d10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
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x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended December 31, 2009
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
File Number 001-34179
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Chordiant
Software, Inc.
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(Exact
name of registrant as specified in its charter)
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Delaware
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93-1051328
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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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):
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Large
accelerated filer
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Accelerated
filer x
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Non-accelerated
filer (Do not check if a smaller reporting
company)
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Smaller
reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes No x
As
of January 15, 2010, there were 30,363,187 shares of the registrant’s common
stock outstanding.
CHORDIANT
SOFTWARE, INC.
QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 2009
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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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29
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Item 3.
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48
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Item 4.
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48
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PART II.
OTHER INFORMATION
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Item 1.
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49
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Item 1A.
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49
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Item 6.
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60
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60
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PART
I - FINANCIAL INFORMATION
Item 1. Financial Statements
(Unaudited).
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
(Unaudited)
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December
31,
2009
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September
30,
2009
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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50,613
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$
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49,863
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Marketable
securities
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1,716
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—
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Accounts
receivable, net
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22,021
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16,708
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Prepaid
expenses and other current assets
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3,453
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4,006
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Total
current assets
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77,803
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70,577
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Property
and equipment, net
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1,638
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1,850
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Goodwill
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22,608
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22,608
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Intangible
assets, net
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—
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303
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Deferred
tax assets—non-current
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3,224
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3,480
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Other
assets
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2,378
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2,491
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Total
assets
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$
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107,651
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$
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101,309
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$
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4,534
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$
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3,809
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Accrued
expenses
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9,242
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6,334
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Deferred
revenue
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32,157
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28,704
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Total
current liabilities
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45,933
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38,847
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Deferred
revenue—long-term
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8,786
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9,257
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Other
liabilities—non-current
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1,151
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1,069
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Restructuring
costs, net of current portion
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21
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123
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Total
liabilities
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55,891
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49,296
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Commitments
and contingencies (Notes 7, 8 and 9)
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Stockholders’
equity:
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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 December 31, 2009 and September 30, 2009
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—
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—
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Common
stock, $0.001 par value; 300,000 shares authorized; 30,362 and 30,208
shares issued and outstanding at December 31, 2009 and September 30, 2009,
respectively
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30
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30
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Additional
paid-in capital
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286,583
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285,666
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Accumulated
deficit
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(237,586
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(236,614
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Accumulated
other comprehensive income
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2,733
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2,931
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Total
stockholders’ equity
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51,760
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52,013
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Total
liabilities and stockholders’ equity
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$
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107,651
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$
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101,309
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The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
CHORDIANT
SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(In
thousands, except per share data)
(Unaudited)
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Three
Months Ended December 31,
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2009
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2008
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Revenues:
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License
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$
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7,432
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$
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7,941
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Service
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14,792
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15,436
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Total
revenues
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22,224
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23,377
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Cost
of revenues:
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License
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134
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98
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Service
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5,545
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6,686
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Amortization
of intangible assets
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303
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303
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Total
cost of revenues
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5,982
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7,087
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Gross
profit
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16,242
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16,290
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Operating
expenses:
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Sales
and marketing
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6,657
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7,780
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Research
and development
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5,354
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5,259
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General
and administrative
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4,504
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4,402
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Restructuring
expense
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144
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784
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Total
operating expenses
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16,659
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18,225
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Loss
from operations
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(417
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(1,935
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Interest
income, net
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29
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292
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Other
income (expense), net
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(90
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)
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685
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Loss
before income taxes
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(478
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(958
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Provision
for income taxes
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494
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1,711
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Net
loss
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$
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(972
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$
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(2,669
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Net
loss per share:
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Basic
and diluted
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$
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(0.03
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$
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(0.09
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Weighted
average shares used in computing net loss per share:
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Basic
and diluted
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30,180
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30,008
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The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
CHORDIANT
SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In
thousands)
(Unaudited)
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Three
Months Ended December 31,
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2009
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2008
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Cash
flows from operating activities:
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Net
loss
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$
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(972
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)
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$
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(2,669
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)
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Adjustments
to reconcile net loss to net cash provided by operating
activities:
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Depreciation
and amortization
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347
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456
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Amortization
of intangibles and capitalized software
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380
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363
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Non-cash
stock-based compensation expense
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889
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965
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Provision
for doubtful accounts
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(27
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)
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202
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Non-cash
provision for income taxes
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503
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1,263
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Changes
in assets and liabilities:
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Accounts
receivable
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(5,524
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)
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2,736
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Prepaid
expenses and other current assets
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318
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1,203
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Other
assets
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29
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(44
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)
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Accounts
payable
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751
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(2,443
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)
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Accrued
expenses, other liabilities—non-current and restructuring
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2,938
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(256
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)
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Deferred
revenue
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3,170
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864
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Net
cash provided by operating activities
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2,802
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2,640
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Cash
flows from investing activities:
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Property
and equipment purchases
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(131
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)
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(180
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)
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Capitalized
product development costs
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(11
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)
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(13
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)
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Increase
in restricted cash
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—
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(1
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)
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Purchases
of marketable securities
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(1,709
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)
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—
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Net
cash used for investing activities
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(1,851
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)
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(194
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)
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Cash
flows from financing activities:
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Proceeds
from exercise of stock options
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27
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11
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Net
cash provided by financing activities
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27
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11
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Effect
of exchange rate changes
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(228
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)
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(4,198
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)
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Net
increase (decrease) in cash and cash equivalents
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|
750
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(1,741
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)
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Cash
and cash equivalents at beginning of period
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49,863
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55,516
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Cash
and cash equivalents at end of period
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$
|
50,613
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$
|
53,775
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The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
CHORDIANT
SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(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 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, 2009 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, 2009, or
2009 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, the valuation of stock-based
compensation, the valuation of goodwill and intangible assets, the 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 its revenue contracts. The Company bases these estimates on
historical experience and on various other assumptions believed to be
reasonable. Actual results may differ from these estimates under different
assumptions or conditions.
Revenue
recognition
The
Company derives revenue from licensing software and related services, which
include assistance in implementation, customization and integration,
post-contract customer support or PCS, training and consulting. All revenue
amounts are presented net of sales taxes in the Company’s Condensed Consolidated
Statements of Operations. The amount and timing of revenue is difficult to
predict and any shortfall in revenue or delay in recognizing revenue could cause
operating results to vary significantly from period to period and could result
in operating losses. The accounting rules related to revenue recognition are
complex and are affected by the interpretation of the rules and an understanding
of industry practices, both of which are subject to change. Consequently, the
revenue recognition accounting rules require management to make significant
estimates based on judgment.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 relevant accounting guidance on software recognition. 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 that is 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 relevant accounting guidance on revenue recognition.
For contracts that involve significant implementation or customization services
essential to the functionality of the products, the license and professional
consulting services revenue is recognized using either the
percentage-of-completion method or the completed contract method.
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 the guidance
on software revenue recognition are met. Expenses associated with these
co-development arrangements are normally expensed as incurred as they are
considered to be research and development costs that do not qualify for
capitalization or deferral. There have been no such arrangements during the
periods presented.
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.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For
arrangements with multiple elements 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 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, and 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.
Collectability
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.
Cash
and Cash Equivalents
Cash
equivalents consist of highly liquid instruments purchased with an original
maturity of three months or less. The Company invests primarily in money market
funds as these investments have historically been subject to minimal credit and
market risks.
Marketable
Securities
Historically
the Company’s marketable securities have been classified as available-for-sale.
Available-for-sale securities are carried at fair value with unrealized gains
and losses included as a separate component of Stockholder’s Equity, net of any
tax effect. Realized gains and losses and declines in value determined by
management to be other than temporary on these investments are included in Other
income (expense), net when held. The Company periodically evaluates these
investments for other-than-temporary impairment. For the purposes of computing
realized gains and losses, cost is identified on a specific identification
basis. See Note 3 for marketable securities at each balance sheet
date.
Restricted
cash
At
December 31, 2009 and September 30, 2009, 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
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
accounts,
commercial paper, corporate bonds, and certificates-of-deposit. The Company has
cash and cash equivalents with various large banks and institutions domestically
and internationally.
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 the Company’s 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 operating results. The following table summarizes the
revenues from customers that accounted for 10% or more of total
revenues:
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
Royal
Bank of Scotland plc
|
|
|
22
|
%
|
|
|
*
|
|
|
|
|
Lloyds
TSB Bank
|
|
|
11
|
%
|
|
|
*
|
|
|
|
|
Citicorp
Credit Services, Inc.
|
|
|
*
|
|
|
|
13
|
%
|
|
|
|
Vodafone
Group Services Limited and affiliated companies
|
|
*
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Represents
less than 10% of total revenues.
|
|
|
|
|
|
|
|
|
At
December 31, 2009, Royal Bank of Scotland plc and Deutsche Angestellten
Krankenkasse accounted for approximately 20% and 11%, respectively,
of accounts receivable. At September 30, 2009, General Motors Corporation, the
Royal Bank of Scotland plc, and Turkiye Is Bankasi, A.S. accounted for
approximately 17%, 14% and 11%, respectively, of accounts
receivable.
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 years 2008 and 2009 and the quarter ended December 31, 2009,
technological feasibility to port existing products to new platforms was
established through the completion of detailed program designs. Costs
aggregating $0.6 million associated with these products have been capitalized
and included in Other Assets as of December 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 life of the product which is 36
months. For the three months ended December 31, 2009 and 2008, amortization
expense, included in cost of revenue for licenses related to these products was
less than $0.1 million for both periods. As of December 31, 2009 and 2008, 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 months ended December 31, 2009 and 2008,
amortization expense, included in cost of revenue for license related to this
product was less than $0.1 million for both periods. As of December 31, 2009,
the unamortized expense was $0.1 million. As of December 31, 2008, the
unamortized expense was $0.3 million.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Subsequent
Events
The
Company has evaluated subsequent events for recognition and disclosure through
the time that these financial statements were filed in Form 10-Q Report with the
SEC on January 28, 2010.
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 the Company’s 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.
Net
income (loss) per share
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 (using the treasury stock method), and unvested
restricted stock units (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. The calculation of diluted net
loss per share excludes potential common shares as their effect is anti-dilutive
for the three months ended December 31, 2009 and 2008.
The
following table sets forth the computation of basic and diluted net income
(loss) per share for the periods indicated (in thousands, except for per share
data):
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
$
|
(972
|
)
|
|
$
|
(2,669
|
)
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock outstanding for basic and diluted
calculations
|
|
30,180
|
|
|
|
30,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share—basic and diluted
|
$
|
(0.03
|
)
|
|
$
|
(0.09
|
)
|
|
The
following table sets forth the potential total common shares that are excluded
from the calculation of diluted net loss per share as their effect is
anti-dilutive as of the dates indicated (in thousands):
|
|
|
|
December
31,
2009
|
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
4,276
|
|
|
|
4,212
|
|
|
|
|
Restricted
stock awards (RSAs)
|
|
90
|
|
|
|
71
|
|
|
|
|
Restricted
stock units (RSUs)
|
|
987
|
|
|
|
520
|
|
|
|
|
|
|
5,353
|
|
|
|
4,803
|
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recent
Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board (FASB) issued an
Accounting Standard Update, or ASU, that that removes tangible products
containing software components and non-software components that function
together to deliver the product’s essential functionality from the scope of
industry-specific revenue accounting guidance for software and software related
transactions. The ASU will be effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010 and early adoption will be permitted. The Company has evaluated the ASU
and has determined that it will not have a significant impact on the
determination or reporting of our financial results.
In
October 2009, the FASB issued an ASU that addresses criteria for separating the
consideration in multiple-element arrangements. The ASU will require companies
to allocate the overall consideration to each deliverable by using a best
estimate of the selling price of individual deliverables in the arrangement, in
the absence of VSOE or other third-party evidence of the selling price. The ASU
will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010 and
early adoption will be permitted. The Company has evaluated the ASU 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
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’s investments are valued under 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:
|
|
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 December 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
|
|
$
|
33,930
|
|
|
$
|
33,930
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Marketable
securities
|
|
|
1,716
|
|
|
|
1,716
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
35,646
|
|
|
$
|
35,646
|
|
|
$
|
—
|
|
|
$
|
—
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
Fair
value of investments as of September 30, 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
|
$
|
39,497
|
|
|
$
|
39,497
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company had the following available for sale securities as of December 31, 2009
(in thousands):
|
|
|
December
31, 2009
|
|
|
|
|
|
Amortized
Cost
|
|
|
|
Gross
Unrealized
Gain
|
|
|
|
Gross
Unrealized
Loss
|
|
|
|
Fair
Value
|
|
|
|
Marketable
securities
|
$
|
1,709
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
1,716
|
|
The
Company had no marketable securities as of September 30, 2009. For the three
months ended December 31, 2009 and September 30, 2009, no gains or losses were
realized on the sale of marketable securities. The marketable securities
represent common shares of SWK Holding Corporation (formerly Kana Software,
Inc.), a publicly-traded company. These purchases were associated with the
attempted, but unsuccessful, acquisition of the Company. As of December 31,
2009, due to the nature of these marketable securities, the Company has
classified these marketable securities as available for sale and intends to hold
these for less than one year.
NOTE
4—BALANCE SHEET COMPONENTS
Accounts
receivable, net
Accounts
receivable, net, consists of the following (in thousands):
|
|
|
|
December
31,
2009
|
|
|
|
September
30,
2009
|
|
|
|
|
Accounts
receivable, net:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
$
|
22,213
|
|
|
$
|
17,017
|
|
|
|
|
Less:
allowance for doubtful accounts
|
|
(192
|
)
|
|
|
(309
|
)
|
|
|
|
|
$
|
22,021
|
|
|
$
|
16,708
|
|
|
Prepaid
expenses and other current assets
Prepaid
expenses and other current assets consist of the following (in
thousands):
|
|
|
|
December
31,
2009
|
|
|
|
September
30,
2009
|
|
|
|
|
Prepaid
expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
|
Prepaid
commissions and royalties
|
$
|
689
|
|
|
$
|
582
|
|
|
|
|
Deferred
tax assets
|
|
1,449
|
|
|
|
1,684
|
|
|
|
|
Other
prepaid expenses and current assets
|
|
1,315
|
|
|
|
1,740
|
|
|
|
|
|
$
|
3,453
|
|
|
$
|
4,006
|
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Property
and equipment, net
Property
and equipment, net, consists of the following (in thousands):
|
|
|
|
December
31,
2009
|
|
|
|
September
30,
2009
|
|
|
|
|
Property
and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
Computer
hardware (useful lives of 3 years)
|
$
|
4,667
|
|
|
$
|
4,580
|
|
|
|
|
Purchased
internal-use software (useful lives of 3 years)
|
|
3,414
|
|
|
|
3,381
|
|
|
|
|
Furniture
and equipment (useful lives of 3 to 7 years)
|
|
743
|
|
|
|
739
|
|
|
|
|
Leasehold
improvements (shorter of 7 years or the term of the lease)
|
|
2,738
|
|
|
|
2,741
|
|
|
|
|
|
|
11,562
|
|
|
|
11,441
|
|
|
|
|
Accumulated
depreciation and amortization
|
|
(9,924
|
)
|
|
|
(9,591
|
)
|
|
|
|
|
$
|
1,638
|
|
|
$
|
1,850
|
|
|
Intangible
assets, net
Intangible
assets, net, consist of the following (in thousands):
|
|
|
December
31, 2009
|
|
September
30, 2009
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Carrying
Amount
|
|
|
|
Gross
Carrying
Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Carrying
Amount
|
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technologies
|
|
$
|
6,904
|
|
|
$
|
(6,904
|
)
|
|
$
|
—
|
|
|
$
|
6,904
|
|
|
$
|
(6,661
|
)
|
|
$
|
243
|
|
|
Customer
list and trade-names
|
|
|
2,731
|
|
|
|
(2,731
|
)
|
|
|
—
|
|
|
|
2,731
|
|
|
|
(2,671
|
)
|
|
|
60
|
|
|
|
|
$
|
9,635
|
|
|
$
|
(9,635
|
)
|
|
$
|
—
|
|
|
$
|
9,635
|
|
|
$
|
(9,332
|
)
|
|
$
|
303
|
|
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 for each of the
three month periods ended December 31, 2009 and 2008, respectively. As of
December 31, 2009, the intangible assets are fully amortized.
Other
assets
Other
assets consist of the following (in thousands):
|
|
|
|
December
31,
2009
|
|
|
|
September
30,
2009
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
|
Long-term
accounts receivable
|
$
|
930
|
|
|
$
|
930
|
|
|
|
|
Long-term
restricted cash
|
|
88
|
|
|
|
90
|
|
|
|
|
Other
assets
|
|
1,360
|
|
|
|
1,471
|
|
|
|
|
|
$
|
2,378
|
|
|
$
|
2,491
|
|
|
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 December 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):
|
|
|
|
December
31,
2009
|
|
|
|
September
30,
2009
|
|
|
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
|
Accrued
payroll, payroll taxes and related expenses
|
$
|
4,248
|
|
|
$
|
2,509
|
|
|
|
|
Accrued
restructuring expenses, current portion (Note 5)
|
|
519
|
|
|
|
408
|
|
|
|
|
Accrued
third party consulting fees
|
|
505
|
|
|
|
505
|
|
|
|
|
Accrued
income, sales and other taxes
|
|
2,684
|
|
|
|
1,786
|
|
|
|
|
Other
accrued liabilities
|
|
1,286
|
|
|
|
1,126
|
|
|
|
|
|
$
|
9,242
|
|
|
$
|
6,334
|
|
|
Deferred
Revenue
Deferred
revenue consists of the following (in thousands):
|
|
|
|
December
31,
2009
|
|
|
|
September
30,
2009
|
|
|
|
|
Deferred
revenue:
|
|
|
|
|
|
|
|
|
|
|
License
|
$
|
7,635
|
|
|
$
|
7,314
|
|
|
|
|
Support
and maintenance
|
|
32,219
|
|
|
|
29,959
|
|
|
|
|
Other
|
|
1,089
|
|
|
|
688
|
|
|
|
|
|
|
40,943
|
|
|
|
37,961
|
|
|
|
|
Less:
current portion
|
|
(32,157
|
)
|
|
|
(28,704
|
)
|
|
|
|
Long-term
deferred revenue
|
$
|
8,786
|
|
|
$
|
9,257
|
|
|
NOTE
5—RESTRUCTURING
Restructuring
Costs
Through
December 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.
Accruals
for facilities restructured prior to 2003 do not reflect any adjustments
relating to the estimated net present value of cash flows associated with the
facilities.
For
each of the periods presented herein, restructuring expenses consist solely
of:
|
|
•
|
Severance
and Termination Benefits—These costs represent severance and payroll taxes
related to restructuring plans.
|
|
|
•
|
Excess
Facilities 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.
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
•
|
Termination
Costs—These costs represent contract termination costs related to the
restructuring plan.
|
As
of December 31, 2009, the total restructuring accrual consisted of the following
(in thousands):
|
|
|
|
Current
|
|
|
|
Non-Current
|
|
|
|
Total
|
|
|
|
|
Severance
and termination benefits
|
$
|
87
|
|
|
$
|
—
|
|
|
$
|
87
|
|
|
|
|
Excess
facilities
|
|
432
|
|
|
|
21
|
|
|
|
453
|
|
|
|
|
Total
|
$
|
519
|
|
|
$
|
21
|
|
|
$
|
540
|
|
|
As
of December 31, 2009 and September 30, 2009, $0.5 million and $0.4 million,
respectively, of the restructuring reserve are 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
or the anticipated settlement dates.
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
|
|
|
|
|
|
|
|
|
2010
(nine months remaining)
|
|
|
|
|
$
|
331
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
453
|
|
|
|
|
|
|
Included
in the future minimum lease payments schedule above is an offset of $0.3 million
of contractually committed sublease rental income.
Fiscal
Year 2010 Restructuring
In
the quarter-ended December 31, 2009, the Company initiated a restructuring plan,
the 2010 Restructuring, intended to consolidate and reduce the size of our
management team. This resulted in a reduction of headcount. As a result of the
cost-cutting measure, the Company recorded a pre-tax cash restructuring charge
in the first quarter of fiscal year 2010, of approximately $0.1 million for
severance costs. The following table summarizes the activity related to the 2010
Restructuring (in thousands):
|
|
|
|
Severance
and
Termination
Benefits
|
|
|
|
|
Provision
|
$
|
144
|
|
|
|
|
Cash
paid
|
|
(57
|
)
|
|
|
|
Reserve
balance as of December 31, 2009
|
$
|
87
|
|
|
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 December 31, 2008, all payments had been
made.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
Severance
and
Benefits
|
|
|
|
Contract
Termination
Costs
|
|
|
|
Total
|
|
|
|
|
Provision
|
$
|
758
|
|
|
$
|
130
|
|
|
$
|
888
|
|
|
|
|
Cash
paid
|
|
(758
|
)
|
|
|
(130
|
)
|
|
|
(888
|
)
|
|
|
|
Reserve
balance as of December 31, 2008
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Fiscal
Year 2005 Restructuring
In
May 2005, the Company undertook an approximate 10% reduction in our workforce.
In connection with this action, the Company 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, 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 we were not ultimately 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 December 31, 2008
|
$
|
—
|
|
|
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 the 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 is net of estimated sublease income based on 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.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table summarizes the activity related to the 2002 Restructuring (in
thousands):
|
|
|
|
Excess
Facilities
|
|
|
|
|
Reserve
balance as of September 30, 2009
|
$
|
531
|
|
|
|
|
Cash
paid
|
|
(78
|
)
|
|
|
|
Reserve
balance as of December 31, 2009
|
$
|
453
|
|
|
NOTE
6—COMPREHENSIVE INCOME (LOSS)
The
components of comprehensive income (loss) are as follows (in
thousands):
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(972
|
)
|
|
$
|
(2,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Change
in foreign currency translation
|
|
(205
|
)
|
|
|
(3,494
|
)
|
|
|
|
Net
change in unrealized gain from investments
|
|
7
|
|
|
|
—
|
|
|
|
|
Comprehensive
loss
|
$
|
(1,170
|
)
|
|
$
|
(6,163
|
)
|
|
NOTE
7—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. As of December 31, 2009, the
Company is in compliance with all covenants of the revolving line of
credit.
The
revolving line of credit contains a provision for a sub-limit of up to $5.0
million for issuances of standby commercial letters of credit. As of December
31, 2009, the Company had utilized $0.1 million of the standby commercial
letters of credit limit which serves as collateral for a leased facility. The
revolving line of credit also contains a provision for a sub-limit of up to $3.0
million for issuances of foreign exchange forward contracts. As of December 31,
2009, the Company had not entered into any foreign exchange forward contracts.
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 December 31,
2009, there were no outstanding balances on the revolving line of
credit.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8—COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company leases its facilities and certain equipment under non-cancelable
operating leases that expire on various dates through 2014. Rent expense is
recognized on a straight line basis over the lease term.
Future
minimum lease payments as of December 31, 2009 are as follows (in
thousands):
|
|
|
|
Operating
Leases
|
|
|
|
Operating
Sublease
Income
|
|
|
|
Net
Operating
Leases
|
|
|
|
|
Fiscal
year ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
(remaining nine months)
|
$
|
2,684
|
|
|
$
|
(196
|
)
|
|
$
|
2,488
|
|
|
|
|
2011
|
|
2,994
|
|
|
|
(86
|
)
|
|
|
2,908
|
|
|
|
|
2012
|
|
2,201
|
|
|
|
—
|
|
|
|
2,201
|
|
|
|
|
2013
|
|
2,031
|
|
|
|
—
|
|
|
|
2,031
|
|
|
|
|
2014
|
|
351
|
|
|
|
—
|
|
|
|
351
|
|
|
|
|
Total
minimum payments
|
$
|
10,261
|
|
|
$
|
(282
|
)
|
|
$
|
9,979
|
|
|
Operating
lease payments in the table above include approximately $0.7 million for our
Boston, Massachusetts facility operating lease commitment included in
Restructuring accrual. As of December 31, 2009, the Company has $0.3 million in
sublease income contractually committed for future periods relating to this
facility. See Note 5 for further discussions.
Asset
Retirement Obligations
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. The FASB guidance requires the recognition of a liability for the
fair value of a legally required conditional ARO 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 ARO is associated with commitments to return property subject to
operating leases to original condition upon lease termination. As of December
31, 2009, the Company estimated that gross expected cash flows of approximately
$0.3 million will be required to fulfill these obligations.
ARO
payments as of December 31, 2009 are included in Other Long-term Liabilities in
the Condensed Consolidated Balance Sheets and are estimated as follows (in
thousands):
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
Fiscal
year ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
145
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
317
|
|
|
|
|
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other
Obligations
In
2003, 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”) and in January 2009, the Company and Ness extended
the Ness agreement through December 31, 2011. Pursuant to the Ness agreement,
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, product development services and certain
other identified technical and consulting services (collectively, the
“Services”). Under the terms of the Ness agreement, the Company pays for
services rendered on a monthly fee basis and reimbursement of approved
out-of-pocket expenses. If the Company had terminated the Ness agreement for
convenience prior to December 31, 2009, it would have been required to pay a
termination fee no greater than $0.5 million, however this cancellation penalty
lapsed at December 31, 2009. The Company also had guaranteed certain equipment
lease obligations of Ness for equipment acquired by Ness to be used in
performance of the Services, either through leasing arrangements or direct cash
purchases, for which the Company was obligated under the agreement to reimburse
Ness. In 2006, Ness entered into a 36 month equipment lease agreement with IBM
India and, in connection with the lease agreement the Company had an outstanding
standby letter of credit to guarantee Ness’ financial commitments under the
lease. During the quarter ended June 30, 2009, the lease expired and the Company
no longer has an obligation to reimburse Ness.
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 and 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
December 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/or reimburse the indemnified party for
losses suffered or incurred by the indemnified party, generally the Company’s
customers or business partners, 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 December 31, 2009.
The
Company may, at its discretion and in the ordinary course of business, enter
into arrangements, generally with the Company’s customers or business partners,
whereby the Company agrees to indemnify them for certain acts, such as personal
property damage, by the Company. The Company may also enter into
arrangements with the Company’s business partners whereby the business partners
agree to provide services as subcontractors for the Company’s implementations.
Accordingly, the Company enters into standard agreements with its customers
whereby the Company agrees to indemnify them for certain acts, such as personal
property damage, by 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 December 31, 2009.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
When,
as part of an acquisition, the Company acquires all of the stock or all of the
assets and liabilities of a company, the Company may assume the liability for
certain events or occurrences that took place prior to the date of acquisition.
The maximum potential amount of future payments, if any, the Company could be
required to make for such obligations is undeterminable at this time.
Accordingly, the Company has no amounts recorded for these contingent
liabilities as of December 31, 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 account 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 of these warranties is minimal. Accordingly, the Company
has no amounts recorded for these contingent liabilities as of December 31,
2009.
NOTE
9—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, 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
(“Securities Act”), and Section 10(b) of the Securities Exchange Act of 1934, as
amended (“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 that conducted IPO’s of their common stock in the late
1990’s or in the year 2000 (collectively, the “IPO Lawsuits”).
On
February 25, 2009, liaison counsel for plaintiffs informed the district 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.
On
June 11, 2009, the Court granted preliminary approval of the tentative
settlement, ordered that Notice of the settlement be published and mailed, and
set a Final Fairness Hearing for September 10, 2009. On October 6,
2009, the District Court certified the settlement class in each IPO Case and
granted final approval of the settlement. On or about October 23,
2009, three shareholders filed a Petition for Permission To Appeal Class
Certification Order, challenging the District Court’s certification of the
settlement classes. Beginning on October 29, 2009, a number of
shareholders filed direct appeals, objecting to final approval of the
settlement. If the settlement is affirmed on appeal, the
settlement will
result in the dismissal of all claims against the Company and its officers and
directors with prejudice, and the Company’s pro rata share of the settlement
fund will be fully funded by insurance.
Yue
vs. Chordiant Software, Inc.
On
January 2, 2008, the Company and certain of its 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 (“CMD”) software product
infringed copyrights in certain software referred to as the “PowerRPC software,”
copyrights that had been owned by Netbula LLC and assigned to Mr. Yue, the owner
of Netbula. On July 23, 2008, the Court issued an order that granted
one employee’s motion to dismiss for lack of personal jurisdiction, with
prejudice, and granted, with leave to amend, the Company’s motion to dismiss,
ruling that Mr. Yue’s company, Netbula LLC, is the real party in interest and
must appear through counsel.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On
September 9, 2008, plaintiffs Yue and Netbula LLC 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 Officer
and its former Vice President, General Counsel and Secretary (the “individual
defendants”). On September 20, 2008, the parties filed a stipulation
allowing plaintiffs to file a Second Amended Complaint dropping the unfair
competition and accession and confusion claims. On November 10,
2008, the Company answered the Second Amended 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. Also
on November 10, 2008, the individual defendants filed a motion to dismiss, which
the Court granted with leave to amend on March 20, 2009. Plaintiffs
filed a Third Amended Complaint on April 6, 2009.
On
May 29, 2009, as stipulated by the parties, the Court allowed plaintiffs to file
a Fourth Amended Complaint to include allegations about the Company’s use in CMD
of a different, additional Netbula product—JavaRPC—an implementation of ONC RPC
for Java. Plaintiffs filed the Fourth Amended Complaint on
May 29, 2009, and the Company and the individual defendants answered on
June 15, 2009. The Fourth Amended Complaint alleges that the Company
infringed Plaintiffs’ copyrights by using PowerRPC and JavaRPC in the
development and distribution of CMD, without the required licenses from
Netbula. The Fourth Amended Complaint seeks monetary damages, an
accounting of profits, and injunctive relief according to proof.
On
July 9, 2009, the Court found triable issues about whether the Company held a
license in PowerRPC, and accordingly denied the Company’s motion for summary
judgment as to that issue.
On
October 30, 2009, both fact and expert discovery closed.
On
November 9, 2009, as stipulated by the parties, the Court ordered the dismissal
of the Company’s Chief Executive Officer from the case, leaving only one
remaining individual defendant, the Company’s former general counsel, Mr. Derek
Witte. On December 21, 2009, the Court granted Mr. Witte’s motion for
summary judgment, finding that he was not vicariously liable for the Company’s
alleged infringement.
Also
on December 21, 2009 the court granted the Company’s Motion for Summary Judgment
as to Statutory Damages and Plaintiffs’ Attorneys’ Fees, ruling that Defendants
are not entitled to recover statutory damages or attorneys’ fees under the
Copyright Act. In addition, the court granted the Company’s motion
for summary adjudication regarding the Company’s status as a reseller, declaring
that the Company, as a reseller for Chordiant Software International, Ltd., has
the same distribution rights as its subsidiary under Netbula’s
licenses. Plaintiffs have moved for reconsideration of that
ruling. In that same Order, the Court also denied plaintiffs’ motion
for summary judgment as to infringement of the copyrights in JavaRPC, finding
triable issues of fact as to whether plaintiffs’ copyrights are valid, and as to
whether Chordiant held a license to JavaRPC.
The
Court has set a final pretrial conference for March 22, 2010. Trial
is scheduled for April 2010, with Jury selection set for April 6, 2010, trial
sessions set for April 7-9 and April 13-16, closing arguments set for April 20,
2010, and jury deliberation set for April 21-23, 2010.
The
Company cannot predict the outcome or provide an estimate of any possible
losses. The Company will continue to vigorously defend itself against the claims
in these actions.
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.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
10—INCOME TAXES
The
Company’s provision for income taxes was $0.5 million and $1.7 million for the
quarter ended December 31, 2009 and 2008, respectively. The $1.2 million
decrease in income taxes is primarily due to a decrease in non-cash tax expense
in our UK subsidiary and a decrease in unrecoverable withholding tax payments
related to sales transactions in India and Turkey compared to quarter ended
December 31 2008.
Of
the total $0.5 million of provision recognized in quarter ended December 31,
2009, a significant portion was related to a non-cash deferred tax expense for
the recognition of taxable income in the United Kingdom. The remainder of the
Company’s provision is attributable to taxes on earnings from the Company’s
foreign subsidiaries, unrecoverable withholding taxes related to sales
transactions that occurred in India and Turkey and a federal and research
development tax refund benefit.
At
September 30, 2009, the Company had $1.0 million of unrecognized tax benefits
related to tax positions taken in prior periods, $0.5 million of which would
affect the Company’s effective tax rate if recognized. As of December 31, 2009,
the Company had gross unrecognized tax benefits of $1.1 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 December 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.
At
December 31, 2009, the Company has $74.3 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 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 that it will have future taxable income sufficient to
realize $4.7 million of tax benefits from its deferred tax assets, which consist
of that portion of net deferred tax assets attributable to net operating losses
(NOLs) residing in the United Kingdom. On September 30, 2008, the Company had
released (eliminated) $10.0 million of the valuation allowance on its DTAs
related to the United Kingdom, of which $9.5 million was recognized as an
offsetting reduction to goodwill (representing pre-acquisition NOLs) and $0.5
million was recognized as a credit (reduction) to the provision for income
taxes. In 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 and
capital allowances, 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 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 December 31, 2009 and September 30, 2009, the balance of
deferred tax valuation allowance was approximately $69.6 million.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 2009, the Company had federal research and development tax
credit carryforwards of approximately $3.8 million. Due to Section 382 ownership
changes under IRC Section 383, $2.1 million of the federal research tax credit
carryforwards were subject to annual limitations and is expected to expire
unutilized.
On
September 30, 2009, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $144.3 million and $36.2 million,
respectively. Approximately $18.1 million of the federal net operating loss
carryforwards represent net operating loss carryforwards related to the
acquisition of Prime Response in 2001. In addition to the federal and state net
operating loss carryforwards, the Company has approximately $13.6 million of net
operating loss carryforwards that are generated in the United Kingdom, none of
which will expire. Approximately $4.3 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 2029
and 2010 through 2029, respectively. At September 30, 2009, there were
approximately $1.8 million of federal research and development credits that
expire in 2025 through 2029. For the year-ended September 30, 2009, there were
also California state credits of approximately $4.0 million of which $3.9
million do not expire.
On
September 23, 2008, the state of California enacted tax legislation on the
utilization of net operating losses and credit limitations. Effective
fiscal year 2009, any California net operating losses that the Company generates
will have a 20 year carryforward period and effective for fiscal year ended
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. For the year ended
September 30, 2009, the Company generated $3.7 million of additional net
operating losses in California which will expire in 2029.
Effective
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.
At
September 30, 2009, the Company has not provided for U.S. federal and state
income taxes on foreign earnings which are expected to be invested outside of
the U.S. indefinitely. Upon distribution of those earnings, the Company will be
subject to U.S. income taxes (subject to a reduction of the foreign tax credit)
and withholding taxes payable to the foreign countries where the foreign
operations are located, if any.
NOTE
11—EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION
2005
Equity Incentive Plan
As
of December 31, 2009, there were approximately 1.8 million shares available for
future grant and approximately 4.8 million options and RSUs that are outstanding
under the 2005 Equity Incentive Plan or 2005 Plan.
2000
Nonstatutory Equity Incentive Plan
As
of December 31, 2009, there were approximately 0.3 million options that are
outstanding under the 2000 Nonstatutory Equity Incentive Plan.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1999
Non-Employee Directors’ Option Plan
As
of December 31, 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. In the quarter ended December 31, 2009, the Board amended the Directors’
Plan to increase the number of shares reserved for future issuance by 0.1
million shares. This amendment was approved by the stockholders at the 2010
Annual Meeting of Stockholders held on January 27, 2010.
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 adoption of the Shareholder Rights Plan, the Company
submitted a non-binding proposal to the Company’s stockholders to approve that
plan, to be voted upon at the 2009 Annual Meeting of Stockholders. On January
28, 2009, at the 2009 Annual Meeting of Stockholders, the stockholders did not
approve the non-binding proposal. As discussed in the Company’s 2008 Proxy
Statement, if the Company’s stockholders did not support the non-binding
proposal, the Board committed to reconsider whether to terminate the
Shareholders Rights Plan and redeem the rights issued thereunder.
On
November 18, 2009, the Board, after deliberations spanning over multiple Board
meetings since the 2009 Annual Meeting of Stockholders, and with the input of
its outside legal and financial advisors, determined not to terminate the
Shareholder Rights Plan, or redeem the rights issued thereunder, at this time.
The Shareholder Rights Plan (and the rights issued thereunder) is scheduled to
expire on July 21, 2011. The Board considered the non-binding stockholder vote
and the current environment relating to shareholder rights plans generally and
balanced those factors against the short life of the Company’s Shareholder
Rights Plan, the current increase in unsolicited and unfavorable acquisition
proposals in the marketplace, particularly at a time when stock prices continue
to experience downward pressure, increased hostile activity, and the overall
effectiveness of such plans in requiring a potential acquirer to negotiate in
good faith with the board so that the board may use its business judgment and
exercise its fiduciary duties to its stockholders to obtain the highest possible
price for the company. The Board also considered that shareholder rights plans
do not prevent legitimate offers from being made. The Board has and will
continue to use its business judgment and to exercise its fiduciary duties, and
continue to consider all reasonable acquisition proposals.
Finally,
the members of the Board made this decision with the knowledge that in doing so,
certain corporate governance organizations would recommend “withhold” votes on
them when they stood for reelection.
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
12/31/2009
of
$2.76
|
|
|
Balance
at September 30, 2009
|
|
|
|
3,694
|
|
|
$
|
6.82
|
|
|
|
|
|
|
|
Granted
|
|
|
|
690
|
|
|
|
2.87
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
|
(14
|
)
|
|
|
1.98
|
|
|
|
|
|
|
|
Options
cancelled/forfeited
|
|
|
|
(94
|
)
|
|
|
6.75
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
|
4,276
|
|
|
$
|
6.20
|
|
6.06
|
|
$
|
314
|
|
|
Vested
and expected to vest at December 31, 2009
|
|
|
|
3,974
|
|
|
$
|
6.36
|
|
5.97
|
|
$
|
301
|
|
|
Exercisable
at December 31, 2009
|
|
|
|
2,610
|
|
|
$
|
7.12
|
|
5.54
|
|
$
|
181
|
|
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table summarizes information about stock options outstanding and
exercisable at December 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
12/31/2009
of
$2.76
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
Closing
Price
at
12/31/2009
of
$2.76
|
|
|
$0.35
– 2.32
|
|
|
653
|
|
|
3.71
|
|
$
|
2.30
|
|
$
|
299
|
|
|
353
|
|
$
|
2.29
|
|
$
|
166
|
|
|
2.50
– 2.87
|
|
|
745
|
|
|
6.89
|
|
|
2.83
|
|
|
15
|
|
|
75
|
|
|
2.57
|
|
|
15
|
|
|
2.98
– 4.90
|
|
|
517
|
|
|
6.13
|
|
|
4.17
|
|
|
—
|
|
|
322
|
|
|
4.21
|
|
|
—
|
|
|
4.95
– 7.65
|
|
|
430
|
|
|
5.33
|
|
|
6.72
|
|
|
—
|
|
|
375
|
|
|
6.81
|
|
|
—
|
|
|
7.68
– 8.13
|
|
|
423
|
|
|
5.87
|
|
|
7.97
|
|
|
—
|
|
|
406
|
|
|
7.97
|
|
|
—
|
|
|
8.25
– 8.28
|
|
|
547
|
|
|
7.05
|
|
|
8.25
|
|
|
—
|
|
|
423
|
|
|
8.25
|
|
|
—
|
|
|
8.35
– 9.25
|
|
|
613
|
|
|
7.49
|
|
|
9.13
|
|
|
—
|
|
|
368
|
|
|
9.06
|
|
|
—
|
|
|
9.26
– 45.00
|
|
|
348
|
|
|
5.66
|
|
|
12.56
|
|
|
—
|
|
|
288
|
|
|
12.53
|
|
|
—
|
|
|
$0.35
– 45.00
|
|
|
4,276
|
|
|
6.06
|
|
$
|
6.20
|
|
$
|
314
|
|
|
2,610
|
|
$
|
7.12
|
|
$
|
181
|
|
The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $2.76 as of December 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 months ended December 31, 2009 and 2008 was
less than $0.1 million for both periods. As of December 31, 2009, total
unrecognized compensation costs related to non-vested stock options was $3.0
million, which is expected to be recognized as expense over a weighted-average
period of approximately 2.4 years. As of December 31, 2008, total unrecognized
compensation costs related to non-vested stock options was $5.9 million, which
is expected to be recognized as expense over a weighted-average period of
approximately 2.3 years.
Stock
Award Activity
Non-vested
stock awards are comprised of restricted stock awards and restricted stock
units. The following table summarizes the stock award activity (in thousands,
except per share data):
|
Non-vested
Stock Awards
|
|
|
|
RSAs
|
|
|
RSUs
|
|
|
Total
Number
of
Shares
Underlying
Awards
|
|
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
|
Non-vested
balance at September 30, 2009
|
|
|
|
90
|
|
|
588
|
|
|
678
|
|
|
$
|
2.48
|
|
|
Awarded
|
|
|
|
—
|
|
|
455
|
|
|
455
|
|
|
|
2.87
|
|
|
Vested/Released
|
|
|
|
—
|
|
|
(140
|
)*
|
|
(140
|
)*
|
|
|
2.32
|
|
|
Forfeited
|
|
|
|
—
|
|
|
(56
|
)
|
|
(56
|
)
|
|
|
2.38
|
|
|
Non-vested
balance at December 31, 2009
|
|
|
|
90
|
|
|
847
|
|
|
937
|
|
|
$
|
2.70
|
|
*The
RSUs released to employees require a two year holding period.
The
aggregate intrinsic value of unvested RSAs based upon the Company’s closing
price of $2.76 as of December 31, 2009 was $0.2 million. As of December 31,
2009, total unrecognized compensation costs related to unvested RSAs was less
$0.1 million which is expected to be recognized as expense over a weighted
average period of approximately 1 month.
On
January 27, 2010, the Company’s Board members were granted 90,000 shares of RSAs
for their annual service awarded under the Directors’ Plan. These grants are
excluded from the preceding table.
The
aggregate intrinsic value of RSUs based upon the Company’s closing price of
$2.76 as of December 31, 2009 was $2.3 million. As of December 31, 2009, total
unrecognized compensation costs related to unvested RSUs was $1.5 million which
is expected to be recognized as expense over a weighted average period of
approximately 3.0 years.
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company settles stock option exercises, RSAs and RSUs with newly issued common
shares.
Valuation
and Expense Information under SFAS 123(R)
On
October 1, 2005, the Company adopted a FASB standard, which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to the Company’s employees and directors including employee stock
options, RSAs, and RSUs based on estimated fair values. The following table
summarizes stock-based compensation expense related to employee stock options,
RSAs, and RSUs for the three months ended December 31, 2009 and 2008,
respectively, which was allocated as follows (in thousands):
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
$
|
162
|
|
|
$
|
134
|
|
|
|
|
Sales
and marketing
|
|
162
|
|
|
|
256
|
|
|
|
|
Research
and development
|
|
90
|
|
|
|
109
|
|
|
|
|
General
and administrative
|
|
475
|
|
|
|
466
|
|
|
|
|
Total
stock-based compensation expense
|
$
|
889
|
|
|
$
|
965
|
|
|
The
weighted-average estimated fair value of stock options granted during the three
months ended December 31, 2009 and 2008 was $1.44 and $1.18 per share,
respectively, using the Black-Scholes model with the following weighted-average
assumptions:
|
|
|
Three Months
Ended December
31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
Expected
lives in years
|
|
3.8
|
|
|
|
2.8
|
|
|
|
|
Risk
free interest rates
|
|
1.6
|
%
|
|
|
1.6
|
%
|
|
|
|
Volatility
|
|
68
|
%
|
|
|
62
|
%
|
|
|
|
Dividend
yield
|
|
0
|
%
|
|
|
0
|
%
|
|
The
fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model with the weighted-average assumptions for
volatility, expected term, and risk free interest rate. 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
the FASB standard. 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.
Stock-based
compensation expense recognized in the Condensed Consolidated Statement of
Operations for the three months ended December 31, 2009 and 2008 is based on
awards ultimately expected to vest and has been reduced for estimated
forfeitures. The FASB standard requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Our estimated forfeiture rate for the three months
ended December 31, 2009 and 2008 was based on our historical forfeiture
experience.
Accuracy
of Fair Value Estimates
The
Company uses available information including third-party analyses to assist in
developing the fair value assumptions based on a trinomial lattice valuation
technique used in the Black-Scholes model. The Company is responsible for
determining the assumptions used in estimating the fair value of share-based
payment awards.
Our
determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Company’s stock price as well
as assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to the Company’s expected stock
price volatility over the term of the
CHORDIANT
SOFTWARE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
awards,
and actual and projected employee stock option exercise behaviors. Because the
Company’s 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 a FASB and an SEC Staff
Accounting Bulletin standard 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
12—SEGMENT INFORMATION
Our
chief operating decision maker reviews financial information presented on a
consolidated basis, accompanied by desegregated information about revenues by
geographic regions for purposes of making operating decisions and assessing
financial performance. Accordingly, the Company has concluded that the Company
has one reportable segment.
The
following table summarizes license revenue by product emphasis (in
thousands):
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
License
revenue:
|
|
|
|
|
|
|
|
|
|
|
Enterprise
Foundation solutions
|
$
|
2,808
|
|
|
$
|
1,544
|
|
|
|
|
Marketing
Director solutions
|
|
332
|
|
|
|
2,381
|
|
|
|
|
Decision
Management solutions
|
|
4,292
|
|
|
|
4,016
|
|
|
|
|
Total
|
$
|
7,432
|
|
|
$
|
7,941
|
|
|
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 December 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
Service
revenue:
|
|
|
|
|
|
|
|
|
|
|
Enterprise
Foundation solutions
|
$
|
8,471
|
|
|
$
|
9,662
|
|
|
|
|
Marketing
Director solutions
|
|
2,254
|
|
|
|
2,951
|
|
|
|
|
Decision
Management solutions
|
|
4,067
|
|
|
|
2,823
|
|
|
|
|
Total
|
$
|
14,792
|
|
|
$
|
15,436
|
|
|
Foreign
revenues are based on the country in which the customer order is generated. The
following is a summary of total revenues by geographic area (in
thousands):
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
$
|
7,077
|
|
|
$
|
8,083
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
11,697
|
|
|
|
6,132
|
|
|
|
|
Germany
|
|
2,473
|
|
|
|
3,636
|
|
|
|
|
Other
EMEA
|
|
977
|
|
|
|
5,526
|
|
|
|
|
Total
EMEA
|
|
15,147
|
|
|
|
15,294
|
|
|
|
|
Total
|
$
|
22,224
|
|
|
$
|
23,377
|
|
|
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 property and equipment by geographic area
(in thousands):
|
|
|
|
December
31
2009
|
|
|
|
September
30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
$
|
1,164
|
|
|
$
|
1,313
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
308
|
|
|
|
343
|
|
|
|
|
Other
EMEA
|
|
166
|
|
|
|
194
|
|
|
|
|
Total
EMEA
|
|
474
|
|
|
|
537
|
|
|
|
|
Total
|
$
|
1,638
|
|
|
$
|
1,850
|
|
|
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
This
discussion and analysis should be read in conjunction with our Condensed
Consolidated Financial Statements and accompanying Notes included in this report
and the 2009 Audited Financial Statements and Notes thereto included in our
Annual Report on Form 10-K for the year ended September 30, 2009 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 2009 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 the 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, has been impacted and continues to be impacted
by the global economic recession. Unprecedented market conditions include
illiquid credit markets, volatile equity markets, and 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 adversely impacts our
customers and potential customers. These economic conditions have not shown
significant improvement 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 unfavorable 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 transactions
on our near term business is uncertain. Customers who have recently reorganized,
merged or face new regulations may delay or terminate their software purchasing
decisions, and 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.
For
the three months ended December 31, 2009, we recorded revenue of $22.2 million,
a decrease of $1.2 million or 5% from the three months ended December 31, 2008.
We incurred a net loss of $1.0 million and ended the quarter with over $52.3
million in cash, cash equivalents, and marketable securities as compared to
$49.9 million at September 30, 2009. We generated cash from operating activities
of $2.8 million.
Total
revenue for the three months ended December 31, 2009 increased $7.0 million or
46% from the three months ended September 30, 2009. The increase in license
revenue was $5.4 million, as we had a higher number of transactions at a higher
average price than for the comparable period. Service revenue increased $1.6
million for the three months ended December 31, 2009 as compared to the three
months ended September 31, 2009. The increase in service revenue was primarily
composed of increases of $1.3 million in consulting revenue, $0.1 million in
training revenue, and $0.3 million in support and maintenance revenue offset by
a decrease of less than $0.1 million in expense reimbursement
revenue.
Software
Industry Consolidation and Possible Increased Competition
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
of other software companies. During the quarter ended December 31, 2009, we
purchased 1.95 million shares of SWK Holding Corporation (formerly Kana
Software, Inc.) for approximately $1.7 million. These purchases were associated
with the attempted, but unsuccessful, acquisition of the Company.
The
enterprise software industry continues to undergo consolidation in sectors of
the software industry in which we operate. IBM, SAP, Oracle and Sun Microsystems
have made numerous acquisitions in the industry and Oracle has entered into an
agreement to acquire Sun Microsystems, subject to certain regulatory approvals.
While we do not believe that the companies acquired by IBM, SAP and Oracle have
been significant competitors of Chordiant in the past, these acquisitions may
indicate that we may face increased competition from larger and more established
entities in the future.
Financial
Trends
Backlog. As of December 31,
2009 and 2008, we had approximately $44.1 million and $55.6 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 yet 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
$11.5 million decline in total backlog over the past fiscal year is due to
declines of approximately $7.1 million, $0.2 million and $4.2 million in the
areas of software licenses, customer support contracts and professional services
consulting contracts, respectively. Backlog declined sequentially for six of the
past eight fiscal quarters but has increased in the two most recent quarters.
The declines in backlog are 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 impacted by recent foreign exchange rate
changes, as significant portions of the underlying balances are denominated in
Euros or in Pounds Sterling.
The
year over year 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 $16.0 million
levels achieved during the past twelve months, future losses will be incurred
unless operating expenses are further reduced.
With
respect to the year over year decline in the backlog of professional service
consulting contracts, as some customers recently delayed or canceled projects,
statements of work for professional services either expired unutilized or were
canceled. For the three months ended December 31, 2009 these items aggregated
$0.2 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
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 Enterprise Foundation products mature and
system integrators become more familiar with our products, our involvement with
implementations has diminished on some projects. If this trend continues to
evolve, certain agreements with customers may transition from a contract
accounting model to a more traditional revenue model whereby revenues are
recorded upon delivery.
Service Revenues. Service
revenues as a percentage of total revenues were 67% and 66% for the three months
ended December 31, 2009 and 2008, respectively. We have shifted our sales force
focus more towards our Decisioning Management solutions rather than our
Enterprise Foundation solutions due to the current economic climate. The
magnitude of professional services required to implement Decisioning Management
solutions is much lower and performed in a shorter period of time than our
Enterprise Foundation solutions, and as such, we expect our professional service
revenue to decrease as we sell more of our Decisioning Management solutions.
While the composition of revenue will continue to fluctuate on a quarterly
basis, we expect that service revenues will represent between 60% and 75% of our
total annual revenues in the foreseeable future.
Revenues from International
Customers versus North America. For all periods presented, revenues were
principally derived from customer accounts in North America and Europe. For the
three months ended December 31, 2009 and 2008, international revenues were $15.1
million and $15.3 million, or approximately 68% and 65% of our total revenues,
respectively. In future periods, we plan to pursue revenue opportunities in
several emerging markets that may include Eastern Europe, Russia, China, and
India. We believe that international revenue may represent a larger portion of
our total revenues if our expansion into emerging markets is
successful.
For
the three months ended December 31, 2009 and 2008, North America revenues were
$7.1 million and $8.1 million, or approximately 32% and 35%, respectively of our
total revenues. We believe North America revenues will continue to represent a
significant portion of our total revenues in the foreseeable
future.
Gross Margins. Management
focuses on license and service gross margin in evaluating our financial
condition and operating performance. Gross margins on license revenues were 98%
and 99% for the three months ended December 31, 2009 and 2008, respectively. 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 Foundation products have higher associated third
party royalty expense than the Marketing Director and Decision Management
products.
Gross
margins on service revenues were 63% and 57% for the three months ended December
31, 2009 and 2008, respectively. Generally gross margins improve as support and
maintenance revenues represent a higher proportion of total services revenues.
We expect that gross margins on service revenues will range between 50% and 65%
in the foreseeable future.
Reductions in Workforce. In
October 2009, we initiated a restructuring plan, the 2010 Restructuring,
intended to consolidate and reduce the size of our management team. This
resulted in a reduction of headcount. As a result of the cost-cutting measure,
we recorded a pre-tax cash restructuring charge in the first quarter of fiscal
year 2010, of approximately $0.1 million for severance costs.
In
October 2008, we initiated a restructuring plan, the 2009 Restructuring,
intended to align our 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 December 31, 2008, all payments had been
made.
In
May 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 ultimately 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. In 2007, we entered into 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 us, further
adjustments to restructuring expense might be required.
Income Taxes. During the
period ended December 31, 2009, we recognized $0.5 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 $1.7 million of non-cash deferred tax
expense during fiscal year 2010. 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 and Assumptions
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, or GAAP,
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.
On
an on-going basis, we evaluate the estimates, including those related to our
allowance for doubtful accounts, valuation of stock-based compensation,
valuation of goodwill and intangible assets, valuation of deferred tax assets,
restructuring expenses, contingencies, vendor specific objective evidence, or
VSOE, of fair value in multiple element arrangements and the estimates
associated with the percentage-of-completion method of accounting for certain of
our revenue contracts. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and the recognition of revenue and
expenses that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe the following critical accounting judgments and estimates are used in
the preparation of our Condensed Consolidated Financial Statements:
|
|
•
|
Revenue
recognition, including estimating the total estimated time required to
complete sales arrangements involving significant implementation or
customization essential to the functionality of our
products;
|
|
|
•
|
Estimating
valuation allowances and accrued liabilities, specifically the allowance
for doubtful accounts, and assessment of the probability of the outcome of
our current litigation;
|
|
|
•
|
Stock-based
compensation expense;
|
|
|
•
|
Accounting
for income taxes;
|
|
|
•
|
Valuation
of long-lived and intangible assets and
goodwill;
|
|
|
•
|
Restructuring
expenses; and
|
|
|
•
|
Determining
functional currencies for the purposes of consolidating our international
operations.
|
Revenue Recognition. We
derive revenues from licenses of our software and related services, which
include assistance in implementation, customization and integration,
post-contract customer support or PCS, 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.
For
arrangements with multiple elements, we recognize 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 we charge 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, we
account for the delivered elements, principally the license portion, based upon
the “residual method” as prescribed by relevant accounting guidance on software
revenue recognition. 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 relevant accounting
guidance on software revenue recognition. 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.
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 the guidance on software revenue
recognition are met. Expenses associated with these co-development arrangements
are normally expensed as incurred as they are considered to be research and
development costs that do not qualify for capitalization or deferral. There have
been no such arrangements during the periods presented.
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 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 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, and the residual is allocated to the delivered
elements.
We
recognize revenue for PCS 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 collectability 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 $23.1 million (including long-term accounts
receivable of $0.9 million) with an allowance for doubtful accounts of $0.2
million as of December 31, 2009. Our gross accounts receivable balance was $21.1
million with an allowance for doubtful accounts of $0.8 million as of December
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, we have
reviewed accounts receivable and have recorded allowances as deemed
necessary.
Probability of the outcome of our
current litigation. As discussed in Note 9, “Litigation” in Notes to
Condensed Consolidated Financial Statements, the Company is subject to various
legal proceedings and claims that arise in the ordinary course of business. In
accordance with GAAP, we record a liability when it is probable that a loss has
been incurred and the
amount
is reasonably estimable. There is significant judgment required in both the
probability determination and as to whether an exposure can be reasonably
estimated. In management’s opinion, we do not have a potential liability related
to any current legal proceedings and claims that would individually or in the
aggregate materially adversely affect its financial condition or operating
results. However, the outcomes of legal proceedings and claims brought against
us are subject to significant uncertainty. Should we fail to prevail in any of
these legal matters or should several of these legal matters be resolved against
us in the same reporting period, the operating results of a particular reporting
period could be materially adversely affected.
Stock-based Compensation Expense.
We estimate the fair value of share-based payment awards on the date of
grant using the Black-Scholes model. The determination of the fair value of
shared-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.
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
the FASB standard on stock compensation. 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. The standard on stock compensation
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 future periods, the
compensation expense that we record may differ significantly from what we have
recorded in the current period. The estimated value of a stock option is most
sensitive to the volatility assumption. Based on the December 31, 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%
and less than 1% change, respectively, in the estimated value of the option
being valued using the Black-Scholes model. See Note 11 to the Condensed
Consolidated Financial Statements for detailed information about stock-based
compensation.
Accounting for Income Taxes.
As part of the process of preparing our Condensed Consolidated Financial
Statements we 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 Consolidated Statement of
Operations.
At
December 31, 2009, we have $74.3 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 we will have future taxable income
sufficient to realize $4.7 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) $10.0 million of the valuation allowance on our DTAs related to the
United Kingdom, of which $9.5 million was recognized as an offsetting reduction
to goodwill (representing pre-acquisition NOLs) and $0.5 million was recognized
as a credit (reduction) to the provision for income taxes. In 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 and capital allowances, 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 December 31, 2009 and
September 30, 2009, the balance of the deferred tax valuation allowance was
approximately $69.6 million.
Valuation of Long-lived and
Intangible Assets and Goodwill. We assess the impairment of identifiable
intangibles and long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Furthermore, we assess
the impairment of goodwill annually. Factors we consider important which could
trigger an impairment review include the following:
|
|
•
|
Significant
underperformance relative to expected historical or projected future
operating results;
|
|
|
•
|
Significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business;
|
|
|
•
|
Significant
negative industry or economic
trends;
|
|
|
•
|
Significant
decline in our stock price for a sustained
period;
|
|
|
•
|
Market
capitalization declines relative to net book value;
and
|
|
|
•
|
A
current expectation that, more likely than not, a long-lived asset will be
sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
|
When
one or more of the above indicators of impairment occurs, we estimate the value
of long-lived assets and intangible assets to determine whether there is
impairment. We measure any impairment based on the projected discounted cash
flow method, which requires us to make several estimates including the estimated
cash flows associated with the asset, the period over which these cash flows
will be generated and a discount rate commensurate with the risk inherent in our
current business model. These estimates are subjective and if we made different
estimates, it could materially impact the estimated fair value of these assets
and the conclusions we reached regarding impairment. 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 no impairment charge was necessary. At December 31, 2009, the
market capitalization of the Company exceeded the book value of the
Company.
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, 2009 and performed Step 1 of the
goodwill impairment analysis required by a FASB standard on “Goodwill and Other
Intangible Assets”, and concluded that goodwill was not impaired as of September
30, 2009 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
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.” 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
losses are included as part of Accumulated Other Comprehensive Income within our
Condensed Consolidated Balance Sheets for all periods presented.
The
magnitude of foreign currency 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, the Canadian Dollar, and the Chinese Yuan. Any future
translation gains or losses could be significantly larger or smaller than those
reported in previous periods. At December 31, 2009, approximately $21.2 million
of our cash and cash equivalents were held by our subsidiaries outside of the
United States as compared to $36.6 million at December 31, 2008.
Recent
Accounting Pronouncements
See
Note 2 to the Condensed Consolidated Financial Statements for detailed
information regarding status of new accounting standards.
IFRS
International
Financial Reporting Standards (IFRS) is a comprehensive series of accounting
standards published by the International Accounting Standards Board (IASB). In
November 2008, the SEC issued for comment a proposed roadmap outlining several
milestones that, if achieved, could lead to mandatory adoption of IFRS by U.S.
issuers starting in 2014. Implementation of IFRS reporting would be in staged
transition periods based upon our filing status. Based upon the current filing
status, we would begin IFRS filing for the fiscal year ending September 30,
2017. The SEC is expected to make a determination in 2011 regarding the
mandatory adoption of IFRS. We are currently assessing the impact that this
potential change would have on our Condensed Consolidated Financial Statements,
and we will continue to monitor the development of the potential implementation
of IFRS.
Results
of Operations
The
following table sets forth, in dollars (in thousands) and as a percentage of
total revenues, unaudited Condensed Consolidated Statements of Operations data
for the periods indicated. This information has been derived from the Condensed
Consolidated Financial Statements included elsewhere in this Quarterly
Report.
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
7,432
|
|
|
|
33
|
%
|
|
$
|
7,941
|
|
|
|
34
|
%
|
|
|
Service
|
|
|
14,792
|
|
|
|
67
|
|
|
|
15,436
|
|
|
|
66
|
|
|
|
Total
revenues
|
|
|
22,224
|
|
|
|
100
|
|
|
|
23,377
|
|
|
|
100
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
134
|
|
|
|
1
|
|
|
|
98
|
|
|
|
—
|
|
|
|
Service
|
|
|
5,545
|
|
|
|
25
|
|
|
|
6,686
|
|
|
|
29
|
|
|
|
Amortization
of intangible assets
|
|
|
303
|
|
|
|
1
|
|
|
|
303
|
|
|
|
1
|
|
|
|
Total
cost of revenues
|
|
|
5,982
|
|
|
|
27
|
|
|
|
7,087
|
|
|
|
30
|
|
|
|
Gross
profit
|
|
|
16,242
|
|
|
|
73
|
|
|
|
16,290
|
|
|
|
70
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
6,657
|
|
|
|
30
|
|
|
|
7,780
|
|
|
|
33
|
|
|
|
Research
and development
|
|
|
5,354
|
|
|
|
24
|
|
|
|
5,259
|
|
|
|
23
|
|
|
|
General
and administrative
|
|
|
4,504
|
|
|
|
20
|
|
|
|
4,402
|
|
|
|
19
|
|
|
|
Restructuring
expense
|
|
|
144
|
|
|
|
1
|
|
|
|
784
|
|
|
|
3
|
|
|
|
Total
operating expenses
|
|
|
16,659
|
|
|
|
75
|
|
|
|
18,225
|
|
|
|
78
|
|
|
|
Loss
from operations
|
|
|
(417
|
)
|
|
|
(2
|
)
|
|
|
(1,935
|
)
|
|
|
(8
|
)
|
|
|
Interest
income, net
|
|
|
29
|
|
|
|
—
|
|
|
|
292
|
|
|
|
1
|
|
|
|
Other
income (expense) , net
|
|
|
(90
|
)
|
|
|
—
|
|
|
|
685
|
|
|
|
3
|
|
|
|
Loss
before income taxes
|
|
|
(478
|
)
|
|
|
(2
|
)
|
|
|
(958
|
)
|
|
|
(4
|
)
|
|
|
Provision
for income taxes
|
|
|
494
|
|
|
|
2
|
|
|
|
1,711
|
|
|
|
7
|
|
|
|
Net
loss
|
|
$
|
(972
|
)
|
|
|
(4
|
)%
|
|
$
|
(2,669
|
)
|
|
|
(11
|
)%
|
|
Comparison
of the Three Months Ended December 31, 2009 and 2008 (Unaudited)
Revenues
The following
summarizes the components of our total revenues:
License
Revenue
The
increase or decrease of license revenue occurring within our 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 generally
recognized under the 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 the progress of work performed
relative to the project length of customer contracts and the dollar value of
such contracts. The following table sets forth our license revenue by product
emphasis for the three months ended December 31, 2009 and 2008 (in thousands,
except percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
License
Revenue:
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
Enterprise
Foundation solutions
|
|
$
|
2,808
|
|
$
|
1,544
|
|
$
|
1,264
|
|
|
82
|
%
|
|
|
|
Marketing
Director solutions
|
|
|
332
|
|
|
2,381
|
|
|
(2,049
|
)
|
|
(86
|
)
|
|
|
|
Decision
Management solutions
|
|
|
4,292
|
|
|
4,016
|
|
|
276
|
|
|
7
|
|
|
|
|
Total
license revenue
|
|
$
|
7,432
|
|
$
|
7,941
|
|
$
|
(509
|
)
|
|
(6
|
)%
|
|
Total
license revenue decreased by $0.5 million or 6% for the three months ended
December 31, 2009 as compared to the same period of the prior year. We had a
similar number of transactions in the comparable periods. Due to the current
economic climate, we have shifted our near term focus of our sales staff towards
Decision Management solutions rather than Enterprise Foundation solutions.
However, our Decision Management solutions generally generate smaller revenue
per transaction than our Enterprise Foundation solutions. Included in license
revenue for the three months ended December 31, 2009 were $1.6 million of
revenues associated with additional seat orders placed by an existing Enterprise
Foundation customer. Included in license revenue for the three months ended
December 31, 2008 is $4.2 million of revenue related to Vodafone. These Vodafone
revenues were associated with the Marketing Director and Decision Management
solutions. License revenue as a percentage of total revenue was 33% and 34% for
the three months ended December 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 our 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 months ended December 31, 2009 and
2008 (in thousands, except percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
Service
Revenue:
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
Enterprise
Foundation solutions
|
|
$
|
8,471
|
|
$
|
9,662
|
|
$
|
(1,191
|
)
|
|
(12
|
)%
|
|
|
|
Marketing
Director solutions
|
|
|
2,254
|
|
|
2,951
|
|
|
(697
|
)
|
|
(24
|
)
|
|
|
|
Decision
Management solutions
|
|
|
4,067
|
|
|
2,823
|
|
|
1,244
|
|
|
44
|
|
|
|
|
Total
service revenue
|
|
$
|
14,792
|
|
$
|
15,436
|
|
$
|
(644
|
)
|
|
(4
|
)%
|
|
Total
service revenue decreased $0.6 million or 4% for the three months ended December
31, 2009 as compared to the same period of the prior year. The change in service
revenue was primarily composed of decreases of $0.8 million in consulting
revenue and $0.4 million in expense reimbursement revenue, offset by increases
of $0.5 million in support and maintenance revenue and $0.1 million in training
revenue. The decrease in consulting revenue is directly related to the decrease
in license revenues in previous periods, since the majority of our customers use
some form of our consulting services in connection with their projects. The
timing of recognizing service revenue can vary from quarter to quarter depending
on the project. We derived more of our license revenues from Decision Management
solutions rather than Enterprise Foundation solutions due to our shift in focus
of our sales staff. This has resulted in an increase of service revenue for our
Decision Management solutions. Service revenue as percentage of total revenue
was 67% and 66% for the three months ended December 31, 2009 and 2008,
respectively.
See
the Overview and Financial Trend section for further analysis of
revenues.
Cost
of Revenues
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 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 months ended December 31, 2009 and 2008 (in thousands, except
percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
Cost
of license revenue
|
|
$
|
134
|
|
|
$
|
98
|
|
|
$
|
36
|
|
37
|
%
|
|
|
|
Percentage
of total revenue
|
|
|
1
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
Cost
of license revenue increased by less than $0.1 million or 37% for the three
months ended December 31, 2009 as compared to the same period of the prior year.
The change is from increase in our royalty expense and the amortization of our
porting capitalized software costs.
Service
Cost
of service revenues consists primarily of personnel, third party consulting,
facility, and travel costs incurred to provide consulting implementation and
integration, consulting customization, training, and PCS. The following table
sets forth our cost of service revenues for the three months ended December 31,
2009 and 2008 (in thousands, except percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
Cost
of service revenue
|
|
$
|
5,545
|
|
|
$
|
6,686
|
|
|
$
|
(1,141
|
)
|
(17
|
)%
|
|
|
|
Percentage
of total revenue
|
|
|
25
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
Cost
of service revenue decreased $1.1 million or 17% for the three months ended
December 31, 2009 as compared to the same period of the prior year. The change
was primarily due to decreases of $0.5 million in consulting cost, $0.2 million
in sales and marketing programs, and $0.4 million in travel expense. We utilized
fewer third party consultants because of the decrease in service
revenue.
Gross
Margins
See
the Financial Trend section for our analysis of gross margins.
Amortization of Intangible
Assets
Amortization
of intangible assets cost consists of the amortization of amounts paid for
developed technologies, customer lists and trade-names resulting from business
acquisitions. The following table sets forth our costs associated with
amortization of intangible assets for the three months ended December 31, 2009
and 2008 (in thousands, except percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
Amortization
of intangible assets
|
|
$
|
303
|
|
|
$
|
303
|
|
|
$
|
—
|
|
—
|
%
|
|
|
|
Percentage
of total revenues
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
These
costs are solely related to the $6.1 million of intangible assets associated
with the acquisition of KiQ in December 2004. As of December 31, 2009, the
intangible assets have been fully amortized.
Operating
Expenses
Sales and
Marketing
Sales
and marketing expense is attributed to activities associated with selling,
promoting and advertising our products, product demonstrations and customer
sales calls. These costs consist primarily of employee compensation and
benefits, commissions and bonuses, facilities, travel expenses and promotional
and advertising expenses. The following table sets forth our sales and marketing
expenses for the three months ended December 31, 2009 and 2008 (in thousands,
except percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
Sales
and marketing expense
|
|
$
|
6,657
|
|
|
$
|
7,780
|
|
|
$
|
(1,123
|
)
|
(14
|
)%
|
|
|
|
Percentage
of total revenues
|
|
|
30
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
Sales
and marketing expense decreased by $1.1 million or 14% for the three months
ended December 31, 2009 as compared to the same period of the prior year. The
change was primarily from decreases of $0.6 million in employee related costs,
$0.1 million in recruiting expense, $0.3 million in consultant expense, and $0.2
million in travel expense offset by an increase of $0.1 million in sales and
marketing programs. The decrease in employee related costs is primarily from a
21% reduction in average headcount for each quarter. See Note 5 to the Condensed
Consolidated Financial Statements for more details regarding the reduction in
headcount.
Research and
Development
Research
and development expense results from the activities associated with the
development of new products, enhancements of existing products and quality
assurance activities. These costs consist primarily of employee compensation and
benefits, facilities, the cost of software and development tools, equipment and
consulting costs, including costs for offshore consultants. The following table
sets forth our research and development expenses for the three months ended
December 31, 2009 and 2008 (in thousands, except percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
Research
and development expense
|
|
$
|
5,354
|
|
|
$
|
5,259
|
|
|
$
|
95
|
|
2
|
%
|
|
|
|
Percentage
of total revenues
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
Research
and development expense increased by $0.1 million or 2% for the three months
ended December 31, 2009 as compared to the same period of the prior year. The change was primarily
from increases of $0.3 million in employee related costs, $0.1 million in
facility expense, and $0.1 million in travel expense offset by decreases of $0.3
million in consultant costs and $0.1 million in recruiting expense. We continue
to reduce the use of consultants for our research and development.
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 and benefits, bonuses, stock compensation expense, 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 months ended December 31, 2009 and 2008
(in thousands, except percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
General
and administrative expense
|
|
$
|
4,504
|
|
|
$
|
4,402
|
|
|
$
|
102
|
|
2
|
%
|
|
|
|
Percentage
of total revenues
|
|
|
20
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
General
and administrative expense increased by $0.1 million or 2% for the three months
ended December 31, 2009 as compared to the same period of the prior year. The
change was primarily from increases of $0.3 million in professional services
offset by decrease of $0.2 million in bad debt expense. The increase in
professional services is primarily due to accounting, tax, legal and outside
service costs associated with our various merger and acquisition activities. The
decrease in bad debt is primarily due to the resolution of a disputed receivable
with one of our customers.
Restructuring
Expense
In
October 2009, we initiated a restructuring plan, the 2010 Restructuring,
intended to consolidate and reduce the size of our management team. This
resulted in a reduction of headcount. As a result of the cost-cutting measure,
we recorded a pre-tax cash restructuring charge in the first quarter of fiscal
year 2010, of approximately $0.1 million for severance costs.
In
October 2008, we initiated a restructuring plan, the 2009 Restructuring,
intended to align our 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 December 31, 2008, all payments had been
made.
In
May 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 ultimately 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 months ended December 31, 2009 and 2008 (in
thousands):
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
Cost
of revenues - service
|
$
|
162
|
|
|
$
|
134
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
162
|
|
|
|
256
|
|
|
|
|
Research
and development
|
|
90
|
|
|
|
109
|
|
|
|
|
General
and administrative
|
|
475
|
|
|
|
466
|
|
|
|
|
Total
operating expenses
|
|
727
|
|
|
|
831
|
|
|
|
|
Total
stock-based compensation expense
|
$
|
889
|
|
|
$
|
965
|
|
|
For
the three months ended December 31, 2009, the aggregate stock-based compensation
cost included in cost of revenues and in operating expenses was $0.9 million and
primarily related to $0.7 million associated with employee stock options, $0.1
million associated with restricted stock awards and $0.1 million associated with
restricted stock units.
For
the three months ended December 31, 2008, the aggregate stock-based compensation
cost included in cost of revenues and in operating expenses was $1.0 million and
primarily related to $0.8 million associated with employee stock options, $0.2
million associated with restricted stock awards, and less than $0.1 million
associated with restricted stock units.
Interest
Income, Net
Interest
income, net, consists primarily of interest income generated from our cash, cash
equivalents, restricted cash and marketable securities, offset by interest
expense incurred in connection with letters of credit and interest charges
imputed under FASB guidance for restructuring accruals. The following table sets
forth our interest income, net for the three months ended December 31, 2009 and
2008 (in thousands, except percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
Interest
income, net
|
|
$
|
29
|
|
|
$
|
292
|
|
|
$
|
(263
|
)
|
(90
|
)%
|
|
|
|
Percentage
of total revenues
|
|
|
—
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
Interest
income, net decreased by $0.3 million or 90% for the three months ended December
31, 2009 as compared to the same period of the prior year. The change is
primarily from the decrease of interest income earned at our foreign
entities.
Other
Income (Expense), Net
Other
income (expense), net is primarily attributed to foreign currency transaction
gains or losses and re-measurement of our short-term intercompany balances
between the U.S. and our foreign denominated subsidiaries. The following table
sets forth our other income, net for the three months ended December 31, 2009
and 2008 (in thousands, except percentages):
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
|
|
|
|
Other
income (expense), net
|
|
$
|
(90
|
)
|
|
$
|
685
|
|
|
$
|
(775
|
)
|
(113
|
)%
|
|
|
|
Percentage
of total revenues
|
|
|
—
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
Other
income decreased by $0.8 million or 113% for the three months ended December 31,
2009 as compared to the same period of the prior year. The change is primarily
due to the re-measurement of our short-term intercompany balances resulting from
changes in foreign exchange rates.
Provision
for Income Taxes
Our
provision for income taxes was $0.5 million and $1.7 million for the three
months ended December 31, 2009 and 2008, respectively. The $1.2 million decrease
in income taxes is primarily due to a decrease in non-cash tax expense in our UK
subsidiary and a decrease in unrecoverable withholding tax payments related to
sales transactions in India and Turkey compared to three months ended December
31 2008.
At
December 31, 2009, we have $74.3 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 we will have future taxable income
sufficient to realize $4.7 million of tax benefits from our deferred tax assets,
which consist of that portion of our net deferred tax assets attributable to our
net operating losses (NOLs) residing in the United Kingdom. On September 30,
2008, we had released (eliminated) $10.0 million of the valuation allowance on
our DTAs related to the United Kingdom, of which $9.5 million was recognized as
an offsetting reduction to goodwill (representing pre-acquisition NOLs) and $0.5
million was recognized as a credit (reduction) to the provision for income
taxes. In 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 and capital
allowances, 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 December 31,
2009 and September 30, 2009, the balance of the deferred tax valuation allowance
was approximately $69.6 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.
For
the three months ended December 31, 2009, we used approximately $1.7 million to
purchase 1.95 million shares of SWK Holding Corporation (formerly Kana Software,
Inc.). While these shares are publicly traded, the trading volumes are low and
our ability to liquidate the shares may be unpredictable. Additionally, we
incurred professional service costs associated with our various merger and
acquisition related activities in the quarter ended December 31,
2009.
We
generated cash from operating and financing activities and used cash in
investing activities. It is anticipated 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.
Due
to the current global economic recession, maintaining our cash balances at their
current levels will be highly dependent upon our ability to enter into new
license and service agreements with customers and the payment terms associated
with these agreements. Historically we have been able to negotiate payment terms
that were favorable to us. In the current economic environment we may not be as
successful in negotiating payments terms that are as favorable as in the past.
If bookings do not meet our expectations, or we are not able to negotiate
favorable payment terms, we would anticipate a decrease in cash and cash
equivalents in the near term.
We
believe that the effects of our strategic actions implemented to improve revenue
as well as to control costs will be adequate to reduce the near term level of
cash used by operations, which, when considered with 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 utilize cash resources to fund acquisitions, purchase
minority ownership interests in other companies, or fund 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.
Operating
Activities
Cash
provided by operating activities was $2.8 million during the three months ended
December 31, 2009, 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, non-cash provision for income taxes , and the
provision for doubtful accounts) aggregating approximately $2.1 million and the
net cash change in assets and liabilities of approximately $1.7 million. This
net cash change in account balances is primarily from deferred revenue of $3.2
million, accrued expenses, other liabilities—non-current and restructuring
accruals of $2.9 million, accounts payable of $0.8 million, prepaid expenses and
other current assets of $0.3 million, and other assets of less than $0.1 million
offset by the change of $5.5 million in accounts receivable. The change in
accounts receivable and deferred revenue is primarily due to the billing of
customers near the end of the period for maintenance renewals for future
periods.
Cash
provided by operating activities was $2.6 million during the three months ended
December 31, 2008, which consisted primarily of our net loss of $2.7 million
adjusted for non-cash items (primarily depreciation and amortization, non-cash
stock-based compensation expense, non-cash provision for income taxes , and the
provision for doubtful accounts) aggregating approximately $3.2 million and the
net cash change in assets and liabilities of approximately $2.1 million. This
net cash change in account balances is primarily from deferred revenue of $0.9
million, accounts receivable of $2.7 million, and prepaid expenses and other
current assets of $1.2 million, offset by net cash changes in account balance in
other assets of $0.1 million, accounts payable of $2.4 million, and $0.2 million
in accrued expenses, other liabilities—non-current and restructuring. The change
in accounts receivable is primarily due to receivables collected at a slower
rate than billed. The change in accounts payable is primarily due to our program
to cut expenses.
Investing
Activities
Cash
used for investing activities was $1.8 million during the three months ended
December 31, 2009. The cash used was primarily from the purchase of $1.7 million
in marketable securities of SWK Holding Corporation (formerly Kana Software,
Inc.), which are classified as available for sale, the purchase of $0.1 million
of property and equipment and the capitalization of less than $0.1 million of
software development costs associated with the porting of an existing product to
a new platform. The property and equipment purchases were primarily computer
equipment and software used in day-to-day operations. As computer equipment
continues to age, we expect that we will need to increase
equipment
purchases
in some future period. Additionally, we may use cash to fund acquisitions,
purchase minority ownership interests in other companies, or fund investments in
other businesses, technologies, or product lines.
Cash
used for investing activities was $0.2 million during the three months ended
December 31, 2008. The cash used was primarily from the purchase of $0.2 million
of property and equipment and the capitalization of less than $0.1 million of
software development costs associated with the porting of an existing product to
a new platform. The property and equipment purchases were primarily computer
equipment and software used in day-to-day operations.
We
have no material commitments for capital expenditures. Expenditures in the next
24 months may increase as the average age of laptops and servers has
increased.
Financing
Activities
Cash
provided by financing activities was less than $0.1 million during the three
months ended December 31, 2009. The cash provided was related to proceeds from
stock option exercises. The majority of stock options outstanding have strike
prices that exceed the current market value, accordingly we do not anticipate
significant proceeds from stock option exercises in the near term.
Cash
provided by financing activities was less than $0.1 million during the three
months ended December 31, 2008. The cash provided was related to proceeds from
stock option exercises. As long as the market value of the Company’s common
stock remains below the exercise price for the majority of the outstanding
exercise price for the majority of outstanding stock options, significant
proceeds from stock option exercised are not expected.
Revolving
Line of Credit
See
Note 7 to the Condensed Consolidated Financial Statements for detailed
information regarding our existing revolving line of credit. We may consider
other bank borrowing options which we believe are commercially available to us.
Such facilities generally allow for higher borrowing limits based on a
percentage of annual recurring revenues.
Contractual
Obligations
Ness
In
2003, we entered into an agreement with Ness Technologies Inc., Ness USA, Inc.
(formerly Ness Global Services, Inc.) and Ness Technologies India, Ltd.
(collectively, “Ness”) and in January 2009, we extended the Ness agreement
through December 31, 2011. Pursuant to the Ness agreement, 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,
product development services and certain other identified technical and
consulting services (collectively, the “Services”). Under the terms of the Ness
agreement, we pay for services rendered on a monthly fee basis and reimbursement
of approved out of-pocket expenses. If we had terminated the Ness agreement for
convenience prior to December 31, 2009, we would have been required to pay a
termination fee no greater than $0.5 million, however, this cancellation penalty
lapsed at December 31, 2009. We also had guaranteed certain equipment lease
obligations of Ness for equipment acquired by Ness to be used in performance of
the Services, either through leasing arrangements or direct cash purchases, for
which we were obligated under the agreement to reimburse Ness. In 2006, Ness
entered into a 36 month equipment lease agreement with IBM India and, in
connection with the lease agreement we had an outstanding standby letter of
credit to guarantee Ness’ financial commitments under the lease. During the
quarter ended June 30, 2009, the lease expired and we no longer have an
obligation to reimburse Ness.
Leases
Operating
lease obligations in the table below include approximately $0.7 million for our
Boston, Massachusetts facility operating lease commitment that is included in
Restructuring Expense. As of December 31, 2009, we had $0.3 million in sublease
income contractually committed for future periods relating to this facility. See
Notes 5 and 8 to the Condensed Consolidated Financial Statements for further
discussion.
We
have asset retirement obligations, associated with commitments to return
property subject to operating leases to original condition upon lease
termination. As of December 31, 2009, we estimate that approximately $0.3
million will be required to fulfill these obligations.
The
following table presents certain payments due under contractual obligations as
of December 31, 2009 based on fiscal years (in thousands):
|
|
|
Payments
Due By Period
|
|
|
|
|
|
Total
|
|
|
|
Due
in
2010
|
|
|
|
Due
in
2011-2012
|
|
|
|
Due
in
2013-2014
|
|
|
|
|
Operating
lease obligations
|
$
|
10,261
|
|
|
$
|
2,684
|
|
|
$
|
5,195
|
|
|
$
|
2,382
|
|
|
|
|
Asset
retirement obligations
|
|
317
|
|
|
|
—
|
|
|
|
317
|
|
|
|
—
|
|
|
|
|
Total
|
$
|
10,578
|
|
|
$
|
2,684
|
|
|
$
|
5,512
|
|
|
$
|
2,382
|
|
|
As
of December 31, 2009, we had $1.1 million of gross unrecognized tax benefits. As
of December 31, 2009, we cannot make a reasonably reliable estimate of the
period in which these liabilities may be settled with the respective tax
authorities, as such they are excluded from the above table. See Note 10 to the
Condensed Consolidated Financial Statements for additional
information.
Indemnification
See
Note 8 to the Condensed Consolidated Financial Statements for detailed
information regarding our indemnifications.
Off
Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
We
are exposed to the impact of interest rate changes, equity volatility and
foreign currency fluctuations.
Interest Rate Risk. The
primary objective of our investment activities is to preserve principal while at
the same time maximizing yields without significantly increasing risk. To
achieve this objective, we primarily invested in money market accounts and
short-term certificates of deposit. Due to the nature of these investments, the
Company did not have a material interest rate risk at September 30, 2009 and
December 31, 2009.
Equity Price Risk. We are
exposed to equity price risk as we hold marketable securities, which had an
estimated fair value of $1.7 million. These marketable securities may be subject
to significant fluctuations in fair value due to the volatility of the stock
market. Using a hypothetical reduction of 10 percent in the stock price of these
marketable securities, the fair value of our marketable securities would
decrease by approximately $0.2 million as of December 31, 2009.
Foreign Currency Risk.
International revenues accounted for approximately 68% of total revenues for
three months ended December 31, 2009. International revenues accounted for
approximately 65% of total revenues for the year ended December 31, 2008. The
Company’s international operations have increased our exposure to foreign
currency fluctuations. Revenues and related expense generated from our
international subsidiaries are generally denominated in the functional
currencies of the local countries. Primary currencies include the United Kingdom
Pound Sterling, the Euro, the Canadian Dollar, and the Chinese Yuan. The
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 currency 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
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 three months ended December 31, 2009 and the
fiscal year ended September 30, 2009, we recorded net foreign currency
transaction loss of $0.1 million and less than $0.1 million,
respectively.
Item 4. Controls and Procedures.
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 (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934) 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
Item 1. Legal Proceedings.
See
Note 9 to the Condensed Consolidated Financial Statements in Part 1, Item 1 of
this Form 10-Q for a description of our legal proceedings.
Item
1A.
The
Company has marked with an asterisk (*) those risk factors that
reflect substantive changes from the risk factors included in the Company’s Form
10-K filed with the Securities and Exchange Commission for the fiscal
year ended September 30, 2009.
We
may experience a shortfall in bookings, revenue, earnings, cash flow or other
financial metrics, 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:
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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;
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Our
ability to close new license
transactions;
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Size
and timing of individual license
transactions;
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Delay,
deferral or termination of customer implementations of our
products;
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Lengthening
of our sales cycle;
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Efficiently
utilizing our global services organization, direct sales force and
indirect distribution channels;
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Our
ability to develop and market new
products;
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Timing
of new product introductions and product
enhancements;
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Mix
of products licensed and services
sold;
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Activities
of and acquisitions by our
competitors;
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Product
and price competition; and
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Our
ability to control our costs.
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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
backlog has declined over the past two years, which will adversely affect
revenues and could result in losses in future periods, and our known backlog of
business may not result in revenue.
We
define backlog as contractual commitments by our customers through purchase
orders or contracts. Backlog includes 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, deferred revenue from
customer support contracts, and deferred consulting and education orders for
services not yet completed or delivered.
Prior
to the most recent two fiscal quarters, when backlog increased, backlog had
declined sequentially over each of the prior six fiscal quarters due to lower
than expected bookings. In the aggregate, backlog declined significantly over
the past fiscal year. The decline in backlog is primarily due to revenue on
previously signed transactions being recognized at a faster pace than new
transactions were 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 $16.0 million levels achieved during
the past twelve months, future losses would be incurred unless operating
expenses are reduced.
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. For the three
months ended December 31, 2009 these items defaulted aggregated $0.2 million and
were removed from backlog at the date of the expiration or
cancellation
Geopolitical
concerns could make the closing of license transactions with new and existing
customers difficult.
Our
revenues may further decrease in fiscal year 2010 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 expectation 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 service and maintenance revenue
opportunities, on which we also depend.
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.
Our primary products have a long
sales and implementation cycle, which makes it difficult to predict our
quarterly and annual results and may cause our operating results to vary
significantly from period to period.
The
period between the initial contact with a prospective customer and the sale 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 may 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.
*Because
a small number of customers account for a substantial portion of our revenues,
the loss of a significant customer could cause a substantial decline in our
revenues.
We
derive a significant portion of our license and service revenue from a limited
number of customers. The loss of a major customer could cause a decrease in
revenues and net income. For the three months ended December 31, 2009, Royal
Bank of Scotland plc and Lloyds TSB Bank accounted for 22% and 11% of our total
revenue, respectively. For the three months ended December 31, 2008, Citicorp
Credit Services, Inc. and Vodafone Group Services Limited and affiliated
companies accounted for 13% and 25%, 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, Vodafone Group Services Limited and affiliated companies, which had
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.
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.
In
periods of worsening economic conditions, our exposure to credit risk and
payment delinquencies on our accounts receivable significantly
increases.
Our
outstanding accounts receivables are generally not secured by any form of
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 frequently monitor 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.
*Our marketable securities could be
adversely affected if the companies underlying the investments are not
successful or if the stock market remains volatile.
Our
marketable securities represent investments in common stock that could decline
or fluctuate in value based upon the results of the investee companies, or a
deterioration of general market conditions. Additionally, trading volumes can
fluctuate and impact our ability to sell shares at favorable prices. To date we
have experienced no losses associated with these possible events; however, we
can provide no assurance that our investment in marketable securities will not
be impacted by future results or adverse market conditions.
*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 87% and
82% of our total revenues for the three months ended December 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 opportunistically 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
bookings and revenues.
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 have shifted the focus of our sales staff towards Decisioning
Management products and have reduced the marketing focus on Enterprise
Foundation products to reflect market conditions. This change in focus may not
be successful and may result in lower revenues.
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 are focusing on those projects that are smaller
and faster to complete. Accordingly, we have shifted our sales force to increase
the marketing of these types of solutions. This plan may not be successful and,
as a result, revenues may not meet our expectations. Further, license and
services fees associated with our Decisioning Management solutions generate
smaller sales and, as a result, may result in lower revenues.
*Given
current economic and market conditions, we may be forced to make additional
reductions to our workforce.
In
July 2005, October 2006, May 2008, October 2008 and first fiscal quarter of
2010, we reduced our workforce, in the case of the reductions in 2005, 2006 and
2008 by approximately 10% to 15% and in the case of the reduction in the first
quarter of 2010 by approximately less than 1%. Given the current economic and
market conditions, we may be forced to further reduce our workforce, which could
materially and adversely affect our business, financial condition and results of
operations.
*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, the Canadian Dollar, and
the Chinese Yuan. Our international sales comprised 68 % and 65% of our total
sales for the three months ended December 31, 2009 and 2008, respectively. 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 three months ended December 31, 2009, we had a foreign
currency transaction loss of $0.1 million. See Item 3, Quantitative and
Qualitative Disclosures about Market Risk, for further discussions.
*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 revenues comprised 67% and 66% of our total revenues for the three
months ended December 31, 2009 and 2008, respectively. Gross margin on service
revenues was 63% and 57% for the three months ended December 31, 2009 and 2008,
respectively. License revenues comprised 33% and 34% of our total revenues for
the three months ended December 31, 2009 and 2008, respectively. Gross margins
on license revenues were 98% and 99% for the three months ended December 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 fiscal year 2009 as compared to fiscal year 2008, in
fiscal year 2008 as compared to fiscal year 2007, and in fiscal year 2009 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 fiscal year 2009 as compared to fiscal year
2008 and in fiscal year 2008 as compared to fiscal year 2007. In addition, we
were not profitable in the three months ended December 31, 2009, fiscal year
2009, or the fiscal years prior to September 30, 2007. As of December 31, 2009,
we had an accumulated deficit of $237.6 million. We may incur losses in the
future and cannot be certain that we can generate sufficient revenues 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 profitability and/or viability concerns by our
vendors, our revenues could decline, which could further adversely affect our
operating results.
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:
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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.
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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.
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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.
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The
enterprise software industry continues to undergo consolidation in sectors of
the software industry in which we operate. IBM, SAP, Oracle and Sun Microsystems
have made numerous acquisitions in the industry and Oracle has entered into an
agreement to acquire Sun Microsystems, which transaction is subject to certain
regulatory approvals. While we do not believe that the companies acquired by
IBM, SAP and Oracle have been significant competitors of Chordiant in the past,
these acquisitions may indicate that we may face increased competition from
larger and more established entities in the future.
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 depends 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 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.
*If
we are not able to successfully manage our partner operations in India, our
operations and financial results may be adversely affected.
Since
2003, we have contracted with Ness Technologies Inc., Ness USA, Inc. (formerly
Ness Global Services, Inc.) and Ness Technologies India, Ltd. (collectively,
“Ness”) to attract, train, assimilate and retain sufficient highly qualified
personnel to provide staffing for our consulting projects, technical support,
product testing and certain sustaining engineering functions. As of December 31,
2009, we use the services of approximately 128 consultants through Ness, down
from the 144 consultants used at December 31, 2008. In addition, as a result of
the reductions in our workforce in recent years, 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. A patent or
copyright infringement claim could have a material adverse effect on our
business, operating results and financial condition.
We
are 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 to settle
such claim, it could be costly.
*If
we fail to adequately address the difficulties of managing our international
operations, our revenues and operating expenses will be adversely
affected.
For
the three months ended December 31, 2009, international revenues were $15.1
million or approximately 68% of our total revenues. For the three months ended
December 31, 2008, international revenues were $15.3 million or approximately
65% of our total revenues. We expect that 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:
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Difficulties
in hiring qualified local
personnel;
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Seasonal
fluctuations in customer orders;
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Longer
accounts receivable collection
cycles;
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Expenses
associated with licensing products and servicing customers in foreign
markets;
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Economic
downturns and political uncertainty in international
economies;
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•
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Income
tax withholding issues in countries in which we do not have a physical
presence, resulting in non-recoverable tax
payments;
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•
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Complex
transfer pricing arrangements between legal
entities;
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•
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Doing
business and licensing our software to customers in countries with weaker
intellectual property protection laws and enforcement capabilities;
and
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•
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Difficulties
in commencing new operations in countries where the Company has not
previously conducted business, including those associated with corporate
and tax laws, banking relationships, product registrations, employment
laws, government regulation, product warranty laws and adopting to local
customs and culture;
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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.
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 engineering
organizations, and several 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 developing and marketing new products.
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. Further, particularly in the current economic environment,
employees or potential employees may choose to work for larger, more profitable
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. If we were to enter into similar
transactions, 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.
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.
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.
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, with our 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. Over the past several
years, IBM has acquired a number of software companies. While we do not believe
those companies were direct competitors of Chordiant in the past, IBM’s
acquisition of these companies may indicate that IBM will become a more
significant competitor of ours in the future. While the Company currently has a
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
often rely on systems integrators to implement our products. 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.
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 a provision 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.
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
recent years, we have, from time to time, reduced our workforce. 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.
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.
Our
failure to successfully acquire or 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 mergers, acquisitions and technology and
other asset transactions. To implement this strategy, we may be involved in
various related discussions and activity. Such endeavors may involve significant
risks and uncertainties, including that we may not consummate opportunities that
we pursue. These endeavors could distract management from current operations
that may adversely affect the Company’s financial condition and operating
results. Merger and acquisition transactions are motivated by many factors,
including, among others, our desire to grow our business, obtain recurring
support and maintenance revenue streams, 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; (vii) the risk of diverting management’s attention from normal daily
operations of the business; (viii) the Company’s ability to issue new releases
of the acquired company’s products on existing or other platforms; (ix) 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; (x) risks of entering markets in which the
Company has no or limited direct prior experience; (xi) incurring significant
legal and accounts costs to investigate and analyze potential merger
opportunities which fail to be completed; and (xii) the potential loss of key
employees of the acquired company. Realization of any of these risks in
connection with any technology transaction or asset purchase we have entered
into, or may enter into, could have a material adverse effect on our business,
operating results and financial condition.
If
we 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.
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.
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 ongoing 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 ongoing 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.
We
may experience additional volatility in our operating results as a result of our
periodic evaluation of our goodwill and deferred tax assets.
We
have recorded significant goodwill and deferred tax asset balances that are
subject to either impairment or realizability evaluations under U.S. Generally
Accepted Accounting Principles. Such evaluations are based on factors including
our future profitability and market value. As a result, if we experience
significant declines in those measurements, these assets could be subject to
impairment or write-off, which would result in additional volatility to our
operating results.
The
exhibits listed on the accompanying index to exhibits are filed or incorporated
by reference (as stated therein) as part of this Quarterly Report on Form
10-Q.
Chordiant
Software, Inc.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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CHORDIANT
SOFTWARE, INC.
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By:
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/s/ PETER
S. NORMAN
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Peter
S. Norman
Chief
Financial Officer and
Principal
Accounting Officer
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EXHIBIT
INDEX
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Exhibit
Number
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Description
of Document
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Form
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Date
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Filed
Herewith
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3.1
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Amended
and Restated Certificate of Incorporation of Chordiant Software,
Inc.
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Form
10-K
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11/20/2008
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3.2
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Certificate
of Designation of Series A Junior Participating Preferred
Stock
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Form
8-K
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7/11/2008
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3.3
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Amended
and Restated Bylaws of Chordiant Software, Inc.
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Form
8-K
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6/3/2008
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4.1
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Specimen
Common Stock Certificate
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Form
S-1
(No.
333-92187)
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2/7/2000
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4.2
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Rights
Agreement dated as of July 10, 2008 by and between Chordiant Software,
Inc. and American Stock Transfer & Trust Company, LLC
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Form
8-K
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7/11/2008
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4.3
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Form
of Rights Certificate
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Form
8-K
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7/11/2008
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10.31*
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Separation
Agreement by and between Chordiant Software, Inc. and Charles Altomare
dated October 9, 2009.
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Form
10-K
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11/19/2009
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10.71
*
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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 (No Holding Period)
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Form
8-K
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11/19/2009
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10.72
*
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Form
of Chordiant Software, Inc. 2005 Equity Incentive Plan 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 (No Holding Period)
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Form
8-K
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11/19/2009
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10.73*
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A
description of certain compensation arrangements between Chordiant
Software, Inc. and its executive officers.
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Form
8-K
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11/19/2009
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10.74*
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Amended
and Restated 1999 Non-Employee Directors' Stock Option
Plan
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Schedule
14A
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12/18/2009
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10.75
*†
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Chordiant
Software, Inc. Fiscal Year 2010 Executive Incentive Bonus
Plan
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X
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10.76
*†
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Chordiant
Software, Inc. Fiscal Year 2010 Senior Vice President and General Manager
Worldwide Client Services Incentive Bonus Plan
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X
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10.77
*†
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Chordiant
Software, Inc. Fiscal Year 2010 General Counsel Incentive Bonus
Plan
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X
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21.1
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Subsidiaries
of Chordiant Software, Inc.
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X
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31.1
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Certification
required by Rule 13a-14(a) or Rule 15d-14(a)
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X
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31.2
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Certification
required by Rule 13a-14(a) or Rule 15d-14(a)
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X
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32.1#
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Certification
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
63 of Title 18 of the United States Code (18 U.S.C. 1350)
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*
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Management
contract or compensatory plan or arrangement.
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#
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The
certification attached as Exhibit 32.1 is not deemed filed with the
Securities and Exchange Commission and is not incorporated by reference
into any filing of Chordiant Software, Inc., whether made before or after
the date of this Form 10-Q irrespective of any general incorporation
language contained in such filing.
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†
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Confidential
treatment has been requested with respect to certain portions of this
exhibit. Omitted portions have been filed separately with the SEC pursuant
to Rule 24b-2 of the Securities Exchange Act of
1934.
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