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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 June 30, 2001





Commission File Number 0-30881











CLICK COMMERCE, INC.


(Exact name of registrant as specified in its charter)





|Delaware                                                        |  | 36-4088644                              
|--------------------------------------------------------------- |  | ----------------------------------------
|(State or other jurisdiction of

incorporation or organization) |  | (I.R.S. Employer

Identification Number)




200 East Randolph Drive, Suite 4900


Chicago, Illinois 60601


(Address of principal executive offices)





(312) 482-9006


(Registrants telephone number, including area code)











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





Yes X        No





On August 10, 2001, 39,288,667 shares of the registrants common stock were issued and
outstanding.





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CLICK COMMERCE, INC.





INDEX





|           |  |                                                                                                                                        |  | Page No.
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|PART I.    |  | FINANCIAL INFORMATION                                                                                                                  |  |         
|          
|          
|          
|Item 1.    |  | Financial Statements                                                                                                                   |  |         
|          
|          
|          
|           |  | Condensed Consolidated Balance Sheets at June 30, 2001 and December 31, 2000                                                           |  | 1       
|          
|          
|          
|           |  | Condensed Consolidated Statements of Operations and Comprehensive Loss for the three

     and six months ended June 30, 2001 and 2000 |  | 2       
|          
|          
|          
|           |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30,

     2001 and 2000                                  |  | 3       
|          
|          
|          
|           |  | Notes to Condensed Consolidated Financial Statements                                                                                   |  | 4       
|          
|          
|          
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of

     Operations                                            |  | 5       
|          
|          
|          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                                             |  | 11      
|          
|          
|          
|PART II.   |  | OTHER INFORMATION                                                                                                                      |  |         
|          
|          
|          
|Item 1.    |  | Legal Proceedings                                                                                                                      |  | 12      
|          
|          
|          
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                                              |  | 12      
|          
|          
|          
|Item 3.    |  | Defaults Upon Senior Securities                                                                                                        |  | 12      
|          
|          
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                    |  | 12      
|          
|          
|          
|Item 5.    |  | Other Information                                                                                                                      |  | 12      
|          
|          
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                                       |  | 12      
|          
|          
|          
|SIGNATURES |  | 14                                                                                                                                    




PART 1.    FINANCIAL INFORMATION





Item 1.    Financial Statements





CLICK COMMERCE, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS





(dollars in thousands)





|                                                              |  | June 30,

2001 |   | December 31,

2000
|------------------------------------------------------------- |  | -------------- | - | ------------------
|
|ASSETS                                                        |  |                |   |                   
|                                                             
|                                                             
|                                                             
|Current assets:                                               |  |                |   |                   
|Cash and cash equivalents                                     |  | $  46,595      |   |                   
|Trade accounts receivable, net                                |  | 9,636          |   |                   
|Revenue earned on contracts in progress in excess of billings |  | 537            |   |                   
|Other current assets                                          |  | 2,015          |   |                   
|Deferred income taxes                                         |  | 330            |   |                   
|                                                              |  |                |   |                   
|Total current
assets                                          |  | 59,113         |   |                   
|Property and equipment, net                                   |  | 3,778          |   |                   
|Deferred income taxes                                         |  | 8,438          |   |                   
|Other assets                                                  |  | 122            |   |                   
|                                                              |  |                |   |                   
|Total assets                                                  |  | $  71,451      |   |                   
|                                                              |  |                |   |                   
|                                                             
|                                                             
|                                                             
|LIABILITIES AND SHAREHOLDERS EQUITY                          |  |                |   |                   
|                                                             
|                                                             
|                                                             
|Current liabilities:                                          |  |                |   |                   
|Accounts payable                                              |  | $    1,351     |   |                   
|Billings in excess of revenue earned on contracts in progress |  | 409            |   |                   
|Deferred revenue                                              |  | 4,337          |   |                   
|Accrued compensation                                          |  | 3,416          |   |                   
|Accrued expenses and other current liabilities                |  | 3,136          |   |                   
|Current portion of capital lease obligations                  |  | 652            |   |                   
|                                                              |  |                |   |                   
|Total current
liabilities                                     |  | 13,301         |   |                   
|Capital lease obligations, less current portion               |  | 1,384          |   |                   
|Other liabilities                                             |  |               |   |                   
|                                                              |  |                |   |                   
|Total
liabilities                                             |  | 14,685         |   |                   
|Shareholders equity:                                        
|Preferred stock                                               |  |               |   |                   
|Common stock                                                  |  | 39             |   |                   
|Additional paid-in capital                                    |  | 87,114         |   |                   
|Accumulated other comprehensive income                        |  | 110            |   |                   
|Deferred compensation                                         |  | (5,261         | ) |                   
|Accumulated deficit                                           |  | (25,236        | ) |                   
|                                                              |  |                |   |                   
|Total shareholders
equity                                    |  | 56,766         |   |                   
|                                                              |  |                |   |                   
|Total liabilities and
shareholders equity                    |  | $  71,451      |   |                   
|                                                              |  |                |   |                   




See accompanying notes to condensed consolidated financial statements.





CLICK COMMERCE, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND


COMPREHENSIVE LOSS





(dollars in thousands, except per share data)





(unaudited)





|                                                                                                                                                                                                                                                                                                          |  | Three Months ended

June 30, |   | Six Months ended

June 30,
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | - | --------------------------
|
|Revenues                                                                                                                                                                                                                                                                                                  |  |                              |   |                           
|Product license                                                                                                                                                                                                                                                                                           |  | $          7,392             |   |                           
|Service                                                                                                                                                                                                                                                                                                   |  | 6,321                        |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Total revenues                                                                                                                                                                                                                                                                                            |  | 13,713                       |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Cost of revenues                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Product license                                                                                                                                                                                                                                                                                           |  | 481                          |   |                           
|Service (exclusive of $15 and $20 for the three months ended June 30,

            2001 and 2000, respectively, and $28 and $24 for the six months

            ended June 30, 2001 and 2000, respectively, reported below as

            amortization of stock-based compensation)                      |  | 3,066                        |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Total cost of revenues                                                                                                                                                                                                                                                                                    |  | 3,547                        |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Gross profit                                                                                                                                                                                                                                                                                              |  | 10,166                       |   |                           
|Operating expenses:                                                                                                                                                                                                                                                                                       |  |                              |   |                           
|Sales and marketing (exclusive of $442 and $647 for the three months

            ended June 30, 2001 and 2000, respectively, and $999 and $748 for

            the six months ended June 30, 2001 and 2000 respectively, reported

            below as amortization of stock-based compensation)       |  | 6,928                        |   |                           
|Research and development (exclusive of $4 and $1 for the three months

            ended June 30, 2001 and 2000, respectively, and $10 and $24 for the

            six months ended June 30, 2001 and 2000, respectively, reported

            below as amortization of stock-based compensation)       |  | 2,672                        |   |                           
|General and administrative (exclusive of $87 and $106 for the three

            months ended June 30, 2001 and 2000, respectively, and $126 and

            $249 for the six months ended June 30, 2001 and 2000 respectively,

            reported below as amortization of stock-based compensation) |  | 2,534                        |   |                           
|Amortization of stock-based compensation                                                                                                                                                                                                                                                                  |  | 548                          |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Total operating expenses                                                                                                                                                                                                                                                                                  |  | 12,682                       |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Operating loss                                                                                                                                                                                                                                                                                            |  | (2,516                       | ) |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Interest income                                                                                                                                                                                                                                                                                           |  | 476                          |   |                           
|Interest expense                                                                                                                                                                                                                                                                                          |  | (33                          | ) |                           
|Other expense                                                                                                                                                                                                                                                                                             |  |                             |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Other income, net                                                                                                                                                                                                                                                                                         |  | 443                          |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Loss before income taxes                                                                                                                                                                                                                                                                                  |  | (2,073                       | ) |                           
|Income tax benefit                                                                                                                                                                                                                                                                                        |  | ( 701                        | ) |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Net loss                                                                                                                                                                                                                                                                                                  |  | (1,372                       | ) |                           
|Accretion related to redeemable preferred stock                                                                                                                                                                                                                                                           |  |                             |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Net loss available to common shareholders                                                                                                                                                                                                                                                                 |  | $        (1,372              | ) |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Basic and diluted loss per share                                                                                                                                                                                                                                                                          |  | $          (0.04             | ) |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Weighted average shares outstandingbasic and diluted                                                                                                                                                                                                                                                     |  | 38,545,031                   |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Comprehensive loss:                                                                                                                                                                                                                                                                                       |  |                              |   |                           
|Net loss                                                                                                                                                                                                                                                                                                  |  | $        (1,372              | ) |                           
|Foreign currency translation adjustment                                                                                                                                                                                                                                                                   |  | 71                           |   |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           
|Comprehensive loss                                                                                                                                                                                                                                                                                        |  | $        (1,301              | ) |                           
|                                                                                                                                                                                                                                                                                                          |  |                              |   |                           




See accompanying notes to condensed consolidated financial statements.





CLICK COMMERCE, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





(dollars in thousands)





(unaudited)





|                                                                            |  | Six months ended

June 30,
|--------------------------------------------------------------------------- |  | --------------------------
|
|Cash flows from operating activities:                                      
|Net loss                                                                    |  | $(4,562                   
|Adjustments to reconcile net loss to net cash used in operating activities:
|Amortization of
stock-based compensation                                    |  | 1,163                     
|Depreciation and
amortization                                               |  | 554                       
|Provision for doubtful
accounts                                             |  | 50                        
|Deferred income
taxes                                                       |  | (2,499                    
|Deferred
compensation                                                       |  | 110                       
|Gain on disposal of
property and equipment                                  |  |                          
|Changes in operating
assets and liabilities:                               
|Trade accounts receivable                                                   |  | (410                      
|Revenue earned on contracts in progress in excess of billings               |  | 997                       
|Other current assets                                                        |  | (107                      
|Accounts payable                                                            |  | (718                      
|Billings in excess of revenues earned on contracts in progress              |  | (618                      
|Deferred revenue                                                            |  | 2,806                     
|Accrued compensation                                                        |  | (533                      
|Accrued expenses and other current liabilities                              |  | (448                      
|Income taxes payable                                                        |  |                          
|Other assets and liabilities                                                |  | (91                       
|                                                                            |  |                           
|Net cash used in operating activities                                       |  | (4,306                    
|                                                                            |  |                           
|Cash flows from investing activities:                                      
|Proceeds from sale of property and equipment                                |  |                          
|Purchases of property and equipment                                         |  | (685                      
|Net maturities of short-term investments                                    |  |                          
|                                                                            |  |                           
|Net cash (used in) provided by investing activities                         |  | (685                      
|                                                                            |  |                           
|Cash flows from financing activities:                                      
|Proceeds from initial public offering, net                                  |  |                          
|Proceeds from exercise of stock options                                     |  | 678                       
|Principal payments under capital lease obligations                          |  | (401                      
|                                                                            |  |                           
|Net cash provided by financing activities                                   |  | 277                       
|                                                                            |  |                           
|Effect of foreign exchange rates on cash equivalents                        |  | (9                        
|                                                                            |  |                           
|Net change in cash and cash equivalents                                     |  | (4,723                    
|Cash and cash equivalents at beginning of period                            |  | 51,318                    
|                                                                            |  |                           
|Cash and cash equivalents at end of period                                  |  | $46,595                   
|                                                                            |  |                           
|Supplemental disclosures:                                                  
|Property and equipment acquired under capital leases                        |  | $  1,742                  
|Interest paid                                                               |  | $      51                 
|Income taxes paid                                                           |  | $      20                 




See accompanying notes to condensed consolidated financial statements.





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, 2001. 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 the 2001 presentation.





2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Revenue Recognition





Beginning in the third quarter of 2000, the Company began to license its software products independent of
its integration services. 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.





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.





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. 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.





Derivative Instruments and Hedging Activities





Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activitiesas amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities.These statements
establish a
comprehensive standard for the recognition and measurement of derivative instruments and hedging activities. These pronouncements require the Company to recognize derivatives on the balance sheet at fair value. In addition, changes in a
derivatives fair value are required to be recognized in earnings unless specific hedge criteria are met. Currently, the pronouncements have no impact on the Company, as the Company has not utilized derivative instruments or entered into any
hedging transactions that are covered by these pronouncements.





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 $239 and $568 of stock-based
compensation expense for the three months ended June 30, 2001 and 2000, respectively, and $545 and $839 for the six months ended June 30, 2001 and 2000, respectively.





In April 2000, the Company issued a warrant to 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 Emerging Issues Task Force 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 and $206 for the three months ended June 30, 2001 and 2000 respectively, and $618 and $206 for the six months ended June 30, 2001 and 2000, respectively.





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





Overview





The Company is a provider of channel management software products and integration services for large, global
companies with complex or specialized dealer, distributor and supplier networks. The Companys software products and integration services enable large, global companies to effectively manage and engage in collaborative business-to-business
electronic commerce throughout all levels of their product and services distribution channels.





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





Beginning in the third quarter of 2000, the Company began to license its software products independent of
its integration services. For those contracts that either do not contain a services component or in which the services element is 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. For contracts in which the services component
meets the requirements of a separate element of a contract, revenue is 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 as determined from
objective evidence that is specific to the Company. The Company records deferred revenue on software contracts for which cash has been received, but for which the requirements for revenue recognition have not been met. The Company records accounts
receivable on software contracts for which the requirements for revenue recognition have been met, but for which cash has not been received.





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.





Maintenance service is sold separately under contacts that are renewable annually. The Company anticipates
that it will sell maintenance service to most, but not all of its customers. The Company recognizes maintenance service revenue ratably over the contract period, typically one year. Maintenance fees are generally billed annually in advance and are
recorded as deferred revenue. As part of the sales process, the Company often performs a needs analysis for the potential customer on a fixed fee basis. Revenue from needs analyses is recognized as the work is performed.





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. 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.





Costs of product license revenues include production and shipping expenses, as well as costs of licensing
third party software incorporated into the Companys products. Costs of service revenues includes salaries and related expenses for professional services and technical support personnel who provide customization and installation and support
services to customers, as well as an allocation of data processing and overhead costs.





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 programs and 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. 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.





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, resulting in a fair value of approximately $5.0 million, which was determined using the Black-Scholes option pricing model. For the six months ended June 30, 2001, the Company has recognized $0.6
million in amortization expense. The Company expects to recognize amortization expense of $0.6 million for the remainder of 2001, $1.2 million in 2002 and 2003, respectively, and $0.4 million in 2004.





The Companys full-time headcount at June 30, 2001 was 316. The Companys expansion has placed
significant demands on management and operational resources. To manage this rapid growth, the Company must invest in and implement scalable operational systems, procedures and controls. The Company must also be able
to recruit qualified candidates. The Company expects any future expansion to continue to challenge its ability to hire, train, manage and retain employees.





On June 30, 2000, the Company completed an initial public offering (IPO) of common stock that
resulted in the issuance of 5,000,000 shares of common stock with an IPO price of $10.00 per share. In connection with the IPO, the Company offered the underwriters the option to purchase an additional 750,000 shares of common stock
(underwriters over-allotment) at the offering price of $10.00 per share. This option was exercised on July 7, 2000. Proceeds to the Company from the IPO and exercise of the underwriters over-allotment amounted to
approximately $52.0 million, net of discounts, commissions and other costs of the offering. The net proceeds are being used for working capital and general corporate purposes, including expansion in sales and marketing both domestically and in
Europe, broadening of business development efforts, and continued investment in product technology.





The Company believes that period-to-period comparisons of operating results should not be relied upon as
predictive of future performance because the substantial increase in revenues in recent periods may not be sustainable. 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. Although the Company has experienced significant percentage growth in revenues in
recent periods, the Company believes that prior growth rates may not be sustainable or indicative of future operating results.





Results of Operations





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





|                                                       |  | Three Months Ended June 30, |   | Six Months Ended June 30,
|------------------------------------------------------ |  | --------------------------- | - | -------------------------
|
|
|Revenues                                               |  |                             |   |                          
|Product license                                        |  | $  7,392                    |   |                          
|Service                                                |  | 6,321                       |   |                          
|                                                       |  |                             |   |                          
|Total revenues                                         |  | 13,713                      |   |                          
|Cost of revenues                                       |  |                             |   |                          
|Product license                                        |  | 481                         |   |                          
|Service (a)                                            |  | 3,066                       |   |                          
|                                                       |  |                             |   |                          
|Total cost of revenues                                 |  | 3,547                       |   |                          
|Gross profit                                           |  | 10,166                      |   |                          
|Operating expenses:                                   
|Sales and marketing (a)                                |  | 6,928                       |   |                          
|Research and development (a)                           |  | 2,672                       |   |                          
|General and administrative (a)                         |  | 2,534                       |   |                          
|Amortization of stock-based

             compensation |  | 548                         |   |                          
|                                                       |  |                             |   |                          
|Total operating expenses                               |  | 12,682                      |   |                          
|                                                       |  |                             |   |                          
|Operating loss                                         |  | $(2,516                     | ) |                          
|                                                       |  |                             |   |                          




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




Comparison of the three months ended June 30, 2001, to the three months ended June 30, 2000





| | Revenue
| | -------




Total revenue increased approximately $6.7 million, or 94%, to $13.7 million for the three months ended June
30, 2001 from $7.1 million for the three months ended June 30, 2000. As a result of the Company beginning to license its software independent of its integration services, revenue is presented as either (i) product license revenue consisting of
licensing the rights to use the Companys software or (ii) service revenue generated from integrating the Companys software, performing needs analyses for customers and providing maintenance and training services. Product license revenue,
comprised of revenue from separate product-only agreements and from bundled agreements accounted for under a percentage completed basis using milestones that specifically relate to product deliveries, increased by $5.7 million due to an increase in
the number of new contracts. Service revenue, comprised of fees related to time and materials service contracts, maintenance, training and needs analyses, as well as bundled agreements accounted for under a percentage completed basis using hours of
input or milestones that specifically relate to integration and customization services, increased by $1.0 million over the prior year quarter. This increase was a result of an increase in revenue from time and materials contracts of $3.3 million,
offset by a decrease of $3.1 million from revenue recognized as service revenue under bundled contracts. The remaining increase in services revenue was primarily a result of increased maintenance services and follow-on orders from existing customers
from the prior year quarter.





| | Cost of Revenue
| | ---------------




Total cost of revenue increased by approximately $1.3 million, or 59%, to $3.5 million for the three months
ended June 30, 2001 from $2.2 million for the three months ended June 30, 2000. Cost of product revenue 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. The increase in cost of services revenue was primarily attributable to an increase in compensation and related expenses due to an increased number of professional services personnel and an increase in third party contractor costs
during the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000.





| | Operating Expenses
| | ------------------




Sales and Marketing.Sales and marketing expenses increased by approximately
$4.0 million, or 135%, to $6.9 million for the three months ended June 30, 2001 from $2.9 million for the three months ended June 30, 2000. The increase in sales and marketing expenses was primarily attributable to an increase in compensation and
related expenses over the prior year quarter due to an increase in the number of sales and marketing personnel. The Company also incurred increased expenses for marketing material and events during the three months ended June 30, 2001.





Research and Development.    Research and development expenses increased by
approximately $1.4 million, or 115%, to $2.7 million for the three month period ended June 30, 2001, compared to $1.2 million for the prior year three month period. This increase was primarily attributable to an increase in third party contractor
costs and an increase in compensation and related expenses due to an increase in the number of product development personnel during the three months ended June 30, 2001. To date, all software development costs have been expensed as
incurred.





General and Administrative.General and administrative expenses increased by
approximately $1.0 million, or 69%, to $2.5 million for the three months ended June 30, 2001 from $1.5 million for the three months ended June, 2000. This increase was primarily attributable to an increase in compensation and related expenses due to
an increased number of operations, management and administrative personnel during the quarter ended June 30, 2001.





Amortization of stock-based compensation.The Company has recorded deferred
compensation for stock options with exercise prices less than the deemed fair value of our common stock at the time of those grants. Deferred compensation is being amortized over the vesting periods of the applicable options, resulting in expense
of $0.2 million and $0.6 million during the three months ended June 30, 2001 and 2000, 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 related
warrant. Accordingly, $0.3 million and $0.2 million of amortization expense was recognized during the three months ended June 30, 2001 and 2000, respectively.





Comparison of the six months ended June 30, 2001, to the six months ended June 30, 2000





| | Revenue
| | -------




Total revenue increased approximately $13.1 million, or 108%, to $25.3 million for the six months ended June
30, 2001 from $12.2 million for the six months ended June 30, 2000. Product license revenue, comprised of revenue from separate product-only agreements and from bundled agreements accounted for under a percentage completed basis using milestones
that specifically relate to product deliveries, increased by $12.1 million due to an increase in the number of new contracts and an increase in average contract size. Service revenue, comprised of fees related to time and materials service
contracts, maintenance, training and needs analyses, as well as bundled agreements accounted for under a percentage completed basis using hours of input or milestones that specifically relate to integration and customization services, increased by
$1.0 million over the prior year. The increase in services revenue was primarily a result of increased maintenance services and follow-on orders from existing customers from the prior year, and an increase in revenue from time and materials
contracts of $5.8 million, offset by a decrease of $6.4 million from revenue recognized as service revenue under bundled contracts.





| | Cost of Revenue
| | ---------------




Total cost of revenue increased by approximately $2.9 million, or 76%, to $6.7 million for the six months
ended June 30, 2001 from $3.8 million for the six months ended June 30, 2000. Cost of product revenue consisted primarily of royalty fees for licensed third party software that is embedded in the Companys products or incorporated in the
Companys product offerings. The increase in cost of services revenue was primarily attributable to an increase in compensation and related expenses due to an increased number of professional services personnel and an increase in third party
contractor costs during the six months ended June 30, 2001 compared to the six months ended June 30, 2000.





| | Operating Expenses
| | ------------------




Sales and Marketing.Sales and marketing expenses increased by approximately
$10.4 million, or 227%, to $15.0 million for the six months ended June 30, 2001 from $4.6 million for the six months ended June 30, 2000. The increase in sales and marketing expenses was primarily attributable to an increase in compensation and
related expenses over the prior year quarter due to an increase in the number of sales and marketing personnel. The Company also incurred increased expenses for marketing material and events during the six months ended June 30, 2001.





Research and Development.Research and development expenses increased by
approximately $3.1 million, or 147%, to $5.3 million for the six months ended June 30, 2001, from $2.1 million for the six months ended June 30, 2000. This increase was primarily attributable to an increase in third party contractor costs and an
increase in compensation and related expenses due to an increase in the number of product development personnel during the six months ended June 30, 2001. To date, all software development costs have been expensed as incurred.





General and Administrative.    General and administrative expenses increased by
approximately $2.6 million, or 95%, to $5.3 million for the six months ended June 30, 2001 from $2.7 million for the six months ended June 30, 2000. This increase was primarily attributable to an increase in compensation and related expenses due to
an increased number of operations, management and administrative personnel during the six months ended June 30, 2001.





Amortization of stock-based compensation.The Company has recorded deferred
compensation for stock options with exercise prices less than the deemed fair value of our common stock at the time of those grants. Deferred compensation is being amortized over the vesting periods of the applicable options, resulting in expense of
$0.5 million and $0.8 million during the six months ending June 30, 2001 and 2000, 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 related
warrant. Accordingly, $0.6 million and $0.2 million of amortization expense was recognized during the six months ended June 30, 2001 and 2000, respectively.





Liquidity and Capital Resources





At June 30, 2001, the Company had $46.6 million of cash and cash equivalents, consisting primarily of
proceeds from its initial public offering. Net cash used in operating activities was $4.3 million and $2.1 million for the six months ended June 30, 2001 and 2000, respectively. The $4.3 million of cash used in the current six month period consisted
of a loss before taxes, amortization of stock-based compensation and depreciation and amortization of approximately $5.4 million and a decrease in accounts payable and accrued compensation and expenses of approximately $1.7 million, offset by an
increase in deferred revenue of approximately $2.8 million.





Net cash used by investing activities was $0.7 million for the six months ended June 30, 2001, consisting of
purchases of property and equipment. The Companys capital expenditures consist of purchases of operating resources to manage operations, including computer software, office furniture and equipment and leasehold improvements.





Net cash provided by financing activities was approximately $0.3 million for period ended June 30, 2001. The
cash provided during the current year period reflects $0.7 million of proceeds from the exercise of stock options offset by $0.4 million in capital lease principal payments.





On March 31, 2001, 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 $0.4 million.





The Company expects some growth in our operating expenses, particularly research and development and sales
and marketing expenses. We may use cash resources to fund investments in complementary businesses or technologies. The Company believes that the net proceeds from the sale of our common stock in our initial public offering, together with our
existing working capital will be sufficient to meet our working capital and operating expenditure requirements for at least the next twelve months. We have no current plans to raise additional equity during the next twelve months, although such
plans are subject to business and market conditions. Thereafter, we may find it necessary to obtain additional equity or debt financing, although we do not currently foresee a need for additional cash resources for long-term needs. In the event
additional financing is required, we may not be able to raise it on acceptable terms or at all.





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.





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, 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 June 30, 2001, the Company had cash and cash equivalents of $46.6 million, which consisted of cash and
highly liquid short-term investments. Declines in interest rates over time will reduce interest income from short-term investments. Based upon the balance of cash and cash equivalents at June 30, 2001, a change in interest rates of 0.5% would cause
a corresponding change in annual interest income of approximately $0.2 million.





PART II.    OTHER INFORMATION





Item 1.    Legal Proceedings





There are no material legal proceedings to which the Company is a party or of which any of its property is
subject.





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 June 30, 2001 the Company had spent approximately $5.4 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





On May 16, 2001, the Company held its Annual Meeting of Shareholders.





At the meeting, three Class I directors were elected to serve a three-year term that will expire at the 2004
Annual Meeting of Shareholders. The votes cast for each director were as follows:





| | For election of Peter N. Larson
| | -------------------------------




|Votes for:      |  | 22,779,237
|--------------- |  | ----------
|Votes withheld: |  | 139,330   




| | For election of Leslie D. Shroyer
| | ---------------------------------




|Votes for:      |  | 22,778,967
|--------------- |  | ----------
|Votes withheld: |  | 139,600   




| | For election of Edwina D. Woodbury
| | ----------------------------------




|Votes for:      |  | 22,778,817
|--------------- |  | ----------
|Votes withheld: |  | 139,750   




The appointment of KPMG LLP as independent auditors of the Company for the fiscal year ended December 31,
2001 was ratified at the meeting with 22,912,957 shares voting in favor, 5,275 shares voting against and 335 shares abstaining.





Item 5.    Other Information





Not applicable.





Item 6.    Exhibits and Reports on Form 8-K





(a) Exhibits:





The following exhibits are filed as part of this Form 10-Q:





|Exhibit Number |  | Description                                                                                                           
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------
|3.1            |  | Amended and Restated Bylaws of Click Commerce, Inc.                                                                   
|              
|              
|              
|10.1           |  | Amendment No. 1 to Limited Waiver and Consent Agreement between Click Commerce, Inc.

and Compaq Computer Corporation.




(b) Reports on Form 8-K





| | A report on Form 8-K dated May 4, 2001 was filed on May 8, 2001. The report
includes the Companys press release dated May 4, 2001, which announced that the Company had agreed to a partial release of the market stand off agreement entered into by the Company with Compaq Computer Corporation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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
 .
| | -----------------------




|By: | /s/    REBECCA
S. MASKEY
|--- | ------------------------

| | 
| | 

| | Rebecca S. Maskey
| | -----------------

| | Executive Vice President,
| | -------------------------

| | Chief Financial Officer and Treasurer
| | -------------------------------------

| | (Principal Financial and Accounting Officer)
| | --------------------------------------------




Date: August 14, 2001