will continue to monitor its exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations, there is no assurance that exchange rate fluctuations will not adversely affect financial results in the future.





Interest Rate Risk





As of March 31, 2002, the Company
had cash and cash equivalents of $29.8 million. Declines in interest rates will reduce interest income from short-term investments. Based upon the balance of cash and cash equivalents at March 31, 2002, a change in interest rates of 0.5% would cause
a corresponding change in annual interest income of approximately $0.2 million. At March 31, 2002, the Company also had $10.0 million in short-term investments, consisting primarily of short-term bond funds, with an average maturity of three years.
A portion of these investments are in fixed rate securities. The fair value of the Companys fixed rate investments may be adversely impacted by a rise in interest rates.




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PART II.    OTHER INFORMATION





Item 1.    Legal Proceedings





On or about December 4, 2001, a putative securities
class action, captioned Murphy v. Click Commerce, Inc., et at, Civil Action 01-CV-11234 was filed against the Company, two of the Companys executive officers and Morgan Stanley & Co., Dain Rauscher Incorporated, Lehman Brothers, Inc.,
Deutsche Bank Securities, Inc., and U.S. Bancorp Piper Jaffray, Inc., the underwriters of the Companys initial public offering, in the United States District Court for the Southern District of New York. The complaint alleges violations of
Section 11 of the Securities Act of 1933 (the Securities Act) against all defendants, a violation of Section 15 of the Securities Act against two of the Companys executive officers and violations of Section 12(a)(2) of the
Securities Act and Section 10(b) of the Securities Exchange Act of 1934, including Rule 10b-5 promulgated thereunder, against the underwriters. The complaint seeks unspecified damages on behalf of a purported class of purchasers of common stock
between June 26, 2000 and December 6, 2000. As of March 1, 2002, various plaintiffs have filed similar actions asserting virtually identical allegations against approximately 300 other companies. To date, there have been no significant developments
in the litigation. The Company intends to defend the lawsuit vigorously.





Item 2.    Changes in Securities and Use of Proceeds





On June 26, 2000, the
Securities and Exchange Commission declared effective the Companys Registration Statement on Form S-1, File No. 333-30564, relating to the initial public offering of the Companys common stock, par value $.001 per share. As of March 31,
2002, the Company had spent approximately $12.0 million of the net proceeds for working capital and general corporate purposes. The remaining proceeds are invested in investment grade, interest-bearing securities.





Item 3.    Defaults Upon Senior Securities





Not applicable.





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





Not applicable.





Item 5.    Other Information





Not applicable.





Item 6.    Exhibits and Reports on Form 8-K





(a)Exhibits:





The following exhibit is filed as part of this Form 10-Q:





Exhibit Number

Description10.1

Release and Severance Agreement between William Conroy and the Company dated as of April 25, 2002.





(b)Reports on Form 8-K





None.




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SIGNATURES





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





CLICK COMMERCE, INC./s/    REBECCA S. MASKEYRebecca S. Maskey Executive Vice
President, Chief Financial Officer and Treasurer (Principal Financial and Accounting
Officer)








Date: May 15, 2001




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