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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 September 30, 2002
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 November 13, 2002, 8,040,115 shares of
the registrant’s common stock were issued and outstanding.
CLICK COMMERCE, INC.
| |
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Page No.
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| PART I. |
|
FINANCIAL INFORMATION |
|
|
| |
| Item 1. |
|
Financial Statements |
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3 |
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4 |
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5 |
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6 |
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| Item 2. |
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9 |
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| Item 3. |
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15 |
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| Item 4. |
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Controls and Procedures |
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16 |
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| PART II. |
|
OTHER INFORMATION |
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| |
| Item 1. |
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17 |
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| Item 2. |
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17 |
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| Item 3. |
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17 |
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| Item 4. |
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17 |
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| Item 5. |
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17 |
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| Item 6. |
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18 |
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| SIGNATURES |
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19 |
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| CERTIFICATIONS |
|
20 |
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
| |
|
September 30, 2002
|
|
|
December 31, 2001
|
|
| |
|
(unaudited) |
|
|
|
|
| ASSETS |
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
25,340 |
|
|
$ |
40,677 |
|
| Short-term investments |
|
|
10,295 |
|
|
|
— |
|
| Trade accounts receivable, net |
|
|
2,455 |
|
|
|
6,670 |
|
| Income taxes receivable |
|
|
— |
|
|
|
158 |
|
| Other current assets |
|
|
1,433 |
|
|
|
2,534 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
39,523 |
|
|
|
50,039 |
|
| Property and equipment, net |
|
|
2,718 |
|
|
|
3,934 |
|
| Other assets |
|
|
515 |
|
|
|
721 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
42,756 |
|
|
$ |
54,694 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
560 |
|
|
$ |
1,096 |
|
| Billings in excess of revenue earned on contracts in progress |
|
|
264 |
|
|
|
443 |
|
| Deferred revenue |
|
|
2,289 |
|
|
|
2,265 |
|
| Accrued compensation |
|
|
1,182 |
|
|
|
1,686 |
|
| Accrued expenses and other current liabilities |
|
|
1,354 |
|
|
|
2,274 |
|
| Accrued restructuring |
|
|
503 |
|
|
|
950 |
|
| Current portion of capital lease obligations |
|
|
730 |
|
|
|
815 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
6,882 |
|
|
|
9,529 |
|
| Capital lease obligations, less current portion |
|
|
177 |
|
|
|
727 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
7,059 |
|
|
|
10,256 |
|
| Shareholders’ equity: |
|
|
|
|
|
|
|
|
| Preferred stock |
|
|
— |
|
|
|
— |
|
| Common stock |
|
|
8 |
|
|
|
8 |
|
| Additional paid-in capital |
|
|
84,966 |
|
|
|
85,113 |
|
| Accumulated other comprehensive income—currency translation adjustment |
|
|
218 |
|
|
|
125 |
|
| Deferred compensation |
|
|
(1,775 |
) |
|
|
(3,334 |
) |
| Treasury stock |
|
|
(111 |
) |
|
|
— |
|
| Accumulated deficit |
|
|
(47,609 |
) |
|
|
(37,474 |
) |
| |
|
|
|
|
|
|
|
|
| Total shareholders’ equity |
|
|
35,697 |
|
|
|
44,438 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities and shareholders’ equity |
|
$ |
42,756 |
|
|
$ |
54,694 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(dollars in thousands, except per share data)
(unaudited)
| |
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product license |
|
$ |
214 |
|
|
$ |
4,911 |
|
|
$ |
1,530 |
|
|
$ |
18,709 |
|
| Service |
|
|
3,272 |
|
|
|
6,084 |
|
|
|
12,715 |
|
|
|
17,967 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
|
3,486 |
|
|
|
10,995 |
|
|
|
14,245 |
|
|
|
36,676 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product license |
|
|
190 |
|
|
|
272 |
|
|
|
522 |
|
|
|
924 |
|
| Service (exclusive of $16 and $15 for the three months ended September 30, 2002 and 2001, respectively, and $46 and $43
for the nine months ended September 30, 2002 and 2001, respectively, reported below as amortization of stock-based compensation) |
|
|
1,952 |
|
|
|
2,965 |
|
|
|
6,534 |
|
|
|
9,221 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total cost of revenues |
|
|
2,142 |
|
|
|
3,237 |
|
|
|
7,056 |
|
|
|
10,145 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
1,344 |
|
|
|
7,758 |
|
|
|
7,189 |
|
|
|
26,531 |
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales and marketing (exclusive of $353 and $442 for the three months ended September 30, 2002 and 2001, respectively,
and $1,085 and $1,441 for the nine months ended September 30, 2002 and 2001, respectively, reported below as amortization of stock-based compensation) |
|
|
1,488 |
|
|
|
5,022 |
|
|
|
8,084 |
|
|
|
20,164 |
|
| Research and development (exclusive of $2 and $4 for the three months ended September 30, 2002 and 2001, respectively,
and $7 and $14 for the nine months ended September 30, 2002 and 2001, respectively, reported below as amortization of stock-based compensation) |
|
|
880 |
|
|
|
2,547 |
|
|
|
3,766 |
|
|
|
7,830 |
|
| General and administrative (exclusive of $14 and $87 for the three months ended September 30, 2002 and 2001,
respectively, and $59 and $213 for the nine months ended September 30, 2002 and 2001, respectively, reported below as amortization of stock-based compensation) |
|
|
963 |
|
|
|
1,757 |
|
|
|
3,639 |
|
|
|
7,148 |
|
| Amortization of stock-based compensation |
|
|
385 |
|
|
|
548 |
|
|
|
1,197 |
|
|
|
1,711 |
|
| Restructuring and other charges |
|
|
— |
|
|
|
1,827 |
|
|
|
1,213 |
|
|
|
1,827 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
3,716 |
|
|
|
11,701 |
|
|
|
17,899 |
|
|
|
38,680 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
|
(2,372 |
) |
|
|
(3,943 |
) |
|
|
(10,710 |
) |
|
|
(12,149 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
|
199 |
|
|
|
366 |
|
|
|
633 |
|
|
|
1,620 |
|
| Interest expense |
|
|
(26 |
) |
|
|
(28 |
) |
|
|
(58 |
) |
|
|
(79 |
) |
| Other expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(100 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other income, net |
|
|
173 |
|
|
|
338 |
|
|
|
575 |
|
|
|
1,441 |
|
| Loss before income taxes |
|
|
(2,199 |
) |
|
|
(3,605 |
) |
|
|
(10,135 |
) |
|
|
(10,708 |
) |
| Income tax benefit |
|
|
— |
|
|
|
(1,276 |
) |
|
|
— |
|
|
|
(3,817 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(2,199 |
) |
|
|
(2,329 |
) |
|
|
(10,135 |
) |
|
|
(6,891 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and diluted loss per share |
|
$ |
(0.27 |
) |
|
|
(0.30 |
) |
|
|
(1.26 |
) |
|
|
(0.89 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average shares outstanding—basic and diluted |
|
|
8,040,148 |
|
|
|
7,858,913 |
|
|
|
8,047,879 |
|
|
|
7,747,132 |
|
| Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(2,199 |
) |
|
|
(2,329 |
) |
|
|
(10,135 |
) |
|
|
(6,891 |
) |
| Foreign currency translation adjustment |
|
|
48 |
|
|
|
7 |
|
|
|
93 |
|
|
|
(2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive loss |
|
$ |
(2,151 |
) |
|
|
(2,322 |
) |
|
|
(10,042 |
) |
|
|
(6,893 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
| |
|
Nine Months ended September 30,
|
|
| |
|
2002
|
|
|
2001
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(10,135 |
) |
|
$ |
(6,891 |
) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
| Amortization of stock-based compensation |
|
|
1,197 |
|
|
|
1,711 |
|
| Depreciation and amortization |
|
|
1,181 |
|
|
|
926 |
|
| Provision for doubtful accounts |
|
|
312 |
|
|
|
80 |
|
| Deferred income taxes |
|
|
— |
|
|
|
(3,747 |
) |
| Amortization of deferred compensation |
|
|
184 |
|
|
|
165 |
|
| Restructuring and other charges, net of payments |
|
|
3 |
|
|
|
1,827 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Trade accounts receivable |
|
|
3,903 |
|
|
|
415 |
|
| Revenue earned on contracts in progress in excess of billings |
|
|
— |
|
|
|
999 |
|
| Income taxes receivable |
|
|
145 |
|
|
|
— |
|
| Other current assets |
|
|
1,101 |
|
|
|
(868 |
) |
| Accounts payable |
|
|
(635 |
) |
|
|
(841 |
) |
| Billings in excess of revenues earned on contracts in progress |
|
|
(179 |
) |
|
|
(530 |
) |
| Deferred revenue |
|
|
24 |
|
|
|
2,217 |
|
| Accrued compensation |
|
|
(504 |
) |
|
|
(806 |
) |
| Accrued expenses and other current liabilities |
|
|
(907 |
) |
|
|
(607 |
) |
| Other assets |
|
|
221 |
|
|
|
(101 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash used in operating activities |
|
|
(4,089 |
) |
|
|
(6,051 |
) |
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| Purchases of short-term investments |
|
|
(10,295 |
) |
|
|
— |
|
| Purchases of property and equipment |
|
|
(331 |
) |
|
|
(1,211 |
) |
| Purchases of intangible assets |
|
|
— |
|
|
|
(685 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(10,626 |
) |
|
|
(1,896 |
) |
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| Proceeds from exercise of stock options |
|
|
32 |
|
|
|
932 |
|
| Purchase of treasury stock |
|
|
(111 |
) |
|
|
— |
|
| Principal payments under capital lease obligations |
|
|
(636 |
) |
|
|
(556 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash (used in) provided by financing activities |
|
|
(715 |
) |
|
|
376 |
|
| Effect of foreign exchange rates on cash and cash equivalents |
|
|
93 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Net change in cash and cash equivalents |
|
|
(15,337 |
) |
|
|
(7,571 |
) |
| Cash and cash equivalents at beginning of period |
|
|
40,677 |
|
|
|
51,318 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of period |
|
$ |
25,340 |
|
|
$ |
43,747 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental disclosures: |
|
|
|
|
|
|
|
|
| Property and equipment acquired under capital leases |
|
$ |
— |
|
|
$ |
1,673 |
|
| Interest paid |
|
|
58 |
|
|
|
79 |
|
| Income taxes paid |
|
|
— |
|
|
|
20 |
|
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the accounts of Click Commerce, Inc. and its wholly owned subsidiaries
(the “Company”) and reflect all adjustments (which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2002. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the Securities and Exchange Commission’s rules and regulations. The unaudited condensed
consolidated financial statements and notes included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K and other documents that
have been filed with the Securities and Exchange Commission.
Certain prior year amounts have been reclassified to
conform to 2002 presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue and Cost Recognition
The Company recognizes product license revenue from licensing the rights to use its software. To-date substantially all product licenses have been on a perpetual basis. The Company generates service revenues from integrating its
software, performing needs analyses for customers and through the sale of maintenance and training services. The Company recognizes revenue in accordance with Statement of Position (“SOP”) No. 97-2 “Software Revenue
Recognition” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.” For those contracts that either do not contain a services component or that have services
which are not essential to the functionality of any other element of the contract, software license revenue is recognized upon shipment of the Company’s software provided that the fee is fixed and determinable, persuasive evidence of an
arrangement exists and collection of the resulting receivable is considered probable. Revenue from service contracts is typically recognized as the services are performed. The revenue to be recognized from multiple-element software contracts is
based on the fair value of each element. The Company records deferred revenue on software contracts for which it has billed or collected amounts, but for which the requirements for revenue recognition have not been met.
Revenue from contracts in which the Company’s services are essential to the functionality of the other elements of the contract is
recognized using the percentage-of-completion method under contract accounting as services are performed or output milestones are reached, as the Company delivers, customizes and installs the software. The percentage completed is measured either by
the percentage of labor hours incurred to date in relation to estimated total labor hours or in consideration of achievement of certain output milestones, depending on the specific nature of each contract. For arrangements in which
percentage-of-completion accounting is used, the Company records cash receipts from customers and billed amounts due from customers in excess of recognized revenue as billings in excess of revenues earned on contracts in progress. The timing and
amount of cash receipts from customers can vary significantly depending on specific contract terms and can therefore have a significant impact on the amount of billings in excess of revenues earned on contracts in progress at the end of any given
period.
6
Revenue from contracts recognized under the percentage-of-completion method are
presented as product revenue to the extent that the underlying milestones are related to software deliveries. To the extent that hours of input are used as the basis for percentage completed or that contract milestones relate to software
customization or other professional services, revenues are presented as service revenues.
Maintenance service is
sold separately under contracts that are renewable annually and is provided only to customers who purchase maintenance. The Company recognizes maintenance service revenue ratably over the contract period, generally one year. Maintenance fees are
generally billed annually in advance and are recorded as deferred revenue. As part of the sales process, the Company may perform a needs analysis for the potential customer on a fixed fee basis. Revenue from needs analyses is recognized as the work
is performed. Training revenue is recognized as the services are provided.
Cost of product license revenue
includes production and shipping expenses which are expensed as incurred, as well as costs of licensing third party software incorporated into the Company’s products. These third party license costs are expensed as the products are delivered.
Cost of service revenue includes salaries and related expenses for professional services and technical support personnel who provide development, customization and installation services to customers, as well as an allocation of data processing and
overhead costs, which are expensed as incurred.
Reimbursement of Out-of-Pocket Expenses
Effective January 1, 2002, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 01-14, which addresses income
statement characterization of reimbursements received for “out-of-pocket” expenses incurred. This EITF requires entities to characterize the reimbursement of out-of-pocket expenses from their customers as revenue, rather than as a
reduction of the related expense in the income statement in certain circumstances. Comparative financial statements for prior periods must conform to this presentation. Although adoption of this EITF Issue effects income statement presentation, it
does not impact the Company’s earnings or earnings per share. The Company has classified out-of-pocket expenses billed to its customers as service revenue. The current and prior year effect on gross margin percentage was not significant.
Cash, cash equivalents and short-term investments
The Company’s cash and cash equivalents in excess of minimum required account balances are invested primarily in money market mutual funds. The remainder of these
funds are invested through a sweep arrangement in overnight Euro funds or other similar investments. The Company’s short-term investments are invested in a short-term highly-liquid bond fund. The Company may, at its discretion, withdraw some or
all of the funds from this account on a daily basis. The fund is comprised primarily of corporate and other bonds that have average maturities of approximately three years and average durations of just over one year.
Reverse Stock Split
On September 4, 2002, the Company effectuated a 1-for-5 reverse stock split of its common stock. On that day each five shares of outstanding common stock of the Company automatically converted to one share of common stock. All
share and per share amounts in the accompanying condensed consolidated financial statements have been retroactively restated to give effect to the September 4, 2002 reverse stock split. The authorized shares of 75,000,000 and par value of $0.001 per
share for the Company’s common stock were not affected by the reverse stock split.
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 $76 and $239
of stock-based compensation expense for the three months ended September 30, 2002 and 2001, respectively, and $269 and $784 for the nine months ended September 30, 2002 and 2001, respectively.
7
In April 2000, the Company issued a warrant to Accenture Ltd
(“Accenture”) to purchase up to 163,646 shares of common stock at $61.11 per share. The warrant vests contingently upon the achievement of certain milestones, primarily the generation of license revenue for the Company, and expires on
April 20, 2004. The warrant contains a significant cash penalty for Accenture’s failure to meet the agreed revenue target by the expiration date, and, accordingly, the fair value of the warrant was measured at the date of grant in accordance
with EITF Issue No. 96-18 and Statement of Financial Accounting Standards No. 123, resulting in a fair value of approximately $5,000, which was determined using the Black-Scholes option-pricing model. This amount is being amortized to expense on a
straight-line basis over the vesting period of the warrant. The Company recognized amortization expense of $309 for each of the three-month periods ended September 30, 2002 and 2001, respectively, and $927 for each of the nine-month periods ended
September 30, 2001 and 2002, respectively.
4. RESTRUCTURING
In the quarter ended June 30, 2002, the Company determined that its cost structure exceeded the level suggested by its assessment of the
Company’s current near-term revenue opportunities. The Company continues to experience longer sales cycles and higher executive level review and approval processes on capital projects, particularly for technology and e-commerce projects. As a
result, the Company developed a plan to reduce its cost structure to a level in line with current revenue opportunities, resulting in an $821 restructuring charge. Included in this restructuring plan was the termination of 51 employees across all
areas of the Company. All of these employees were notified of their termination by June 30, 2002, and were severed by August 2, 2002. The resulting employee severance and related costs are presented below. The facilities related costs represent the
remaining lease payments for closing four regional offices.
In conjunction with the restructuring, the Company
recorded a $451 asset impairment charge. The write-down of assets, primarily computer equipment under capital leases, was a direct result of the recent staffing reductions. The fair value of the equipment included in the write-down was deemed to be
$0. The Company has no foreseeable use for the assets and the assets are under leases which at the end of the lease term the Company is required to either return the equipment or purchase the equipment at the then fair market value. The company
intends to return this equipment upon expiration of the current lease terms.
As of September 30, 2002, the
majority of the Company’s restructuring accrual related to employee severance, benefits and related costs. Due to extended payment terms under severance arrangements with certain employees, payments against the restructuring charge will be made
through the quarter ending March 31, 2003. In the quarter ended June 30, 2002, the Company adjusted the restructuring accrual for items that were recorded as part of the restructuring charge taken in the third quarter of 2001, primarily for excess
subcontractor notice-of-termination costs and employee benefit costs. The following table contains the significant components of the restructuring charge and current year-to-date activity relating to those components.
| |
|
Accrual at December 31, 2001
|
|
Additional restructuring charges
|
|
Adjustment to previous accrual
|
|
|
2002 YTD cash payments
|
|
|
Balance at September 30, 2002
|
| Employee severance, benefits and related costs |
|
$ |
849 |
|
$ |
720 |
|
$ |
(59 |
) |
|
$ |
(1,149 |
) |
|
$ |
361 |
| Facilities related costs |
|
|
41 |
|
|
42 |
|
|
— |
|
|
|
(29 |
) |
|
|
54 |
| Other |
|
|
60 |
|
|
59 |
|
|
— |
|
|
|
(31 |
) |
|
|
88 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
950 |
|
$ |
821 |
|
$ |
(59 |
) |
|
$ |
(1,209 |
) |
|
$ |
503 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Click Commerce, Inc. (the “Company”) is a provider of Partner
Relationship Management software products and integration services that connect large and middle market companies with their distribution channel partners. The Company’s software products and integration services enable companies to effectively
manage and engage in collaborative business-to-business electronic commerce throughout all levels of their sell-side channels and processes. The Company develops, implements and supports private marketplaces, which are secure systems that use the
Internet to communicate between companies with all participants in the network or chain of distribution who have a password and an Internet browser.
The Company commenced operations on August 20, 1996. During the period from inception until early 1998, the Company was primarily engaged in developing software for the Relationship Manager (formerly
referred to as the Extranet Manager). In 1996 and 1997, the Company was also engaged in developing Internet Web sites and providing related consulting services. The Company implemented the first Click Commerce Relationship Manager in the second
quarter of 1997.
The Company’s revenue is derived from sales of licenses of its software, comprised of the
Relationship Manager and a portfolio of applications, as well as from needs analyses, professional services, training, maintenance and support and out-of-pocket expenses billed to its customers. The Company’s software is generally licensed on a
perpetual basis.
Operating expenses are classified into four general categories: sales and marketing, research
and development, general and administrative and amortization of stock-based compensation. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public
relations and marketing materials. Research and development expenses consist primarily of personnel costs to support product development. General and administrative expenses consist primarily of salaries and other related costs for executive
management, finance and administrative employees, legal and accounting services and until March 31, 2002, an allocation of project management overhead. Amortization of stock-based compensation represents the amortization over the related service
period of the difference between the exercise price of options granted and the deemed fair market value of the underlying common stock on the date of grant, as well as amortization of the warrant issued in connection with a joint marketing agreement
with Accenture Ltd. (“Accenture”).
In April 2000, the Company issued a warrant to Accenture to purchase
up to 163,646 shares of common stock at an exercise price of $61.11 per share. The warrant vests contingently upon the achievement of certain milestones, primarily the generation of license revenue for the Company, and expires on April 20, 2004. The
warrant contains a significant cash penalty for Accenture’s failure to meet the agreed revenue target by the expiration date, and, accordingly, the fair value of the warrant was determined on the date of grant in accordance with Emerging Issues
Task Force Issue No. 96-18 and Statement of Financial Accounting Standards No. 123 to be approximately $5.0 million, which was determined using the Black-Scholes option pricing model. This amount is included in additional paid-in capital and is
being amortized to expense over the vesting period of the warrants. For the nine months ended September 30, 2002, the Company recognized $0.9 million in amortization expense. The Company expects to recognize future amortization expense of $0.3
million for the remainder of 2002, $1.2 million in 2003 and $0.4 million in 2004.
The Company believes that
period-to-period comparisons of operating results should not be relied upon as predictive of future performance. The Company’s prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early
stage of development, particularly companies in new, rapidly evolving markets. The Company may not be successful in addressing such risks and difficulties.
9
Results of Operations
The following table sets forth selected unaudited financial data for the periods indicated in dollars and as a percentage of total revenue.
| |
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| |
|
in
000’s
|
|
|
% of Revenue
|
|
|
in
000’s
|
|
|
% of Revenue
|
|
|
in 000’s
|
|
|
% of Revenue
|
|
|
in 000’s
|
|
|
% of Revenue
|
|
| Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product license |
|
$ |
214 |
|
|
6.1 |
% |
|
$ |
4,911 |
|
|
44.7 |
% |
|
$ |
1,530 |
|
|
10.7 |
% |
|
$ |
18,709 |
|
|
51.0 |
% |
| Service |
|
|
3,272 |
|
|
93.9 |
|
|
|
6,084 |
|
|
55.3 |
|
|
|
12,715 |
|
|
89.3 |
|
|
|
17,967 |
|
|
49.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
|
3,486 |
|
|
100.0 |
|
|
|
10,995 |
|
|
100.0 |
|
|
|
14,245 |
|
|
100.0 |
|
|
|
36,676 |
|
|
100.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product license |
|
|
190 |
|
|
5.5 |
|
|
|
272 |
|
|
2.5 |
|
|
|
522 |
|
|
3.7 |
|
|
|
924 |
|
|
2.5 |
|
| Service (a) |
|
|
1,952 |
|
|
56.0 |
|
|
|
2,965 |
|
|
27.0 |
|
|
|
6,534 |
|
|
45.9 |
|
|
|
9,221 |
|
|
25.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total cost of revenues |
|
|
2,142 |
|
|
61.4 |
|
|
|
3,237 |
|
|
29.4 |
|
|
|
7,056 |
|
|
49.5 |
|
|
|
10,145 |
|
|
27.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
1,344 |
|
|
38.6 |
|
|
|
7,758 |
|
|
70.6 |
|
|
|
7,189 |
|
|
50.5 |
|
|
|
26,531 |
|
|
72.3 |
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales and marketing (a) |
|
|
1,488 |
|
|
42.7 |
|
|
|
5,022 |
|
|
45.7 |
|
|
|
8,084 |
|
|
56.7 |
|
|
|
20,164 |
|
|
55.0 |
|
| Research and development (a) |
|
|
880 |
|
|
25.2 |
|
|
|
2,547 |
|
|
23.2 |
|
|
|
3,766 |
|
|
26.4 |
|
|
|
7,830 |
|
|
21.3 |
|
| General and administrative (a) |
|
|
963 |
|
|
27.6 |
|
|
|
1,757 |
|
|
16.0 |
|
|
|
3,639 |
|
|
25.5 |
|
|
|
7,148 |
|
|
19.5 |
|
| Amortization of stock-based compensation |
|
|
385 |
|
|
11.0 |
|
|
|
548 |
|
|
5.0 |
|
|
|
1,197 |
|
|
8.4 |
|
|
|
1,711 |
|
|
4.7 |
|
| Restructuring and other charges |
|
|
— |
|
|
|
|
|
|
1,827 |
|
|
16.6 |
|
|
|
1,213 |
|
|
8.5 |
|
|
|
1,827 |
|
|
5.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
3,716 |
|
|
106.6 |
|
|
|
11,701 |
|
|
106.4 |
|
|
|
17,899 |
|
|
125.7 |
|
|
|
38,680 |
|
|
105.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
$ |
(2,372 |
) |
|
(68.0 |
)% |
|
$ |
(3,943 |
) |
|
(35.9 |
)% |
|
$ |
(10,710 |
) |
|
(75.2 |
)% |
|
$ |
(12,149 |
) |
|
(33.1 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Exclusive of amortization of stock-based compensation presented as a separate caption. |
Comparison of the three months ended September 30, 2002 to the three months ended September 30, 2001
Revenue
Total revenue
decreased approximately $7.5 million, or 68.3%, to $3.5 million for the three months ended September 30, 2002 from $11.0 million for the three months ended September 30, 2001. Product license revenue, comprised of revenue from separate product-only
agreements and from multi-element agreements accounted for under a percentage-completed basis using milestones that specifically relate to product deliveries, decreased by $4.7 million, or 95.6%, as a result of a decrease in the number of new
contracts and the average selling price of the current quarter’s contracts due to the economic slowdown and significant decline in information technology spending. Service revenue, comprising fees related to time and materials service
contracts, maintenance, training and needs analyses, reimbursement of out-of-pocket expenses, as well as multi-element agreements accounted for under a percentage-completed basis using hours of input or milestones that specifically relate to
integration and customization services, decreased by $2.8 million, or 46.2%, over the prior year quarter. This decrease was due to professional services delivered on a time and material basis being lower by $2.1 million, needs analysis and addenda
contracts being lower by $0.4 million, and service revenue from multi-element contracts being
10
lower by $0.3 million. In any period, service revenue from time and materials contracts is dependent on, among other things, license transactions closed during the current and preceding quarters
and customer decisions regarding implementations of licensed software.
Cost of Revenue
Total cost of revenue decreased approximately $1.1 million, or 33.8%, to $2.1 million for the three months ended
September 30, 2002 compared to $3.2 million for the three months ended September 30, 2001. This cost of revenue decrease was primarily a result of lower third party contractor costs and employee compensation and related costs due to a reduction in
project management personnel. Cost of product revenue decreased by $0.1 million or 30.1% due to lower royalty fees for licensed third party software that is embedded in the Company’s products or incorporated in the Company’s product
offerings arising from lower product sales, as well as lower amortization of product packaging and other product costs. Gross profit margins decreased to 38.6% for the three months ended September 30, 2002, compared to 70.6% for the three months
ended September 30, 2001. The gross margin decrease was due to a decrease in product revenue as a percent of total revenue as well as lower margins on both product and services revenue. The decrease in service margins was due to a classification of
project management overhead in cost of services in the current quarter, lower average hourly rates and a lower utilization rate for the professional services staff in the current quarter. Product margins were lower due to lower product revenues
against which comparable product-related costs are amortized.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased by approximately $3.5 million, or 70.4%, to $1.5
million for the three months ended September 30, 2002 from $5.0 million for the three months ended September 30, 2001. The decrease in sales and marketing expense was primarily attributable to lower employee compensation and related costs due to a
reduction in personnel and from lower discretionary marketing spending.
Research and
Development. Research and development expenses decreased by approximately $1.7 million, or 65.4%, to $0.9 million for the three months ended September 30, 2002, compared to $2.6 million for the prior year three-month
period. This decrease was primarily attributable to lower third party contractor costs and a reduction in salaries. To date, all software development costs have been expensed as incurred.
General and Administrative. General and administrative expenses decreased by approximately $0.8 million, or 45.2%, to $1.0 million for the
three months ended September 30, 2002 from $1.8 million for the three months ended September 30, 2001. This decrease was primarily attributable to lower employee compensation and related costs due to a reduction in administrative personnel and lower
overhead costs.
Amortization of stock-based compensation. Prior to its initial
public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4.6 million. Such deferred compensation is being amortized over the vesting
periods of the applicable options, resulting in expense of $0.1 million and $0.2 million for the three months ended September 30, 2002 and 2001, respectively. Additionally, the $5.0 million fair value of the warrant issued to Accenture in April 2000
is being amortized over the vesting period of the warrant. Accordingly, $0.3 million of amortization expense was recognized during each of the three months ended September 30, 2002 and 2001, respectively.
Restructuring. The Company did not record a restructuring charge in the quarter ended September 30, 2002.
Income tax expense. The Company recorded an income tax benefit of $0.7 million for
the three months ended September 30, 2001. For the three months ended September 30, 2002, the Company’s earnings did not include an income tax benefit, as a full tax valuation allowance against deferred tax assets generated from the
Company’s net loss for the three months ended September 30, 2002 was recorded. In the fourth quarter of 2001,
11
the Company established a valuation allowance for deferred tax assets that were previously generated. Although future taxable income of the Company may be sufficient to utilize a substantial
amount of the Company’s net operating loss carry forwards and to realize its deferred tax assets, management has concluded that the realization of the Company’s deferred tax assets did not meet the “more likely than not” criteria
under SFAS No. 109.
Comparison of the nine months ended September 30, 2002 to the nine months ended September 30, 2001
Revenue
Total revenue decreased approximately $22.4 million, or 61.2%, to $14.2 million for the nine months ended September 30, 2002 from $36.7 million for the nine months ended September 30, 2001. Product
license revenue, comprised of revenue from separate product-only agreements and from multi-element agreements accounted for under a percentage completed basis using milestones that specifically relate to product deliveries, decreased by $17.2
million, or 91.8%, as a result of a decrease in the number of new contracts and the average selling price of the 2002 contracts due to the economic slowdown and significant decline in information technology spending. Service revenue, comprised of
fees related to time and materials service contracts, maintenance, training and needs analyses, reimbursement of out-of-pocket expenses, as well as multi-element agreements accounted for under a percentage completed basis using hours of input or
milestones that specifically relate to integration and customization services, decreased by $5.3 million, or 29.2%, over the prior year quarter. This decrease was due to professional services revenue delivered on a time and materials basis being
lower by $2.7 million, needs analysis and addenda contracts revenue being lower by $1.7 million, services revenue from multi-element contracts being lower by $2.1 million and training revenue being lower by $0.2 million. The service revenue decrease
was offset by a $1.4 million increase in maintenance and support services.
Cost of Revenue
Total cost of revenue decreased approximately $3.1 million, or 30.4%, to $7.0 million for the nine months ended September 30,
2002 compared to $10.1 million for the nine months ended September 30, 2001. This cost of revenue decrease was primarily a result of lower third party contractor costs and employee compensation and related costs due to a reduction in project
management personnel. Cost of product revenue decreased by $0.4 million or 43.5% due to lower royalty fees for licensed third party software that is embedded in the Company’s products or incorporated in the Company’s product offerings
arising from lower product sales, as well as lower amortization of product packaging and other costs. Gross profit margins decreased to 50.5% for the nine months ended September 30, 2002, compared to 72.3% for the nine months ended September 30,
2001. The gross margin decrease was due to a decrease in product revenue as a percent of total revenue as well as lower margins on both product and services revenue. The decrease in service margins was due to a classification of project management
overhead in cost of services, lower average hourly rates and lower professional services staff utilization. Product margins were lower due to lower product revenues against which comparable product-related costs are amortized.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased by approximately $12.1 million, or 59.9%, to $8.1 million for the nine months ended September 30, 2002 from
$20.2 million for the nine months ended September 30, 2001. The decrease in sales and marketing expense was primarily attributable to lower employee compensation and related costs due to a reduction in personnel and discretionary marketing spending.
Research and Development. Research and development expenses decreased by
approximately $4.1 million, or 51.9%, to $3.8 million for the nine months ended September 30, 2002, compared to $7.8 million for the prior year nine month period. This decrease was primarily attributable to lower third party contractor costs and a
reduction in salaries. To date, all software development costs have been expensed as incurred.
12
General and Administrative. General and
administrative expenses decreased by approximately $3.5 million, or 49.1%, to $3.6 million for the nine months ended September 30, 2002 from $7.1 million for the nine months ended September 30, 2001. This decrease was primarily attributable to lower
employee compensation and related costs due to a reduction in administrative personnel and lower overhead costs.
Amortization of stock-based compensation. Prior to its initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company
recorded deferred compensation expense of $4.6 million. Such deferred compensation expense is being amortized over the vesting periods of the applicable options, resulting in expense of $0.3 million and $0.8 million for the nine months ended
September 30, 2002 and 2001, respectively. Additionally, the $5.0 million fair value of the warrant issued to Accenture in April 2000 is being amortized over the vesting period of the warrant. Accordingly, $0.9 million of amortization expense was
recognized during each of the nine months ended September 30, 2002 and 2001, respectively.
Restructuring. In the quarter ended June 30, 2002, the Company recorded a $0.8 million restructuring charge primarily related to severance and other benefit costs for 51 employees terminated as part of
the restructuring plan and a $0.45 million asset write-down for excess equipment. The asset write-down was recorded to adjust the carrying value of excess equipment to its deemed fair value of $0 as these excess assets are leased under capital
leases with fair market value buy out provisions at the end of the related lease terms. The restructuring charge also included the costs of closing four regional offices. The Company expects these actions to save approximately $6 million on an
annual basis. The Company also reversed into income approximately $59,000 of excess severance accruals originally recorded as part of the restructuring charge taken in the quarter ended September 30, 2001.
Income tax expense. The Company recorded an income tax benefit of $3.8 million for the nine months ended
September 30, 2001. For the nine months ended September 30, 2002, the Company’s earnings did not include an income tax benefit, as a full tax valuation allowance against deferred tax assets generated from the Company’s net loss for the
nine months ended September 30, 2002 was recorded. In the fourth quarter of 2001, the Company established a valuation allowance for deferred tax assets that were previously generated. Although future taxable income of the Company may be sufficient
to utilize a substantial amount of the Company’s net operating loss carry forwards and to realize its deferred tax assets, management has concluded that the realization of the Company’s deferred tax assets did not meet the “more
likely than not” criteria under SFAS No. 109.
Liquidity and Capital Resources
At September 30, 2002, the Company had $35.6 million of cash, cash equivalents and short-term investments, consisting primarily of
proceeds from its initial public offering. Net cash used in operating activities was $4.1 million and $6.1 million for the nine months ended September 30, 2002 and 2001, respectively. The $4.1 million of cash used in the current nine month period
primarily consisted of a loss before amortization of stock-based compensation and depreciation and amortization totaling approximately $7.8 million offset by current assets of $1.1 million less a decrease in accrued compensation, expenses and other
current liabilities of $1.4 million and a decrease in accounts receivable of $3.9 million.
Net cash used by
investing activities was $10.6 million for the nine months ended September 30, 2002 reflecting the diversification of investments from money market and overnight Euro and corporate paper investments to short-term highly liquid bond funds comprised
of corporate and other bonds with average original maturities greater than 90 days. The transfer of funds to these short-term investments was $10.3 million in the nine-month period ended September 30, 2002. During the nine months ended September 30,
2002, the Company also purchased $0.3 million of property and equipment.
Net cash used in financing activities
was approximately $0.7 million for the nine months ended September 30, 2002. The cash used during the current year period reflects $0.6 million in capital lease payments and $0.1 million for the purchase of treasury stock under the Company’s
approved stock buy-back program.
13
On March 31, 2002, the Company renewed its $3.0 million revolving credit
facility. In January 2000, the Company obtained a letter of credit under this facility totaling $0.5 million to secure a new office lease. This letter of credit is renewable annually and declines by $0.1 million on the first, second, third and
fourth anniversaries of the lease and then declines to $38,130 on the fifth anniversary until the lease expires in August 2005. Accordingly, the letter of credit has declined to $0.3 million.
The Company may use cash resources to fund investments in complementary businesses or technologies. The Company believes that working capital will be sufficient to
meet its working capital and operating expenditure requirements for at least the next twelve months. The Company has no current plans to raise additional equity during the next twelve months, although such plans are subject to business and market
conditions. Thereafter, the Company may find it necessary to obtain additional equity or debt financing, although the Company does not currently foresee a need for additional cash resources for long-term needs. In the event additional financing is
required, the Company may not be able to raise it on acceptable terms or at all.
In May 2002, the Company
announced that its Board of Directors had authorized the repurchase of up to $5.0 million of its common stock in the open market. These shares may be purchased pursuant to Rule 10b-18 under the Securities Exchange Act of 1934 from time to time in
the public market or through privately negotiated transactions. The timing and amount of any repurchase will be at the discretion of the Company’s management. As of September 30, 2002, the Company had repurchased 25,764 shares of its common
stock at an average purchase price of $4.30 per share and at an aggregate cost of $110,760.
On August 30, 2002,
at a special meeting of its stockholders, an amendment to the Company’s certificate of incorporation was approved in order to effect a reverse stock split of the Company’s common stock at a ratio between 1-for-2 and 1-for-5, as determined
by the Company’s Board of Directors. At a special meeting of the Board of Directors on August 30, 2002, the Board of Directors approved a 1-for-5 reverse stock split of the Company’s common stock effective as of September 4, 2002, in order
to improve the trading price for the common stock and improve the likelihood that the Company will be allowed to maintain the common stock’s listing on the Nasdaq National Market by satisfying the minimum bid requirement for continued listing
on the Nasdaq National Market System. As previously disclosed by the Company on a Current Report on Form 8-K dated September 4, 2002, the Company received on September 9, 2002, a letter from Nasdaq informing the Company that the Company had not
satisfied the minimum bid price requirement for listing of its common stock and that it would be delisted on September 17, 2002. The Company appealed such notice on September 12, 2002, requesting a hearing before a listing qualification panel to
review such delisting determination. Subsequently, Nasdaq informed the Company that it had evidenced compliance with the bid price requirement for continued listing on the Nasdaq National Market.
In addition, the Company continues to evaluate strategic alternatives, including opportunities to strategically grow the business, enter into strategic relationships
or enter into business combinations. The Company can provide no assurance that it will consummate any such strategic alternatives and may elect to terminate such evaluation at any time.
Recent Accounting Pronouncements
In June 2001,
the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations.” This statement requires that the fair value of a liability for legal obligations associated with the retirement of tangible long-lived assets be
recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Such legal obligations include obligations a party is required to settle as a result of an existing or enacted law, statute, or ordinance, or
written or oral contract. These associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for fiscal years beginning after June 15, 2002. The Company does not expect that
the adoption of this statement will have a material impact on the Company.
14
In July 2002, the FASB issued statement No. 146. “Accounting for Cost
Associated with Exit or Disposal Activities.” This statement will require the recording of exit or disposal costs when they are incurred and can be measured at fair value. A liability is incurred when an event obligates a company to transfer or
use assets (i.e., when an event leaves the company little or no discretion to avoid transferring or using assets in the future). These costs will be subsequently adjusted for changes in estimated cash flows. This statement is effective for
exit or disposal activities initiated after December 31, 2002. This statement does not impact the treatment of liabilities for exit and disposal costs previously recorded prior to adoption.
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, and related approval processes capital and intellectual property spending of Click Commerce’s target customers, changes in technology, deployment delays or
errors associated with the Company’s products and the Company’s ability to protect its intellectual property rights. For a discussion of these and other risk factors that could affect the Company’s business, see “Risk
Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, which is on file with the Securities and Exchange Commission.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The following discusses the Company’s exposure to market risk related to changes in foreign currency exchange rates and interest rates. This discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in Part I of the Company’s Annual Report on Form 10-K under “Risk Factors.”
Foreign Currency Exchange Rate Risk
To date, predominately all of the Company’s recognized revenues have been denominated in U.S. dollars and primarily from customers in the United States and the exposure to foreign currency
exchange rate changes has been immaterial. The Company expects, however, that future product license and professional services revenues may also be derived from international markets and may be denominated in the currency of the applicable market.
As a result, operating results may become subject to significant fluctuations based upon changes in the exchange rates of certain currencies in relation to the U.S. dollar. Furthermore, to the extent the Company engages in international sales
denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make the Company’s products less competitive in international markets. Although the Company will continue to monitor its exposure to
currency fluctuations, and, when appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, there is no assurance that exchange rate fluctuations will not adversely affect financial results in the
future.
Interest Rate Risk
As of September 30, 2002, the Company had cash and cash equivalents of $25.3 million. Declines in interest rates will reduce interest income from short-term investments.
Based upon the balance of cash and cash
15
equivalents at September 30, 2002, a change in interest rates of 0.5% would cause a corresponding change in annual interest income of approximately $0.1 million. At September 30, 2002, the
Company also had $10.3 million in short-term investments, consisting primarily of short-term bond funds, with an average maturity of three years. A portion of these investments are in fixed rate securities. The fair value of the Company’s fixed
rate investments may be adversely impacted by a rise in interest rates.
Item 4. Controls and Procedures
Within the 90 day period prior to the filing of this report, the Company carried out an evaluation, under the
supervision of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (“Exchange
Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Subsequent to the date of their evaluation, there have been no significant changes in the Company’s internal controls or in other
factors that could significantly affect these controls.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about December 4, 2001, a
putative securities class action, captioned Murphy v. Click Commerce, Inc., et at, Civil Action 01-CV-11234 was filed against the Company, two of the Company’s executive officers and Morgan Stanley & Co., Dain Rauscher Incorporated, Lehman
Brothers, Inc., Deutsche Bank Securities, Inc., and U.S. Bancorp Piper Jaffray, Inc., the underwriters of the Company’s initial public offering, in the United States District Court for the Southern District of New York. The complaint alleges
violations of Section 11 of the Securities Act of 1933 (the “Securities Act”) against all defendants, a violation of Section 15 of the Securities Act against two of the Company’s executive officers and violations of Section 12(a)(2)
of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934, including Rule 10b-5 promulgated thereunder, against the underwriters. The complaint seeks unspecified damages on behalf of a purported class of purchasers of common
stock between June 26, 2000 and December 6, 2000. As of September 30, 2002, various plaintiffs have filed similar actions asserting virtually identical allegations against approximately 300 other companies.
Although some global settlement discussions have taken place among the various affected parties, there have been no significant
developments in the litigation. No discovery has occurred to date, and no dispositive motions have been filed. The Company intends to defend the lawsuit vigorously. No assurance can be given, however, that this matter will be resolved in the
Company’s favor.
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
September 30, 2002, the Company had spent approximately $16.8 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
August 30, 2002, the Company held a Special Meeting of Shareholders.
At the meeting, an amendment to the
Company’s Certificate of Incorporation to affect a reverse stock split ranging from 1-for-2 to 1-for-5 as determined by the Board of Directors was approved. The votes cast were as follows:
For approval of amendment to certificate of incorporation to effect a reverse stock split:
| Votes for: |
|
36,818,816 |
| Votes against: |
|
39,893 |
| Votes withheld: |
|
10,210 |
Item 5. Other Information
Not applicable.
17
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
|
| |
| 3.4 |
|
Amendment to Certificate of Incorporation of Click Commerce, Inc. |
| |
| 99.3 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| 99.4 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
Report on Form 8-K dated September 4, 2002 the Company’s approval and authorization of a 1-for-5 reverse stock split
of the Company’s common stock.
18
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/ MICHAEL W.
NELSON
|
| |
|
Michael W. Nelson Vice President,
Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
Date: November 14, 2002
19
CERTIFICATIONS
I, Michael W. Ferro, Jr., certify that:
1. I have reviewed this quarterly report on
Form 10-Q of Click Commerce, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s
other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal controls; and
6. The registrant’s other certifying officers and
I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
Date
November 14, 2002
| |
|
/s/ MICHAEL W. FERRO, JR.
|
| |
|
Michael W. Ferro, Jr. |
| |
|
Chief Executive Officer and Chairman of the Board of Directors |
20
I, Michael W. Nelson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Click Commerce, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial
data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date
November
14, 2002
| |
|
/s/ MICHAEL W. NELSON
|
| |
|
Michael W. Nelson |
| |
|
Vice President, Chief Financial Officer and Treasurer |
21