d10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(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, 2009
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 001-34179
|
|
|
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 has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
: Yes 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, 2009, there were 30,177,822 shares of the registrant’s common stock
outstanding.
CHORDIANT
SOFTWARE, INC.
QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2009
PART I.
FINANCIAL INFORMATION
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Page
No.
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Item 1.
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3
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3
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4
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5
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6
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Item 2.
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30
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Item 3.
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49
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Item 4.
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50
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PART II.
OTHER INFORMATION
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Item 1.
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51
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Item 1A.
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51
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Item 4.
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64
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Item 6.
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65
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65
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PART
I - FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
(Unaudited)
|
|
|
March
31,
2009
|
|
|
|
September
30,
2008
|
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|
|
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ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
53,318
|
|
|
$
|
55,516
|
|
Accounts
receivable, net
|
|
|
9,514
|
|
|
|
24,873
|
|
Prepaid
expenses and other current assets
|
|
|
4,639
|
|
|
|
8,168
|
|
Total
current assets
|
|
|
67,471
|
|
|
|
88,557
|
|
Property
and equipment, net
|
|
|
2,427
|
|
|
|
3,165
|
|
Goodwill
|
|
|
22,608
|
|
|
|
22,608
|
|
Intangible
assets, net
|
|
|
909
|
|
|
|
1,514
|
|
Deferred
tax assets—non-current
|
|
|
3,922
|
|
|
|
6,849
|
|
Other
assets
|
|
|
2,664
|
|
|
|
2,007
|
|
Total
assets
|
|
$
|
100,001
|
|
|
$
|
124,700
|
|
|
|
|
|
|
|
|
|
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,455
|
|
|
$
|
7,711
|
|
Accrued
expenses
|
|
|
6,574
|
|
|
|
9,456
|
|
Deferred
revenue
|
|
|
26,907
|
|
|
|
33,503
|
|
Total
current liabilities
|
|
|
37,936
|
|
|
|
50,670
|
|
Deferred
revenue—long-term
|
|
|
9,460
|
|
|
|
12,831
|
|
Other
liabilities—non-current
|
|
|
1,020
|
|
|
|
818
|
|
Restructuring
costs, net of current portion
|
|
|
326
|
|
|
|
529
|
|
Total
liabilities
|
|
|
48,742
|
|
|
|
64,848
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 8, 9 and 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 51,000 shares authorized (500 shares designated
as Series A Junior Participating Preferred Stock); none issued and
outstanding at March 31, 2009 and September 30, 2008
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value; 300,000 shares authorized; 30,177 and 30,076
shares issued and outstanding at March 31, 2009 and
September 30, 2008, respectively
|
|
|
30
|
|
|
|
30
|
|
Additional
paid-in capital
|
|
|
283,833
|
|
|
|
281,910
|
|
Accumulated
deficit
|
|
|
(232,054
|
)
|
|
|
(225,850
|
)
|
Accumulated
other comprehensive income
|
|
|
(550
|
)
|
|
|
3,762
|
|
Total
stockholders’ equity
|
|
|
51,259
|
|
|
|
59,852
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
100,001
|
|
|
$
|
124,700
|
|
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,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
4,287
|
|
|
$
|
4,807
|
|
|
$
|
12,228
|
|
|
$
|
13,614
|
|
Service,
including related party items aggregating nil and $52 for the three months
ended March 31, 2009 and 2008, respectively, and nil and $116 for the six
months ended March 31, 2009 and 2008, respectively.
|
|
|
13,716
|
|
|
|
19,909
|
|
|
|
29,151
|
|
|
|
40,236
|
|
Total
revenues
|
|
|
18,003
|
|
|
|
24,716
|
|
|
|
41,379
|
|
|
|
53,850
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
103
|
|
|
|
283
|
|
|
|
200
|
|
|
|
617
|
|
Service
|
|
|
5,797
|
|
|
|
8,532
|
|
|
|
12,483
|
|
|
|
17,010
|
|
Amortization
of intangible assets
|
|
|
303
|
|
|
|
303
|
|
|
|
606
|
|
|
|
606
|
|
Total
cost of revenues
|
|
|
6,203
|
|
|
|
9,118
|
|
|
|
13,289
|
|
|
|
18,233
|
|
Gross
profit
|
|
|
11,800
|
|
|
|
15,598
|
|
|
|
28,090
|
|
|
|
35,617
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
6,362
|
|
|
|
7,400
|
|
|
|
14,142
|
|
|
|
16,303
|
|
Research
and development
|
|
|
4,843
|
|
|
|
6,381
|
|
|
|
10,102
|
|
|
|
13,106
|
|
General
and administrative
|
|
|
3,064
|
|
|
|
4,019
|
|
|
|
7,465
|
|
|
|
9,022
|
|
Restructuring
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
784
|
|
|
|
—
|
|
Total
operating expenses
|
|
|
14,269
|
|
|
|
17,800
|
|
|
|
32,493
|
|
|
|
38,431
|
|
Loss
from operations
|
|
|
(2,469
|
)
|
|
|
(2,202
|
)
|
|
|
(4,403
|
)
|
|
|
(2,814
|
)
|
Interest
income, net
|
|
|
137
|
|
|
|
613
|
|
|
|
429
|
|
|
|
1,448
|
|
Other
income (expense), net
|
|
|
(103
|
)
|
|
|
350
|
|
|
|
582
|
|
|
|
485
|
|
Loss
before income taxes
|
|
|
(2,435
|
)
|
|
|
(1,239
|
)
|
|
|
(3,392
|
)
|
|
|
(881
|
)
|
Provision
for (benefit from) income taxes
|
|
|
1,101
|
|
|
|
(80
|
)
|
|
|
2,812
|
|
|
|
73
|
|
Net
loss
|
|
$
|
(3,536
|
)
|
|
$
|
(1,159
|
)
|
|
$
|
(6,204
|
)
|
|
$
|
(954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,059
|
|
|
|
33,066
|
|
|
|
30,033
|
|
|
|
33,181
|
|
Diluted
|
|
|
30,059
|
|
|
|
33,066
|
|
|
|
30,033
|
|
|
|
33,181
|
|
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,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,204
|
)
|
|
$
|
(954
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used for) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
868
|
|
|
|
864
|
|
Amortization
of intangibles and capitalized software
|
|
|
742
|
|
|
|
1,140
|
|
Non-cash
stock-based compensation expense
|
|
|
1,906
|
|
|
|
2,157
|
|
Provision
for doubtful accounts and sales returns
|
|
|
167
|
|
|
|
175
|
|
Realized
gain on sale of marketable securities
|
|
|
—
|
|
|
|
(8
|
)
|
Accretion
of discounts on marketable securities
|
|
|
—
|
|
|
|
(51
|
)
|
Non-cash
provision for income taxes
|
|
|
1,968
|
|
|
|
—
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
13,390
|
|
|
|
1,856
|
|
Prepaid
expenses and other current assets
|
|
|
4,045
|
|
|
|
(2,047
|
)
|
Other
assets
|
|
|
(448
|
)
|
|
|
702
|
|
Accounts
payable
|
|
|
(2,901
|
)
|
|
|
1,067
|
|
Accrued
expenses, other liabilities- non-current and restructuring
|
|
|
(2,241
|
)
|
|
|
(4,076
|
)
|
Deferred
revenue
|
|
|
(5,216
|
)
|
|
|
(13,430
|
)
|
Net
cash provided by (used for) operating activities
|
|
|
6,076
|
|
|
|
(12,605
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of propertyand equipment
|
|
|
(277
|
)
|
|
|
(950
|
)
|
Capitalized
product development costs
|
|
|
(38
|
)
|
|
|
(111
|
)
|
Proceeds
from release of (increase in) restricted cash
|
|
|
1
|
|
|
|
(3
|
)
|
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
|
|
|
(314
|
)
|
|
|
10,403
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
16
|
|
|
|
614
|
|
Excess
tax benefits from stock-based compensation
|
|
|
—
|
|
|
|
17
|
|
Repurchase
of common stock
|
|
|
—
|
|
|
|
(8,086
|
)
|
Net
cash provided by (used for) financing activities
|
|
|
16
|
|
|
|
(7,455
|
)
|
Effect
of exchange rate changes
|
|
|
(7,976
|
)
|
|
|
626
|
|
Net
decrease in cash and cash equivalents
|
|
|
(2,198
|
)
|
|
|
(9,031
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
55,516
|
|
|
|
77,987
|
|
Cash
and cash equivalents at end of period
|
|
$
|
53,318
|
|
|
$
|
68,956
|
|
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 insurance, healthcare,
telecommunications, financial services, 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 Generally Accepted Accounting Principles, or GAAP, in the United States
have been condensed or omitted pursuant to such rules and regulations. The
September 30, 2008 Condensed Consolidated Balance Sheet was derived from audited
financial statements, but does not include all disclosures required by GAAP 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, 2008, or
2008 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.
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
GAAP in the United States 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
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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, the Company recognizes revenue for services
and PCS 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 PCS is generally established with the contractual future renewal
rates included in the contracts, when the renewal rate is substantive and
consistent with the fees when support services are sold separately. When
contracts contain multiple elements and fair value VSOE exists for all
undelivered elements, the Company accounts for the delivered elements,
principally the license portion, based upon the “residual method” as prescribed
by SOP 97-2. In multiple element transactions where VSOE is not established for
an undelivered element, revenue is recognized upon the establishment of VSOE for
that element or when the element is delivered.
At
the time a transaction is entered into, the Company assesses whether any
services included within the arrangement relate to significant implementation or
customization essential to the functionality of our products. For contracts for
products that do not involve significant implementation or customization
essential to the product functionality, the Company recognizes license revenue
when there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection of the fee is probable and delivery has occurred as
prescribed by SOP 97-2. For contracts that involve significant implementation or
customization services essential to the functionality of our products, the
license and professional consulting services revenue is recognized using either
the percentage-of-completion method or the completed contract method as
prescribed by Statement of Position No. 81-1, “Accounting for Performance of
Construction-Type and Certain Product-Type Contracts”, or SOP 81-1.
The
percentage-of-completion method is applied when the Company has the ability to
make reasonably dependable estimates of the total effort required for completion
using labor hours incurred as the measure of progress towards completion. The
progress toward completion is measured based on the “go-live” date. The
“go-live” date is defined as the date the essential product functionality has
been delivered or the application enters into a production environment or the
point at which no significant additional Chordiant supplied professional service
resources are required. Estimates are subject to revisions as the contract
progresses to completion and these changes are accounted for as changes in
accounting estimates when the information becomes known. Information impacting
estimates obtained after the balance sheet date but before the issuance of the
financial statements is used to update the estimates. Provisions for estimated
contract losses, if any, are recognized in the period in which the loss becomes
probable and can be reasonably estimated. When additional licenses are sold
related to the original licensing agreement, revenue is recognized upon delivery
if the project has reached the go-live date, or if the project has not reached
the go-live date, revenue is recognized under the percentage-of-completion
method. Revenue from these arrangements is classified as license and service
revenue based upon the estimated fair value of each element using the residual
method.
The
completed contract method is applied when the Company is unable to obtain
reasonably dependable estimates of the total effort required for completion.
Under the completed contract method, all revenue and related costs of revenue
are deferred and recognized upon completion.
For
product co-development arrangements relating to software products in development
prior to the consummation of the individual arrangements, where the Company
retains the intellectual property being developed, and intends to sell the
resulting products to other customers, license revenue is deferred until the
delivery of the final product, provided all other requirements of SOP 97-2 are
met. Expenses associated with these co-development arrangements are accounted
for under SFAS No. 86, “Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed” and are normally expensed as incurred as
they are considered to be research and development costs that do not qualify for
capitalization or deferral.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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, 2009 and September 30, 2008, interest bearing certificates of deposit
were classified as restricted cash. These restricted cash balances serve as
collateral for letters of credit securing certain lease obligations. These
restricted cash balances are classified in Other Assets in the Condensed
Consolidated Balance Sheets. See Note 4 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, and accounts
receivable. To date, the Company has invested excess funds in money market
accounts, commercial paper, corporate bonds, and certificates-of-deposit. The
Company has cash and cash equivalents on deposit at various large banks and
institutions domestically and internationally. As of March 31, 2009, the Company
held no marketable securities.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Based upon current economic conditions, the Company reviewed accounts receivable
and has recorded allowances as deemed necessary.
Some
of our current or prospective customers have recently been facing financial
difficulties. Customers that have accounted for significant revenues in the past
may not generate revenues in any future period, causing any failure to obtain
new significant customers or additional orders from existing customers to
materially affect our operating results. The following table summarizes the
revenues from customers that accounted for 10% or more of total
revenues:
|
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Citicorp
Credit Services, Inc.
|
|
|
11
|
%
|
|
|
25
|
%
|
|
|
12
|
%
|
|
|
23
|
%
|
|
|
Vodafone
Group Services Limited and affiliated companies
|
|
12
|
%
|
|
|
*
|
|
|
|
19
|
%
|
|
|
*
|
|
|
|
Wellpoint,
Inc.
|
|
|
*
|
|
|
|
11
|
%
|
|
|
*
|
|
|
|
11
|
%
|
|
|
International
Business Machines (“IBM”)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Represents
less than 10% of total revenues.
As
previously announced, the Company agreed to license certain of its software to
IBM’s customers.
At
March 31, 2009, Turkiye Is Bankasi, A.S., Vodafone Group Services Limited and
affiliated companies, and Citicorp Credit Services, Inc. accounted for 20%, 16%
and 11%, of our accounts receivable, respectively. At September 30, 2008,
Citicorp Credit Services, Inc., Vodafone Group Services Limited, and IBM
accounted for approximately 19%, 18%, and 13% 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 and the six months ended March 31, 2009, technological
feasibility to port existing products to new platforms was established through
the completion of detailed program designs. Costs aggregating $0.5 million
associated with these products have been capitalized and included in Other
Assets as of March 31, 2009. As the porting of these products are completed, the
capitalized costs are being amortized using the straight-line method over the
estimated economic lives of the products which is 36 months. For the three and
six months ended March 31, 2009, amortization expense, included in cost of
revenue for licenses related to these products was less than $0.1 and $0.1
million, respectively. As of March 31, 2009, the unamortized expense was
approximately $0.4 million.
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 were 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 remaining estimated economic life of the product
which is 36 months. For the three and six months ended March 31, 2009 and 2008,
amortization expense, included in cost of revenue for license related to this
product was less than $0.1 million and $0.1 million, respectively, for both
periods. As of March 31, 2009, the unamortized expense was $0.2
million.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Income
Taxes
Income
taxes are accounted for using an asset and liability approach, which requires
the recognition of taxes payable or refundable for the current period and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in our financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets is based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
Effective
October 1, 2007, the Company adopted Financial Accounting Standards
Interpretation, No. 48 “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” or FIN 48. FIN 48 prescribes a
recognition threshold and measurement guidance for the financial statement
reporting of uncertain tax positions taken or expected to be taken in a
company’s income tax return. The application of FIN 48 is explained in Note 11
to the Condensed Consolidated Financial Statements.
Net
Income (Loss) Per Share
The
Company computes net income (loss) per share in accordance with Statement of
Financial Accounting Standard, 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, unvested restricted stock awards or RSAs (using
the treasury stock method), and unvested restricted stock units or RSUs (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
RSUs are not included in the computation of earnings per share as they are
considered contingently issuable shares. The calculation of diluted net loss per
share excludes potential common shares as their effect is anti-dilutive for the
three and six months ended March 31, 2009 and March 31, 2008.
The
following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except for per share
data):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common stockholders
|
$
|
(3,536
|
)
|
|
$
|
(1,159
|
)
|
|
$
|
(6,204
|
)
|
|
$
|
(954
|
)
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock outstanding
|
|
30,059
|
|
|
|
33,137
|
|
|
|
30,033
|
|
|
|
33,252
|
|
|
|
Common
stock subject to repurchase
|
|
—
|
|
|
|
(71
|
)
|
|
|
—
|
|
|
|
(71
|
)
|
|
|
Denominator
for basic calculation
|
|
30,059
|
|
|
|
33,066
|
|
|
|
30,033
|
|
|
|
33,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive potential common shares
|
|
—
|
(*)
|
|
|
—
|
(*)
|
|
|
—
|
(*)
|
|
|
—
|
(*)
|
|
|
Effect
of dilutive RSAs and RSUs
|
|
—
|
(*)
|
|
|
—
|
(*)
|
|
|
—
|
(*)
|
|
|
—
|
(*)
|
|
|
Denominator
for diluted calculation
|
|
30,059
|
|
|
|
33,066
|
|
|
|
30,033
|
|
|
|
33,181
|
|
|
|
Net
loss per share – basic
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.03
|
)
|
|
|
Net
loss per share – diluted
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.03
|
)
|
|
(*) – Potential common shares are
excluded from the calculation of diluted net loss per share as their effect is
anti-dilutive.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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,
2009
|
|
|
|
March
31,
2008
|
|
|
|
Employee
stock options
|
|
3,995
|
|
|
|
4,015
|
|
|
|
RSAs
|
|
90
|
|
|
|
71
|
|
|
|
RSUs
|
|
538
|
|
|
|
—
|
|
|
|
|
|
4,623
|
|
|
|
4,086
|
|
|
Recent
Accounting Pronouncements
In
November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
08-6, “Equity Method Investment Accounting Considerations” or EITF 08-6. EITF
08-6 clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. EITF 08-6 is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited.
The Company does not currently have any investments that are accounted for under
the equity method and therefore EITF 08-6 will not have a significant impact on
the determination of our financial results.
In
November 2008, the FASB ratified EITF Issue No. 08-7, “Accounting for Defensive
Intangible Assets” or EITF 08-7. EITF 08-7 clarifies the accounting for certain
separately identifiable intangible assets which an acquirer does not intend to
actively use but intends to hold to prevent its competitors from obtaining
access to them. EITF 08-7 requires an acquirer in a business combination to
account for a defensive intangible asset as a separate unit of accounting which
should be amortized to expense over the period the asset diminishes in value.
EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with
early adoption prohibited. The Company has evaluated
the new EITF and has determined that it will not have a significant impact on
the determination or reporting of our financial results.
In
October, 2008, the FASB issued FASB Staff Position (FSP) FAS 157-3, “Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active” or FSP 157-3.
FSP 157-3 clarifies the application of FAS 157 and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. FSP 157-3 is effective
upon issuance, including prior periods for which financial statements have not
been issued. Revisions resulting from a change in the valuation technique or its
application should be accounted for as a change in accounting estimate following
the guidance in FAS Statement No. 154, “Accounting Changes and Error
Corrections” or FAS 154. However, the disclosure
provisions in FAS 154 for a change in accounting estimate are not required for
revisions resulting from a change in valuation technique or its application. The
Company has evaluated the new FSP and has determined that it will not have a
significant impact on the determination or reporting of our financial
results.
NOTE
3—FINANCIAL INSTRUMENTS AND FAIR VALUE
The
Company adopted the provisions of SFAS 157 effective October 1, 2008. Under this
standard, fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
The
Company has investments that are valued in accordance with the provisions of
SFAS 157. SFAS 157 establishes a hierarchy for inputs used in measuring fair
value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when
available. The hierarchy is broken down into three levels based on the
reliability of inputs as follows:
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
Level
1 – Valuations based on quoted prices in active markets for identical
assets that the Company has the ability to access.
|
|
Level
2 – Valuations based on quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or
indirectly.
|
|
Level
3 – Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
|
The
following table represents information about the Company’s investments measured
at fair value on a recurring basis (in thousands).
|
|
Fair
value of investments as of March 31, 2009
|
|
|
|
Total
|
|
|
|
Quoted
Prices
In
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Money
Market Funds included in Cash and Cash Equivalents
|
$
|
42,071
|
|
|
$
|
42,071
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
4—BALANCE SHEET COMPONENTS
Accounts
receivable, net
Accounts
receivable, net, consists of the following (in thousands):
|
|
|
March
31,
2009
|
|
|
|
September
30,
2008
|
|
|
|
Accounts
receivable, net:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
$
|
10,253
|
|
|
$
|
25,502
|
|
|
|
Less:
allowance for doubtful accounts
|
|
(739
|
)
|
|
|
(629
|
)
|
|
|
|
$
|
9,514
|
|
|
$
|
24,873
|
|
|
Prepaid
expenses and other current assets
Prepaid
expenses and other current assets consist of the following (in
thousands):
|
|
|
March
31,
2009
|
|
|
|
September
30,
2008
|
|
|
|
Prepaid
expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
Prepaid
commissions and royalties
|
$
|
913
|
|
|
$
|
2,171
|
|
|
|
Deferred
tax assets
|
|
1,949
|
|
|
|
3,102
|
|
|
|
Other
prepaid expenses and current assets
|
|
1,777
|
|
|
|
2,895
|
|
|
|
|
$
|
4,639
|
|
|
$
|
8,168
|
|
|
Property
and equipment, net
Property
and equipment, net, consists of the following (in thousands):
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
March
31,
2009
|
|
|
|
September
30,
2008
|
|
|
|
Property
and equipment, net:
|
|
|
|
|
|
|
|
|
|
Computer
hardware (useful lives of 3 years)
|
$
|
4,452
|
|
|
$
|
4,744
|
|
|
|
Purchased
internal-use software (useful lives of 3 years)
|
|
3,345
|
|
|
|
3,323
|
|
|
|
Furniture
and equipment (useful lives of 3 to 7 years)
|
|
718
|
|
|
|
749
|
|
|
|
Leasehold
improvements (shorter of 7 years or the term of the lease)
|
|
2,667
|
|
|
|
2,811
|
|
|
|
|
|
11,182
|
|
|
|
11,627
|
|
|
|
Accumulated
depreciation and amortization
|
|
(8,755
|
)
|
|
|
(8,462
|
)
|
|
|
|
$
|
2,427
|
|
|
$
|
3,165
|
|
|
Intangible
assets, net
Intangible
assets, net, consist of the following (in thousands):
|
|
March
31, 2009
|
|
September
30, 2008
|
|
|
|
Gross
Carrying
Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Carrying
Amount
|
|
|
|
Gross
Carrying
Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Carrying
Amount
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technologies
|
|
$
|
6,904
|
|
|
$
|
(6,213
|
)
|
|
$
|
691
|
|
|
$
|
6,904
|
|
|
$
|
(5,765
|
)
|
|
$
|
1,139
|
|
Customer
list and trade-names
|
|
|
2,731
|
|
|
|
(2,513
|
)
|
|
|
218
|
|
|
|
2,731
|
|
|
|
(2,356
|
)
|
|
|
375
|
|
|
|
$
|
9,635
|
|
|
$
|
(8,726
|
)
|
|
$
|
909
|
|
|
$
|
9,635
|
|
|
$
|
(8,121
|
)
|
|
$
|
1,514
|
|
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 months ended March 31, 2009 and 2008,
respectively. The Company expects amortization expense on acquired intangible
assets to be $0.6 million for the remainder of fiscal year 2009 and $0.3 million
for the first quarter of fiscal year 2010.
Other
assets
Other
assets consist of the following (in thousands):
|
|
|
March
31,
2009
|
|
|
|
September
30,
2008
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Long-term
restricted cash
|
$
|
81
|
|
|
$
|
89
|
|
|
|
Long-term
account receivable
|
|
930
|
|
|
|
—
|
|
|
|
Other
assets
|
|
1,653
|
|
|
|
1,918
|
|
|
|
|
$
|
2,664
|
|
|
$
|
2,007
|
|
|
The
long-term account receivable balance represents a receivable from a single
customer related to a multiple year maintenance renewal that occurred during the
quarter ended March 31, 2009. This amount represents a payment which is due in
the quarter ending March 31, 2011. All revenue associated with this receivable
has been deferred and will be recognized as revenue over the term of the
services performed. As of March 31, 2009, an allowance has not been
provided for this receivable based on the Company’s assessment of the underlying
customer’s credit worthiness.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accrued
expenses
Accrued
expenses consist of the following (in thousands):
|
|
|
March
31,
2009
|
|
|
|
September
30,
2008
|
|
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
Accrued
payroll, payroll taxes and related expenses
|
$
|
3,603
|
|
|
$
|
5,088
|
|
|
|
Accrued
restructuring expenses, current portion (Note 5)
|
|
432
|
|
|
|
538
|
|
|
|
Accrued
third party consulting fees
|
|
861
|
|
|
|
1,264
|
|
|
|
Accrued
income, sales and other taxes
|
|
486
|
|
|
|
1,678
|
|
|
|
Other
accrued liabilities
|
|
1,192
|
|
|
|
888
|
|
|
|
|
$
|
6,574
|
|
|
$
|
9,456
|
|
|
Deferred
revenue
Deferred
revenue consists of the following (in thousands):
|
|
|
March
31,
2009
|
|
|
|
September
30,
2008
|
|
|
|
Deferred
revenue:
|
|
|
|
|
|
|
|
|
|
License
|
$
|
6,041
|
|
|
$
|
12,465
|
|
|
|
Support
and maintenance
|
|
29,397
|
|
|
|
32,908
|
|
|
|
Other
|
|
929
|
|
|
|
961
|
|
|
|
|
|
36,367
|
|
|
|
46,334
|
|
|
|
Less:
current portion
|
|
(26,907
|
)
|
|
|
(33,503
|
)
|
|
|
Long-term
deferred revenue
|
$
|
9,460
|
|
|
$
|
12,831
|
|
|
NOTE
5—RESTRUCTURING
Restructuring
Costs
Through
March 31, 2009, the Company approved certain restructuring plans to, among other
things, reduce its workforce, terminate contracts and consolidate facilities.
Restructuring and asset impairment expenses have been recorded to align the
Company’s cost structure with changing market conditions and to create a more
efficient organization. The Company’s restructuring expenses have been comprised
primarily of: (i) severance and termination benefit costs related to the
reduction of our workforce; (ii) lease termination costs and costs associated
with permanently vacating certain facilities, and (iii) contract termination
costs. The Company accounted for each of these costs in accordance with SFAS No.
146, “Accounting for Costs Associated with Exit or Disposal Activities” or SFAS
146 or previous guidance under Emerging Issues Task Force 94-3 “Liabilities
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)”, or EITF
94-3.
Retroactive
application of SFAS 146 to periods prior to January 1, 2003, was prohibited;
accordingly, the accrual relating to facilities vacated prior to the effective
date of SFAS 146 continues to be accounted for in accordance with the guidance
of EITF 94-3. Accruals for facilities that were restructured prior to 2003 do
not reflect any adjustments relating to the estimated net present value of cash
flows associated with the facilities.
For
each 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.
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
•
|
Excess
Facilities Costs—These costs represent future minimum lease payments
related to excess and abandoned office space under leases, and the
disposal of property and equipment including facility leasehold
improvements, net of estimated sublease
income.
|
|
•
|
Termination
Costs—These costs represent contract termination costs related to the
restructuring plan.
|
As
of March 31, 2009, the total restructuring accrual consisted of the following
(in thousands):
|
|
|
Current
|
|
|
|
Non-Current
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
facilities
|
$
|
432
|
|
|
$
|
326
|
|
|
$
|
758
|
|
|
|
Total
|
$
|
432
|
|
|
$
|
326
|
|
|
$
|
758
|
|
|
As
of March 31, 2009 and September 30, 2008, $0.4 million and $0.5 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.
As
of March 31, 2009, all severance and termination benefits and contract
termination costs have been paid.
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
Net Future
Minimum
Lease
Payments
|
|
|
|
|
|
|
|
2009
(six months remaining)
|
|
|
|
|
$
|
83
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
556
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
119
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
758
|
|
|
|
|
|
|
Included
in the net future minimum lease payments schedule above is an offset of $0.5
million of contractually committed sublease rental income.
Fiscal
Year 2009 Restructuring
In
October 2008, the Company initiated a restructuring plan, the 2009
Restructuring, intended to align its resources and cost structure with expected
future revenues. The 2009 Restructuring plan includes reductions in headcount
and third party consultants across all functional areas in both North America
and Europe. The 2009 Restructuring plan includes a reduction of approximately
13% of the Company’s permanent workforce. A significant portion of the positions
eliminated were in North America.
As
a result of the cost-cutting measures, the Company recorded a pre-tax cash
restructuring charge in the first quarter of fiscal year 2009, of approximately
$0.9 million, including $ 0.8 million for severance costs and $0.1 million for
other contract termination costs. As of March 31, 2009, all payments have been
made.
|
|
|
Severance
and
Benefits
|
|
|
|
Contract
Termination
Costs
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
$
|
758
|
|
|
$
|
130
|
|
|
$
|
888
|
|
|
|
Cash
paid
|
|
(758
|
)
|
|
|
(130
|
)
|
|
|
(888
|
)
|
|
|
Reserve
balance as of March 31, 2009
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 lines, 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 quarter 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. During the quarter ended December 31, 2008, the Company reversed the
charge as the Company was not required to pay the severance expense to the
employee.
The
following table summarizes the activity related to the 2005 Restructuring (in
thousands):
|
|
|
Severance
and
Termination
Benefits
|
|
|
|
Reserve
balance as of September 30, 2008
|
$
|
123
|
|
|
|
Provision
adjustment
|
|
(104
|
)
|
|
|
Non-cash
|
|
(19
|
)
|
|
|
Cash
paid
|
|
—
|
|
|
|
Reserve
balance as of March 31, 2009
|
$
|
—
|
|
|
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 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 recorded net of estimated sublease income based on the
then 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 was lower than previously estimated as
part of the restructure facility reserve, and the Company recorded an additional
$0.4 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, 2008
|
$
|
943
|
|
|
|
Non-cash
|
|
—
|
|
|
|
Cash
paid
|
|
(185
|
)
|
|
|
Reserve
balance as of March 31, 2009
|
$
|
758
|
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
6—COMPREHENSIVE LOSS
The
components of comprehensive loss are as follows (in
thousands):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,536
|
)
|
|
$
|
(1,159
|
)
|
|
$
|
(6,204
|
)
|
|
$
|
(954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain (loss)
|
|
|
(818
|
)
|
|
|
685
|
|
|
|
(4,312
|
)
|
|
|
713
|
|
Net
change in unrealized loss from investments
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
Comprehensive
loss
|
|
$
|
(4,354
|
)
|
|
$
|
(483
|
)
|
|
$
|
(10,516
|
)
|
|
$
|
(245
|
)
|
NOTE
7—RELATED PARTY TRANSACTIONS
Charles
E. Hoffman, a director of the Company, is the former President and Chief
Executive Officer of Covad Communications Group, Inc. (“Covad”), a customer of
ours. Revenue from Covad was zero and less than $0.1 million for the three
months ended March 31, 2009 and 2008, respectively and zero and $0.1 million for
the six months ended March 31, 2009 and 2008, respectively.
David
A. Weymouth is a former director of the Company. Through June 2005,
Mr. Weymouth was the Corporate Responsibility Director of Barclay’s Group,
a customer of ours. Mr. Weymouth terminated his relationship with Barclay’s
Group and became an associate with Deloitte & Touche LLP, a prior provider
of tax services to the Company. Mr. Weymouth resigned as a member of the Board
of Directors of the Company in February 2008.
In
February 2008, Dan Gaudreau became a director of the Company. Mr. Gaudreau is
the Chief Financial Officer of Actuate Corporation, a provider of licensed
technology to the Company. The Company paid royalties to Actuate Corporation of
less than $0.1 million and zero for the three and six months ended March 31,
2008 and 2009, respectively.
NOTE
8—BORROWINGS
Revolving
Line of Credit
The
Company’s revolving line of credit with Comerica Bank expires on June 7, 2010.
The terms of the agreement include a $5.0 million line of credit, available on a
non-formula basis, and requires the Company to (i) maintain at least a $5.0
million cash balance in Comerica Bank accounts, (ii) maintain a minimum quick
ratio of 2 to 1, (iii) maintain a liquidity ratio of at least 1 to 1 at all
times, and (iv) subordinate any debt issuances subsequent to the effective date
of the agreement, and certain other covenants. All assets of the Company have
been pledged as collateral on the credit facility.
The
revolving line of credit contains a provision for a sub-limit of up to $5.0
million for issuances of standby commercial letters of credit. As of March 31,
2009, the Company had utilized $0.4 million of the standby commercial letters of
credit limit which serves as collateral for computer equipment leases for Ness
(see Note 9) of approximately $0.2 million and collateral for a leased facility
of approximately $0.2 million. 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, 2009, the Company had not entered
into any foreign exchange forward contracts. Pursuant to the March 2006 amended
agreement, the Company is required to secure the standby commercial letters of
credit and foreign exchange forward contracts through June 7, 2010. 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, 2009,
there were no outstanding balances on the revolving line of
credit.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
9—COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company leases its facilities and certain equipment under non-cancelable
operating leases that expire on various dates through 2013. Rent expense is
recognized on a straight line basis over the lease term.
Future
minimum lease payments as of March 31, 2009 are as follows (in
thousands):
|
|
|
Operating
Leases
|
|
|
|
Operating
Sublease
Income
|
|
|
|
Net
Operating
Leases
|
|
|
|
Fiscal
year ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
(remaining six months)
|
$
|
1,704
|
|
|
$
|
(121
|
)
|
|
$
|
1,583
|
|
|
|
2010
|
|
3,438
|
|
|
|
(293
|
)
|
|
|
3,145
|
|
|
|
2011
|
|
2,889
|
|
|
|
(86
|
)
|
|
|
2,803
|
|
|
|
2012
|
|
2,176
|
|
|
|
—
|
|
|
|
2,176
|
|
|
|
2013
|
|
2,019
|
|
|
|
—
|
|
|
|
2,019
|
|
|
|
Thereafter
|
|
351
|
|
|
|
—
|
|
|
|
351
|
|
|
|
Total
minimum payments
|
$
|
12,577
|
|
|
$
|
(500
|
)
|
|
$
|
12,077
|
|
|
Operating
lease payments in the table above include approximately $1.3 million for our
Boston, Massachusetts facility operating lease commitment that is included in
Restructuring Expense. As of March 31, 2009, the Company has $0.5 million in
sublease income contractually committed for future periods relating to this
facility. See Note 5 for further discussions.
The
office lease for our Cupertino headquarters was scheduled to expire on December
31, 2008. In July 2008, the Company renewed the lease for a five year period
with an option to renew for an additional five years. The table above includes
our lease commitment for this facility.
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, 2009, the Company estimated that gross expected
cash flows of approximately $0.3 million will be required to fulfill these
obligations.
Asset
retirement obligation payments as of March 31, 2009 are included in Other
liabilities - non-current and are estimated as follows (in
thousands):
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
Estimated
Payments
|
|
|
|
|
|
|
|
Fiscal
year ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
(remaining six months)
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
289
|
|
|
|
|
|
|
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 has been extended annually. 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. From 2004 to 2008, the Company further expanded its agreement
with Ness whereby Ness is providing certain additional technical and consulting
services. In January 2009, the Company extended its agreement with Ness through
December 31, 2011 to provide technical and consulting services, however if the
Company terminates the agreement for convenience prior to December 31, 2009, it
may be required to pay a termination fee no greater than $0.5 million. 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 enters into indemnification agreements
pursuant to which the Company is obligated to indemnify certain of its officers,
directors or employees for certain events or occurrences while the officer,
director or employee is, or was, serving at the Company’s request in such
capacity. The Company’s Bylaws similarly provide for indemnification of its
officers, directors and employees under certain circumstances to the maximum
extent permitted under Delaware law. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements and arrangements 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. As a result of
insurance policy coverage, the Company believes the estimated fair value of
these indemnification agreements and arrangements is minimal. Accordingly, the
Company has no liabilities recorded for these agreements or arrangements as of
March 31, 2009.
The
Company enters into standard agreements with indemnification provisions in its
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 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 agreements is
unlimited. The Company has not incurred significant costs to defend lawsuits or
settle claims related to these 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,
2009.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 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
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, 2009.
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, 2009.
The
Company warrants that its 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,
2009.
NOTE
10—LITIGATION
IPO
Laddering
Beginning
in July 2001, the Company, and certain of its officers and directors
(“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 (the “court”), 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 (“IPO”), violated Section 11 of the Securities
Act of 1933, as amended (the “Securities Act”) and Section 10(b) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) 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 (“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. 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 the Company 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
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, the Company 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 court's earlier decision certifying as class actions the
six IPO Lawsuits designated as "focus cases." Thereafter, the court ordered a
stay of all proceedings in all of the IPO Lawsuits pending the outcome of
plaintiffs’ petition to the Second Circuit for rehearing en banc. On April 6,
2007, the Second Circuit denied plaintiffs’ rehearing petition, but clarified
that the plaintiffs may seek to certify a more limited class in the Court.
Accordingly, the settlement will not be finally approved. Plaintiffs filed
amended complaints with the court 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. On October 2, 2008,
the plaintiffs withdrew their class certification motion. On February
25, 2009, liaison counsel for plaintiffs informed the court that a settlement of
the IPO Lawsuits had been agreed to in principle, subject to formal approval by
the parties and preliminary and final approval by the court. On April 2, 2009,
the parties submitted a tentative settlement agreement to the court and moved
for preliminary approval thereof. If approved, the settlement would result in
the dismissal of all claims against the Company and the Individuals with
prejudice, and the Company's pro rata share of the settlement fund will be fully
funded by insurance. 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.
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 (N.D. Cal.)”. The
complaint alleged that the Company’s Marketing Director software product
infringed copyrights in certain software referred to as the “PowerRPC software”,
copyrights that had been owned by Netbula LLC (“Netbula”) and assigned to Mr. Yue,
the sole employee and owner of Netbula. The alleged infringement included (a)
distributing more copies of the PowerRPC software than had originally been
authorized in a run time license Netbula granted to Chordiant Software,
International, (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, and (e)
unauthorized distribution of PowerRPC for server based products. The plaintiff
sought monetary damages, disgorgement of profits, and injunctive relief
according to proof. On February 5, 2008, the Company and its officers and
employee 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. On July 23, 2008, the court issued an order that (1) denied
plaintiff's motion to disqualify counsel; (2) granted one employee’s motion to
dismiss for lack of personal jurisdiction, with prejudice, and (3) granted the
Company’s motion to dismiss, ruling that Netbula is the real party in interest
and must appear through counsel. The court ruled that Netbula could file an
amended complaint within 45 days and join Mr. Yue as an individual plaintiff at
that time.
On
September 9, 2008, plaintiffs Dongxiao Yue and Netbula filed a First Amended
Complaint asserting four causes of action relating to the Company’s alleged
unauthorized use and distribution of plaintiffs’ PowerRPC software: claims for
copyright infringement, unfair competition, and “accession and confusion of
property” against the Company, and a claim for vicarious copyright infringement
against the Company’s Chief Executive Offer and its former Vice President,
General Counsel and Secretary (the “individual defendants”).
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On
September 20, 2008, the parties filed a stipulation allowing plaintiffs to file
a Second Amended Complaint asserting the two causes of action for copyright
infringement and vicarious copyright infringement, but not including the unfair
competition and accession and confusion claims. The Second Amended Complaint
seeks monetary damages, disgorgement of profits, and injunctive relief according
to proof. On November 10, 2008, the Company answered the complaint and asserted
various affirmative defenses, including that the plaintiffs’ claims are barred
by the existence of an express or implied license from the plaintiffs. The court
has allowed discovery to proceed on this license-based defense and set April 9,
2009 for a hearing. On March 2, 2009, the Company filed a motion for summary
judgment based on this defense. On April 2, 2009, the court issued an
order notifying the parties that it would take the motion under submission
without oral argument.
On
November 10, 2008, the individual defendants filed a motion to dismiss on
grounds that the plaintiffs failed to state a claim as to them. On March 20,
2009, the court granted the motion to dismiss with leave for plaintiffs to amend
their complaint. Plaintiffs filed a Third Amended Complaint on April 6, 2009,
and the Company and individual defendants answered the complaint on April 23,
2009 and asserted various affirmative defenses.
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.
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 assets recognized under FIN 48 did not materially differ from the
net assets recognized before adoption, and, therefore, the Company did not
record an adjustment to retained earnings related to the adoption of FIN
48. At the adoption date of October 1, 2007, the Company had $0.8
million of unrecognized tax benefits related to tax positions taken in prior
periods, $0.2 million of which would affect the Company’s effective tax rate if
recognized. From October 1, 2008 through March 31, 2009, unrecognized tax
benefits increased by $0.3 million due to additional accrued interest and
penalties and uncertain tax return positions filed during the period. As of
March 31, 2009, we had gross unrecognized tax benefits of $1.3
million.
The
Company recognizes accrued interest and penalties related to unrecognized tax
benefits in the Provision for Income Taxes. The Company had less than $0.1
million accrued for interest and penalties as of March 31, 2009.
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 2008 remain open to examination
due to net operating loss carryforwards and credit carryforwards. Tax years 2003
and later remain open to examination in Canada and years 2004 and later remain
open to examination in Germany.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Tax
audits of the 2005 tax year are currently in process in the Netherlands. The
Company does not expect resolution of these audits to have a material impact on
our financial statements and the Company does not expect a significant increase
or decrease in unrecognized tax benefits over the next 12 months.
At
March 31, 2009, the Company has $71.7 million in gross deferred tax assets
(DTAs) attributable principally to net operating losses (NOLs) and to a lesser
extent temporary differences relating to deferred revenue. Historically, the
Company maintained a 100% valuation allowance on DTAs because it previously was
unable to conclude that it is more-likely-than-not as of March 31, 2009 that it
will realize the tax benefits of these DTAs. Based on recent
operating results and the reorganization of the Company’s intellectual property
into the U.S., current projections of disaggregated future taxable income has
enabled the Company to conclude that it is more-likely-than-not as of March 31,
2009 that it will have future taxable income sufficient to realize $5.9 million
of tax benefits from its deferred tax assets, which consist of that portion of
net deferred tax assets attributable to NOLs residing in the United Kingdom. The
Company released (eliminated) the valuation allowance on its DTAs related to the
United Kingdom, of which $9.5 million was recognized in the period ended
September 30, 2008 as an offsetting reduction to goodwill (representing
pre-acquisition NOLs). Beginning October 1, 2008 and through future periods, the
Company expects to incur tax expense related to the United Kingdom which will
result in an increase in overall expense; however, to the extent that such tax
expense is offset by the utilization of NOLs, the recognition of this additional
tax expense will be a non-cash item.
At
March 31, 2009, the Company’s provision for income taxes was $2.8 million for
the six months period then ended. Of this total, $2.0 million was related to a
non-cash deferred tax expense for the recognition of taxable income in the
United Kingdom. The Company also had unrecoverable withholding taxes related to
sales transactions that occurred in Turkey, Poland, Spain and India. The
remainder of the Company’s provision is attributable to taxes on earnings from
the Company’s foreign subsidiaries.
The
remaining balance of gross deferred tax assets was generated in the U.S. With
respect to U.S. generated deferred tax assets, the Company recorded a full
valuation allowance as the future realization of the tax benefit is not
considered by management to be more likely than not. The Company’s estimate of
future taxable income considers available positive and negative evidence
regarding current and future operations, including projections of income in
various states and foreign jurisdictions. The Company believes the
estimate of future taxable income is reasonable; however, it is inherently
uncertain, and if future operations generate taxable income greater than
projected, further adjustments to reduce the valuation allowance are possible.
Conversely, if the Company realizes unforeseen material losses in the future, or
the ability to generate future taxable income necessary to realize a portion of
the net deferred tax asset is materially reduced, additions to the valuation
allowance could be recorded. At March 31, 2009 and September 30, 2008, the
balance of deferred tax valuation allowance was approximately $65.9
million.
Under
the Tax Reform Act of 1986, the amounts of, and the benefit from, net operating
losses that can be carried forward may be impaired or limited in certain
circumstances. Under Section 382 of the Internal Revenue Code (IRC), as amended,
a cumulative stock ownership change of more than 50% over a three-year period
can cause such limitations. The Company has analyzed its historical ownership
changes and removed any net operating loss carryforwards that will expire
unutilized from its deferred tax balances as a result of an IRC 382
limitation.
On
September 30, 2008, approximately $35.5 million of additional net operating loss
and capital allowance carryforwards were generated in the United Kingdom, none
of which will expire. The Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $139.1 million and $26.4
million, respectively. The Company generated pre-acquisition net operating
losses related to Prime Response. Of the total $33.4 million of pre-acquisition
net operating losses generated, approximately $19.6 million of pre-acquisition
net operating losses expired unutilized as a result of an IRC Section 382 study.
Upon being realized, the remaining $13.8 million of pre-acquisition net
operating loss carryforwards will reduce goodwill and intangibles recorded at
the date of acquisition before reducing the tax provision. Approximately $4.1
million of additional net operating loss carryforwards are related to stock
option deductions which, if utilized, will be accounted for as an addition to
equity rather than as a reduction of the provision for income taxes. These
carryforwards are available to offset future federal and state taxable income
and expire in fiscal years 2011 through 2028 and 2009 through 2028,
respectively. On September 30, 2008, there were approximately $1.4 million of
federal research and development credits that expire in 2025 through 2028. In
addition, there are alternative minimum tax credits of approximately $0.1
million that do not expire. On September 30, 2008, there were also state credits
of approximately $3.7 million of which $3.6 million do not
expire.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On
September 23, 2008, the state of California enacted tax legislation on the
utilization of net operating losses and credit limitations. Beginning
in fiscal year 2009, any California net operating losses that the Company
generates will have a 20 year carryforward period and effective for fiscal year
2012, will have a two year carryback period. In addition, for fiscal year 2009
through fiscal year 2010, the Company will be unable to utilize California net
operating losses as they are being temporarily disallowed as a result of this
legislation. This may give rise to tax expense for any such taxable income
rising out of the disallowable 2 year period. Any disallowed California net
operating losses that cannot be utilized during the disallowed period will be
extended by two years. For fiscal year 2012, the carryback amount
cannot exceed 50% of the net operating loss, for fiscal year 2013, the carryback
cannot exceed 75% of the net operating loss, and for fiscal year 2014, the
carryback cannot exceed 100% of the net operating loss.
Beginning
in fiscal year 2009, California business tax credits will be limited to 50% of
the Company’s tax liability. The carryover period for disallowed
credit will be extended by the number of tax years that the credit was
disallowed.
NOTE
12—EMPLOYEE BENEFIT PLANS
2005
Equity Incentive Plan
As
of March 31, 2009, there were approximately 2.0 million shares available for
future grant and approximately 4.0 million options that were outstanding under
the 2005 Equity Incentive Plan, or 2005 Plan. In the quarter ended December 31,
2008, the Board amended the 2005 Plan to incorporate the following
changes:
1.
|
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 2009 Annual Meeting of Stockholders’ held on January
28, 2009.
|
2.
|
granted
0.5 million RSUs, equal to an equivalent number of shares of Common Stock,
to executive officers and management team members. Vesting of the shares
are time based with one third of the RSU’s vesting each year after the
date of grant for a period of three years. In the event of certain changes
in control of the Company, any unvested shares would automatically
vest.
|
In
October 2007, the Company granted 0.2 million performance-based 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. As of March 31, 2009, management believes achieving the two year
performance criteria is unlikely.
In
the quarter ended March 31, 2009, the Company granted 67,500 RSUs, equal to an
equivalent number of shares of Common Stock, to management team members. Vesting
of the shares are time based with one third of the RSU’s vesting each year after
the date of grant for a period of three years.
2000
Nonstatutory Equity Incentive Plan
As
of March 31, 2009, there were approximately 0.3 million options outstanding
under the 2000 Nonstatutory Equity Incentive Plan.
1999
Non-Employee Directors’ Option Plan
As of
March 31, 2009, there were approximately 0.1 million shares of common stock are
available for future grant and 0.2 million options that are outstanding under
the 1999 Non-Employee Directors’ Option Plan or Directors’ Plan. On
November 19, 2008, the Board amended the Directors’ Plan, which amendment did
not require stockholder approval, such that the maximum number of shares of
restricted stock that a Board member may receive in connection with the annual
grant
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of restricted stock under
the Directors’ Plan be limited to 15,000 shares. The Company granted Board
members restricted stock awards on January
28, 2009.
Shareholder
Rights Plan
On
July 7, 2008, the Board of Directors adopted the Shareholder Rights Plan. See
Note 12 to the 2008 Form 10-K filed with the SEC for more detailed information.
In conjunction with the Shareholder Rights Plan, the Company proposed a
non-binding resolution in the 2009 Annual Meeting of Stockholders to approve the
Shareholder Rights Plan. On January 28, 2009, at the Annual Meeting of
Stockholders, the stockholders did not approve the non-binding resolution
approving the Shareholder Rights Plan. On April 29, 2009, the Board considered
the stockholders action at the 2009 Annual Meeting and elected not to redeem the
rights issued under the Shareholder Rights Plan.
Stock
Option Activity
The
following table summarizes stock option activity under our stock option plans
(in thousands, except per share data):
|
|
|
|
Outstanding
|
|
|
|
|
|
Shares
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
Closing
Price
at
3/31/2009
of
$3.03
|
|
Balance
at September 30, 2008
|
|
|
|
3,662
|
|
|
$
|
8.19
|
|
|
|
|
|
|
Granted
|
|
|
|
893
|
|
|
|
2.85
|
|
|
|
|
|
|
Options
exercised
|
|
|
|
(11
|
)
|
|
|
1.56
|
|
|
|
|
|
|
Options
cancelled/forfeited
|
|
|
|
(549
|
)
|
|
|
8.62
|
|
|
|
|
|
|
Balance
at March 31, 2009
|
|
|
|
3,995
|
|
|
$
|
6.96
|
|
6.48
|
|
$
|
559
|
|
Vested
and expected to vest at March 31, 2009
|
|
|
|
3,491
|
|
|
$
|
6.94
|
|
6.31
|
|
$
|
490
|
|
Exercisable
at March 31, 2009
|
|
|
|
2,232
|
|
|
$
|
7.51
|
|
5.91
|
|
$
|
161
|
|
The
following table summarizes information about stock options outstanding and
exercisable at March 31, 2009 (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
3/31/2009
of
$3.03
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
Closing
Price
at
3/31/2009
of
$3.03
|
|
$0.35
– 2.32
|
|
|
714
|
|
|
4.44
|
|
$
|
2.30
|
|
$
|
524
|
|
|
159
|
|
$
|
2.22
|
|
$
|
128
|
|
2.50
– 4.75
|
|
|
501
|
|
|
6.64
|
|
|
4.03
|
|
|
35
|
|
|
307
|
|
|
3.76
|
|
|
33
|
|
4.90
– 7.50
|
|
|
544
|
|
|
5.67
|
|
|
6.35
|
|
|
—
|
|
|
406
|
|
|
6.51
|
|
|
—
|
|
7.53
– 8.15
|
|
|
524
|
|
|
6.58
|
|
|
7.89
|
|
|
—
|
|
|
408
|
|
|
7.90
|
|
|
—
|
|
8.25
– 8.28
|
|
|
602
|
|
|
7.62
|
|
|
8.25
|
|
|
—
|
|
|
352
|
|
|
8.25
|
|
|
—
|
|
8.35
– 9.25
|
|
|
687
|
|
|
8.01
|
|
|
9.13
|
|
|
—
|
|
|
299
|
|
|
9.06
|
|
|
—
|
|
9.26
– 45.00
|
|
|
423
|
|
|
6.54
|
|
|
12.55
|
|
|
—
|
|
|
301
|
|
|
12.54
|
|
|
—
|
|
$0.35
– 45.00
|
|
|
3,995
|
|
|
6.48
|
|
$
|
6.96
|
|
$
|
559
|
|
|
2,232
|
|
$
|
7.51
|
|
$
|
161
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $3.03 as of March 31, 2009,
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, 2009 was less than
$0.1 million for both periods and less than $0.1 million and $0.7 million
for the three and six months ended March 31, 2008, respectively. As of March 31,
2009, total unrecognized compensation costs related to non-vested stock options
was $5.0 million, which is expected to be recognized as expense over a
weighted-average period of approximately 2.1 years. As of March 31, 2008, total
unrecognized compensation costs related to non-vested stock options was $6.3
million, which was expected to be recognized as expense over a weighted-average
period of approximately 2.8 years.
Stock
Award Activity
Our
non-vested stock awards are comprised of restricted stock and restricted stock
units. The following table summarizes the stock awards activity (in thousands,
except per share data):
Non-vested
Stock Awards
|
|
|
|
RSAs
|
|
|
RSUs
|
|
|
Total
of Shares
Number
Underlying
Awards
|
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
Non-vested
balance at September 30, 2008
|
|
|
|
71
|
|
|
0
|
|
|
71
|
|
|
8.44
|
|
Awarded
|
|
|
|
90
|
|
|
588
|
|
|
678
|
|
|
2.42
|
|
Vested/Released
|
|
|
|
(71)
|
|
|
—
|
|
|
(71)
|
|
|
(8.44)
|
|
Forfeited
|
|
|
|
—
|
|
|
(50)
|
|
|
(50)
|
|
|
2.32
|
|
Non-vested
balance at March 31, 2009
|
|
|
|
90
|
|
|
538
|
|
|
628
|
|
|
2.43
|
|
On
January 28, 2009, the Company’s Board members (excluding the CEO)
were granted 90,000 RSAs for their annual service award under the Directors’
Plan. The aggregate intrinsic value of unvested RSAs based upon the Company’s
closing price of $3.03 as of March 31, 2009 was $0.3 million. The fair value of
shares vested pursuant to RSAs was $0.6 million. As of March 31, 2009, total
unrecognized compensation costs related to unvested RSAs was $0.2 million which
is expected to be recognized as expense over a weighted average period of
approximately 0.8 year.
Restricted
stock units granted by the Company are equal to an equivalent number of shares
of the Company’s Common Stock. Vesting of the shares are time based with one
third of the RSU’s vesting each year after the date of grant for a period of
three years. The aggregate intrinsic value of RSUs based upon the Company’s
closing price of $3.03 as of March 31, 2009 was $1.6 million. As of March 31,
2009, total unrecognized compensation costs related to unvested RSUs was $1.2
million which is expected to be recognized as expense over a weighted average
period of approximately 2.7 years. There were no vested RSUs during the
period.
In
October 2007, the Company granted 0.2 million performance-based RSUs to selected
executives of the Company pursuant to the 2005 Plan. These RSUs are excluded
from the table above. Based upon management’s assessment of the likelihood of
achieving the two year performance criteria, the Company has estimated that zero
out of a maximum of 0.2 million of unvested RSUs with an average fair value of
$13.99 per unit will be awarded at the end of the measurement period. During the
six months ended March 31, 2009, zero stock compensation expense related to the
performance-based RSUs has been recognized. During the six months ended March
31, 2008, $0.2 million of stock compensation expense was recorded but was
subsequently reversed as the likelihood of achieving the two year performance
criteria was unlikely. If the maximum target of RSUs outstanding were assumed to
be earned, total unrecognized compensation costs would be approximately $2.3
million which would be expected to be recognized as expense over a weighted
average period of approximately 6 months.
The
Company settles stock option exercises, RSAs and RSUs with newly issued common
shares.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 stock options, RSAs, and RSUs
based on estimated fair values. The following table summarizes stock-based
compensation expense related to stock options, RSAs, and RSUs for the three
and six months ended March 31, 2009 and 2008, respectively, which was allocated
as follows (in thousands):
|
|
|
Three
Months Ended March 31,
|
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues, service
|
$
|
145
|
|
|
$
|
109
|
|
|
$
|
279
|
|
|
$
|
262
|
|
|
|
Sales
and marketing
|
|
218
|
|
|
|
230
|
|
|
|
474
|
|
|
|
471
|
|
|
|
Research
and development
|
|
119
|
|
|
|
144
|
|
|
|
228
|
|
|
|
343
|
|
|
|
General
and administrative
|
|
459
|
|
|
|
498
|
|
|
|
925
|
|
|
|
1,081
|
|
|
|
Total
stock-based compensation expense
|
$
|
941
|
|
|
$
|
981
|
|
|
$
|
1,906
|
|
|
$
|
2,157
|
|
|
The
weighted-average estimated fair value of stock options granted during the three
months ended March 31, 2009 and 2008 was $1.39 and $2.96 per share,
respectively, and for the six months ended March 31, 2009 and 2008 was $1.18 and
$4.30, respectively, using the Black-Scholes model with the following
weighted-average assumptions:
|
|
|
Three
Months Ended March 31,
|
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Expected
lives in years
|
|
4.1
|
|
|
|
3.7
|
|
|
|
2.8
|
|
|
|
3.5
|
|
|
|
Risk
free interest rates
|
|
1.8
|
%
|
|
|
2.3
|
%
|
|
|
1.6
|
%
|
|
|
3.3
|
%
|
|
|
Volatility
|
|
64
|
%
|
|
|
61
|
%
|
|
|
62
|
%
|
|
|
60
|
%
|
|
|
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.
As
stock-based compensation expense recognized in the Condensed Consolidated
Statements of Operations for the three and six months ended March 31, 2009 and
2008 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, 2009 and 2008 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.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and director 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 stock
options, RSAs, and
RSUs. Although the fair
value of stock options, RSAs, and RSUs is determined in accordance with SFAS
123(R) and Staff
Accounting Bulletin 107, Share-based Payment 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,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
License
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
solutions
|
$
|
2,442
|
|
|
$
|
3,870
|
|
|
$
|
3,986
|
|
|
$
|
10,084
|
|
|
|
Marketing
solutions
|
|
739
|
|
|
|
579
|
|
|
|
3,120
|
|
|
|
1,293
|
|
|
|
Decision
management solutions
|
|
1,106
|
|
|
|
358
|
|
|
|
5,122
|
|
|
|
2,237
|
|
|
|
Total
|
$
|
4,287
|
|
|
$
|
4,807
|
|
|
$
|
12,228
|
|
|
$
|
13,614
|
|
|
The
following table summarizes service revenue consisting of consulting
implementation and integration, consulting customization, training, PCS, and
certain reimbursable out-of-pocket expenses by product emphasis (in
thousands):
|
|
|
Three
Months Ended March 31,
|
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Service
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
solutions
|
$
|
8,108
|
|
|
$
|
13,439
|
|
|
$
|
17,770
|
|
|
$
|
28,649
|
|
|
|
Marketing
solutions
|
|
2,210
|
|
|
|
3,070
|
|
|
|
5,161
|
|
|
|
6,188
|
|
|
|
Decision
management solutions
|
|
3,398
|
|
|
|
3,400
|
|
|
|
6,220
|
|
|
|
5,399
|
|
|
|
Total
|
$
|
13,716
|
|
|
$
|
19,909
|
|
|
$
|
29,151
|
|
|
$
|
40,236
|
|
|
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,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
$
|
7,968
|
|
|
$
|
14,671
|
|
|
$
|
16,050
|
|
|
$
|
30,262
|
|
|
|
Europe
|
|
10,035
|
|
|
|
10,045
|
|
|
|
25,329
|
|
|
|
23,588
|
|
|
|
Total
|
$
|
18,003
|
|
|
$
|
24,716
|
|
|
$
|
41,379
|
|
|
$
|
53,850
|
|
|
Included
in foreign revenue results for Europe is revenue from the United Kingdom of $4.6
million and $10.7 million for the three and six months ended March 31, 2009 and
$6.0 and $12.1 million for the three and six months ended March 31, 2008,
respectively.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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,
2009
|
|
|
|
September
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
$
|
1,806
|
|
|
$
|
2,250
|
|
|
|
Europe
|
|
621
|
|
|
|
915
|
|
|
|
Total
|
$
|
2,427
|
|
|
$
|
3,165
|
|
|
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, which started 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. On April 30, 2008, the Company terminated
the 2008 Repurchase Plan after repurchasing a total of 3.4 million shares of
common stock for $18.6 million at an average price of $5.55 per share.
Repurchased shares were immediately retired and resumed the status of authorized
but unissued shares.
This
discussion and analysis should be read in conjunction with our Condensed
Consolidated Financial Statements and accompanying Notes included in this
report and the 2008 Audited Financial Statements and Notes thereto included in
our Annual Report on Form 10-K for the year ended September 30, 2008 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 2008 Form
10-K. Chordiant undertakes no obligation to update any forward-looking statement
to reflect events after the date of this report.
Overview
We
generate substantially all of our revenues from insurance, healthcare,
telecommunications, financial services and retail markets. 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.
Our
business, like other businesses, faces the potential effects of the global
economic recession. Unprecedented market conditions include illiquid credit
markets, volatile equity markets, dramatic fluctuations in foreign currency
rates and economic recession, all of which have adversely impacted our
business.
Our
operations and performance depend on our customers having adequate resources to
purchase our products and services. The unprecedented turmoil in the credit
markets and the global economic downturn generally will adversely impact our
customers and potential customers. These economic conditions have continued to
deteriorate despite government intervention globally, and may remain volatile
and uncertain for the foreseeable future. Customers may alter their purchasing
activities in response to a lack of credit, economic uncertainty and concern
about the stability of markets in general, and these customers may reduce, delay
or terminate purchases of our products and services or other sales activities
that affect purchases of our products and services. If we are unable to
adequately respond to changes in demand resulting from deteriorating economic
conditions, our financial condition and operating results may be materially and
adversely affected.
Several
of our current and prior customers have recently merged with others, been forced
to raise significant levels of new capital, or received funds and/or equity
infusions from regulators or governmental entities. This list of companies is
extensive and includes Wachovia Corporation, AIG, Halifax Bank of Scotland,
Royal Bank of Scotland, Barclays, and Lloyds. The impact of these mergers and
changes in ownership on Chordiant’s near term business is uncertain. Customers
who have recently reorganized, merged or face new regulations may delay or
terminate their software purchasing decisions, and as an acquired or merged
entity may lose the ability to make such purchasing decisions, resulting in
declines in our bookings, revenues and cash flows. Alternatively, merged
customers may expand the use of our software across the larger entity resulting
in opportunities for us to sell additional software and services.
Total
revenue for the three months ended March 31, 2009 decreased $5.4 million or 23%
from the three months ended December 31, 2008. License revenue decreased $3.7
million as we completed fewer license transactions at lower average prices.
Service revenue decreased $1.7 million from the three months ended December 31,
2008. The decrease in service revenue was primarily composed of decreases of
$1.0 million in consulting revenue, $0.5 million in support and maintenance
revenue, $0.1 million in training revenue, and $0.1 million in expense
reimbursement revenue.
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 ILOG,
Cognos, DataMirror and Watchfire Corporation; Oracle completed
its
acquisitions
of Hyperion, Moniforce and BEA Systems; Sun Microsystems acquired MySQL and SAP
acquired BusinessObjects, YASU Technologies and Pilot Software. While we do not
believe that ILOG, Cognos, DataMirror, Watchfire Corporation, Hyperion,
Moniforce, BEA Systems, MySQL, BusinessObjects, YASU Technologies, or Pilot 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 may face
increased competition from larger and more established entities in the future.
In addition, Oracle recently announced their intent to acquire Sun
Microsystems.
Financial
Trends
Backlog. As of
March 31, 2009 and 2008, we had approximately $44.6 million and $93.5 million in
backlog, respectively, which we define as contractual commitments made by our
customers through purchase orders or contracts. 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;
|
|
•
|
contractual
commitments received from customers through purchase orders or contracts
that have yet to be delivered;
|
|
•
|
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. Consulting service orders that have expired are excluded from
backlog.
|
The
$48.9 million decline in total backlog over the past twelve month period is due
to declines of approximately $28.0 million, $10.8 million and $10.1 million in
the areas of software licenses, customer support contracts and professional
services consulting contracts, respectively. Backlog has declined sequentially
over each of the past five fiscal quarters. The declines in backlog are
primarily due to revenue on previously signed transactions being recognized at a
faster pace than new transactions are being consummated. Each category of
backlog has also been unfavorably impacted by recent foreign exchange rate
changes, as significant portions of the underlying balances are denominated in
Euros or Pounds Sterling.
The
decline in backlog and the associated deferred revenue balances will adversely
affect revenues in future periods and our ability to forecast future revenues
will be diminished. Because our backlog has declined, the financial results of
future periods will be more dependent upon the signing of new transactions.
Accordingly, the level of future revenues will be less predictable. If average
quarterly aggregate bookings remain at the $15.7 million levels achieved during
the past twelve months, future losses would be incurred unless operating
expenses are reduced.
With
respect to the decline in the backlog of professional services consulting
contracts, as some customers recently delayed or canceled projects, statements
of work for professional services either expired unutilized or were canceled.
For the six months ended March 31, 2009 these items aggregated $4.6 million and
were removed from backlog at the date of the expiration or cancellation. While
additional significant cancelations are not contemplated, such events could
cause further declines.
Backlog
at March 31, 2009 includes approximately $6.6 million of licenses and support
balances relating to a large telecommunications customer commitment, the
majority of which is expected to be recognized as revenue in the quarter ending
June 30, 2009. Accordingly, the balance of backlog may continue to decline in
the near term if bookings are not sufficient to offset the amounts expected to
be recognized as revenue.
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.
A
significant portion of our revenues have 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 a prolonged period of time, it will
cause the associated backlog of services to be recognized as revenue over a
similar 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 76% and 81% for the three months ended March
31, 2009 and 2008, respectively, and 70% and 75% for the six months ended March
31, 2009 and 2008, respectively. While the composition of revenue will continue
to fluctuate on a quarterly basis, we expect that service revenue will represent
between 55% and 70% 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, 2009 and 2008,
international revenues were $10.0 million for both periods, or approximately 56%
and 41% of our total revenues, respectively. For the six months ended March 31,
2009 and 2008, international revenues were $25.3 million and $23.6 million, or
approximately 61% and 44% of our total revenues, respectively. We believe that
international revenue will represent a larger portion of our total revenues as
we expand into emerging markets.
For
the three months ended March 31, 2009 and 2008, North America revenues were $8.0
million and $14.7 million, or approximately 44% and 59% of our total revenues,
respectively. For the six months ended March 31, 2009 and 2008, North America
revenues were $16.0 million and $30.3 million, or approximately 39% and 56% of
total revenues, respectively. The decrease for the three and six months was
primarily due to fewer number of transactions with transactions of smaller
magnitude. 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 margins in evaluating our financial condition and
operating performance. Gross margins on license revenues were 98% and 94% for
the three months ended March 31, 2009 and 2008, respectively, and 98% and 95%
for the six months ended March 31, 2009 and 2008. The increase in margin for the
three and six months ended March 31, 2009 is primarily a function of the fixed
periodic amortization costs associated with capitalized software. We fully
amortized the costs in fiscal year 2008. We expect license gross margin on
current products to range from 96% to 98% 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 58% and 57% for the three months ended March 31,
2009 and 2008, respectively and 57% and 58% for the six months ended March 31,
2009 and 2008, respectively. We expect that gross margins on service revenue to
range between 50% and 60% in the foreseeable future.
Reductions in Workforce. In
October 2008, we initiated a restructuring plan, the 2009 Restructuring,
intended to align its resources and cost structure with expected future
revenues. The 2009 Restructuring plan includes reductions in headcount and third
party consultants across all functional areas in both North America and Europe.
The 2009 Restructuring plan includes a reduction of approximately 13% of our
permanent workforce. A significant portion of the positions eliminated were in
North America.
As
a result of the cost-cutting measures, we recorded a pre-tax cash restructuring
charge in the first quarter of fiscal year 2009, of approximately $0.9 million,
including $ 0.8 million for severance costs and $0.1 million for other contract
termination costs. As of March 31, 2009, all payments have been
made.
On
May 1, 2008, we implemented a reduction of approximately 10% of our workforce.
We reduced our headcount across all functions of the organization. We
reallocated resources in support of growth opportunities in emerging markets as
well as adding headcount in revenue generating areas such as sales and
alliances. We incurred approximately $0.5 million in expenses in the third
quarter of fiscal year 2008 in connection with this reduction of force. As these
costs did not meet the criteria of SFAS 146 to qualify as restructuring
expenses, the expenses were charged as operating expenses to the respective
functional areas.
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. During the quarter ended March 31, 2007, we incurred an
additional charge of less than $0.1 million for additional severance expense for
an employee located in France. During the quarter ended December 31, 2008, we
reversed the charge as we were not required to pay the severance expense to the
employee.
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 executed a sublease with a sub-lessee for the remaining term
of our lease at a rate lower than that which was forecasted when the original
restructuring expense was recorded in 2002. This change in estimate resulted in
a $0.4 million restructuring expense for the fiscal year ended September 30,
2007. If the sub-lessee of the facility were to default on their payments to the
Company, further adjustments to restructuring expense would be
required.
Income Taxes. During the
quarter ending March 31, 2009, we recognized $2.0 million of non-cash deferred
tax expense related to taxable income in the United Kingdom. It is expected that
we will recognize a total of approximately $3.7 million of non-cash deferred tax
expense during fiscal year 2009. We expect the deferred tax expense to be
reduced in future years.
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 new and
rapidly evolving businesses. There can be no assurance we will be successful in
addressing these risks and difficulties. Moreover, we may not achieve or
maintain profitability in the future.
Critical
Accounting Estimates
Our
discussion and analysis of our financial condition and results of operations are
based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with Generally Accepted Accounting Principles 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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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 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 $11.2 million (including long-term accounts receivable of $0.9 million) with
an allowance for doubtful accounts of $0.7 million as of March 31, 2009. 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. 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. Based upon current economic
conditions, the Company has reviewed accounts receivable and has recorded
allowances as deemed necessary
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, 2009 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%, 4% or less than 1% change,
respectively, in the estimated value of the option being valued using the
Black-Scholes model.
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 Condensed Consolidated
Statement of Operations.
At
March 31, 2009, we have $71.7 million in gross deferred tax assets (DTAs)
attributable principally to our net operating losses (NOLs) and to a lesser
extent temporary differences relating to deferred revenue. Historically, we
maintained a 100% valuation allowance on our DTAs because we have previously
been unable to conclude that it is more-likely-than-not that we will realize the
tax benefits of these DTAs. Based on recent operating results and the
reorganization of our intellectual property into the U.S., our current
projections of disaggregated future taxable income have enabled us to conclude
that it is more-likely-than-not that as of March 31, 2009 we will have future
taxable income sufficient to realize $5.9 million of tax benefits from our
deferred tax assets, which consist of that portion of our net deferred tax
assets attributable to our NOLs residing in the United Kingdom. On September 30,
2008, we released (eliminated) the valuation allowance on our DTAs relating to
the United Kingdom, of which $9.5 million was recognized as an offsetting
reduction to goodwill (representing pre-acquisition NOLs). Beginning on October
1, 2008 through future periods, we expect to incur tax expense related to the
United Kingdom which will result in an increase in overall expense; however, to
the extent that such tax expense is offset by the utilization of NOLs, the
recognition of this additional tax expense will be a non-cash item.
The
remaining balance of gross deferred tax assets was generated in the U.S. With
respect to our U.S. generated deferred tax assets, we have recorded a full
valuation allowance as the future realization of the tax benefit is not
considered by management to be more likely than not. Our estimate of future
taxable income considers available positive and negative evidence regarding our
current and future operations, including projections of income in various states
and foreign jurisdictions. We believe our estimate of future taxable income is
reasonable; however, it is inherently uncertain, and if our future operations
generate taxable income greater than projected, further adjustments to reduce
the valuation allowance are possible. Conversely, if we realize unforeseen
material losses in the future, or our ability to generate future taxable income
necessary to realize a portion of the net deferred tax asset is materially
reduced, additions to the valuation allowance could be recorded. At March 31,
2009 and September 30, 2008, the balance of the deferred tax valuation allowance
was approximately $65.9 million.
Effective
October 1, 2007, the Company adopted Financial Accounting Standards
Interpretation, No. 48 “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” or FIN 48. FIN 48 prescribes a
recognition threshold and measurement guidance for the financial statement
reporting of uncertain tax positions taken or expected to be taken in a
company’s income tax return. The application of FIN 48 is explained in Note 11
to the Condensed Consolidated Financial Statements.
Valuation of Long-lived and
Intangible Assets and Goodwill. We assess the
impairment of identifiable intangibles and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Furthermore, we assess the impairment of goodwill annually. Factors
we consider important which could trigger an impairment review include the
following:
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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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Significant
decline in our stock price for a sustained
period;
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Market
capitalization declines relative to net book value;
and
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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. Recently, due to the
decline of our stock price, our market capitalization, and the general economic
climate we have assessed our long-lived assets and intangible assets and
determined that impairment was not necessary. At March 31, 2009, the market
capitalization of the Company exceeded the book value of the Company. In the
event that the market capitalization of the Company declines further, goodwill
impairment charges might be necessary in future periods.
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 ended September 30, 2008 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, 2008 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 several 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. Cost to terminate contracts represents contract
termination costs related to the restructuring plan. 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, potential defaults on
existing subleases, or changes in the market, the ultimate restructuring
expenses for these abandoned facilities could vary by material amounts. See Note
5 to the Condensed Consolidated Financial Statement for detailed information
regarding restructuring expense.
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, 2009, approximately $36.2 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):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
4,287
|
|
|
|
24
|
%
|
|
$
|
4,807
|
|
|
|
19
|
%
|
|
$
|
12,228
|
|
|
|
30
|
%
|
|
$
|
13,614
|
|
|
|
25
|
%
|
|
Service
|
|
|
13,716
|
|
|
|
76
|
|
|
|
19,909
|
|
|
|
81
|
|
|
|
29,151
|
|
|
|
70
|
|
|
|
40,236
|
|
|
|
75
|
|
|
Total
revenues
|
|
|
18,003
|
|
|
|
100
|
|
|
|
24,716
|
|
|
|
100
|
|
|
|
41,379
|
|
|
|
100
|
|
|
|
53,850
|
|
|
|
100
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
103
|
|
|
|
1
|
|
|
|
283
|
|
|
|
1
|
|
|
|
200
|
|
|
|
1
|
|
|
|
617
|
|
|
|
1
|
|
|
Service
|
|
|
5,797
|
|
|
|
32
|
|
|
|
8,532
|
|
|
|
35
|
|
|
|
12,483
|
|
|
|
30
|
|
|
|
17,010
|
|
|
|
32
|
|
|
Amortization
of intangible assets
|
|
|
303
|
|
|
|
2
|
|
|
|
303
|
|
|
|
1
|
|
|
|
606
|
|
|
|
1
|
|
|
|
606
|
|
|
|
1
|
|
|
Total
cost of revenues
|
|
|
6,203
|
|
|
|
35
|
|
|
|
9,118
|
|
|
|
37
|
|
|
|
13,289
|
|
|
|
32
|
|
|
|
18,233
|
|
|
|
34
|
|
|
Gross
profit
|
|
|
11,800
|
|
|
|
65
|
|
|
|
15,598
|
|
|
|
63
|
|
|
|
28,090
|
|
|
|
68
|
|
|
|
35,617
|
|
|
|
66
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
6,362
|
|
|
|
35
|
|
|
|
7,400
|
|
|
|
30
|
|
|
|
14,142
|
|
|
|
34
|
|
|
|
16,303
|
|
|
|
30
|
|
|
Research
and development
|
|
|
4,843
|
|
|
|
27
|
|
|
|
6,381
|
|
|
|
26
|
|
|
|
10,102
|
|
|
|
24
|
|
|
|
13,106
|
|
|
|
24
|
|
|
General
and administrative
|
|
|
3,064
|
|
|
|
17
|
|
|
|
4,019
|
|
|
|
16
|
|
|
|
7,465
|
|
|
|
18
|
|
|
|
9,022
|
|
|
|
17
|
|
|
Restructuring
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
784
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
operating expenses
|
|
|
14,269
|
|
|
|
79
|
|
|
|
17,800
|
|
|
|
72
|
|
|
|
32,493
|
|
|
|
78
|
|
|
|
38,431
|
|
|
|
71
|
|
|
Loss
from operations
|
|
|
(2,469
|
)
|
|
|
(14
|
)
|
|
|
(2,202
|
)
|
|
|
(9
|
)
|
|
|
(4,403
|
)
|
|
|
(10
|
)
|
|
|
(2,814
|
)
|
|
|
(5
|
)
|
|
Interest
income, net
|
|
|
137
|
|
|
|
1
|
|
|
|
613
|
|
|
|
3
|
|
|
|
429
|
|
|
|
1
|
|
|
|
1,448
|
|
|
|
2
|
|
|
Other
income (expense), net
|
|
|
(103
|
)
|
|
|
(1
|
)
|
|
|
350
|
|
|
|
1
|
|
|
|
582
|
|
|
|
1
|
|
|
|
485
|
|
|
|
1
|
|
|
Loss
before income taxes
|
|
|
(2,435
|
)
|
|
|
(14
|
)
|
|
|
(1,239
|
)
|
|
|
(5
|
)
|
|
|
(3,392
|
)
|
|
|
(8
|
)
|
|
|
(881
|
)
|
|
|
(2
|
)
|
|
Provision
for (benefit from) income taxes
|
|
|
1,101
|
|
|
|
6
|
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
2,812
|
|
|
|
7
|
|
|
|
73
|
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(3,536
|
)
|
|
|
(20
|
)%
|
|
$
|
(1,159
|
)
|
|
|
(5
|
)%
|
|
$
|
(6,204
|
)
|
|
|
(15
|
)%
|
|
$
|
(954
|
)
|
|
|
(2
|
)%
|
|
Comparison
of the Three and Six Months Ended March 31, 2009 and 2008
(Unaudited)
Revenues
Total
revenues decreased $6.7 million, or 27%, to $18.0 million for the three months
ended March 31, 2009 compared to $24.7 million for the three months ended March
31, 2008. This change was primarily from decreases of $0.5 million or 11% in
license revenue and $6.2 million or 31% in service revenue. Total revenues
decreased $12.5 million, or 23%, to $41.4 million for the six months ended March
31, 2009 compared to $53.9 million for the six months ended March 31, 2008. This
change was primarily attributable to a decrease of $1.4 million or 10%
of license revenue and $11.1 million or 28% 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, 2009 and 2008 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
License
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
solutions
|
|
$
|
2,442
|
|
|
$
|
3,870
|
|
|
$
|
(1,428
|
)
|
|
(37
|
)%
|
|
$
|
3,986
|
|
|
$
|
10,084
|
|
|
$
|
(6,098
|
)
|
|
(60
|
)%
|
|
Marketing
solutions
|
|
|
739
|
|
|
|
579
|
|
|
|
160
|
|
|
28
|
|
|
|
3,120
|
|
|
|
1,293
|
|
|
|
1,827
|
|
|
141
|
|
|
Decision
management solutions
|
|
1,106
|
|
|
|
358
|
|
|
|
748
|
|
|
209
|
|
|
|
5,122
|
|
|
|
2,237
|
|
|
|
2,885
|
|
|
129
|
|
|
Total
license revenue
|
|
$
|
4,287
|
|
|
$
|
4,807
|
|
|
$
|
(520
|
)
|
|
(11
|
)%
|
|
$
|
12,228
|
|
|
$
|
13,614
|
|
|
$
|
(1,386
|
)
|
|
(10
|
)%
|
|
Total
license revenue decreased by $0.5 million or 11% and $1.4 million or 10%
from the three and six months ended March 31, 2009, respectively, as compared to
the same comparable periods in the prior year. This change in license revenue is
the result of fewer sales transactions and transactions of smaller magnitude
being executed in the comparative periods, primarily due to the current economic
climate. Additionally, customer demand for our Decision management
solutions has increased while demand for our Enterprise solutions has decreased.
License revenue as a percentage of total revenues was 24% and 19% for the
three months ended March 31, 2009 and 2008, respectively and 30% and 25% for the
six months ended March 31, 2009 and 2008, respectively.
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, 2009
and 2008 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
Service
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
solutions
|
|
$
|
8,108
|
|
|
$
|
13,439
|
|
|
$
|
(5,331
|
)
|
|
(40
|
)%
|
|
$
|
17,770
|
|
|
$
|
28,649
|
|
|
$
|
(10,879
|
)
|
|
(38
|
)%
|
|
Marketing
solutions
|
|
|
2,210
|
|
|
|
3,070
|
|
|
|
(860
|
)
|
|
(28
|
)
|
|
|
5,161
|
|
|
|
6,188
|
|
|
|
(1,027
|
)
|
|
(17
|
)
|
|
Decision
management solutions
|
|
3,398
|
|
|
|
3,400
|
|
|
|
(2
|
)
|
|
—
|
|
|
|
6,220
|
|
|
|
5,399
|
|
|
|
821
|
|
|
15
|
|
|
Total
service revenue
|
|
$
|
13,716
|
|
|
$
|
19,909
|
|
|
$
|
(6,193
|
)
|
|
(31
|
)%
|
|
$
|
29,151
|
|
|
$
|
40,236
|
|
|
$
|
(11,085
|
)
|
|
(28
|
)%
|
|
Total
service revenue decreased $6.2 million or 31% from the three months ended March
31, 2008 as compared to the three months ended March 31, 2009. This change was
due primarily to a decrease of $3.3 million in consulting revenue, $1.8 million
in support and maintenance revenue, $0.6 million in training revenue and $0.5
million in reimbursement of out-of-pocket expense revenue. Service revenue as a
percentage of total revenues was 76% and 81% for the three months ended
March 31, 2009 and 2008, respectively.
Total
service revenue decreased $11.1 million or 28% from the six months ended March
31, 2008 as compared to the six months ended March 31, 2009. This change was
attributable primarily to a decrease of $5.7 million in consulting
revenue, $3.8 million in support and maintenance revenue, $0.8 million in
training revenue and $0.8 million in reimbursement of out-of-pocket expense
revenue. Service revenue as a percentage of total revenues was 70% and
75% for the six months ended March 31, 2009 and 2008,
respectively.
The
decreases in consulting revenue for the three and six month periods are directly
related to the decreases in license revenues for comparable periods since the
majority of our customers use some form of our consulting services in connection
with their projects.
See
the Financial Trend section for further analysis of 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. Capitalized software development costs
pertain to a banking product that was completed and available for general
release in August 2005 and third party costs associated with the porting of
existing products to new platforms. The following table sets forth our cost of
license revenues for the three and six months ended March 31, 2009 and 2008 (in
thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
Cost
of license revenue
|
|
$
|
103
|
|
|
$
|
283
|
|
|
$
|
(180
|
)
|
|
(64
|
)%
|
|
$
|
200
|
|
|
$
|
617
|
|
|
$
|
(417
|
)
|
|
(68
|
)%
|
|
Percentage
of total revenue
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
The
cost of license revenue decreased by $0.2 million or 64% and $0.4 million or 68%
from the three and six months ended March 31, 2008 to the three and six months
ended March 31, 2009, respectively. This change is primarily attributable
to amortization of third party technology which became fully amortized in fiscal
year 2008. In addition, we reduced royalty expense associated with third party
technology included in our products.
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, 2009 and 2008 (in thousands, except
percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
Cost
of service revenue
|
|
$
|
5,797
|
|
|
$
|
8,532
|
|
|
$
|
(2,735
|
)
|
|
(32
|
)%
|
|
$
|
12,483
|
|
|
$
|
17,010
|
|
|
$
|
(4,527
|
)
|
|
(27
|
)%
|
|
Percentage
of total revenue
|
|
|
32
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
30
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
Cost
of service revenue decreased by $2.7 million or 32% from the three months ended
March 31, 2008 to the three months ended March 31, 2009. This change is
primarily attributable to decreases of $0.5 million in employee related costs,
$1.5 million in consultant costs, $0.2 million in facilities cost, and $0.5
million in travel costs. The 32% decrease in service costs is consistent with
the decrease of 31% in service revenue. The decrease in employee related costs
is primarily attributable to a 7% reduction in average headcount. See Note 5-
Restructuring to the Condensed Consolidated Financial Statement for more details
regarding reduction in headcount.
Cost
of service revenue decreased by $4.5 million or 27% from the six months ended
March 31, 2008 to the six months ended March 31, 2009. This change is primarily
attributable to decreases of $1.1 million in employee related costs, $0.1 in
recruiting, $2.1 million in consultant costs, $0.3 million in facilities cost,
and $1.0 million in travel costs, offset by increase of $0.1 in miscellaneous
costs. The 27% decrease in service costs is consistent with the decrease of
28% in service revenue. The decrease in employee related costs is primarily
from a 5% reduction in average headcount. See Note 5- Restructuring to the
Condensed Consolidated Financial Statement for more details regarding reduction
in headcount. The decrease in travel expense is primarily attributable to a
decrease in travel by our employees.
Gross
Margin
See
the Financial Trend section for our analysis of gross margins.
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,
2009 and 2008 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
Amortization
of intangible assets
|
$
|
303
|
|
|
$
|
303
|
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
606
|
|
|
$
|
606
|
|
|
$
|
—
|
|
|
—
|
%
|
|
Percentage
of total revenue
|
|
|
2
|
%
|
|
|
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 2009 and $0.3 million for the first
quarter of 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 compensation and
benefits, 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, 2009 and
2008 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
Sales
and marketing expense
|
|
$
|
6,362
|
|
|
$
|
7,400
|
|
|
$
|
(1,038
|
)
|
|
(14
|
)%
|
|
$
|
14,142
|
|
|
$
|
16,303
|
|
|
$
|
(2,161
|
)
|
|
(13
|
)%
|
|
Percentage
of total revenue
|
|
|
35
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
34
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
Sales
and marketing expense decreased by $1.0 million or 14% from the three months
ended March 31, 2008 to the three months ended March 31, 2009. This change is
primarily due to decreases of $0.9 million in employee costs, $0.2 million in
facilities cost, and $0.2 million in travel costs, offset by increase of $0.1
million in consultant costs and $0.2 million in lead generation activities. The
decrease in employee related costs is primarily from a 6% reduction in average
headcount.
Sales
and marketing expense decreased by $2.2 million or 13% from the six months ended
March 31, 2008 to the six months ended March 31, 2009. This change is primarily
due to decreases of $1.6 million in employee costs, $0.2 million in recruiting
costs, $0.4 million in sales events, $0.3 million in facilities costs, and $0.2
million in travel costs, offset by increases of $0.5 million in consultant
costs. The decrease in employee related costs is primarily from a 4%
reduction in average headcount.
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, 2009 and 2008 (in thousands, except
percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
Research
and development expense
|
|
$
|
4,843
|
|
|
$
|
6,381
|
|
|
$
|
(1,538
|
)
|
|
(24
|
)%
|
|
$
|
10,102
|
|
|
$
|
13,106
|
|
|
$
|
(3,004
|
)
|
|
(23
|
)%
|
|
Percentage
of total revenue
|
|
|
27
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
Research
and development expense decreased by $1.5 million or 24% from the three months
ended March 31, 2008 to the three months ended March 31, 2009. This change is
primarily due to decreases of $0.7 million in employee salary and benefit costs,
$0.1 million in recruiting costs, $0.5 million in consultant costs, and $0.2
million in facilities costs. The decrease in employee related costs is
primarily from a 27% reduction in average headcount.
Research
and development expense decreased by $3.0 million or 23% from the six months
ended March 31, 2008 to the six months ended March 31, 2009. This change is
primarily due to decreases of $1.6 million in employee salary and benefit costs,
$0.1 million in recruiting costs, $0.8 million in consultant costs, $0.3 million
in facilities costs, and $0.2 million in travel expenses. The decrease in
employee related costs is primarily from a 26% reduction in average
headcount.
General and Administrative
General
and administrative expense is composed primarily of costs associated with our
executive and administrative personnel (e.g. the office of 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, 2009 and
2008 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
General
and administrative expense
|
|
$
|
3,064
|
|
|
$
|
4,019
|
|
|
$
|
(955
|
)
|
|
(24
|
)%
|
|
$
|
7,465
|
|
|
$
|
9,022
|
|
|
$
|
(1,557
|
)
|
|
(17
|
)%
|
|
Percentage
of total revenue
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
18
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
General
and administrative expense decreased by $1.0 million or 24% from the three
months ended March 31, 2008 to the three months ended March 31, 2009. This
change is primarily due to decreases of $0.6 million in employee related costs,
$0.1 million in travel costs, $0.3 million in profession services and $0.1
million in bad debt expense, offset by $0.1 million in facilities
costs. The decrease in employee related costs is primarily from a 29%
reduction in average headcount.
General
and administrative expense decreased by $1.6 million or 17% from the six months
ended March 31, 2008 to the six months ended March 31, 2009. This change is
primarily due to decreases of $1.2 million in employee related costs, $0.1
million in recruiting costs, $0.1 million in consulting costs, $0.2 million in
travel costs, and $0.3 million in professional services , offset by increase of
$0.3 million in facilities cost. The decrease in employee related costs is
primarily attributable to a 26% reduction in average headcount. The decrease in
professional services is primarily due to a decrease in the use of legal
services associated with the Derivative lawsuit which was recently
settled.
Restructuring Expense
In
October 2008, the Company initiated a restructuring plan, the 2009
Restructuring, intended to align its resources and cost structure with expected
future revenues. The 2009 Restructuring plan includes reductions in headcount
and third party consultants across all functional areas in both North America
and Europe. The 2009 Restructuring plan includes a reduction of approximately
13% of the Company’s permanent workforce. A significant portion of the positions
eliminated were in North America.
As
a result of the cost-cutting measures, the Company recorded a pre-tax cash
restructuring charge in the first quarter of fiscal year 2009, of approximately
$0.9 million, including $ 0.8 million for severance costs and $0.1 million for
other contract termination costs. As of March 31, 2009, all payments have been
made.
In
May 2005, the Company appointed a task force to improve profitability and
control expenses. The goal of the task force was to create a better alignment of
functions within the Company, to make full utilization of the Company’s India
development center, to develop a closer relationship between the Company’s field
operations and customers, to review the sales and implementation models, as well
adjust as the organization model to flatten management levels, to review the
Company’s product line, and to enhance the Company’s business model for
profitability and operating leverage. This work resulted in an approximate 10%
reduction in the Company’s workforce, or 2005 Restructuring, and in July 2005
affected employees were notified. As part of the 2005 Restructuring, the Company
incurred a one-time restructuring charge of $1.1 million in the fourth quarter
ended September 30, 2005 for severance and termination
benefits.
During
the quarter 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. During the quarter ended December 31, 2008, the Company reversed the
charge as the Company was not required to pay the severance expense to the
employee.
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, 2009 and 2008 (in
thousands):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues – service
|
$
|
145
|
|
|
$
|
109
|
|
|
$
|
279
|
|
|
$
|
262
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
218
|
|
|
|
230
|
|
|
|
474
|
|
|
|
471
|
|
|
|
Research
and development
|
|
119
|
|
|
|
144
|
|
|
|
228
|
|
|
|
343
|
|
|
|
General
and administrative
|
|
459
|
|
|
|
498
|
|
|
|
925
|
|
|
|
1,081
|
|
|
|
Total
operating expenses
|
|
796
|
|
|
|
872
|
|
|
|
1,627
|
|
|
|
1,895
|
|
|
|
Total
stock-based compensation expense
|
$
|
941
|
|
|
$
|
981
|
|
|
$
|
1,906
|
|
|
$
|
2,157
|
|
|
For
the three months ended March 31, 2009, the aggregate stock-based compensation
cost included in cost of revenues and in operating expenses was $0.9 million
that is primarily related to $0.7 million associated with employee stock
options, $0.1 million associated with restricted stock awards and $0.1 million
for restricted stock units. 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 six months ended March 31, 2009, 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, $0.2
million associated with restricted stock awards and $0.2 million for restricted
stock units. 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.
Interest
Income (Expense), Net
Interest
income (expense), 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
(expense), net for the three and six months ended March 31, 2009 and 2008 (in
thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
Interest
income, net
|
|
$
|
137
|
|
|
$
|
613
|
|
|
$
|
(476
|
)
|
|
(78
|
)%
|
|
$
|
429
|
|
|
$
|
1,448
|
|
|
$
|
(1,019
|
)
|
|
(70
|
)%
|
|
Percentage
of total revenue
|
|
|
1
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
Interest
income, net decreased by 78% and 70% from the three and six months ended March
31, 2008 to the three and six months ended March 31, 2009, respectively. This
change is primarily due to higher cash balances and marketable securities in the
same period of the prior year. In addition, we earned less interest income due
to lower interest rates.
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, net for the three and six months
ended March 31, 2009 and 2008 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
Other
income, net
|
|
$
|
(103
|
)
|
|
$
|
350
|
|
|
$
|
(453
|
)
|
|
(129
|
)%
|
|
$
|
582
|
|
|
$
|
485
|
|
|
$
|
97
|
|
|
20
|
%
|
|
Percentage
of total revenue
|
|
|
(1
|
)%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
Other
income decreased by 129% from the three ended March 31, 2008 to the
three ended March 31, 2009. Other income increased by 20% from the six
months ended March 31, 2008 to the six months ended March 31, 2009. The increase
or decrease is primarily due to changes in foreign exchange rates associated
with the Pound Sterling and Euro.
Provision
for (Benefit from) Income Taxes
These
provisions for (benefits from) 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, 2009 and 2008 (in thousands, except percentages):
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
%
|
|
Provision
for (benefit from) income taxes
|
|
$
|
1,101
|
|
|
$
|
(80
|
)
|
|
$
|
1,181
|
|
|
1,476
|
%
|
|
$
|
2,812
|
|
|
$
|
73
|
|
|
$
|
2,739
|
|
|
3,752
|
%
|
|
Percentage
of total revenue
|
|
|
6
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
Our
provision for income taxes was $2.8 million and $0.1 million for the six months
ended March 31, 2009 and 2008, respectively. The $2.7 million increase in income
taxes is primarily due to an increase in taxable income of our UK entities which
led to a non-cash tax expense of approximately $2.0 million and an increase of
$0.5 million in unrecoverable withholding tax payments related to sales
transactions that occurred in Turkey, Poland, Spain and India compared to the
six months ended March 31, 2008. The remainder of our provision for income taxes
is primarily attributable to taxes on earnings from our foreign
subsidiaries.
At
March 31, 2009, we have $71.7 million in gross deferred tax assets (DTAs)
attributable principally to our net operating losses (NOLs) and to a lesser
extent temporary differences relating to deferred revenue. Historically, we
maintained a 100% valuation allowance on our DTAs because we have previously
been unable to conclude that it is more-likely-than-not that we will realize the
tax benefits of these DTAs. Based on recent operating results and the
reorganization of our intellectual property into the U.S., our current
projections of disaggregated future taxable income have enabled us to conclude
that it is more-likely-than-not that as of March 31, 2009 we will have future
taxable income sufficient to realize $5.9 million of tax benefits from our
deferred tax assets, which consist of that portion of our net deferred tax
assets attributable to our NOLs residing in the United Kingdom. On September 30,
2008, we released (eliminated) the valuation allowance on our
DTAs
relating to the United Kingdom, of which $9.5 million was recognized as an
offsetting reduction to goodwill (representing pre-acquisition NOLs). Beginning
on October 1, 2008 through future periods, we expect to incur tax expense
related to the United Kingdom which will result in an increase in overall
expense; however, to the extent that such tax expense is offset by the
utilization of NOLs, the recognition of this additional tax expense will be a
non-cash item.
The
remaining balance of gross deferred tax assets was generated in the U.S. With
respect to our U.S. generated deferred tax assets, we have recorded a full
valuation allowance as the future realization of the tax benefit is not
considered by management to be more likely than not. Our estimate of future
taxable income considers available positive and negative evidence regarding our
current and future operations, including projections of income in various states
and foreign jurisdictions. We believe our estimate of future taxable income is
reasonable; however, it is inherently uncertain, and if our future operations
generate taxable income greater than projected, further adjustments to reduce
the valuation allowance are possible. Conversely, if we realize unforeseen
material losses in the future, or our ability to generate future taxable income
necessary to realize a portion of the net deferred tax asset is materially
reduced, additions to the valuation allowance could be recorded. At March 31,
2009 and September 30, 2008, the balance of the deferred tax valuation allowance
was approximately $65.9 million.
Liquidity
and Capital Resources
Prior
to fiscal year 2007, we had not been profitable and we periodically generated
cash through the issuance of our common stock. In fiscal year 2008, we
repurchased and retired $18.6 million of our common stock. For six months ended
March 31, 2009, we generated cash from operating and financing activities
but used cash for investing activities. It is anticipated that that our current
cash balances are adequate to fund operations for the next twelve months,
however in the event we are not profitable, we would anticipate a decrease in
cash and cash equivalents in the near term. Our third fiscal quarter ending June
30, 2009 will benefit from the last payment due on a contractual commitment with
a large telecommunications company. Cash payments relating to this agreement are
expected to be $5.2 million.
Operating
Activities
Cash
provided by operating activities was $6.1 million during the six months ended
March 31, 2009, which consisted primarily of our net loss of $6.2 million
adjusted for non-cash items (primarily depreciation and amortization, non-cash
stock-based compensation expense, non-cash provision for income taxes,
provision for doubtful accounts and other non-cash charges) aggregating
approximately $5.7 million and the net cash inflow effect from changes in assets
and liabilities of approximately $6.6 million. This net cash inflow was
primarily related to the collection of $13.3 million in accounts receivable and
an increase of prepaid and other current assets of $4.0 million offset by
decreases in deferred revenue of $5.2 million, accrued expenses of $2.2
million, accounts payable of $2.9 million, and other assets of $0.4
million.
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, other assets of $0.7 million, and accounts payable of $1.0
million.
Investing
Activities
Cash
used in investing activities was $0.3 million during the six months ended March
31, 2009. This cash used was primarily from the purchase of $0.3 million of
property and equipment and the capitalization of less than $0.1 million of
software development costs associated with the porting of existing products to a
new platform.
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.
Financing
Activities
Cash
provided by financing activities was less than $0.1 million during the six
months ended March 31, 2009. This cash was provided from the payment of the
exercise prices of stock option exercises by employees.
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.
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 USA, Inc. (formerly
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 internal engineering organization, product testing services
and product development services (collectively, the “Services”). The agreement
had an initial term of three years and has been extended annually. 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. From 2004 to 2008, we further expanded the agreement with
Ness whereby Ness is providing certain additional technical and consulting
services. In January 2009, we extended our agreement with Ness through December
31, 2011 to provide technical and consulting services, however if we terminate
the agreement for convenience prior to December 31, 2009, we may be required to
pay a termination fee no greater than $0.5 million. In addition to service
agreements, we 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 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 $1.3 million for our
Boston, Massachusetts facility operating lease commitment that is included in
Restructuring Expense. As of March 31, 2009, the Company had $0.5 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 was scheduled to expire on December
31, 2008. In July 2008, the Company renewed the lease for a five year period
with an option to renew for an additional five years. The table below includes
this lease commitment.
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, 2009, we estimate that approximately $0.3 million
will be required to fulfill these obligations.
We
have no material commitments for capital expenditures and do not anticipate
capital expenditures to exceed historic levels.
The
following table presents certain payments due under contractual obligations as
of March 31, 2009 based on fiscal years (in thousands):
|
|
|
Payments
Due By Period
|
|
|
|
|
Total
|
|
|
|
Due
in
2009
|
|
|
|
Due
in
2010-2011
|
|
|
|
Due
in
2012-2013
|
|
|
|
Thereafter
|
|
|
Operating
lease obligations
|
$
|
12,577
|
|
|
$
|
1,704
|
|
|
$
|
6,327
|
|
|
$
|
4,195
|
|
|
$
|
351
|
|
|
Asset
retirement obligations
|
|
289
|
|
|
|
—
|
|
|
|
133
|
|
|
|
156
|
|
|
|
—
|
|
|
Total
|
$
|
12,866
|
|
|
$
|
1,704
|
|
|
$
|
6,460
|
|
|
$
|
4,351
|
|
|
$
|
351
|
|
Effective
October 1, 2007, the Company adopted FIN No. 48 and reclassified $0.2 million of
gross unrecognized tax benefits to Other liabilities—non-current in our
Condensed Consolidated Balance Sheets. As of March 31, 2009, the Company had
$1.3 million of gross unrecognized tax benefits. As of March 31, 2009, 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 minimize the level of cash used
by operations, which, when added to existing cash balances, will be sufficient
to meet our working capital and operating resource expenditure requirements for
the near term. If the global economy weakens further, 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.
Interest Rate Risk. Our
exposure to market rate risk for changes in interest rates relates primarily to
money market accounts, and short-term certificates of deposit. We currently
invest our excess cash in money market accounts and certificates-of-deposit with
maturities of less than three months. 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. As of March 31, 2009, the Company held no fixed rate
securities.
To
provide a meaningful assessment of the interest rate risk associated with the
Company’s total restricted cash of less than $0.1 million as of September 30,
2008, 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 September 30, 2008 and an average interest rate of 2%, a
decrease in 100 basis points would decrease the fair value of restricted cash by
less than $0.1 million. At March 31, 2009, the Company did not hold any
investments that the Company deemed to have a material interest rate
risk.
Foreign Currency Risk.
International revenues accounted for approximately 56% and 61% of total revenues
for three and six months ended March 31, 2009. International revenues accounted
for approximately 48% of total revenues for the year ended September 30, 2008.
The Company’s international operations 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. We
do not hedge our exposure to foreign currency fluctuations. We performed a
sensitivity analysis as of March 31, 2009 to determine the hypothetical impact
of a decrease in average foreign exchange rates of 10% against the US dollar.
Such a decline would decrease revenue by approximately $2.0 million and increase
loss from operations by $0.6 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, 2009 and for the
fiscal year ended September 30, 2008, we recorded net foreign currency
transaction gains of $0.6 million and $0.3 million, respectively.
Evaluation
of Disclosure Controls and Procedures
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(e) and 15d-15(e) 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 in alerting them in
a timely manner to material information required to be disclosed in our periodic
reports filed with the SEC.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the most
recent fiscal quarter 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.
RISK
FACTORS
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, 2008.
*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 may
include:
|
•
|
Additional
deterioration and changes in domestic and foreign markets and economies,
including those impacted by the turmoil in the financial services,
mortgage and credit markets;
|
|
•
|
Size
and timing of individual license
transactions;
|
|
•
|
Delay,
deferral or termination of customer implementations of our
products;
|
|
•
|
Lengthening
of our sales cycle;
|
|
•
|
Efficiently
utilizing 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;
|
|
•
|
Our
ability to develop and market new products;
and
|
|
•
|
Our
ability to control our 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 bookings,
revenues and operating results to fluctuate significantly. Based upon the
preceding factors, we may experience a shortfall in bookings, 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
known backlog of business may not result in revenue and backlog has declined for
several consecutive quarters.
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 has declined
significantly over the past several quarters due to lower than expected
bookings. 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 or at all. 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. The risk that customers will reduce
the scope of, delay or terminate projects, thus delaying or eliminating our
ability to recognize backlog as revenue, is exacerbated in the current economic
environment. During the six months ended March 31, 2009, statements of work for
professional services aggregating approximately $4.6 million were reversed from
our backlog balances as the underlying projects were canceled or the statement
of work contractually expired unutilized.
*Recent
worldwide market turmoil may adversely affect our customers which directly
impacts our business and results of operations.
The
Company’s operations and performance depend on our customers having adequate
resources to purchase our products and services. The unprecedented turmoil in
the global markets and the global economic downturn generally continues to
adversely impact our customers and potential customers. These market and
economic conditions have continued to deteriorate despite government
intervention globally, and may remain volatile and uncertain for the foreseeable
future. Customers have altered and may continue to alter their purchasing and
payment activities in response to deterioration in their businesses, lack of
credit, economic uncertainty and concern about the stability of markets in
general, and these customers may reduce, delay or terminate purchases of, and
payment for, our products and services. Recently, a number of our current and
prospective customers have merged with others, been forced to raise significant
amounts of capital, or received loans or equity investments from the government,
which actions may result in less demand for our products and services. If we are
unable to adequately respond to changes in demand resulting from deteriorating
market and economic conditions, our financial condition and operating results
may be materially and adversely affected.
*In
periods of worsening economic conditions, our exposure to credit risk and
payment delinquencies on our accounts receivable significantly
increases.
A
substantial majority of our outstanding accounts receivables are not covered by
collateral. In addition, our standard terms and conditions permit payment within
a specified number of days following the receipt of our product. While we have
procedures to monitor and limit exposure to credit risk on our receivables,
there can be no assurance such procedures will effectively limit our credit risk
and avoid losses. As economic conditions deteriorate, certain of our customers
have faced and may face liquidity concerns and have delayed and may delay or may
be unable to satisfy their payment obligations, which would have a material
adverse effect on our financial condition and operating results.
Our
cash and cash equivalents could be adversely affected if the financial
institutions in which we hold our cash and cash equivalents fail.
Our
cash and cash equivalents are highly liquid investments with original maturities
of three months or less at the time of purchase. We maintain the cash and cash
equivalents with reputable major financial institutions. Deposits with these
banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits
or similar limits in foreign jurisdictions. While we monitor daily the cash
balances in the operating accounts and adjust the balances as appropriate, these
balances could be impacted if one or more of the financial institutions with
which we deposit fails or is subject to other adverse conditions in the
financial or credit markets. To date we have experienced no loss or lack of
access to our invested cash or cash equivalents; however, we can provide no
assurance that access to our invested cash and cash equivalents will not be
impacted by adverse conditions in the financial and credit markets.
*To
date, our sales have been concentrated in the insurance, healthcare,
telecommunications and financial services 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 several large markets—insurance, healthcare,
telecommunications and financial services, accounted for approximately 86% and
94% of our total revenues for the quarters ended March 31, 2009 and
2008,
respectively.
We expect that revenues from these 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 conditions in our target markets further
deteriorates, our revenues may decline. Some of our current and prospective
customers, especially those in the financial services and insurance industries,
have faced and may continue to face severe financial difficulties given their
exposure to deteriorating financial and credit markets, as well as the mortgage
and homebuilder sectors of the economy. This may cause our current and
prospective customers to reduce, delay or terminate their spending on
technology, which in turn would have an adverse impact on our sales and
revenues.
*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 quarter ended March 31, 2009, Vodafone Group
Services Limited and affiliated companies and Citicorp Credit Services, Inc.
accounted for 12% and 11%, respectively, of our total revenue. For the quarter
ended March 31, 2008, Citicorp Credit Services, Inc. and Wellpoint Inc.
accounted for 25% and 11%, respectively, of our total revenue. While our
customer concentration has fluctuated, we expect that a limited number of
customers will continue to account for a substantial portion of our revenues 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 income would be adversely affected. In addition, customers that
have accounted for significant revenues in the past may not generate revenues in
any future period, which may materially affect our operating results. For
example, a large telecommunication customer with purchase commitments through
the quarter ended June 30, 2009 may not purchase additional products or services
with us. The deteriorating economic environment has resulted in failures of
financial institutions and significant consolidation within the financial
services industry from which we derive a significant portion of our customers
and revenues. Accordingly, the risk that we could lose a significant customer is
exacerbated in the current economic environment.
Historically,
some of our products and services have assisted companies in attracting and
retaining customers. To the extent financial institutions and other large
companies shrink the size of their customer base, the demand for these products
may be reduced.
Some
of our customers have used our products to aggressively expand the size of their
customer base. Our marketing, decisioning and enterprise solutions have been
used to varying degrees on projects intended to manage leads, personalize
marketing campaigns and deliver highly effective sales messages. Due to the
current economic climate, many large financial institutions have been forced to
deleverage, sell parts of their businesses, or otherwise reduce the size of
their organizations. In these situations it is possible that the demand for our
products has been, and may continue to be, reduced, resulting in lower revenues
in the future.
Over
the near term we plan to increase the focus of our sales staff towards
Decisioning Management products and reduce the focus on Enterprise Foundation
products to reflect market conditions. There can be no assurance that this
change in focus will be successful.
Sales
of Enterprise Foundation solutions generally have a much higher cost to a
customer than Decisioning Management solutions. The magnitude of the
professional services required to implement Enterprise Foundation projects is
also much higher and often can take long periods of time to complete.
Decisioning products are generally faster to implement and can produce a
positive return on investment in a shorter period of time. Due to the current
economic climate, our customers may focus on those projects that are smaller and
faster to complete. Accordingly, our sales force plans to increase their focus
on selling these types of solutions. This change in focus may not be successful
and, as a result, revenues may not meet our expectations.
*Fluctuations
in the value of the U.S. dollar relative to foreign currencies 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 56 % of our total sales for the quarter ended
March 31, 2009. Our international
sales
comprised 41% of our total sales for the quarter ended March 31, 2008. Our
future operating results, as well as our cash and deferred revenue balances,
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 quarter ended March 31, 2009, we had a foreign currency
transaction gain of $0.6 million. See Item 3, Quantitative and Qualitative
Disclosures about Market Risk, for further discussions.
*Given
that our stock price is near its historical low, we may be subject to takeover
overtures that will divert the attention of our management and Board, and
require us to incur expenses for outside advisors.
Given
that our stock price is near its historical low, we may be subject to takeover
overtures. Evaluating and addressing these overtures would require the
time and attention of our management and Board, divert them from their focus on
our business, and require us to incur additional expenses on outside legal,
financial and other advisors, all of which could materially and adversely affect
our business, financial condition and results of operations.
*If
current economic and market conditions worsen, we may be forced to make
additional reductions to our workforce.
In
July 2005, October 2006, May 2008 and October 2008, we reduced our workforce by
approximately 10% - 15% in each instance. If current economic and market
conditions worsen, we may be forced to further reduce our workforce, which could
materially and adversely affect our business, financial condition and results of
operations.
*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 76% and 81% of our total revenues for the quarters
ended March 31, 2009 and 2008, respectively. Gross margin on service revenue was
58% and 57% for the three months ended March 31, 2009 and 2008, respectively.
License revenues comprised 24% and 19% of our total revenues for the quarters
ended March 31, 2009 and 2008, respectively. Gross margins on license revenues
were 98% and 94% for the three months ended March 31, 2009 and 2008,
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 may expand our services organization, requiring us to
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. In addition, given the current economic
environment, customers and potential customers have sought and may seek
discounts on our services, or services at no charge, which has and would further
reduce our services gross margins and materially and adversely affect our
business, financial condition and results of operations.
*Our
revenues decreased in the quarter ended March 31, 2009 as compared to the
quarter ended March 31, 2008. In addition, our revenues decreased in fiscal year
2008 as compared to fiscal year 2007, and until the fiscal year ended September
30, 2007, we were not profitable, which may raise vendor viability concerns
about us and thereby make it more difficult to consummate license transactions
with new and existing customers.
Our
revenues decreased materially in the quarter ended March 31, 2009 as compared to
the quarter ended March 31, 2008 and in fiscal year 2008 as compared to fiscal
year 2007. In addition, while we were profitable for the years ended September
30, 2007 and September 30, 2008, we were not profitable for the years prior to
September 30, 2007. As of March 31, 2009, we had an accumulated deficit of
$232.1 million. We may incur losses in the future and cannot be certain that we
can generate sufficient revenues to continue to achieve profitability. Continued
losses or decreased revenues may make 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. This concern over vendor
viability is exacerbated in the current economic environment.
Anti-takeover
provisions could make it more difficult for a third-party to acquire
us.
We
have adopted a stockholder rights plan and initially declared a dividend
distribution of one right for each outstanding share of common stock to
stockholders of record as of July 21, 2008. Each right entitles the holder
to purchase one one-hundredth of a share of our Series A Junior
Participating Preferred Stock for $20. Under certain circumstances, if
a
person
or group acquires 20 percent or more of our outstanding common stock,
holders of the rights (other than the person or group triggering their exercise)
will be able to purchase, in exchange for the $20 exercise price, shares of our
common stock or of any company into which we are merged, having a value of $40.
The rights expire on July 21, 2011, unless extended by our Board of Directors.
Because the rights may substantially dilute the stock ownership of a person or
group attempting to acquire us without the approval of our Board of Directors,
our rights plan could make it more difficult for a third-party to acquire us (or
a significant percentage of our outstanding capital stock) without first
negotiating with our Board of Directors regarding that acquisition.
In
addition, our Board of Directors has the authority to issue up to
51 million shares of Preferred Stock (of which 500,000 shares have been
designated as Series A Junior Participating Preferred Stock) and to fix the
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions thereof. The rights of the holders of our common
stock may be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock may have the effect of delaying, deterring or preventing a
change of control of Chordiant without further action by the stockholders and
may adversely affect the voting and other rights of the holders of our common
stock.
Further,
certain provisions of our charter documents, including limiting the ability of
stockholders to raise matters at a meeting of stockholders without giving
advance notice, may have the effect of delaying or preventing changes in control
or management of Chordiant, which could have an adverse effect on the market
price of our stock. In addition, our charter documents do not permit cumulative
voting, which may make it more difficult for a third party to gain control of
our Board of Directors. Similarly, we have a classified Board of Directors
whereby approximately one-third of our Board members are elected annually to
serve for three-year terms, which may also make it more difficult for a third
party to gain control of our Board of Directors. Further, we are
subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law, which will prohibit us from engaging in a “business
combination” with an “interested stockholder” for a period of three years after
the date of the transaction in which the person became an interested
stockholder, even if such combination is favored by a majority of stockholders,
unless the business combination is approved in a prescribed manner. The
application of Section 203 also could have the effect of delaying or
preventing a change of control or management.
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, typically
ranging from three to eighteen 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 a
significant commitment of technical and financial resources that may be provided
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 technology purchases given the current
economic conditions and specifically the issues that continue to impact the
financial and credit markets. The result is that our sales cycles have
lengthened in some instances, requiring more time to finalize transactions. In
particular, in each of the past several quarters transactions that we expected
to close before the end of the quarter were delayed or suspended.
*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, each of whom we
expect will continue to be a significant source of competition. 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.
|
|
•
|
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.
|
|
•
|
Application software
vendors: we compete with providers of stand-alone point solutions
for web-based customer relationship management as well as traditional
client/server-based, call-center service customer and sales-force
automation solution providers, many of whom offer broad suites of
application and other software.
|
The
enterprise software industry continues to undergo consolidation in sectors of
the software industry in which we operate. For example, in 2007 and 2008, IBM
acquired ILOG, Cognos, DataMirror and Watchfire Corporation; Oracle
acquired Hyperion, Moniforce and BEA Systems; Sun Microsystems acquired MySQL;
and SAP acquired BusinessObjects, YASU Technologies and Pilot Software. While we
do not believe that ILOG, 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. In addition, Oracle recently announced their
intent to acquire Sun Microsystems.
Many
of our competitors have greater resources, broader customer relationships and
broader product and service offerings than we do. In addition, many of these
competitors have extensive knowledge of our industry. Current and potential
competitors have established, or may further 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.
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 accounting
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 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 testing and certain sustaining engineering
functions. As of March 31, 2009, we use the services of approximately 129
consultants through Ness. In addition, as a result of the reductions in our
workforce that took place in July 2005, October 2006, May 2008 and October 2008,
by approximately 10% - 15% in each instance, we continue to have a
significant
dependence
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
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 pay damages and/or enter into royalty or licensing agreements to be
able to sell our products, if at all. Royalty and licensing agreements, if
required, may not be available on terms acceptable to us or at all.
We
are also the subject of a suit by a person and related entity claiming that
certain of our products infringe their copyrights. Such litigation is
costly. If any of our products were found to infringe such
copyrights, we could be required to pay damages. 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.
*If
we fail to adequately address the difficulties of managing our international
operations, our revenues and operating expenses will be adversely
affected.
For
the quarter ended March 31, 2009, international revenues were $10.0 million or
approximately 56% of our total revenues. For the quarter ended March 31, 2008,
international revenues were $10.0 million or approximately 41% 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 and provide services 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 quarter of fiscal year 2007. The absence of
a business office in France may harm our ability to attract and retain customers
in that country.
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, 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. In addition, in July
2005, October 2006, May 2008 and October 2008 we reduced the size of our
workforce by approximately 10% - 15% in each instance, which may have a negative
effect on our ability to attract and retain qualified personnel. Further,
particularly in the current economic environment, employees or potential
employees may choose to work for larger, more stable companies.
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 accounting 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 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.
Geopolitical
concerns could make the closing of license transactions with new and existing
customers difficult.
Our
revenues may further decrease in fiscal year 2009 or beyond if we are unable to
enter into new large value license transactions with new and existing customers.
The current state of the global financial markets and the global economic
decline generally 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 globally will stabilize. 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 value license transactions also directly affects our
ability to create additional consulting services and maintenance revenues, on
which we also depend.
The
company's common stock price has historically been and may continue to 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 our operating
results;
|
|
•
|
Changes
in economic and political conditions in the United States and
abroad;
|
|
•
|
Terrorist
attacks, war or the threat of terrorist attacks or
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 the Company 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.
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, existing business alliance partners IBM, Ness, Electronic Data
Systems, Tata Consultancy Services 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 any of
IBM, Ness, Electronic Data Systems, Tata Consultancy Services 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, Ness, Electronic Data Systems, Tata Consultancy Services
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 ILOG, Cognos, DataMirror and Watchfire Corporation. While we do
not believe that ILOG, 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 takeover 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 fiscal 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 our 2006 Annual Report on Form
10-K.
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 existing, 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 and may in
the future discover software errors in our products as well as in third-party
products, and as a result have experienced and may in the future experience
delays in the shipment of our new products.
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, October 2006, May 2008 and October 2008 we reduced the size of our
workforce by approximately 10% - 15% 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 suite of products as well as the continued
contributions of our key management, finance, engineering, sales, 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. 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 products, 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 products or
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. Given the current economic environment, the risk that one or more
of our suppliers or vendors may go out of business or be unable to meet their
contractual obligations to us is exacerbated. 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, which could have a
material adverse effect on our business, operating results and financial
condition.
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 our reputation, and any necessary investigative
work and repairs could cause us to incur significant expenses and delays in
implementation, which could have a material adverse effect on our business,
operating results and financial condition.
*If
our products do not keep up with advancing technological requirements or 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, including 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. If our products do not keep up with advancing
technological requirements or operate with the hardware and software platforms
used by our customers, our customers may license competing products and our
revenues will decline.
A
failure in our attempt to deploy our software through a Software-as-a-Service
(SaaS) model could cause injury to our reputation and impair our ability to
develop, market and sell our products under a SaaS model.
In
the fiscal year ended September 30, 2007, we entered into a license with a third
party that will allow that third party to develop and host in their data centers
applications based on our software, to provide services to their customers, most
of whom are in markets that we do not currently penetrate. As we have
no previous experience in deploying our software in a SaaS model, a failure of
this effort could have a detrimental effect to our ability to attract other
third parties to use our software in their SaaS businesses.
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 or markets.
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: (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, particularly those 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 our 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.
Changes
in our revenue recognition model could result in short-term declines in
revenue.
Historically,
we have recognized revenue for a high percentage of our license transactions on
the percentage-of-completion method of accounting or 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 might 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.
Management
must report on, and our independent registered public accounting firm must
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
satisfying those requirements. Accordingly, 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 ongoing system and process evaluations and the 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
January 28, 2009, we held our Annual Meeting of Stockholders in Cupertino,
California. Of the 30,081,690 shares outstanding and entitled to vote as of the
record date of December 1, 2008, 25,245,795 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 our two nominees to serve as directors to hold
office until the 2012 annual meeting of stockholders, (ii) the ratification of
the selection by the Company’s Audit Committee of the Board of Directors of BDO
Seidman, LLP as our independent auditors for our fiscal year ending September
30, 2009, (iii) the approval of the Company’s 2005 Equity Incentive Plan, as
amended (“the 2005 Plan”) to increase the aggregate number of shares of common
stock authorized for issuance under the 2005 Plan by 650,000 shares, and (iv)
the approval of a non-binding resolution to approve the Shareholder Rights Plan
that was previously adopted by the Company’s Board of Directors on July 7,
2008.
Our
two nominees were elected as directors, each to hold office until the 2012
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
|
|
|
William
J. Raduchel, Ph.D.
|
|
19,363,335
|
|
5,882,460
|
|
0
|
|
|
Allen
A.A. Swann
|
|
21,092,053
|
|
4,153,742
|
|
0
|
|
In
addition to the directors elected above, Charles E. Hoffman, David R. Springett,
Dan A. Gaudreau, Richard G. Stevens, and Steven R. Springsteel continued to
serve as directors after the annual meeting.
The
selection of BDO Seidman, LLP as our independent auditors for our fiscal year
ending September 30, 2009 was ratified by the vote set forth below:
|
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
|
24,599,300
|
|
604,053
|
|
42,442
|
|
0
|
|
The
proposal to approve the 2005 Plan to increase the aggregate number of shares of
common stock authorized for issuance under the 2005 Plan by 650,000 shares was
approved by the vote set forth below:
|
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
|
13,833,798
|
|
4,348,526
|
|
39,649
|
|
7,023,822
|
|
The
non-binding resolution to approve the Shareholder Rights Plan that was
previously adopted by the Company’s Board of Directors on July 7, 2008 was not
approved by the vote set forth below.
|
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
|
3,899,417
|
|
14,240,824
|
|
81,732
|
|
7,023,822
|
|
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
|
|
|
|
Incorporated
by Reference
|
|
|
Exhibit
Number
|
|
Description
of Document
|
|
Form
|
|
Date
Filed
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Chordiant Software,
Inc.
|
|
Form
10-K
|
|
11/20/2008
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of Chordiant Software, Inc.
|
|
Form 8-K
|
|
6/3/2008
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Certificate
of Designation of Series A Junior Participating Preferred
Stock.
|
|
Form
8-K
|
|
7/11/2008
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Specimen
Common Stock Certificate.
|
|
Form
S-1/A (No. 333-92187)
|
|
2/7/2000
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Rights
Agreement by and between Chordiant Software, Inc. and American Stock
Transfer & Trust Company, LLC dated as of July 10,
2008.
|
|
Form
8-K
|
|
7/11/2008
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
Form
of Rights Certificate.
|
|
Form
8-K
|
|
7/11/2008
|
|
|
|
|
|
|
|
|
|
|
|
10.6*
|
|
Chordiant
Software, Inc. 2005 Equity Incentive Plan, as amended.
|
|
Schedule
14-A
|
|
12/17/2008
|
|
|
|
|
|
|
|
|
|
|
|
10.69*
|
|
Form
of Chordiant Software, Inc. 2005 Equity Incentive Plan Restricted Stock
Unit Grant Notice and Chordiant Software, Inc. 2005 Equity Incentive Plan
Restricted Stock Unit Agreement.
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.78*+
|
|
Form
of Chordiant Software, Inc. Fiscal Year 2009 Executive Incentive Bonus
Plan.
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.79*+
|
|
Chordiant
Software, Inc. Fiscal Year 2009 Executive Incentive Bonus Plan for Steven
R. Springsteel
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.80*+
|
|
Chordiant
Software, Inc. Fiscal Year 2009 Executive Incentive Bonus Plan for Peter
S. Norman
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.81*+
|
|
Chordiant
Software, Inc. Fiscal Year 2009 Executive Incentive Bonus Plan for Charles
A. Altomare
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.82*+
|
|
Chordiant
Software, Inc. 2009 Vice President Worldwide Sales Incentive Bonus
Plan
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.83*+
|
|
Chordiant
Software, Inc. 2009 Vice President Worldwide Professional Services
Incentive Bonus Plan
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.84*+
|
|
Chordiant
Software, Inc. 2009 General Counsel Incentive Bonus Plan
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.85*
|
|
Amended
and Restated 1999 Non-Employee Directors’ Stock Option
Plan.
|
|
Form
10-Q
|
|
1/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated
by Reference
|
|
|
Exhibit
Number
|
|
Description
of Document
|
|
Form
|
|
Date
Filed
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
10.86†
|
|
Addendum
C dated January 14, 2009 to the Master Services Agreement by and between
Chordiant Software, Inc. and Ness USA, Inc. dated December 15, 2003, as
amended.
|
|
Form
10-Q
|
|
1/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
10.87*
|
|
Form
of Chordiant Software, Inc. Amended and Restated 1999 Non-Employee
Directors’ Stock Option Plan Restricted Stock Award Grant Notice and
Chordiant Software, Inc. Amended and Restated 1999 Non-Employee Directors’
Stock Option Plan Restricted Stock Award Agreement.
|
|
Form
10-Q
|
|
1/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
10.88*
|
|
Form
of Chordiant Software, Inc. Amended and Restated 1999 Non-Employee
Directors’ Stock Option Plan Restricted Stock Award Grant Notice for
Non-U.S. Directors and Chordiant Software, Inc. Amended and Restated 1999
Non-Employee Directors’ Stock Option Plan Restricted Stock Award Agreement
for Non-U.S. Directors.
|
|
Form
10-Q
|
|
1/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
10.89*
|
|
Form
of Indemnity Agreement by and between Chordiant Software, Inc. and its
directors and officers.
|
|
Form
10-Q
|
|
1/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
10.90*
|
|
Offer
Letter for Marchai Bruchey dated March 2, 2009.
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.91*
|
|
Change
of Control Agreement by and between Chordiant Software, Inc. and Marchai
Bruchey dated April 8, 2009.
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.92*
|
|
Separation
Agreement by and between Chordiant Software, Inc. and David C. Cunningham
dated February 13, 2009.
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.93
|
|
Addendum
D dated March 20, 2009 to the Master Services Agreement by and between
Chordiant Software, Inc. and Ness USA, Inc. dated December 15, 2003, as
amended.
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.94
|
|
Amendment
Number Three dated December 21, 2007 to the Master Agreement for
Subcontracted Services dated June 14, 2006 by and between Chordiant
Software, Inc. and International Business Machines
Corporation.
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.95
†
|
|
Amendment
No. 1 dated June 4, 2007 to the Master Professional Services Agreement
dated June 6, 2006 by and between Chordiant Software, Inc. and Citicorp
Credit Services, Inc. (USA).
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.96
†
|
|
Letter
Agreement dated November 11, 2008 by and between Chordiant Software, Inc.
and Citicorp Credit Services, Inc. (USA).
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
10.97*
|
|
Form
of Chordiant Software, Inc. 2005 Equity Incentive Plan Stock Restricted
Stock Unit Grant Notice for Non-U.S. Employees and Chordiant Software,
Inc. 2005 Equity Incentive Plan Restricted Stock Unit Agreement for
Non-U.S. Employees.
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated
by Reference
|
|
|
Exhibit
Number
|
|
Description
of Document
|
|
Form
|
|
Date
Filed
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
21.1
|
|
Chordiant
Software, Inc. Subsidiaries.
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification
required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification
required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
32.1#
|
|
Certification
required by Rule 13a-14(a) or Rule 15d-14(a) and Section 1350 of Chapter
63 of Title 18 of the United States Code (18 U.S.C. 1350).
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
†
|
Confidential
treatment has been requested with respect to certain portions of this
exhibit. Omitted portions have been filed separately with the SEC as
required by Rule 406 of Regulation
C.
|
#
|
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.
|
+
|
The
Company has attached as Exhibits 10.78-10.84 copies of its 2009 Executive
Bonus Plans that it originally filed with the Securities and Exchange
Commission under cover of the Company’s quarterly report on Form 10-Q
filed on January 30, 2009 and disclosed by the Company on Form 8-K filed
on November 25, 2008. The Company had filed with the SEC a
request for confidentiality of certain information contained in those
Bonus Plans. The Company has received comments from the SEC staff on its
confidentiality request. As a result, the Company has included some
previously redacted information in those filed Bonus Plans which has now
been added either because of subsequent public disclosure by the Company
or such information consists of headings contained in tables which are
included as part of the Bonus
Plans.
|