-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
SW8c60fch3gcXlcgCgGNmEceguXXgpyCb87W0Yp36CKX2pWvWJSFJflyq8OkcFNT
zQuuKzhB3toGVLSQ2+XdoQ==
UNITED STATES FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended
June 30,
2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission File Number 000-29357
Chordiant Software, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware 93-105328 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
20400 Stevens Creek Boulevard, Suite 400
(408) 517-6100
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 [ ]
The number of shares of the Registrant's common stock outstanding as of
August 5, 2003 was 63,382,873.
CHORDIANT SOFTWARE, INC.
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CHORDIANT SOFTWARE, INC. 6,286 8,532 1,215 136 119 161 The accompanying notes are an integral part of
these condensed consolidated financial statements. 3
CHORDIANT SOFTWARE, INC. Three Months Ended Six Months Ended June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 Revenues: License $ 6,486 $ 6,038 $ 10,624 $ 17,122 Service 10,599 9,037 20,276 20,762 Total revenues 17,085 15,075 30,900 37,884 Cost of revenues: License 319 488 580 1,055 Service 6,024 6,606 11,950 16,159 Non-cash compensation expense 314 74 778 171 Total cost of revenues 6,657 7,168 13,308 17,385 Gross profit 10,428 7,907 17,592 20,499 Operating expenses: Sales and marketing: Non-cash compensation expense 277 100 691 236 Other sales and marketing expense 4,717 8,305 10,733 17,419 Research and development: Non-cash compensation expense 370 193 865 390 Other research and development expense 3,895 5,166 7,965 10,101 Purchased in-process research and development -- 997 -- 997 General and administrative: Non-cash compensation expense 512 74 978 160 Other general and administrative expense 1,950 1,935 3,510 4,126 Amortization of intangible assets 891 954 1,781 1,778 1,161 939 1,161 4,498 Total operating expenses 13,773 18,663 27,684 39,705 Loss from operations (3,345 (10,756 (10,092 (19,206 Interest expense (47 (88 (94 (92 Other income (expense), net 1 296 (151 541 Net loss $ (3,391 $ (10,548 $ (10,337 $ (18,757 Net loss per share: Basic and diluted $ (0.06 $ (0.19 $ (0.18 $ (0.35 Shares used in per share
calculation: The accompanying notes are an integral part of
these condensed consolidated financial statements. 4
CHORDIANT SOFTWARE, INC. The accompanying notes are an integral part of
these condensed consolidated financial statements. 5
CHORDIANT SOFTWARE, INC.
NOTE 1-- The accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting of only normal and recurring
items, which in the opinion of management, are necessary to present fairly the
financial position, results of operations and cash flows for the interim periods
presented. 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. These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2002. We believe that the effects of our strategic actions implemented to improve
revenue as well as control costs will be adequate to generate sufficient cash
resources to fund our operations. Failure to generate sufficient revenues
or control spending could adversely affect our ability to achieve our business
objectives.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Reclassifications Certain reclassifications have been made to prior year
balances to conform to current year presentation. Principles of consolidation The accompanying condensed consolidated financial statements include our accounts and
the accounts of our wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management 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. Such estimates include the allowance for
doubtful accounts, valuation of goodwill and intangible assets, valuation of deferred tax assets, restructuring costs,
contingencies 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 that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions. Revenue recognition We derive revenues from licenses of our software and related services, which
include assistance in implementation, customization and integration,
post-contract customer support, training and consulting. The amount
and timing of our revenue is difficult to predict and any shortfall in revenue
or delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in operating losses.
6 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 product. For contracts involving significant
implementation or customization essential to the functionality of our product, we recognize the license and
professional consulting services revenues using the percentage-of-completion method using labor hours
incurred as the measure of progress towards completion as prescribed by
Statement of Position ("SOP") No. 81-1, "Accounting for Performance of
Construction-Type and Certain Product-Type Contracts." The progress toward
completion is measured based on the "go-live date." We define the "go-live date"
as the date on which the essential functionality has been delivered or on which
the application enters into a production environment or the point at which no
significant additional Chordiant supplied professional services resources are required. Estimates are subject to revisions as the contract
progresses to completion. We account for the change in estimate in the period
the change has been identified. Provisions for estimated contract losses 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 either 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 revenues based
upon the estimated fair value of each element. On contracts not involving significant implementation or customization
essential to the functionality of our product, we recognize license revenue
when there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection of the fee is probable and delivery has occurred as
prescribed by SOP No. 97-2, "Software Revenue Recognition.". We assess collection based on a number of factors, including past transaction
history with the customer and the credit-worthiness of the customer. We do not
request collateral from our customers. If we determine that collection of a fee
is not probable, we defer the fee and recognize revenue at the time collection
becomes probable, which is generally upon receipt of cash. For arrangements with
multiple elements, we recognize revenue for services and post-contract customer
support based upon vendor specific objective evidence ("VSOE") of fair value of
the respective elements. VSOE of fair value for the services element is based
upon the standard hourly rates we charge for services when such services are
sold separately. VSOE of fair value for annual post-contract customer support is
established with the optional stated future renewal rates included in the
contracts. When contracts contain multiple elements, and VSOE of fair value
exists for all undelivered elements, we account for the delivered elements,
principally the license portion, based upon the "residual method" as prescribed
by SOP No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain
Transactions." In situations in which we are obligated to provide unspecified additional software products in the future,
we recognize revenue as a subscription ratably over the term of the commitment
period. For all sales we use either a signed license agreement or a binding purchase order 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 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 recognize revenue for post-contract customer support ratably over the
support period, generally one year. Our training and consulting services
revenues are
recognized as such services are performed. 7 Restricted cash At June 30, 2003 and December 31, 2002, we had a
balance of $1.5 million in the form of short-term investments, which were
restricted from withdrawal. The balance is classified as long-term
restricted cash and serves as a security deposit
in a post-contract customer support revenue transaction. At June 30, 2003 and December 31, 2002, we also had an interest bearing
certificate of deposit classified as short-term investments and restricted cash
which serves as collateral for a $0.4 million letter of credit security deposit
for a leased facility.
Stock-based
Compensation
We have adopted the
disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" during the quarter ended March 31,
2003. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based compensation
and also amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the methods of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As permitted by SFAS 148 and SFAS 123, we continue to
apply the accounting provisions of
Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." We generally grant
stock options at exercise prices equal to the fair market value of the
underlying stock on the date of grant and, therefore, under APB Opinion No. 25,
no compensation expense is recognized in the statements of operations. Had we recorded compensation expense based on the estimated grant date fair value, as
defined by SFAS No. 123, for awards granted under our stock option plans and
stock purchase plan, our net loss and loss per share would have been
increased to the pro forma amounts below (in thousands, except per share amounts): Three Months Ended Six Months Ended June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 Net loss -- as reported $ (3,391 $ (10,548 $ (10,337 (18,757 (662 (3,623 (1,727 (7,042 Net loss -- proforma (3,739 (13,862 (11,650 (25,105 Basic and diluted net loss per share --
as reported $ (0.06 $ (0.19 $ (0.18 $ (0.35 Basic and diluted net loss per
share -- proforma $ (0.06 $ (0.25 $ (0.20 $ (0.46
Concentrations of credit risk
Financial instruments that potentially subject us to concentrations of credit
risk consist of cash, cash equivalents, short-term investments and accounts
receivable. To date, we have invested excess funds in money market accounts,
commercial paper, municipal bonds and term notes. We deposit cash, cash
equivalents and short-term investments with financial institutions that we
believe are credit worthy. Our accounts receivable are derived from revenues
earned from customers principally located in the Americas and Europe. We perform
ongoing credit evaluations of our customers' financial condition and, generally,
we do not require collateral from our customers. We maintain reserves for
potential credit losses on customer accounts when deemed necessary.
8 The following table summarizes the revenues from customers in excess of 10%
of total revenues:
At June 30, 2003, the total amount due to the Company from Royal Bank of Scotland and Canadian
Imperial Bank of Commerce accounted for approximately 35% and 20% of accounts
receivable, respectively. At December 31, 2002, the total amount due to
the Company from Barclays accounted for approximately 38%
of accounts receivable.
NOTE 3--RECENT ACCOUNTING PRONOUNCEMENTS:
Effective January 1, 2003, we
adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," and also SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 143 requires that the fair value of
an asset retirement obligation be recorded as a liability in the period in which
the Company incurs the obligation. SFAS No. 145 requires that certain gains and losses
from extinguishment of debt no longer be classified as an extraordinary item.
The adoption of these statements did not have a significant impact on our consolidated financial position or
results of operations. Effective January 1, 2003, we
adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires that a liability for costs associated with an exit or disposal activity
be recognized and measured initially at fair value only when the liability is
incurred. The adoption of this statement did not have a significant impact on
our consolidated financial position or results of operations.
In April 2003, the Financial Accounting
Standards Board ("FASB") issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities", which amends SFAS No. 133 for certain decisions made by the FASB
Derivatives Implementation Group. In particular, SFAS No. 149 (1) clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, and (4) amends certain other existing
pronouncements. This Statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, most provisions of SFAS No. 149 are to be applied
prospectively. We do not expect the adoption of SFAS No. 149 to have a
material impact upon our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that under previous guidance issuers could account for as
equity. It requires that those instruments be classified as liabilities in
balance sheets. the guidance in SFAS No. 150 is generally effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective on July 1, 2003. We do not expect the adoption of
SFAS No. 150 to have a material impact upon our financial position or results of
operations. 9
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on
the existing disclosure requirements for most guarantees, including residual
value guarantees issued in conjunction with operating lease agreements. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value of the obligation it assumes
under that guarantee and must disclose that information in its interim and
annual financial statements. The initial recognition and measurement provisions
of this interpretation apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45
did not have a significant impact on our consolidated financial position or
results of operations. In January 2003, the FASB issued
FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires us to
consolidate a variable interest entity if we are subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We do not currently
have any variable interest entities and, accordingly, the adoption of FIN 46 did
not have a significant impact on our
consolidated financial position or results of operations. NOTE 4--BALANCE SHEET COMPONENTS (Unaudited): The main components of accounts receivable, net
are as follows (in thousands): ) ) Unbilled receivables relate to earned service revenues and
licenses delivered that have not yet been billed and maintenance services for
future periods that have been purchased by our customers, but have not yet been
billed. The main components of property and equipment, net
are as follows (in thousands): December 31, 2002
Computer hardware
(useful lives of 3 years)
Purchased internal-use
software (useful lives of 3 years)
Furniture and
equipment (useful lives of 3 to 7 years)
Leasehold improvements
(shorter of 7 years or the term of the lease) ) )
10 The main components of accrued expenses are as
follows (in thousands): The components of intangible assets, excluding
goodwill, are as follows (in thousands):
June 30, 2003
December 31, 2002
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying Amount
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying Amount
Intangible assets:
Developed technologies
$
2,374
$
(1,451
)
$
923
$
2,374
$
(1,059
)
$
1,315
Purchased technologies
7,162
(5,243
)
1,919
7,162
(4,050
)
3,112
Customer list
190
(80
)
110
190
(48
)
142
Tradenames
982
(740
)
242
982
(576
)
406
$
10,708
$
(7,514
)
$
3,194
$
10,708
$
(5,733
)
$
4,975 All of our
acquired intangible assets, excluding goodwill, are subject to amortization and
are carried at cost less accumulated amortization. Amortization is computed over
the estimated useful lives which are as follows: Developed technologies-one and
one half to three years; purchased technologies-three years; tradenames-three
years; customer list-three years. Aggregate amortization expense for intangible
assets totaled $1.8 million and $1.8 million for the six months ended June 30,
2003 and 2002, respectively. We expect amortization expense on purchased
intangible assets to be $1.8 million for the remaining six months in fiscal
2003, $1.3 million in fiscal 2004 and $0.1 million in fiscal 2005, at which time
existing purchased intangible assets will be fully amortized. NOTE 5--RESTRUCTURING: Restructuring Costs
During the three months ended June
30, 2003 and fiscal year 2002, several areas of the Company
were restructured to reduce expenses and improve efficiency in
order to achieve cash flow and profitability breakeven in the near future. This
restructuring program included a worldwide workforce reduction and consolidation of
excess facilities and certain business functions. 11
Workforce reduction
The restructuring program resulted
in the reduction of 30 regular
employees during the three months ended June 30, 2003 and 108 regular employees
during fiscal year 2002. All areas of the Company were affected by this
restructuring. We recorded a total workforce reduction expense relating to
severance and benefits of approximately
$1.2 million and $3.8 million for the three months ended June 30, 2003 and
the year ended December 31, 2002, respectively.
Consolidation of excess facilities
We accrued for lease costs of $0.2
million and $2.8 million
during the three months ended June 30, 2003 and the year ended December 31, 2002,
respectively,
pertaining to the estimated future obligations for non-cancelable lease payments
for the consolidation of excess facilities relating to lease terminations and
non-cancelable lease costs. This expense included estimated sub-lease income
based on current comparable rates for leases in the respective markets. If
facilities rental rates continue to decrease in these markets or if it takes
longer than expected to sublease these facilities,
the maximum amount by which the
loss could exceed the original estimate is approximately $1.9
million.
A summary of the restructuring expense and
other special charges is outlined as follows (in thousands): Amounts related to net lease expenses due to the consolidation of facilities
will be paid over the lease terms through fiscal 2011. As of June 30, 2003, $3.8 million related to the restructuring reserve remains outstanding. The
remaining accrual primarily relates to the termination and/or sublease of our
excess facilities and to severance and other benefits for impacted employees.
NOTE 6--BORROWINGS: Notes payable Borrowings consist of several notes payable for equipment
leases assumed by Chordiant upon the acquisition of OnDemand, Inc. Interest rates range from 12.86% to 15.61%. The notes are due at various
times through 2004. As of June 30, 2003, the total outstanding
notes payable balance for equipment leases was approximately $0.3 million. In February 2003, we entered into a note payable agreement for
our Directors' & Officers' ("D&O") insurance policy totaling $1.0 million.
The interest rate is 6% and principal and interest payments on the note payable
will be made on a monthly basis through October 2003. As of June 30,
2003, the outstanding note payable balance related to the D&O insurance policy
was $0.3 million.
Revolving line of
credit
Our line of credit with
Comerica Bank which is comprised of an accounts receivable line and an equipment
line expired on October 15, 2002. We received a 60-day extension and then
another 30-day extension on our line of credit. We have negotiated a new
two-year credit facility effective from March 28, 2003 and have amended our
financial covenants to amounts that we believe will allow for compliance.
12
Under the new line of
credit, our assets collateralize borrowings under both elements, require us to
maintain a minimum quick ratio of 2.00 to 1.00, a tangible net worth of at least
$15.0 million plus 60% of the proceeds of any equity offerings and subordinated
debt issuance subsequent to the effective date of this line of credit agreement,
and certain other covenants.
Under the new terms and
conditions of the accounts receivable line, the total amount of the line of
credit is $7.5 million. Borrowings under the accounts receivable line of credit
will bear interest at the lending bank's prime rate plus 0.5%. Advances are
available on a non-formula basis up to $2,000,000 (non-formula portion),
however, if outstanding receivables exceed $2,000,000, then all outstanding
receivables shall be covered by 80% of Eligible Accounts.
Borrowings under the new
$2.5 million equipment line bear interest at the lending bank's prime rate plus
1.0%. In March 2003, we borrowed $2.5 million against the
equipment line of credit. At June 30, 2003, the outstanding line of credit
balance was $2.2 million. At June
30, 2003, we were in compliance with the respective debt covenants.
We have no material
commitments for capital expenditures or strategic commitments and we anticipate
a low rate of capital expenditures. We may use cash to acquire or license
technology, products or businesses related to our current business. In addition,
we anticipate that we will experience low growth in our
operating expenses for the foreseeable future and that our operating expenses
will continue to be a material use of our cash resources. NOTE 7--LITIGATION:
Beginning in July 2001, we and certain of our officers and
directors, as well as the underwriters of our initial public offering ("IPO")
and hundreds of other companies ("Issuers"), individuals and IPO underwriters,
were named as defendants in a series of class action shareholder complaints
filed in the United States District Court for the Southern District of New York.
Those cases are now consolidated under the caption, In re Initial Public
Offering Securities Litigation, Case No. 91 MC 92. In the amended
complaint against Chordiant, the plaintiffs allege that Chordiant, certain of
our officers and directors and our IPO underwriters violated section 11 of the
Securities Act of 1933 based on allegations that Chordiant's registration
statement and prospectus failed to disclose material facts regarding the
compensation to be received by, and the stock allocation practices of, the IPO
underwriters. The complaint also contains a claim for violation of section 10(b)
of the Securities Exchange Act of 1934 based on allegations that this omission
constituted a deceit on investors. The plaintiffs seek unspecified monetary
damages and other relief.
In October 2002, the parties agreed to toll the statute of
limitations with respect to Chordiant's officers and directors until September
30, 2003, and on the basis of this agreement, our officers and directors were
dismissed from the lawsuit without prejudice. In February 2003, the court issued
a decision denying the motion to dismiss the Section 11 claims against Chordiant
and almost all of the other company defendants and denying the motion to dismiss
the Section 10(b) claims against Chordiant and many of the company defendants.
In June 2003, Issuers and Plaintiffs reached a tentative
settlement agreement that would, among other things, result in the dismissal
with prejudice of all claims against the Issuers and their officers and
directors in the IPO Lawsuits. In addition, the tentative settlement guarantees
that, in the event that the Plaintiffs recover less than $1 billion in
settlement or judgment against the Underwriter defendants in the IPO Lawsuits,
the Plaintiffs will be entitled to recover the difference between the actual
recovery and $1 billion from the insurers for the Issuers. Although Chordiant
has approved this settlement proposal in principle, it remains subject to a
number of procedural conditions, as well as formal approval by the Court.
We are 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 or results of operations. 13 NOTE 8 --COMMITMENTS AND CONTINGENCIES: Future payments due under debt and lease obligations as of
June 30, 2003 are
as follows (in thousands): We have entered into a two-year agreement, beginning March 19, 2002, with
Merit International ("Merit"), pursuant to which Merit will provide exclusive training and
certain consulting services for a fixed fee. Upon the effective date of the
agreement, we transferred to Merit our training operations including selected
employees. In addition, Merit will provide to our customers resource development
services in exchange for an agreed-upon fee negotiated on a
transaction-by-transaction basis. We believe this agreement will provide us with
high quality training and consulting services. We will pay Merit certain minimum
revenue amounts, as follows: July 1, 2003 to December 31, 2003: (British Pounds) 942,000; and
January 1, 2004 to June 30, 2004: (British Pounds) 429,300, for a total of
(British Pounds) 1.4 million. After six months from the effective date, we may,
at our option, terminate the agreement and pay an early termination fee that
reduces from (British Pounds) 555,000 to (British Pounds) 0 over time. Payment
of the early termination fee will release our obligation related to the minimum
revenue target. As of June 30, 2003, the early termination fee
that we would have to pay to terminate the agreement was
approximately (British Pounds) 315,000.
Indemnifications As permitted under Delaware law,
we have agreements whereby we indemnify our officers, directors and certain
employees for certain events or occurrences while the employee,
officer or director is, or was serving, at our request in such capacity. The
term of the indemnification period is for the officer's or director's lifetime.
The maximum potential amount of future payments we could be required to make
under these indemnification agreements is unlimited; however, we have a Director
and Officer insurance policy that limits our exposure and may enable us to
recover a portion of any future amounts paid. As a result of our insurance
policy coverage, we believe the estimated fair value of these indemnification
agreements is minimal. We enter into standard
indemnification agreements in our ordinary course of business. Pursuant to these
agreements, we indemnify, defend, hold harmless, and agree to reimburse the indemnified
party for losses suffered or incurred by the indemnified party, generally our
business partners or customers, in connection with patent, or any copyright
or other intellectual property infringement claim by any third party with
respect to our products. The term of these indemnification agreements is
generally perpetual after execution of the agreement. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited. We have never incurred costs to defend
lawsuits or settle claims related to these indemnification agreements. As a
result, we believe the estimated fair value of these agreements is minimal.
Accordingly, we have no liabilities recorded for these agreements as of June 30, 2003.
14 We enter into arrangements with
our business partners, whereby the business partner agrees to provide services
as a subcontractor for our implementations. We may, at our discretion and in the
ordinary course of business, subcontract the performance of any of our services.
Accordingly, we enter into standard indemnification agreements with our
customers, whereby we indemnify them for other acts, such as personal property
damage, of our subcontractors. The maximum potential amount of future payments
we could be required to make under these indemnification agreements is
unlimited; however, we have general and umbrella insurance policies
that may enable us to recover a portion of any amounts paid. We have not
incurred significant costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, we believe the estimated fair value of
these agreements is minimal. Accordingly, we have no liabilities recorded for
these agreements as of June 30, 2003. When as part of an acquisition we
acquire all of the stock or all of the assets and liabilities of a company,
we 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 we could be required to make for such obligations is undeterminable at
this time. All of these obligations were grandfathered under the provisions of
FIN 45 as they were in effect prior to
March 31, 2003. Accordingly, we
have no liabilities recorded for these liabilities as of June 30,
2003. We warrant that our software
products will perform in all material respects in accordance with our 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, we warrant that our maintenance and consulting services will be performed
consistent with generally accepted industry standards through completion of the
agreed upon services. If necessary, we would provide for the estimated cost of
product and service warranties based on specific warranty claims and claim
history, however, we have not incurred significant expense under our product
or services warranties to date. As a result, we believe the estimated fair value on
these warranties is minimal. Accordingly, we have no liabilities recorded for
these warranties as of June 30, 2003. NOTE 9--RELATED PARTY TRANSACTIONS: During the quarter ended March 31, 2002, two of our executives exercised
285,000 stock options in exchange for notes receivable (the "Notes") of
$496,000. The Notes were full-recourse collateralized by the underlying stock. The
Notes were due in February and March of 2003 and accrued interest between 6.0%
and 6.5% per annum, which was deemed market rates for the individuals. Both
notes were paid in full during the quarter ended March 31, 2003. NOTE 10--NET LOSS PER SHARE: Basic and diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net loss per
share includes potential common stock unless their effect is antidilutive.
Potential common stock consist of common shares issuable upon the exercise of
stock options (using the treasury stock method) and common shares subject to
repurchase by us. The following table sets forth the computation of basic and
diluted net loss per share for the three and six months ended June 30, 2003 and 2002
(in thousands, except per share data): Three Months Ended Six Months Ended June 30, 2003 June 30, 2002 June 30, 2003 Net loss available to common stockholders $ (3,391 ) $ (10,548 $ (10,337 (18,757 ) Weighted average common stock outstanding 62,903 54,763 62,230
54,314 Common stock subject to repurchase (4,336 (7 (4,336 (7 Denominator for basic and diluted calculation 58,567 54,756 57,894 54,307 Net loss per share - basic and diluted $ (0.06 ) $ (0.19 $ (0.18 (0.35 ) 15
The following table sets forth the potential common shares
that are excluded from the calculation of diluted net loss per share as their
effect is antidilutive (in thousands):
June 30, 2003 NOTE 11--COMPREHENSIVE LOSS:
The components of comprehensive loss, net of tax, are as
follows (in thousands): For the three and six months ended June 30, 2003 and 2002, amortized
costs of available-for-sale investments approximated their fair values due to
their short maturities. As such, unrealized gains or losses on
available-for-sale investments were insignificant for the three and six months ended
June 30, 2003 and 2002. NOTE 12--SEGMENT INFORMATION: Based on the information that our chief operating decision
maker reviews for assessing performance and allocating resources, we have
concluded that we have one reportable segment. License revenues for enterprise solutions amounted to
$5.8
million and $4.1 million for the three months ended
June 30, 2003 and 2002,
respectively. License revenues for enterprise solutions amounted to
$7.9
million and $13.9 million for the
six months ended June 30, 2003 and 2002, respectively. License revenues for application products were approximately
$0.7 million and $1.9 million for the three months ended
June 30, 2003 and 2002,
respectively. License revenues for application products were approximately
$2.7 million and $3.2 million for the
six months ended June 30, 2003 and 2002,
respectively. 16 Service revenues consist of consulting assistance and
implementation, customization and integration and post-contract customer
support, training and certain reimbursable out-of-pocket expenses. Service
revenues for enterprise solutions were approximately $8.1 million and $6.5
million for the three months ended June 30, 2003 and 2002, respectively.
Service
revenues for enterprise solutions were approximately $15.3 million for both the six months ended June 30, 2003 and 2002, respectively. Service revenues for application products were approximately $2.5 million and $2.6 million
for the three months ended June 30, 2003 and 2002, respectively. Service revenues for application products were approximately $5.0 million and $5.5
million for the six months ended June 30, 2003 and 2002, respectively.
Foreign revenues are based on the country in which the
customer is located. The following is a summary of total revenues by geographic
area (in thousands):
Three Months Ended Six Months Ended June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 Americas $ 3,025 $ $ $ 14,019 Other 41 $ 17,085 $ 15,075 $ 30,900 $ 37,884
Property and equipment information is based on the physical
location of the assets. The following is a summary of property and equipment,
net by geographic area (in thousands):
17 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 financial statements and accompanying notes included in this report and the
2002 audited financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2002. 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 in our Annual Report on
Form 10-K. Chordiant undertakes no obligation to update any forward-looking
statement to reflect events after the date of this report. Overview Chordiant Software, Inc. ("Chordiant", "the
Company", or "we") is an enterprise software vendor that offers a transactional
customer system for global companies that seek to improve the quality
of customer interactions and to reduce costs through increased employee
productivity and process efficiencies. Chordiant concentrates on serving global
customers in retail financial services, communications and consumer direct
industries. We deliver a complete customer system that includes software applications and
tools and services that enable businesses to successfully integrate their
customer information and corporate systems for an accurate, real-time view of
their customers across all forms of customer interaction. We believe our system offers great flexibility to businesses to set business
policies and processes to control the quality of servicing, fulfillment and
marketing to their customers. Our system enables companies to control and change
their business policies and process. We believe that we are leaders in providing
business process driven solutions for customer management. Our software architecture is based on the J2EE (Java 2 Enterprise Edition)
industry standard that is widely supported by vendors and widely adopted by
business customers in the industries we serve. We believe that solutions based
on other architectures are less capable of meeting the current and future
requirements of global companies. We believe that the application of accounting standards is as important as a
company's reported financial position, results of operations and cash flows. We
believe that our accounting policies are prudent and provide a clear view of our
financial performance. We have formed a Disclosure Committee, composed of senior
financial and legal personnel, to help ensure the completeness and accuracy of
our financial results and disclosures. In addition, prior to the release of our
financial results, our key management reviews our annual and quarterly results,
along with key accounting policies and estimates, with our audit committee,
which is composed of independent board members. We do not use off-balance-sheet
arrangements with unconsolidated related parties, nor do we use other forms of
off-balance-sheet arrangements such as research and development arrangements.
We have had several acquisitions over the past two years. As a result of
these acquisitions, comparison of prior period revenues and expenses may not be
meaningful. Service revenues as a percentage of total revenues were 62%
and 60% for the
three months ended June 30, 2003 and 2002, respectively. Service revenues
as a percentage of total revenues were 66% and 55% for the six months ended June
30, 2003 and 2002, respectively. We expect that
service revenues will continue to represent over 40% of our total
revenues. We sell our products through our direct sales force, and we augment our sales
efforts through relationships with systems integrators, application service
providers and technology vendors.
18 For the three and six months ended June 30, 2003 and 2002, revenues were principally
derived from customer accounts in the Americas and Europe (principally the
United Kingdom). For the three months ended June 30, 2003 and 2002,
international revenues were $14.1 million and $10.8 million, or approximately
82% and 71% of our total revenues, respectively. For the six months
ended June 30, 2003 and 2002,
international revenues were $25.8 million and $30.7 million, or approximately
84% and 81% of our total revenues, respectively. We believe international
revenues will continue to represent a significant portion of our total revenues
in future periods. A small number of customers account for a significant portion of our total
revenues. As a result, the loss or delay of individual orders or delays in the
product implementations for a customer can have a material impact on our
revenues. We expect that revenues from a small number of customers will continue
to account for a majority of our total revenues in the future as historical
implementations are completed and replaced with new projects from new and
existing customers. Customer concentration has reduced and we expect that trend
to continue. Pricing pressure during the past year has intensified
particularly with application products. Several of our competitors continue to
aggressively price their products with large discounts in comparison to our
prices. Our strategy is to continue to offer products with functionality that
is different and superior to our competitors. Our international revenue growth rate has continued to outpace our United
States revenue growth rate. We feel this has occurred because our leadership and market presence has been very
strong internationally, particularly in the United Kingdom. We have experienced a lengthening of our customers' contract cycle and have
taken that issue into account for our forecasting model. We expect this
trend to continue so long as the economic environment for enterprise software
remains weak. Since our inception, we have incurred substantial research and
development costs and have invested heavily in the expansion of our product
development, sales, marketing and professional services organizations in order
to build an infrastructure to support our long-term growth strategy. The number
of our full-time employees decreased from 328 at December 31, 2002, to 278 at
June 30,
2003, representing a decrease of approximately 15%. In April 2003, we implemented a
workforce reduction intended to align our cost base with our expected operating
performance. The restructuring charge for the three months ended June 30, 2003
was $1.2 million. The restructuring charge is comprised of severance and
associated employee termination costs and accruals for lease costs pertaining to
the estimated future obligations for non-cancelable lease payments for
additional excess facilities that were vacated due to reductions in workforce.
As we continue to monitor our operating expenses and strategize for the future,
further expense reductions may become necessary to improve operating
performance, including further reductions of our workforce in nonperforming
regions. Because the restructuring charge and related benefits are derived from
management's estimates, which are based on currently available information, our
restructuring may not achieve the benefits currently anticipated or on the
timetable or at the level, currently contemplated. In addition, our software
license revenues and operating performance may continue to be negatively
impacted by: (i) the uncertainty in the information technology industry and
associated reductions in capital expenditures; (ii) geopolitical uncertainties;
(iii) additional terrorist attacks; (iv) a lack of confidence in corporate
governance and accounting practices; (v) the diversity in global economic
conditions; (vi) continued intense competition; (vii) business and chief
executive officer confidence in the economy, evidenced, in part, by stock market
levels; and (viii) other factors described under "Risk Factors" below.
Accordingly, additional actions, including a further restructuring of our
operations, may be required in the future. As a result, the demand for our
products and services and, ultimately, our future financial performance, are
difficult to predict with any degree of certainty. We believe that period-to-period comparisons of our operating results should
not be relied upon as indicative of future performance. Our prospects must be
considered given the risks, expenses and difficulties frequently encountered by
companies in early stages of development, particularly companies in new and
rapidly evolving businesses. There can be no assurance we will be successful in
addressing these risks and difficulties. Moreover, we
may not achieve or maintain profitability in the future.
19
Results of Operations
The following table sets forth, as a percentage of total revenues,
condensed consolidated statements of operations data for the periods indicated: Three Months Ended Six Months Ended June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 Revenues: License 38 40 34 45 Service 62 60 66 55 Total revenues 100 100 100 100 Cost of revenues: License 2 3 2 3 Service 35 44 39 43 Non-cash compensation expense 2 1 2 -- Total cost of revenues 39 48 43 46 Gross profit 61 52 57 54 Operating expenses: Sales and marketing: Non-cash compensation expense 2 1 2 -- Other sales and marketing expense 28 55 35 46 Research and development: Non-cash compensation expense 2 1 3 1 Other research and development expense 23 34 26 27 Purchased in-process research and development -- 7 -- 3 General and administrative: Non-cash compensation expense 3 -- 3 -- Other general and administrative expense 11 13 11 11 Amortization of intangible assets 5 6 6 5 7 6 4 12 Total operating expenses 81 123 90 105 Loss from operations (20) (71) (33) (51) Interest expense -- (1) -- -- Other income (expense), net -- 2 -- 1 Net loss (20) (70) (33) (50) 20 Comparison of the Three Months Ended June 30, 2003 and
2002 Revenues
License. Total license
revenues increased to $6.5 million for the quarter ended June 30, 2003 from $6.0 million, or approximately
7%, for the quarter ended
June 30, 2002. License revenues
for enterprise solutions increased to $5.8 million for the
quarter ended June 30, 2003 from $4.1 million, or approximately 39%, for the quarter ended
June 30,
2002. License revenues for application products decreased to
$0.7 million for the quarter ended June 30, 2003 from $1.9 million, or
approximately 62%, for the
quarter ended June 30, 2002. The overall license revenue increase was primarily due to
larger aggregate dollar sales to new and existing
customers for our enterprise solutions.
Service. Total service revenues, including reimbursement of
out-of-pocket expenses, increased to $10.6 million for the quarter ended June 30, 2003 from $9.0 million, or approximately
17%, for the quarter ended
June 30, 2002. Service revenues for enterprise solutions increased to $8.1
million for the quarter ended June 30, 2003 from $6.5 million, or approximately
25%,
for the quarter ended June 30, 2002. Service revenues for application products
decreased to $2.5 million for the quarter ended June 30, 2003 from $2.6 million, or approximately
2%, for the quarter ended June 30, 2002. The overall
service revenues increase was primarily due to a continuation in large customer
implementations as well as maintenance, support and consulting revenues
associated with license agreements. Cost of revenues License. Cost of license revenues
decreased to $0.3 million for the
quarter ended June 30, 2003 from $0.5 million, or approximately 35%, for the
quarter ended June 30, 2002. These costs resulted in license gross margins of
approximately 95% and 92% for the quarters ended June 30, 2003 and 2002,
respectively. The cost of license revenues reflects a lower royalty mix in
the quarter ended June 30, 2003. We expect cost of license revenues to
remain in the four to six percent range of license revenues. Service. Cost of service
revenues decreased to $6.0 million for the
quarter ended June 30, 2003 from $6.6 million, or approximately 9%, for the
quarter ended June 30, 2002. These costs resulted in service gross margins of
43% and 27% for the quarters ended June 30, 2003 and 2002, respectively.
Service gross margins improved mainly as the result of combined effects of
restructuring actions implemented, increased efficiencies and reduced spending.
We expect cost of services revenues to remain at or above 40% of service
revenues. Operating Expenses Sales and marketing. Sales and
marketing expenses decreased to $5.0 million for the quarter ended June 30,
2003 from $8.4 million, or approximately
41%, for the quarter ended June 30, 2002.
The decrease in these expenses were
mainly attributable to a decrease of $1.9 million in personnel related expenses
due to a decrease in headcount and commission expenses, a decrease of $1.1
million in marketing programs and trade shows and a decrease of approximately
$0.5 million in office, facilities and depreciation related expenses due to
restructuring actions implemented. These decreases
are partially offset by an increase of approximately $0.2 million of non-cash compensation
expense. Research and development.
Research and development expenses decreased to $4.3 million for the quarter
ended June 30, 2003 from $5.4 million, or approximately 20%, for the quarter
ended June 30, 2002. The decrease in
these expenses were mainly attributable to a decrease of $0.9 million in
personnel related expenses due to a decrease in headcount and a decrease of
approximately $0.4 million in office, facilities and depreciation related
expenses due to restructuring actions implemented. These decreases are partially
offset by an increase of $0.2 million of non-cash compensation expense.
21 Purchased
in-process research and development. In-process research and development
expense represents technology acquired that on the date of acquisition, the
technology had not achieved technological feasibility and there was no
alternative future use based on the state of development. Because the product
under development may not achieve commercial viability, the amount of acquired
in-process research and development was immediately expensed. The nature of the
efforts required to develop the purchased in-process research and development
into a commercially viable product principally relate to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the product can be produced to meet its designed
specifications, including functions, features and technical performance
requirements. During the quarter ended June 30, 2003, there were no expenses
related to purchased in-process research and development. Purchased
in-process research and development of $1.0 million for the quarter ended June
30, 2002 is related to the OnDemand, Inc. acquisition that was completed on
April 1, 2002. General and administrative.
General and administrative expenses increased to $2.5 million for the quarter
ended June 30, 2003 from $2.0 million, or approximately 23%, for the quarter
ended June 30, 2002. The increase in these expenses is mainly due to an increase of
approximately $0.5 million of non-cash compensation expense primarily related to
vesting of restricted stock. Amortization of intangibles.
Amortization of intangibles was $0.9 million for the quarter ended June 30, 2003
compared to $1.0 million
for the quarter ended June 30, 2002. Restructuring expenses.
During the three months ended June
30, 2003 and fiscal year 2002, several areas of the Company
were restructured to reduce expenses and improve efficiency in
order to achieve cash flow and profitability breakeven in the near future. This
restructuring program included a worldwide workforce reduction and consolidation of
excess facilities and certain business functions.
Workforce reduction
The restructuring program resulted
in the reduction of 30 regular
employees during the three months ended June 30, 2003 and 108 regular employees
during fiscal year 2002. All areas of the Company were affected by this
restructuring. We recorded a total workforce reduction expense relating to
severance and benefits of approximately
$1.2 million and $3.8 million for the three months ended June 30, 2003 and
the year ended December 31, 2002, respectively.
Consolidation of excess facilities
We accrued for lease costs of $0.2
million and $2.8 million
during the three months ended June 30, 2003 and the year ended December 31, 2002,
respectively,
pertaining to the estimated future obligations for non-cancelable lease payments
for the consolidation of excess facilities relating to lease terminations and
non-cancelable lease costs. This expense included estimated sub-lease income
based on current comparable rates for leases in the respective markets. If
facilities rental rates continue to decrease in these markets or if it takes
longer than expected to sublease these facilities, the maximum amount by which the
loss could exceed the original estimate is approximately $1.9
million.
A summary of the restructuring expense and
other special charges is outlined as follows (in thousands): Amounts related to net lease expenses due to the consolidation of facilities
will be paid over the lease terms through fiscal 2011. As of June 30, 2003, $3.8 million related to the restructuring reserve remains outstanding. The
remaining accrual primarily relates to the termination and/or sublease of our
excess facilities and to severance and other benefits for impacted employees.
22
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Cupertino, CA 95014
(Address of Principal Executive Offices including Zip Code)
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed
since last report)
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2003
TABLE OF CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands)
(Unaudited)
June
30, 2003
December
31, 2002
ASSETS
Current assets:
Cash and cash
equivalents
$
30,718
$
30,731
Short-term
investments and restricted cash
1,097
9,245
Accounts receivable, net
18,711
15,343
Prepaid expenses
and other current assets
4,263
3,162
Total current assets
54,789
58,481
Restricted cash
1,500
1,500
Property and equipment, net
3,728
5,069
Goodwill, net
24,874
24,874
Intangible assets, net
3,194
4,975
Other assets
1,350
1,788
Total assets
$
89,435
$
96,687
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings
$
1,583
$
1,114
Accounts payable
3,387
5,936
Accrued expenses
6,300
9,450
Accrued restructuring
3,847
4,557
Deferred revenue
20,588
15,990
Total current liabilities
35,705
37,047
Deferred revenue,
long-term
Borrowings, long-term
Other liabilities
Total liabilities
43,325
45,876
Stockholders' equity:
Common stock
55
55
Treasury stock
(332
)
(332
)
Additional paid-in capital
231,639
230,192
Notes receivable from stockholders
--
(496
)
Deferred stock-based compensation
(4,004
)
(6,750
)
Accumulated deficit
(182,840
)
(172,503
)
Accumulated other
comprehensive income
1,592
645
Total stockholders' equity
46,110
50,811
Total liabilities and stockholders' equity
$
89,435
$
96,687
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
(Unaudited)
Restructuring expense
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Basic and diluted
58,567
54,756
57,894
54,307
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
Six
Months Ended
June
30, 2003
June 30, 2002
Cash flows from operating activities:
Net loss
$
(10,337
)
$
(18,757
)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization
1,492
1,965
Amortization of
intangibles
1,781
1,778
Non-cash compensation expense
3,312
957
Provision for
doubtful accounts
21
554
Warrants issued to customers
21
--
Loss on disposal
of assets
49
--
Purchased
in-process research and development
--
997
Changes in assets
and liabilities:
Accounts
receivable
(3,389
)
6,927
Prepaid
expenses and other current assets
(1,101
)
2,025
Other assets
438
(206
)
Accounts
payable
(2,549
)
(1,133
)
Accrued expenses
(3,150
)
(3,125
)
Accrued
restructuring
(582
)
3,510
Deferred revenue
2,352
(2,969
)
Other
liabilities
(42
)
(699
)
Net cash used in operating
activities
(11,684
)
(8,176
)
Cash flows from investing activities:
Property and equipment purchases
(218
)
(836
)
Proceeds from
disposal of property and equipment
18
88
Cash used for acquisition, net
of cash acquired
--
(4,772
)
Restricted cash
44
--
Purchases of short-term investments
(576
)
(9,044
)
Proceeds from sales and maturities of short-term investments
8,680
19,650
Net cash provided by investing
activities
7,948
5,086
Cash flows from financing activities:
Exercise of stock
options
58
1,463
Proceeds from
issuance of common stock
--
3,029
Proceeds from
issuance of common stock for employee stock purchase plan
674
981
Proceeds from
borrowings
3,491
444
Repayment of notes receivable
496
--
Repayment of
borrowings
(1,943
)
(669
)
Net cash provided by financing
activities
2,776
5,248
Effect of foreign currency exchange
rate changes
947
901
Net increase (decrease) in cash and cash
equivalents
(13
)
3,059
Cash and cash equivalents at beginning of
period
30,731
27,068
Cash and cash equivalents at end of
period
$
30,718
$
30,127
Supplemental noncash activities:
Common stock issued for stockholder notes
$
--
$
496
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
)
)
)
$
)
Add:
Non-cash compensation expense included in reported net loss
314
309
414
694
Less:
Non-cash compensation expense determined under fair value method
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Three
Months Ended
Six Months Ended
June 30, 2003
June 30, 2002
June 30, 2003
June 30, 2002
Barclays
11%
--
16%
--
H3G
--
16%
--
20%
Lloyds TSB
--
--
--
15%
EDS
--
--
--
10%
Royal Bank of Scotland
28%
--
17%
--
USAA
--
19%
--
11%
June 30, 2003
December 31, 2002
Accounts
receivable, net:
Accounts
receivable
$
11,140
$
8,783
Unbilled
receivables
7,727
6,741
Allowance for doubtful accounts
(156
(181
$
18,711
$
15,343
June 30, 2003
Property and equipment, net:
$
11,526
$
11,312
2,531
2,497
1,655
1,634
2,772
2,840
18,484
18,283
Accumulated depreciation and amortization
(14,756
(13,214
$
3,728
$
5,069
June 30, 2003
December 31, 2002
Accrued
expenses:
Accrued payroll and related expenses
$
5,480
$
8,570
Other accrued liabilities
820
880
$
6,300
$
9,450
Facilities
Severance and Benefits
Total
Reserve balance at December 31,
2002
$
3,366
$
1,191
$
4,557
Total expense
202
959
1,161
Non-cash
7
(130)
(123)
Cash paid
(212)
(1,536)
(1,748)
Reserve balance at June 30, 2003
$
3,363
$
484
$
3,847
Borrowings
Operating Leases
Sublease Income
Total
Remaining portion of Fiscal 2003
$
925
$
1,622
$
(271
)
$
2,276
Fiscal 2004
1,123
2,846
(438
)
3,531
Fiscal 2005
750
1,999
(143
)
2,606
Fiscal 2006
--
2,144
--
2,144
Fiscal 2007
--
1,868
--
1,868
Thereafter
--
4,468
--
4,468
Total
$
2,798
$
14,947
$
(852
)
$
16,893
June 30, 2002
)
)
$
)
)
)
)
)
)
$
Three
Months Ended
Six Months Ended
June 30, 2002
June 30, 2003
June 30, 2002
Warrants
outstanding
1,850
1,650
1,850
1,650
Employee
stock options
10,259
8,031
10,259
8,031
Common
stock subject to repurchase
4,336
7
4,336
7
16,445
9,688
16,445
9,688
Three Months Ended
Six Months Ended
June 30, 2003
June 30,
2002
June 30, 2003
June 30,
2002
Net loss
$
(3,391
)
$
(10,548
)
$
(10,337
)
$
(18,757
)
Other comprehensive income:
Foreign
currency translation gain
727
1,002
947
882
Comprehensive loss
$
(2,664
)
$
(9,546
)
$
(9,390
)
$
(17,875
)
4,331
5,096
7,197
Europe (principally United Kingdom)
10,598
25,714
30,311
146
90
376
June 30, 2003
December 31, 2002
Americas
$
1,985
$
2,867
Europe
(principally United Kingdom)
1,742
2,198
Other
1
4
$
3,728
$
5,069
%
%
%
%
Restructuring expense
%
%
%
%
Facilities
Severance and Benefits
Total
Reserve balance at December 31,
2002
$
3,366
$
1,191
$
4,557
Total expense
202
959
1,161
Non-cash
7
(130)
(123)
Cash paid
(212)
(1,536)
(1,748)
Reserve balance at June 30, 2003
$
3,363
$
484
$
3,847
On August 23, 2002, we implemented a stock option exchange program (the "Program"). Under the Program, holders of outstanding options with an exercise price of $3.00 or greater per share (the "Eligible Options") were given the choice of retaining these options or canceling the options in exchange for (i) restricted shares of common stock ("Restricted Stock") to be issued as soon as possible after the expiration of the Program period and/or (ii) replacement options issuable six (6) months and one (1) day following the cancellation of the Program at the closing market price on that date. On October 4, 2002, we amended the Program to provide the Chief Executive Officer and Chief Financial Officer of the Company, if they participated in the Program, with a Separate Restricted Stock Agreement (the "CEO and CFO Agreement"), which includes specific vesting provisions based on achieving certain financial performance goals. 11,668,875 options were subject to the Program, which closed on October 9, 2002.
Employees tendered 8,109,640 stock options and received 2,780,967 shares of Restricted Stock pursuant to the Program. In addition, employees tendered 672,948 stock options, which were cancelled and to the extent an employee was still with the Company were replaced six (6) months and one (1) day following expiration of the Program. The tendered stock options represented approximately 59% of our total outstanding stock options as of the expiration date of the Program.
In addition, in October 2002, we issued 3,706,745 shares of Restricted Stock to our employees residing in the United Kingdom, including to our Chief Executive Officer. The Restricted Stock issued to our Chief Executive Officer is subject to the CEO and CFO Agreement.
The Program has been accounted for under the guidance of Emerging Issues Task Force Issue No. 00-23 "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25" and Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25." Because we offered to cancel existing fixed stock options in exchange for a grant of restricted stock within six months of the cancellation date of the existing options, the Eligible Options became subject to variable accounting treatment at the commencement date of the Program. Variable accounting ceased upon cancellation of the tendered options. A total of 2,886,287 Eligible Options that were not tendered will remain subject to variable accounting. We recorded $6.1 million of unearned stock-based compensation expense based on the fair market value of the Restricted Stock at the date of issuance. For the quarter ended June 30, 2003, $1.3 million was recorded as stock-based compensation expense. The compensation expense on variable options will be re-measured at the end of each operating period until the options are exercised, forfeited or have expired. Depending upon movements in the market value of our common stock, this accounting treatment may result in significant additional stock-based compensation charges in future periods.
As part of the Program implemented in 2002, we issued 499,068 replacement options at the current market value of $0.88 per share on April 11, 2003 to employees.
The total stock-based compensation expense by operating classification is described as follows (in thousands):
Three Months Ended |
||||||
June 30, 2003 |
June 30, 2002 |
|||||
Cost of revenues |
$ |
314 |
$ |
74 |
||
Sales and marketing |
|
277 |
|
100 |
||
Research and development |
|
370 |
|
193 |
||
General and administrative |
|
512 |
|
74 |
||
Total |
$ |
1,473 |
$ |
441 |
||
23
Other Income (Expense), net, and Interest Expense
Interest and other income, net, consist primarily of interest income generated from our cash, cash equivalents, short-term investments, foreign currency gains and losses and other non-operating income and expenses. Interest expenses are incurred in connection with outstanding borrowings. Other income (expense), net, decreased to none for the quarter ended June 30, 2003 from $0.3 million for the quarter ended June 30, 2002. The decrease is mainly attributable to a lower return on our investments as a result of declining investment balances and lower interest rates and an asset write-off of disposed property and equipment.
Provision for Income Taxes
We have not generated taxable income since inception and, as a result, no provision for income taxes was recorded during the periods presented. Our deferred tax assets primarily consist of net operating loss carryforwards, nondeductible allowances and research and development tax credits. We have recorded a valuation allowance for the full amount of our net deferred tax assets, as the future realization of the tax benefit is not considered by management to be more-likely-than-not.
Comparison of the Six Months Ended June 30, 2003 and 2002
Revenues
License. Total license revenues decreased to $10.6 million for the six months ended June 30, 2003 from $17.1 million, or approximately 38%, for the six months ended June 30, 2002. License revenues for enterprise solutions decreased to $7.9 million for the six months ended June 30, 2003 from $13.9 million, or approximately 43%, for the six months ended June 30, 2002. License revenues for application products decreased to $2.7 million for the six months ended June 30, 2003 from $3.2 million, or approximately 15%, for the six months ended June 30, 2002. The overall license revenue decrease was primarily due to the lack of growth in the number of product implementations by new and existing customers as they reduced or delayed spending.
Service. Total service revenues, including reimbursement of out-of-pocket expenses, decreased to $20.3 million for the six months ended June 30, 2003 from $20.8 million, or approximately 2%, for the six months ended June 30, 2002. Service revenues for enterprise solutions remained flat at $15.3 million for both the six months ended June 30, 2003 and 2002. Service revenues for application products decreased to $5.0 million for the six months ended June 30, 2003 from $5.5 million, or approximately 8%, for the six months ended June 30, 2002. The overall service revenue decrease was primarily due to the lack of growth in the number of product implementations by new and existing customers as they reduced or delayed spending.
Cost of revenues
License. Cost of license revenues decreased to $0.6 million for the six months ended June 30, 2003 from $1.1 million, or approximately 45%, for the six months ended June 30, 2002. These costs resulted in license gross margins of approximately 95% and 94% for the six months ended June 30, 2003 and 2002, respectively. The aggregate cost of license revenues is in line with the decrease in aggregate license revenues. We expect cost of license revenues to remain in the four to six percent range of license revenues.
Service. Cost of service revenues decreased to $12.7 million for the six months ended June 30, 2003 from $16.3 million, or approximately 22%, for the six months ended June 30, 2002. These costs resulted in service gross margins of 37% and 21% for the six months ended June 30, 2003 and 2002, respectively. Service gross margins improved mainly as the result of combined effects of restructuring actions implemented, increased efficiencies and reduced spending. We expect cost of services revenues to remain at or above 40% of service revenues.
24
Operating Expenses
Sales and marketing. Sales and marketing expenses decreased to $11.4 million for the six months ended June 30, 2003 from $17.7 million, or approximately 35%, for the six months ended June 30, 2002. The decrease in these expenses were mainly attributable to a decrease of $4.3 million in personnel related expenses due to a decrease in headcount and commission expenses, a decrease of $1.9 million in marketing programs, trade shows and professional services and a decrease of approximately $0.6 million in office, facilities and depreciation related expenses due to restructuring actions implemented. These decreases are partially offset by an increase of $0.5 million of non-cash compensation expense.
Research and development. Research and development expenses decreased to $8.8 million for the six months ended June 30, 2003 from $10.5 million, or approximately 16%, for the six months ended June 30, 2002. The decrease in these expenses were mainly attributable to a decrease of $1.5 million in personnel related expenses due to a decrease in headcount and bonus expenses and a decrease of approximately $0.7 million in overhead allocations, office, facilities and depreciation related expenses due to restructuring actions implemented. These decreases are partially offset by an increase of $0.5 million of non-cash compensation expense.
Purchased in-process research and development. In-process research and development expense represents technology acquired that on the date of acquisition, the technology had not achieved technological feasibility and there was no alternative future use based on the state of development. Because the product under development may not achieve commercial viability, the amount of acquired in-process research and development was immediately expensed. The nature of the efforts required to develop the purchased in-process research and development into a commercially viable product principally relate to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the product can be produced to meet its designed specifications, including functions, features and technical performance requirements. During the six months ended June 30, 2003, there were no expenses related to purchased in-process research and development. Purchased in-process research and development of $1.0 million for the six months ended June 30, 2002 is related to the OnDemand, Inc. acquisition that was completed on April 1, 2002.
General and administrative. General and administrative expenses increased to $4.5 million for the six months ended June 30, 2003 from $4.3 million, or approximately 5%, for the six months ended June 30, 2002. The increase in these expenses were mainly attributable to an increase of $0.8 million of non-cash compensation expense primarily related to vesting of restricted stock and an increase of $0.2 million state tax related expenses. These increases are partially offset by a decrease of $0.5 million in personnel related expenses due to a decrease in headcount and bonus expenses and a decrease of $0.3 million in professional services and other expenses.
Amortization of intangibles. Amortization of intangibles was $1.8 million for both the six months ended June 30, 2003 and the six months ended June 30, 2002.
Restructuring expenses. During the three months ended June 30, 2003 and fiscal year 2002, several areas of the Company were restructured to reduce expenses and improve efficiency in order to achieve cash flow and profitability breakeven in the near future. This restructuring program included a worldwide workforce reduction and consolidation of excess facilities and certain business functions.
Workforce reduction
The restructuring program resulted in the reduction of 30 regular employees during the six months ended June 30, 2003 and 108 regular employees during fiscal year 2002. All areas of the Company were affected by this restructuring. We recorded a total workforce reduction expense relating to severance and benefits of approximately $1.2 million and $3.8 million for the three months ended June 30, 2003 and the year ended December 31, 2002, respectively.
25
Consolidation of excess facilities
We accrued for lease costs of $0.2 million and $2.8 million during the six months ended June 30, 2003 and the year ended December 31, 2002, respectively, pertaining to the estimated future obligations for non-cancelable lease payments for the consolidation of excess facilities relating to lease terminations and non-cancelable lease costs. This expense included estimated sub-lease income based on current comparable rates for leases in the respective markets. If facilities rental rates continue to decrease in these markets or if it takes longer than expected to sublease these facilities, the maximum amount by which the loss could exceed the original estimate is approximately $1.9 million.
A summary of the restructuring expense and other special charges is outlined as follows (in thousands):
Facilities | Severance and Benefits | Total | ||||
|
|
| ||||
Reserve balance at December 31, 2002 | $ | 3,366 | $ | 1,191 | $ | 4,557 |
Total expense | 202 | 959 | 1,161 | |||
Non-cash | 7 | (130) | (123) | |||
Cash paid | (212) | (1,536) | (1,748) | |||
|
|
| ||||
Reserve balance at June 30, 2003 | $ | 3,363 | $ | 484 | $ | 3,847 |
|
|
|
Amounts related to net lease expenses due to the consolidation of facilities will be paid over the lease terms through fiscal 2011. As of June 30, 2003, $3.8 million related to the restructuring reserve remains outstanding. The remaining accrual primarily relates to the termination and/or sublease of our excess facilities and to severance and other benefits for impacted employees.
Non-cash compensation expense. We recorded amortization of stock-based compensation expense of $0.4 million for the six months ended June 30, 2003 compared to $1.0 million for the six months ended June 30, 2002 in relation to options granted prior to our initial public offering with an exercise price lower than the deemed fair market value of the underlying common stock at the date of issuance. At June 30, 2003, approximately $0.5 million of stock-based compensation remained to be amortized.
On August 23, 2002, we implemented a stock option exchange program (the "Program"). Under the Program, holders of outstanding options with an exercise price of $3.00 or greater per share (the "Eligible Options") were given the choice of retaining these options or canceling the options in exchange for (i) restricted shares of common stock ("Restricted Stock") to be issued as soon as possible after the expiration of the Program period and/or (ii) replacement options issuable six (6) months and one (1) day following the cancellation of the Program at the closing market price on that date. On October 4, 2002, we amended the Program to provide the Chief Executive Officer and Chief Financial Officer of the Company, if they participated in the Program, with a Separate Restricted Stock Agreement (the "CEO and CFO Agreement"), which includes specific vesting provisions based on achieving certain financial performance goals. 11,668,875 options were subject to the Program, which closed on October 9, 2002.
Employees tendered 8,109,640 stock options and received 2,780,967 shares of Restricted Stock pursuant to the Program. In addition, employees tendered 672,948 stock options, which were cancelled and to the extent an employee was still with the Company were replaced six (6) months and one (1) day following expiration of the Program. The tendered stock options represented approximately 59% of our total outstanding stock options as of the expiration date of the Program.
In addition, in October 2002, we issued 3,706,745 shares of Restricted Stock to our employees residing in the United Kingdom, including to our Chief Executive Officer. The Restricted Stock issued to our Chief Executive Officer is subject to the CEO and CFO Agreement.
The Program has been accounted for under the guidance of Emerging Issues Task Force Issue No. 00-23 "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25" and Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25." Because we offered to cancel existing fixed stock options in exchange for a grant of restricted stock within six months of the cancellation date of the existing options, the Eligible Options became subject to variable accounting treatment at the commencement date of the Program. Variable accounting ceased upon cancellation of the tendered options. A total of 2,886,287 Eligible Options that were not tendered will remain subject to variable accounting. We recorded $6.1 million of unearned stock-based compensation expense based on the fair market value of the Restricted Stock at the date of issuance. For the six months ended June 30, 2003, $2.9 million was recorded as stock-based compensation expense. The compensation expense on variable options will be re-measured at the end of each operating period until the options are exercised, forfeited or have expired. Depending upon movements in the market value of our common stock, this accounting treatment may result in significant additional stock-based compensation charges in future periods.
26
As part of the Program implemented in 2002, we issued 499,068 replacement options at the current market value of $0.88 per share on April 11, 2003 to employees.
The total stock-based compensation expense by operating classification is described as follows (in thousands):
Six Months Ended |
||||||
June 30, 2003 |
June 30, 2002 |
|||||
Cost of revenues |
$ |
778 |
$ |
171 |
||
Sales and marketing |
|
691 |
|
236 |
||
Research and development |
|
865 |
|
390 |
||
General and administrative |
|
978 |
|
160 |
||
Total |
$ |
3,312 |
$ |
957 |
||
Other Income (Expense), net, and Interest Expense
Interest and other income, net, consist primarily of interest income generated from our cash, cash equivalents, short-term investments, foreign currency gains and losses and other non-operating income and expenses. Interest expenses are incurred in connection with outstanding borrowings. Other income (expense), net, decreased to $(0.2) million for the six months ended June 30, 2003 from $0.5 million for the six months ended June 30, 2002. The decrease is mainly attributable to a lower return on our investments as a result of declining investment balances and lower interest rates and the write-off of a long outstanding acquisition-related balance.
Provision for Income Taxes
We have not generated taxable income since inception and, as a result, no provision for income taxes was recorded during the periods presented. Our deferred tax assets primarily consist of net operating loss carryforwards, nondeductible allowances and research and development tax credits. We have recorded a valuation allowance for the full amount of our net deferred tax assets, as the future realization of the tax benefit is not considered by management to be more-likely-than-not.
Liquidity and Capital Resources
Our cash, cash equivalents, short-term investments and restricted cash and long-term restricted cash consist principally of money market funds, municipal bonds, and marketable equity securities, which totaled $33.3 million at June 30, 2003. All of our short-term investments are classified as available-for-sale under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The securities are carried at fair market value. Gains and losses on investments are recognized when realized on the consolidated statements of operations.
Cash used in operating activities primarily consists of our net loss adjusted for certain non-cash items including depreciation, amortization, non-cash compensation expense and the effect of changes in assets and liabilities. Cash used in operating activities for the six months ended June 30, 2003 was $11.7 million and consisted primarily of our net loss of $10.3 million adjusted for non-cash items of approximately $6.7 million and the effect of changes in assets and liabilities of approximately $8.0 million. The effect of changes in assets and liabilities resulted primarily from an increase in accounts receivable of $3.4 million, an increase in prepaid expenses and other assets of $1.1 million, a decrease in accounts payable of $2.5 million, a decrease in accrued expenses of $3.2 million and partially offset by an increase in deferred revenue of $2.4 million. Cash used in operating activities for the six months ended June 30, 2002 was $8.2 million and consisted primarily of our net loss of $18.8 million adjusted for non-cash items of $6.3 million and the effect of changes in assets and liabilities of $4.3 million. The effect of changes in assets and liabilities resulted primarily from a decrease in accounts receivable of $6.9 million, a decrease in prepaid expenses and other assets of $2.0 million, an increase in accrued restructuring expenses of $3.5 million and partially offset by a decrease in accounts payable of $1.1 million, a decrease in accrued expenses of $3.1 million, a decrease in other liabilities of $0.7 million and a decrease in deferred revenue of $3.0 million.
27
Cash provided by investing activities for the six months ended June 30, 2003 was $7.9 million and consisted primarily of $8.1 million of proceeds from sales and maturities of short-term investments (net of purchases of short-term investments) and partially offset by $0.2 million of property and equipment purchases. Cash provided by investing activities for the six months ended June 30, 2002 was $5.1 million and consisted primarily of $10.6 million of proceeds from sales and maturities of short-term investments (net of purchases of short-term investments) and partially offset by $4.8 million for proceeds used in the acquisition of OnDemand, Inc. (net of cash acquired) and $0.8 million of property and equipment purchases.
Cash provided by financing activities for the six months ended June 30, 2003 was $2.8 million and consisted primarily of proceeds from borrowings of $1.5 million (net of repayment of borrowings), proceeds from the issuance of common stock for the employee stock purchase plan of $0.7 million and $0.5 million from the repayment of notes receivable. Cash provided by financing activities for the six months ended June 30, 2002 was $5.2 million and consisted of proceeds from the exercise of stock options of approximately $1.4 million, proceeds from the issuance of common stock for the employee stock purchase plan of $1.0 million, proceeds from the sale of 479,100 shares of our common stock to Canadian Imperial Holdings Inc. for an aggregate purchase price of $3.0 million and partially offset by the repayment of borrowings of $0.2 million (net of proceeds from borrowings).
At June 30, 2003, we had a balance of $1.5 million in the form of short-term investments, which were restricted from withdrawal and is now classified as long-term restricted cash on our balance sheet. The balance serves as a security deposit in a revenue transaction. At June 30, 2003 and December 31, 2002, we also had an interest bearing certificate of deposit classified as short-term investments and restricted cash which serves as collateral for a $0.4 million letter of credit security deposit for a leased facility.
Notes payable
Borrowings consist of several notes payable for equipment leases assumed by Chordiant upon the acquisition of OnDemand, Inc. Then interest rates range from 12.86% to 15.61%. The notes are due at various times from 2003 through 2004. As of June 30, 2003, the total outstanding notes payable balance for equipment leases was approximately $0.3 million.
In February 2003, we entered into a note payable agreement for our Directors' & Officers' ("D&O") insurance policy totaling $1.0 million. The interest rate is 6% and principal and interest payments on the note payable will be made on a monthly basis through October 2003. As of June 30, 2003, the outstanding note payable balance related to the D&O insurance policy was $0.3 million.
Revolving line of credit
Our line of credit with Comerica Bank which is comprised of two elements, an accounts receivable line and an equipment line, is effective from March 28, 2003.
Under the new line of credit, our assets collateralize borrowings under both elements, and we are required to maintain a minimum quick ratio of 2.00 to 1.00, a tangible net worth of at least $15.0 million plus 60% of the proceeds of any equity offerings and subordinated debt issuance subsequent to the effective date of this line of credit agreement. Certain other covenants also apply.
Under the new terms and conditions of the accounts receivable line, the total amount of the line of credit is $7.5 million. Borrowings under the accounts receivable line of credit will bear interest at the lending bank's prime rate plus 0.5%. Advances are available on a non-formula basis up to $2,000,000 (non-formula portion), however, if outstanding receivables exceed $2,000,000, then all outstanding receivables shall be covered by 80% of Eligible Accounts.
28
Borrowings under the new $2.5 million equipment line bear interest at the lending bank's prime rate plus 1.0%. In March 2003, we borrowed $2.5 million against the equipment line of credit. At June 30, 2003, the outstanding line of credit balance was $2.2 million. At June 30, 2003, we were in compliance with the respective debt covenants.
We have no material commitments for capital expenditures or strategic commitments and we anticipate a low rate of capital expenditures. We may use cash to acquire or license technology, products or businesses related to our current business. In addition, we anticipate that we will experience low or no growth or a decline in our operating expenses for the foreseeable future and that our operating expenses will continue to be a material use of our cash resources.
Future Commitments
Future payments due under debt and lease obligations as of June 30, 2003 are as follows (in thousands):
Borrowings | Operating Leases | Sublease Income | Total | ||||||
|
|
|
|
||||||
Remaining portion of Fiscal 2003 | $ | 925 | $ | 1,622 | $ | (271 | ) | $ | 2,276 |
Fiscal 2004 | 1,123 | 2,846 | (438 | ) | 3,531 | ||||
Fiscal 2005 | 750 | 1,999 | (143 | ) | 2,606 | ||||
Fiscal 2006 | -- | 2,144 | -- | 2,144 | |||||
Fiscal 2007 | -- | 1,868 | -- | 1,868 | |||||
Thereafter | -- | 4,468 | -- | 4,468 | |||||
|
|
|
|
||||||
Total | $ | 2,798 | $ | 14,947 | $ | (852 | ) | $ | 16,893 |
|
|
|
|
We have entered into a two-year agreement, beginning March 19, 2002, with Merit International ("Merit"), pursuant to which Merit will provide exclusive training and certain consulting services for a fixed fee. Upon the effective date of the agreement, we transferred to Merit our training operations including selected employees. In addition, Merit will provide to our customers resource development services in exchange for an agreed-upon fee negotiated on a transaction-by-transaction basis. We believe this agreement will provide us with high quality training and consulting services. We will pay Merit certain minimum revenue amounts, as follows: July 1, 2003 to December 31, 2003: (British Pounds) 942,000; and January 1, 2004 to June 30, 2004: (British Pounds) 429,300, for a total of (British Pounds) 1.4 million. After six months from the effective date, we may, at our option, terminate the agreement and pay an early termination fee that reduces from (British Pounds) 555,000 to (British Pounds) 0 over time. Payment of the early termination fee will release our obligation related to the minimum revenue target. As of June 30, 2003, the early termination fee that we would have to pay to terminate the agreement was approximately (British Pounds) 315,000.
29
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to estimates of percentage of completion on our service contracts, uncollectible receivables, investment values, intangible assets, restructuring costs and contingencies. 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 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 policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:
* | Revenue recognition, including estimating the total estimated days to complete sales arrangements involving significant implementation or customization essential to the functionality of our product; |
* | Estimating valuation allowances and accrued liabilities, specifically the allowance for doubtful accounts, and assessment of the probability of the outcome of our current litigation; |
* | Restructuring costs; and |
* | Determining functional currencies for the purposes of consolidating our international operations. |
Revenue recognition
We derive revenues from licenses of our software and related services, which include assistance in implementation, customization and integration, post-contract customer support, training and consulting. In addition to determining our results of operations for a given period, our revenue recognition determines the timing of certain expenses, such as sales commissions and royalties. Revenue recognition rules for software companies are very complex and certain judgments affect the application of our revenue policy. 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.
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 product. For contracts involving significant implementation or customization essential to the functionality of our product, we recognize the license and professional consulting services revenues using the percentage-of-completion method using labor hours incurred as the measure of progress towards completion as prescribed by Statement of Position ("SOP") No. 81-1, "Accounting for Performance of Construction-Type and Certain Product-Type Contracts." The progress toward completion is measured based on the "go-live date." We define the "go-live date" as the date on which the essential functionality has been delivered or on which the application enters into a production environment or the point at which no significant additional Chordiant supplied professional services resources are required. Estimates are subject to revisions as the contract progresses to completion. We account for the change in estimate in the period the change has been identified. Provisions for estimated contract losses 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 either upon delivery if the project has reached the go-live date or if the project has not reached the go-live date under the percentage of completion method. We classify revenues from these arrangements as license and service revenues based upon the estimated fair value of each element.
On contracts not involving significant implementation or customization essential to the functionality of our product, we recognize license revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection of the fee is probable and delivery has occurred as prescribed by SOP No. 97-2, "Software Revenue Recognition."
30
We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not probable, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash.
For arrangements with multiple elements, we recognize revenue for services and post-contract customer support based upon vendor specific objective evidence ("VSOE") of fair value of the respective elements. VSOE of fair value for the services element is based upon the standard hourly rates we charge for services when such services are sold separately. VSOE of fair value for annual post-contract customer support is established with the optional stated future renewal rates included in the contracts. When contracts contain multiple elements, and VSOE of fair value exists for all undelivered elements, we account for the delivered elements, principally the license portion, based upon the "residual method" as prescribed by SOP No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions."
In situations in which we are obligated to provide unspecified additional software products in the future, we recognize revenue as a subscription ratably over the term of the commitment period.
For all sales we use either a binding purchase order or signed 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 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 recognize revenue for post-contract customer support ratably over the support period, generally one year. Our training and consulting services revenues are recognized as such services are performed.
Allowance for doubtful accounts and accruals for litigation
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 accounts receivable balance was $18.7 million, net of allowance for doubtful accounts of $0.2 million as of June 30, 2003. 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.
Our current estimated range of liability related to some of the pending litigation is based on claims for which we can estimate the amount and range of loss. We have recorded at least the minimum estimated liability related to those claims, when there is a range of loss. Because of the uncertainties related to both the amount and range of loss on the remaining pending litigation, we are unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise our estimates. Such revisions in our estimates could materially impact our results of operations and financial position.
Restructuring costs
During the quarter ended June 30, 2003 and fiscal 2002, we implemented cost-reduction plans as part of our continued effort to streamline our operations to reduce ongoing operating expenses. These plans resulted in restructuring charges related to, among others, the consolidation of excess facilities. These charges relate to facilities and portions of facilities we no longer utilize and either seek to terminate early or sublease. Lease termination costs for the abandoned facilities were estimated for the remaining lease obligations and brokerage fees 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 continued negotiations with landlords or changes in the market, the ultimate restructuring expenses for these abandoned facilities could vary by material amounts.
31
Determining functional currencies for the purpose of consolidation
We have several foreign subsidiaries which together accounted for approximately 84% of our revenues, 45% of our assets and 65% of our total liabilities as of and for the six months ended June 30, 2003.
In preparing our condensed consolidated financial statements, we are required to translate the financial statements of the foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States dollars. This process results in exchange gains and losses which, under the relevant accounting guidance are either included within the statement of operations or as a separate part of our net equity under the caption "cumulative translation adjustment."
Under the relevant accounting guidance the treatment of these translation gains or losses is dependent upon our management's determination of the functional currency of each subsidiary. The functional currency is determined based on management judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts 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 is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is 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 statement of operations. If we dispose of any of our subsidiaries, any cumulative translation gains or losses would be realized into our 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 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, we had cumulative translation gains of approximately $0.9 million which were included as part of accumulated other comprehensive income within our balance sheet at June 30, 2003.
The magnitude of these gains or losses is dependent upon movements in the exchange rates of the foreign currencies in which we transact business against the United States dollar. These currencies include the United Kingdom Pound Sterling, the Euro and Australian and Canadian Dollars. Any future translation gains or losses could be significantly higher than those noted in each of these years. In addition, if we determine that a change in the functional currency of one of our subsidiaries has occurred at any point in time we would be required to include any translation gains or losses from the date of change in our statement of operations.
Recent Accounting Pronouncements
Effective January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," and also SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 143 requires that the fair value of an asset retirement obligation be recorded as a liability in the period in which the Company incurs the obligation. SFAS No. 145 requires that certain gains and losses from extinguishment of debt no longer be classified as an extraordinary item. The adoption of these statements did not have a significant impact on our consolidated financial position or results of operations.
Effective January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The adoption of this statement did not have a significant impact on our consolidated financial position or results of operations.
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends SFAS No. 133 for certain decisions made by the FASB Derivatives Implementation Group. In particular, SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (4) amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most provisions of SFAS No. 149 are to be applied prospectively. We do not expect the adoption of SFAS No. 149 to have a material impact upon our financial position or results of operations.
32
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 changes the accounting for certain financial instruments that under previous guidance issuers could account for as equity. It requires that those instruments be classified as liabilities in balance sheets. the guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003. We do not expect the adoption of SFAS No. 150 to have a material impact upon our financial position or results of operations.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of this interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a significant impact on our consolidated financial position or results of operations.
As permitted under Delaware law, we have agreements whereby we indemnify our officers, directors and certain employees for certain events or occurrences while the employee, officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a Director and Officer insurance policy that limits our exposure and may enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal.
We enter into standard indemnification agreements in our ordinary course of business. Pursuant to these agreements, we indemnify, defend, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our business partners or customers, in connection with patent, or any copyright or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual after execution of the agreement. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of June 30, 2003.
We enter into arrangements with our business partners, whereby the business partner agrees to provide services as a subcontractor for our implementations. We may, at our discretion and in the ordinary course of business, subcontract the performance of any of our services. Accordingly, we enter into standard indemnification agreements with our customers, whereby we indemnify them for other acts, such as personal property damage, of our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have general and umbrella insurance policies that may enable us to recover a portion of any amounts paid. We have not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of June 30, 2003.
When as part of an acquisition we acquire all of the stock or all of the assets and liabilities of a company, we 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 we could be required to make for such obligations is undeterminable at this time. All of these obligations were grandfathered under the provisions of FIN 45 as they were in effect prior to March 31, 2003. Accordingly, we have no liabilities recorded for these liabilities as of June 30, 2003.
33
We warrant that our software products will perform in all material respects in accordance with our 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, we warrant that our maintenance and consulting services will be performed consistent with generally accepted industry standards through completion of the agreed upon services. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history, however, we have not incurred significant expense under our product or services warranties to date. As a result, we believe the estimated fair value on these warranties is minimal. Accordingly, we have no liabilities recorded for these warranties as of June 30, 2003.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires us to consolidate a variable interest entity if we are subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We do not currently have any variable interest entities and, accordingly, the adoption of FIN 46 did not have a significant impact on our consolidated financial position or results of operations.
RISK FACTORS
Weakness in technology spending in our target markets combined with geopolitical concerns, vendor viability concerns and our limited resources may make the closing of license transactions to new and existing customers difficult.
Our revenues fell in the six months ended June 30, 2003 compared to revenues for the six months ended June 30, 2002. Our revenues will continue to decrease in 2003 if we are unable to enter into new large-scale license transactions with new and existing customers. The current state of world affairs and geopolitical concerns have left many customers reluctant to enter into new license transactions without some assurance that the vendors will continue to operate and that the economy both in the customer's home country and worldwide will have some economic and political stability. The issues of vendor viability including our limited resources and geopolitical instability will continue to make closing license transactions difficult. Our ability to enter into new license transactions also directly affects our ability to create additional consulting services and maintenance revenues, on which we also depend.
We expect to continue to incur losses and use cash and may not achieve or maintain profitability. In addition, we may continue to reduce our cash balance, which would cause our stock price to decline.
We incurred losses of $3.4 million and $10.3 million for the three and six months ended June 30, 2003, respectively. As of June 30, 2003, we had an accumulated deficit of $182.8 million. We expect to continue to incur losses during the next fiscal year. Moreover, we expect to continue to incur significant sales and marketing and research and development expenses. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot be certain that we can achieve this growth, maintain our past growth rates or generate sufficient revenues to achieve profitability. Cash and cash equivalents, short-term investments and restricted cash and long-term restricted cash at June 30, 2003 and December 31, 2002 was $33.3 million and $41.5 million, respectively.
Because a small number of customers account for a substantial portion of our revenues, our revenues are dependent upon our ability to continue to win large contracts with new and existing customers.
We derive a significant portion of our software license revenues in each quarter from a limited number of customers. The loss of a major customer in a particular quarter could cause a decrease in revenue, deferred revenues and net income. For the three months ended June 30, 2003, Barclays and Royal Bank of Scotland accounted for 11% and 28% of our total revenues, respectively. For the three months ended June 30, 2002, Hutchinson 3 G and USAA accounted for 16% and 19% of our total revenues, respectively. For the six months ended June 30, 2003, Barclays and Royal Bank of Scotland accounted for 16% and 17% of our total revenues, respectively. For the six months ended June 30, 2002, Hutchinson 3 G, USAA, Lloyds TBS and EDS accounted for 20%, 11%, 15% and 10% of our total revenues, respectively. While our size has increased and customer concentration has fluctuated, we expect that a limited number of customers will continue to account for a substantial portion of our revenues. As a result, if we lose a major customer, or if a contract is delayed or cancelled or we do not contract with new major customers, our revenues and net loss would be adversely affected. In addition, customers that have accounted for significant revenues in the past may not generate revenues in any future period, causing our failure to obtain new significant customers or additional orders from existing customers to materially affect our operating results.
34
Our percentage derived from deferred revenue may continue to decline, which may reduce our forecasting accuracy resulting in investor disappointment and resulting stock price reductions.
Historically, a large amount of license revenue flowed through deferred revenue. For the three months ended June 30, 2003 and 2002, 26% and 78%, respectively, of license revenue was derived from deferred revenue. For the six months ended June 30, 2003 and 2002, 35% and 79%, respectively, of license revenue was derived from deferred revenue. Less reliance on deferred revenue requires the licensing of software that does not involve significant implementation or customization essential to its functionality. If we are unable to increase license revenues from products that do not involve significant implementation or customization essential to its functionality, we may miss our revenue forecasts, which may cause our stock price to decline.
Our reliance on international operations may cause reduced revenues and increased operating expenses.
For the three months ended June 30, 2003, international revenues were $14.1 million or approximately 82% of our total revenues. For the three months ended June 30, 2002, international revenues were $10.7 million or approximately 71% of our total revenues. For the six months ended June 30, 2003, international revenues were $25.8 million or approximately 84% of our total revenues. For the six months ended June 30, 2002, international revenues were $30.7 million or approximately 81% of our total revenues. We expect international revenues will continue to represent a significant portion of our total revenues in future periods. We have faced, and will continue to face, risks associated with:
* | Difficulties in managing our widespread operations; |
* | Difficulties in hiring qualified local personnel; |
* | Seasonal fluctuations in customer orders; |
* | Longer accounts receivable collection cycles; |
* | Expenses associated with products used in foreign markets; |
* | Currency fluctuation and hedging activities; and |
* | Economic downturns in international economies. |
Any of these factors could have a significant impact on our ability to license products on a competitive and timely basis and could adversely affect our operating expenses and net income. Our international sales are denominated in both the U.S. dollar and in local currencies. As a result, increases in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets and could negatively affect our operating results and cash flows.
Competition in our markets is intense and could reduce our sales and prevent us from achieving profitability and maintaining adequate liquidity.
Increased competition in our markets could result in price reductions, reduced gross margins and loss of market share, any one of which could reduce our future revenues and liquidity. The market for our products is intensely competitive, evolving and subject to rapid technological change. The intensity of competition is expected to increase in the future. As discussed above, we consider our primary competition to be from internal development, custom systems integration projects and application software competitors. In particular, we compete with:
* | Internal information technology departments: in-house information technology departments of potential customers have developed or may develop systems that provide some or all of the functionality of our products. We expect that internally developed application integration and process automation efforts will continue to be a significant source of competition. |
* | Point application vendors: we compete with providers of stand-alone point solutions for web-based customer relationship management and traditional client/server-based, call-center service customer and sales-force automation solution providers. |
Many of our competitors have greater resources and broader customer relationships than we do. In addition, many of these competitors have extensive knowledge of our industry. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to offer a single solution and to increase the ability of their products to address customer needs.
35
We may experience a shortfall in revenue or earnings or otherwise fail to meet public market expectations, which could materially and adversely affect our business, the market price of our common stock and our liquidity.
Our revenues and operating results may fluctuate significantly because of a number of factors, many of which are outside of our control. Some of these factors include:
* | Size and timing of individual license transactions; |
* | Delay or deferral of customer implementations of our products; |
* | Lengthening of our sales cycle; |
* | Further deterioration and changes in domestic and foreign markets and economies; |
* | Success in expanding our global services organization, direct sales force and indirect distribution channels; |
* | Timing of new product introductions and product enhancements; |
* | Appropriate mix of products licensed and services sold; |
* | Levels of international transactions; |
* | Activities of and acquisitions by competitors; |
* | Product and price competition; and |
* | Our ability to develop and market new products and control costs. |
One or more of the foregoing factors may cause our operating expenses to be disproportionately high during any given period or may cause our revenues and operating results to fluctuate significantly. Based upon the preceding factors, we may experience a shortfall in revenues, earnings or liquidity or otherwise fail to meet public market expectations, which could materially and adversely affect our business, financial condition, results of operations and the market price of our common stock.
Our operating results fluctuate significantly and an unanticipated decline in revenues or cash flow may disappoint investors and result in a decline in our stock price.
Our quarterly revenues depend primarily upon product implementation by our customers. We have historically recognized most of our license and services revenue through the percentage-of-completion method, using labor hours incurred as the measure of progress towards completion of implementation of our products, and we expect this practice to continue. Thus, delays in implementation by our customers and systems integration partners would reduce our quarterly revenue. Historically, a significant portion of new customer orders have been booked in the third month of the 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 deferred revenue. If our revenues or operating margins are below the expectations of the investment community, our stock price is likely to decline.
Our inability to maintain and grow our relationships with systems integrators would harm our ability to market and implement our products and reduce future revenues.
Inability to establish or maintain relationships with systems integrators would significantly harm our capacity to license our software products. Systems integrators install and deploy our products, in addition to those of our competitors, and perform custom integration of systems and applications. Some systems integrators also engage in joint marketing and sales efforts with us. If these relationships deteriorate, we will have to devote substantially more resources to the sales and marketing, implementation and support of our products than we would have to otherwise. Our efforts may also not be as effective as those of the systems integrators, which could reduce revenues. 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 these systems integrators and, as a result, these systems integrators may be more likely to recommend competitors' products and services.
Failure to successfully customize or implement our products for a customer could prevent recognition of revenues, collection of amounts due or cause legal claims by the customer.
If a customer is not able to customize or deploy our products successfully, the customer may not complete expected product deployment, which would prevent recognition of revenues and collection of amounts due, and could result in claims against us. We have, in the past, had disputes with customers concerning product performance.
Our primary products have a long sales and implementation cycle, which makes it difficult to predict our quarterly results and may cause our operating results to vary significantly.
The period between initial contact with a prospective customer and the implementation of our products is unpredictable and often lengthy, ranging to date from three to twenty-four months. Thus, revenue, cash receipt and deferred revenue could vary significantly from quarter to quarter. Any delays in the implementation of our products could cause reductions in our revenues. The licensing of our products is often an enterprise-wide decision that generally requires us to provide a significant level of education to prospective customers about the use and benefits of our products. The implementation of our products involves significant commitment of technical and financial resources and is commonly associated with substantial implementation efforts that may be performed by us, by the customer or by third-party systems integrators. 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.
36
Our stock price is subject to significant fluctuations.
Since our initial public offering in February 2000, the price of our common stock has fluctuated widely. We believe that factors such as the risks described herein or other factors could cause the price of our common stock to continue to fluctuate, perhaps substantially. In addition, recently, the stock market in general, and the market for high technology stocks in particular, has experienced extreme price fluctuations, which have often been unrelated to the operating performance of the affected companies. Such fluctuations could adversely affect the market price of our common stock.
If we are unable to maintain our Nasdaq National Market listing, the liquidity of our common stock would be seriously limited.
Since July 16, 2002, our stock has had minimum closing bid prices fluctuating above and below $1.00 per share. The minimum bid price requirement for continued listing with the Nasdaq National Market is $1.00 per share. If we fail to comply with the minimum bid price requirement for 30 straight trading days, we will receive a deficiency notice from the Nasdaq National Market. If we are in compliance with the core Nasdaq National Market initial listing criteria at that time, we will then have 180 calendar days (or such additional period permitted by The Nasdaq Stock Market, Inc., or Nasdaq) to comply with the minimum bid price requirement. To reestablish compliance, our minimum closing bid price must be more than $1.00 per share for 10 consecutive trading days.
If we do not reestablish compliance with the minimum bid price requirement during the 180-day period (or any such additional period permitted by Nasdaq), Nasdaq will commence delisting proceedings and we may be delisted from the Nasdaq National Market. In such event, we will attempt to have our common stock traded on The Nasdaq SmallCap Market. Stock trading on The Nasdaq SmallCap Market is typically less liquid and usually involves larger variations between the bid and ask price than stock trading on the Nasdaq National Market. Therefore, the transfer of our stock from the Nasdaq National Market to The Nasdaq SmallCap Market could have an adverse effect on the liquidity of our common stock and your ability to sell our common stock. Moreover, if our common stock is delisted, it could limit our potential to raise future capital through the sale of our common stock, which could seriously harm our business.
We may incur in future periods significant stock-based compensation charges related to certain stock options and stock awards.
Based on certain accounting standards involving stock compensation, we will incur variable accounting costs related to the issuance of restricted stock and stock options, including those associated with our stock option cancellation/re-grant program. Accounting standards require us to remeasure compensation cost for such options each reporting period based on changes in the market value of the underlying common stock. Depending upon movements in the market value of our common stock, the variable accounting treatment of those stock options may result in significant additional non-cash compensation costs in future periods. Refer to the discussions under the caption "Non-Cash Compensation Expenses" set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations in this report on Form 10-Q.
We are the target of a securities class action complaint and are at risk of securities class action litigation, which may result in substantial costs and divert management attention and resources.
Beginning in July 2001, Chordiant and certain of our officers and directors were named as defendants in several class action shareholder complaints filed in the United States District Court for the Southern District of New York, now consolidated as In re Chordiant Software, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-6222. In the amended complaint, the plaintiffs allege that Chordiant, certain of our officers and directors and the underwriters of our initial public offering ("IPO") violated the federal securities laws because the Company's IPO registration statement and prospectus contained untrue statements of material fact or omitted to state material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. 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 IPOs in the late 1990s. Although Chordiant has approved in principle a settlement proposed by the plaintiffs that would require no payment by Chordiant and result in the dismissal of all claims against Chordiant and its officers and directors with prejudice, the settlement remains subject to a number of procedural conditions, as well as formal approval by the Court. 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.
37
Our products need to successfully operate in a company-wide environment; if they do not, we may lose sales and suffer decreased revenues.
If existing customers have difficulty deploying our products or choose not to fully deploy the 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 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.
Defects in our products could diminish demand for our products and result in decreased revenues, decreased market acceptance and injury to our reputation.
Errors may be found from time to time in our new, acquired or enhanced products. Any significant software errors in our products may result in decreased revenues, decreased sales, injury to our reputation and/or increased warranty and repair costs. Although we conduct extensive product testing during product development, we have in the past discovered software errors in our products as well as in third party products, and as a result have experienced delays in the shipment of our new products. The latest major release of our primary product suite was introduced in January 2002.
To date, our sales have been concentrated in the financial services, travel and leisure and telecommunications 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 three large markets-financial and insurance services, travel and leisure and telecommunications-accounted for approximately 86% and 86% of our total revenues for the three months ended June 30, 2003 and 2002, respectively. Sales of our products and services in three large markets-financial and insurance services, travel and leisure and telecommunications-accounted for approximately 84% and 90% of our total revenues for the six months ended June 30, 2003 and 2002, respectively. We expect that revenues from these three markets will continue to account for a substantial portion of our total revenues in 2003. If we are unable to successfully increase penetration of our existing markets or achieve sales in additional markets, or if the overall economic climate of our target markets deteriorates, our revenues may decline.
In addition, we cannot predict what effect the U.S. 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. If these or other outside factors cause existing or prospective customers to cancel or delay deployment of products such as ours, our operating results would be adversely affected.
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. 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. We anticipate that services revenues will continue to represent over 40% of total revenues. To increase services revenues, we must expand our services organization, successfully recruit and train a sufficient number of qualified services personnel and obtain renewals of current maintenance contracts by our customers. This expansion could further reduce gross margins in our services revenues.
If our service revenues fall below certain contract obligations, we will incur service expenses without corresponding revenues that would increase our losses.
We have entered into a two-year agreement, beginning March 19, 2002, with Merit International, pursuant to which Merit will provide exclusive training and certain consulting services for a fixed fee. Upon the effective date of the agreement, we transferred to Merit our training operations including selected employees. In addition, Merit will provide to our customers resource development services in exchange for an agreed-upon fee negotiated on a transaction-by-transaction basis. We believe this agreement will provide us with high quality training and consulting services. We will pay Merit certain minimum revenue amounts, as follows: July 1, 2003 to December 31, 2003: (British Pounds) 942,000; and January 1, 2004 to June 30, 2004: (British Pounds) 429,300, for a total of (British Pounds) 1.4 million. After six months from the effective date, we may, at our option, terminate the agreement and pay an early termination fee that reduces from (British Pounds) 555,000 to (British Pounds) 0 over time. Payment of the early termination fee will release our obligation related to the minimum revenue target. As of June 30, 2003, the early termination fee that we would have to pay to terminate the agreement was approximately (British Pounds) 315,000.
38
Because we have recently reduced the size of our workforce, we may not have the workforce necessary to support our platform of products, 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 impact the development and sales of our products.
In 2002 and 2003, we reduced the size of our workforce and may carry out further reductions in the future. Our recent reductions were intended to align our operating expenses with our revenue expectations. However, these reductions or future reductions could have a negative impact on our operating performance because we may not have the workforce necessary to support the develop of additional products. Further, in the event that demand for our products increases as a result of a positive turn in the economy, we may need to rebuild our workforce and we may be unable to hire, train or retain qualified personnel in a timely manner, which may weaken our ability to market our products in a timely manner, negatively impacting our operations. Our success depends largely on ensuring that we have adequate personnel to support our platform as well as the continued contributions of our key management, engineering, sales and marketing and professional services personnel.
If we fail to introduce new versions and releases of functional and scalable products in a timely manner, customers may license competing products and our revenues may decline.
If we are unable to ship or implement enhancements to our products when planned, or fail to achieve timely market acceptance of these enhancements, we may suffer lost sales and could fail to achieve anticipated revenues. A majority of our total revenues have been, and are expected to be, derived from the license of our primary product suite. Our future operating results will depend on the demand for the product suite by future customers, including new and enhanced releases that are subsequently introduced. If our competitors release new products that are superior to our products in performance or price, or if we fail to enhance our products or introduce new features and functionality in a timely manner, demand for our products may decline. We have in the past experienced delays in the planned release dates of new versions of our software products and upgrades. New versions of our products may not be released on schedule or may contain defects when released.
We depend on technology licensed to us by third parties, and the loss or inability to maintain these licenses could prevent or delay sales of our products.
We license from several software providers technologies that are incorporated into our products. We anticipate that we will continue to license technology from third parties in the future. This software may not continue to be available on commercially reasonable terms, if at all. The loss of technology licenses could result in delays in the license of our products until equivalent technology, if available, is developed or identified, licensed and integrated into our products. Even if substitute technologies are available, there can be no guarantee that we will be able to license these technologies on commercially reasonable terms, if at all.
Defects in third party products associated with our products could impair our products' functionality and injure our reputation.
The effective implementation of our products depends upon the successful operation of third-party products in conjunction with our products. Any undetected errors 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.
39
Our customers and system 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 system integration partners may have access to the computer source code for certain elements of our products and may alter the source code. Alteration of our source code may lead to implementation, operation, technical support and upgrade problems for our customers. This could adversely affect the market acceptance of our products, and any necessary investigative work and repairs could cause us to incur significant expenses and delays in implementation.
If our products do not operate with the hardware and software platforms used by our customers, our customers may license competing products and our revenues will decline.
If our products fail to satisfy advancing technological requirements of our customers and potential customers, the market acceptance of these products could be reduced. We currently serve a customer base with a wide variety of constantly changing hardware, software applications and networking platforms. Customer acceptance of our products depends on many factors such as:
* | Our ability to integrate our products with multiple platforms and existing or legacy systems; |
* | Our ability to anticipate and support new standards, especially Internet and enterprise Java standards; and |
* | The integration of additional software modules and third party software applications with our existing products. |
Our failure to successfully integrate future acquired companies and technologies into our operations and technologies could prevent us from operating efficiently.
Our business strategy includes pursuing opportunities to grow our business, both internally and through merger, acquisition and technology and other asset transactions. To implement this strategy, we may be involved in additional technology and asset purchase transactions. Merger and acquisition transactions are motivated by many factors, including, among others, our desire to acquire skilled personnel, obtain new technologies and expand and enhance our product offerings. Growth through mergers and acquisitions has several identifiable risks, including difficulties associated with successfully integrating the previously distinct businesses into our organization, the substantial management time devoted to integrating personnel, technology and entire companies, the possibility that we might not be successful in retaining the employees of the acquired companies, undisclosed liabilities, the failure to realize anticipated benefits (such as cost savings and synergies) and issues related to integrating acquired technology or content into our products (such as unanticipated expenses). Realization of any of these risks in connection with any technology acquisition or asset purchase we have entered into, or may enter into, could have a material adverse effect on our business, operating results and financial condition.
If we become subject to intellectual property infringement claims, 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. Any claims, with or without merit, could be costly and time-consuming to defend, divert our management's attention or cause product delays. We have no patents that we could use defensively against any company bringing such a claim. If any of our products were found to infringe a third party's proprietary rights, we could be required to enter into royalty or licensing agreements to be able to sell our products. Royalty and licensing agreements, if required, may not be available on terms acceptable to us or at all.
40
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes, foreign currency fluctuations and change in the market values of our investments. The following table presents the amounts of short-term investments and restricted cash that are subject to interest rate risk by year of expected maturity and average interest rates as of June 30, 2003 (in thousands):
|
2003
|
Fair Value
|
2004 |
Fair Value
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Short-term investments and restricted cash | $ |
518 |
$ |
518 |
$ |
579 |
$ |
579 |
|||||
Average interest rates | 2.018 | % |
1.60 | % |
Interest Rate Risk. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments to hedge our investment portfolio. We invest excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect and preserve invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carries a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities, which have declined in market value due to changes in interest rates.
Foreign Currency Risk.
International revenues from our foreign subsidiaries accounted for approximately 82% and 71% of total revenues for the three months ended June 30, 2003 and 2002, respectively. International revenues from our foreign subsidiaries accounted for approximately 84% and 81% of total revenues for the six months ended June 30, 2003 and 2002, respectively. International sales are made mostly from our foreign sales subsidiaries in their respective countries and are typically denominated in the local currency of each country. These subsidiaries also incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency.
Additionally, one of our foreign subsidiaries holds cash equivalent investments in currencies other than its respective local currency. Such holdings increase our exposure to foreign exchange rate fluctuations. As exchange rates vary, the holdings may magnify foreign currency exchange rate fluctuations or upon translation or adversely impact overall expected profitability through foreign currency losses incurred upon the sale or maturity of the investments. Foreign currency gains, net for the three months ended June 30, 2003 and 2002 were $0.1 million and zero, respectively. Foreign currency gains, net for the six months ended June 30, 2003 and 2002 were $0.1 million and zero, respectively.
Our international business is subject to risks, including, but not limited to changing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility when compared to the United States. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.
41
Item 4. Controls and Procedures
Limitation on Effectiveness of Controls. Rules promulgated under the Securities Exchange Act of 1934, as amended (the "Act") define "disclosure controls and procedures" to mean controls and procedures that are designed to ensure that information required to be disclosed by public companies in the reports filed or submitted under the Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms ("Disclosure Controls"). New rules promulgated under the Act define "internal control over financial reporting" to mean a process designed by, or under the supervision of, a public company's principal executive and principal financial officers, or persons performing similar functions, and effected by such company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ("GAAP"), including those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements ("Internal Controls").
We have designed our Disclosure Controls and Internal Controls to provide reasonable assurances that their objectives will be met. A control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that its objectives will be met. All control systems are subject to inherent limitations, such as resource constraints, the possibility of human error and the possibility of intentional circumvention of these controls. Furthermore, the design of any control system is based in part upon assumptions about the likelihood of future events, which assumptions may ultimately prove to be incorrect. As a result, we cannot assure you that our control system will detect every error or instance of fraudulent conduct.
Evaluation of Disclosure Controls. Our Chief Executive Officer and our Chief Financial Officer are responsible for establishing and maintaining our Disclosure Controls. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our Disclosure Controls as of a date within 90 days before the filing date of this Quarterly Report on Form 10-Q, have concluded that our Disclosure Controls are effective to provide reasonable assurances that our Disclosure Controls will meet their defined objectives.
Changes in internal controls. During the period covered by this Quarterly Report on Form 10-Q, we did not make any significant changes in our Internal Controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
Beginning in July 2001, we and certain of our officers and directors, as well as the underwriters of our initial public offering ("IPO") and hundreds of other companies ("Issuers"), individuals and IPO underwriters, were named as defendants in a series of class action shareholder complaints filed in the United States District Court for the Southern District of New York. Those cases are now consolidated under the caption, In re Initial Public Offering Securities Litigation, Case No. 91 MC 92. In the amended complaint against Chordiant, the plaintiffs allege that Chordiant, certain of our officers and directors and our IPO underwriters violated section 11 of the Securities Act of 1933 based on allegations that Chordiant's registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The complaint also contains a claim for violation of section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.
In October 2002, the parties agreed to toll the statute of limitations with respect to Chordiant's officers and directors until September 30, 2003, and on the basis of this agreement, our officers and directors were dismissed from the lawsuit without prejudice. In February 2003, the court issued a decision denying the motion to dismiss the Section 11 claims against Chordiant and almost all of the other company defendants and denying the motion to dismiss the Section 10(b) claims against Chordiant and many of the company defendants.
In June 2003, Issuers and Plaintiffs reached a tentative settlement agreement that would, among other things, result in the dismissal with prejudice of all claims against the Issuers and their officers and directors in the IPO Lawsuits. In addition, the tentative settlement guarantees that, in the event that the Plaintiffs recover less than $1 billion in settlement or judgment against the Underwriter defendants in the IPO Lawsuits, the Plaintiffs will be entitled to recover the difference between the actual recovery and $1 billion from the insurers for the Issuers. Although Chordiant has approved this settlement proposal in principle, it remains subject to a number of procedural conditions, as well as formal approval by the Court.
42
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 29, 2003, our Annual Meeting of Stockholders was held in Cupertino, California. Of the 63,633,140 shares outstanding and entitled to vote as of the record date of April 15, 2003, 51,051,304 shares were present or represented by proxy at the meeting. At the meeting, stockholders were asked to vote with respect to (i) the election of 2 directors to hold office until the 2006 Annual Meeting of Stockholders or until such time as their respective successors are elected and qualified and (ii) the ratification of the selection of PricewaterhouseCoopers LLP as our independent accountants for our fiscal year ending December 31, 2003.
The following nominees were elected as class II directors, each to hold office until the 2006 Annual Meeting of Stockholders or until such time as their respective successors are elected and qualified, by the vote set forth below:
Nominee |
Votes For | Withheld |
William Raduchel |
49,409,805 |
1,641,499 |
Samuel T. Spadafora |
46,576,564 |
4,474,740 |
The selection of PricewaterhouseCoopers LLP as our independent accountants for our fiscal year ending December 31, 2003 was ratified by the vote set forth below:
Votes For | Votes Against | Abstentions |
50,465,403 |
553,714 |
32,187 |
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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.
(b) Reports on Form 8-K
On April 7, 2003, the Company furnished a Current Report on Form 8-K, announcing a revenue shortfall for the quarter ended March 31, 2003 and cost cutting actions implemented as a result.
On April 22, 2003, the Company furnished a Current Report on Form 8-K which announced the Company's financial results for the quarter ended March 31, 2003 and certain other information. A copy of the Company's press release announcing the financial results and certain other information was attached and incorporated therein by reference.
43
Chordiant Software, Inc.
SIGNATURES
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.
Dated: August 14, 2003
Chordiant Software, Inc. |
(Registrant) |
/s/ Steve G. Vogel |
| |
Steve G. Vogel | |
Senior Vice President of Finance, Chief Financial Officer and Secretary | |
(Principal Financial and Accounting Officer) |
44
EXHIBIT INDEX
3.1 |
Amended and Restated Certificate of Incorporation of Chordiant Software, Inc. (filed as Exhibit 3.1 with Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and incorporated herein by reference). | |
3.2 |
Amended and Restated Bylaws of Chordiant Software, Inc. (filed as Exhibit 3.2 with Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and incorporated herein by reference). | |
3.3 |
Amended and Restated Bylaws of Chordiant Software, Inc. (filed as Exhibit 3.2 with Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and incorporated herein by reference). | |
4.1 |
Specimen Common Stock Certificate (filed as Exhibit 4.2 with Amendment No. 2 to Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on February 7, 2000 and incorporated herein by reference). | |
4.2 |
Amended and Restated Registration Rights Agreement, dated as of September 28, 1999 (filed as Exhibit 4.3 with Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and incorporated herein by reference). | |
4.3 |
Subordinated Registration Rights Agreement, dated July 19, 2000, by and among Chordiant Software, Inc. and the Sellers of capital stock of White Spider Software, Inc. (filed as Exhibit 4.3 with Chordiant's Registration Statement on Form S-4 (No. 333-54856) filed on February 2, 2001 and incorporated herein by reference). | |
4.4 |
Registration Rights Agreement, dated May 17, 2001, by and between Chordiant Software, Inc. and ActionPoint, Inc. (filed as Exhibit 4.4 to Chordiant's Annual Report on Form 10-K filed on March 29, 2002 and incorporated herein by reference). |
|
4.5 |
Warrant agreement, dated August 12, 2002, by and between Chordiant Software, Inc. and International Business Machines Corporation ("IBM") (filed as Exhibit 4.5 to Chordiant's Quarterly Report on Form 10-Q filed on May 15, 2003 and incorporated herein by reference). |
10.29* |
Change of Control Agreement, dated April 24, 2003, by and between Chordiant Software, Inc. and Allen Swann. |
|
10.30 | Second Amendment to Amended and Restated Loan and Security Agreement by and between Chordiant Software, Inc. and Comerica Bank-California, successor in interest to Imperial Bank, dated March 28, 2003. | |
24.1 |
Power of Attorney (set forth on signature page). | |
31.1 | Certification required by Rule 13a-14(a) or Rule15d-14(a). | |
31.2 | Certification required by Rule 13a-14(a) or Rule15d-14(a). | |
32.1++ |
Certification required by Rule 13a-14(a) or Rule15d-14(a) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). |
* | Management contract or compensatory plan or arrangement. |
++ | This certification "accompanies" the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Annual Report on Form 10-K), irrespective of any general incorporation language contained in such filing. |
45
SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This Second Amendment to Amended and Restated Loan and Security Agreement (this
"Amendment") is
entered into as of March 28, 2003, by and between COMERICA BANK-CALIFORNIA
("Bank") and CHORDIANT
SOFTWARE, INC. ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Amended and Restated Loan and
Security Agreement dated
as of August 16, 2000, as amended (the "Agreement"). The parties desire to amend
the Agreement in
accordance
with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The following defined terms in Section 1.1 of the Agreement are hereby
amended to read as
follows:
"Committed Revolving Line" means a credit extension of up to Five Million
Dollars
($5,000,000).
"Current Liabilities" means, as of any applicable date, all amounts that should,
in accordance
with GAAP, be included as current liabilities on the consolidated balance sheet
of Borrower and its
Subsidiaries, as at such date, plus, to the extent not already included therein,
all Obligations under
this
Agreement, and including all Indebtedness that is payable upon demand or within
one year from the date
of determination thereof unless such Indebtedness is renewable or extendible at
the option of Borrower or
any Subsidiary to a date more than one year from the date of determination.
"Equipment Line" means a credit extension of up to Two Million Five Hundred
Thousand
Dollars ($2,500,000).
"Equipment Maturity Date" means March 27, 2006.
"Revolving Maturity Date" means March 27, 2005.
2. Section 2.1(a)(i) of the Agreement is amended by deleting the phrase "Three
Million Dollars
($3,000,000) where it appears in the fifth (5th) and eighth (8th) lines thereof,
and replacing it with
"Two MillionDollars ($2,000,000)."
3. Subsections (i) and (ii) of Section 2.1(b) of the Agreement are amended to
read as follows:
(b) Equipment Advances.
(i) Subject to and upon the terms and conditions of this Agreement, at any time
from the date hereof through March 27, 2004 (the "Equipment Availability End
Date"), Bank agrees to
make advances (each an "Equipment Advance" and, collectively, the "Equipment
Advances") to Borrower
in an aggregate outstanding amount not to exceed the Equipment Line. Each
Equipment Advance shall
not exceed one hundred percent (100%) of the invoice amount of equipment,
furniture and software
approved by Bank from time to time (which Borrower shall, in any case, have
purchased within 90 days of
the date of the corresponding Equipment Advance), excluding taxes, shipping,
warranty charges, freight
discounts, soft costs, and installation expense; provided, that Borrower may
request a single Equipment
Advance on or about March 28, 2003 (the "Initial Equipment Advance") which may
be used to refinance
existing equipment, furniture and software approved by Bank. The foregoing
notwithstanding, not more
than 25% of the aggregate Equipment Advances may be used to finance software.
(ii) Interest shall accrue from the date of each Equipment Advance at the rate
specified in Section 2.3(a), and shall be payable monthly on the first (1st)
calendar day of each month
(the
"Payment Date"). The Initial Equipment Advance shall be payable in thirty (30)
equal monthly
installments of principal, plus all accrued interest, beginning on the Payment
Date of the month
immediately following the Initial Equipment Advance, and continuing on the same
day of each month
thereafter until paid. Any subsequent Equipment Advances (except for Equipment
Advances used to
finance software) that are outstanding on September 27, 2003 (the "First Term
Date") shall be payable in
thirty (30) equal monthly installments of principal, plus all accrued interest,
beginning on the Payment
Date of the month immediately following the First Term Date, and continuing on
the same day of each
month thereafter through the Equipment Maturity Date. Any Equipment Advances
used to finance
software that are outstanding on the First Term Date shall be payable in
twenty-four (24) equal monthly
installments of principal, plus all accrued interest, beginning on the Payment
Date of the month
immediately following the First Term Date, and continuing on the same day of
each month thereafter
until paid. Any Equipment Advances (except for Equipment Advances used to
finance software) drawn
after the First Term Date that are outstanding on the Equipment Availability End
Date shall be payable in
twenty-four (24) equal monthly installments of principal, plus all accrued
interest, beginning on the
Payment Date of the month immediately following the Equipment Availability End
Date, and continuing
on the same day of each month thereafter through the Equipment Maturity Date.
Any Equipment
Advances used to finance software drawn after the First Term Date that are
outstanding on the Equipment
Availability End Date shall be payable in eighteen (18) equal monthly
installments of principal, plus all
accrued interest, beginning on the Payment Date of the month immediately
following the Equipment
Availability End Date, and continuing on the same day of each month thereafter
until paid. All unpaid
amounts due under this Section 2.1(b) and any other amounts due under this
Agreement (except as
otherwise expressly specified herein) shall be immediately due and payable on
the Equipment Maturity
Date. Equipment Advances, once repaid, may not be reborrowed. Borrower may
prepay any Equipment
Advances without penalty or premium.
4. The first sentence of Section 2.1(c)(i) of the Agreement is amended by
deleting the phrase "Four
Million Dollars ($4,000,000) where it appears in the third (3rd) line thereof,
and replacing it with "Two
Million
Dollars ($2,000,000)."
5. Section 2.1(d) of the Agreement is amended to read as follows:
(d) Foreign Exchange Sublimit. If there is availability under the Committed Revolving Line, Borrower may enter in foreign exchange forward contracts with the Bank under which Borrower commits to purchase from or sell to Bank a set amount of foreign currency more than one business day after the contract date (the "FX Forward Contract"). Bank will subtract 10% of each outstanding FX Forward Contract from the foreign exchange sublimit which is a maximum of $2,000,000 (the "FX Sublimit"). Such subtracted amount shall be deducted from availability under the Committed Revolving Line for other Credit Extensions. The total FX Forward Contracts at any one time may not exceed $25,000,000. Bank may terminate the FX Forward Contracts if an Event of Default occurs.
6. Section 2.2 of the Agreement is amended to read as follows:
2.2 Overadvances. If at any time or for any reason the aggregate amount of the
outstanding
Advances plus the aggregate face amount of all outstanding Letters of Credit
plus the aggregate amount
outstanding in respect of the FX Sublimit exceeds the lesser of (a) the
Committed Revolving Line, or (b)
the greater of (i) Two Million Dollars ($2,000,000) or (ii) the Borrowing Base,
Borrower shall
immediately pay to Bank, in cash, the amount of such excess.
7. Subsections (i) and (ii) of Section 2.3(a) of the Agreement are amended to
read as follows:
(a) Interest Rates.
(i) Advances. Except as set forth in Section 2.3(b), any Advances shall
bear interest, on the outstanding daily balance thereof, at a rate equal to the
Prime Rate plus one-half
percent (0.50%).
(ii) Equipment Advances. Except as set forth in Section 2.3(b), the
Equipment Advances shall bear interest, on the outstanding daily balance
thereof, at a rate equal to the
Prime Rate plus one percent (1.0%).
8. Borrower shall not request or receive LIBOR Rate Advances.
9. The second paragraph of Section 6.3 of the Agreement is amended by deleting
the phrase "Three
Million Dollars ($3,000,000)" where it appears in the second (2nd) line thereof,
and replacing it with
"Two
Million Dollars ($2,000,000)."
10. The last paragraph of Section 6.3 of the Agreement is amended to read as
follows:
Bank shall have a right within sixty (60) days after March 28, 2003, and from
time to time
thereafter, to audit Borrower's Accounts and appraise Collateral at Borrower's
expense, the results of
which shall be satisfactory to Bank, provided that such audits will be conducted
no more often than every
twelve (12) months unless an Event of Default has occurred and is continuing;
provided, however, that if
Advances under the Committed Revolving Line, including Letters of Credit and
availability used under
the Committed Revolving Line for FX Forward Contracts, exceed Two Million
Dollars ($2,000,000), then
such audits may be conducted no more often than every six (6) months unless an
Event of Default has
occurred and is continuing.
11. Section 6.8 of the Agreement is amended to read as follows:
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each fiscal
quarter of
Borrower, or, in the event Borrower's aggregate balance of unrestricted cash and
cash equivalents ever
falls below $25,000,000, as of the last day of each calendar month, a ratio of
Quick Assets to Current
Liabilities, less non-refundable and deferred maintenance revenue, of at least
2.0 to 1.0.
12. Section 6.9 of the Agreement is amended to read as follows:
6.9 Tangible Net Worth. Borrower shall maintain, as of the last day of each
fiscal quarter,
or, in the event Borrower's aggregate balance of unrestricted cash and cash
equivalents ever falls below
$25,000,000, as of the last day of each calendar month, a Tangible Net Worth of
not less than Fifteen
Million Dollars ($15,000,000) plus sixty percent (60%) of any New Equity.
13. Section 6.12 of the Agreement is amended to read as follows:
6.12 Revenue. For each fiscal quarter of Borrower beginning with the quarter
ending March
31, 2003, Borrower shall achieve quarterly revenue of at least seventy-five
percent (75%) of the
projected
revenue for such period as set forth in Borrower's projections delivered to Bank
and attached hereto as
Exhibit E.
14. A new Section 6.13 is added to the Agreement, which shall read as follows:
6.13 Cash Maintained at Bank. Borrower shall maintain at all times at least Five
Million
Dollars ($5,000,000) in one or more depository or operating accounts with Bank.
15. Exhibit A is deleted and replaced with Exhibit A attached hereto.
16. Exhibit D is deleted and replaced with Exhibit D attached hereto.
17. Exhibit E shall be in the form of Exhibit E attached hereto.
18. Upon execution of this Amendment and on each anniversary date of this
Amendment until the
Revolving Maturity Date, Borrower shall pay to Bank a non-refundable fee for the
Committed Revolving Line
in
the amount of $12,500. Upon execution of this Amendment, Borrower shall pay to
Bank a non-refundable fee
for
the Equipment Line in the amount of $6,250.
19. All references in the Loan Documents to "Imperial Bank" shall mean and refer to "Comerica Bank-California." Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Agreement.
20. Borrower represents and warrants that the representations and warranties
contained in the
Agreement are true and correct as of the date of this Amendment, and that no
Event of Default has
occurred and is
continuing.
21. This Amendment may be executed in two or more counterparts, each of which
shall be deemed
an original, but all of which together shall constitute one instrument.
22. As a condition to the effectiveness of this Amendment, Bank shall have
received, in form and
substance satisfactory to Bank, the following:
(a) this Amendment, duly executed by Borrower;
(b) Corporate Resolutions to Borrow;
(c) Payment of the fees then due specified in Section 18 hereof, plus all Bank
Expenses incurred through the date of this Amendment;
(d) A negative pledge agreement covering intellectual property; and
(e) such other documents, and completion of such other matters, as Bank may
reasonably deem necessary or appropriate.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first
date above
written.
CHORDIANT SOFTWARE, INC.
By: /s/ Steve G. Vogel
Title: Senior Vice President and Chief Financial Officer
COMERICA BANK-CALIFORNIA
By: /s/ Robin Wenzel
Title: First Vice President and Manager
DEBTOR CHORDIANT SOFTWARE, INC.
SECURED PARTY: COMERICA BANK-CALIFORNIA
EXHIBIT A
COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as "Borrower" or "Debtor") whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:
(a) all accounts (including health-care-insurance receivables), chattel paper
(including
tangible and electronic chattel paper), deposit accounts, documents (including
negotiable documents),
equipment
(including all accessions and additions thereto), general intangibles (including
payment intangibles and
software),
goods (including fixtures), instruments (including promissory notes), inventory
(including all goods held
for sale
or lease or to be furnished under a contract of service, and including returns
and repossessions),
investment
property (including securities and securities entitlements), letter of credit
rights, money, and all of
Debtor's books
and records with respect to any of the foregoing, and the computers and
equipment containing said books
and
records;
(b) all common law and statutory copyrights and copyright registrations,
applications for
registration, now existing or hereafter arising, in the United States of America
or in any foreign
jurisdiction,
obtained or to be obtained on or in connection with any of the forgoing, or any
parts thereof or any
underlying or
component elements of any of the forgoing, together with the right to copyright
and all rights to renew
or extend
such copyrights and the right (but not the obligation) of Secured Party to sue
in its own name and/or in
the name of
the Debtor for past, present and future infringements of copyright;
(c) all trademarks, service marks, trade names and service names and the
goodwill
associated therewith, together with the right to trademark and all rights to
renew or extend such
trademarks and
the right (but not the obligation) of Secured Party to sue in its own name
and/or in the name of the
Debtor for past,
present and future infringements of trademark;
(d) all (i) patents and patent applications filed in the United States Patent
and Trademark
Office or any similar office of any foreign jurisdiction, and interests under
patent license agreements,
including,
without limitation, the inventions and improvements described and claimed
therein, (ii) licenses
pertaining to any
patent whether Debtor is licensor or licensee, (iii) income, royalties, damages,
payments, accounts and
accounts
receivable now or hereafter due and/or payable under and with respect thereto,
including, without
limitation,
damages and payments for past, present or future infringements thereof, (iv)
right (but not the
obligation) to sue in
the name of Debtor and/or in the name of Secured Party for past, present and
future infringements
thereof,
(v) rights corresponding thereto throughout the world in all jurisdictions in
which such patents have
been issued or
applied for, and (vi) reissues, divisions, continuations, renewals, extensions
and continuations-in-part
with respect
to any of the foregoing; and
(e) any and all cash proceeds and/or noncash proceeds of any of the foregoing,
including,
without limitation, insurance proceeds, and all supporting obligations and the
security therefore or for
any right to
payment. All terms above have the meanings given to them in the California
Uniform Commercial Code, as
amended or supplemented from time to time, including revised Division 9 of the
Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991 (S.B. 45), Section 35,
operative July 1, 2001.
Notwithstanding the foregoing, the Collateral shall not include any copyrights,
patents,
trademarks, servicemarks and applications therefore, now owned or hereafter
acquired, or any claims for damages
by way of any past, present and future infringement of any of the foregoing
(collectively, the
"Intellectual
Property"); provided, however, that the Collateral shall include all accounts
and general intangibles
that consist of
rights to payment and proceeds from the sale, licensing or disposition of all or
any part, or rights in,
the foregoing (the "Rights to Payment"). Notwithstanding the foregoing, if a judicial
authority (including a U.S.
Bankruptcy
Court) holds that a security interest in the underlying Intellectual Property is
necessary to have a
security interest in
the Rights to Payment, then the Collateral shall automatically, and effective as
of the Closing Date,
include the
Intellectual Property to the extent necessary to permit perfection of Bank's
security interest in the
Rights to
Payment.
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of March 28, 2003, by and between
COMERICA BANKCALIFORNIA
("Bank"), and CHORDIANT SOFTWARE, INC. ("Borrower").
In connection with that certain Amended and Restated Loan and Security Agreement
dated as of August 16,
2000 between Borrower and Bank, as amended including, without limitation, by
that certain Second
Amendment to
Amended and Restated Loan and Security Agreement dated as of the date hereof
(collectively, the "Loan
Agreement")
and the other related documents being concurrently executed between Borrower and
Bank in connection
therewith,
Borrower hereby agrees as follows:
1. Except as permitted in the Loan Agreement, Borrower shall not sell, transfer,
assign, mortgage,
pledge,
lease, grant a security interest in, or encumber, or enter into any agreement, document, instrument or
other arrangement
(except with or in favor of Bank) with any person which directly or indirectly
prohibits or has the
effect of prohibiting
Borrower from selling, transferring, assigning, mortgaging, pledging, leasing,
granting a security
interest in or upon, or encumbering any of Borrower's intellectual property, including, without
limitation, the following:
a. Any and all copyright rights, copyright applications, copyright registrations
and like
protection in each work or authorship and derivative work thereof, whether
published or unpublished and
whether or not
the same also constitutes a trade secret, now or hereafter existing, created,
acquired or held
(collectively, the"Copyrights");
b. Any and all trade secrets, and any and all intellectual property rights in
computer software and
computer software products now or hereafter existing, created, acquired or held;
c. Any and all design rights which may be available to Borrower now or hereafter
existing,
created, acquired or held;
d. All patents, patent applications and like protections, including, without
limitation,
improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the
same, including,
without limitation, the patents and patent applications (collectively, the
"Patents");
e. Any trademark and servicemark rights, whether registered or not, applications
to register and
registrations of the same and like protections, and the entire goodwill of the
business of Borrower
connected with and
symbolized by such trademarks (collectively, the "Trademarks");
f. Any and all claims for damages by way of past, present and future
infringements of any of therights included above, with the right, but not the obligation, to sue for and
collect such damages for
said use or
infringement of the intellectual property rights identified above;
g. All licenses or other rights to use any of the Copyrights, Patents or
Trademarks and all license
fees and royalties arising from such use to the extent permitted by such license
or rights;
h. All amendments, extensions, renewals and extensions of any of the Copyrights,
Patents or
Trademarks; and
i. All proceeds and products of the foregoing, including, without limitation,
all payments under
insurance or any indemnity or warranty payable in respect of any of the
foregoing.
2. Borrower covenants and agrees that it will not agree with any Person other
than Bank not to grant a
security interest in, or otherwise encumber, any of its property, or permit any
Subsidiary to do so.
3. It shall be an Event of Default under the Loan Documents between Borrower and
Bank if there is a
breach of any term of this Negative Pledge Agreement.
4. Capitalized items used herein without definition shall have the same meanings
as set forth in the Loan
and Security Agreement of even date herewith. This Agreement may be executed in
two or more counterparts,
each of
which shall be deemed an original, but all of which together shall constitute
the same instrument.
CHORDIANT SOFTWARE, INC.
By: /S/ Steve G. Vogel
Title: Senior Vice President and Chief Financial Officer
COMERICA BANK-CALIFORNIA
By: /s/ Robin Wenzel
Title: First Vice President and Manager
Exhibit 31.1
CERTIFICATIONS
I, Stephen Kelly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chordiant Software, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2003 /s/ Stephen Kelly
Stephen Kelly
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Steve G. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chordiant Software, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2003 /s/ Steve G. Vogel
Steve G. Vogel
Chief Financial Officer
Exhibit 32.1
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as adopted), Stephen Kelly, Chief Executive Officer of Chordiant Software, Inc. (the "Company"), and Steve G. Vogel, Chief Financial Officer of the Company, each hereby certify that, to the best of their knowledge:
1. The Company's quarterly report on Form 10-Q for the period ended June 30, 2003, to which this Certification is attached as Exhibit 32.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the periods covered by the Periodic Report and the results of operations of the Company for the periods covered by the Periodic Report.
In Witness Whereof, the undersigned have set their hands hereto as of the 14th day of August, 2003.
/s/ Stephen Kelly |
/s/ Steve G. Vogel |
|
Stephen Kelly |
Steve G. Vogel |