UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended December 31, 2007
OR
¨
|
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 000-29357
Chordiant
Software, Inc.
(Exact
name of Registrant as specified in its Charter)
Delaware
|
93-1051328
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
Number)
|
20400
Stevens Creek Boulevard, Suite 400
Cupertino,
CA 95014
(Address
of Principal Executive Offices including Zip Code)
(408)
517-6100
(Registrant’s
Telephone Number, Including Area Code)
(Former
name, former address and former fiscal year if changed since last
report)
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 ¨
Indicate
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” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act). Yes ¨ No x
As
of January 31, 2008, there were 33,212,666 shares of the registrant’s common
stock outstanding.
CHORDIANT
SOFTWARE,
INC.
QUARTERLY
REPORT ON FORM 10-Q FOR
THE PERIOD ENDED DECEMBER 31, 2007
PART I.
FINANCIAL
INFORMATION
|
Page No.
|
|
|
|
Item 1.
|
|
3
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
Item 2.
|
|
26
|
|
|
|
Item 3.
|
|
41
|
|
|
|
Item 4.
|
|
42
|
|
|
|
PART II.
OTHER
INFORMATION
|
|
|
|
|
Item 1.
|
|
43
|
|
|
|
Item 1A.
|
|
43
|
|
|
|
Item 6.
|
|
52
|
|
|
|
|
|
52
|
|
|
|
PART
I - FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED BALANCE
SHEETS
(In
thousands, except per share
data)
(Unaudited)
|
|
|
December
31,
2007
|
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
76,212
|
|
|
$
|
77,987
|
|
Marketable
securities
|
|
|
10,885
|
|
|
|
12,159
|
|
Restricted
cash
|
|
|
48
|
|
|
|
46
|
|
Accounts
receivable,
net
|
|
|
21,091
|
|
|
|
27,381
|
|
Prepaid
expenses and other current
assets
|
|
|
7,347
|
|
|
|
5,306
|
|
Total
current
assets
|
|
|
115,583
|
|
|
|
122,879
|
|
Restricted
cash—long-term
|
|
|
267
|
|
|
|
265
|
|
Property
and equipment,
net
|
|
|
3,957
|
|
|
|
3,638
|
|
Goodwill
|
|
|
32,044
|
|
|
|
32,044
|
|
Intangible
assets,
net
|
|
|
2,423
|
|
|
|
2,725
|
|
Other
assets
|
|
|
2,078
|
|
|
|
3,264
|
|
Total
assets
|
|
$
|
156,352
|
|
|
$
|
164,815
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,469
|
|
|
$
|
8,080
|
|
Accrued
expenses
|
|
|
13,703
|
|
|
|
13,804
|
|
Deferred
revenue, including
related party balances of $52and
$116at
December31,
2007and September 30,
2007,
respectively
|
|
|
38,002
|
|
|
|
44,548
|
|
Total
current
liabilities
|
|
|
60,174
|
|
|
|
66,432
|
|
Deferred
revenue—long-term
|
|
|
19,109
|
|
|
|
23,434
|
|
Restructuring
costs, net of
current portion
|
|
|
837
|
|
|
|
942
|
|
Other
long-term
liabilities
|
|
|
870
|
|
|
|
646
|
|
Total
liabilities
|
|
|
80,990
|
|
|
|
91,454
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
(Notes 8,
9 and 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value;
51,000 shares authorized; none issued and outstanding at December
31, 2007and
September 30,
2007
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par
value; 120,000
shares
authorized;
33,309 and
33,221shares
issued and outstanding at
December
31, 2007and
September 30,
2007,
respectively
|
|
|
33
|
|
|
|
33
|
|
Additional
paid-in
capital
|
|
|
297,412
|
|
|
|
295,650
|
|
Accumulated
deficit
|
|
|
(226,710
|
)
|
|
|
(226,915
|
)
|
Accumulated
other comprehensive
income
|
|
|
4,627
|
|
|
|
4,593
|
|
Total
stockholders’
equity
|
|
|
75,362
|
|
|
|
73,361
|
|
Total
liabilities and
stockholders’ equity
|
|
$
|
156,352
|
|
|
$
|
164,815
|
|
The
accompanying notes are an integral
part of these Condensed
Consolidated
Financial
Statements.
CHORDIANT
SOFTWARE,
INC.
(In
thousands, except per share
data)
(Unaudited)
|
|
Three
Months Ended
December
31,
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
License
|
|
$
|
8,807
|
|
|
$
|
7,162
|
|
Service,
including related party
items aggregating $64
and $63
for
the three months ended
December
31,
2007and
2006,
respectively.
|
|
|
20,327
|
|
|
|
15,777
|
|
Total
revenue
|
|
|
29,134
|
|
|
|
22,939
|
|
Cost
of
revenues:
|
|
|
|
|
|
|
|
|
License
|
|
|
334
|
|
|
|
454
|
|
Service,
including
related party items
aggregating $177
for the three
months
ended December
31, 2006
|
|
|
8,478
|
|
|
|
7,466
|
|
Amortization
of intangible
assets
|
|
|
303
|
|
|
|
303
|
|
Total
cost of
revenue
|
|
|
9,115
|
|
|
|
8,223
|
|
Gross
profit
|
|
|
20,019
|
|
|
|
14,716
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Sales
and
marketing
|
|
|
8,903
|
|
|
|
7,264
|
|
Research
and
development
|
|
|
6,725
|
|
|
|
6,296
|
|
General
and
administrative
|
|
|
5,003
|
|
|
|
5,611
|
|
Restructuring
expense
|
|
|
—
|
|
|
|
6,472
|
|
Total
operating
expense
|
|
|
20,631
|
|
|
|
25,643
|
|
Loss
from
operations
|
|
|
(612
|
)
|
|
|
(10,927
|
)
|
Interest
income,
net
|
|
|
835
|
|
|
|
304
|
|
Other
income (expense),
net
|
|
|
134
|
|
|
|
(15
|
)
|
Income
(loss)before
income
taxes
|
|
|
357
|
|
|
|
(10,638
|
)
|
Provision
for income
taxes
|
|
|
152
|
|
|
|
111
|
|
Net
income
(loss)
|
|
$
|
205
|
|
|
$
|
(10,749
|
)
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)per
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.34
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in
computing net income
(loss) per
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
33,292
|
|
|
|
31,725
|
|
Diluted
|
|
|
33,864
|
|
|
|
31,725
|
|
The
accompanying notes are an integral
part of these Condensed
Consolidated
Financial
Statements.
CHORDIANT
SOFTWARE,
INC.
(In
thousands)
(Unaudited)
|
|
Three
Months Ended
December31,
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net
income
(loss)
|
|
$
|
205
|
|
|
$
|
(10,749
|
)
|
Adjustments
to reconcile net
income (loss)
to
net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
397
|
|
|
|
350
|
|
Amortization
of intangibles and
capitalized software
|
|
|
570
|
|
|
|
528
|
|
Non-cash
stock-based compensation
expense
|
|
|
1,175
|
|
|
|
976
|
|
Provision
for doubtful accounts
and sales returns
|
|
|
38
|
|
|
|
111
|
|
Loss
on disposal of
assets
|
|
|
—
|
|
|
|
489
|
|
Accretion
of discounts on
marketable securities
|
|
|
(32
|
)
|
|
|
—
|
|
Other
non-cash
charges
|
|
|
—
|
|
|
|
445
|
|
Changes
in assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
6,255
|
|
|
|
(22,698
|
)
|
Prepaid
expenses and other current
assets
|
|
|
(2,013
|
)
|
|
|
(3,497
|
)
|
Other
assets
|
|
|
999
|
|
|
|
(263
|
)
|
Accounts
payable
|
|
|
396
|
|
|
|
(2,298
|
)
|
Accrued
expenses, other long-term
liabilities and
restructuring
|
|
|
23
|
|
|
|
7,273
|
|
Deferred
revenue
|
|
|
(10,664
|
)
|
|
|
31,727
|
|
Net
cash provided by (used
for) operating
activities
|
|
|
(2,651
|
)
|
|
|
2,394
|
|
Cash
flows from investing
activities:
|
|
|
|
|
|
|
|
|
Property
and equipment
purchases
|
|
|
(723
|
)
|
|
|
(1,058
|
)
|
Capitalized
product development
costs
|
|
|
(66
|
)
|
|
|
—
|
|
Increase
inrestricted
cash
|
|
|
(2
|
)
|
|
|
(81
|
)
|
Purchases
of marketable securities
and short-term
investments
|
|
|
(4,340
|
)
|
|
|
—
|
|
Proceeds
from maturities of
marketable
securities
and short-term
investments
|
|
|
5,647
|
|
|
|
—
|
|
Net
cash provided by (used for)
investing activities
|
|
|
516
|
|
|
|
(1,139
|
)
|
Cash
flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock
options
|
|
|
569
|
|
|
|
221
|
|
Payment
on capital
leases
|
|
|
—
|
|
|
|
(56
|
)
|
Excess
tax benefits from
stock-based compensation
|
|
|
17
|
|
|
|
—
|
|
Net
cash provided by financing
activities
|
|
|
586
|
|
|
|
165
|
|
Effect
of exchange rate
changes
|
|
|
(226
|
)
|
|
|
688
|
|
Net
increase (decrease)
in
cash and cash
equivalents
|
|
|
(1,775
|
)
|
|
|
2,108
|
|
Cash
and cash equivalents at
beginning of period
|
|
|
77,987
|
|
|
|
45,278
|
|
Cash
and cash equivalents at end
of period
|
|
$
|
76,212
|
|
|
$
|
47,386
|
|
The
accompanying notes are an integral
part of these Condensed
Consolidated
Financial
Statements.
CHORDIANT
SOFTWARE,
INC.
(UNAUDITED)
NOTE
1—THE COMPANY
Chordiant
Software, Inc. or the Company,
or Chordiant is an enterprise software vendor that offers software solutions
for
global business-to-consumer companies that seek to improve the quality of
their
customer interactions and to reduce costs through increased employee
productivity and process efficiencies. The Company concentrates on serving
global customers in banking, insurance, healthcare, communications, retail and
other consumer direct
industries.
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis
of
presentation
The
accompanying Condensed Consolidated
Financial Statements have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission, orSEC.
Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United Stateshave
been condensed or omitted pursuant
to such rules and regulations. The September 30, 2007 Condensed Consolidated
Balance Sheetswas
derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States. However, the Company
believes that the disclosures are adequate to make the information presented
not
misleading. These unaudited Condensed Consolidated Financial Statements should
be read in conjunction with the audited
Consolidated
Financial
Statements
and related Notes
included in the Company’sAnnual
Report on Form 10-K
for the year ended September 30,
2007, or 2007 Form 10-K,
filed
with the
SEC.
All
adjustments, consisting of only
normal recurring adjustments, which in the opinion of management, are necessary
to state fairly the financial position, results of operations and cash flows
for
the interim periods presented have been made. The results of operations for
interim periods are not necessarily indicative of the results expected for
the
full fiscal year or for any future period.
Reclassifications
Certain
reclassifications have been made
to prior period balances to conform to the current period’s
presentation.
Principles
of
consolidation
The
accompanying unaudited Condensed
Consolidated Financial Statements include the accountsof
the Companyand itswholly-owned
subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Use
of estimates
The
preparation of Condensed
Consolidated Financial Statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date
of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods.
On
an on-going basis, the Company
evaluates the estimates, including those related to the allowance for doubtful
accounts, valuation of stock-based compensation, valuation of goodwill and
intangible assets, valuation of deferred tax assets, restructuring expenses,
contingencies, Vendor
Specific
Objective
Evidence,
or VSOE, of fair value in multiple element arrangements
and the
estimates associated with the percentage-of-completion method of accounting
for
certain of our revenue contracts. The Company bases these estimates on
historical experience and on various other assumptions that are believed
to be
reasonable. Actual results may differ from these estimates under different
assumptions or conditions.
Revenue
recognition
The
Company derives revenue from
licensing software and related services, which include assistance in
implementation, customization and integration, post-contract customer
support, or PCS,
training and consulting. All revenue
amounts are presented net of sales taxes in the Company’s Condensed Consolidated
Statements of Operations.
The amount and timing of revenue is difficult to predict and any shortfall
in
revenue or delay in recognizing revenue could cause operating results to
vary
significantly from period to period and could result in operating losses.
The
accounting rules related to revenue recognition are complex and are affected
by
the interpretation of the rules and an understanding of industry practices,
both
of which are subject to change. Consequently, the revenue recognition accounting
rules require management to make significant estimates based on
judgment.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Software
license revenue is recognized
in accordance with AICPA’s
Statement
of Position No.
97-2 “Software Revenue Recognition,” as amended by Statement of Position No.
98-9 “Software Revenue Recognition with Respect to Certain Arrangements”
(collectively “SOP 97-2”).
For
arrangements with multiple elements,
the Company recognizes revenue for services and post-contract customer support
based upon the fair value VSOE of the respective elements. The fair value VSOE
of the services element is based upon the standard hourly rates charged for
the
services when such services are sold separately. The fair value VSOE for
annual
post-contract customer support is generally established with the contractual
future renewal rates included in the contracts, when the renewal rate is
substantive and consistent with the fees when support services are sold
separately. When contracts contain multiple elements and fair value VSOE
exists
for all undelivered elements, the Company accounts for the delivered elements,
principally the license portion, based upon the “residual method” as prescribed
by SOP 97-2. In multiple element transactions where VSOE is not established
for
an undelivered element, revenue is recognized upon the establishment of VSOE
for
that element or when the element is delivered.
At
the time a transaction is entered
into, the Company assesses whether any services included within the arrangement
relate to significant implementation or customization essential to the
functionality of our products. For contracts for products that do not involve
significant implementation or customization essential to the product
functionality, the Company recognizes license revenue when there is persuasive
evidence of an arrangement, the fee is fixed or determinable, collection
of the
fee is probable and delivery has occurred as prescribed by SOP 97-2. For
contracts that involve significant implementation or customization services
essential to the functionality of our products, the license and professional
consulting services revenue is recognized using either the
percentage-of-completion method or the completed contract method as prescribed
by Statement of Position No. 81-1, “Accounting for Performance of
Construction-Type and Certain Product-Type Contracts”, or SOP 81-1.
The
percentage-of-completion method is
applied when the Company has the ability to make reasonably dependable estimates
of the total effort required for completion using labor hours incurred as
the
measure of progress towards completion. The progress toward completion is
measured based on the “go-live” date. The “go-live” date is defined as the date
the essential product functionality has been delivered or the application
enters
into a production environment or the point at which no significant additional
Chordiant supplied professional service resources are required. Estimates
are
subject to revisions as the contract progresses to completion and these changes
are accounted for as changes in accounting estimates when the information
becomes known. Information impacting estimates obtained after the balance
sheet
date but before the issuance of the financial statements is used to update
the
estimates. Provisions for estimated contract losses, if any, are recognized
in
the period in which the loss becomes probable and can be reasonably estimated.
When additional licenses are sold related to the original licensing agreement,
revenue is recognized upon delivery if the project has reached the go-live
date,
or if the project has not reached the go-live date, revenue is recognized
under
the percentage-of-completion method. Revenue from these arrangements is
classified as license and service revenue based upon the estimated fair value
of
each element using the residual method.
The
completed contract method is applied
when the Company is unable to obtain reasonably dependable estimates of the
total effort required for completion. Under the completed contract method,
all
revenue and related costs of revenue are deferred and recognized upon
completion.
For
product co-development arrangements
relating to software products in development prior to the consummation of
the
individual arrangements, where the Company retains the intellectual property
being developed, and intends to sell the resulting products to other customers,
license revenue is deferred until the delivery of the final product, provided
all other requirements of SOP 97-2 are met. Expenses associated with these
co-development arrangements are accounted for under SFAS No. 86,
“Accounting for the Costs of Computer Software to Be Sold, Leased,
or
Otherwise Marketed” and are
normally expensed as incurred as they are considered to be research and
development costs that do not qualify for capitalization or
deferral.
Revenue
from subscription or term
license agreements, which include software and rights to unspecified future
products or maintenance, is recognized ratably over the term of the subscription
period. Revenue from subscription or term license agreements, which include
software, but exclude rights to unspecified future products and maintenance,
is
recognized upon delivery of the software if all conditions of recognizing
revenue have been met including that the related agreement is non-cancelable,
non-refundable and provided on an unsupported basis.
For
transactions involving extended
payment terms, the Company deems these fees not to be fixed or determinable
for
revenue recognition purposes and revenue is recognized.
For
arrangements with multiple elements
accounted for under SOP 97-2 where the Company determines it can account
for the
elements separately and the fees are not fixed or determinable due to extended
payment terms, revenue is recognized in the following manner. If the undelivered
element is PCS, or other services, an amount equal to the estimated value
of the
services to be rendered prior to the next payment becoming due is allocated
to
the undelivered services. The residual of the payment is allocated to the
delivered elements of the arrangement.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
For
arrangements with multiple elements
accounted for under SOP 81-1 where the Company determines it can account
for the
elements separately and the fees are not fixed or determinable due to extended
payment terms, revenue is recognized in the following manner. Amounts are
first
allocated to the undelivered elements included in the arrangement, as payments
become due or are received, the residual is allocated to the delivered
elements.
Revenue
for PCSis
recognized ratably over the support
period which ranges from one to five years.
Training
and consulting services revenue
is recognized as such services are performed on an hourly or daily basis
for
time and material contracts. For consulting services arrangements with a
fixed
fee, revenue is recognized on a percentage-of-completion
basis.
For
all sales, either a signed license
agreement or a binding purchase order with an underlying master license
agreement is used as evidence of an arrangement. Sales through third party
systems integrators are evidenced by a master agreement governing the
relationship together with binding purchase orders or order forms on a
transaction-by-transaction basis. Revenues from reseller arrangements are
recognized on the “sell-through” method, when the reseller reports to the
Company the sale of software products to end-users. The Company’s agreements
with customers and resellers do not contain product return
rights.
Collectibility
is assessed based on a
number of factors, including past transaction history with the customer and
the
credit-worthiness of the customer. Collateral is generally not requested
from
customers. If it is determined that the collection of a fee is not probable,
the
revenue is recognized at the time the collection becomes probable, which
is
generally upon the receipt of cash.
Restricted
cash
At
December 31, 2007 and September 30,
2007, restricted cash included
interest-bearing
certificates of
deposit. These restricted
cash balances
serve
as collateral for letters of
credit securing certain lease obligations and PCS obligations.
Concentrations
of credit
risk
Financial
instruments that potentially
subject the Company to concentrations of credit risk consist of cash, cash
equivalents, restricted cash, marketable securities and accounts receivable.
To
date, the Company has invested excess funds in money market accounts, commercial
paper, corporate bonds, certificates-of-deposit, and marketable securities
with
maturities of less than one year. The Company hasdepositedcash
and cash equivalents and marketable
securities with various high quality institutions domestically and
internationally. The Company’s marketable securities are composed of investment
instruments that are highly rated.
The
Company’s accounts receivable are
derived from sales to customers located in North America, Europe,
and elsewhere in the world. The
Company performs ongoing credit evaluations of customers’ financial condition
and, generally, requires no collateral from customers. The Company maintains
an
allowance for doubtful accounts when deemed necessary. The Company estimates
its
allowance for doubtful accounts by analyzing accounts receivable for specific
risk accounts as well as providing for a general allowance amount based on
historical bad debt and billing dispute percentages. The estimate considers
historical bad debts, customer concentrations, customer credit-worthiness
and
current economic trends. To date, bad debts have not been material and have
been
within management expectations.
The
following table summarizes the
revenues from customers and resellers that accounted for 10% or more of total
revenues:
|
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Citicorp
Credit
Services,
Inc.
|
|
|
22
|
%
|
|
|
13
|
%
|
|
|
International
Business Machines
(“IBM”)
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
Wellpoint,
Inc.
|
|
|
11
|
%
|
|
|
*
|
|
|
|
Lloyds
TSB Bank
plc.
|
|
|
*
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Represents
less
than 10% of total revenues.
As
previously announced, the Company has
agreed to license certain of its software to IBM’s
customers.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
At
December
31,2007,
Wellpoint, Inc. and Citicorp Credit
Services, Inc. accounted
for 27%
and 13%,of
our accounts receivable, respectively.
At
September 30, 2007,
Wellpoint,Inc.,
IBM and Citicorp Credit Services,
Inc. accounted
for approximately
28%,17%
and 15% of our accounts receivable,
respectively.
Research
and
Development
Costs
incurred in the research and
development of new products and enhancements to existing products are charged
to
expense as incurred until the technological feasibility of the product or
enhancement has been established. Technological feasibility of the product
is
determined after the completion of a detailed program design and a determination
has been made that any uncertainties related to high-risk development issues
have been resolved. If the process of developing the product does not include
a
detail program design, technological feasibility is determined only after
completion of a working model. After establishing technological feasibility,
additional development costs incurred through the date the product is available
for general release to customers is capitalized and amortized over the estimated
product life.
When
technological feasibility is
established through the completion of a working model the period of time
between
achieving technological feasibility and the general release of new product
is
generally short and software development costs qualifying for capitalization
have historically been insignificant.
During
the quarter ended September
30, 2006,
technological feasibility to port an
existing product to a new platform was established through the completion
of a
detailed program design. Costs aggregating$0.5
million associated with this
producthave been
capitalized and included in Other Assets as of September 30, 2007.
This product was completed and became
available for
general release in July 2007,accordingly,the
capitalized
costsare
being amortizedusing
the straight-line method over the
remaining estimated economic life of the product which is 36 months. For
the three months ended December
31, 2007,
amortization expense, included in cost
of revenue for
licenses, related to this product was less than $0.1 million. As
of December 31, 2007, the unamortized
expense was $0.4 million.
During
the quarter ended
September 30, 2004, technological feasibility for an acquired banking
product was established through the completion of a detailed program design.
Costs aggregating $2.7 million associated with this product have been
capitalized and included in Other Assets as of September 30, 2005. During
the quarter ended September 30,
2005, the product became available
for general release and, accordingly, the costs capitalized commenced to
be
amortized. The capitalized costs are being amortized using the straight-line
method over the remaining estimated economic life of the product which is
36
months. For the three
months
ended December
31, 2007
and 2006, amortization expense,
included in cost of revenue for
licenses, related to this product was $0.2 millionfor
each of the quarter.As
of December 31, 2007, the unamortized
expense was $0.5 million.
Income
Taxes
Income
taxes are accounted for using an
asset and liability approach, which requires the recognition of taxes payable
or
refundable for the current period and deferred tax liabilities and assets
for
the future tax consequences of events that have been recognized in our financial
statements or tax returns. The measurement of current and deferred tax
liabilities and assets is based on provisions of the enacted tax law; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount
of
any tax benefits that, based on available evidence, are not expected to be
realized.
Effective
October 1, 2007, the Company adopted Financial Accounting Standards
Interpretation, No. 48 “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” or FIN 48. FIN 48 prescribes a
recognition threshold and measurement guidance for the financial statement
reporting of uncertain tax positions taken or expected to be taken in a
company’s income tax return. The application of FIN 48 is explained in Note 11
to the Condensed Consolidated Financial Statements.
Net
income (loss) per
share
The
Company
computes net income (loss) per share in accordance with Statement of Financial
Accounting Standard, or SFAS, No. 128, “Earnings per Share”, or SFAS
128. Under the provisions of SFAS 128, basic net income (loss) per share
is
computed by dividing the net income (loss) by the weighted average number
of
common shares outstanding during the period. Diluted net income (loss) per
share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and potentially dilutive shares outstanding during
the
period. Potentially dilutive shares, which consist of incremental shares
issuable upon the exercise of stock options and unvested restricted stock
(using
the treasury stock method), are included in the calculation of diluted net
income per share, in periods in which net income is reported, to the extent
such
shares are dilutive. In accordance with SFAS 123(R), unvested performance
based
restricted stock units are not included in the computation of earnings per
share
as they are considered contingently issuable shares. The calculation of diluted
net loss per share excludes potential common shares as their effect is
anti-dilutive for the three months ended December 31, 2006.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The
following table sets forth the
computation of basic and diluted netincome (loss)per
share for the periods indicated (in
thousands, except for per share data):
|
|
Three Months Ended
December31,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)
available
to common
stockholders
|
$
|
205
|
|
|
$
|
(10,749
|
)
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock
outstanding
|
|
33,292
|
|
|
|
31,882
|
|
|
|
Common
stock subject to
repurchase
|
|
—
|
|
|
|
(157
|
)
|
|
|
Denominator
for basic
calculations
|
|
33,292
|
|
|
|
31,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive potential
common shares
|
|
572
|
|
|
|
—
|
|
(*)
|
|
Denominator
for diluted
calculations
|
|
33,864
|
|
|
|
31,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)per
share—basic
|
$
|
0.01
|
|
|
$
|
(0.34
|
)
|
|
|
Net
income
(loss)
per
share—diluted
|
$
|
0.01
|
|
|
$
|
(0.34
|
)
|
|
(*)
–
Dilutive
potential common shares are
excluded from the calculation of diluted net loss per share.
The
following table sets forth the
potential total common shares that are excluded from the calculation of diluted
net loss per share as their effect is anti-dilutive as of the dates indicated
(in thousands):
|
|
|
December
31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock
options
|
|
3,544
|
|
|
|
|
|
|
|
Restricted
stock
|
|
157
|
|
|
|
|
|
|
|
|
|
3,701
|
|
|
|
|
|
|
Recent
Accounting
Pronouncements
In
November 2007, the Securities and
Exchange Commission, or SEC, issued Staff Accounting Bulletin, orSAB, No. 109, “Written Loan Commitments
Recorded at Fair Value Through Earnings”. SAB 109 provides guidance on written
loan commitments that the expected net future cash flows related to the
associated servicing of the loan should be included in the measurement of
all
written loan commitments that are accounted for at fair value through earnings.
The guidance is applicable for fiscal years beginning after December 15,
2007.
The Company has evaluated the new standard and has determined that it will
not
have a significant impact on the determination or reporting of our financial
results.
In
December 2007, the SEC issued SAB No.
110, “Share-Based Payment”. SAB 110 allows for the continued use of the
“simplified method” allowed under SAB 107 in developing an estimate of expected
term “plain vanilla” share options in accordance with SFAS 123(R). The guidance
is applicable after December 31, 2007. The Company has evaluated the new
standard and has determined that it will not have a significant impact on
the
determination or reporting of our financial results.
In
December 2007, the Financial
Accounting Standards Board, or FASB, issued SFAS
No.141(R), “Business
Combinations”, or SFAS
141(R). SFAS
141(R) replaces SFAS
No. 141. SFAS 141(R)establishes
principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non controlling
interest in the acquiree and the goodwill acquired. The Statement also
establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. SFAS 141(R)is
effective for fiscal years beginningafter
December 15, 2008. The
Company is currently evaluatingthe effects of implementing
this new
standard.
In
December
2007, the FASB issued SFAS No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of Accounting Research Bulletin No. 51”, or SFAS 160. SFAS 160
establishes accounting and reporting standards for
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
ownership
interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in
a
parent’s ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. The Statement also establishes
reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of
the
noncontrolling owners. SFAS No. 160
is effective for fiscal years beginningafter
December 15,
2008. The
Company is currently
evaluatingthe effects of
implementing this new standard.
NOTE
3—MARKETABLE
SECURITIES
The
Company has the following
marketable
securities (in
thousands):
|
|
December 31,
2007
|
|
|
|
|
Amortized
cost
|
|
|
|
Gross
Unrealized
Gain
|
|
|
|
Gross
Unrealized
Loss
|
|
|
|
Fair
Value
|
|
|
|
Marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
$
|
1,636
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,636
|
|
|
|
Corporate
bonds
|
|
9,246
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
9,249
|
|
|
|
Total
|
$
|
10,882
|
|
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
$
|
10,885
|
|
|
|
|
|
|
|
|
September
30,
2007
|
|
|
|
|
Amortized
cost
|
|
|
|
Gross
Unrealized
Gain
|
|
|
|
Gross
Unrealized
Loss
|
|
|
|
Fair
Value
|
|
|
|
Marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
$
|
3,008
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
3,007
|
|
|
|
Corporate
bonds
|
|
9,153
|
|
|
|
3
|
|
|
|
(4
|
)
|
|
|
9,152
|
|
|
|
Total
|
$
|
12,161
|
|
|
$
|
3
|
|
|
$
|
(5
|
)
|
|
$
|
12,159
|
|
|
As
of December 31, 2007 and September
30, 2007, all marketable securities have maturity dates less than one year.
For
the three months ended December 31, 2007 and September 30, 2007, no gains
or
losses were realized on the sale of marketable securities.
NOTE
4—BALANCE SHEET
COMPONENTS
Accounts
receivable, net
Accounts
receivable, net,consists
of the following (in
thousands):
|
|
|
December
31,
2007
|
|
|
|
September
30,
2007
|
|
|
|
Accounts
receivable,
net:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
$
|
21,194
|
|
|
$
|
27,546
|
|
|
|
Less:
allowance for doubtful
accounts
|
|
(103
|
)
|
|
|
(165
|
)
|
|
|
|
$
|
21,091
|
|
|
$
|
27,381
|
|
|
Prepaid
expenses and other current
assets
Prepaid
expense and other current assets
consist of the following (in thousands):
|
|
|
December
31,
2007
|
|
|
|
September
30,
2007
|
|
|
|
Prepaid
expense and other current
assets:
|
|
|
|
|
|
|
|
|
|
Prepaid
commissions and
royalties
|
$
|
4,363
|
|
|
$
|
3,104
|
|
|
|
Other
prepaid expenses and current
assets
|
|
2,984
|
|
|
|
2,202
|
|
|
|
|
$
|
7,347
|
|
|
$
|
5,306
|
|
|
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Property
and equipment, net
Property
and equipment, net,consists
of the following (in
thousands):
|
|
|
December
31,
2007
|
|
|
|
September
30,
2007
|
|
|
|
Property
and equipment,
net:
|
|
|
|
|
|
|
|
|
|
Computer
hardware (useful lives of
3 years)
|
$
|
4,478
|
|
|
$
|
4,167
|
|
|
|
Purchased
internal-use software
(useful lives of 3 years)
|
|
3,017
|
|
|
|
2,685
|
|
|
|
Furniture
and equipment (useful
lives of 3 to 7 years)
|
|
745
|
|
|
|
739
|
|
|
|
Leasehold
improvements (shorter of
7 years or the term of the lease)
|
|
2,903
|
|
|
|
2,883
|
|
|
|
|
|
11,143
|
|
|
|
10,474
|
|
|
|
Accumulated
depreciation and
amortization
|
|
(7,186
|
)
|
|
|
(6,836
|
)
|
|
|
|
$
|
3,957
|
|
|
$
|
3,638
|
|
|
Intangible
assets, net
Intangible
assets, net,consist
of the following (in
thousands):
|
|
December
31,
2007
|
|
September
30,
2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Carrying
Amount
|
|
|
|
Gross
Carrying
Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Carrying
Amount
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technologies
|
|
$
|
6,904
|
|
|
$
|
(5,092
|
)
|
|
$
|
1,812
|
|
|
$
|
6,904
|
|
|
$
|
(4,869
|
)
|
|
$
|
2,035
|
|
Customer
list and
trade-names
|
|
|
2,731
|
|
|
|
(2,120
|
)
|
|
|
611
|
|
|
|
2,731
|
|
|
|
(2,041
|
)
|
|
|
690
|
|
|
|
$
|
9,635
|
|
|
$
|
(7,212
|
)
|
|
$
|
2,423
|
|
|
$
|
9,635
|
|
|
$
|
(6,910
|
)
|
|
$
|
2,725
|
|
All
of the Company’sacquired
intangible assets are subject
to amortization and are carried at cost less accumulated amortization.
Amortization is computed on a straight line basis over the estimated useful
lives which are as follows: Developed technologies—one and one half
to five years; trade-names—three to five years; customer list—three to five
years. Aggregate amortization expense for intangible assets totaled $0.3
million
for each of the three
monthsended December 31,
2007 and 2006, respectively. The Company expects amortization expense on
acquired intangible assets to be $0.9 million for the remainder of fiscal
year
2008, $1.2 million in fiscal year 2009 and $0.3 million in fiscal year
2010.
Other
assets
Other
assets consist of the following
(in thousands):
|
|
|
December
31,
2007
|
|
|
|
September
30,
2007
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Long-term
accounts
receivable
|
$
|
—
|
|
|
$
|
984
|
|
|
|
Other
assets
|
|
2,078
|
|
|
|
2,280
|
|
|
|
|
$
|
2,078
|
|
|
$
|
3,264
|
|
|
The
long-term accounts receivable
balance represents a receivable from a single customer related to a sale
transaction that occurred during the quarter ended December 31, 2006. This
amount represents the third and final payment which is due in the quarter
ending
December 2008. All revenue
associated with this receivable hasbeen
deferred and will not be recognized
until the payment becomes due. As of December 31, 2007, the receivable has
been recorded as a
current accounts receivable.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Accrued
expenses
Accrued
expenses consist of the
following (in thousands):
|
|
|
December
31,
2007
|
|
|
|
September
30,
2007
|
|
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
Accrued
payroll, payroll taxes and
related expenses
|
$
|
7,842
|
|
|
$
|
6,781
|
|
|
|
Accrued
restructuring expenses,
current portion (Note 5)
|
|
1,721
|
|
|
|
3,044
|
|
|
|
Accrued
third party consulting
fees
|
|
724
|
|
|
|
1,264
|
|
|
|
Accrued
income, sales and other
taxes
|
|
1,920
|
|
|
|
1,143
|
|
|
|
Other
accrued
liabilities
|
|
1,496
|
|
|
|
1,572
|
|
|
|
|
$
|
13,703
|
|
|
$
|
13,804
|
|
|
NOTE
5—RESTRUCTURING
Restructuring
Costs
Through
December
31, 2007,the Company implementedcertain
restructuring plans to, among
other things, reduce its workforce and consolidate facilities. Restructuring
and
asset impairment expenses
have been recorded to align the
Company’s cost structure with changing market conditions and to create a more
efficient organization. The Company’s restructuring expenses
have been comprised primarily of: (i)
severance and termination benefit costs related to the reduction of our
workforce; and (ii) lease termination costs and costs associated with
permanently vacating certain facilities. The Company accounted for each of
these
costs in accordance with SFAS No. 146, “Accounting
for Costs Associated with
Exit or Disposal Activities” or previous guidance under Emerging Issues Task
Force 94-3 “Liabilities
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an
Activity (including Certain Costs Incurred in a Restructuring)”, or EITF 94-3.
Retroactive
application of SFAS 146 to
periods prior to January 1, 2003, was prohibited; accordingly, the accrual
relating to facilities vacated prior to the effective date of SFAS 146 continues
to be accounted for in accordance with the guidance of EITF 94-3. Accruals
for
facilities that were restructured prior to 2003 do not reflect any adjustments
relating to the estimated net present value of cash flows associated with
the
facilities.
For
each ofthe periods presented
herein,
restructuring expenses
consist solely of:
|
•
|
Severance
and
Termination Benefits—These costs represent severance and payroll taxes
related to restructuring
plans.
|
|
•
|
Excess
Facilities—These costs represent future minimum lease payments related to
excess and abandoned office space under leases, the disposal of
property
and equipment including facility leasehold improvements, and net
of
estimated sublease income.
|
As
of December 31, 2007,
the total restructuring accrual
consisted of the following (in thousands):
|
|
Current
|
|
Non-Current
|
|
Total
|
|
|
Severance
and termination
benefits
|
$
|
97
|
|
$
|
—
|
|
$
|
97
|
|
|
Excess
facilities
|
|
1,624
|
|
|
837
|
|
|
2,461
|
|
|
Total
|
$
|
1,721
|
|
$
|
837
|
|
$
|
2,558
|
|
As
of December 31, 2007,
and September 30, 2007,
$1.7 million
and $3.0 million
related to the restructuring
reserve are included in the Accrued
Expenses
line item on the Condensed
Consolidated Balance
Sheets,
respectively. The allocation between
current portion and long-term
portion is based on the current
lease agreements.
The
Company expects the remaining
severance and termination benefit accrual to be
paid
by September 30,
2008.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The
excess
facilities reserve relates to two
facilities: one located in the United Kingdomand
one in Boston,
Massachusetts.
The Company expects to
pay the excess
facilities amounts related to the restructured or vacated leased office space
as
follows (in thousands):
|
Fiscal
Year Ended September 30,
|
|
|
|
|
|
Total
Future
Minimum
Lease
Payments
|
|
|
|
|
|
|
|
2008
(remaining
nine
months)
|
|
|
|
|
$
|
1,519
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
412
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
405
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
2,461
|
|
|
|
|
|
|
Included
in the future minimum lease
payments schedule above is an offset of $0.8million
of contractually committed
sublease rental income for the Bostonfacility.
In
November 2007, the Company negotiated
a break clause in the United Kingdomlease
allowing for an early termination
of the respective facility which will release the Company of any future rent
liabilities subsequent to January 2008. The scheduled lease payments shown
in
the table above reflect apayment
of $1.2million
in the second quarter of fiscal
year 2008 associated with the early termination of the United Kingdomlease.
Subsequent
to December 31, 2007 and
as of the date of the
filing of this Form 10-Q, the Company has paid its final lease
payment for the
United Kingdomlease
and has been released from any
future rent
liabilities.
Fiscal
Year 2007
Restructuring
In
October 2006, the Company initiated a
restructuring plan intended to align its resources and cost structure with
expected future revenues. The restructuring plan included a balancing of
service
resources worldwide, elimination of duplicative functions internationally,
and a
shift in the U.S.field
organization toward a focus on
domain–based sales and pre-sales teams. As a result of the restructuring plan,
management undertook a reduction of 33 positions or approximately 10% of
the
Company’s workforce and consolidation of the European headquarters in the
United Kingdomand
the closure of the Franceoffice,
or 2007 Restructuring. As
part of the 2007
Restructuring, the Company
initially
incurred
a one-time restructuring
expenseof
$6.5million
for severance and termination
benefits, and excess facilities expensed
to Restructuring
Expense in the Condensed
Consolidated Statements
of
Operations. The Company accrued lease costs pertaining to the consolidation
of
excess facilities relating to lease terminations and non-cancelable lease
costs.
The Company was able
to
terminate the Francefacility
lease during the year-ended
September 30, 2007. In the quarter ended December 31, 2007, the Company negotiated
an early
termination option for the United Kingdomlease
which
terminatedthe
lease inJanuary
2008. Managementbelieves the current
restructure reserve
amount is sufficient to meet all payments required as a result of the
anticipated early termination.
The
following table summarizes the
activity related to the 2007 Restructuring(in
thousands):
|
|
|
Excess
Facilities
|
|
|
|
Reserve
balance as of September
30, 2007
|
$
|
2,526
|
|
|
|
Non-cash
|
|
(62
|
)
|
|
|
Cash
paid
|
|
(1,282
|
)
|
|
|
Reserve
balance as of December
31, 2007
|
$
|
1,182
|
|
|
Fiscal
Year 2005
Restructuring
In
May 2005, the Company appointed a
task force to improve profitability and control expenses. The goal of the
task
force was to create a better alignment of functions within the Company, to
make
full utilization of the Company’s India development center, to develop a closer
relationship between the Company’s field operations and customers, to review the
sales and implementation models, as well adjust as the organization model
to
flatten management levels, to review the Company’s product line, and to enhance
the Company’s business model for profitability and operating leverage. This work
resulted in an approximate 10% reduction in the Company’s workforce, or
2005 Restructuring,and in July 2005 affected
employees were
notified. As part of the
2005 Restructuring, the
Company incurred a one-time restructuring charge of $1.1 million in the fourth
quarter ended September 30, 2005 for severance and termination
benefits.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The
following table summarizes the
activity related to the 2005 Restructuring
(in
thousands):
|
|
|
Severance
and
Termination
Benefits
|
|
|
|
Reserve
balance as of September
30, 2007
|
$
|
100
|
|
|
|
Non-cash
|
|
(3
|
)
|
|
|
Cash
paid
|
|
—
|
|
|
|
Reserve
balance as of December
31, 2007
|
$
|
97
|
|
|
Prior
Restructurings
During
fiscal year 2002, based upon
the Company’scontinued
evaluation of economic
conditions in the information technology industry and our expectations regarding
revenue levels, the Company
restructured
several areas
so as to
reduce expenses and improve revenue
per employee, or 2002
Restructuring. As part of
2002 Restructuring,
the
Companyrecorded a total workforce
reduction
expense relating to severance and termination benefits of approximately $2.0
million and $3.8 million for years ended December 31, 2003 and
2002, respectively. In addition to
these costs, the
Companyaccrued lease costs
related to excess facilities of $0.2 million and $2.8 million during the
years
ended December 31, 2003 and 2002, respectively, pertaining to the
consolidation of excess facilities relating to lease terminations and
non-cancelable lease costs. This expense is net of estimated sublease income
based on current comparable rates for leases in the respective
markets.
During
theyear ended September
30, 2007, the Company
entered into a new
sublease for the last remaining facility lease associated with the 2002
Restructuring.
As a result of
this sublease
rental income being lower than
previously estimated as part of the restructure facility reserve, the Company
recorded an additional $0.4million
of restructuring expense
during the year ended September
30, 2007. The
sublease
term is through the
entire remaining term of
theCompany’s lease
obligation
for the facility.
The
following table summarizes the
activity related to the 2002 Restructuring
(in
thousands):
|
|
|
Excess
Facilities
|
|
|
|
Reserve
balance as of September
30, 2007
|
$
|
1,360
|
|
|
|
Non-cash
|
|
—
|
|
|
|
Cash
paid
|
|
(81
|
)
|
|
|
Reserve
balance as of December
31, 2007
|
$
|
1,279
|
|
|
NOTE
6—COMPREHENSIVE
INCOME
(LOSS)
The
components of comprehensive income
(loss) are as
follows (in
thousands):
|
|
Three Months Ended
December
31,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)
|
$
|
205
|
|
|
$
|
(10,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
Change
in foreign currency
translation
|
|
29
|
|
|
|
452
|
|
|
|
Net
change in unrealized
gain
from
investments
|
|
5
|
|
|
|
—
|
|
|
|
Comprehensive
income
(loss)
|
$
|
239
|
|
|
$
|
(10,297
|
)
|
|
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
7—RELATED
PARTY
TRANSACTIONS
In
August 2005, the Company entered into
a service provider agreement with Infogain Corporation, or Infogain.
Samuel T. Spadafora, aformer
director and executive officer
of the Company,
is a director of Infogain. Mr.
Spadafora terminated his relationship with the Company in November
2006.
Charles
E. Hoffman, a director of the
Company, is the President and Chief Executive Officer of Covad Communications
Group, Inc., or
Covad,
a customer of
ours.
The
following presents the related party
transaction balances (in thousands):
|
|
Revenue
|
|
Cost
of
Revenues
|
|
Payments
|
|
|
|
Three
Months Ended December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Infogain
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
177
|
|
$
|
—
|
|
$
|
117
|
|
|
Covad
|
|
64
|
|
|
63
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
64
|
|
$
|
63
|
|
$
|
—
|
|
$
|
177
|
|
$
|
—
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue
|
|
|
|
|
|
|
|
|
As
of
December
31,
2007
|
|
|
As
of
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infogain
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covad
|
|
52
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
8—BORROWINGS
Revolving
line of
credit
The
Company’s revolving line of credit with Comerica Bank was amended and restated
on March 8, 2006 and was extended to March 7, 2008. The terms of the agreement
include a $5.0 million line of credit, available on a non-formula basis,
and
require the Company to maintain (i) at least a $5.0 million cash balance
in
Comerica Bank accounts, (ii) a minimum quick ratio of 2 to 1, (iii) a liquidity
ratio of at least 1 to 1 at all times, and (iv) subordinate any debt issuances
subsequent to the effective date of the agreement, and certain other covenants.
All assets of the Company have been pledged as collateral on the credit
facility.
The
revolving line of credit contains a provision for a sub-limit of up to $5.0
million for issuances of standby commercial letters of credit. As of December
31, 2007, the Company had utilized $0.3 million of the standby commercial
letters of credit limit of which $0.3 million serves as collateral for computer
equipment leases for Ness (see Note 9). The revolving line of credit also
contains a provision for a sub-limit of up to $3.0 million for issuances
of
foreign exchange forward contracts. As of December 31, 2007, the Company
had not
entered into any foreign exchange forward contracts. Pursuant to the amendment
in March 2006, the Company is required to secure the standby commercial letters
of credit and foreign exchange forward contracts through March 7, 2008. If
these
have not been secured to Comerica Bank’s satisfaction, the Company’s cash and
cash equivalent balances held by Comerica Bank automatically secure such
obligations to the extent of the then continuing or outstanding and undrawn
letters of credit or foreign exchange contracts.
Borrowings
under the revolving line of credit bear interest at the lending bank’s prime
rate. Except for the standby commercial letters of credit, as of December
31,
2007, there were no outstanding balances on the revolving line of
credit.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
9—COMMITMENTS
AND
CONTINGENCIES
Lease
Commitments
The
Company leases its facilities
and certain equipment under
non-cancelable operating leases that expire on various dates through 2013.
Rent
expense is recognized on a straight line basis over the lease
term.
Future
minimum lease payments as of
December 31, 2007
are
as follows (in
thousands):
|
|
|
Operating
Leases
|
|
|
|
Operating
Sublease
Income
|
|
|
|
Net
Operating
Leases
|
|
|
|
Fiscal
year ended September
30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
(remaining nine
months)
|
$
|
3,619
|
|
|
$
|
(185
|
)
|
|
$
|
3,434
|
|
|
|
2009
|
|
2,503
|
|
|
|
(283
|
)
|
|
|
2,220
|
|
|
|
2010
|
|
2,276
|
|
|
|
(293
|
)
|
|
|
1,983
|
|
|
|
2011
|
|
1,671
|
|
|
|
(86
|
)
|
|
|
1,585
|
|
|
|
2012
|
|
802
|
|
|
|
—
|
|
|
|
802
|
|
|
|
Thereafter
|
|
557
|
|
|
|
—
|
|
|
|
557
|
|
|
|
Total
minimum
payments
|
$
|
11,428
|
|
|
$
|
(847
|
)
|
|
$
|
10,581
|
|
|
Operating
lease payments in the table
above include approximately $3.4 millionfor
two
facility operating lease commitments
that are
included in Restructuring
Expense.
One
of the leases is located in
Boston,
Massachusettsand
the other is located in the
United Kingdom.
As
of December 31,
2007, the Company has $0.8 million insublease
income contractually committed
for future periods relating to the Boston,
Massachusetts facility
classified as an operating
lease. See Note
5for
further discussion. The scheduled lease
payments shown in
the table above includes$1.2
million that was paid in
the second quarter of fiscal year
2008 associated with the early termination of the United Kingdomlease.
Subsequent
to December 31, 2007 and
as of the date of the
filing of this Form 10-Q, the Company haspaid its final lease
payment for the
United Kingdom lease
and hasbeen released from
any future rent
liabilities.
Asset
Retirement
Obligations
As
required by SFAS No.143 “Accounting
for Asset Retirement Obligations”, or SFAS
143,and
Interpretation No. 47, “Accounting
for Conditional Asset Retirement Obligations, an interpretation of FASB
Statement No. 143”,
orFIN 47, the Company
recorded an Asset Retirement Obligation (ARO) of approximately $0.3 million
and
a corresponding increase in leasehold improvementsin the fiscal year
2007. SFAS 143 and FIN
47 requires the
recognition of a liability for the fair value of a legally required conditional
asset retirement obligation when incurred, if the liability’s fair value can be
reasonability estimated. The fair value of the liability is added to the
carrying amount of the associated asset and this additional carrying amount
is
amortized over the life of the asset.
The
Company’s asset retirement
obligations are associated with commitments to return property subject to
operating leases to original condition upon lease termination. As of
December
31, 2007, the Company estimated
that gross
expected cash flows of approximately $0.4 million
will be required to fulfill
these obligations.
Asset
retirement obligation payments as
of December 31,
2007 are
estimated
as
follows (in
thousands):
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
Fiscal
year ended September
30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
(remaining nine
months)
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
201
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
350
|
|
|
|
|
|
|
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Other
Obligations
The
Company entered into an agreement
with Ness Technologies Inc.,Ness USA, Inc. (formerlyNess
Global Services, Inc.)and
Ness Technologies India, Ltd.
(collectively, “Ness”), effective December 15,
2003, pursuant to which Ness
provides the
Company’scustomers with
technical product support through a worldwide help desk facility, a sustaining
engineering function that serves as the interface between technical product
support and internal engineering organization, product testing services and
product development services (collectively, the “Services”). The agreement had
an initial term of three years and was extended for twoadditional
year terms.
Under the terms of the agreement, the
Company pays for services rendered on a monthly fee basis, including the
requirement to reimburse Nessfor
approved out-of-pocket expenses. The
agreement may be terminated for convenience by the Company, subject to the
payment of a termination fee. In 2004, 2005, 2006
and 2007
the Company further
expanded its agreement with Ness whereby Nessis
providing certain additional
technical and consulting services. The additional agreements can be cancelled
at
the option of the Company without the payment of a termination fee. The
remaining minimum purchase commitment under these agreements, if Chordiant
was
to cancel the contracts, was approximately $0.7 million
at December 31,
2007. In addition to service
agreements, the Company has also guaranteed certain equipment lease obligations
of Ness(see
Note 8). Nessmay
procure equipment to be used in
performance of the Services, either through leasing arrangements or direct
cash
purchases, for which the Company is obligated under the agreement to reimburse
them. In connection with the procurement of equipment, Ness has entered into
a
36 month equipment lease agreement with IBM India and, in connection with
the
lease agreement the Company has an outstandingstandby
letter of credit in the amount
of $0.3
million
in guarantee of Ness’
financial
commitments under the lease.
Over the term of the lease, the Company’sobligation
to reimburse Ness is
approximately equal to the amount of
the guarantee.
Indemnification
As
permitted under Delawarelaw,
the Company has agreements whereby
the Company has
indemnifiedour
officers, directors and certain
employees for certain events or occurrences while the employee, officer or
director is, or was serving, at the Company’srequest
in such capacity. The term of
the indemnification period is for the officer’s or director’s lifetime. The
maximum potential amount of future payments the Companycould
be required to make under these
indemnification agreements is unlimited; however, the Companyhasa
Director and
Officer insurance policy that limits
the Company’sexposure
and may enable the Company to
recover a portion of any future amounts paid. Future payments may be required
to
defend current and former directors in the derivative class action lawsuits
described in Note 10.As
a result of insurance policy
coverage, the
Companybelievesthe
estimated fair value of these
indemnification agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of December 31, 2007.
The
Company entersinto
standard indemnification agreements
in our ordinary course of business. Pursuant to these agreements, the Company
agrees to indemnify, defend, hold harmless, and to reimburse the indemnified
party for losses suffered or incurred by the indemnified party, generally
the Company’sbusiness
partners or customers, in
connection with any patent, copyright or other intellectual property
infringement claim by any third party with respect to the Company’sproducts.
The term of these
indemnification agreements is generally perpetual after execution of the
agreement. The maximum potential amount of future payments the Company could
be
required to make under these indemnification agreements is unlimited. The
Company has not incurred significant costs to defend lawsuits or settle claims
related to these indemnification agreements. The Company believes the estimated
fair value of these agreements is minimal. Accordingly, the Company
has no liabilities recorded for these agreements as of December 31,
2007.
The
Company enters into arrangements
with our business partners, whereby the business partners agree to provide
services as subcontractors for the Company’simplementations.
The Company may, at
itsdiscretion
and in the ordinary course of
business, subcontract the performance of any of theseservices.
Accordingly, the Company
enters into standard indemnification agreements with itscustomers,
whereby the Company
indemnifies them for other acts, such as personal property damage by
itssubcontractors.
The maximum potential
amount of future payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company has general
and
umbrella insurance policies that may enable the Company to recover a portion
of
any amounts paid. The Company has not incurred significant costs to defend
lawsuits or settle claims related to these indemnification agreements. As
a
result, the Company believes the estimated fair value of these agreements
is
minimal. Accordingly, the Company has no liabilities recorded for these
agreements as of December
31,
2007.
When,
as part of an acquisition, the
Company acquires all of the stock or all of the assets and liabilities of
a
company, the Company may assume the liability for certain events or occurrences
that took place prior to the date of acquisition. The maximum potential amount
of future payments, if any, the Company could be required to make for such
obligations is undeterminable at this time. Accordingly, the Company has
no
amounts recorded for these contingent liabilities as of December 31,
2007.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The
Company warrants that software
products will perform in all material respects in accordance with standard
published specifications and documentation in effect at the time of delivery
of
the licensed products to the customer for a specified period of time.
Additionally, the Company warrants that maintenance and consulting services
will
be performed consistent with
generally accepted industry
standards. If necessary, the Company would provide for the estimated cost
of
product and service warranties based on specific warranty claims and claim
history, however, the Company has not incurred significant expense under
product
or services warranties to date. As a result, the Company believes the estimated
fair value on these warranties is minimal. Accordingly, the Company has no
amounts recorded for these contingent liabilities as of December 31,
2007.
NOTE
10—LITIGATION
IPO
Laddering
Beginning
in July 2001, the Company and
certain of its officers and directors, or individuals,
were named as defendants in
a series of class action stockholder complaints filed in the United States
District Court for the Southern District of New York, now consolidated under
the
caption, “In re ChordiantSoftware,
Inc. Initial Public Offering
Securities Litigation, Case No. 01-CV-6222”. In the amended complaint, filed in
April 2002, the plaintiffs allege that the Company, the individuals,
and the underwriters of the
Company’s initial public offering, or IPO, violated section 11 of the Securities
Act of 1933 and section 10(b) of the Exchange Act of 1934 based on allegations
that the Company’s registration statement and prospectus failed to disclose
material facts regarding the compensation to be received by, and the stock
allocation practices of, the Company’s IPO underwriters. The complaint also
contains claims against the Individuals for control person liability under
Securities Act section 15 and Exchange Act section 20. The plaintiffs seek
unspecified monetary damages and other relief. Similar complaints were filed
in
the same court against hundreds of other public companies, or Issuers, that
conducted IPO’s of their common stock in the late 1990’s or in the year 2000
(collectively, the “IPO Lawsuits”).
In
August 2001, all of the IPO Lawsuits
were consolidated for pretrial purposes before United States Judge Shira
Scheindlin of the Southern District of New York. In July 2002, the Company
joined in a global motion to dismiss the IPO Lawsuits filed by all of the
Issuers (among others). In October 2002, the Court entered an order dismissing
the individuals
from the IPO Lawsuits without
prejudice, pursuant to an agreement tolling the statute of limitations with
respect to the individuals.
In February 2003, the court
issued a decision denying the motion to dismiss against Chordiant and many
of
the other Issuers.
In
June 2003, Issuers and plaintiffs reached a tentative settlement agreement
that
would, among other things, result in the dismissal with prejudice of all
claims
against the Issuers and individuals in the IPO Lawsuits, and the assignment
to
plaintiffs of certain potential claims that the Issuers may have against
the
underwriters. The tentative settlement also provides that, in the event that
plaintiffs ultimately recover less than a guaranteed sum of $1 billion from
the
IPO underwriters, plaintiffs would be entitled to payment by each participating
Issuer’s insurer of a pro rata share of any shortfall in the plaintiffs’
guaranteed recovery. In September 2003, in connection with the possible
settlement, those individuals who had entered tolling agreements with plaintiffs
(described above) agreed to extend those agreements so that they would not
expire prior to any settlement being finalized. In June 2004, Chordiant and
almost all of the other Issuers entered into a formal settlement agreement
with
the plaintiffs. On February 15, 2005, the Court issued a decision
certifying a class action for settlement purposes, and granting preliminary
approval of the settlement subject to modification of certain bar orders
contemplated by the settlement. On August 31, 2005, the Court reaffirmed
class
certification and preliminary approval of the modified settlement in a
comprehensive Order, and directed that Notice of the settlement be published
and
mailed to class members beginning November 15, 2005. On February 24, 2006,
the
Court dismissed litigation filed against certain underwriters in connection
with
the claims to be assigned to the plaintiffs under the settlement. On April
24,
2006, the Court held a Final Fairness Hearing to determine whether to grant
final approval of the settlement. On December 5, 2006, the Second Circuit
Court
of Appeals vacated the lower Court's earlier decision certifying as class
actions the six IPO Lawsuits designated as "focus cases." Thereafter, the
District Court ordered a stay of all proceedings in all of the IPO Cases
pending
the outcome of plaintiffs’ petition to the Second Circuit for rehearing en banc.
On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing petition, but
clarified that the plaintiffs may seek to certify a more limited class in
the
district court. Accordingly, the settlement will not be finally approved.
Plaintiffs filed amended complaints in six “focus cases” on or about August 14,
2007. The Company is not a focus case. In September 2007, the
Company's named
officers and directors again extended the tolling agreement with plaintiffs.
On
or about September 27, 2007, plaintiffs moved to certify the classes
alleged in the focus cases and to appoint class representatives and class
counsel in those cases. The focus case issuers filed
motions to dismiss the claims against them on or about November 9,
2007 and an opposition to plaintiffs' motion for class certification
on December 21, 2007. This action may divert the efforts and
attention of our management and, if determined adversely to us, could have
a
material impact on our business, results of operations, financial condition
or
cash flows.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Derivative
Class Action
On
August 1, 2006, a stockholder derivative complaint was filed in the United
States District Court for the Northern District of California by Jesse Brown
under the caption Brown v. Kelly, et al. Case No. C06-04671 JW (N.D. Cal.).
On
September 13, 2006, a second stockholder derivative complaint was filed in
the
United States District Court for the Northern District of California by Louis
Suba under the caption Suba v. Kelly et al., Case No. C06-05603 JW (N.D.
Cal.).
Both complaints were brought purportedly on behalf of the Company against
certain current and former officers and directors. On November 27, 2006,
the
court entered an order consolidating these actions
and requiring the plaintiffs to file a consolidated complaint. The
consolidated complaint was filed on January 11, 2007. The consolidated complaint
alleges, among other things, that the named officers and directors: (a) breached
their fiduciary duties as they colluded with each other to backdate stock
options, (b) violated section 10(b), 14(a) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder through their alleged actions,
and (c) were unjustly enriched by their receipt and retention of such stock
options. On May 21, 2007, the Company filed a motion to dismiss the entire
action on the grounds that the plaintiffs failed to take the steps necessary
to
bring a derivative action. Instead of opposing the motion to dismiss on November
14, 2007, the plaintiffs filed an Amended Complaint adding new allegations
against five more current and former officer and directors. The substantive
allegations in the Amended Complaint are similar to those in the previous
complaint. On December 14, 2007, the Company again filed a motion to dismiss
the
entire action on the grounds that the plaintiffs failed to take the steps
necessary to bring a derivative action. The individual defendants also filed
a
motion to dismiss. On
January 22, 2008, the parties reached an agreement in principal on the
settlement of this lawsuit. The parties are working to finalize and memorialize
the terms of that settlement and will then seek court approval of the
settlement.
Patent
Claim
In
September 2006, the Company received a letter from Acacia Technologies Group,
a
patent holding company, suggesting that the Company may be infringing on
two
patents, designated by United States Patent Numbers 5,537,590 and 5,701,400,
which are held by one of their patent licensing and enforcement
subsidiaries. The Company is currently reviewing the validity of
these patents and whether the Company’s products may infringe upon
them. The Company has not formed a view of whether the Company may
have liability for infringement of these patents. Any related claims, whether
or not they
have merit, could be costly and time-consuming to defend, divert management’s
attention or cause product delays. If any of the Company’s products were found
to infringe such patents, the patent holder could seek an injunction to enjoin
use of the infringing product. If the Company was required to settle such
a
claim, it could have a material impact on our business, results of operations,
financial condition or cash flows.
Yue
vs Chordiant Software, Inc.
On
January 2, 2008, the Company and
certain of our officers and one other employee were named in a complaint
filed
in the United States District Court for the Northern District of California
by
Dongxiao Yue under the caption Dongxiao Yue v. Chordiant Software, Inc. et
al.
Case No. CV 08-0019 BZ (N.D. Cal.). The complaint alleges that the Company’s
Marketing Director software product infringed copyrights in certain software
referred to as the “PowerRPC software,” copyrights in which had been owned by
Netbula LLC and assigned to Dr. Yue, the sole employee and owner of Netbula.
The
alleged infringement includes (a) distributing more copies of the PowerRPC
software than had originally been authorized in a run time license Netbula
granted to Chordiant Software, Intl., (b) infringement of a software developer
kit (“SDK”) by making copies of the SDK in excess of those that had been
licensed by Netbula, (c) making unauthorized derivative works of the SDK,
(d)
unauthorized distribution of PowerRPC for products operating on the Windows
Vista platform, (e) unauthorized distribution of PowerRPC for server based
products.Plaintiff also
claims that the license Netbula granted to Chordiant Software, Int’l Ltd. should
not be construed to authorize uses by its parent company, Chordiant Software,
Inc. The plaintiff seeks monetary damages, disgorgement of profits, and
injunctive relief according to proof. The Company and its officers
and employee will serve their response to the complaint on or after February
13,
2008.
The
Company, from time to time,
is
also subject to various other claims
and legal actions arising in the ordinary course of business. The ultimate
disposition of these various other claims and legal actions is not expected
to
have a material effect on our business, financial condition, results of
operations or cash flows. However, litigation is subject to inherent
uncertainties.
NOTE
11—INCOME TAXES
Effective
October 1, 2007, the Company adopted FIN No. 48 “Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109”. FIN 48 prescribes a
recognition threshold and measurement guidance for the financial statement
reporting of uncertain tax positions taken or expected to be taken in a
company’s income tax return. FIN 48 also provides guidance related to
recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition matters related to uncertain tax positions.
FIN 48 utilizes a two-step approach for evaluating uncertain tax positions
accounted for in accordance with SFAS 109. Step one, recognition, requires
a
company to determine if the weight of available
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
evidence
indicates that a tax position is more likely than not to be sustained upon
audit, including the resolution of related appeals or litigation processes,
if
any. Step two, measurement, is based on the largest amount of benefit which
is
more likely than not to be realized on ultimate settlement. The cumulative
effect of adopting FIN 48, if any, is recorded as an adjustment to the opening
balance of retained earnings as of the adoption date.
The
net income tax assets recognized under FIN 48 did not materially differ from
the
net assets recognized before adoption, and, therefore, the Company did not
record an adjustment to retained earnings related to the adoption of FIN
48. At the adoption date of October 1, 2007, the Company had $0.8
million of unrecognized tax benefits related to tax positions taken in prior
periods, $0.2 million of which would affect the Company’s effective tax rate if
recognized.
The
Company recognizes accrued interest and penalties related to unrecognized
tax
benefits in the Provision for Income Taxes. The Company had less than $0.1
million accrued for interest and penalties as of December 31, 2007.
The
Company files income tax returns in the U.S. federal jurisdiction and various
state and foreign jurisdictions. With few exceptions, all U.S. federal, state
and United Kingdom tax years between 1995 and 2007 remain open to examination
due to net operating loss carryforwards and credit carryforwards. Tax years
2003
and later remain open to examination in Canada and years 2004 and later remain
open to examination in Germany.
Tax
audits of the 2005 tax year are currently in process in the Netherlands and
Canada. The Company does not expect resolution of these audits to have a
material impact on our financial statements and the Company does not expect
a
significant increase or decrease in unrecognized tax benefits over the next
12
months.
The
Company provides a valuation
allowance for deferred tax assets when it is more likely than not that the
net
deferred tax assets will not be realized. Based on a number of factors,
including the lack of a history of profitsprior to 2007 and
the fact that the market in which we
compete is intensely competitive and characterized by rapidly changing
technology, the Company believes that there is sufficient uncertainty regarding
the realization of deferred tax assets such that a full valuation allowance
has
been provided. At December 31, 2007, the Companyhad
approximately
$127.6 million
and $18.9 million of net
operating loss carryforwards for federal and state purposes, respectively,
and
net operating loss carryforwards of approximately $34.6 million
in the United Kingdom.
As
a result of an IRC Section 382 study
completed during fiscal 2008, it was determined that $19.6 million of net
operating loss carryforwards resulting from the acquisition of Prime Response
will expire unutilized. The $127.6 million in total federal net operating
loss
carryforwards is presented net of these Section 382 limitations. Upon being realized,
the
remaining $13.8
million
of
the Prime Response federal
net operating loss
carryforwards will reduce goodwill and intangibles recorded at the date of
acquisition before reducing the tax provision. Approximately $3.5 million
of
additional net operating loss carryforwards are related to stock option
deductions which, if utilized, will be accounted for as an addition to equity
rather than as a reduction of the provision for income taxes. The net operating
loss carryforwards are available to offset future federal and state taxable
income and expire in years from 2008 through 2026. At December 31, 2007,
there
are approximately $3.5 million of federal research and development credits
and
alternative minimum tax credits that expire in years 2011 through 2027. At
December 31, 2007, there were also California state
credits of approximately $3.5
million that do not expire.
NOTE
12—EMPLOYEE
BENEFIT
PLANS
2005
Equity Incentive
Plan
As
of December 31, 2007, there were
approximately 1.9
million
shares available
for future grant and approximately 3.4million
options that areoutstanding
under the 2005 Equity
Incentive Plan or 2005 Plan. In December 2007, the
Board amended the
2005 plan to increase the
number of shares reserved for future issuance by 0.7 million
shares. This amendment
was approved by the
stockholders at the2008
Annual Meeting of Stockholders’ held on February
1, 2008.
In
October 2007,the
Company granted 0.2 million performance-based
restricted stock units
or RSUs to selected executivesof the Companypursuant
to the 2005 Plan.
The performance-based restricted
stock units cliff
vest
at the end of a two
year requisite service period, constituting
the Company’s fiscal years
2008 and 2009,upon
achievement of specified
performance criteria established by the Compensation Committee of our Board
of
Directors. The award agreements for RSUs generally provide that vesting will
be
accelerated in certain events related to changes in control of the Company.
Total compensation cost for these awards isbased
on the fair market value of the
shares at the date of grant. The portion of the total compensation cost related
to the performance-based awards is subject to adjustment each quarter based
on
management’s assessment of the likelihood of achieving the two year performance
criteria.
2000
Nonstatutory Equity Incentive
Plan
As
of December 31, 2007, there were
approximately 0.4
million
options that
areoutstanding
under the 2000 Nonstatutory
Equity Incentive Plan.
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
1999
Non-Employee Directors’ Option
Plan
As
of December 31, 2007, there were
approximately 0.3million
shares of common stock are
available for future grant and 0.2millionoptions that
are
outstanding under the 1999
Non-Employee Directors’ Option Planor Directors’ Plan.
In
December 2007, the Board amended the
Directors’ Plan to incorporate the following changes:
1.
|
expand
the type of awards that may
be granted under the Directors’ Plan to allow restricted stock awards and
restricted stock unit awards;
and
|
2.
|
for
fiscal year 2008 and
thereafter, directors will be awarded restricted stock awards instead
of
stock options for their annual and initial automatic Board service
award.
|
This
amendment was approved by the
stockholders at
the2008 Annual Meeting
of
Stockholders’ held
on February
1, 2008.
Stock
Option
Activity
The
following table summarizes stock
option, restricted stock
unitsand restricted
stockawardsactivity
under our stock option plans
(in thousands, except per share data):
|
|
Shares
Available
for
Grant
|
|
|
|
Shares
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
Closing
Price
at
12/31/2007
of
$8.55
|
|
Balance
at September 30,
2007
|
|
3,058
|
|
|
|
3,178
|
|
|
$
|
7.96
|
|
|
|
|
|
|
Authorized
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Options
and
awards granted
|
|
(919
|
)
|
|
|
919
|
|
|
|
9.70
|
|
|
|
|
|
|
Options
exercised
|
|
—
|
|
|
|
(88
|
)
|
|
|
6.46
|
|
|
|
|
|
|
Cancellation
of unvested
restricted stock
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Options
and
awards cancelled/forfeited
|
|
39
|
|
|
|
(39
|
)
|
|
|
11.30
|
|
|
|
|
|
|
Authorized
reduction in shares
from existing plans
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Balance
at December 31,
2007
|
|
2,174
|
|
|
|
3,970
|
|
|
$
|
8.36
|
|
8.22
|
|
$
|
3,847
|
|
Vested
and expected to vest at
December 31, 2007
|
|
|
|
|
|
3,029
|
|
|
$
|
8.20
|
|
7.97
|
|
$
|
3,449
|
|
Exercisable
at December 31,
2007
|
|
|
|
|
|
1,592
|
|
|
$
|
7.41
|
|
6.87
|
|
$
|
2,946
|
|
The
following table summarizes
information about stock options outstanding and exercisable at December 31,
2007
(in thousands, except exercise prices and contractual life
data):
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
Closing
Price
at
12/31/2007
of
$8.55
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
Closing
Price
at
12/31/2007
of
$8.55
|
|
$0.35
–
6.45
|
|
|
570
|
|
|
5.82
|
|
$
|
4.02
|
|
$
|
2,584
|
|
|
484
|
|
$
|
3.82
|
|
$
|
2,290
|
|
6.48
–
7.80
|
|
|
543
|
|
|
7.70
|
|
|
7.18
|
|
|
745
|
|
|
321
|
|
|
7.08
|
|
|
472
|
|
7.88
–
8.15
|
|
|
439
|
|
|
7.93
|
|
|
7.98
|
|
|
250
|
|
|
209
|
|
|
7.99
|
|
|
118
|
|
8.25
–
8.25
|
|
|
817
|
|
|
9.10
|
|
|
8.25
|
|
|
245
|
|
|
193
|
|
|
8.25
|
|
|
58
|
|
8.28
–
9.23
|
|
|
179
|
|
|
7.73
|
|
|
8.53
|
|
|
23
|
|
|
80
|
|
|
8.61
|
|
|
8
|
|
9.25
–
9.25
|
|
|
814
|
|
|
9.88
|
|
|
9.25
|
|
|
—
|
|
|
30
|
|
|
9.25
|
|
|
—
|
|
9.26
–
45.00
|
|
|
608
|
|
|
7.89
|
|
|
12.67
|
|
|
—
|
|
|
275
|
|
|
12.53
|
|
|
—
|
|
$0.35
–
45.00
|
|
|
3,970
|
|
|
8.22
|
|
$
|
8.36
|
|
$
|
3,847
|
|
|
1,592
|
|
$
|
7.41
|
|
$
|
2,946
|
|
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The
aggregate intrinsic value in the
preceding table represents the total intrinsic value, based on the Company’s
closing stock price of $8.55 as
of December 31, 2007,
which would have been received by the
option holders had all option holders exercised their options as of that
date.
The total number of in-the-money options vested and exercisable
as of December 31,
2007 was
approximately 1.3 million.
As of December 31,
2007,
approximately 1.6 million
outstanding options were
vested and exercisable,
and the weighted average
exercise price was $7.41.
The total intrinsic value of options
exercised during the three months ended December 31, 2007and
2006was
$0.7 million
and
$0.2 million
respectively.The fair value
of options vested for the
three
months ended December
31, 2007 and
2006 was $0.6 million
for each
period. As of December 31,
2007,
total unrecognized compensation costs
related to non-vested stock options was $7.0 million,
which is expected to be
recognized as expense over a weighted-average period of approximately
2.9 years.
As of December 31, 2006, total
unrecognized compensation costs related to non-vested stock options was $3.8
million, which wasexpected
to be recognized as expense
over a weighted-average period of approximately 1.3 years.
The
Company had nounvested
restricted stock awards as of
December 31,
2007. The
Company had 0.4 million unvested restricted
stock awards
as of December 31,
2006. The total fair value of the
unvested restricted stock awards at grant date was $0.8 million.
Aggregate intrinsic value of
the unvested restricted stock awards at December 31,
2006 was $1.3million.
During the three months ended
December 31,
2006, approximately 0.3 million
shares vested related to
restricted stock awards. The weighted average fair value at grant date of
the
unvested restricted stock awards was $5.25 as
of December 31, 2006.
As of December 31, 2006,
total unrecognized compensation costs
related to unvested restricted stock awards was $0.1 million
which wasto
be recognized as expense over a
weighted average period of approximately 1.0 year.
As
of December 31, 2007, the total fair
value and number
of
vested RSUs was zero.
Based upon management’s
assessment of the likelihood of achieving the two year performance criteria,
the
Company has
0.1
million of unvested
RSUs with an average fair value
of $15.38 per
unit. During
the three months ended December
31, 2007, $0.3 million
of stock compensation expense
related to the performance-based RSUs has been recognized.The
total unrecognized compensation
costs related to unvested RSUs was $1.9 million which is expected to be
recognized as expense over a weighted average period of approximately
21 months. If
the maximum target of
RSUs outstanding were assumed to be earned, total unrecognized compensation
costs would be approximately $3.0 million which
would
be expected to be recognized
as expense
over a weighted average period of approximately
21
months.
The
Company settles stock
option exercises,
restricted stock units and
restricted stock awards with newly issued common shares.
Valuation
and Expense Information under
SFAS 123(R)
On
October 1,
2005, the Company adopted SFAS
123(R), which requires the measurement and recognition of compensation expense
for all share-based payment awards made to the Company’s employees and directors
including employee stock options, restricted stock awards, restricted stock
unitsand employee stock
purchases related to
the Employee Stock
Purchase
Planbased
on estimated fair values. The
following table summarizes stock-based compensation expense related to employee
stock options,restricted
stock awardsand RSUsfor
the three months ended December
31,
2007and 2006,
respectively, which was allocated as
follows (in thousands):
|
|
Three Months Ended
December
31,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
expense:
|
|
|
|
|
|
|
|
|
|
Cost
of
revenues
|
$
|
153
|
|
|
$
|
107
|
|
|
|
Sales
and
marketing
|
|
241
|
|
|
|
329
|
|
|
|
Research
and
development
|
|
199
|
|
|
|
93
|
|
|
|
General
and
administrative
|
|
582
|
|
|
|
447
|
|
|
|
Total
stock-based compensation
expense
|
$
|
1,175
|
|
|
$
|
976
|
|
|
The
weighted-average estimated fair
value of stock options granted during the three months ended December 31,
2007 and
2006 was
$4.43 and
$4.03 per
share, respectively, using the
Black-Scholes model with the following weighted-average
assumptions:
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Three Months Ended December31,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
Expected
lives in
years
|
|
3.5
|
|
|
|
3.6
|
|
|
|
Risk
free interest
rates
|
|
3.4
|
%
|
|
|
4.6
|
%
|
|
|
Volatility
|
|
59
|
%
|
|
|
71
|
%
|
|
|
Dividend
yield
|
|
0
|
%
|
|
|
0
|
%
|
|
The
fair value of each option award is
estimated on the date of grant using the Black-Scholes option valuation model
with the weighted-average assumptions for volatility, expected term, and
risk
free interest rate. With the adoption of SFAS 123(R) on October 1,
2005, the Company used the trinomial
lattice valuation technique to determine the assumptions used in the
Black-Scholes model. The trinomial lattice valuation technique was used to
provide a better estimate of fair values and meet the fair value objectives
of
SFAS 123(R).
The expected term of options
granted is derived from historical data on employee exercises and post-vesting
employment termination behavior. The risk-free rate is based on the U.S.
Treasury rates in effect during the corresponding period of grant. The expected
volatility rate is based on the historical volatility of our stock
price.
As
stock-based compensation expense
recognized in the Condensed
Consolidated
Statement
of Operations
for the three months ended December
31, 2007 and
2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures.
SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised,
if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Our estimated forfeiture rate for the three months ended December
31,
2007 and 2006 was
based on our historical forfeiture
experience.
Accuracy
of Fair Value
Estimates
The
Company uses third party
analyses to assist in developing
the assumptions based on a trinomial lattice valuation technique used in
the
Black-Scholes model. The Company
is responsible for determining
the assumptions used in estimating the fair value of share-based payment
awards.
Thisdetermination
of fair value of
share-based payment awards on the date of grant using an option-pricing model
is
affected by the Company’s stock price as well as assumptions regarding a number
of highly complex and subjective variables. These variables include, but
are not
limited to the Company’s expected stock price volatility over the term of the
awards, and actual and projected employee stock option exercise behaviors.
Because the Company’s employee stock options have certain characteristics that
are significantly different from traded options, and because changes in the
subjective assumptions can materially affect the estimated value, in
management’s opinion, the existing valuation models may not provide an accurate
measure of the fair value of the Company’s employee stock options and restricted
stock awards. Although the fair value of employee stock options and restricted
stock awards is determined in accordance with SFAS 123(R) and SAB 107 using
an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market
transaction.
NOTE
13—SEGMENT
INFORMATION
Our
chief operating decision maker
reviews financial information presented on a consolidated basis, accompanied
by
desegregated information about revenues by geographic regions for purposes
of
making operating decisions and assessing financial performance. Accordingly,
the
Company has concluded that the Company has one reportable
segment.
The
following table summarizes license
revenue by product emphasis (in thousands):
|
|
Three Months Ended
December
31,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
License
revenue:
|
|
|
|
|
|
|
|
|
|
Enterprisesolutions
|
$
|
6,214
|
|
|
$
|
3,545
|
|
|
|
Marketing
solutions
|
|
714
|
|
|
|
989
|
|
|
|
Decision
management
solutions
|
|
1,879
|
|
|
|
2,628
|
|
|
|
Total
|
$
|
8,807
|
|
|
$
|
7,162
|
|
|
CHORDIANT
SOFTWARE,
INC.
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The
following table summarizes service
revenue consisting of consulting implementationand
integration, consulting
customization,
training,post-contract customer
supportservices, or PCS and
certainreimbursable
out-of-pocket expenses by product emphasis (in thousands):
|
|
Three Months Ended
December
31,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
Servicerevenue:
|
|
|
|
|
|
|
|
|
|
Enterprisesolutions
|
$
|
15,209
|
|
|
$
|
12,199
|
|
|
|
Marketing
solutions
|
|
3,118
|
|
|
|
2,605
|
|
|
|
Decision
management
solutions
|
|
2,000
|
|
|
|
973
|
|
|
|
Total
|
$
|
20,327
|
|
|
$
|
15,777
|
|
|
Foreign
revenues are based on the
country in which the customer order is generated. The following is a summary
of
total revenues by geographic area (in thousands):
|
|
Three Months Ended
December
31,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
$
|
15,591
|
|
|
$
|
13,221
|
|
|
|
Europe
|
|
13,543
|
|
|
|
9,718
|
|
|
|
Total
|
$
|
29,134
|
|
|
$
|
22,939
|
|
|
Included
in foreign revenue results for Europe
are revenue from the
United Kingdomof
$6.1 millionand
$6.3 millionfor
the three months ended December
31,
2007and
2006,
respectively.
Property
and equipment, netinformation
is based on the physical
location of the assets. The following is a summary of property and equipment
by
geographic area (in thousands):
|
|
|
December
31
2007
|
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
$
|
2,719
|
|
|
$
|
2,346
|
|
|
|
Europe
|
|
1,238
|
|
|
|
1,292
|
|
|
|
Total
|
$
|
3,957
|
|
|
$
|
3,638
|
|
|
This
discussion and analysis should be
read in conjunction with ourCondensed Consolidated Financial
Statements
and accompanying Notes
included in this report and the
2007 Audited Financial Statements and Notes thereto included in our Annual
Report on Form 10-K for the year ended September 30, 2007 filed with the
SEC.
Operating results are not necessarily indicative of results that may occur
in
future periods.
The
following discussion and analysis
contains forward-looking statements. These statements are based on our current
expectations, assumptions, estimates and projections about our business and
our
industry, and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry’s results, levels of activity, performance or
achievement to be materially different from any future results, levels of
activity, performance or achievements expressed or implied in or contemplated
by
the forward-looking statements. Words such as “believe,” “anticipate,” “expect,”
“intend,” “plan,” “will,” “may,” “should,” “estimate,” “predict,” “guidance,”
“potential,” “continue” or the negative of such terms or other similar
expressions, identify forward-looking statements. Our actual results and
the
timing of events may differ significantly from those discussed in the
forward-looking statements as a result of various factors, including but
not
limited to, those discussed under the subheading “Risk Factors” and those
discussed elsewhere in this report, in our other SEC filings and under the
heading “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in our 2007 Form 10-K. Chordiant undertakes no obligation to
update any forward-looking statement to reflect events after the date of
this
report.
Overview
As
an enterprise software vendor, we
generate substantially all of our revenues from the banking, insurance,
healthcare, telecommunications, and retail industries. Our customers typically
fund purchases of our software and services out of their lines of business
and
information technology budgets. As a result, our revenues are heavily influenced
by our customers’ long-term business outlook and willingness to invest in new
enterprise information systems and business applications.
For
the three months ended December 31,
2007, total revenues increased 27%
and backlog increased 38%
as
compared to the same period of the
prior year. For the three
months ended December 31, 2007, backlog increased $20.6million
or 27% compared to the previous
three months ended September 30, 2007. This increase in backlog is primarily
related to a large telecommunications
customer
commitment entered into during
the quarter totaling $26.1 million for license and support services. Under
the
terms of the commitment, the customer is required to purchase $26.1 million
of
license and support services over a period of approximately 28 months ending
April 1, 2010. We recognized $1.5 million
of license and service revenue
associated with this transaction during the quarter and expect to recognize
the
remainder of the backlog revenue over the commitment period according to
scheduled minimum purchase amounts and dates. To the extent the customer
places
orders in advance of the commitment dates, the timing of the license and
support
revenue could be accelerated versus the scheduled purchase dates and
amounts.
Software
Industry Consolidation and Possible Increased Competition
The
enterprise software industry continues to undergo consolidation in sectors
of
the software industry in which we operate. Within the last 12 months, IBM
acquired Cognos, DataMirror and Watchfire
Corporation, Oracle completed its
acquisition of Hyperion and Moniforce and has entered into an agreement to
purchase BEA Systems, Sun Microsystems has entered in an agreement to
purchase MySQL and SAP acquired BusinessObjects, YASU Technologies and Pilot
Software. While we do not believe
that Cognos, DataMirror,
Watchfire Corporation, Hyperion, Moniforce,
BEA Systems, MySQL,
BusinessObjects, YASU Technologies, or Pilot Software have been significant
competitors of
Chordiant in the past, the acquisition of these companies by IBM, ,Oracle,
Sun Microsystems and SAP may indicate that we
will face increased
competition from larger and more established entities in the
future.
Financial
Trends
Backlog.
Our
revenues havebeen derived from large
customer
transactions. For some of these transactions, the associated professional
services provided to the customer can span over a period greater than one
year.
If the services delivery period is over a prolonged period of time, it will
cause the associated backlog to be recognized as revenue over a similar period
of time. As of December 31, 2007 and 2006, we had approximately $96.0
million
and $69.8 million in backlog,
respectively, which we define as contractual commitments by our customers
through purchase orders or contracts. Backlog at December
31, 2007 includes
approximately $25.2 million relating to a large telecommunications customer
commitment. The increase in
backlog is partially offset by a decline in deferred revenue recorded on
our
Condensed Consolidated
Balance Sheets.
For the period ended December 31, 2006
to December 31, 2007 aggregate deferred revenue balances decreased
$4.4 million
due to a decrease of
$7.1 million
in short-term deferred revenue
and an increase of $2.7 million in long-term deferred revenue. Theincrease in long-term
deferred revenue
was primarily driven by entering into multi-year support and maintenance
contracts with our customers. Backlog is comprised of:
|
•
|
software
license orders which
the delivered
products have not
been accepted by customers or have not otherwise met all of the
required
criteria for revenue recognition. This component includes billed
amounts
classified as deferred revenue;
|
|
•
|
deferred
revenue from customer
support contracts;
|
|
•
|
consulting
service orders
representing the unbilled remaining balances of consulting contracts
not
yet completed or delivered, plus deferred consulting revenue where
we have
not otherwise met all of the required criteria for revenue
recognition.
|
Backlog
is not necessarily indicative of
revenues to be recognized in a specified future period. There are many factors
that would impact Chordiant’s conversion of backlog as recognizable revenue,
such as Chordiant’s progress in completing projects for its customers,
Chordiant’s customers’ meeting anticipated schedules for customer-dependent
deliverables and customers increasing the scope or duration of a contract
causing license revenue to be deferred for a longer period of
time.
Chordiant
provides no assurances that
any portion of its backlog will be recognized as revenue during any fiscal
year
or at all, or that its backlog will be recognized as revenues in any given
period. In addition, it is possible that customers from whom we expect to
derive
revenue from backlog will default and as a result we may not be able to
recognize expected revenue from backlog.
Implementation
by
Third Parties.Over time, as
our products mature and system integrators become more familiar with our
products, our involvement with implementations has diminished on some projects.
If this trend continues to evolve, certain agreements with customers may
transition from a contract accounting model (SOP 81-1) to a more traditional
revenue model whereby revenues are recorded upon delivery(SOP 97-2).
Service
Revenues.
Service revenues as
a
percentage of total revenues were 70% and 69%
for the three months ended December
31, 2007 and 2006,
respectively. While
the composition of revenue will
continue to fluctuate on a quarterly basis, we expect that service
revenues will
represent between 50% and 60% of our total annual revenues
in the foreseeable
future.
Revenues
fromInternational
Customers
versus
North
America. For
all periods presented, revenues were
principally derived from customer accounts in North America and Europe.
For the three months ended December
31, 2007 and 2006, international revenues were $13.5 million
and $9.7
million, or approximately
46% and 42%,
respectively,of our total revenues.
We believe
international revenues will continue to represent a significant portion of
our
total revenues in future periods. International revenues were favorably impacted
for the three months ended December 31, 2007, as compared to the three months
ended December 31, 2006, as both the British Pound and the Euro increased
in
average value by approximately 7%
and 12%,
respectively, as compared to the U.S.
Dollar.
For
the three months ended December 31,
2007 and 2006,
North
Americarevenues were $15.6
million
and $13.2 million, or
approximately 54% and
58%,
respectivelyof our total revenues.
As the
U.S.economy
has remained strong, we have
seen an increase in North
Americarevenues.
Large customers have become more
willing to invest in new enterprise infrastructure projects. We believe North
Americarevenues will continue
to represent 50%
to 60% of our total revenues in the future.
Gross
Margins.
Management
focuses on license and
service gross margin in evaluating our financial condition and operating
performance. Gross margins on license revenues were 96%
and 94% for the three months ended
December 31, 2007 and 2006, respectively. The 2%
increaseis
primarily a function of the fixed
periodic amortization costs associated with capitalized software costs being
divided by a largerlicense
amount quarter-over-quarter. We
expect license gross margin on current products to range from 95% to 97%
in the
foreseeable future. The margin will fluctuate with the mix of products sold.
Historically, the enterprise solution products have higher associated third
party royalty expense than the marketing solution products and decision
management products.
Gross
margins on service revenues were
58%
and 53% for the three months ended
December 31, 2007 and 2006, respectively. The increase in gross margins for
the
three months period ending December 31, 2007 is primarily due to improved
consulting services utilization rates and increased support and maintenance
revenue. We expect that gross margins on service revenues to range between
55%
and 60% in the foreseeable future.
Costs
Related to
Stock Option Investigation. For the three months
ending December 31,
2006, significant outside
professional servicescostsare
included in general and
administrative costs associated with the Company’s stock option investigation
which began in July 2006 and was completed during the quarter ended March
31,
2007. This issue is more fully described in the in Note 3, “Restatement
of Previously Issued Consolidated Financial Statements” in Notes to Consolidated
Financial Statements of the Annual Report on Form 10-K for the fiscal year
ended
September 30, 2006. For the
quarter
ended December
31,
2006,
these costs were $1.0 million.
We have not incurred any additional
costs since the quarter ended March 31, 2007 and do not expect to incur such
costs in future periods.
Cost
to Amend
Eligible Options. In July 2006, our Board of Directors (the “Board”)
initiated a review of our historical stock option grant practices and appointed
the Audit Committee to oversee the investigation. The Audit Committee determined
that the correct measurement dates for a number of stock option grants made
by
us during the period 2000 to 2006, or Review Period, differ from the measurement
dates previously used to account for such option grants. The Audit Committee
identified
errors
related to the determination of the measurement dates for grants of options
where the price of our common stock on the selected grant date was lower
than
the price on the actual grant date which would permit recipients to exercise
these options at a lower exercise price. As such, these affected stock options
are deemed, for accounting purposes, to have been granted at a discount.
Based
on the determination made for accounting purposes, the discounted options
(for
accounting purposes) may now be deemed to have been granted at a discount
for
tax purposes, which may expose the holders of these impacted stock option
grants
to potentially adverse tax treatment under Section 409A of the Internal Revenue
Code and state law equivalents. As
more fully described on Form SC
TO-I filed with the SEC on March 29,
2007, Chordiant offered certain optionees the opportunity to increase the
exercise price of the discounted options to limit the potential adverse personal
tax consequences that may apply to those stock options under Section 409A
of the
Internal Revenue Code and state law equivalents. On April 26, 2007, eligible
optionees finalized their elections under the offer and were awarded a future
cash payment equal to the price differential of the Amended Options. These
payments will be treated as bonus payments. These cash payments were
approximately $0.3 million and
were
paid out in January 2008. The cost of
these bonus payments were fully accrued as of December 31,
2007.
Reduction
in
Workforce.
In October
2006, the Company initiated a
restructuring plan intended to align its resources and cost structure with
expected future revenues. The restructuring plan included a balancing of
services resources worldwide, an elimination of duplicative functions
internationally, and a shift in the U.S.field
organization toward a focus on
domain-based sales and pre-sales teams.
The
restructuring plan included an
immediate reduction in positions of slightly more than ten percent of the
Company's workforce, consolidation of our European facilities, and the closure
of our Franceoffice.
A majority of the positions
eliminated were in Europe.
The plan was committed to on October
24, 2006, and we began notifying employees on October 25,
2006.
We
initially recorded a pre-tax cash restructuring expense of $6.5 million as
calculated using the net present value of the related costs as required by
SFAS
146. The expense was composed of costs for severance and exiting excess
facilities. In November 2007, we negotiated a break clause in the lease allowing
for an early termination of the United Kingdom facility which will release
us of
any future rent liabilities subsequent to January 2008. Subsequent to December
31, 2007 and as of the date of the filing of this Form 10-Q, we have paid
the
final lease payment for the United Kingdom lease and have been released from
any
future rent liabilities.
In
July 2005, we undertook an
approximate 10% reduction in our workforce. In connection with this action,
we
incurred a one-time cash expense of approximately $1.1 million
in the fourth quarter ended
September 30, 2005 for severance benefits. As of December 31, 2007,
$0.1million
of the cash charges remains
outstanding.
During
fiscal year 2002, we restructured
several areas of the Company to reduce expenses and improve revenues. As
part of
this restructuring, we closed an office facility in Boston,
Massachusettsand
recorded an expense associated with
the long-term lease which expires in January 2011. During the three months
ended
March 31, 2007, we completed a new sublease with a sub-lessee for the remaining
term of our lease at a rate lower than that which was forecasted when the
original restructuring expense was recorded in 2002. This change in estimate
resulted in a $0.4 million restructuring expense for the year ended September
30, 2007.
Past
Results
may not be
Indicative of Future Performance.
We believe that
period-to-period comparisons of our operating results should not be relied
upon
as indicative of future performance. Our prospects must be considered given
the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in new and rapidly evolving
businesses. There can be no assurance we will be successful in addressing
these
risks and difficulties. Moreover, we may not achieve or maintain profitability
in the future.
Critical
Accounting
Estimates
Our
discussion and analysis of our
financial condition and results of operations are based upon our Condensed Consolidated
Financial
Statements,
which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of
contingent assets and liabilities.
On
an on-going basis, we evaluate the
estimates, including those related to our allowance for doubtful accounts,
valuation of stock-based compensation, valuation of goodwill and intangible
assets, valuation of deferred tax assets, restructuring expenses, contingencies,
vendor specific objective evidence, or VSOE, of fair value in multiple element
arrangements and the estimates associated with the percentage-of-completion
method of accounting for certain of our revenue contracts. We base our estimates
on historical experience and on various other assumptions that are believed
to
be reasonable under the circumstances, the results of which form the basis
for
making judgments about the carrying values of assets and liabilities and
the
recognition of revenue and expenses that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We
believe the following critical
accounting judgments and estimates are used in the preparation
of our Condensed
Consolidated Financial
Statements:
|
•
|
Revenue
recognition, including
estimating the total estimated time required to complete sales
arrangements involving significant implementation or customization
essential to the functionality of our
products;
|
|
•
|
Estimating
valuation allowances
and accrued liabilities, specifically the allowance for doubtful
accounts,
and assessment of the probability of the outcome of our current
litigation;
|
|
•
|
Stock-based
compensation
expense;
|
|
•
|
Accounting
for income
taxes;
|
|
•
|
Valuation
of long-lived and
intangible assets and
goodwill;
|
|
•
|
Restructuring
expenses;
and
|
|
•
|
Determining
functional currencies
for the purposes of consolidating our international
operations.
|
Revenue
Recognition.
We derive revenues
from
licenses of our software and related services, which include assistance in
implementation, customization and integration, post-contract customer support,
training and consulting. The amount and timing of our revenue is difficult
to
predict and any shortfall in revenue or delay in recognizing revenue could
cause
our operating results to vary significantly from quarter to quarter and could
result in operating losses. The accounting rules related to revenue recognition
are complex and are affected by interpretation of the rules and an understanding
of industry practices, both of which are subject to change. Consequently,
the
revenue recognition accounting rules require management to make significant
estimates based on judgment.
Software
license revenue is recognized
in accordance with AICPA’s
Statement
of Position No.
97-2 “Software Revenue Recognition,” as amended by Statement of Position No.
98-9 “Software Revenue Recognition with Respect to Certain Arrangements”, or
collectively SOP 97-2.
For
arrangements with multiple elements,
we recognize revenue for services and post-contract customer support based
upon
the fair value VSOE of the respective elements. The fair value VSOE of the
services element is based upon the standard hourly rates we charge for the
services when such services are sold separately. The fair value VSOE for
annual
post-contract customer support is generally established with the contractual
future renewal rates included in the contracts, when the renewal rate is
substantive and consistent with the fees when support services are sold
separately. When contracts contain multiple elements and fair value VSOE
exists
for all undelivered elements, we account for the delivered elements, principally
the license portion, based upon the “residual method” as prescribed by SOP 97-2.
In multiple element transactions where VSOE is not established for an
undelivered element, we recognize revenue upon the establishment of VSOE
for
that element or when the element is delivered.
At
the time we enter into a transaction,
we assess whether any services included within the arrangement related to
significant implementation or customization essential to the functionality
of
our products. For contracts for products that do not involve significant
implementation or customization essential to the product functionality, we
recognize license revenues when there is persuasive evidence of an arrangement,
the fee is fixed or determinable, collection of the fee is probable and delivery
has occurred as prescribed by SOP 97-2. For contracts that involve significant
implementation or customization essential to the functionality of our products,
we recognize the license and professional consulting services revenue using
either the percentage-of-completion method or the completed contract method
as
prescribed by Statement of Position No. 81-1, “Accounting for Performance of
Construction-Type and Certain Product-Type Contracts”, or SOP
81-1.
The
percentage-of-completion method is
applied when we have the ability to make reasonably dependable estimates
of the
total effort required for completion using labor hours incurred as the measure
of progress towards completion. The progress toward completion is measured
based
on the “go-live” date. We define the “go-live” date as the date the essential
product functionality has been delivered or the application enters into a
production environment or the point at which no significant additional Chordiant
supplied professional service resources are required. Estimates are subject
to
revisions as the contract progresses to completion. We account for the changes
as changes in
accounting estimates when the information becomes known. Information impacting
estimates obtained after the balance sheet date but before the issuance of
the
financial statements is used to update the estimates. Provisions for estimated
contract losses, if any, are recognized in the period in which the loss becomes
probable and can be reasonably estimated. When we sell additional licenses
related to the original licensing agreement, revenue is recognized upon delivery
if the project has reached the go-live date, or if the project has not reached
the go-live date, revenue is recognized under the percentage-of-completion
method. We classify revenues from these arrangements as license and service
revenue based upon the estimated fair value of each element using the residual
method.
The
completed contract method is applied
when we are unable to obtain reasonably dependable estimates of the total
effort
required for completion. Under the completed contract method, all revenue
and
related costs of revenue are deferred and recognized upon
completion.
For
product co-development arrangements
relating to software products in development prior to the consummation of
the
individual arrangements where we retain the intellectual property being
developed and intend to sell the resulting products to other customers, license
revenue is deferred until the delivery of the final product, provided all
other
requirements of SOP 97-2 are met. Expenses associated with these co-development
arrangements are accounted for under SFAS 86 and are normally expensed as
incurred as they are considered to be research and development costs that
do not
qualify for capitalization or deferral.
Revenue
from subscription or term
license agreements, which include software and rights to unspecified future
products or maintenance, is recognized ratably over the term of the subscription
period. Revenue from subscription or term license agreements, which include
software, but exclude rights to unspecified future products and maintenance,
is
recognized upon delivery of the software if all conditions of recognizing
revenue have been met including that the related agreement is non-cancelable,
non-refundable and provided on an unsupported basis.
For
transactions involving extended
payment terms, we deem these fees not to be fixed or determinable for revenue
recognition purposes and revenue is recognized.
For
arrangements with multiple elements
accounted for under SOP 97-2 where we determine we can account for the elements
separately and the fees are not fixed or determinable due to extended payment
terms, revenue is recognized in the following manner. If the undelivered
element
is PCS, or other services, an amount equal to the estimated value of the
services to be rendered prior to the next payment becoming due is allocated
to
the undelivered services. The residual of the payment is allocated to the
delivered elements of the arrangement.
For
arrangements with multiple elements
accounted for under SOP 81-1 where we determine we can account for the elements
separately and the fees are not fixed or determinable due to extended payment
terms, revenue is recognized in the following manner. Amounts are first
allocated to the undelivered elements included in the arrangement, as payments
become due or are received, the residual is allocated to the delivered
elements.
We
recognize revenue for post-contract
customer support ratably over the support period which ranges from one to
five
years.
Our
training and consulting services
revenues are recognized as such services are performed on an hourly or daily
basis for time and material contracts. For consulting services arrangements
with
a fixed fee, we recognize revenue on a percentage-of-completion
method.
For
all sales we use either a signed
license agreement or a binding purchase order where we have a master license
agreement as evidence of an arrangement. Sales through our third party systems
integrators are evidenced by a master agreement governing the relationship
together with binding purchase orders or order forms on a
transaction-by-transaction basis. Revenues from reseller arrangements are
recognized on the “sell-through” method, when the reseller reports to us the
sale of our software products to end-users. Our agreements with customers
and
resellers do not contain product return rights.
We
assess collectibility based on a
number of factors, including past transaction history with the customer and
the
credit-worthiness of the customer. We generally do not request collateral
from
our customers. If we determine that the collection of a fee is not probable,
we
recognize revenue at the time collection becomes probable, which is generally
upon the receipt of cash.
Allowance
for
Doubtful Accounts. We
must make estimates of the
uncollectability of our accounts receivables. We specifically analyze accounts
receivable and analyze historical bad debts, customer concentrations, customer
credit-worthiness and current economic trends when evaluating the adequacy
of
the allowance for doubtful accounts. Generally, we require no collateral
from
our customers. Our gross accounts receivable balance was $21.1 million with
an allowance for doubtful accounts
of $0.1 million
as of December 31,
2007.
Our gross accounts receivable balance
was $28.5 million
(including
long-term accounts receivable
of $1.0 million)with an
allowance for doubtful accounts of $0.2 million
as of September 30,
2007.
If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to make
payments,
additional allowances would be required. To date, bad debts have not been
material and have been within management’s expectations.
Stock-based
Compensation Expense. Upon
adoption of SFAS 123(R) on October 1, 2005, we began estimating the value
of employee stock awardson
the date of grant using the
Black-Scholes model. Prior to the adoption of SFAS 123(R), the value of each
employee stock awardwas
estimated on the date of grant using
the Black-Scholes model for the purpose of the pro forma financial disclosure
in
accordance with SFAS 123. The determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected
by
our stock price as well as assumptions regarding a number of highly complex
and
subjective variables. These variables include, but are not limited to the
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors.
With
the adoption of SFAS 123(R) on
October 1, 2005, we used the trinomial lattice valuation technique to
determine the assumptions used in the Black-Scholes model. The trinomial
lattice
valuation technique was used to provide better estimates
of
fair
values and meet the fair value
objectives of SFAS 123(R). The expected term of options granted is derived
from historical data on employee exercises and post-vesting employment
termination behavior. The expected volatility is based on the historical
volatility of our stock.
As
stock-based compensation expense
recognized in the Condensed Consolidated Statement of Operations is based
on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time
of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures were estimated based on historical
experience.
If
factors change and we employ
different assumptions in the application of SFAS 123(R) in future periods,
the
compensation expense that we record under SFAS 123(R) may differ significantly
from what we have recorded in the current period. The estimated value of
a stock
option is most sensitive to the volatility assumption. Based on the December
31,
2007 variables, it is estimated that a change of 10% in either the volatility,
expected life or interest rate assumption would result in a corresponding 8%, 5%
or 1%
change,
respectively,in the estimated value
of the option
being valued using the Black-Scholes model.
As
stock-based compensation expense
attributable to performance restricted stock units, or RSUs, is based on
management’s assessment of the likelihood of achieving certain criteria,
the amount of expense that is recorded in a period is dependent on the accuracy
of management’s estimates. It is estimated that a 5% change in management’s
achievement estimates would result in a corresponding 22% change in the stock
compensation expense recorded for the period. The RSUs granted vest at the
end
of fiscal year 2009 if certain specified performance criteria are achieved.
It
is expected that estimates will become more accurate leading up to September
30,
2009.
Accounting
for
Income Taxes.As
part of the process of preparing our
Condensed Consolidated Financial Statements we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process
involves estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These differences result
in
deferred tax assets and liabilities, which are included within our Condensed
Consolidated Balance Sheets.
We must then assess the likelihood
that our deferred tax assets will be recovered from future taxable income
and to
the extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision
in
the statement of operations.
We
have recorded a valuation allowance
equal to 100% of the deferred tax assets as of December 31, 2007, due to
uncertainties related to our ability to utilize our net deferred tax assets,
primarily consisting of certain net operating loss carryforwards,research
and development
creditsand temporary
differences relating to deferred revenue. Deferred tax assets
have been fully
reserved for in all periods presented.
Effective
October 1, 2007, the Company adopted Financial Accounting Standards
Interpretation, No. 48 “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” or FIN 48. FIN 48 prescribes a
recognition threshold and measurement guidance for the financial statement
reporting of uncertain tax positions taken or expected to be taken in a
company’s income tax return. The application of FIN 48 is explained in Note 11
to the Condensed Consolidated Financial Statements.
Valuation
of
Long-lived and Intangible Assets and Goodwill.We
assess the impairment of identifiable
intangibles and long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Furthermore, we
assess
the impairment of goodwill annually. Factors we consider important which
could
trigger an impairment review include the following:
|
•
|
Significant
underperformance
relative to expected historical or projected future operating
results;
|
|
•
|
Significant
changes in the manner
of our use of the acquired assets or the strategy for our overall
business;
|
|
•
|
Significant
negative industry or
economic trends;
|
|
•
|
Significant
decline in our stock
price for a sustained
period;
|
|
•
|
Market
capitalization declines
relative to net book value;
and
|
|
•
|
A
current expectation that, more
likely than not, a long-lived asset will be sold or otherwise disposed
of
significantly before the end of its previously estimated useful
life.
|
When
one or more of the above indicators
of impairment occurs we estimate the value of long-lived assets and intangible
assets to determine whether there is impairment. We measure any impairment
based
on the projected discounted cash flow
method,
which requires us to make
several estimates including the estimated cash flows associated with the
asset,
the period over which these cash flows will be generated and a discount rate
commensurate with the risk inherent in our current business model. These
estimates are subjective and if we made different estimates, it could materially
impact the estimated fair value of these assets and the conclusions we reached
regarding impairment. To date, we have not identified any triggering events
noted above.
We
are required to perform an impairment
review of our goodwill balance on at least an annual basis. This impairment
review involves a two-step process as follows:
Step
1—We compare the fair value of our
reporting units to the carrying value, including goodwill, of each of those
units. For each reporting unit where the carrying value, including goodwill,
exceeds the unit’s fair value, we proceed on to Step 2. If a unit’s fair value
exceeds the carrying value, no further work is performed and no impairment
charge is necessary.
Step
2—We perform an allocation of the
fair value of the reporting unit to our identifiable tangible and non-goodwill
intangible assets and liabilities. This derives an implied fair value for
the
reporting unit’s goodwill. We then compare the implied fair value of the
reporting unit’s goodwill with the carrying amount of the reporting unit’s
goodwill. If the carrying amount of the reporting unit’s goodwill is greater
than the implied fair value of its goodwill, an impairment charge would be
recognized for the excess.
We
determined that we have one reporting
unit. We completed a goodwill impairment review for the period ending September
30, 2007 and performed Step 1 of the goodwill impairment analysis required
by
SFAS 142, “Goodwill and Other Intangible Assets,” and concluded that goodwill
was not impaired as of September 30, 2007 using the methodology described
above.
Accordingly, Step 2 was not performed. We will continue to test for impairment
on an annual basis and on an interim basis if an event occurs or circumstances
change that would more likely than not reduce the fair value of our reporting
units below their carrying amount.
Restructuring
Expenses.In the past five
years, we have implemented cost-reduction plans as part of our continued
effort
to streamline our operations to reduce ongoing operating expenses. These
plans
resulted in restructuring expenses related to, among others, the consolidation
of excess facilities. These charges relate to facilities and portions of
facilities we no longer utilize and either seek to terminate early or sublease.
Lease termination costs and brokerage fees for the abandoned facilities were
estimated for the remaining lease obligations and were offset by estimated
sublease income. Estimates related to sublease costs and income are based
on
assumptions regarding the period required to locate and contract with suitable
sub-lessees and sublease rates which can be achieved using market trend
information analyses provided by a commercial real estate brokerage retained
by
us. Each reporting period we review these estimates and to the extent that
these
assumptions change due to new agreements with landlords, new subleases with
tenants, or changes in the market, the ultimate restructuring expenses for
these
abandoned facilities could vary by material amounts.
Determining
Functional Currencies for the Purpose of Consolidation.We
have several foreign subsidiaries
that together account for a significant portion of our revenues, expenses,
assets and liabilities.
In
preparing our Condensed Consolidated
Financial Statements, we are required to translate the financial statements
of
the foreign subsidiaries from the currency in which they keep their accounting
records, generally the local currency, into United Statesdollars.
This process results in
exchange gains and losses which, under the relevant accounting guidance are
either included within theCondensed Consolidated
Statement of Operations
or as a separate part of our
net equity under the caption “Accumulated
Other
Comprehensive
Income.”
Under
the relevant accounting
guidance, the treatment of these translation gains or losses is dependent
upon
our management’s determination of the functional currency of each subsidiary.
The functional currency is determined based on management’s judgment and
involves consideration of all relevant economic facts and circumstances
affecting the subsidiary. Generally, the currency in which the subsidiary
conducts a majority of its transactions, including billings, financing, payroll
and other expenditures would be considered the functional currency but any
dependency upon the parent and the nature of the subsidiary’s operations must
also be considered.
If
any subsidiary’s functional currency
were deemed to be the local currency, then any gain or loss associated with
the
translation of that subsidiary’s financial statements would be included in
cumulative translation adjustments. However, if the functional currency were
deemed to be the United
Statesdollar then any gain
or loss associated with the translation of these financial statements would
be
included within our Condensed Consolidated
Statement of
Operations.
If we dispose of any of our
subsidiaries, any cumulative translation gains or losses would be recognized
in
our Condensed Consolidated
Statement of Operations.
If we determine that there
has been a change in the functional currency of a subsidiary to the United Statesdollar,
any translation gains or losses
arising after the date of change would be included within our Condensed Consolidated
Statement of
Operations.
Based
on our assessment of the factors
discussed above, we consider the relevant subsidiary’s local currency to be the
functional currency for each of our international subsidiaries. Accordingly,
foreign currency translation gains and loses are included as part of
Accumulated
Other
Comprehensive
Income
within our Condensed Consolidated
Balance Sheetsfor
all periods
presented.
The
magnitude of these gains or losses
is dependent upon movements in the exchange rates of the foreign currencies
in
which we transact business against the United Statesdollar.
These currencies include the
United Kingdom Pound Sterling, the Euro and the Canadian Dollar. Any future
translation gains or losses could be significantly higher than those reported
in
previous periods. At December 31, 2007, approximately $48.3 million
of our cash and cash equivalents
were held by our subsidiaries outside of the United States.
Recent
Accounting
Pronouncements
See
Note 2 to the Condensed Consolidated
Financial Statements under section “Recent Accounting Pronouncements” for
detailed information regarding status of new accounting standards that are
not
yet effective for us.
Results
of
Operations
The
following table sets forth, in
dollars(in
thousands)and as a
percentage of total revenues, unaudited Condensed Consolidated Statements
of
Operations data for the periods indicated. This information has been derived
from the Condensed Consolidated Financial Statements included elsewhere in
this
Quarterly Report.
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Statements
of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
8,807
|
|
|
|
30
|
%
|
|
$
|
7,162
|
|
|
|
31
|
%
|
|
Service
|
|
|
20,327
|
|
|
|
70
|
|
|
|
15,777
|
|
|
|
69
|
|
|
Total
revenue
|
|
|
29,134
|
|
|
|
100
|
|
|
|
22,939
|
|
|
|
100
|
|
|
Cost
of
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
334
|
|
|
|
1
|
|
|
|
454
|
|
|
|
2
|
|
|
Service
|
|
|
8,478
|
|
|
|
29
|
|
|
|
7,466
|
|
|
|
33
|
|
|
Amortization
of intangible
assets
|
|
|
303
|
|
|
|
1
|
|
|
|
303
|
|
|
|
1
|
|
|
Total
cost of
revenue
|
|
|
9,115
|
|
|
|
31
|
|
|
|
8,223
|
|
|
|
36
|
|
|
Gross
profit
|
|
|
20,019
|
|
|
|
69
|
|
|
|
14,716
|
|
|
|
64
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and
marketing
|
|
|
8,903
|
|
|
|
31
|
|
|
|
7,264
|
|
|
|
32
|
|
|
Research
and
development
|
|
|
6,725
|
|
|
|
23
|
|
|
|
6,296
|
|
|
|
27
|
|
|
General
and
administrative
|
|
|
5,003
|
|
|
|
17
|
|
|
|
5,611
|
|
|
|
25
|
|
|
Restructuring
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
6,472
|
|
|
|
28
|
|
|
Total
operating
expense
|
|
|
20,631
|
|
|
|
71
|
|
|
|
25,643
|
|
|
|
112
|
|
|
Loss
from
operations
|
|
|
(612
|
)
|
|
|
(2
|
)
|
|
|
(10,927
|
)
|
|
|
(48
|
)
|
|
Interest
income,
net
|
|
|
835
|
|
|
|
3
|
|
|
|
304
|
|
|
|
1
|
|
|
Other
income (expense),
net
|
|
|
134
|
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
(—
|
)
|
|
Income
(loss)before
income
taxes
|
|
|
357
|
|
|
|
1
|
|
|
|
(10,638
|
)
|
|
|
(47
|
)
|
|
Provision
for income
taxes
|
|
|
152
|
|
|
|
—
|
|
|
|
111
|
|
|
|
—
|
|
|
Net
income
(loss)
|
|
$
|
205
|
|
|
|
1
|
%
|
|
$
|
(10,749
|
)
|
|
|
(47
|
)%
|
|
Comparison
of the Three Months Ended
December 31, 2007and
2006(Unaudited)
Revenues
Total
revenues increased $6.2 million,
or 27%,
to $29.1 million
for the three months ended
December 31, 2007 as
compared to the same period of the
prior year.This increase
was primarily due to a 23%increase
in license revenue
and
a
29%
increase
in servicerevenue.
The
following summarizes the components
of our total revenues:
License
Revenue
The
increase or decrease of license revenue
occurring within the three
different product groupsis
dependent on the timing of when
a sales transaction
iscompleted
and whether a license
transaction was sold with essential consulting services. Products licensedwith
essential consulting services
are generally
recognized
as
revenue under the
percentage-of-completion
method of
accounting. The timing and amount of revenue for those transactions being
recognized under the percentage-of-completion method is
influenced by the progress
of work performed relative to
the project length of customer contracts and the dollar value of such
contracts. The
following table sets fourth our
license revenue by product emphasis for the three months ended December 31,
2007and
2006 (in
thousands, except
percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
License
Revenue:
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
Enterprise
solutions
|
|
$
|
6,214
|
|
$
|
3,545
|
|
$
|
2,669
|
|
|
75
|
%
|
|
|
Marketing
solutions
|
|
|
714
|
|
|
989
|
|
|
(275
|
)
|
|
(28
|
)
|
|
|
Decision
management
solutions
|
|
|
1,879
|
|
|
2,628
|
|
|
(749
|
)
|
|
(29
|
)
|
|
|
Total
license
revenue
|
|
$
|
8,807
|
|
$
|
7,162
|
|
$
|
1,645
|
|
|
23
|
%
|
|
Total
license revenue increased by
$1.6 million
or 23%
for the three
months ended December 31,
2007as
compared to the same period of the
prior
year. The
increase is attributed to the number
of projects and the degree of progress associated with percentage-of-completion
transactions.
Service
Revenue
Service
revenue isprimarily
composed of consulting
implementation and integration, consulting customization, training,
post-contract customer support services, or PCS,
and certain reimbursable out-of-pocket
expenses. The increase or decrease of service revenue within the three different
product emphases is primarily due to the timing of when license transactions
are
completed, whether or not the license was sold with essential consulting
services, the sophistication of the customer’s application, and the expertise of
the customer’s internal development team. For otherservice
transactions, service revenue
will lag in timing compared to the period of when the license revenue is
recognized. The
following table sets forth our
service revenue by product emphasis for the three months ended December 31,
2007and
2006 (in
thousands, except
percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
Service
Revenue:
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
Enterprise
solutions
|
|
$
|
15,209
|
|
$
|
12,199
|
|
$
|
3,010
|
|
|
25
|
%
|
|
|
Marketing
solutions
|
|
|
3,118
|
|
|
2,605
|
|
|
513
|
|
|
20
|
|
|
|
Decision
management
solutions
|
|
|
2,000
|
|
|
973
|
|
|
1,027
|
|
|
106
|
|
|
|
Total
service
revenue
|
|
$
|
20,327
|
|
$
|
15,777
|
|
$
|
4,550
|
|
|
29
|
%
|
|
Total
service revenue
increased$4.6 million
or 29%
for the three months ended
December 31, 2007,
as compared
to the same period of
the prior year.
The$4.6
million
increase is primarily related to
increases of $3.0million
in PCSrevenue,
$1.2 million
in consulting
revenue, $0.3
million in training revenue and $0.1
million in reimbursement of
out-of-pocket expense
revenue.The
increase in PCSrevenueis
a function of the growth in new
license transactions sold with PCS agreements combined with the renewal of
existing PCS customers at a rate in excess of existing customers declining
PCS
at some point in time after the first year. The increase in consulting revenue
is a direct result of the growth in license revenue as the majority of our
customers will use some form of our consulting services in connection with
their
project.
Cost
of Revenue
License
Cost
of license revenues includes
third partysoftware
royalties and amortization of
capitalized software development costs. Royalty expenses can vary depending
upon
the mix of products sold within the period. The capitalized software development
costsprimarilypertain
to a banking product that was
completed and available for
general release in August 2005 and the third party costs associated with
the
porting of a product to a new platform. The
porting project was completed in
August 2007 and the aggregate costs capitalized were $0.5 million. Amortization expense
for
the banking product and porting
project for the three months ended December 31, 2007 were$0.2
million
and
less than $0.1 million,
respectively. Amortization
costs
for the
banking product are
expectedthrough
2008and amortization costs
of the porting project are expected through 2010. The following table
sets forth our cost
of license revenues for the three months ended
December 31,
2007and 2006
(in
thousands, except
percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
Cost
of license
revenue
|
|
$
|
334
|
|
|
$
|
454
|
|
|
$
|
(120
|
)
|
(26
|
)%
|
|
|
Percentage
of total
revenue
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
Cost
of licenserevenue
decreasedby
$0.1
million or 26% from the three months
ended
December 31,
2006 as
compared to the same
period of the prior
year. The
decrease is primary due to the
reduction in royalty expense associated with third party technology included
in
our products.
Service
Cost
of service revenues consists
primarily of personnel, third party consulting,
facility and travel costs
incurred to provide consulting implementation and integration, consulting
customization, training, PCS support
services. The
following table sets forth our cost
of service revenues
for the three months ended
December 31, 2007 and
2006 (in thousands, except
percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
Cost
of service
revenue
|
|
$
|
8,478
|
|
|
$
|
7,466
|
|
|
$
|
1,012
|
|
14
|
%
|
|
|
Percentage
of total
revenue
|
|
|
29
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
Cost
of service revenue increased $1.0
million or 14% for
the three months ended December 31,
2007, as compared to the same period of the prior year.This change is primarily
due to
an increase in third
party
consulting costs of $1.2 million offset by adecreasein
personnel and related costs of $0.2
million associated with a decrease in headcount. Service costs increased
at a
lower rate as compared to the increase in service revenue due to improved
utilization of our internal consultant teams, replacing full time employees
with
third party consultants (converting a fixed cost to a variable cost) and
increasing PCS revenue, which to a limited degree is not based on a variable
cost model, so there is not a direct relationship of revenue to
costs.
Amortization
of Intangible
Assets
Amortization
of intangible assets cost
consists primarily of the amortization of amounts paid for developed
technologies, customer lists and trade-names resulting from business
acquisitions. The following table sets forth our costs associated with
amortization of intangible assets for the three months ended December 31,
2007
and 2006 (in thousands, except percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
Amortization
of intangible
assets
|
|
$
|
303
|
|
|
$
|
303
|
|
|
$
|
—
|
|
—
|
%
|
|
|
Percentage
of total
revenues
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
We
expect amortization expense
forintangible
assets to be $0.3 million for each
of the three
remaining quarters in fiscal year 2008, $1.2 million in fiscal
year
2009
and $0.3 million
in fiscalyear2010.
Operating
Expenses
Sales
and
Marketing
Sales
and marketing expense is
attributed to activities
associated with
selling,
promoting
and advertising our products,
product demonstrations and customer sales calls. These costs consist primarily
of employee salaries, commissions and bonuses, benefits, facilities, travel
expenses and promotional and advertising expenses. The following table sets
forth our sales and marketing expenses for the three months ended December
31,
2007 and 2006 (in thousands, except percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
Sales
and marketing expense
|
|
$
|
8,903
|
|
|
$
|
7,264
|
|
|
$
|
1,639
|
|
23
|
%
|
|
|
Percentage
of total
revenues
|
|
|
31
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
|
Sales
and marketing expense increased by $1.6 million
or
23% forthe
three months ended December31,
2007 as compared to the
same period of the
prior year. The increase is primarily due to increases
of $1.0 million in sales
and marketing program costs, $0.4 million in personnel and related
costs and
$0.2 million in consultant
costs. The
increase in sales and marketing
program costs was mainly attributed to two annual worldwide sales events:
Sales
Kick Off and Presidents Club. In the prior year, these events occurred in
the
March 2007 quarter.
Research
and
Development
Research
and development expense
results from the
activities associated
with the development of new products, enhancements of existing products and
quality assurance activities. These costs consist primarily of employee
compensation, benefits, facilities, the cost of software and development
tools,
equipment and consulting costs, including costs for offshore consultants.
The
following table sets forth our research and development expenses for the
three
months ended December 31, 2007 and 2006 (in thousands, except
percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
Research
and development
expense
|
|
$
|
6,725
|
|
|
$
|
6,296
|
|
|
$
|
429
|
|
7
|
%
|
|
|
Percentage
of total
revenues
|
|
|
23
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
Research
and development expense
increased by $0.4
million
or 7%
for the
three months ended
December 31,
2007 as compared to the
same period of the
prior year. The increase is
primarily related to increases of $0.3 million
for personnel and related
costs and $0.1
million in outsourced
research and development expenses. The increase in personnel costs was driven
by
a 17%
increase in average headcount for the
comparative periods.
General
and
Administrative
General
and administrative expense
results from
activities managed
byour executive and administrative
personnel (e.g. the CEO, legal, human resourcesand
finance personnel). These costs
consist primarily of employee compensation,
bonuses, stock-based compensation
expense, benefits,
facilities, consulting,
legal and auditcosts,
including costs for Sarbanes-Oxley Act of 2002 (SOX) compliance.
The following table sets forthour
general and administrative expenses
for the three months ended December 31, 2007and
2006 (in
thousands, except
percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
General
and administrative
expense
|
|
$
|
5,003
|
|
|
$
|
5,611
|
|
|
$
|
(608
|
)
|
(11
|
)%
|
|
|
Percentage
of total
revenues
|
|
|
17
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
General
and administrative expense
decreased by
$0.6
million or 11% for
the three months ended
December 31,
2007,
as compared to the same period of the
prior year. The decrease isprimarily due to a
decrease of $0.7 million in
professional services mainly associated with the stock option investigation
that
occurred in the prior year. The investigation and its associated costs were
completed by March 2007. This decrease in costs was offset by an increase
of
$0.2 million in travel related costs.
Restructuring
Expense
In
October 2006, we initiated a restructuring plan that included an immediate
reduction in positions of slightly more than ten percent of the Company's
workforce, consolidation of our European facilities, and the closure of our
French office. A majority of the positions eliminated were in Europe. For
the
three months ended December 31, 2006, we initially recorded a pre-tax cash
restructuring expense of $6.5 million as calculated using the net present
value
of the related costs as required by SFAS 146. The expense was composed of
$1.7
million for severance costs and $4.8 million for exiting excess facilities
of
which $1.0 million of the excess facility expense was associated with non-cash
charges for the write-off of leasehold improvements and the reversal of a
favorable purchase price adjustment related to the France office lease.
Subsequent to December 31, 2007 and as of the date of the filing of this
Form
10-Q, all liabilities associated with this restructuring expense has been
paid.
Stock-based
Compensation (included in Individual
Operating
Expense
and
Cost
of
Revenue
categories)
The
following table sets forthour
stock-based compensation expense and
functional breakdown for the three months ended December 31,2007
and
2006 (in
thousands):
|
|
Three Months Ended
December
31,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
Cost
of revenues- service
|
$
|
153
|
|
|
$
|
107
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Sales
and
marketing
|
|
241
|
|
|
|
329
|
|
|
|
Research
and
development
|
|
199
|
|
|
|
93
|
|
|
|
General
and
administrative
|
|
582
|
|
|
|
447
|
|
|
|
Total
operating
expense
|
|
1,022
|
|
|
|
869
|
|
|
|
Total
stock-based compensation
expense
|
$
|
1,175
|
|
|
$
|
976
|
|
|
For
the three months ended December 31,
2007, the aggregate stock-based
compensation
cost included in cost of revenues and in operating expenses was $1.2 million
and primarily related to
$0.9 million
associated with employee stock
options and $0.3
million
associated with
restricted stock units.
For the three months ended
December 31,
2006, the aggregate stock-based
compensation cost included in cost of revenues and in operating expenses
was
$1.0 million
and primarily related to
$0.8 million
associated with employee stock
options and $0.2
million
associated with
restricted stock awards.
Interest
Income, Net
Interest
income, net, consists primarily
of interest income generated from our cash, cash
equivalents,
restricted cash and
marketable securities, offset by interest expense incurred in connection
with
our capital leases,letters
of credit and imputed under SFAS
146 restructuring accruals. The following table sets forth our interest income,
net for the three months ended December 31, 2007 and 2006 (in thousands,
except
percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
Interest
income,
net
|
|
$
|
835
|
|
|
$
|
304
|
|
|
$
|
531
|
|
175
|
%
|
|
|
Percentage
of total
revenues
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
Interest
income, net increased by
$0.5 million or
175% forthe
three months ended December 31,
2007, as compared to the
same period of the
prior year. This increase is primarilydue to the
Company transferring a portion of
its funds into marketable securities which earn a higher return of interest
than
other investments we utilized in the prior year.
Other
Income (Expense), Net
Other
income (expense), net
isprimarily attributed
toforeign currency transaction
gains or
losses and re-measurement of our short-term intercompany balances between
the
U.S.and
our foreign denominated
subsidiaries. The following table sets forthour
other income (expense), net for the
three months ended
December
31, 2007and
2006 (in
thousands, except
percentages):
|
|
|
Three
Months Ended December
31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
|
Other
income (expense), net
|
|
$
|
134
|
|
|
$
|
(15
|
)
|
|
$
|
149
|
|
993
|
%
|
|
|
Percentage
of total
revenues
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
Other
income
(expense) increasedby
$0.1
million or 993% forthe
three months ended December 31,2007,
as compared to the same period of the
prior year. This increase was primarily related to the selling of a website
domain name during the three months ended December 31, 2007. This was a
non-recurring transaction and not considered part of our normal business
operations.
Provision
for Income
Taxes
Our
provision for income taxes was $0.2
million and $0.1 million for the three months ended December 31, 2007 and
2006,
respectively. These provisions are primarily attributable to taxes on earnings
from our foreign subsidiaries,certain
foreign withholding taxes, minimum
taxes at the
state level, and the alternate minimum tax for federal
purposes.
Our
deferred tax assets primarily
consist of net operating loss carryforwards, nondeductible allowances and
research and development tax credits. We have recorded a valuation allowance
for
the full amount of our net deferred tax assets, as the future realization
of the
tax benefit is not considered by management to be
more-likely-than-not.
Liquidity
and Capital
Resources
Prior
to fiscal 2007,we have not been profitable
and we have
financed any shortfall from our operating activities through the issuance of our common
stock.
For the three months
ended
December 31, 2007, we used cash from operations, but generated cash from
financing and investing activities. It is anticipated that we will generate
cash
from operations or financing activities in excess of the cash requirements
for
the next twelve months.
Operating
Activities
Cash
used by
operating activities was $2.7
million during the
three
months ended December 31, 2007,
which consisted primarily of our net
income of
$0.2 million
adjusted for non-cash items
(primarily depreciationandamortization,
non-cash stock-based
compensation expense, and
the provision for doubtful
accounts)
aggregating approximately $2.1 million
and the net cash outfloweffect
from changes in assets and
liabilities of approximately $5.0 million.
This net cash outflow
was primarilydueto
the
change in account balances in
deferred revenue of $10.7 million, in prepaid expenses and other current
assets
of $2.0 million, offset by cash inflows from the change in account balances
in
accounts receivable of $6.3 million, in other assets of $1.0 million and
in
accrued expenses and accounts payable of $0.4 million.
Cash
provided by operating activities
was $2.4 million during the three months ended December 31, 2006, which
consisted primarily of our net loss of $10.7 million adjusted for
non-cash items (primarily
depreciation and amortization, non-cash
stock-based
compensation expense,provision
for doubtful accounts, loss on
disposal of assets and
other
non-cash charges)
aggregating approximately $2.9 million and the net cash inflow effect from
changes in assets and liabilities of approximately $10.2 million. This net
cash
inflow was primarily related to the timing of payments for vendor invoices
and
other accrued liabilities and an increase in deferred revenues of $31.7 million.
The increase in deferred revenues is the result of two large sales transactions
totaling $34.0 million
that were consummatedduring
the period for which revenue
was notrecognized
until subsequent periods.
This increase corresponds with an increase in accounts receivable of $22.7
million primarily related to sales transactions that closed at the end of
the
quarter not allowing sufficient time within the quarter to collect the
cash.
Investing
Activities
Cash
provided
byinvesting activities
was $0.5 million
during the three months ended
December 31, 2007.
The
cash
provided wasprimarily from
$1.3 million of net proceeds from
marketable securities offset by the use of cash for the purchase
of $0.7 million of property and
equipment,and
the capitalization of less than $0.1
million
of software development costs
associated with the porting of an
existing product to a new platform.
The property and equipment
purchases were primarily computer equipment and software used in day-to-day
operations.
Cash
used for investing activities was
$1.1 million during the three months ended December 31, 2006. This use of
cash
was primarily for purchases of property and equipment associated with the
closure of the previousEuropean
headquarters office and the
opening of the new smaller European headquarters office during the
period.
Financing
Activities
Cash
provided by financing activities
was $0.6 million
during the three months ended
December 31, 2007. The cash
provided wasprimarily
related to proceeds from stock option exercises of
$0.6 million
and less than $0.1
million from excess tax benefits
from stock-based compensation.
Cash
provided by financing activities
was $0.2 million during the three months ended December 31, 2006. The cash provided
wasprimarily related to
proceeds from stock option exercises of $0.2 million, offset by payments
of $0.1 million
on capital lease
obligations.
Revolving
Line of
Credit
See
Note 8 to the Condensed Consolidated
Financial Statements for detailed information regarding our revolving line
of
credit.
Contractual
Obligations
Ness
We
entered
into an agreement with Ness
Technologies Inc., Ness Global Services, Inc. and Ness Technologies India,
Ltd.
(collectively, “Ness”), effective December 15,
2003, pursuant to which Ness
provides our customers with technical product support through a worldwide
help
desk facility, a sustaining engineering function that serves as the interface
between technical product support and our internal engineering organization,
product testing services and product development services (collectively,
the
“Services”). The agreement had an initial term of three years and was extended
for twoadditional
year terms.
Under the terms of the agreement,
wepay
for services rendered on a monthly
fee basis, including the requirement to reimburse Nessfor
approved out-of-pocket expenses. The
agreement may be terminated for convenience by us,
subject to the payment of a
termination fee. In 2004,
2005, 2006 and 2007 wefurther
expanded ouragreement
with Ness whereby Nessis
providing certain additional
technical and consulting services. The additional agreements canbe cancelled at the
option of
uswithout the payment
of a
termination fee. The remaining minimum purchase commitment under these
agreements, if Chordiant was to cancel the contracts, was approximately
$0.7 million
at December 31,
2007. In addition to service
agreements, we also
guaranteed certain equipment lease
obligations of Ness
(see
Note 9 to the Condensed
Consolidated
Financial Statements). Nessmay
procure equipment to be used in
performance of the Services, either through leasing arrangements or direct
cash
purchases, for which we
areobligated under the
agreement to reimburse them. In connection with the procurement of equipment,
Ness has entered into a 36 month equipment lease agreement with IBM India
and,
in connection with the lease agreement wehave an
outstandingstandby letter of credit
in the amount
of $0.3
million
in guarantee of Ness’
financial
commitments under the lease.
Over the term of the lease, our obligation to reimburse Nessis
approximately equal to the amount of
the guarantee.
Leases
Operating
lease payments in the table
belowinclude
approximately $3.4 million
for
two
facility operating lease commitments
that are
included
in Restructuring
expenses.
One
of the leases is located in
Boston,
Massachusetts
and
the other is located in the
United Kingdom.
As
of December 31,
2007, the Company has $0.8 million insublease
income contractually committed
for future periods relating to the Boston,
Massachusetts facility
classified as an operating
lease. See Notes 5
and 9 to the Condensed Consolidated
Financial Statements for
further discussion.
In
November 2007, we negotiated a
break clause in the in the United
Kingdom lease allowing for an early termination of the respective facility
which
will release the Company of any future rent liabilities subsequent to January
2008. The scheduled lease paymentsshown
in the table below includes
$1.2 million that was paid in
the second quarter of fiscal year 2008 associated with the early termination
of
the United
Kingdomlease. Subsequent
to December 31, 2007 and
as of the date of the
filing of this Form 10-Q, the Company has paid its final lease
payment for the
United Kingdomlease
and has been released from
any future rent
liabilities.
We
haveasset retirement obligations,associated
with commitments to return
property subject to operating leases to original condition upon lease
termination. Asof
December
31,
2007, weestimate
that gross expected cash flows
of approximately $0.4
million
will be required to
fulfill these obligations
We
have no material commitments for
capital expenditures and do not anticipate capital expenditures to fluctuate
significantly from historic levels.
The
following table presents certain
payments due under contractualobligations as of December
31,
2007 based on fiscal years
(in
thousands):
|
|
|
Payments
Due
By
Period
|
|
|
|
|
Total
|
|
|
|
Due
in
2008
|
|
|
|
Due
in
2009-2010
|
|
|
|
Due
in
2011-2012
|
|
|
|
Thereafter
|
|
|
Operating
lease
obligations
|
$
|
11,428
|
|
|
$
|
3,619
|
|
|
$
|
4,779
|
|
|
$
|
2,473
|
|
|
$
|
557
|
|
|
Asset
retirement
obligations
|
|
350
|
|
|
|
—
|
|
|
|
—
|
|
|
|
350
|
|
|
|
—
|
|
|
Total
|
$
|
11,778
|
|
|
$
|
3,619
|
|
|
$
|
4,779
|
|
|
$
|
2,823
|
|
|
$
|
557
|
|
Effective
October 1, 2007, the Company adopted FIN No. 48 and reclassified $0.2 million
of
gross unrecognized tax benefits to Other Long-Term Liabilities in our Condensed
Consolidated Balance Sheets. As of December 31, 2007, the Company cannot
make a
reasonably reliable estimate of the period in which these liabilities may
be
settled with the respective tax authorities. See Note
11 to the Condensed Consolidated
Financial Statements for additional information.
We
believe that the effects of our
strategic actions implemented to improve revenue as well as to control costs
will be adequate to generate sufficient cash flows from operations, which,
when
combined with existing cash balances, we anticipate will be sufficient to
meet
our working capital and operating resource expenditure requirements for the
near
term. If the global economy weakens, a decline could occur.
We
anticipate that operating expenses
will continue to be a material use of our cash resources. We may continue
to
utilize cash resources to fund acquisitions or investments in other businesses,
technologies or product lines. In the long-term, we may require additional
funds
to support our working capital and operating expense requirements or for
other
purposes, and may seek to raise these additional funds through public or
private
debt or equity financings. There can be no assurance that this additional
financing will be available, or if available, will be on reasonable terms.
Failure to generate sufficient revenues or to control spending could adversely
affect our ability to achieve our business objectives.
Indemnification
See
Note 9 to the Condensed Consolidated
Financial Statements for detailed information regarding our
indemnifications.
Off
Balance
Sheet
Arrangements
None.
We
are exposed to the impact of interest
rate changes and foreign currency fluctuations.
The
following table presents
the amounts of
restricted cashand
marketable securitiesthat
are subject to interest rate risk by year of expected maturity and average
interest rates as of December 31,
2007 (in
thousands):
|
|
|
December
31, 2007
|
|
|
Fair
Value
|
|
Average
Interest
Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash invested
in short-term
investments
|
$
|
315
|
|
$
|
315
|
|
2.8
|
%
|
|
|
Marketable
securities
|
|
10,885
|
|
|
10,885
|
|
4.6
|
%
|
|
|
Total
restricted cash and
marketable securities
|
$
|
11,200
|
|
$
|
11,200
|
|
4.6
|
%
|
|
The
following table presents the amounts
of restricted cash that are subject to interest rate risk by year of expected
maturity and average interest rates as of December 31, 2006(in
thousands):
|
|
|
December
31, 2006
|
|
|
Fair
Value
|
|
Average
Interest
Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash invested
in short-term
investments
|
$
|
602
|
|
$
|
602
|
|
1.6
|
%
|
|
Interest
Rate
Risk. Our exposure to
market rate risk for changes in interest rates relates primarily to money
market
accounts, commercial paper, short-term certificates of depositand marketable securities. We
invest our excess cash in money
market accounts, commercial paper, certificates-of-deposit, and marketable securitieswith
maturities
of less than one year.Fixed
rate securities may have their
fair market value adversely impacted due to a rise in interest rates. Due
in
part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell our fixed rate securities which have declined
in
market value due to changes in interest rates.
To
provide a meaningful assessment of
the interest rate risk associated with the Company’s total restricted cash and
marketable securities, we
performed a sensitivity analysis to determine the hypothetical impact of
a
decrease in interest rate of 100 basis points. Assuming consistent investment
levels as of December 31, 2007, interest income would decline by less than
$0.1
million. Assuming consistent investment levels as of December 31, 2006, interest
income would have declined by less than $0.1 million.
Foreign
Currency
Risk. International
revenues accounted for
approximately 46% and 42% of total revenues for three
months ended December 31,
2007 and 2006, respectively.
International
revenues increased $3.8 million or 39% compared to the same period of the
prior
year. The growth in our international operations has increased our exposure
to
foreign currency fluctuations. Revenues and related expense generated
from our international subsidiaries are generally denominated in the functional
currencies of the local countries. Primary currencies include the
United
Kingdom Pound Sterling,
the Euro
and the Canadian
Dollar. The Condensed Consolidated
Statement
of Operations is translated into United States Dollars at the average exchange
rates in each applicable period. To the extent the United States Dollar
strengthens against foreign currencies, the translation of these foreign
currencies denominated transactions results in reduced revenues, operating
expense, and net income for our international operations. Similarly, our
revenues, operating expenses, and net income will increase for our international
operations, if the United States Dollar weakens against foreign
currencies. Using the
average foreign currency exchange rates for the three months ended December
31,
2006, our international revenues for the three months ended December 31,
2007
would have been lower than we reported by approximately $1.1 million and
our
international income from operations would have been lower than we reported
by
$0.4 million.
We
are also exposed to foreign exchange
rate fluctuations as we convert the financial statements of our foreign
subsidiaries and our investments in equity interests into United Statesdollars
in consolidation. If there is a
change in foreign currency exchange rates, the conversion of the foreign
subsidiaries’ financial statements into United Statesdollars
will lead to a translation gain
or loss which is recorded as a component of accumulated other comprehensive
income which is a
componentof Stockholders’
Equity.
In addition, we have certain
assets and liabilities that are denominated in currencies other than the
relevant entity’s functional currency. Changes in the functional currency value
of these assets and liabilities create fluctuations that will lead to a
transaction gain or loss.
For the three months ended December 31, 2007 and 2006, we recorded net foreign
currency transaction gains (losses), realized and unrealized, of less than
$0.1
million which was recorded in Other income (expense), net, in the Condensed
Consolidated Statements of Operations.
Under
the supervision and with the
participation of our management, including the President and Chief Executive
Officer and the Chief Financial Officer, we have evaluated the effectiveness
of
our disclosure controls and procedures as required by Exchange Act of 1934,
as
amended, Rule 13a-15(b) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective. There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
II - OTHER
INFORMATION
See
Note 10 to the Condensed
Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q for
a
description of our legal proceedings.
Item
1A.
The
Company has marked with an
asterisk (*) those risk factors that reflect substantive changes from
the risk factors included in the Company’s Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended September 30,
2007.
The
matters relating to the Audit Committee of the Board’s review of our historical
stock option granting practices and the restatement of our Consolidated
Financial Statements have resulted in litigation, and may result in additional
litigation.
On
July 24, 2006, the Company announced that the Audit Committee of the Company’s
Board of Directors, with the assistance of independent legal counsel, was
conducting a review of our stock option practices covering the time from
the
Company’s initial public offering in 2000 through June 2006. As described in
Note 3 “Restatement of Previously Issued Consolidated Financial Statements” in
Notes to Consolidated Financial Statements in the 2006 Form 10-K, the Audit
Committee reached a conclusion that incorrect measurement dates were used
for
financial accounting purposes for stock option grants in certain prior periods.
As a result, the Company has recorded additional non-cash stock-based
compensation expense, and related tax effects, related to certain stock option
grants, and the Company has restated certain previously filed financial
statements included in the 2006 Annual Report on Form 10-K.
This
review of our historical stock option granting practices has required us
to
incur substantial expenses for legal, accounting, tax and other professional
services, has diverted our management’s attention from our business, and any
litigation or future government enforcement actions could in the future
adversely affect our business, financial condition, results of operations
and
cash flows.
Our
historical stock option granting practices and the restatement of our prior
financial statements have exposed us to greater risks associated with litigation
proceedings. Several derivative complaints have been filed pertaining to
allegations relating to stock option grants. We cannot assure you that these
or
future similar complaints or any future litigation or regulatory action will
result in the same conclusions reached by the Audit Committee. The conduct
and
resolution of these matters will be time consuming, expensive and distracting
from the conduct of our business.
We
contacted the SEC regarding the Audit Committee’s review and, in July 2006, the
SEC commenced an investigation into our historical stock option grant practices.
In November 2006, a representative of the Audit Committee and its informal
advisors met with the enforcement staff of the SEC and provided them with
a
report of the Audit Committee’s investigation and findings. In January 2007, the
enforcement staff of the SEC notified the Company that its investigation
had
been terminated and no enforcement action had been recommended to the
Commission.
The
findings of the Audit Committee’s review are more fully described in Note 3
to the Consolidated Financial
Statements and in Item 9A of the Annual Report on Form 10-K for the year
ended September 30, 2006.
*Prior
to the three months ended March
31, 2007, we were not profitable and we may incur losses in the future, which
may raise vendor viability concerns thereby making it more difficult to close
license transactions with new and existing customers.
While
the Company was profitable in the
amount of $0.2 million
for the three months ended
December 31, 2007, we incurred a loss of $10.7 million
for the three months ended
December 31, 2006. As of December 31, 2007, we had an accumulated deficit
of
$226.7million.
We may incur losses in future
periods and cannot be certain that we can generate sufficient revenues to
achieve profitability. Continued losses may leave many customers reluctant
to
enter into new large value license transactions without some assurance that
we
will operate profitably. If we fail to enter into new large value license
transactions due to lack of vendor profitability and/or viability concerns,
our
revenues will decline, which could further adversely affect our operating
results.
*Because
a small number of customers
account for a substantial portion of our revenues, the loss of a significant
customer could cause a substantial decline in our revenues.
We
derive a significant portion of our
license and service revenues from a limited number of customers. The loss
of a
major customer could cause a decrease in revenues and net income. For the
three
months ended December 31, 2007, Citicorp Credit
Services,
Inc.,IBM,
and Wellpoint, Inc., accounted for 22%,
11%
and
11% of our total revenue.
While our customer
concentration has fluctuated, we expect that a
limited number of
customers will continue to account for a substantial portion of our revenues.
As
a result, if we lose a major customer, or if a contract is delayed or cancelled
or we do not contract with new major customers, our revenues and net
incomewould
be adversely affected. In
addition, customers that have accounted for significant revenues in the past
may
not generate revenues in any future period, causing our failure to obtain
new
significant customers or additional orders from existing customers to materially
affect our operating results.
*If
we fail to adequately address the
difficulties of managing our international operations, our revenues and
operating expenses will be adversely affected.
For
the quarter ended December 31, 2007,
international revenues were $13.5 million
or approximately 46%
of our total revenues. While North
American revenues continue
to represent a majority ofour overall revenues,
international
revenues will continue to represent a significant portion of our total revenues
in future periods. We have faced, and will continue to face, difficulties
in
managing international operations which include:
|
•
|
Difficulties
in hiring qualified
local personnel;
|
|
•
|
Seasonal
fluctuations in customer
orders;
|
|
•
|
Longer
accounts receivable
collection cycles;
|
|
•
|
Expenses
associated with licensing
products and servicing customers in foreign
markets;
|
|
•
|
Economic
downturns and political
uncertainty in international
economies;
|
|
•
|
Income
tax withholding issues in
countries in which we do not have a physical presence, resulting
in
non-recoverable tax
payments;
|
|
•
|
Complex
transfer pricing
arrangements between legal
entities;
|
|
•
|
Doing
business and licensing our
software to customers in countries with weaker intellectual property
protection laws and enforcement
capabilities;
|
|
•
|
Difficulties
in
commencing new operations in countries where the Company has not
previously conducted business, including those associated with
tax laws,
employment laws, government regulation, product warranty laws and
adopting
to local customs and culture;
and
|
Any
of these factors could have a
significant impact on our ability to license products on a competitive and
timely basis and could adversely affect our operating expenses and net income.
Additionally we closed our only French office in the first fiscal quarter
of
2007. The absence of a business office in Francemay
harm our ability to attract and
retain customers in that country.
Our
known backlog of business may not
result in revenue.
An
increasingly material portion of our
revenues has been derived from large orders, as major customers deployed
our
products. We define backlog as contractual commitments by our customers through
purchase orders or contracts. Backlog is comprised of software license orders
which have not been accepted by customers or have not otherwise met all of
the
required criteria for revenue recognition, deferred revenue from customer
support contracts, and deferred consulting and education orders for services
not
yet completed or delivered. Backlog is not necessarily indicative of revenues
to
be recognized in a specified future period. There are many factors that would
impact the Company’s filling of backlog, such as the Company’s progress in
completing projects for its customers and Chordiant’s customers’ meeting
anticipated schedules for customer-dependent deliverables. The Company provides
no assurances that any portion of its backlog will be filled during any fiscal
year or at all or that its backlog will be recognized as revenues in any
given
period. In addition, it is possible that customers from whom we expect to
derive
revenue from backlog will default and as a result we may not be able to
recognize expected revenue from backlog.
*Fluctuations
in the value of the U.S.
dollar relative to foreign currencies could make our products less competitive
in international markets and could negatively affect our operating results
and
cash flows.
A
significant portion of our sales and
operating expenses result from transactions outside of the U.S.,
often in foreign currencies. These
currencies include the
United Kingdom Pound Sterling, the Euro
and the Canadian
Dollar. Our international sales comprised 46%
of our total sales for the three
months ended December 31, 2007. Our international sales comprised 42%
of our total sales for the three
months ended December 31, 2006. Our
future operating results will
continue to be subject to fluctuations in foreign currency rates, especially
if
international sales increase as a percentage of our total sales, and we may
be
negatively impacted by fluctuations in foreign currency rates in the future.
For
the three months ended December 31, 2007, we had an unrealized foreign currency
transaction gain of less
than $0.1
million. See Item
3 Quantitative
and Qualitative Disclosures
about Market Risk for further discussions.
Geopolitical
concerns could make the
closing of license transactions with new and existing customers
difficult.
Our
revenues will decrease in fiscal
year 2008or
beyond if we are unable to enter into
new large-scale license transactions with new and existing customers. The
current state of world affairs and geopolitical concerns have left many
customers reluctant to enter into new large value license transactions without
some assurance that the economy both in the customer’s home country and
worldwide will have some economic and political stability. Geopolitical
instability will continue to make closing large license transactions difficult.
In addition, we cannot predict what effect the U.S. military presence overseas
or potential or actual political or military conflict have had or are continuing
to have on our existing and prospective customers’ decision-making process with
respect to licensing or implementing enterprise-level products such as ours.
Our
ability to enter into new large license transactions also directly affects
our
ability to create additional consulting services and maintenance revenues,
on
which we also depend.
Competition
in our markets is intense
and could reduce our sales and prevent us from achieving
profitability.
Increased
competition in our markets
could result in price reductions for our products and services, reduced gross
margins and loss of market share, any one of which could reduce our future
revenues. The market for our products is intensely competitive, evolving
and
subject to rapid technological change. Historically, our primary competition
has
been from internal development, custom systems integration projects and
application software competitors. In particular, we compete
with:
|
•
|
Internal
information technology departments:in-house
information technology
departments of potential customers have developed or may develop
systems
that provide some or all of the functionality of our products.
We expect
that internally developed application integration and process automation
efforts will continue to be a significant source of
competition.
|
|
•
|
Custom
systems
integration projects:we compete
with large systems
integrators who may develop custom solutions for specific companies
which
may reduce the likelihood that they would purchase our products
and
services.
|
|
•
|
Point
application vendors:we compete
with providers of
stand-alone point solutions for web-based customer relationship
management
and traditional client/server-based, call-center service customer
and
sales-force automation solution
providers.
|
The
enterprise software industry continues to undergo consolidation in sectors
of
the software industry in which we operate. Within the last 12 months, IBM
acquired Cognos, DataMirror and Watchfire
Corporation, Oracle completed its
acquisition of Hyperion and Moniforce and has entered into an agreement to
purchase BEA systems, Sun Microsystems has entered in an agreement to purchase
MySQL and SAP acquired BusinessObjects, YASU Technologies and Pilot Software.
While we do not believe that
Cognos, DataMirror,
Watchfire Corporation, Hyperion, Moniforce,
BEA Systems, MySQL,
BusinessObjects, YASU Technologies, or Pilot Software have been significant
competitors of
Chordiant in the past, the acquisition of these companies by IBM, Oracle,
Sun Microsystems and SAP may indicate that we
will face increased
competition from larger and more established entities in the
future.
Many
of our competitors have greater
resources and broader customer relationships than we do. In addition, many
of
these competitors have extensive knowledge of our industry. Current and
potential competitors have established, or may establish, cooperative
relationships among themselves or with third parties to offer a single solution
and to increase the ability of their products to address customer
needs.
*The
company's common stock price has historically been and may continue be volatile,
which could result in substantial losses for stockholders.
The
market price of shares of the Company’s common stock has been and is likely to
continue to be highly volatile and may be significantly affected by factors
such
as the following:
|
•
|
Actual
or anticipated fluctuations in its operating results;
|
|
•
|
Changes
in economic and political conditions in the United States and abroad;
|
|
•
|
Terrorist
attacks, war or the threat of terrorist attacks and war;
|
|
•
|
The
announcement of mergers or acquisitions by the Company or its competitors;
|
|
•
|
Developments
in ongoing or threatened litigation;
|
|
•
|
Announcements
of technological innovations;
|
|
•
|
Failure
to comply with the requirements of Section 404 of the Sarbanes-Oxley
Act;
|
|
•
|
New
products or new contracts announced by it or its competitors;
|
|
•
|
Developments
with respect to intellectual property laws;
|
|
•
|
Price
and volume fluctuations in the stock market;
|
|
•
|
Changes
in corporate purchasing of software by companies in the industry
verticals
supported by the Company;
|
|
•
|
Adoption
of new accounting standards affecting the software industry; and
|
|
•
|
Changes
in financial estimates by securities analysts.
|
In
addition, following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has often been brought
against such companies. If the Company is involved in such litigation, it
could
result in substantial costs and a diversion of management’s attention and
resources and could materially harm the Company’s business, operating results
and financial condition.
We
may experience a shortfall in
bookings, revenue,
earnings, cash flow or
otherwise fail to meet public market expectations, which could materially
and
adversely affect our business and the market price of our common
stock.
Our
revenues and operating results may
fluctuate significantly because of a number of factors, many of which are
outside of our control. Some of these factors include:
|
•
|
Size
and timing of individual
license transactions;
|
|
•
|
Delay
or deferral of customer
implementations of our products and subsequent impact on
revenues;
|
|
•
|
Lengthening
of our sales
cycle;
|
|
•
|
Potential
additional deterioration
and changes in domestic and foreign markets and economiesincluding
those impacted
by the difficulties
in the sub-prime
lending markets;
|
|
•
|
Success
in expanding our global
services organization, direct sales force and indirect distribution
channels;
|
|
•
|
Timing
of new product
introductions and product
enhancements;
|
|
•
|
Appropriate
mix of products
licensed and services sold;
|
|
•
|
Levels
of international
transactions;
|
|
•
|
Activities
of and acquisitions by
competitors;
|
|
•
|
Product
and price competition;
and
|
|
•
|
Our
ability to develop and market
new products and control
costs.
|
One
or more of the foregoing factors may
cause our operating expenses to be disproportionately high during any given
period or may cause our revenues and operating results to fluctuate
significantly. Based upon the preceding factors, we may experience a shortfall
in revenues and earnings or otherwise fail to meet public market expectations,
which could materially and adversely affect our business, financial condition,
results of operations and the market price of our common
stock.
Our
operating results and cash flows
fluctuate significantly and delays in delivery or implementation of our products
or changes in the payment terms with customers may cause unanticipated declines
in revenues or cash flow, which could disappoint investors and result in
a
decline in our stock price.
Our
quarterly revenues depend primarily
upon product implementation by our customers. We have historically recognized
a
significant portion of our license and services revenue through the
percentage-of-completion method, using labor hours incurred as the measure
of
progress towards completion of implementation of our products and we expect
this
practice to continue. The percentage of completion accounting method requires
ongoing estimates of progress of complicated and frequently changing technology
projects. Documenting the measure of progress towards completion of
implementation is subject to potential errors and changes in estimates. As
a
result, even minor errors or minor changes in estimates may lead to significant
changes in accounting results which may be revised in later quarters due
to
subsequent information and events. Thus, delays or changes
in
customer
business goals or direction
when implementing our software may adverselyimpact
our quarterly revenue.
Additionally, we may increasingly enter into term, subscription or transaction
based licensing transactions that would cause us to recognize license revenue
for such transactions over a longer period of time than we have historically
experienced for our perpetual licenses. In addition, a significant portion
of
new customer orders have been booked in the third month of each calendar
quarter, with many of these bookings occurring in the last two weeks of the
third month. We expect this trend to continue and, therefore, any failure
or
delay in bookings would decrease our quarterly revenue and cash flows. The
terms
and conditions of individual license agreements with customers vary from
transaction to transaction. Historically, the Company has been able to obtain
prepayments for product in some cases, but
more recently we have entered into
large transactions with payments from customers due over one or more
years. Other transactions
link payment to the delivery or acceptance of products. If we are unable
to
negotiate prepayments of fees our cash flows and financial ratios with respect
to accounts receivable would be adverselyimpacted.
If our revenues, operating
margins or cash flows are below the expectations of the investment community,
our stock price is likely to decline.
If
we fail to maintain and expand our
relationships with systems integrators and other business partners, our ability
to develop, market, sell, and support our products may be adversely
affected.
Our
development, marketing and
distribution strategies rely on our ability to form and maintain long-term
strategic relationships with systems integrators, in particular, our existing
business alliance partners, IBM, and Accenture. These business relationships
often consist of joint marketing programs, technology partnerships and resale
and distribution arrangements. Although most aspects of these relationships
are
contractual in nature, many important aspects of these relationships depend
on
the continued cooperation between the parties. Divergence in strategy, change
in
focus, competitive product offerings or potential contract defaults may
interfere with our ability to develop, market, sell, or support our products,
which in turn could harm our business. If either IBM or Accenture were to
terminate their agreements with us or our relationship were to deteriorate,
it
could have a material adverse effect on our business, financial condition
and
results of operations. In many cases, these parties have extensive relationships
with our existing and potential customers and influence the decisions of
these
customers. A number of our competitors have stronger relationships with IBM
and
Accenture and, as a result, these systems integrators may be more likely
to
recommend competitors’ products and services. Within the year IBM
acquired Cognos, DataMirror and Watchfire
Corporation.
While we do
not believe that either Cognos,
DataMirror or Watchfire Corporation had been a direct
competitor of
Chordiant in the past, IBM’s acquisition of these companies
may indicate that IBM will become a
competitor of ours in the future. While the Company currently has good
relationship with IBM, this relationship and the Company’s strategic
relationship agreement with IBM may be harmed if the Company increasingly
finds
itself competing with IBM. Our relationships with systems integrators and
their
willingness to recommend our products to their customers could be harmed
if the
Company were to be subject to a take over attempt from a competitor of such
systems integrators.
If
systems integrators fail to properly
implement our software, our business, reputation and financial results may
be
harmed.
We
are increasingly relying on systems
integrators to implement our products, and this trend may continue. As a
result,
we have less quality control over the implementation of our software with
respect to these transactions and are more reliant on the ability of our
systems
integrators to correctly implement our software. If these systems integrators
fail to properly implement our software, our business, reputation and financial
results may be harmed.
Our
primary products have a long sales
and implementation cycle, which makes it difficult to predict our quarterly
results and may cause our operating results to vary
significantly.
The
period between initial contact with
a prospective customer and the implementation of our products is unpredictable
and often lengthy, ranging from three to twenty-four months. Thus, revenue
and
cash receipts could vary significantly from quarter to quarter. Any delays
in
the implementation of our products could cause reductions in our revenues.
The
licensing of our products is often an enterprise-wide decision that generally
requires us to provide a significant level of education to prospective customers
about the use and benefits of our products. The implementation of our products
involves significant commitment of technical and financial resources and
is
commonly associated with substantial implementation efforts that may be
performed by us, by the customer or by third-party systems integrators. If
we
underestimate the resources required to meet the expectations we have set
with a
customer when we set prices, then we may experience a net losson
that customer engagement. If this
happens with a large customer engagement, then this could have a material
adverse effect on our financial results. Customers generally consider a wide
range of issues before committing to purchase our products, including product
benefits, ability to operate with existing and future computer systems, vendor
financial stability and longevity, ability to accommodate increased transaction
volume and product reliability.
If
we do not maintain effectiveinternal
controlsover
financial reporting, investors
could lose confidence in our financial reporting and customers may delay
purchasing decisions, which would harm our business and the market price
of our
common stock.
Effective
internal controls are
necessary for us to provide reliable financial reports. If we cannot provide
reliable financial reports, our business could be harmed. We are a complex
company with complex accounting issues and thus subject to
related
risks
of errors in financial reporting
which may cause problems in corporate governance, the costs of which may
outweigh the costs of the underlying errors themselves. For example, the
Audit Committee of the Company’s Board of Directors, with the assistance of
outside legal counsel, conducted a review of our stock option practices covering
the time from the Company’s initial public offering in 2000 through September
2006. The Audit Committee reached a conclusion that incorrect measurement
dates
were used for financial accounting purposes for stock option grants in certain
prior periods. As a result, the Company recorded an additional non-cash
stock-based compensation expense, and related tax effects, related to stock
option grants and concluded that a material weakness surrounding the control
activities relating to the stock option grants existed at September 30,
2006. To correct
these accounting errors, we restated the Consolidated Financial Statements
contained in our Annual Report on Form 10-K for the year ended September
30,
2006 and our Quarterly Report on Form 10-Q for the three months ended June
30,
2006. As a result of this need to restate financial statements, management
and
the Audit Committee determined that material weaknesses in our internal control
over financial reporting existed as of September 30, 2006. These material
weaknesses were remediated during fiscal year 2007 and management concluded
internal controls over financial reporting were effective for the reporting
period.
If
we are not successful in maintainingeffective
internal controls over
financial reporting, customers may delay purchasing decisions or we may lose
customers, create investor uncertainty, face litigation and the market price
of
our common stock may decline. For more information, please refer to the
discussion under the heading “Item 9A. Controls and Procedures” in the 2006Annual
Report on Form
10-K.
*If
we are not able to successfully
manage our partner operations in India,
our operations and financial results
may be adversely affected.
In
2003, we entered into an agreement
with Ness Technologies Inc., Ness Global Services, Inc. and Ness Technologies
India, Ltd. (collectively, “Ness”), an independent contracting company with
global technical resources and an operations center in Bangalore, India and
operations in other locations. The agreement provides for Ness,
at our direction, to attract, train,
assimilate and retain sufficient highly qualified personnel to perform staffing
for consulting projects, technical support, product test and certain sustaining
engineering functions. As of December 31, 2007,
we use the services of approximately
148 consultants
through Ness.
In addition, as a result of the
reduction in our workforce that took place in July 2005, and the reduction
in
our workforce that took place in October 2006, by approximately 10% in each
instance, we continue to
bedependent on Ness.
This
agreement is an important component
of our strategy to address the business needs of our customers and manage
our
expenses. The success of this operation will depend on our ability and
Ness’s
ability to attract, train, assimilate
and retain highly qualified personnel in the required periods. A disruption
of
our relationship with Nesscould
adversely affect our operations.
Failure to effectively manage the organization and operations will harm our
business and financial results.
If
our products do not operate
effectively in a company-wide environment, we may lose sales and suffer
decreased revenues.
If
existing customers have difficulty
deploying our products or choose not to fully deploy our products, it could
damage our reputation and reduce revenues. Our success requires that our
products be highly scalable, and able to accommodate substantial increases
in
the number of users. Our products are expected to be deployed on a variety
of
computer software and hardware platforms and to be used in connection with
a
number of third-party software applications by personnel who may not have
previously used application software systems or our products. These deployments
present very significant technical challenges, which are difficult or impossible
to predict. If these deployments do not succeed, we may lose future sales
opportunities and suffer decreased revenues. If we underestimate the resources
required to meet the expectations we have set with a customer when we set
prices, then we may experience a net loss
on
that customer engagement. If this
happens with a large customer engagement then this could have a material
adverse
effect on our financial results.
Defects
in our products could diminish
demand for our products and result in decreased revenues, decreased market
acceptance and injury to our reputation.
Errors
may be found from time-to-time in
our new, acquired or enhanced products. Any significant software errors in
our
products may result in decreased revenues, decreased sales, and injury to
our
reputation and/or increased warranty and repair costs. Although we conduct
extensive product testing during product development, we have in the past
discovered software errors in our products as well as in third-party products,
and as a result have experienced delays in the shipment of our new
products.
Because
competition for qualified
personnel is intense, we may not be able to retain or recruit personnel,
which
could impact the development and sales of our products.
If
we are unable to hire or retain
qualified personnel, or if newly hired personnel fail to develop the necessary
skills or fail to reach expected levels of productivity, our ability to develop
and market our products will be weakened. Our success depends largely on
the
continued contributions of our key management, finance, engineering, sales
and
marketing and professional services personnel. In particularin prior years,
we have had significant turnover of
our executives as well in our sales, marketing and finance organizations
and
many key positions are held by people who have less than two
years of experience
in their roles with one Company. If these people are
not well suited to
their new roles, then this could result in the Company having problems
in
executing
its strategy or in
reporting its financial results. Because of the dependency on a small number
of
large deals, we are uniquely dependent upon the talents and relationships
of a
few executives and have no guarantee of their retention. Changes in key sales
management could affect our ability to maintain existing customer relationships
or to close pending transactions. We have been targeted by recruitment agencies
seeking to hire our key management, finance, engineering, sales and marketing
and professional services personnel. In addition, in July 2005 and again
in
October of 2006, we reduced the size of our workforce by approximately 10%
in
each instance, which may have a negative effect on our ability to attract
and
retain qualified personnel.
*To
date, our sales have been
concentrated in the banking, insurance,
healthcare,
andtelecommunications
markets, and if we are unable to continue sales in these markets or successfully
penetrate new markets, or
if these industries reduce their spending in reaction to the difficulties
in the
sub-prime lending market, our revenues may
decline.
Sales
of our products and services in
fivelarge
markets—banking, insurance,
healthcare,
telecommunications
and
retail markets accounted for approximately 97%
and 99% of our total revenues for the
three months ended December 31, 2007 and 2006, respectively. We expect that
revenues from these five marketswill continue to account
for a
substantial portion of our total revenues for the foreseeable future. If
we are
unable to successfully increase penetration of our existing markets or achieve
sales in additional markets, or if the overall economic climate of our target
markets deteriorates, our revenues may decline. Some of our current
or prospective
customers, especially those in the banking and insurance industries are
in businesses that have or could have exposure, directly or indirectly, to
the
residential mortgage sector or homebuilder sector which has recently been
facing
financial difficulties. If this causes our current or prospective
customers to
reduce their spending on technology, then this could have an adverse impact
on
our sales and revenues.
*
Low gross margin in services revenues
could adversely impact our overall gross margin and net income.
Our
services revenues have had lower
gross margins than our license revenues. Service revenues comprised 70% and 69%
of our total revenues for the
three months ended
December 31,
2007 and
2006, respectively.
Gross margin on service revenues was
58%
and 53%
for thethree months ended
December 31, 2007 and
2006,
respectively. License revenues
comprised 30% and
31% of our total revenues
for the three months ended
December 31,
2007 and
2006, respectively.
Gross margins on license revenues were
96%
and 94%
for the three months ended
December
31, 2007and
2006,
respectively.
As
a result, an increase in the
percentage of total revenues represented by services revenues, or an unexpected
decrease in license revenues, could have a detrimental impact on our overall
gross margins. To increase services revenues, we expect to expand our services
organization, successfully recruit and train a sufficient number of qualified
services personnel, enter into new implementation projects and obtain renewals
of current maintenance contracts by our customers. This expansion could further
reduce gross margins in our services revenues.
We
may not have the workforce necessary
to support our platform of products if demand for our products substantially
increased, and, if we need to rebuild our workforce in the future, we may
not be
able to recruit personnel in a timely manner, which could negatively impact
the
development,salesand
supportof our products.
In
July 2005 and again in October of
2006, we reduced the size of our workforce by approximately 10% in each
instance. In the event that demand for our products increases, we may need
to
rebuild our workforce or increase outsourced functions to companies based
in
foreign jurisdictions and we may be unable to hire, train or retain qualified
personnel in a timely manner, which may weaken our ability to market our
products in a timely manner, negatively impacting our operations. Our success
depends largely on ensuring that we have adequate personnel to support our
platform of products as well as the continued contributions of our key
management, finance, engineering, sales and marketing and professional services
personnel.
If
we fail to introduce new versions and
releases of functional and scalable products in a timely manner, customers
may
license competing products and our revenues may decline.
If
we are unable to ship or implement
enhancements to our products when planned, or fail to achieve timely market
acceptance of these enhancements, we may suffer lost sales and could fail
to
achieve anticipated revenues. We have in the past, and expect in the future,
to
derive a significant portion of our total revenues from the license of our
primary product suite. Our future operating results will depend on the demand
for the product suite by future customers, including new and enhanced releases
that are subsequently introduced. If our competitors release new products
that
are superior to our products in performance or price, or if we fail to enhance
our products or introduce new features and functionality in a timely manner,
demand for our products may decline. We have in the past experienced delays
in
the planned release dates of new versions of our software products and upgrades.
New versions of our products may not be released on schedule or may contain
defects when released.
We
depend on technology licensed to us
by third parties, and the loss or inability to maintain these licenses could
prevent or delay sales of our products.
We
license from several software
providers technologies that are incorporated into our products. We anticipate
that we will continue to license technology from third parties in the future.
This software may not continue to be available on
commercially
reasonable
terms, if at all. While
currently we are not materially dependent on any single third party for such
licenses, the loss of the technology licenses could result in delays in the
license of our products until equivalent technology is developed or identified,
licensed and integrated into our products. Even if substitute technologies
are
available, there can be no guarantee that we will be able to license these
technologies on commercially reasonable terms, if at all.
Defects
in third party products
associated with our products could impair our products’ functionality and injure
our reputation.
The
effective implementation of our
products depends upon the successful operation of third-party products in
conjunction with our products. Any undetected defects in these third-party
products could prevent the implementation or impair the functionality of
our
products, delay new product introductions or injure our reputation. In the
past,
while our business has not been materially harmed, product releases have
been
delayed as a result of errors in third-party software and we have incurred
significant expenses fixing and investigating the cause of these
errors.
Our
customers and systems integration
partners may have the ability to alter our source code and resulting
inappropriate alterations could adversely affect the performance of our
products, cause injury to our reputation and increase operating
expenses.
Customers
and systems integration
partners may have access to the computer source code for certain elements
of our
products and may alter the source code. Alteration of our source code may
lead
to implementation, operation, technical support and upgrade problems for
our
customers. This could adversely affect the market acceptance of our products,
and any necessary investigative work and repairs could cause us to incur
significant expenses and delays in implementation.
If
our products do not operate with the
hardware and software platforms used by our customers, our customers may
license
competing products and our revenues will decline.
If
our products fail to satisfy
advancing technological requirements of our customers and potential customers,
the market acceptance of these products could be reduced. We currently serve
a
customer base with a wide variety of constantly changing hardware, software
applications and networking platforms. Customer acceptance of our products
depends on many factors such as:
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Our
ability to integrate our
products with multiple platforms and existing or legacy systems;
and,
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Our
ability to anticipate and
support new standards, especially Internet and enterprise Java
standards.
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*Our
failure to successfully integrate
with future acquired or merged companies and technologies could prevent us
from
operating efficiently.
Our
business strategy includes pursuing
opportunities to grow our business, both through internal growth and through
merger, acquisition and technology and other asset transactions. To implement
this strategy, we may be involved in merger and acquisition activity and
additional technology and asset purchase transactions. Merger and acquisition
transactions are motivated by many factors, including, among others, our
desire
to grow our business, acquire skilled personnel, obtain new technologies
and
expand and enhance our product offerings. Mergers and acquisitions of
high-technology companies are inherently risky, and the Company cannot be
certain that any acquisition will be successful and will not materially harm
the
Company’s business, operating results or financial condition. Generally,
acquisitions involve numerous risks, including the following: (i) the benefits of the
acquisition (such as cost savings
and synergies) not materializing as planned or not materializing within
the time periods or to the extent anticipated (ii) the Company’s ability to
manage acquired entities’ people and processes that are headquartered in
separate geographical locations from the Company’s headquarters, (iii) the
possibility that the Company will pay more than the value it derives from
the
acquisition, (iv) difficulties in integration of the operations, technologies,
content and products of the acquired companies, (v) the assumption of certain
known and unknown liabilities of the acquired companies, (vi) difficulties
in
retaining key relationships with customers, partners and suppliers of the
acquired company, (vi) the risk of diverting management’s attention from normal
daily operations of the business, (vii) the Company’s ability to issue new
releases of the acquired company’s products on existing or other platforms,
(viii) negative impact to the Company’s financial condition and results of
operations and the potential write down of impaired goodwill and intangible
assets resulting from combining the acquired company’s financial condition and
results of operations with its financial statements, (ix) risks of entering
markets in which the Company has no or limited direct prior experience; and
(x)
the potential loss of key employees of the acquired company. Realization of any of these
risks in
connection with any technology transaction or asset purchase we have entered
into, or may enter into, could have a material adverse effect on our business,
operating results and financial condition.
*If
we become subject to intellectual
property infringement claims, including copyright or patent
infringement claims, these claims
could be costly and time-consuming to defend, divert management’s attention,
cause product delays and have an adverse effect on our revenues and net
income.
We
expect that software product
developers and providers of software in markets similar to our target markets
will increasingly be subject to infringement claims as the number of products
and competitors in our industry grows and the
functionality
of products overlap.
Additionally, we are
seeing
copyright infringement claims being asserted by certain third party software
developers. Any claims,
with or without merit, could be costly and time-consuming to defend, divert
our
management’s attention or cause product delays. If any of our products were
found to infringe a third party’s proprietary rights, we could be required to
enter into royalty or licensing agreements to be able to sell our products.
Royalty and licensing agreements, if required, may not be available on terms
acceptable to us or at all.
In
particular, if we are
sued for patent infringement by a
patent holding company, one which has acquired large numbers of patents solely
for the purpose of bringing suit against alleged infringers rather than
practicing the patents, it may be costly to defend such suit. We have received
a
letter from one such patent holding company alleging that our products may
infringe one or more of their patents. We are also the subject
of a suit by a
person claiming that certain of our products infringe his
copyrights. If
any of our products were found to infringe such patentor copyrights,
the patent or copyright holder
could seek an injunction to
enjoin our use of the infringing product. If we were not able to remove or
replace the infringing portions of software with non-infringing software,
and
were no longer able to license some or all of our software products, such
an
injunction would have an extremely detrimental effect on our business. If
we
were required to settle such claim, it could be extremely costly. A patent
or copyright infringement
claim could have a material
adverse effect on our business, operating results and financial
condition.
The
application of percentage-of-completion
and completed contract
accounting to our business is complex and may result in delays in the reporting
of our financial results and revenue not being recognized as we
expect.
Although
we attempt to use standardized
license agreements designed to meet current revenue recognition criteria
under
generally accepted accounting principles, we must often negotiate and revise
terms and conditions of these standardized agreements,
particularly in
multi-product transactions. At the time of entering into a transaction, we
assess whether any services included within the arrangement require us to
perform significant implementation or customization essential to the
functionality of our products. For contracts involving significant
implementation or customization essential to the functionality of our products,
we recognize the license and professional consulting services revenues using
the
percentage-of-completion method using labor hours incurred as the measure
of
progress towards completion. The application of the percentage-of-completion
method of accounting is complex and involves judgments and estimates, which
may
change significantly based on customer requirements. This complexity combined
with changing customer requirements could result in delays in the proper
determination of our
percentage-of-completion
estimates and revenue not being recognized as we expect.
We
have also entered into co-development
projects with our customers to jointly develop new vertical applications,
often
over the course of a year or longer. In such cases we may only be able to
recognize revenue upon delivery of the new application. The accounting treatment
for these co-development projects could result in delays in the recognition
of
revenue. The failure to successfully complete these projects to the satisfaction
of the customer could have a material adverse effect on our business, operating
results and financial condition.
Changes
in our revenue recognition model
could result in short term declines to revenue.
Historically,
a high percentage of
license revenues have been accounted for on the
percentage-of-completion
method of accounting or recognized as revenue upon the delivery of product.
If
we were to enter into new types of transactions accounted for on a subscription
or term basis, revenues might be recognized over a longer period of time.
The
impact of this change would make revenue recognition more predictable over
the
long term, but it might also result in a short term reduction of revenue
as the
new transactions took effect.
We
may encounter unexpected delays in
maintainingthe
requisiteinternal
controlsover
financial reporting and we expect
to incur additional expenses and diversion of management’s time as a result of
performing future system and process evaluation, testing and remediation
required to comply with future management assessment and auditor attestation
requirements.
In
connection with the Company’s
compliance with Section 404 under SOX for the fiscal years ended
September 30, 2006 and 2005, we identified certain material weaknesses. In
future periods, we will continue to document our internal controls to allow
management to report on, and our independent registered public accounting
firm
to attest to, our internal control, over financial reporting as required
by
Section 404 of SOX, within the time frame required by Section 404. We
may encounter unexpected delays in implementing those requirements, therefore,
we cannot be certain about the timely completion
of our evaluation, testing
and remediation actions or the impact that these activities will have on
our
operations. We also expect to incur additional expenses and diversion of
management’s time as a result of performing the system and process evaluation,
testing and remediation required to comply with management’s assessment and
auditor attestation requirements. If we are not able to timely comply with
the
requirements set forth in Section 404 in future periods, we might be
subject to sanctions or investigation by the regulatory authorities. Any
such
action could adversely affect our business or financial
results.
The
exhibits listed on the accompanying
index to exhibits are filed or incorporated by reference (as stated therein)
as
part of this Quarterly Report on Form 10-Q.
Chordiant
Software,
Inc.
Pursuant
to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
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CHORDIANT
SOFTWARE,
INC.
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By:
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/s/ PETER
S.NORMAN
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Peter
S.
Norman
Chief
Financial Officer
and
Principal
Accounting
Officer
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EXHIBIT
INDEX
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Incorporated
by
Reference
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Exhibit
Number
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Description
of
Document
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Form
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Date
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Filed
Herewith
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3.1
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Amended
and Restated Certificate
of Incorporation of Chordiant Software, Inc..
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Form
S-1
(No.
333-92187)
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2/6/1999
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3.2
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Amended
and Restated Bylaws of
Chordiant Software, Inc..
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Form 8-K
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2/2/2006
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31.1
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Certification
required by Rule
13a-14(a) or Rule 15d-14(a).
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X
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10.69
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Global
Framework Agreement, dated
December 21, 2007, by and between Registrant and Vodafone Group
Services
Limited.
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X
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31.2
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Certification
required by Rule
13a-14(a) or Rule 15d-14(a).
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X
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32.1#
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Certification
required by Rule
13a-14(a) or Rule 15d-14(a) and Section 1350 of Chapter 63 of Title
18 of
the United States Code (18 U.S.C. 1350).
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X
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#
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The
certification attached as Exhibit 32.1 is not deemed filed with
the
Securities and Exchange Commission and is not incorporated by reference
into any filing of Chordiant Software, Inc., whether made before
or after
the date of this Form 10-K irrespective of any general incorporation
language contained in such filing.
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