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 March 31, 2008
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
No.)
|
20400
Stevens Creek Boulevard, Suite 400
Cupertino,
CA 95014
(Address
of principal executive offices) (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, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer x
|
|
Non-accelerated
filer ¨ (Do not check
if a smaller reporting company)
|
Smaller
reporting company ¨
|
|
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 April 30, 2008, there were 30,043,988 shares of the registrant’s common stock
outstanding.
CHORDIANT
SOFTWARE, INC.
QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2008
PART I.
FINANCIAL INFORMATION
|
Page
No.
|
|
|
|
Item 1.
|
|
3
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
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|
|
Item 2.
|
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27
|
|
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|
Item 3.
|
|
43
|
|
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|
Item 4.
|
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44
|
|
|
|
PART II.
OTHER INFORMATION
|
|
|
|
|
Item 1.
|
|
45
|
|
|
|
Item 1A.
|
|
45
|
|
|
|
Item 2.
|
|
55
|
|
|
|
Item 4.
|
|
56
|
|
|
|
Item 5.
|
|
57
|
|
|
|
Item 6.
|
|
58
|
|
|
|
|
|
58
|
|
|
|
PART
I - FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
(Unaudited)
|
|
|
March
31,
2008
|
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
68,956
|
|
|
$
|
77,987
|
|
Marketable
securities
|
|
|
751
|
|
|
|
12,159
|
|
Accounts
receivable, net including $255 due from related parties at September 31,
2007
|
|
|
25,883
|
|
|
|
27,381
|
|
Prepaid
expenses and other current assets
|
|
|
7,617
|
|
|
|
5,352
|
|
Total
current assets
|
|
|
103,207
|
|
|
|
122,879
|
|
Property
and equipment, net
|
|
|
3,751
|
|
|
|
3,638
|
|
Goodwill
|
|
|
32,044
|
|
|
|
32,044
|
|
Intangible
assets, net
|
|
|
2,120
|
|
|
|
2,725
|
|
Other
assets
|
|
|
2,451
|
|
|
|
3,529
|
|
Total
assets
|
|
$
|
143,573
|
|
|
$
|
164,815
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
9,174
|
|
|
$
|
8,080
|
|
Accrued
expenses
|
|
|
11,031
|
|
|
|
13,804
|
|
Deferred
revenue, including related party balances of nil and $116 at March 31,
2008 and September 30, 2007, respectively
|
|
|
38,213
|
|
|
|
44,548
|
|
Total
current liabilities
|
|
|
58,418
|
|
|
|
66,432
|
|
Deferred
revenue—long-term
|
|
|
16,925
|
|
|
|
23,434
|
|
Restructuring
costs, net of current portion
|
|
|
733
|
|
|
|
942
|
|
Other
long-term liabilities
|
|
|
894
|
|
|
|
646
|
|
Total
liabilities
|
|
|
76,970
|
|
|
|
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 March 31, 2008 and September 30,
2007
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value; 300,000 shares authorized; 31,866 and 33,221
shares issued and outstanding at March 31, 2008 and
September 30, 2007, respectively
|
|
|
32
|
|
|
|
33
|
|
Additional
paid-in capital
|
|
|
289,138
|
|
|
|
295,650
|
|
Accumulated
deficit
|
|
|
(227,869
|
)
|
|
|
(226,915
|
)
|
Accumulated
other comprehensive income
|
|
|
5,302
|
|
|
|
4,593
|
|
Total
stockholders’ equity
|
|
|
66,603
|
|
|
|
73,361
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
143,573
|
|
|
$
|
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 March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
4,807
|
|
|
$
|
18,882
|
|
|
$
|
13,614
|
|
|
$
|
26,044
|
|
Service,
including related party items aggregating $52 and $61 for the three months
ended March 31, 2008 and 2007, respectively, and $116 and $124 for the six
months ended March 31, 2008 and 2007, respectively
|
|
|
19,909
|
|
|
|
13,883
|
|
|
|
40,236
|
|
|
|
29,660
|
|
Total
revenues
|
|
|
24,716
|
|
|
|
32,765
|
|
|
|
53,850
|
|
|
|
55,704
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
283
|
|
|
|
583
|
|
|
|
617
|
|
|
|
1,037
|
|
Service
|
|
|
8,532
|
|
|
|
5,622
|
|
|
|
17,010
|
|
|
|
13,088
|
|
Amortization
of intangible assets
|
|
|
303
|
|
|
|
303
|
|
|
|
606
|
|
|
|
606
|
|
Total
cost of revenues
|
|
|
9,118
|
|
|
|
6,508
|
|
|
|
18,233
|
|
|
|
14,731
|
|
Gross
profit
|
|
|
15,598
|
|
|
|
26,257
|
|
|
|
35,617
|
|
|
|
40,973
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
7,400
|
|
|
|
8,314
|
|
|
|
16,303
|
|
|
|
15,578
|
|
Research
and development
|
|
|
6,381
|
|
|
|
7,296
|
|
|
|
13,106
|
|
|
|
13,592
|
|
General
and administrative
|
|
|
4,019
|
|
|
|
5,295
|
|
|
|
9,022
|
|
|
|
10,906
|
|
Restructuring
expense
|
|
|
—
|
|
|
|
255
|
|
|
|
—
|
|
|
|
6,727
|
|
Total
operating expenses
|
|
|
17,800
|
|
|
|
21,160
|
|
|
|
38,431
|
|
|
|
46,803
|
|
Income
(loss) from operations
|
|
|
(2,202
|
)
|
|
|
5,097
|
|
|
|
(2,814
|
)
|
|
|
(5,830
|
)
|
Interest
income, net
|
|
|
613
|
|
|
|
492
|
|
|
|
1,448
|
|
|
|
796
|
|
Other
income, net
|
|
|
350
|
|
|
|
180
|
|
|
|
485
|
|
|
|
165
|
|
Income
(loss) before income taxes
|
|
|
(1,239
|
)
|
|
|
5,769
|
|
|
|
(881
|
)
|
|
|
(4,869
|
)
|
Provision
for (benefit from) income taxes
|
|
|
(80
|
)
|
|
|
794
|
|
|
|
73
|
|
|
|
905
|
|
Net
income (loss)
|
|
$
|
(1,159
|
)
|
|
$
|
4,975
|
|
|
$
|
(954
|
)
|
|
$
|
(5,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.18
|
)
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
33,066
|
|
|
|
32,153
|
|
|
|
33,181
|
|
|
|
31,939
|
|
Diluted
|
|
|
33,066
|
|
|
|
33,216
|
|
|
|
33,181
|
|
|
|
31,939
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
Months Ended March 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(954
|
)
|
|
$
|
(5,774
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used for) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
864
|
|
|
|
724
|
|
Amortization
of intangibles and capitalized software
|
|
|
1,140
|
|
|
|
1,056
|
|
Non-cash
stock-based compensation expense
|
|
|
2,157
|
|
|
|
1,869
|
|
Provision
for doubtful accounts and sales returns
|
|
|
175
|
|
|
|
78
|
|
Loss
on disposal of assets
|
|
|
—
|
|
|
|
663
|
|
Realized
gain on sale of marketable securities
|
|
|
(8
|
)
|
|
|
—
|
|
Accretion
of discounts on marketable securities
|
|
|
(51
|
)
|
|
|
—
|
|
Other
non-cash charges
|
|
|
—
|
|
|
|
445
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,856
|
|
|
|
(9,331
|
)
|
Prepaid
expenses and other current assets
|
|
|
(2,047
|
)
|
|
|
(4,357
|
)
|
Other
assets
|
|
|
702
|
|
|
|
780
|
|
Accounts
payable
|
|
|
1,067
|
|
|
|
(539
|
)
|
Accrued
expenses, other long-term liabilities and restructuring
|
|
|
(4,076
|
)
|
|
|
2,992
|
|
Deferred
revenue
|
|
|
(13,430
|
)
|
|
|
34,864
|
|
Net
cash provided by (used for) operating activities
|
|
|
(12,605
|
)
|
|
|
23,470
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property, equipment, and leasehold improvements
|
|
|
(950
|
)
|
|
|
(1,506
|
)
|
Capitalized
product development costs
|
|
|
(111
|
)
|
|
|
—
|
|
Proceeds
from release of (increase in) restricted cash
|
|
|
(3
|
)
|
|
|
167
|
|
Purchases
of marketable securities and short-term investments
|
|
|
(5,099
|
)
|
|
|
—
|
|
Proceeds
from maturities of marketable securities and short-term
investments
|
|
|
16,566
|
|
|
|
—
|
|
Net
cash provided by (used for) investing activities
|
|
|
10,403
|
|
|
|
(1,339
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
614
|
|
|
|
3,235
|
|
Payment
on capital leases
|
|
|
—
|
|
|
|
(96
|
)
|
Excess
tax benefits from stock-based compensation
|
|
|
17
|
|
|
|
—
|
|
Repurchase
of common stock
|
|
|
(8,086
|
)
|
|
|
—
|
|
Net
cash provided by (used for) financing activities
|
|
|
(7,455
|
)
|
|
|
3,139
|
|
Effect
of exchange rate changes
|
|
|
626
|
|
|
|
773
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(9,031
|
)
|
|
|
26,043
|
|
Cash
and cash equivalents at beginning of period
|
|
|
77,987
|
|
|
|
45,278
|
|
Cash
and cash equivalents at end of period
|
|
$
|
68,956
|
|
|
$
|
71,321
|
|
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, or SEC. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. The September 30,
2007 Condensed Consolidated Balance Sheet was 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’s Annual 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
accounts of the Company and its wholly-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 the 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 that is
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
deferred until the fees become due and payable.
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 PCS is 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
March 31, 2008 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.
These restricted cash balances are classified in Prepaid Expenses and Other
Current Assets and in Other Assets in the Condensed Consolidated Balance Sheets.
See Note 3 for restricted cash balances at each balance sheet date.
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’s
marketable securities are composed of investment instruments that are highly
rated. As of the date of the filing of this Form 10-Q, the Company has sold all
of its marketable securities, converting the funds to cash and cash
equivalents.
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.
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. 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
result. The following table summarizes the revenues from customers and resellers
that accounted for 10% or more of total revenues:
|
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Citicorp
Credit Services, Inc.
|
|
|
25
|
%
|
|
|
*
|
|
|
|
23
|
%
|
|
|
*
|
|
|
|
Wellpoint,
Inc.
|
|
|
11
|
%
|
|
|
*
|
|
|
|
11
|
%
|
|
|
*
|
|
|
|
International
Business Machines (“IBM”)
|
|
|
*
|
|
|
|
40
|
%
|
|
|
10
|
%
|
|
|
28
|
%
|
|
|
Lloyds
TSB Bank plc
|
|
|
*
|
|
|
|
12
|
%
|
|
|
*
|
|
|
|
11
|
%
|
|
|
Sky
Subscribers Services Limited
|
|
|
*
|
|
|
|
10
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Represents
less than 10% of total revenues.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As
previously announced, the Company agreed to license certain of its software to
IBM’s customers.
At
March 31, 2008, Citicorp Credit Services, Inc., Akbank T.A.S., and Wellpoint,
Inc. accounted for 15%, 13% and 12%, 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
Software
development costs are expensed as incurred until technological feasibility of
the underlying software product is achieved. After technological feasibility is
established, software development costs are capitalized until general
availability of the product. Capitalized costs are then amortized at the greater
of a straight line basis over the estimated product life, or the ratio of
current revenue to total projected product revenue.
During
fiscal year 2008, technological feasibility to port existing products to new
platforms was established through the completion of detailed program designs.
Costs aggregating $0.1 million associated with these products have been
capitalized and included in Other Assets as of March 31, 2008. These
products were not available for general release as of March 31, 2008,
accordingly the costs capitalized have not been amortized.
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
product have 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 costs are being amortized using the
straight-line method over the estimated economic life of the product which is 36
months. For the three and six months ended March 31, 2008, amortization expense,
included in cost of revenue for licenses related to this product was both less
than $0.1 million. As of March 31, 2008, 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
estimated economic life of the product which is 36 months. For the three and six
months ended March 31, 2008 and 2007, amortization expense, included in cost of
revenue for licenses, related to this product was $0.2 million and $0.5 million,
respectively. As of March 31, 2008, the unamortized expense was $0.3
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 Financial Accounting Standards Board or 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 discussed 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
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and six months ended March 31, 2008 and six months
ended March 31, 2007.
The
following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands, except for
per share data):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common stockholders
|
$
|
(1,159
|
)
|
|
$
|
4,975
|
|
|
$
|
(954
|
)
|
|
$
|
(5,774
|
)
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock outstanding
|
|
33,137
|
|
|
|
32,276
|
|
|
|
33,252
|
|
|
|
32,102
|
|
|
|
Common
stock subject to repurchase
|
|
(71
|
)
|
|
|
(123
|
)
|
|
|
(71
|
)
|
|
|
(163
|
)
|
|
|
Denominator
for basic calculation
|
|
33,066
|
|
|
|
32,153
|
|
|
|
33,181
|
|
|
|
31,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive potential common shares
|
|
—
|
(*)
|
|
|
984
|
|
|
|
—
|
(*)
|
|
|
—
|
(*)
|
|
|
Effect
of dilutive common stock subject
to repurchase
|
|
—
|
(*)
|
|
|
79
|
|
|
|
—
|
(*)
|
|
|
—
|
(*)
|
|
|
Denominator
for diluted calculation
|
|
33,066
|
|
|
|
33,216
|
|
|
|
33,181
|
|
|
|
31,939
|
|
|
|
Net
income (loss) per share – basic
|
$
|
(0.04
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.18
|
)
|
|
|
Net
income (loss) per share – diluted
|
$
|
(0.04
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.18
|
)
|
|
(*) –
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 date indicated (in thousands)
|
|
|
March
31,
2008
|
|
|
|
March
31,
2007
|
|
|
|
Employee
stock options
|
|
4,015
|
|
|
|
2,659
|
|
|
|
Restricted
stock awards
|
|
71
|
|
|
|
—
|
|
|
|
|
|
4,086
|
|
|
|
2,659
|
|
|
Recent
Accounting Pronouncements
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No. 133” or
SFAS 161. SFAS 161 requires enhanced disclosures about how and why an entity
uses derivative instruments, how derivative instruments and related hedge items
are accounted for under Statement 133 and its related interpretations, and how
derivative instruments and related hedged items affected an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 is
effective for fiscal years beginning after November 15, 2008, with early
application encouraged. The Company is currently evaluating the effects of
implementing this new standard.
In
February 2008, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) No. FAS 157-1 and FSP No. FAS 157-2. FSP No. 157-1 amends SFAS
No. 157, “Fair Value Measurements,” to exclude SFAS No. 13, “Accounting for
Leases,” and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under Statement
13. FSP No. 157-2 delays the effective date of SFAS No. 157 for nonfinancial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The
Company has evaluated the new FSPs and has determined that it will not have a
significant impact on the determination or reporting of our financial
results.
In
December 2007, the Securities and Exchange Commission, or SEC, issued Staff
Accounting Bulletin, or 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.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
December 2007, the 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 beginning after December 15,
2008. The Company is currently evaluating the 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 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 beginning after
December 15, 2008. The Company is currently evaluating the effects of
implementing this new standard.
In
November 2007, the SEC, issued SAB, 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.
NOTE
3—BALANCE SHEET COMPONENTS
Accounts
Receivable, Net
Accounts
receivable, net consists of the following (in thousands):
|
|
|
March
31,
2008
|
|
|
|
September
30,
2007
|
|
|
|
Accounts
receivable, net:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
$
|
26,095
|
|
|
$
|
27,546
|
|
|
|
Less:
allowance for doubtful accounts
|
|
(212
|
)
|
|
|
(165
|
)
|
|
|
|
$
|
25,883
|
|
|
$
|
27,381
|
|
|
Prepaid
Expenses and Other Current Assets
Prepaid
expense and other current assets consist of the following (in
thousands):
|
|
|
March
31,
2008
|
|
|
|
September
30,
2007
|
|
|
|
Prepaid
expense and other current assets:
|
|
|
|
|
|
|
|
|
|
Prepaid
commissions and royalties
|
$
|
4,071
|
|
|
$
|
3,104
|
|
|
|
Restricted
cash
|
|
49
|
|
|
|
46
|
|
|
|
Other
prepaid expenses and current assets
|
|
3,497
|
|
|
|
2,202
|
|
|
|
|
$
|
7,617
|
|
|
$
|
5,352
|
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Property
and Equipment, Net
Property
and equipment, net consists of the following (in thousands):
|
|
|
March
31,
2008
|
|
|
|
September
30,
2007
|
|
|
|
Property
and equipment, net:
|
|
|
|
|
|
|
|
|
|
Computer
hardware (useful lives of 3 years)
|
$
|
4,665
|
|
|
$
|
4,167
|
|
|
|
Purchased
internal-use software (useful lives of 3 years)
|
|
3,070
|
|
|
|
2,685
|
|
|
|
Furniture
and equipment (useful lives of 3 to 7 years)
|
|
756
|
|
|
|
739
|
|
|
|
Leasehold
improvements (shorter of 7 years or the term of the lease)
|
|
2,921
|
|
|
|
2,883
|
|
|
|
|
|
11,412
|
|
|
|
10,474
|
|
|
|
Accumulated
depreciation and amortization
|
|
(7,661
|
)
|
|
|
(6,836
|
)
|
|
|
|
$
|
3,751
|
|
|
$
|
3,638
|
|
|
Intangible
Assets, Net
Intangible
assets, net consist of the following (in thousands):
|
|
March
31, 2008
|
|
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
|
|
|
$
|
(5,317
|
)
|
|
$
|
1,587
|
|
|
$
|
6,904
|
|
|
$
|
(4,869
|
)
|
|
$
|
2,035
|
|
Customer
list and trade-names
|
|
|
2,731
|
|
|
|
(2,198
|
)
|
|
|
533
|
|
|
|
2,731
|
|
|
|
(2,041
|
)
|
|
|
690
|
|
|
|
$
|
9,635
|
|
|
$
|
(7,515
|
)
|
|
$
|
2,120
|
|
|
$
|
9,635
|
|
|
$
|
(6,910
|
)
|
|
$
|
2,725
|
|
All
of the Company’s acquired 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 and $0.6 million
for each of the three and six month periods ended March 31, 2008 and 2007,
respectively. The Company expects amortization expense on acquired intangible
assets to be $0.6 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):
|
|
|
March
31,
2008
|
|
|
|
September
30,
2007
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Long-term
accounts receivable
|
$
|
118
|
|
|
$
|
984
|
|
|
|
Long-term
restricted cash
|
|
274
|
|
|
|
265
|
|
|
|
Other
assets
|
|
2,059
|
|
|
|
2,280
|
|
|
|
|
$
|
2,451
|
|
|
$
|
3,529
|
|
|
The
long-term accounts receivable balance at September 30, 2007 represented 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 has been deferred and will not be recognized
until the payment becomes due. As of March 31, 2008, this 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):
|
|
|
March
31,
2008
|
|
|
|
September
30,
2007
|
|
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
Accrued
payroll, payroll taxes and related expenses
|
$
|
5,451
|
|
|
$
|
6,781
|
|
|
|
Accrued
restructuring expenses, current portion (Note 5)
|
|
554
|
|
|
|
3,044
|
|
|
|
Accrued
third party consulting fees
|
|
1,223
|
|
|
|
1,264
|
|
|
|
Accrued
income, sales and other taxes
|
|
1,358
|
|
|
|
1,143
|
|
|
|
Stock
repurchase settlement (Note 14)
|
|
1,215
|
|
|
|
—
|
|
|
|
Other
accrued liabilities
|
|
1,230
|
|
|
|
1,572
|
|
|
|
|
$
|
11,031
|
|
|
$
|
13,804
|
|
|
Deferred
Revenue
Deferred
revenue consists of the following (in thousands):
|
|
|
March
31,
2008
|
|
|
|
September
30,
2007
|
|
|
|
Deferred
revenue:
|
|
|
|
|
|
|
|
|
|
License
|
$
|
19,110
|
|
|
$
|
27,409
|
|
|
|
Support
and maintenance
|
|
34,375
|
|
|
|
39,292
|
|
|
|
Other
|
|
1,653
|
|
|
|
1,281
|
|
|
|
|
|
55,138
|
|
|
|
67,982
|
|
|
|
Less:
current portion
|
|
(38,213
|
)
|
|
|
(44,548
|
)
|
|
|
Long-term
deferred revenue
|
$
|
16,925
|
|
|
$
|
23,434
|
|
|
NOTE
4—MARKETABLE SECURITIES
The
Company held the following marketable securities (in
thousands):
|
|
March
31, 2008
|
|
|
|
|
Amortized
Cost
|
|
|
|
Gross
Unrealized
Gain
|
|
|
|
Gross
Unrealized
Loss
|
|
|
|
Fair
Value
|
|
|
|
Marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Taxable
municipal bonds
|
$
|
756
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
751
|
|
|
|
Total
|
$
|
756
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
751
|
|
|
|
|
|
|
|
|
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 March 31, 2008 and September 30, 2007, all marketable securities had maturity
dates less than one year. For the three and six months ended March 31, 2008,
less than $0.1 million of gains were realized on the sale of marketable
securities. For the three and six months ended March 31, 2007, no gains or
losses were realized on the sale of marketable securities. Subsequent to March
31, 2008, all marketable securities were sold and converted to cash
equivalents.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5—RESTRUCTURING
Restructuring
Costs
Through
March 31, 2008, the Company approved certain 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 reductions in 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 or SFAS 146, “Accounting for Costs Associated with Exit or
Disposal Activities” or previous guidance under Emerging Issues Task Force 94-3
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 of the 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, net of estimated
sublease income.
|
As
of March 31, 2008, the total restructuring accrual consisted of the following
(in thousands):
|
|
|
Current
|
|
|
|
Non-Current
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and termination
|
$
|
135
|
|
|
$
|
—
|
|
|
$
|
135
|
|
|
|
Excess
facilities
|
|
419
|
|
|
|
733
|
|
|
|
1,152
|
|
|
|
Total
|
$
|
554
|
|
|
$
|
733
|
|
|
$
|
1,287
|
|
|
As
of March 31, 2008 and September 30, 2007, $0.6 million and $3.0 million,
respectively, of the restructuring reserve is included in the Accrued Expenses
line item on the Condensed Consolidated Balance Sheets. 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 will be
substantially paid by September 30, 2008.
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 six months)
|
|
|
|
|
$
|
211
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
412
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
404
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
1,152
|
|
|
|
|
|
|
Included
in the future minimum lease payments schedule above is an offset of $0.8 million
of contractually committed sublease rental income.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Kingdom and the closure of the France
office or 2007 Restructuring.
As
part of the fiscal year 2007 Restructuring, the Company initially incurred a
one-time restructuring expense of $6.5 million 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 in France and the United Kingdom.
During the three months ended March 31, 2007, the Company incurred an additional
charge of $0.1 million for employee severance costs associated with the closure
of the France office. In March 2007, the Company negotiated an early termination
of the France office lease associated with its closure resulting in a $0.2
million reduction in the restructure facility liability. This reduction was
recorded as an offset to restructuring expense in the period. The Company was
able to terminate the France facility 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 Kingdom lease which terminated the lease in
January 2008. All termination payments have now been made.
The
following table summarizes the activity related to the 2007 Restructuring (in
thousands):
|
|
|
Excess
Facilities
|
|
|
|
Reserve
balance as of September 30, 2007
|
$
|
2,526
|
|
|
|
Charge/adjustment
|
|
(36
|
)
|
|
|
Non-cash
|
|
(62
|
)
|
|
|
Cash
paid
|
|
(2,428
|
)
|
|
|
Reserve
balance as of March 31, 2008
|
$
|
—
|
|
|
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 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.
During
the six months ended March 31, 2007, the Company incurred an additional charge
of less than $0.1 million for additional severance expense for an employee
located in France.
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
|
|
|
|
Charge/adjustment
|
|
38
|
|
|
|
Non-cash
|
|
(3
|
)
|
|
|
Cash
paid
|
|
—
|
|
|
|
Reserve
balance as of March 31, 2008
|
$
|
135
|
|
|
Prior
Restructurings
During
fiscal year 2002, based upon the Company’s continued evaluation of economic
conditions in the information technology industry and our expectations regarding
revenue levels, the Company restructured several areas so as to
reduce
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
expenses
and improve revenue per employee, or 2002 Restructuring. As part of the
2002 Restructuring, the Company recorded 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 Company accrued 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 was net of estimated sublease income based on current
comparable rates for leases in the respective markets.
During
the year 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
$0.3 million of restructuring expense during the year ended September 30, 2007.
The sublease term is through the entire remaining term of the Company’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
|
|
(208
|
)
|
|
|
Reserve
balance as of March 31, 2008
|
$
|
1,152
|
|
|
NOTE
6—COMPREHENSIVE INCOME (LOSS)
The
components of comprehensive income (loss) are as follows (in
thousands):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,159
|
)
|
|
$
|
4,975
|
|
|
$
|
(954
|
)
|
|
$
|
(5,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
685
|
|
|
|
79
|
|
|
|
713
|
|
|
|
531
|
|
Net
change in unrealized gain from investments
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
Comprehensive
income (loss)
|
|
$
|
(483
|
)
|
|
$
|
5,054
|
|
|
$
|
(245
|
)
|
|
$
|
(5,243
|
)
|
NOTE
7—RELATED PARTY TRANSACTIONS
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.
Pursuant to software and services agreements, revenue from Covad was
approximately $0.1 million for the three and six months ended March 31,
2008 and 2007, respectively. Accounts receivable from Covad was nil and $0.3
million as of March 31, 2008 and September 30, 2007, respectively. Deferred
revenue from Covad was nil and $0.1 million as of March 31, 2008 and September
30, 2007, respectively.
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, subsequently amended and extended to March 7, 2008 and
extended three additional months to June 7, 2008. The terms of the agreement
include a $5.0 million line of credit, available on a non-formula basis, and
requires 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.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31,
2008, the Company had utilized $0.2 million of the standby commercial letters of
credit limit of which $0.2 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 March 31, 2008, 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 June 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 March 31, 2008,
there were no outstanding balances on the revolving line of credit.
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 March 31, 2008 are as follows (in
thousands):
|
|
|
Operating
Leases
|
|
|
|
Operating
Sublease
Income
|
|
|
|
Net
Operating
Leases
|
|
|
|
Fiscal
year ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
(remaining six months)
|
$
|
1,610
|
|
|
$
|
(139
|
)
|
|
$
|
1,471
|
|
|
|
2009
|
|
2,586
|
|
|
|
(283
|
)
|
|
|
2,303
|
|
|
|
2010
|
|
2,377
|
|
|
|
(293
|
)
|
|
|
2,084
|
|
|
|
2011
|
|
1,781
|
|
|
|
(86
|
)
|
|
|
1,695
|
|
|
|
2012
|
|
916
|
|
|
|
—
|
|
|
|
916
|
|
|
|
Thereafter
|
|
660
|
|
|
|
—
|
|
|
|
660
|
|
|
|
Total
minimum payments
|
$
|
9,930
|
|
|
$
|
(801
|
)
|
|
$
|
9,129
|
|
|
Operating
lease obligations in the table above include approximately $1.9 million for our
Boston, Massachusetts facility operating lease commitment that is included
in Restructuring Expense. As of March 31, 2008, the Company has $0.8
million in sublease income contractually committed for future periods relating
to this facility. See Note 5 for further discussion.
The
office lease for our Cupertino headquarters expires on December 31, 2008. In
April 2008, the Company has exercised an option to renew our lease for an
additional five years at ninety-five percent of the fair market value on
December 31, 2008. While market rates can not be determined at this time, the
Company expects our operating lease expense for this facility to increase
effective January 1, 2009.
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”, or FIN 47, the Company recorded an Asset Retirement Obligation (ARO)
of approximately $0.3 million and a corresponding increase in leasehold
improvements in 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 March 31, 2008, the Company estimated that gross expected
cash flows of approximately $0.4 million will be required to fulfill these
obligations.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Asset
retirement obligation payments as of March 31, 2008 are included in Other
Long-term Liabilities and are estimated as follows (in thousands):
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
Fiscal
year ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
(remaining six months)
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
206
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
365
|
|
|
|
|
|
|
Other
Obligations
The
Company entered into an agreement with Ness Technologies Inc., Ness USA, Inc.
(formerly Ness Global Services, Inc.) and Ness Technologies India, Ltd.
(collectively, “Ness”), effective December 15, 2003, pursuant to which Ness
provides the Company’s 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 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 two additional one year terms. Under the terms of the
agreement, the Company pays for services rendered on a monthly fee basis,
including the requirement to reimburse Ness for 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 Ness is 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 March 31, 2008. In
addition to service agreements, the Company has also guaranteed certain
equipment lease obligations of Ness (see Note 8). Ness may 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 outstanding standby
letter of credit in the amount of $0.2 million in guarantee of Ness’ financial
commitments under the lease. Over the term of the lease, the Company’s
obligation to reimburse Ness is approximately equal to the amount of the
guarantee.
Indemnification
As
permitted under Delaware law, the Company has agreements whereby the Company has
indemnified our officers, directors and certain employees for certain events or
occurrences while the employee, officer or director is, or was serving, at the
Company’s request 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 Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a Director and Officer insurance
policy that limits the Company’s exposure 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 lawsuit described in
Note 10. As a result of insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements as of
March 31, 2008.
The
Company enters into 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’s business
partners or customers, in connection with any patent, copyright or other
intellectual property infringement claim by any third party with respect to the
Company’s products. 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 March 31, 2008.
The
Company enters into arrangements with our business partners, whereby the
business partners agree to provide services as subcontractors for the Company’s
implementations. The Company may, at its discretion and in the ordinary course
of business, subcontract the performance of any of these services. Accordingly,
the Company enters into standard indemnification
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
agreements
with its customers, whereby the Company indemnifies them for other acts, such as
personal property damage by its subcontractors. 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 March 31, 2008.
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 March 31, 2008.
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 March 31,
2008.
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 Chordiant Software, 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
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. On March 16, 2008, the court denied the motions to dismiss
in the focus cases. 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.
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 a tentative non-binding agreement in
principle 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. Under the tentative proposal the Company’s cash contribution
toward the settlement would not be material to the financial
statements.
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 which had been owned by Netbula LLC and assigned to Mr. 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 employees have filed a motion to
dismiss the complaint for failure to state a claim upon which relief could be
granted, and as to lack of personal jurisdiction as to one employee. These
motions are presently scheduled for hearing in June 2008.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 liabilities 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 our effective tax rate if
recognized. There were no material changes to the amount of unrecognized tax
benefits during the first six months of fiscal 2008.
The
Company recognized 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 March 31, 2008.
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 2002
and later remain open to examination in the Netherlands, tax years 2003 and
later remain open to examination in Canada and years 2004 and later remain open
to examination in Germany.
An
audit of the 2005 tax year is currently in process in the Netherlands. The
Company does not expect resolution of this audit 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 profits prior 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 March 31, 2008, the
Company had 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 $34.5 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 would 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, would 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 March 31, 2008,
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
March 31, 2008, there were also California state credits of approximately $3.5
million that do not expire.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
12—EMPLOYEE BENEFIT PLANS
2005
Equity Incentive Plan
As
of March 31, 2008, there were approximately 2.5 million shares available for
future grant and approximately 3.4 million options that were outstanding 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 the 2008 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 executives of the Company pursuant to the 2005 Plan.
The performance-based RSUs 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 is based 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 March 31, 2008, there were approximately 0.4 million options outstanding
under the 2000 Nonstatutory Equity Incentive Plan.
1999
Non-Employee Directors’ Option Plan
As
of March 31, 2008, there were approximately 0.2 million shares of common stock
available for future grant and 0.2 million options that were outstanding
under the 1999 Non-Employee Directors’ Option Plan or 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 (RSAs) and RSU awards;
and
|
2.
|
for
fiscal year 2008 and thereafter, directors will be awarded RSAs instead of
stock options for their annual and initial automatic Board service
awards.
|
This
amendment was approved by the stockholders at the 2008 Annual Meeting of
Stockholders’ held on February 1, 2008.
On
February 1, 2008, the Company’s Board members were granted 71,088 RSAs for their
annual service award under the Directors’ Plan. The RSAs cliff vest at the
earlier of the date of the first anniversary of the most recent Annual Meeting
or on the date of the next Annual meeting.
Stock
Option Activity
The
following table summarizes stock option, RSA, and RSUs activity under our
stock option plans (in thousands, except per share data):
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
Options
Outstanding
|
|
|
|
Shares
Available
for
Grant
|
|
|
|
Shares
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
Closing
Price
at
3/31/2008
of
$6.03
|
|
Balance
at September 30, 2007
|
|
3,058
|
|
|
|
3,178
|
|
|
$
|
7.96
|
|
|
|
|
|
|
Authorized
|
|
700
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Options
granted
|
|
(1,037
|
)
|
|
|
1,037
|
|
|
|
9.32
|
|
|
|
|
|
|
Restricted
stock awards granted
|
|
(71
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Restricted
stock units granted *
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
—
|
|
|
|
(98
|
)
|
|
|
6.24
|
|
|
|
|
|
|
Cancellation
of unvested restricted stock
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Options
and awards cancelled/forfeited
|
|
102
|
|
|
|
(102
|
)
|
|
|
9.39
|
|
|
|
|
|
|
Authorized
reduction in shares from existing plans
|
|
(9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Balance
at March 31, 2008
|
|
2,795
|
|
|
|
4,015
|
|
|
$
|
8.31
|
|
7.97
|
|
$
|
1,164
|
|
Vested
and expected to vest at March 31, 2008
|
|
|
|
|
|
3,103
|
|
|
$
|
8.16
|
|
7.70
|
|
$
|
1,128
|
|
Exercisable
at March 31, 2008
|
|
|
|
|
|
1,791
|
|
|
$
|
7.53
|
|
6.72
|
|
$
|
1,076
|
|
* The number of
RSUs granted is an estimate based upon management’s assessment of the likelihood
of achieving the two year performance criteria.
The
following table summarizes information about stock options outstanding and
exercisable at March 31, 2008 (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
3/31/2008
of
$6.03
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
Closing
Price
at
3/31/08
of
$6.03
|
|
$0.35
– 6.45
|
|
|
635
|
|
|
5.89
|
|
$
|
4.21
|
|
$
|
1,164
|
|
|
495
|
|
$
|
3.87
|
|
$
|
1,076
|
|
6.48
– 7.80
|
|
|
536
|
|
|
7.33
|
|
|
7.17
|
|
|
—
|
|
|
349
|
|
|
7.08
|
|
|
—
|
|
7.88
– 8.15
|
|
|
439
|
|
|
7.69
|
|
|
7.98
|
|
|
—
|
|
|
235
|
|
|
7.98
|
|
|
—
|
|
8.25
– 8.25
|
|
|
802
|
|
|
8.81
|
|
|
8.25
|
|
|
—
|
|
|
246
|
|
|
8.25
|
|
|
—
|
|
8.28
– 9.13
|
|
|
201
|
|
|
7.94
|
|
|
8.51
|
|
|
—
|
|
|
87
|
|
|
8.56
|
|
|
—
|
|
9.25
– 9.25
|
|
|
799
|
|
|
9.62
|
|
|
9.25
|
|
|
—
|
|
|
77
|
|
|
9.25
|
|
|
—
|
|
9.26
– 45.00
|
|
|
603
|
|
|
7.60
|
|
|
12.67
|
|
|
—
|
|
|
302
|
|
|
12.39
|
|
|
—
|
|
$0.35
– 45.00
|
|
|
4,015
|
|
|
7.97
|
|
$
|
8.31
|
|
$
|
1,164
|
|
|
1,791
|
|
$
|
7.53
|
|
$
|
1,076
|
|
The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $6.03 as of March 31, 2008,
which would have been received by the option holders had all option holders
exercised their options as of that date. The total intrinsic value of options
exercised during the three and six months ended March 31, 2008 was less than
$0.1 million and $0.7 million, respectively, and $4.0 million and
$4.3 million for the three and six months ended March 31, 2007,
respectively. The fair value of options vested was $0.1 million and $0.8 million
for the three and six months ended March 31, 2008 and $0.3 million and $0.9
million for the three and six months ended March 31, 2007, respectively. As of
March 31, 2008, total unrecognized compensation costs related to non-vested
stock options was $6.3 million, which is expected to be recognized as expense
over a weighted-average period of approximately 2.8 years. As of March 31, 2007,
total unrecognized compensation costs related to non-vested stock options was
$5.7 million, which was expected to be recognized as expense over a
weighted-average period of approximately 1.5 years.
On
February 1, 2008, the Company’s Board members were granted 71,088 RSAs for their
annual service award under the Directors’ Plan. The Company had 0.1 million
unvested RSAs as of March 31, 2008, which were excluded from the preceding
tables. The total fair value of the unvested RSAs at grant date was $0.6
million. Aggregate intrinsic value of the unvested RSAs at March 31, 2008 was
$0.4 million. During the three months ended March 31, 2008, zero shares vested
related to RSAs. The weighted average fair value at grant date of the unvested
RSAs was $8.44 per share as of March 31, 2008. As of March 31,
2008,
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
total
unrecognized compensation costs related to unvested RSAs was $0.5 million which
is expected to be recognized as expense over a weighted average period of
approximately 0.8 year.
The
Company had 0.1 million unvested RSAs as of March 31, 2007. The total fair value
of the unvested RSAs at grant date was $0.4 million. Aggregate intrinsic value
of the unvested RSAs at March 31, 2007 was $0.9 million. During the three and
six months ended March 31, 2007, approximately 0.1 million and 0.2 million
shares vested related to RSAs, respectively. There were no shares of restricted
stock awarded during the three and six months ended March 31, 2007. The weighted
average fair value at grant date of the unvested RSAs was $5.25 as of March 31,
2007. As of March 31, 2007, total unrecognized compensation costs related to
unvested RSAs was less than $0.1 million which is expected to be recognized as
expense over a weighted average period of approximately 0.3 years.
As
of March 31, 2008, 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 less than 0.1 million out of a maximum of
0.2 million of unvested RSUs with an average fair value of $15.38 per unit.
During the six months ended March 31, 2008, $0.2 million of stock compensation
expense related to the performance-based RSUs has been recognized. The total
unrecognized compensation costs related to unvested RSUs was $0.6 million which
is expected to be recognized as expense over a weighted average period of
approximately 18 months. If the maximum target of RSUs outstanding were
assumed to be earned, total unrecognized compensation costs would be
approximately $3.1 million which would be expected to be recognized as
expense over a weighted average period of approximately 18 months.
The
Company settles stock option exercises, RSAs and RSUs 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, RSAs,
RSUs and employee stock purchases related to the Employee Stock Purchase Plan
based on estimated fair values. The following table summarizes stock-based
compensation expense related to employee stock options, RSA and RSUs for
the three and six months ended March 31, 2008 and 2007, respectively, which was
allocated as follows (in thousands):
|
|
|
Three
Months Ended March 31,
|
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues, service
|
$
|
109
|
|
|
$
|
54
|
|
|
$
|
262
|
|
|
$
|
161
|
|
|
|
Sales
and marketing
|
|
230
|
|
|
|
237
|
|
|
|
471
|
|
|
|
566
|
|
|
|
Research
and development
|
|
144
|
|
|
|
168
|
|
|
|
343
|
|
|
|
262
|
|
|
|
General
and administrative
|
|
498
|
|
|
|
434
|
|
|
|
1,081
|
|
|
|
880
|
|
|
|
Total
stock-based compensation expense
|
$
|
981
|
|
|
$
|
893
|
|
|
$
|
2,157
|
|
|
$
|
1,869
|
|
|
The
weighted-average estimated fair value of stock options granted during the three
months ended March 31, 2008 and 2007 was $2.96 and $4.07 per share,
respectively, and for the six months ended March 31, 2008 and 2007 was $4.30 and
$4.06, respectively, using the Black-Scholes model with the following
weighted-average assumptions:
|
|
|
Three
Months Ended March 31,
|
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Expected
lives in years
|
|
3.7
|
|
|
|
3.5
|
|
|
|
3.5
|
|
|
|
3.5
|
|
|
|
Risk
free interest rates
|
|
2.3
|
%
|
|
|
4.8
|
%
|
|
|
3.3
|
%
|
|
|
4.7
|
%
|
|
|
Volatility
|
|
61
|
%
|
|
|
63
|
%
|
|
|
60
|
%
|
|
|
63
|
%
|
|
|
Dividend
yield
|
|
0
|
%
|
|
|
0
|
%
|
|
|
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.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As
stock-based compensation expense recognized in the Condensed Consolidated
Statements of Operations for the three and six months ended March 31, 2008 and
2007 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 and six months ended March 31, 2008 and 2007 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.
Our determination 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
RSAs. Although the fair value of employee
stock options and RSAs 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 March 31,
|
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
License
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
solutions
|
$
|
3,870
|
|
|
$
|
12,619
|
|
|
$
|
10,084
|
|
|
$
|
16,164
|
|
|
|
Marketing
solutions
|
|
579
|
|
|
|
1,268
|
|
|
|
1,293
|
|
|
|
2,257
|
|
|
|
Decision
management solutions
|
|
358
|
|
|
|
4,995
|
|
|
|
2,237
|
|
|
|
7,623
|
|
|
|
Total
|
$
|
4,807
|
|
|
$
|
18,882
|
|
|
$
|
13,614
|
|
|
$
|
26,044
|
|
|
The
following table summarizes service revenue consisting of consulting
implementation and integration, consulting customization, training,
post-contract customer support services, or PCS and certain reimbursable
out-of-pocket expenses by product emphasis (in thousands):
|
|
|
Three
Months Ended March 31,
|
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Service
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
solutions
|
$
|
13,439
|
|
|
$
|
10,147
|
|
|
$
|
28,649
|
|
|
$
|
22,346
|
|
|
|
Marketing
solutions
|
|
3,070
|
|
|
|
2,903
|
|
|
|
6,188
|
|
|
|
5,508
|
|
|
|
Decision
management solutions
|
|
3,400
|
|
|
|
833
|
|
|
|
5,399
|
|
|
|
1,806
|
|
|
|
Total
|
$
|
19,909
|
|
|
$
|
13,883
|
|
|
$
|
40,236
|
|
|
$
|
29,660
|
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31,
|
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
14,671
|
|
|
$
|
9,473
|
|
|
$
|
30,262
|
|
|
$
|
22,694
|
|
|
|
|
|
10,045
|
|
|
|
23,292
|
|
|
|
23,588
|
|
|
|
33,010
|
|
|
|
Total
|
$
|
24,716
|
|
|
$
|
32,765
|
|
|
$
|
53,850
|
|
|
$
|
55,704
|
|
|
Included
in foreign revenue results for Europe is revenue from the United Kingdom of $6.0
million and $12.1 million for the three and six months ended March 31, 2008 and
$9.5 and $15.8 million for the three and six months ended March 31, 2007,
respectively.
Net
property and equipment information is based on the physical location of the
assets. The following is a summary of net property and equipment by geographic
area (in thousands):
|
|
|
March
31,
2008
|
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
$
|
2,519
|
|
|
$
|
2,346
|
|
|
|
Europe
|
|
1,232
|
|
|
|
1,292
|
|
|
|
Total
|
$
|
3,751
|
|
|
$
|
3,638
|
|
|
NOTE
14—STOCK REPURCHASE
On
February 28, 2008, the Company’s Board of Directors authorized a program to
repurchase up to $25 million of the Company’s common stock over a one year
period, or 2008 Repurchase Plan, starting on March 4, 2008. In conjunction with
the 2008 Repurchase Plan, the Company entered into a written trading plan with a
broker under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to
effect the repurchases. Repurchased shares are immediately retired and will
resume the status of authorized but unissued shares. As of March 31, 2008, the
Company had repurchased 1.5 million shares of our common stock for $9.3 million
at an average price of $6.10 per share. The Company terminated
the 2008 Stock Repurchase Plan as of April 30, 2008. Subsequent to March 31,
2008, through April 30, 2008, the Company had repurchased an additional 1.8
million shares of our common stock for $9.3 million at an average price of $5.09
per share. As of April 30, 2008, the Company had repurchased a total of 3.4
million shares of our common stock for $18.6 million at an average price of
$5.55 per share.
NOTE
15—SUBSEQUENT EVENT
On
May 1, 2008, the Company committed to a cost reduction plan intended to align
its resources and cost structure with expected future revenues. The plan
anticipates a re-allocation of employee resources between functional groups. The
plan includes an immediate reduction in positions equal to approximately ten
percent of the Company’s worldwide workforce. We notified employees on May 1,
2008.
As
a result of the cost-cutting measures, the Company estimates that it will record
pre-tax operating charges in the third quarter of fiscal year 2008 of
approximately $0.4 million for severance costs.
This
discussion and analysis should be read in conjunction with our Condensed
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 March 31, 2008, total revenues decreased 25% and backlog
increased 19% as compared to the same period of the prior year. For the three
months ended March 31, 2008, backlog decreased $2.5 million or 3% compared to
the balance at December 31, 2007. This decrease in backlog is primarily related
to a reduction of license and support and maintenance deferred revenue balances
at the end of the quarter.
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. In 2007 and 2008 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
have primarily been 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 multiple quarters, it will cause the associated backlog to be
recognized as revenue over a similar period of time. As of March 31, 2008 and
2007, we had approximately $93.5 million and $78.6 million in backlog,
respectively, which we define as contractual commitments by our customers
through purchase orders or contracts. Backlog at March 31, 2008 includes
approximately $26.1 million relating to a large telecommunications customer
commitment. For the period ended March 31, 2008 as compared to the previous
period ended December 31, 2007, aggregate deferred revenue balances decreased
$2.0 million due to a decrease of $2.2 million in long-term deferred revenue
offset by an increase of $0.2 million in short-term deferred
revenue. Backlog is comprised of:
|
•
|
software
license orders for 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;
and,
|
|
•
|
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, certain agreements with customers may transition from a
contract accounting model (SOP81-1) to a more traditional revenue model whereby
revenues are recorded upon delivery (SOP 97-2).
Service Revenue. Service revenue as a
percentage of total revenues were 81% and 42% for the three months ended March
31, 2008 and 2007, respectively, and 75% and 53% for the six months ended March
31, 2008 and 2007, respectively. While the composition of revenue will continue
to fluctuate on a quarterly basis, we expect that service revenue will represent
between 50% and 60% of our total revenues in the future.
Revenues from International Customers versus North America Revenues. For all periods
presented, revenues were principally derived from customer accounts in North
America and Europe. For the three months ended March 31, 2008 and 2007,
international revenues were $10.0 million and $23.3 million, or approximately
41% and 71% of our total revenues, respectively. For the six months ended March
31, 2008 and 2007, international revenues were $23.6 million and $33.0 million,
or approximately 44% and 59% of our total revenues, respectively. The decrease
in international revenue for the three and six months ended March 31, 2008 was
primarily due to a decrease in license revenue. During the March 31, 2007
quarter, a large customer transaction was recognized as
revenue. International revenues were favorably impacted for the three
months ended March 31, 2008, as compared to the three months ended March 31,
2007, as both the British Pound and the Euro increased in average value by
approximately 1% and 14%, respectively, as compared to the U.S.
Dollar.
For
the three months ended March 31, 2008 and 2007, North America revenues were
$14.7 million and $9.5 million, or approximately 59% and 29% of our total
revenues, respectively. For the six months ended March 31, 2008 and 2007, North
America revenues were $30.3 million and $22.7 million, or approximately 56% and
41% of total revenues, respectively. We believe North America
revenues will continue to represent a significant portion of our total revenues
in the foreseeable 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 94% and 97% for
the three months ended March 31, 2008 and 2007, respectively, and 95% and 96%
for the six months ended March 31, 2008 and 2007. The 1 % decrease for the
quarter ending March 31, 2008 is primarily a function of the fixed periodic
amortization costs associated with capitalized software being divided by a
smaller license 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 revenue were 57% and 60% for the three months ended March 31,
2008 and 2007, respectively and 58% and 56% for the six months ended March 31,
2008 and 2007, respectively. The decrease in gross margins for the three months
period ending March 31, 2008 is primarily due to the mix of consulting revenue
versus support revenue. Consulting revenue, which has a lower gross margin than
support revenue, increased to a larger percentage of total service revenue
reducing the overall gross margin. We expect that gross margins on service
revenue to range between 55% and 60% in the second half of fiscal year
2008.
Costs Related to Stock Option Investigation. For the three
and six months ended March 31, 2007, significant professional service costs are
included in general and administrative expense associated with the Company’s
stock option investigation which began in July 2006 and was completed during the
quarter ended March 2007. This issue is more fully described in the Note 2 of
the Consolidated Financial Statements in our 2006 Form 10-K. For the three and
six months ended March 31, 2007, these costs were $0.8 million and $1.8 million,
respectively. We have not incurred any additional costs since the quarter ended
March 31, 2007 and do not expect to incur such costs in the future
periods.
Cost to Amend Eligible Options.
In July 2006, our Board of Directors, or 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,
differed 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 were treated as bonus payments. These cash payments were
approximately $0.3 million and were paid out in January 2008.
Reduction in Workforce. In October 2006, we
initiated a restructuring plan intended to align our 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 our workforce, the consolidation of our European facilities,
and the closure of our France office. 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. During the three months ended March 31, 2007, we incurred an
additional charge of $0.1 million for employee severance costs associated with
the closure of our France office. Also during the three months ended March 31,
2007, we negotiated an early termination of the France office lease associated
with its closure, resulting in a $0.2 million reduction in the excess facility
liability. This reduction was recorded as an offset to restructuring expense in
the period. In November 2007, we negotiated a break clause in the lease allowing
for an early termination of the United Kingdom facility which released us from
any future rent liabilities subsequent to January 2008. All termination payments
have now been made.
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 March 31, 2008, $0.1 million 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, Massachusetts and 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 $0.3 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 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:
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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;
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Estimating
valuation allowances and accrued liabilities, specifically the allowance
for doubtful accounts, and assessment of the probability of the outcome of
our current litigation;
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Stock-based
compensation expense;
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Accounting
for income taxes;
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Valuation
of long-lived and intangible assets and
goodwill;
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Restructuring
expenses; and
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•
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Determining
functional currencies for the purposes of consolidating our international
operations.
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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 the 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 that is 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 deferred
until the fees become payable and due.
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 $26.2 million (including long-term accounts receivable of $0.1 million) with
an allowance for doubtful accounts of $0.2 million as of March 31, 2008. 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 awards on the date of grant using the Black-Scholes
model. Prior to the adoption of SFAS 123(R), the value of each employee stock
award was 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 March 31, 2008 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
52% 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 March 31, 2008, 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 credits and 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 discussed 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:
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•
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Significant
underperformance relative to expected historical or projected future
operating results;
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Significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business;
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Significant
negative industry or economic
trends;
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•
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Significant
decline in our stock price for a sustained
period;
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•
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Market
capitalization declines relative to net book value;
and
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•
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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.
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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. While the recent decline in our
stock price and negative economic trends have lowered our market capitalization
at March 31, 2008, our market capitalization is still at the levels
significantly higher than our book value.
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 States dollars. This process results in exchange gains and losses which,
under the relevant accounting guidance are either included within the Condensed
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 States dollar 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 States dollar, 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 Sheets for 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
States dollar. These currencies include the United Kingdom Pound Sterling,
the Euro and the Canadian Dollar. Any future translation gains or losses could
be significantly larger or smaller than those reported in previous periods. At
March 31, 2008, approximately $41.7 million of our cash and cash equivalents
were held by our subsidiaries outside of the United States.
Recent
Accounting Pronouncements
See
Note 2 to the Condensed Consolidated Financial Statements under section “Recent
Accounting Pronouncements” for detailed information regarding status of new
accounting standards that are not yet effective for us.
Results
of Operations
The
following table sets forth, in dollars and as a percentage of total revenues,
unaudited Condensed Consolidated Statements of Operations data for the periods
indicated. This information has been derived from the Condensed Consolidated
Financial Statements included elsewhere in this Quarterly Report (in thousands,
except percentages):
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Three
Months Ended March 31,
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Six
Months Ended March 31,
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2008
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2007
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2008
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2007
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Statements
of Operations Data:
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Revenues:
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License
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$
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4,807
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19
|
%
|
|
$
|
18,882
|
|
|
|
58
|
%
|
|
$
|
13,614
|
|
|
|
25
|
%
|
|
$
|
26,044
|
|
|
|
47
|
%
|
|
Service
|
|
|
19,909
|
|
|
|
81
|
|
|
|
13,883
|
|
|
|
42
|
|
|
|
40,236
|
|
|
|
75
|
|
|
|
29,660
|
|
|
|
53
|
|
|
Total
revenues
|
|
|
24,716
|
|
|
|
100
|
|
|
|
32,765
|
|
|
|
100
|
|
|
|
53,850
|
|
|
|
100
|
|
|
|
55,704
|
|
|
|
100
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
283
|
|
|
|
1
|
|
|
|
583
|
|
|
|
2
|
|
|
|
617
|
|
|
|
1
|
|
|
|
1,037
|
|
|
|
2
|
|
|
Service
|
|
|
8,532
|
|
|
|
35
|
|
|
|
5,622
|
|
|
|
17
|
|
|
|
17,010
|
|
|
|
32
|
|
|
|
13,088
|
|
|
|
23
|
|
|
Amortization
of intangible assets
|
|
|
303
|
|
|
|
1
|
|
|
|
303
|
|
|
|
1
|
|
|
|
606
|
|
|
|
1
|
|
|
|
606
|
|
|
|
1
|
|
|
Total
cost of revenues
|
|
|
9,118
|
|
|
|
37
|
|
|
|
6,508
|
|
|
|
20
|
|
|
|
18,233
|
|
|
|
34
|
|
|
|
14,731
|
|
|
|
26
|
|
|
Gross
profit
|
|
|
15,598
|
|
|
|
63
|
|
|
|
26,257
|
|
|
|
80
|
|
|
|
35,617
|
|
|
|
66
|
|
|
|
40,973
|
|
|
|
74
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
7,400
|
|
|
|
30
|
|
|
|
8,314
|
|
|
|
25
|
|
|
|
16,303
|
|
|
|
30
|
|
|
|
15,578
|
|
|
|
28
|
|
|
Research
and development
|
|
|
6,381
|
|
|
|
26
|
|
|
|
7,296
|
|
|
|
23
|
|
|
|
13,106
|
|
|
|
24
|
|
|
|
13,592
|
|
|
|
24
|
|
|
General
and administrative
|
|
|
4,019
|
|
|
|
16
|
|
|
|
5,295
|
|
|
|
16
|
|
|
|
9,022
|
|
|
|
17
|
|
|
|
10,906
|
|
|
|
20
|
|
|
Restructuring
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
255
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,727
|
|
|
|
12
|
|
|
Total
operating expenses
|
|
|
17,800
|
|
|
|
72
|
|
|
|
21,160
|
|
|
|
65
|
|
|
|
38,431
|
|
|
|
71
|
|
|
|
46,803
|
|
|
|
84
|
|
|
Income
(loss) from operations
|
|
|
2,202
|
|
|
|
(9
|
)
|
|
|
5,097
|
|
|
|
15
|
|
|
|
(2,814
|
)
|
|
|
(5
|
)
|
|
|
(5,830
|
)
|
|
|
(10
|
)
|
|
Interest
income, net
|
|
|
613
|
|
|
|
3
|
|
|
|
492
|
|
|
|
2
|
|
|
|
1,448
|
|
|
|
2
|
|
|
|
796
|
|
|
|
2
|
|
|
Other
income, net
|
|
|
350
|
|
|
|
1
|
|
|
|
180
|
|
|
|
—
|
|
|
|
485
|
|
|
|
1
|
|
|
|
165
|
|
|
|
—
|
|
|
Income
(loss) before income taxes
|
|
|
(1,239
|
)
|
|
|
(5
|
)
|
|
|
5,769
|
|
|
|
17
|
|
|
|
(881
|
)
|
|
|
(2
|
)
|
|
|
(4,869
|
)
|
|
|
(8
|
)
|
|
Provision
for (benefit from) income taxes
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
794
|
|
|
|
2
|
|
|
|
73
|
|
|
|
—
|
|
|
|
905
|
|
|
|
2
|
|
|
Net
income (loss)
|
|
$
|
(1,159
|
)
|
|
|
(5
|
)%
|
|
$
|
4,975
|
|
|
|
15
|
%
|
|
$
|
(954
|
)
|
|
|
(2
|
)%
|
|
$
|
(5,774
|
)
|
|
|
(10
|
)%
|
|
Comparison
of the Three and Six Months Ended March 31, 2008 and 2007
(Unaudited)
Revenues
Total
revenues decreased $8.0 million, or 25%, to $24.7 million for the three months
ended March 31, 2008 compared to $32.8 million for the three months ended March
31, 2007. This decrease was primarily due to a $14.1 million or 75% decrease in
license revenue offset by an increase of $6.0 million or 43% in service revenue.
Total revenues decreased $1.9 million, or 3%, to $53.8 million for the six
months ended March 31, 2008 compared to $55.7 million for the six months ended
March 31, 2007. This decrease was primarily due to $12.4 million or 48% decrease
in license revenue offset by an increase of $10.5 million or 36% in service
revenue.
The
following summarizes the components of our total revenues:
License
Revenue
The
increase or decrease of license revenue occurring within the three different
product emphases is dependent on the timing of when a sales transaction is
completed and whether a license transaction was sold with essential consulting
services. License revenue sold with essential consulting services is recognized
under percentage-of-completion method of accounting. The timing and amount of
revenue for those transactions being recognized under the
percentage-of-completion is influenced by progress of work performed relative to
the project length of customer contracts and the dollar value of such contracts.
These orders typically involve consulting services that are essential to
functionality of the respective licenses. The following table sets forth
our license revenue by product emphasis for the three and six months ended March
31, 2008 and 2007 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
License
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
solutions
|
|
$
|
3,870
|
|
|
$
|
12,619
|
|
|
$
|
(8,749
|
)
|
|
(69
|
)%
|
|
$
|
10,084
|
|
|
$
|
16,164
|
|
|
$
|
(6,080
|
)
|
|
(38
|
)%
|
|
Marketing
solutions
|
|
|
579
|
|
|
|
1,268
|
|
|
|
(689
|
)
|
|
(54
|
)
|
|
|
1,293
|
|
|
|
2,257
|
|
|
|
(964
|
)
|
|
(43
|
)
|
|
Decision
management solutions
|
|
358
|
|
|
|
4,995
|
|
|
|
(4,637
|
)
|
|
(93
|
)
|
|
|
2,237
|
|
|
|
7,623
|
|
|
|
(5,386
|
)
|
|
(71
|
)
|
|
Total
license revenue
|
|
$
|
4,807
|
|
|
$
|
18,882
|
|
|
$
|
(14,075
|
)
|
|
(75
|
)%
|
|
$
|
13,614
|
|
|
$
|
26,044
|
|
|
$
|
(12,430
|
)
|
|
(48
|
)%
|
|
Total
license revenue decreased by $14.1 million or 75% and $12.4 million or 48%
for the three and six months ended March 31, 2008, respectively, as compared to
the same comparable periods in the prior year. The decrease in license revenue
is the result of fewer sales transactions and transactions of smaller magnitude
being executed in the comparative periods.
Service
Revenue
Service
revenue is primarily composed of consulting implementation and integration,
consulting customization, training, 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 non-essential service
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 and six months ended March 31, 2008
and 2007 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
Service
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
solutions
|
|
$
|
13,439
|
|
|
$
|
10,147
|
|
|
$
|
3,292
|
|
|
32
|
%
|
|
$
|
28,649
|
|
|
$
|
22,346
|
|
|
$
|
6,303
|
|
|
28
|
%
|
|
Marketing
solutions
|
|
|
3,070
|
|
|
|
2,903
|
|
|
|
167
|
|
|
6
|
|
|
|
6,188
|
|
|
|
5,508
|
|
|
|
680
|
|
|
12
|
|
|
Decision
management solutions
|
|
3,400
|
|
|
|
833
|
|
|
|
2,567
|
|
|
308
|
|
|
|
5,399
|
|
|
|
1,806
|
|
|
|
3,593
|
|
|
199
|
|
|
Total
service revenue
|
|
$
|
19,909
|
|
|
$
|
13,883
|
|
|
$
|
6,026
|
|
|
43
|
%
|
|
$
|
40,236
|
|
|
$
|
29,660
|
|
|
$
|
10,576
|
|
|
36
|
%
|
|
Total
service revenue increased $6.0 million or 43% for the three months ended March
31, 2007 as compared to the three months ended March 31, 2008. This change
is primarily related to increases of $2.6 million in consulting revenue, $2.1
million in support and maintenance revenue, $0.6 million in training
revenue and $0.7 million in reimbursement of out-of-pocket expense
revenue.
Total
service revenue increased $10.6 million or 36% from the six months ended March
31, 2007 to the six months ended March 31, 2008. This change is primarily
related to increases of $5.1 million in support and maintenance revenue, $3.8
million in consulting revenue, $0.9 million in training revenue and $0.8 million
of reimbursement of out-of-pocket expense revenue.
Cost
of Revenue
License
Cost
of license revenue includes third-party software royalties and amortization of
capitalized software development costs. Royalty expenses can vary depending upon
the mix of products sold within the period. In addition, not all license
products have associated royalty expense. The capitalized software development
costs pertain to a banking product that was completed and available for general
release in August 2005 and the third party costs associated with porting of
existing products to new platforms. One of the porting projects was completed in
August 2007 and the aggregate costs capitalized were $0.5 million. Amortization
expense for the banking product for the three and six months ended March 31,
2008 were $0.2 million and $0.5 million, respectively. Amortization expense
for the porting project for the three and six months ended March 31, 2008 was
less than $0.1 million in each period. Amortization costs for the banking
product are expected to continue through 2008 and amortization costs of the
porting project are expected through 2010. The following table sets forth our
cost of license revenues for the three and six months ended March 31, 2008 and
2007 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
Cost
of license revenue
|
|
$
|
283
|
|
|
$
|
583
|
|
|
$
|
(300
|
)
|
|
(52
|
)%
|
|
$
|
617
|
|
|
$
|
1,037
|
|
|
$
|
(420
|
)
|
|
(41
|
)%
|
|
Percentage
of total revenue
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
The
cost of license revenue decreased by $0.3 million or 52% from the three months
ended March 31, 2007 to the three months ended March 31, 2008. This change
is primarily due to the reduction in royalty expense resulting from a 75%
decrease in license revenue.
The
cost of license revenue decreased $0.4 million or 41% for the six months ended
March 31, 2007 to the six months ended March 31, 2008. This change is
primarily due to the reduction in royalty expense resulting from a 48% decrease
in license revenue.
Service
Cost
of service revenue consists primarily of personnel costs, third-party consulting
costs, facility and travel costs incurred to provide consulting implementation
and integration, consulting customization, training, and PCS support services.
The following table sets forth our cost of service revenue for the three and six
months ended March 31, 2008 and 2007 (in thousands, except
percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
Cost
of service revenue
|
|
$
|
8,532
|
|
|
$
|
5,622
|
|
|
$
|
2,910
|
|
|
52
|
%
|
|
$
|
17,010
|
|
|
$
|
13,088
|
|
|
$
|
3,922
|
|
|
30
|
%
|
|
Percentage
of total revenue
|
|
|
35
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
32
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
Cost
of service revenue increased by $2.9 million or 52% from the three months ended
March 31, 2007 to the three months ended March 31, 2008. This change is
primarily due to a deferral of consulting costs in the prior year period of $1.1
million associated with an undelivered license element, a $1.3 million increase
in third party consulting costs and a $0.5 million increase in travel
expense.
Cost
of service revenue increased by $3.9 million or 30% from the six months ended
March 31, 2007 to the six months ended March 31, 2008. This change is primarily
due to a deferral of consulting costs in the prior year period of $1.2 million
associated with an undelivered license element, a $2.4 million increase in third
party consulting costs, a $0.5 million increase in travel expense offset by a
$0.1 million decrease in facility costs.
Amortization of Intangible Assets
Amortization
of intangible assets cost consists primarily of the amortization of amounts paid
for developed technologies, customer lists and tradenames resulting from
business acquisitions. The following table sets forth our costs associated with
amortization of intangible assets for the three and six months ended March 31,
2008 and 2007 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
Amortization
of intangible assets
|
$
|
303
|
|
|
$
|
303
|
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
606
|
|
|
$
|
606
|
|
|
$
|
—
|
|
|
—
|
%
|
|
Percentage
of total revenue
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
We
expect amortization expense for intangible assets to be $0.3 million for each of
the two remaining quarters in fiscal year 2008, $1.2 million in fiscal year 2009
and $0.3 million in fiscal year 2010.
Operating
Expenses
Sales and Marketing
Sales
and marketing expense is composed primarily of costs 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 and six months ended March 31, 2008 and 2007 (in thousands, except
percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
Sales
and marketing expense
|
|
$
|
7,400
|
|
|
$
|
8,314
|
|
|
$
|
(914
|
)
|
|
(11
|
)%
|
|
$
|
16,303
|
|
|
$
|
15,578
|
|
|
$
|
725
|
|
|
5
|
%
|
|
Percentage
of total revenue
|
|
|
30
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
30
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
Sales
and marketing expense decreased by $0.9 million or 11% from the three months
ended March 31, 2007 to the three months ended March 31, 2008. This change is
primarily due to a decrease of $1.0 million in employee costs driven mainly by a
decrease in sales commission expense, a decrease in sales and marketing events
of $0.8 million offset by increases of $0.6 million of consultant costs, $0.1
million of travel costs and $0.1 million of facility costs. In the prior year,
the sales and marketing program costs for sales kickoff and presidents club
occurred in the March 31, 2007 quarter while in the current year, these programs
occurred in the December 31, 2007 quarter.
Sales
and marketing expense increased by $0.7 million or 5% from the six months ended
March 31, 2007 to the six months ended March 31, 2008. This change is primarily
due to a decrease of $0.6 million in employee costs driven mainly by a decrease
in commission expense, offset by increases of $0.8 million in consultant costs,
$0.2 million in recruiting and $0.2 million in sales and marketing program
costs.
Research and Development
Research
and development expense is composed primarily of costs 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 and six months
ended March 31, 2008 and 2007 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
Research
and development expense
|
|
$
|
6,381
|
|
|
$
|
7,296
|
|
|
$
|
(915
|
)
|
|
(13
|
)%
|
|
$
|
13,106
|
|
|
$
|
13,592
|
|
|
$
|
(486
|
)
|
|
(4
|
)%
|
|
Percentage
of total revenue
|
|
|
26
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
Research
and development expense decreased by $0.9 million or 13% from the three months
ended March 31, 2007 to the three months ended March 31, 2008. This decrease is
primarily due to a $0.8 million reduction in employee costs related to executive
and employee bonuses not being earned for the quarter. In addition, travel
and entertainment expenses decreased $0.1 million in the March 31, 2008
quarter.
Research
and development expense decreased by $0.5 million or 4% from the six months
ended March 31, 2007 to the six months ended March 31, 2008. This decrease is
primarily due to a $0.3 million reduction in employee costs related to executive
and employee bonuses not being earned for the second quarter of the year ending
March 31, 2008. In addition, travel and entertainment expenses decreased
$0.2 million for the period.
General and Administrative
General
and administrative expense is composed primarily of costs associated with our
executive and administrative personnel (e.g. the CEO, legal, human resources and
finance personnel). These costs consist primarily of employee compensation,
bonuses, stock compensation expense, benefits, facilities, consulting, legal and
audit costs, including costs for Sarbanes-Oxley Act of 2002 (SOX) compliance.
The following table sets forth our general and administrative expenses for the
three and six months ended March 31, 2007 and 2008 (in thousands, except
percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
General
and administrative expense
|
|
$
|
4,019
|
|
|
$
|
5,295
|
|
|
$
|
(1,276
|
)
|
|
(24
|
)%
|
|
$
|
9,022
|
|
|
$
|
10,906
|
|
|
$
|
(1,884
|
)
|
|
(17
|
)%
|
|
Percentage
of total revenue
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
17
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
General
and administrative expense decreased by $1.3 million or 24% from the three
months ended March 31, 2007 to the three months ended March 31, 2008. This
change is primarily due to decreases of $0.6 million in professional services
associated with the stock option investigation in prior year, $0.5 million in
executive and employee bonuses not being earned in the current quarter and $0.2
million in travel expenses.
General
and administrative expense decreased by $1.9 million or 17% from the six months
ended March 31, 2007 to the six months ended March 31, 2008. This change is
primarily due to decreases of $1.3 million in professional services associated
with the stock option investigation in prior year and $0.6 million of executive
and employee bonuses not being earned in the second current quarter of the year
ending March 31, 2008.
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.
At
December 31, 2006, we recorded a pre-tax cash restructuring charge of $6.5
million as calculated using the net present value of the related costs as
required by SFAS 146. The charge was composed of $1.7 million for severance
costs and $4.8 million for exiting excess facilities. The facilities are subject
to operating leases expiring through 2010. The Company anticipated that
approximately $5.4 million of the charge would result in cash
expenditures.
During
the quarter ended March 31, 2007, the Company incurred an additional charge of
$0.1 million for employee severance costs associated with the closure of the
France office. Also during March 2007, the Company negotiated an early
termination of the France office lease associated with its closure resulting in
a $0.2 million reduction in the restructure facility liability. This reduction
was recorded as an offset to restructuring expense in the period.
Prior Restructuring. 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, Massachusetts and recorded a charge associated with
the long term lease which expires in January 2011. In the March 2007 quarter, 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 restructure
charge was recorded in 2002. This change in estimate resulted in a $0.3 million
charge to restructuring in the quarter ended March 31, 2007.
Stock-Based Compensation (Included in Individual Operating Expense and Cost of Revenue Categories)
The
following table sets forth our stock-based compensation expense and functional
breakdown for the three and six months ended March 31, 2008 and 2007 (in
thousands):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues – service
|
$
|
109
|
|
|
$
|
54
|
|
|
$
|
262
|
|
|
$
|
161
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
230
|
|
|
|
237
|
|
|
|
471
|
|
|
|
566
|
|
|
|
Research
and development
|
|
144
|
|
|
|
168
|
|
|
|
343
|
|
|
|
262
|
|
|
|
General
and administrative
|
|
498
|
|
|
|
434
|
|
|
|
1,081
|
|
|
|
880
|
|
|
|
Total
operating expense
|
|
872
|
|
|
|
839
|
|
|
|
1,895
|
|
|
|
1,708
|
|
|
|
Total
stock-based compensation expense
|
$
|
981
|
|
|
$
|
893
|
|
|
$
|
2,157
|
|
|
$
|
1,869
|
|
|
For
the three months ended March 31, 2008, the aggregate stock-based compensation
cost included in cost of revenues and in operating expenses was $1.0 million
that is primarily related to $1.0 million associated with employee stock
options, $0.1 million associated with restricted stock awards and a decrease of
$0.1 million for restricted stock units. For the three months ended March 31,
2007, the aggregate stock-based compensation cost included in cost of revenues
and in operating expenses was $0.9 million that is primarily related to $0.8
million associated with employee stock options and $0.1 million associated with
restricted stock awards.
For
the six months ended March 31, 2008, the aggregate stock-based compensation cost
included in cost of revenues and in operating expenses was $2.2 million that is
primarily related to $1.9 million associated with employee stock
options, less than $0.1 million associated with restricted stock awards and
$0.2 million for restricted stock units. For the six months ended March 31,
2007, the aggregate stock-based compensation cost included in cost of revenues
and in operating expenses was $1.9 million that is primarily related to $1.5
million associated with employee stock options and $0.4 million associated with
restricted stock awards.
Interest
Income, Net
Interest
income, net, consists primarily of interest income generated from our cash, cash
equivalents, and marketable securities offset by interest expense incurred in
connection with capital equipment leases and imputed under SFAS 146
restructuring accruals. The following table sets forth our interest income, net
for the three and six months ended March 31, 2008 and 2007 (in thousands, except
percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
Interest
income, net
|
|
$
|
613
|
|
|
$
|
492
|
|
|
$
|
121
|
|
|
25
|
%
|
|
$
|
1,448
|
|
|
$
|
796
|
|
|
$
|
652
|
|
|
82
|
%
|
|
Percentage
of total revenue
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
Interest
income, net increased by 25% and 82% from the three and six months
ended March 31, 2007 to the three and six months ended March 31, 2008,
respectively, primarily due to the Company transferring a portion of its funds
into marketable securities which earn a higher return of interest income than
other investments we utilized in the prior year and higher average cash balances
in the current year than in the prior year. We anticipate lower interest income
in the near term due to the use of up to $25 million for the stock repurchase
program.
Other
Income, Net
These
gains and losses are primarily associated with foreign currency transaction
gains or losses and the re-measurement of our short-term intercompany balances
between the U.S. and our foreign currency denominated subsidiaries. The
following table sets forth our other income (expense), net for the three and six
months ended March 31, 2008 and 2007 (in thousands, except
percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
Other
income, net
|
|
$
|
350
|
|
|
$
|
180
|
|
|
$
|
170
|
|
|
94
|
%
|
|
$
|
485
|
|
|
$
|
165
|
|
|
$
|
320
|
|
|
194
|
%
|
|
Percentage
of total revenue
|
|
|
1
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
1
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
Other
income increased by 94% and 194% from the three and six months ended March 31,
2007 to the three and six months ended March 31, 2008, respectively. This
increase is primarily due to higher transaction gains associated with our
foreign intercompany balances.
Provision
for (Benefit from) Income Taxes
These
provisions (benefits) are primarily attributable to taxes on earnings from our
foreign subsidiaries, certain foreign withholding taxes, and the alternate
minimum tax for federal taxes. The following table sets forth our provision
for (benefit from) income taxes for the three and six months ended March 31,
2008 and 2007 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
|
|
|
%
|
|
Provision
(benefit) for income taxes
|
|
$
|
(80
|
)
|
|
$
|
794
|
|
|
$
|
(874
|
)
|
|
(110
|
)%
|
|
$
|
73
|
|
|
$
|
905
|
|
|
$
|
(832
|
)
|
|
(92
|
)%
|
|
Percentage
of total revenue
|
|
|
—
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
—
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
The
provision for income taxes decreased 110% and 92% for the three and six months
ended March 31, 2008, respectively, as compared to the same periods of the prior
year. This decrease year-to-year and quarter-to-quarter is primarily due to a
$0.5 million withholding tax payment related to a sales transaction that
occurred in Turkey during the March 2007 quarter.
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
For
the three and six months ended March 31, 2008, we have not been profitable and
have not generated a net increase in cash and cash equivalents. We expect our
current cash and cash equivalent balances to be in excess of cash requirements
for the next twelve months.
Operating
Activities
Cash
used for operating activities was $12.6 million during the six months ended
March 31, 2008, which consisted primarily of our net loss of $1.0 million
adjusted for non-cash items (primarily depreciation and amortization, non-cash
stock-based compensation expense, provision for doubtful accounts and other
non-cash charges) aggregating approximately $4.3 million and the net cash
outflow effect from changes in assets and liabilities of approximately $15.9
million. This net cash outflow was primarily related to decreases in deferred
revenue of $13.4 million, accrued expenses of $4.1 million and prepaid
expenses of $2.0 million offset by increases in accounts receivable of $1.9
million and accounts payable of $1.1 million.
Cash
provided by operating activities was $23.5 million during the six months ended
March 31, 2007, which consisted primarily of our net loss of $5.8 million
adjusted for non-cash items (primarily depreciation, amortization, provision for
doubtful accounts, loss on disposal of assets, other non-cash charges and
non-cash stock-based compensation expense) aggregating approximately $4.8
million and the net cash inflow effect from changes in assets and liabilities of
approximately $24.4 million. This net cash inflow was primarily related to
increases in deferred revenue of $34.9 million and accrued expenses of $3.0
million offset by reductions in accounts receivable of $9.3 million and prepaid
expenses of $4.4 million. The increase in deferred revenue is the result of
sales transactions that were completed during the six month period ended March
31, 2007 for which revenue is not recognized until subsequent
periods.
Investing
Activities
Cash
provided by investing activities was $10.4 million during the six months ended
March 31, 2008. This cash provided was primarily from $11.5 million of net
proceeds from marketable securities offset by the use of cash for the purchase
of $1.0 million of property and equipment and the capitalization of $0.1 million
of software development costs associated with the porting of existing products
to a new platform.
Cash
used for investing activities was $1.3 million during the six months ended March
31, 2007. This use of cash was primarily for purchases of property and equipment
associated with the closure of the old European headquarters office and the
opening of the new smaller European headquarters office during the
period.
Financing
Activities
Cash
used by financing activities was $7.5 million during the six months ended March
31, 2008. This use of cash was primarily related to the repurchase of $8.1
million of common stock under our stock repurchase program offset by proceeds
from stock option exercises of $0.6 million. We expect to continue using
cash for financing activities in connection with our stock repurchase
program.
Cash
provided by financing activities was $3.1 million during the six months ended
March 31, 2007. This cash provided was primarily related to proceeds from stock
option exercises of $3.2 million.
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 two additional one year
terms. Under the terms of the agreement, we pay for services rendered on a
monthly fee basis, including the requirement to reimburse Ness for 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 we further expanded our agreement with Ness whereby Ness is providing
certain additional technical and consulting services. The additional agreements
can be cancelled at the option of us 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 March 31, 2008.
In addition to service agreements, we also guaranteed certain equipment lease
obligations of Ness (see Note 9 to the Condensed Consolidated Financial
Statements). Ness may
procure equipment to be used in performance of the Services, either through
leasing arrangements or direct cash purchases, for which we are 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 we have an outstanding standby letter of credit in the
amount of $0.2 million in guarantee of Ness’ financial commitments under the
lease. Over the term of the lease, our obligation to reimburse Ness is
approximately equal to the amount of the guarantee.
Leases
Operating
lease obligations in the table below include approximately $1.9 million for our
Boston, Massachusetts facility operating lease commitments that are
included in Restructuring expenses. As of March 31, 2008, the Company has $0.8
million in sublease income contractually committed for future periods relating
to this facility. See Notes 5 and 9 to the Condensed Consolidated Financial
Statements for further discussion.
The
office lease for our Cupertino headquarters expires on December 31, 2008. In
April 2008, we have exercised an option to renew our lease for an additional
five years at ninety-five percent of the fair market value on December 31, 2008.
While market rates can not be determined at this time, we expect our operating
lease expense for this facility to increase effective January 1,
2009.
We
have asset retirement obligations, associated with commitments to return
property subject to operating leases to original condition upon lease
termination. As of March 31, 2008, we estimate 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 contractual obligations as
of March 31, 2008 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
|
$
|
9,930
|
|
|
$
|
1,610
|
|
|
$
|
4,963
|
|
|
$
|
2,697
|
|
|
$
|
660
|
|
|
Asset
retirement obligations
|
|
365
|
|
|
|
—
|
|
|
|
—
|
|
|
|
365
|
|
|
|
—
|
|
|
Total
|
$
|
10,295
|
|
|
$
|
1,610
|
|
|
$
|
4,963
|
|
|
$
|
3,062
|
|
|
$
|
660
|
|
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 March 31, 2008, 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,
additional declines in cash balances 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 cash and marketable
securities that are subject to interest rate risk and average interest rates as
of March 31, 2008 (in thousands):
|
|
|
March
31, 2008
|
|
|
Fair
Value
|
|
Average
Interest
Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash invested in short-term investments
|
$
|
323
|
|
$
|
323
|
|
2.7
|
%
|
|
|
Marketable
securities
|
|
751
|
|
|
751
|
|
5.5
|
%
|
|
|
Total
restricted cash and marketable securities
|
$
|
1,074
|
|
$
|
1,074
|
|
4.7
|
%
|
|
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
March 31, 2007 (in thousands):
|
|
|
March
31, 2007
|
|
|
Fair
Value
|
|
Average
Interest
Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash invested in short-term investments
|
$
|
354
|
|
$
|
354
|
|
3.0
|
%
|
|
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 deposit and
marketable securities. We invest our excess cash in money market accounts,
commercial paper, certificates-of-deposit, and marketable securities with
maturities of less than one year. We do not invest in auction rate securities.
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
March 31, 2008, interest income would decline by less than $0.1 million.
Assuming consistent investment levels as of March 31, 2007, interest income
would have declined by less than $0.1 million.
Foreign Currency Risk.
International revenues accounted for approximately 44% and 59% of total revenues
for six months ended March 31, 2008 and 2007, respectively. International
revenues decreased $9.4 million or 29% compared to the same period of the prior
year. Our international operations have 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 six months
ended March 31, 2008, our international revenues for the six months ended March
31, 2008 would have been lower than we reported by approximately $0.3 million
and our international loss from operations would have been greater than we
reported by $0.1 million. Using the average foreign currency exchange rates for
the six months ended March 31, 2007, our international revenues for the six
months ended March 31, 2008 would have been lower than we reported by
approximately $1.9 million and our international loss from operations would have
been greater than we reported by $0.2 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 States dollars in consolidation. If there is a change in
foreign currency exchange rates, the conversion of the foreign subsidiaries’
financial statements into United States dollars will lead to a translation gain
or loss which is recorded as a component of accumulated other comprehensive
income which is a component of 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 six months ended March 31, 2008 and 2007, we
recorded net foreign currency transaction gains of $0.4 million and $0.2
million, respectively, which was recorded in “Other income, 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 March 31, 2008 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.
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.
*To
date, our sales have been concentrated in the financial services, insurance,
healthcare, telecommunications and retail markets, and if we are unable to
continue sales in these markets or successfully penetrate new markets, our
revenues may decline.
Sales
of our products and services in five large markets—banking, insurance,
healthcare, telecommunications and retail markets accounted for approximately
98% and 99% of our total revenues for the six months ended March 31, 2008 and
2007, respectively. We expect that revenues from these five markets will
continue to account for a substantial portion of our total revenues for the
foreseeable future. However, we are seeking to expand in other markets. 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 further 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. This may cause our current or
prospective customers to reduce their spending on technology, which in turn
would have an adverse impact on our sales and revenues.
*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 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. 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. Certain of our customers have become more
cautious regarding their IT purchases given the overall economy and specifically
the issues that continue to impact the financial markets. The result of
this attitude is that our sales cycles have lengthened in some instances,
requiring more time to finalize transactions. In particular, several
transactions we expected to close before the end of the quarter ended March 31,
2008 were delayed.
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, would
conduct 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.
*
We were not profitable for the six months ended March 31, 2008 and we may
continue to 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.
We
incurred losses of $1.0 million and $5.8 million for the six months ended March
31, 2008 and 2007, respectively. As of March 31, 2008, we had an accumulated
deficit of $227.9 million. We may continue to incur losses 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 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 revenue 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 March 31, 2008, Citicorp
Credit Services, Inc. and Wellpoint, Inc. accounted for 25% and 11% of our
total revenue. For the six months ended March 31, 2008, Citicorp Credit
Services, Inc., Wellpoint, Inc. and IBM accounted for 23%, 11% and 10% of
our total revenue, respectively. 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 in any given period. 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 loss would 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 six months ended March 31, 2008, international revenues were $23.6 million
or approximately 44% of our total revenues. For the six months ended March 31,
2007, international revenues were $33.0 million or approximately 59% of our
total 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 France may 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 denominated in foreign currencies. These currencies
include the United Kingdom Pound Sterling, the Euro and the Canadian Dollar. Our
international sales comprised 44% of our total sales for the six months ended
March 31, 2008. Our international sales comprised 59% of our total sales for the
six months ended March 31, 2007. 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 six months ended March 31, 2008, we had a foreign currency transaction gain
of $0.4 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 2008 or 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 2007 and 2008, 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;
|
|
•
|
Financial
difficulties or poor operating results announced by significant
customers;
|
|
•
|
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
economies including 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.
A
portion of 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 adversely impact 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 adversely impacted. 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, Accenture and HCL
Technologies. 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, Accenture, or HCL Technologies 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, Accenture and HCL Technologies
and, as a result, these systems integrators may be more likely to recommend
competitors’ products and services. In 2007 and 2008, 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.
If
we do not maintain effective internal controls over 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 maintaining effective 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 2006 Annual 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 March 31, 2008, we use the services of approximately 143
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 are now
more dependent 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 or termination of our relationship with Ness could
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 particular in prior years, we have had significant turnover of our
executives as well as 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 the 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.
*
Low gross margin in services revenues could adversely impact our overall gross
margin and income.
Our
services revenues have had lower gross margins than our license revenues.
Service revenue comprised 75% and 53% of our total revenues for the six months
ended March 31, 2008 and 2007, respectively. Gross margin on service revenue was
58% and 56% for the six months ended March 31, 2008 and 2007, respectively.
License revenues comprised 25% and 47% of our total revenues for the six months
ended March 31, 2008 and 2007, respectively. Gross margins on license revenues
were 95% and 96% for the six months ended March 31, 2008 and 2007,
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, sales and support of 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:
|
•
|
Our
ability to integrate our products with multiple platforms and existing or
legacy systems; and,
|
|
•
|
Our
ability to anticipate and support new standards, especially Internet and
enterprise Java standards.
|
*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 patent or 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 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.
In
the past 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 maintaining the requisite internal controls
over 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.
On
February 28, 2008, the Company’s Board of Directors authorized the 2008
Repurchase Plan, a program to repurchase up to $25 million of the Company’s
common stock over a one year period. Repurchases under the plan began on March
4, 2008. In conjunction with the 2008 Repurchase Plan, the Company entered into
a written trading plan with a broker under Rule 10b5-1 of the Securities
Exchange Act of 1934, as amended, to effect the repurchases. The timing and
amount of any shares repurchased under the 2008 Repurchase Plan are determined
by the Company’s management based on its evaluation of market conditions and
other factors. Repurchased shares are immediately retired and will resume the
status of authorized but unissued shares. The following table sets forth
information with respect to repurchases of our common stock during the three
months ended March 31, 2008 (in thousands, except shares and average price per
share):
|
Period
|
|
Total Number
of Shares Purchased
|
|
|
Average
Price Paid Per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or Programs
|
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs
|
|
|
January
1, 2008 - January 31, 2008
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|
February
1, 2008 - February 29, 2008
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
March
1, 2008 - March 31, 2008
|
|
1,524,078
|
|
|
6.10
|
|
1,524,078
|
|
|
15,700
|
|
|
Total
|
|
1,524,078
|
|
$
|
6.10
|
|
1,524,078
|
|
$
|
15,700
|
|
The
Company terminated the 2008 Stock Repurchase Plan as of April 30,
2008.
On
February 1, 2008, our Annual Meeting of Stockholders was held in Cupertino,
California. Of the 33,303,036 shares outstanding and entitled to vote as of the
record date of December 3, 2007, 29,728,682 shares were present or represented
by proxy at the meeting. At the meeting, stockholders were asked to vote with
respect to (i) the election of two directors to hold office until the 2011
Annual Meeting of Stockholders or until such time as their respective successors
are elected and qualified, (ii) the ratification to amend Chordiant’s 2005
Equity Incentive Plan (“the 2005 Plan”) to increase the number of shares
authorized and reserved for issuance under the 2005 Plan by an additional
700,000 shares of common stock, (iii) the ratification to amend Chordiant’s
Amended and Restated 1999 Non-Employee Directors’ Stock Option Plan (Directors’
Plans) to expand the types of awards that may be granted to include restricted
stock awards and restricted stock units and for fiscal year 2008 and thereafter,
directors will receive awards of restricted stock awards instead of stock
options as their annual and initial automatic board service award, and (iv) the
ratification of the selection of BDO Seidman, LLP as our independent registered
public accounting firm for our fiscal year ending September 30
2008.
The
following nominees were elected as directors, each to hold office until the 2011
Annual Meeting of Stockholders or until such time as their respective successors
are elected and qualified, by the vote set forth below:
|
Nominee
|
|
Votes
For
|
|
Withheld
|
|
Broker
Non-Votes
|
|
|
Steven
R. Springsteel
|
|
28,238,421
|
|
1,490,261
|
|
0
|
|
|
Richard
G. Stevens
|
|
28,363,244
|
|
1,365,438
|
|
0
|
|
In
addition to the directors elected above, William J. Raduchel, David R.
Springett, Charles E. Hoffman, Dan A. Gaudreau, and Allen A. A. Swann continued
to serve as directors after the annual meeting. On February 1, 2008, David A.
Weymouth resigned as a member of the Company’s Board of Directors.
Stockholders’
approval to increase the number of shares authorized and reserved for issuance
under the 2005 Plan by an additional 700,000 shares of common stock was ratified
by the vote set forth below:
|
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
|
21,859,217
|
|
4,330,782
|
|
57,358
|
|
3,481,325
|
|
Stockholders’
approval to amend the Directors’ Plans to expand the types of awards that may be
granted to include restricted stock awards and restricted stock units and for
fiscal year 2008 and thereafter, directors will receive awards of restricted
stock awards instead of stock options as their annual and initial automatic
board service award:
|
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
|
23,238,161
|
|
2,944,620
|
|
64,576
|
|
3,481,325
|
|
The
selection of BDO Seidman, LLP as our independent registered public accounting
firm for our fiscal year ended September 30, 2008 was ratified by the vote set
forth below:
|
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
|
28,501,658
|
|
1,172,899
|
|
54,124
|
|
0
|
|
Unregistered
Sales of Equity Securities and the Use of Proceeds
On
April 30, 2008, the Company terminated the 2008 Stock Repurchase Plan. Under the
2008 Stock Repurchase Plan, the Company repurchased a total of 3.4 million
shares of our common stock at an average price of $5.55 per share totaling $18.6
million.
Compensatory
Arrangements of Certain Officers
On
April 30, 2008, the Board of Directors amended the 2008 Executive Plan, 2008
Worldwide Vice President of Professional Services Bonus Plan, and 2008 General
Counsel Bonus Plan (or “the Plans”). The amendment allows the measurement of the
weighted Non-GAAP Operating Profit component of the Plans for fiscal year 2008
to be calculated using either the original method or using an alternative method
(provided that Non-GAAP Operating Profit for fiscal year 2008 is at least a
certain identified amount), defaulting to the method that will result in a
higher bonus payout. If the alternative method results in a higher payout, it is
limited to a maximum aggregate annual payout of $1.2 million for the Non-GAAP
Operating Profit component of the Plans.
Cost
Associated with Exit or Disposal Activities
On
May 1, 2008, the Company committed to a cost reduction plan intended to align
its resources and cost structure with expected future revenues. The plan
anticipates a re-allocation of employee resources between functional groups. The
plan includes an immediate reduction in positions equal to approximately ten
percent of the Company’s worldwide workforce. We notified employees on May 1,
2008.
As
a result of the cost-cutting measures, the Company estimates that it will record
pre-tax operating charges in the third quarter of fiscal year 2008 of
approximately $0.4 million for severance costs.
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.
|
CHORDIANT
SOFTWARE, INC
|
|
|
|
|
|
|
By:
|
/s/ PETER
S. NORMAN
|
|
|
|
Peter
S. Norman
Chief
Financial Officer and
Principal
Accounting Officer
|
|
EXHIBIT
INDEX
|
|
|
Exhibit
Number
|
|
Description
of Document
|
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Chordiant Software, Inc.
(filed as Exhibit 3.1 to Chordiant’s Registration Statement on Form S-1
(No. 333-92187) filed on December 6, 1999 and incorporated herein by
reference).
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of Chordiant Software, Inc. (filed as exhibit 3.2 to
Chordiant’s Form 8-K dated February 1, 2006 and incorporated herein by
reference)
|
|
|
|
31.1
|
|
Certification
required by Rule 13a-14(a) or Rule15d-14(a).
|
|
|
|
31.2
|
|
Certification
required by Rule 13a-14(a) or Rule15d-14(a).
|
|
|
|
32.1#
|
|
Certification
required by Rule 13a-14(a) or Rule15d-14(a) and Section 1350 of Chapter 63
of Title 18 of the United States Code (18 U.S.C. 1350).
|
|
|
|
#
|
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-Q irrespective of any general incorporation
language contained in such
filing.
|