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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, DC 20549****FORM 10-Q**   þ **Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934****For the quarterly period ended **December 31, 2005******OR**   o **Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934****For the transition period from                      to                     ****Commission file number 0-16569****CAM COMMERCE SOLUTIONS, INC.****(Exact name of registrant as specified in its Charter)**   **Delaware** **95-3866450**(State or other jurisdiction (IRS Employerof incorporation or organization) Identification No.)   **17075 Newhope Street** **92708****Fountain Valley, California**  (Address of principal (Zip code)Executive offices)  **(714) 241-9241**(Registrant’s telephone number including area code)Indicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.Yes þ      No oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” inRule 12b-2 of the Exchange Act.Large Accelerated Filer o      Accelerated Filer o      Non-accelerated Filer þIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o       NoþAs of February 1, 2006, there were 3,874,000 shares of common stock outstanding.  
 

 
**CAM COMMERCE SOLUTIONS, INC.****INDEX**                   Page NumberPART I — Financial Information                 Item 1 Financial Statements:                   a) Condensed Balance Sheets at December 31, 2005 (Unaudited) andSeptember 30, 2005  3                b) Unaudited Condensed Statements of Income for the threemonths ended December 31, 2005 and 2004  4                c) Unaudited Condensed Statements of Cash Flows for thethree months ended December 31, 2005 and 2004  5                e) Notes to Unaudited Condensed Financial Statements  6-13              Item 2 Management’s Discussion and Analysis of Financial Condition andResults of Operations  14-22              Item 3 Quantitative and Qualitative Disclosures About Market Risk  23              Item 4 Controls and Procedures  23            PART II — Other Information                 Item 1 Legal Proceedings  24              Item 1A Risk Factors  24              Item 2 Unregistered Sales of Equity Securities and Use of Proceeds  24              Item 3 Defaults Upon Senior Securities  24              Item 4 Submission of Matters to a Vote of Security Holders  24              Item 5 Other Information  24              Item 6 Exhibits  24-25            Signatures  26  Exhibit 31(a) Exhibit 31(b) Exhibit 32
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**PART I. FINANCIAL INFORMATION****Item 1. Financial Statements****CAM COMMERCE SOLUTIONS, INC.****CONDENSED BALANCE SHEETS****(In thousands, except share and per share data)**           DECEMBER 31, 2005  SEPTEMBER 30, 2005   (Unaudited)     **ASSETS**        Current assets:        Cash and cash equivalents $15,380  $15,763 Marketable available-for-sale securities  5,970   5,300 Accounts receivable, net  2,483   1,930 Inventories  290   306 Deferred income taxes  1,188   1,188 Other current assets  172   132        Total current assets  25,483   24,619          Deferred income taxes  373   714 Property and equipment, net  585   610 Intangible assets, net  449   467 Other assets  51   51        Total assets $26,941  $26,461                 **LIABILITIES AND STOCKHOLDERS’ EQUITY**        Current liabilities:        Accounts payable $475  $445 Accrued compensation and related expenses  1,009   1,154 Deferred service revenue and customer deposits  1,853   1,728 Cash dividends payable  541   385 Other accrued liabilities  149   260        Total current liabilities  4,027   3,972 Commitments        Stockholders’ equity:        Common stock, $0.001 par value; 12,000,000shares authorized, 3,861,000 shares issuedand outstanding at December 31, 2005 and3,846,000 at September 30, 2005  4   4 Capital in excess of par value  20,375   20,152 Accumulated other comprehensive loss  (17)  (18)Retained earnings  2,552   2,351        Total stockholders’ equity  22,914   22,489        Total liabilities and stockholders’ equity $26,941  $26,461        See accompanying notes.
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**CAM COMMERCE SOLUTIONS, INC.****UNAUDITED CONDENSED STATEMENTS OF INCOME****(In thousands, except per share data)**           THREE MONTHS ENDED   DECEMBER 31, 2005  DECEMBER 31, 2004 **REVENUES**        Net hardware, software and installation revenues $3,064  $3,348 Net service revenues  1,344   1,405 Net payment processing revenues  2,578   1,397        Total net revenues  6,986   6,150 **COSTS AND EXPENSES**        Cost of hardware, software and installation revenues (1)  1,665   1,684 Cost of service revenues (1)  594   539 Cost of payment processing revenues  118   142        Total cost of revenues  2,377   2,365 Selling, general and administrative expenses (1)  3,272   2,881 Research and development expenses (1)  363   340 Interest income  (206)  (109)       Total costs and expenses  5,806   5,477        Income before provisions for income taxes  1,180   673 Provisions for income taxes  438   271        Net income $742  $402                 Basic net income per share $0.19  $0.11        Diluted net income per share $0.18  $0.10        Shares used in computing basic net income per share  3,849   3,787 Shares used in computing diluted net income per share  4,096   4,065 Cash dividends declared per common share $0.14   —          (1) Includes stock-based compensation expense as follows:        Cost of hardware, software and installation revenues $4  $— Cost of service revenues  5   — Selling, general and administrative expenses  25   — Research and development expenses  8   — Payments for a related party (Geoff Knapp, officer and director of CAM Commerce) for building rentin the amount of $40 are included in Selling, General, and Administrative expenses above.See accompanying notes.
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**CAM COMMERCE SOLUTIONS, INC.****UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS****(In thousands)**           THREE MONTHS ENDED   DECEMBER 31,  DECEMBER 31,   2005  2004 Operating activities:        Net income $742  $402 Adjustments to reconcile net income to netcash provided by operating activities:        Depreciation and amortization  182   215 Provision for doubtful accounts  (23)  9 Change in deferred income taxes  341   — Income tax deduction from exercise of stock options  —   247 Share-based compensation  42   — Excess tax benefits from share-based compensationarrangements  (57)  — Changes in operating assets and liabilities:        Accounts receivable  (530)  (337)Inventories  16   104 Other assets  (40)  42 Accounts payable  30   (69)Accrued compensation and related expenses  (145)  (207)Deferred service revenue and customer deposits  125   36 Other accrued liabilities  (51)  (118)       Cash provided by operating activities  632   324 Cash flows from investing activities:        Purchase of property and equipment  (66)  (68)Capitalized software development costs  (73)  (75)Purchase of marketable securities  (953)  (694)Change in marketable securities  (1)  (6)Proceeds from maturity of marketable securities  285   —        Cash used in investing activities  (808)  (843)Cash flows from financing activities:        Proceeds from exercise of stock options and warrants  121   173 Excess tax benefits from share-based payment arrangements  57   — Dividends paid on common stock  (385)  —        Cash provided (used) by financing activities  (207)  173        Net decrease in cash and cash equivalents  (383)  (346)Cash and cash equivalents at beginning of period  15,763   16,591        Cash and cash equivalents at end of period $15,380  $16,245        See accompanying notes.
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2005****(In thousands, except per share data)****ORGANIZATION AND BUSINESS**CAM Commerce Solutions, Inc. (the Company) was incorporated in California in 1983, andreincorporated in Delaware in 1987. The Company designs, develops, markets and services highlyintegrated retailing and payment processing solutions for small to medium size traditional andeCommerce businesses based on its open architecture software. These integrated solutions includeinventory management, point of sale, accounting, credit and debit card processing, Internet sales,gift card and customer loyalty programs, and extensive management reporting. Payment processingservices are provided on a transaction based business model.**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES****Presentation of Condensed Financial Statements**The accompanying financial statements of the Company as of and for the three months ended December31, 2005 and 2004 are unaudited. They have been prepared pursuant to the rules and regulations ofthe United States Securities and Exchange Commission (SEC). Accordingly, they do not include allof the information and footnotes required by generally accepted accounting principles (GAAP) forcomplete financial statements. In the opinion of management, all adjustments necessary for a fairpresentation of such financial statements have been included. Such adjustments consisted only ofnormal recurring items. Interim results are not necessarily indicative of results for a full year.The condensed financial statements and notes are presented as permitted by Form 10-Q and,therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the yearended September 30, 2005.**Cash Equivalents**Cash equivalents represent highly liquid investments with original maturities of three months orless.**Marketable Securities**All investment securities are considered to be available-for-sale and are carried at fair value.Management determines the classification at the time of purchase and re-evaluates itsappropriateness at each balance sheet date. The Company’s marketable securities at December 31,2005 and September 30, 2005 consisted of debt instruments and certificates of deposit that bearinterest at various rates and mature in two years or less. The net unrealized losses on securitiesavailable-for-sale at December 31, 2005 and September 30, 2005 were ($17) and ($18), respectively.There were no realized gains (losses) for the three months ended December 31, 2005 and 2004.**Accounts Receivable and Allowance For Doubtful Accounts**The Company has accounts receivable from customers who were given extended payment terms for goodsand services rendered. Extended payment terms are generally provided only to establishedrelationship customers in good credit standing, and generally represent net 30 day terms. Paymentfor goods and services are typically due with an initial deposit payment upon signing the purchaseagreement, with the balance due upon the delivery.Management evaluates accounts receivables that are 30 days past due the payment terms on a regularbasis to charge off any accounts deemed uncollectible at the time. An allowance for doubtfulaccounts is maintained for estimated losses resulting from the inability of customers to makerequired payments.**Concentrations of Credit Risk**The Company sells its products primarily to small-to-medium size retailers. Credit is extendedbased on an evaluation of the customer’s financial condition, and collateral is generally notrequired. Credit losses have traditionally been minimal and such losses have been withinmanagement’s expectations.
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2005****(In thousands, except per share data)****Inventories**Inventories are stated at the lower of cost or market determined on a first-in, first-out basis, ornet realizable value. Inventories are composed of finished goods, which include electronic pointof sale hardware and computer equipment used in the sale and service of the Company’s products.**Comprehensive Income**The following table presents the calculation of comprehensive income:           THREE MONTHS ENDED   DECEMBER 31, 2005  DECEMBER 31, 2004 Net income $742  $402 Unrealized gain (loss) onmarketable securitiesavailable for sale, net of tax  1   (9)       Comprehensive income $743  $393        **Revenue Recognition Policy**The Company’s revenue recognition policy is significant because revenue is a key component ofresults of operations. In addition, revenue recognition determines the timing of certain expensessuch as commissions. Specific guidelines are followed to measure revenue, although certainjudgments affect the application of our revenue policy. The Company recognizes revenue inaccordance with Statement of Position 97-2 (SOP 97-2), “Software Revenue Recognition,” as amendedand interpreted by Statement of Position 98-9, “Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions,” and Staff Accounting Bulletin No. 104 (SAB104), “Revenue Recognition.” SAB 104 provides further interpretive guidance for public companieson the recognition, presentation, and disclosure of revenue in financial statements.The Company derives revenue from the sale of computer hardware, licensing of computer software,post-contract support (PCS), installation and training services, and payment processing services.System revenue from hardware sales and software licensing is recognized when a system purchaseagreement has been signed, the hardware and software has been shipped, there are no uncertaintiessurrounding product acceptance, the pricing is fixed and determinable, and collection is consideredprobable. If a sales transaction contains an undelivered element, the vendor-specific objectiveevidence (VSOE) of fair value of the undelivered element is deferred and the revenue recognizedonce the element is delivered. The undelivered elements are primarily installation and trainingservices. Revenue related to these services are deferred and recognized when the services have beenprovided. VSOE of fair value for installation and training services are based upon standard ratescharged since those services are always sold as a separate option and priced independently.Installation and training services are separately priced, are generally available from othersuppliers and are not essential to the functionality of the software products. Payments for theCompany’s hardware and software are typically due with an initial deposit payment upon signing thesystem purchase agreement, with the balance due upon delivery, although established relationshipcustomers in good credit standing receive thirty day payment terms. VSOE of fair value for PCS isthe price the customer is required to pay since it is sold as a separate option and pricedindependently. PCS services are billed on a monthly basis and recorded as revenue in theapplicable month, or on an annual basis with the revenue being deferred and recognized ratably overthe support period. If an arrangement includes multiple elements, the fees are allocated to the variouselements based upon VSOE of fair value, as described above.
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2005****(In thousands, except per share data)**The Company recognizes payment processing revenues in the period the service is performed.Revenues are estimated based on the accumulation of sufficient historical information required toanalyze trends and formulate a reasonable estimate. The significant historical informationrequired to formulate a reliable estimate are the total dollar volume of credit card transactionsprocessed and the related revenue for these credit card transactions.**Segments**Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of anEnterprise and Related Information” (SFAS 131), established standards for the way that publicbusiness enterprises report selected financial information about operating segments in annual andinterim financial statements and significant foreign operations. Because the Company operates inone business segment and has no significant foreign operations, no additional reporting is requiredunder SFAS 131.**Recently Issued Accounting Announcements**On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS123R) which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, supersedes AccountingPrinciples Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and amends SFASNo. 95, “Statement of Cash Flows”. Generally, the approach in SFAS 123R is similar to the approachdescribed in SFAS 123. However, SFAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financial statements based ontheir fair values (i.e., pro forma disclosure is no longer an alternative to financial statementrecognition). As further discussed in the Share-Based Compensation Note, the Company adopted SFAS123R effective October 1, 2005 using the modified prospective method. The application of thismethod is described below under the subheading “Share-Based Compensation” in these Notes toUnaudited Condensed Financial Statements.**Intangible Assets**The Company capitalizes costs incurred to develop new marketable software and enhance the Company’sexisting systems software. Costs incurred in creating the software are charged to expense whenincurred as research and development until technological feasibility has been established throughthe development of a detailed program design. Once technological feasibility has been established,software production costs are capitalized and reported at the lower of amortized cost or netrealizable value.License agreements and capitalized software costs are amortized on the straight-line method overestimated useful lives ranging from three to five years. Amortization of capitalized softwarecosts commences when the products are available for general release to customers.**Reclassifications**Certain reclassifications have been made to the fiscal 2005 financial statements to conform to thefiscal 2006 presentation.**Use of Estimates**The preparation of financial statements in accordance with United States generally acceptedaccounting principles requires the Company to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financial statements and reportedamounts of net revenue and expenses during the reporting period. The Company regularly evaluatesestimates and assumptions related to revenue recognition, receivables and inventory, capitalized software, allowances fordoubtful accounts, intangible asset valuations, deferred income tax asset valuation allowances,accounting for share-based compensation related to SFAS123R, and other contingencies. The estimatesand assumptions are based on historical experience and on various other factors that are believedto be reasonable under the
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2005****(In thousands, except per share data)**circumstances, the results of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources. To the extent there arematerial differences between the Company’s estimates and the actual results, the Company’s futureresults of operations will be affected.**Shipping and Handling**Shipping and handling fees and costs are included in the Statement of Income under the line itemstitled “Net hardware, software and installation revenues” and “Cost of hardware, software andinstallation revenues.”**Net Income Per Share**Basic net income per share is based upon the weighted average number of common shares outstandingfor each period presented. Diluted net income per share is based upon the weighted average numberof common shares and common equivalent shares outstanding for each period presented. Commonequivalent shares include stock options and warrants assuming conversion under the treasury stockmethod. Common equivalent shares are excluded from diluted net income per share if their effect isanti-dilutive. Options outstanding of 62 shares for the three monthsended December 31, 2005 and warrants outstanding of 175 shares for the three months ended December 31, 2004were excluded from the diluted net income per share computation because their effect isanti-dilutive.The computations of basic and diluted net income per share for the three month period endedDecember 31, 2005 and 2004 are as follows:           THREE MONTHS ENDED   DECEMBER 31, 2005  DECEMBER 31, 2004 **Numerator:**        Net income for basic and diluted net income pershare $742  $402        **Denominator:**        Weighted-average shares outstanding  3,849   3,787        Denominator for basic net income per share:        Weighted-average shares  3,849   3,787 Effect of dilutive securities:        Stock options & warrants  247   278        Denominator for diluted net income per share:        Weighted average shares and assumed conversions  4,096   4,065        Basic net income per share $0.19  $0.11        Diluted net income per share $0.18  $0.10        **Dividends Declared**On August 3, 2005, the Board of Directors authorized a new dividend policy, which pays stockholdersa variable dividend based on the quarterly results. On October 14, 2005, the Company paid adividend of $385 ($0.10 per common share) for June quarter results to stockholders of record onOctober 3, 2005. In November 2005, the Board of Directors declared a dividend of $0.14 per commonshare for September quarter results, payable on January 12, 2006 to stockholders of record onJanuary 3, 2006. The decision to pay a dividend will be re-evaluated quarterly based on the earnings performance of the company andis subject to approval by the Board of Directors each quarter. The Company did not pay dividendsfor quarterly results prior to the third quarter of fiscal 2005.
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2005****(In thousands, except per share data)****Share-Based Compensation**The Company adopted the Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised2004), “Share-Based Payment” (“SFAS 123R”) effective October 1, 2005. Prior to October 1, 2005,the Company followed the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation” (SFAS 123), as amended by SFAS 148, “Accounting for Stock-Based Compensation –Transition and Disclosure,” and, accordingly, accounted for its stock-based compensation plansusing the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”) and related interpretations.SFAS 123R requires share-based payments, including grants of employee stock options, to berecognized in the Statement of Income as an expense, based on their grant date fair values withsuch fair values amortized over the estimated service period. The Company elected to utilize themodified prospective method for the transition to SFAS 123R. Under the modified prospectivemethod, SFAS 123R applies to all awards granted or modified after the date of adoption. Inaddition, under the modified prospective method, compensation expense will be recognized for allstock-based compensation awards granted prior to, but not yet vested as of October 1, 2005, basedon grant-date fair values estimated in accordance with the original provisions of SFAS 123.On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff PositionNo. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-BasedPayment Awards” (the FSP). The FSP provides that companies may elect to use a specified“short-cut” method to calculate the historical pool of windfall tax benefits upon adoption of SFAS123R. The Company has elected to use this short-cut method to calculate the historical pool ofwindfall tax benefits, and has elected to use one accounting pool forthe windfall tax benefitsrelated to employees and non-employees on a combined basis.No stock-based employee compensation cost was recognized in the Statement of Income for the yearended September 30, 2005 (including the three-month period ended December 31, 2004), as all optionsgranted under those plans had an exercise price equal to the market value for the underlying commonstock on the date of grant. In accordance with the modified prospective method of transition toSFAS 123R, prior periods were not restated to reflect the impact of adopting the new standard.Under SFAS 123 the Company based its expense calculation for the stock compensation pro formafootnote disclosure on actual forfeitures; however, SFAS 123R requires an estimate of forfeituresbe used in the calculation. Upon adoption of SFAS 123R the Company changed its methodology toinclude an estimate of forfeitures.During the three months ended December 31, 2005, the share-based compensation expense included inexpenses and the related tax benefits were $42 and $16, respectively.No share-based compensation was capitalized for the three monthsended December 31, 2005 and 2004. The impact of share-basedcompensation on basic and diluted earnings per share for the three months ended December 31, 2005was $0.01 and $0.01, respectively. In addition, in connection with the adoption of SFAS 123R, netcash provided by operating activities decreased and net cash provided by financing activities increasedin the first three months of fiscal 2006 by $57 related to excess tax benefits from exercise ofstock-based awards.Prior to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resultingfrom the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS123R requires the cash flows related to the tax benefits resulting from tax deductions in excess ofthe compensation cost recognized for those options (excess tax benefits) to be classified asfinancing cash flows. The $57 excess
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2005****(In thousands, except per share data)**tax benefit classified as a financing cash inflow would have been classified as an operating cashinflow if the Company had not adopted SFAS 123R.The following table illustrates the impact of adopting SFAS 123R and the impact of applying theoriginal provisions of SFAS 123 as if the Company were to account for share-based compensationunder APB 25:           THREE MONTHS ENDED   DECEMBER 31, 2005   SFAS  APB   123R  25 Income before income taxes $1,180  $1,222 Net income $742  $768 Basic net income per share $0.19  $0.20 Diluted net income per share $0.18  $0.19 Cash flow from operations $632  $689 Cash flow from financing activities  ($207)  ($264)At December 31, 2005, there was $387 of total unrecognized compensation cost related to unvestedstock options. This cost is expected to be recognized over a weighted-average period ofapproximately two years.The following table illustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS 123 to stock-based employee compensation forperiods prior to adoption of SFAS 123R.       THREE MONTHS ENDED   DECEMBER 31, 2004 Reported net income $402 Add: Share-based compensation expense included inreported net income, net of related tax effects  — Deduct: Share-based compensation expense determinedunder fair-value method for all awards, net of relatedtax effects  (48)    Pro forma net income $354     Earnings per share:    Basic – as reported $0.11     Basic – pro forma $0.09     Diluted – as reported $0.10     Diluted – pro forma $0.09     In 1993, the stockholders of the Company approved the Company’s 1993 Stock Option Plan (the “1993Plan”) under which nonstatutory options may be granted to key employees and individuals who provideservices to the Company, at an exercise price not less than the fair market value of the stock atthe date of grant, and expire ten years from the date of grant. The options are exercisable basedon vesting periods as determined by the Board of Directors. The 1993 Plan allowed for the issuanceof an aggregate of 1,200 shares of the Company’s common stock. The 1993 Plan has a term of tenyears. There have been 1,200
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2005****(In thousands, except per share data)**options granted under the 1993 Plan as of December 31, 2005. The Company currently has 257 sharesreserved for issuance related to the options that remain outstanding under the 1993 Plan.In April 2000, the Company’s Board of Directors approved the Company’s 2000 Stock Option Plan (the“2000 Plan”) under which nonstatutory options may be granted to key employees and individuals whoprovide services to the Company, at an exercise price not less than the fair market value of thestock at the date of grant, and expire ten years from the date of grant. The options areexercisable based on vesting periods as determined by the Board of Directors. Each outside directoris automatically granted an option to purchase seven thousand five hundred shares of common stockannually, subject to certain eligibility requirements. The plan allows for the issuance of anaggregate of 750 shares of the Company’s common stock. The term of the plan is unlimited induration. There have been 545 options granted under the plan as of December 31, 2005. The Companyhas 560 shares reserved for issuance related to the options that remain outstanding under the 2000Plan.Outstanding unvested stock options generally vest ratably over four years based upon continuousservice. The Company accounts for these grants as single grants and recognizes share-basedcompensation cost using the straight-line method.The Company’s stock option plans provide for accelerated vesting of unvested options in the eventof a change in control. A change in control provision meets the criteria of a performancecondition under SFAS 123R. All outstanding unvested options at December 31, 2005 are subject toaccelerated vesting under this provision.A summary of changes in the stock option plans for the three months ended December 31, 2005 is asfollows:                           WEIGHTED          WEIGHTED  AVERAGE      NUMBER  AVERAGE  REMAINING  AGGREGATE   OF  EXERCISE  LIFE  INTRINSIC   OPTIONS  PRICE  (IN YEARS)  VALUE Options outstanding atSeptember 30, 2005  626  $6.32   5.5  $7,157 Granted  —   N/A   N/A   N/A Exercised  15  $8.13   N/A  $155 Forfeited  —   N/A   N/A   N/A Expired  —   N/A   N/A   N/A                 Options outstanding atDecember 31, 2005  611  $6.27   5.2  $8,884                 Options exercisable atDecember 31, 2005  533  $5.65   4.8  $8,088                 Options that wouldbecomeexercisable at December31, 2005 pursuant to theCompany’s option plans inthe event of a change incontrol  611  $6.27   5.2  $8,884                 For the three month period ended December 31, 2005, the amount of cash received from the exerciseof stock options was $121 and the related tax benefit was $60.
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**CAM COMMERCE SOLUTIONS, INC.****NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS****DECEMBER 31, 2005****(In thousands, except per share data)**For options exercised during the three-month periods ended December 31, 2005 and 2004, newly issuedshares were issued.Changes in the Company’s nonvested options for the three months ended December 31, 2005 ispresented below:               WEIGHTED       AVERAGE   NUMBER OF  GRANT-DATE   OPTIONS  FAIR VALUE Nonvested at September 30, 2005  88  $4.89 Granted  —   N/A Vested  10  $4.04 Forfeited  —   N/A Nonvested at December 31, 2005  78  $5.00 The Company uses the Black-Scholes-Merton option valuation model to determine the weighted averagefair value of options. The Company utilizes assumptions on expected life, risk-free rate, expectedvolatility, and dividend yield to determine such values. The Company did not disclose assumptionsbecause there were no grants in the three months ended December 31,2005 and 2004. If grants wereto occur, the expected life of options granted would be derived from historical data on employeeexercise and post-vesting termination behavior. The risk-free rate would be based on treasuryinstruments in effect at the time of grant whose terms are consistent with the expected life of theCompany’s stock options. Expected volatility would be based on historical volatility of theCompany’s stock. The dividend yield would be based on historical experience and expected futurechanges.A summary of the grant-date fair value and intrinsic value information during the three monthsended December 31, 2005 is as follows:           THREE MONTHS ENDED   DECEMBER 31, 2005  DECEMBER 31, 2004 Weighted-average grant-date fair value per share  —   — Intrinsic value of options exercised $155  $615 Total fair value of shares vested during the year  42   72 
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**Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations****CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****Three Months Ended December 31, 2005 as Compared to Three Months Ended December 31, 2004****(All dollar amounts in thousands)****CAUTIONARY STATEMENT**You should read the following discussion and analysis with our Unaudited Condensed FinancialStatements and related Notes thereto contained elsewhere in this report. We urge you to carefullyreview and consider the various disclosures made in this report and in our other reports filed withthe Securities and Exchange Commission (SEC).The section entitled “Risk Factors” set forth below, and similar discussions in our other SECfilings, discuss some of the important risk factors that may affect our business, results ofoperations and financial condition. You should carefully consider those risks, in addition to theother information in this report and in our other filings with the SEC, before deciding topurchase, hold or sell our common stock.**OVERVIEW**We design, develop, market and service highly integrated retailing and payment processing solutionsfor small to medium size traditional and eCommerce businesses based on our open architecturesoftware. These integrated solutions include inventory management, point of sale, accounting,credit and debit card processing, Internet sales, gift card and customer loyalty programs, andextensive management reporting. Payment processing services are provided on a transaction basedbusiness model.We offer several turn-key retailing systems that consist of software, hardware, installation,training, technical support services and web hosting services. Our systems, known as CAM32,Profit$, RetailSTAR, Retail ICE and Microbiz offer the ability to obtain: (i) automated pricing ofeach item; (ii) billing for charge account customers; (iii) printing of a customer invoice; (iv)tracking of inventory count on an item by item basis; (v) computation of gross profit, dollarsand/or percentage of each item; and (vi) tracking of sales by clerk and department by day and/ormonth. In addition, our systems provide full management reporting including zero sales reports,inventory ranking, overstock and understock, sales analysis, inventory valuation (last cost,average cost and retail) and other reports. The systems can also provide integrated or interfacedaccounting functions including accounts receivable, accounts payable, and general ledger.We also provide payment processing services through our X-Charge software and a third party creditcard payment processor. X-Charge is a payment processing software program that is integrated withour point of sale software. X-Charge generates revenues for us based on sales transaction paymentprocessing services provided to our customers. Typically, the payments being processed are creditcard transactions.**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**The preparation of financial statements in accordance with United States generally acceptedaccounting principles requires us to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of our financial statements and reported amounts ofnet revenue and expenses during the reporting period. We regularly evaluate estimates andassumptions related to revenue recognition, receivables and inventory, capitalized software,allowances for doubtful accounts, intangible asset valuations, deferred income tax asset valuationallowances, accounting for share-based compensation related to SFAS123R, and other contingencies.The estimates and assumptions are based on historicalexperience and on various other factors that we believe are reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying values of assets andliabilities
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands)**that are not readily apparent from other sources. To the extent there are material differencesbetween our estimates and the actual results, our future results of operations will be affected.We believe the following critical accounting policies require us to make significant judgments andestimates in the preparation of our financial statements:**Revenue Recognition**We derive revenue from the sale of computer hardware, licensing of computer software, post-contractcustomer support, installation and training services, and payment processing services. Systemrevenue from hardware sales and software licensing is recognized when a system purchase agreementhas been signed, the hardware and software has been shipped, there are no uncertainties surroundingproduct acceptance, the pricing is fixed and determinable, and collection is considered probable.If a sales transaction contains an undelivered element, the vendor-specific objective evidence(VSOE) of fair value of the undelivered element is deferred and the revenue recognized once theelement is delivered. The undelivered elements are primarily installation and training services.Revenue related to these services is deferred and recognized when the services have been provided.VSOE of fair value for installation and training services are based upon standard rates chargedsince those services are always sold as a separate option and priced independently. Installationand training services are separately priced, are generally available from other suppliers and arenot essential to the functionality of the software products. Payments for our hardware andsoftware are typically due with an initial deposit payment upon signing the system purchaseagreement, with the balance due upon delivery, although established relationship customers in goodcredit standing receive thirty day payment terms. VSOE of fair value for post-contract support(PCS) is the price the customer is required to pay since it is sold as a separate option and pricedindependently. PCS services are billed on a monthly basis and recorded as revenue in theapplicable month, or on an annual basis with the revenue being deferred and recognized ratably overthe support period. If an arrangement includes multiple elements, the fees are allocated to thevarious elements based upon VSOE of fair value, as described above.We recognize payment processing revenues in the period the service is performed. Revenues areestimated based on the accumulation of sufficient historical information required to analyze trendsand formulate a reasonable estimate. The significant historical information required to formulate areliable estimate are the total dollar volume of credit card transactions processed and the relatedrevenue for these credit card transactions.**Receivables**We have accounts receivable from customers who were given extended payment terms for goods andservices rendered. Extended payment terms are generally provided only to established relationship customers in good credit standing, and generally represent net 30 dayterms. Payment for goods and services are typically due with an initial deposit payment uponsigning the purchase agreement, with the balance due upon delivery.An allowance for doubtful accounts is maintained for estimated losses resulting from the inabilityof customers to make required payments. If the financial condition of our customers was todeteriorate, resulting in an impairment of their ability to make payments, additional allowancescould be required. Actual losses have traditionally been minimal and within our expectations.**Inventory**We write down inventory for estimated obsolescence equal to the difference between the cost ofinventory and the estimated realizable value based upon assumptions about future demand and marketconditions. If actual market conditions are less favorable than those projected by us, additionalinventory write-downs could be required. Historically inventory write-downs have been minimal andwithin our expectations.
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands)****Capitalized Software**We capitalize costs incurred to develop new marketable software and enhance our existing systemssoftware. Costs incurred in creating the software are expensed when incurred as research anddevelopment expense until technological feasibility has been established through the development ofa detailed program design. Once technological feasibility has been established, softwaredevelopment costs are capitalized and reported at the lower of amortized cost or net realizablevalue.**Impairment of Intangible Assets**The value of our intangible assets could be impacted by future adverse changes such as (i) anyfuture declines in our operating results, and (ii) any failure to meet our future performanceprojections. An annual impairment review will be performed during the fourth quarter of each fiscalyear or more frequently if indicators of impairment exist. In the process of the annual impairmentreview, we use the income approach methodology of valuation that includes the undiscounted cashflow method to determine the fair value of our assets. Significant management judgment is requiredin the forecast of future operating results that are used in the undiscounted cash flow method ofvaluation. The estimates used are consistent with the plans and estimates that we use to manage ourbusiness. It is reasonably possible, however, that certain of our products will not gain ormaintain market acceptance, which could result in estimates of anticipated future net revenuediffering materially from those used to assess the recoverability ofthese assets. In that event, revenue and cost forecasts would not be achieved, and we could incur additionalimpairment charges.**Deferred Taxes**We utilize the liability method of accounting for income taxes as set forth in SFAS No. 109,“Accounting for Income Taxes.” Prior to fiscal 2004, we recorded a valuation allowance to reduceour deferred tax assets to the amount that we believed was more likely than not to be realized.During the fourth quarter of fiscal 2004, the valuation allowance was reversed based on our beliefthat sufficient future income from operations is expected to be able to recognize the net deferredtax assets. In assessing the need for a valuation allowance, we consider all positive and negativeevidence, including projected future taxable income and recent financial performance.
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands)****RESULTS OF OPERATIONS**The following tables summarize the fluctuation analysis of results of our operations for the threemonths ended December 31, 2005 versus the three months ended December 31, 2004.                   Three months ended December 31,  Variance   2005  2004  Amount  % Net hardware, software and installationrevenues $3,064  $3,348   ($284)  (8%)Net service revenues  1,344   1,405   (61)  (4%)Net payment processing revenues  2,578   1,397   1,181   85%               Total net revenues  6,986   6,150   836   14%Cost of hardware, software andinstallation revenues  1,665   1,684   (19)  (1%)Cost of service revenues  594   539   55   10%Cost of payment processing revenues  118   142   (24)  (17%)               Total cost of revenues  2,377   2,365   12   1%Selling, general and administrativeexpenses  3,272   2,881   391   14%Research and development expenses  363   340   23   7%Interest income  (206)  (109)  97   89%               Total costs and expenses  5,806   5,477   329   6%               Income before provision for income taxes  1,180   673   507   75%Provision for income taxes  438   271   167   62%               Net income $742  $402   340   85%                                Gross profit on hardware, software andinstallationrevenues $1,399  $1,664   (265)  (16%)Gross profit on service revenues  750   866   (116)  (13%)Gross profit on payment processingrevenues  2,460   1,255   1,205   96%               Total gross profit $4,609  $3,785   824   22%                                Gross margin on hardware, software andinstallation revenues  46%  50%    Gross margin on service revenues  56%  62%    Gross margin on payment processingrevenues  95%  90%    Gross margin on total net revenues  66%  62%    
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands, except in reference to the number of X-Charge accounts andresellers)****Significant Trends**X-Charge payment processing revenues continued to increase from quarter to quarter and year overyear. For the three months ended December 31, 2005, payment processing revenues increased byapproximately 85% over the same period of the prior year. We had a new record with 922 processingaccounts installed during the quarter, as compared to 707 for the same quarter of last year. As ofDecember 31, 2005, we had over 5,500 active processing accounts and 222 X-Charge resellers thatearned residual income from their processing accounts. We had a new record for pre-tax incomemargin of 17% and pre-tax profit of $1,180 as a result of the increase in high margin, recurringX-Charge payment processing revenues.System sales declined slightly, compared to prior year, but we are attempting to reverse this trendby generating additional sales leads through extensive marketing efforts. Service revenues as apercentage of the total revenues for the three months ended December 31, 2005 dropped slightly, incomparison to the same quarter of last year. This trend is expected to continue.The results for the three months ended December 31, 2005 included $42 in share-based compensationexpense related to the adoption of SFAS123R in this quarter, which for same period of the prioryear, this expense was not reflected on the financial statements but disclosed in the footnotes asrequired under previous accounting rules.**Revenues**We derive revenues from system sales, consisting of computer hardware, licensing of computersoftware, installation and training, post contract customer support service, and payment processingservice (X-Charge). Net revenues, consisting of system revenues, service revenues and paymentprocessing revenues, for the three months ended December 31, 2005 increased 14% to $6,986, comparedto $6,150 for the three months ended December 31, 2004. System revenues for the three months endedDecember 31, 2005 decreased 8%, compared to the three months ended December 31, 2004, due to lowersoftware sales to both existing and new customers. Service revenues for the three months endedDecember 31, 2005 decreased 4%, compared to the three months ended December 31, 2004, whichincluded revenues from a high dollar support contract that was cancelled during the second quarterof fiscal 2005. Payment processing revenues for the three months ended December 31, 2005 increased85% due to a higher number of accounts processing with X-Charge over the prior year.**Gross Margin**Gross margin on net revenues for the three months ended December 31, 2005 increased to 66%,compared to 62% for the three months ended December 31, 2004. Gross margin on system revenues forthe three months ended December 31, 2005 decreased to 46%, compared to 50% for the three monthsended December 31, 2004, due to lower margins on peripheral sales and decrease in high marginsoftware sales. Gross margin on service revenues for the three months ended December 31, 2005decreased to 56%, compared to 62% for the three month period ended December 31, 2004, related to an increase in salaries expense.Gross margin on payment processing revenues for the three months ended December 31, 2005 increasedto 95%, compared to 90% for the three months ended December 31, 2004, primarily due to an increasein processing revenues.
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands)****Selling, General and Administrative Expenses**Salaries, sales commissions, marketing expenses, and rent expenses represent the largest componentsof selling, general and administrative expenses. Selling, general and administrative expensesexpressed as a percentage of net revenues was flat at 47% for the three months ended December 31,2005 and 2004. Selling, general and administrative expenses increased 14% for the three monthsended December 31, 2005, compared to the same period ended December 31, 2004. This increase wasprimarily due to the increase in commissions expense related to higher payment processing revenues,higher consulting fees paid for an accounting system upgrade, and higher payroll costs related toan increase in administrative and sales personnel needed for X-Charge business growth.**Research and Development Expenses**Research and development expenses expressed as a percentage of revenues for the three months endedDecember 31, 2005 was 5%, compared to 6% for the three months ended December 31, 2004. Researchand development expenses increased to $363 for the three months ended December 31, 2005, comparedto $340 for the same period of the prior year, due to an increase in salaries expense. We continueto invest in the enhancements of new features for the existing software products of Retail Star andCAM32.**Income Taxes**Provision for income taxes for the three months ended December 31, 2005 was $438, compared to $271for the same period of the prior year. The effective tax rate for the three months ended December31, 2005 was 37% compared to 40% for the three months ended December 31, 2004. This lowereffective tax rate was due to a decrease in the projected federal statutory and state tax rates andthe recognition of tax credits for fiscal 2006 compared to fiscal 2005. We expect tocontinue to incur provision for federal and state income taxes for the foreseeable future.**LIQUIDITY AND CAPITAL RESOURCES**Our cash and cash equivalents plus marketable securities totaled $21,350 on December 31, 2005compared to $21,063 on September 30, 2005. The increase resulted from cash provided from operatingactivities. During the three months ended December 31, 2005, we generated $632 from operations,expended $139 for fixed assets and capitalized software development, used $953 for marketablesecurities investment and $385 for dividend payment, and received $285 from maturity of bondinvestments and $121 from stock options exercised, compared to the three months ended December 31,2004 in which we generated $324 from operations, used $143 for fixed assets and capitalizedsoftware development and $694 for marketable securities purchase, and received $173 from stockoptions and warrants exercised.In August 2005, the Board of Directors approved a new dividend policy, which pays stockholders avariable dividend based on the quarterly results. On October 14, 2005, we paid a dividend of $385($0.10 per common share) to stockholders of record on October 3, 2005 based on results for thethree months ended June 30, 2005. In November 2005, the Board of Directors declared a dividend of$0.14 per common share, payable on January 12, 2006 to stockholders of record on January 3, 2006.The dividend was based on the results for the three month period ended September 30, 2005. We didnot pay dividends for quarterly results prior to the third quarter of fiscal 2005.The decision to pay a dividend will be re-evaluated quarterly based on our earnings performance,regulatory limitations and other conditions which may affect our desire to pay dividends in thefuture and is subject to approval by the Board of Directors. Other than performance, there are norestrictions that currently materially limit or that we reasonably believe are likely to limitmaterially the future payment of dividends.At December 31, 2005 cash and cash equivalents plus marketable securities made up 84% of our totalcurrent assets. Our current ratio at December 31, 2005 was 6.3. Management believes our existingworking
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**CAM COMMERCE SOLUTIONS, INC.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS****(All dollar amounts in thousands)**capital, coupled with funds generated from our operations will be sufficient to fund our presentlyanticipated working capital requirements for the foreseeable future.Inflation has had no significant impact on our operations.**Contracts and Commitments**