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Proc-Type: 2001,MIC-CLEAR
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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 September 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 October 29, 2003 was
64,674,358.
CHORDIANT SOFTWARE, INC. PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated
Financial Statements CHORDIANT SOFTWARE,
INC. 5,241 8,532 940 136 90 161 The accompanying notes are an integral part of
these condensed consolidated financial statements. 3 CHORDIANT SOFTWARE,
INC. Three Months Ended Nine Months Ended September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002 Revenues: License $ 6,642 $ 8,625 $ 17,266 $ 25,747 Service 11,124 10,276 31,400 31,038 Total revenues 17,766 18,901 48,666 56,785 Cost of revenues: License 267 163 847 1,218 Service 6,406 7,018 18,356 23,177 Non-cash compensation expense 343 62 1,121 233 Total cost of revenues 7,016 7,243 20,324 24,628 Gross profit 10,750 11,658 28,342 32,157 Operating expenses: Sales and marketing: Non-cash compensation expense 304 77 995 313 Other sales and marketing expense 4,995 7,619 15,728 25,038 Research and development: Non-cash compensation expense 414 212 1,279 602 Other research and development expense 4,110 5,281 12,075 15,382 Purchased in-process research and development -- -- -- 997 General and administrative: Non-cash compensation expense 675 61 1,653 222 Other general and administrative expense 1,432 2,323 4,942 6,448 Amortization of intangible assets 890 954 2,671 2,732 -- 225 1,161 4,723 Total operating expenses 12,820 16,752 40,504 56,457 Loss from operations (2,070 (5,094 (12,162 (24,300 Interest expense (37 (68 (131 (161 Other income (expense), net (22 194 (173 736 Net loss $ (2,129 $ (4,968 $ (12,466 $ (23,725 Net loss per share: Basic and diluted $ (0.04 $ (0.09 $ (0.22 $ (0.43 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 for the reasonably foreseeable
future. 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 products.
For contracts involving significant implementation or customization essential to
the functionality of our products, we recognize the license and professional
consulting services revenues using the percentage-of-completion method using
labor hours incurred as the measure of progress towards completion 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 product 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 for products not involving significant implementation or
customization essential to the product functionality, 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 September 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 September 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 Nine Months Ended September 30, 2003
September 30, 2003
September 30, 2002 Net loss -- as reported $ (2,129 $ (4,968 $ (12,466 (23,725 (1,425 (3,793 (3,152 (10,835 Net loss -- proforma (3,065 $ (8,516 $ (14,715
(33,621 Basic and diluted net loss per share -- as
reported $ (0.04 $ (0.09 $ (0.22 $ (0.43 Basic and diluted net loss per share --
proforma $ (0.05 $ (0.15 $ (0.26 $ (0.61
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 September 30, 2003, the total amount due to the Company from
Royal Bank of Scotland and Canadian Imperial Bank of Commerce accounted for
approximately 22% and 10% 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.
Effective January 1,
2003, we adopted SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format. Additionally, SFAS No. 148 amends APB Opinion
No. 28, "Interim Financial Reporting," and requires disclosure of the pro forma
effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure requirements of SFAS No. 148 are effective for
interim periods beginning after December 15, 2002 and have been implemented in
our financial statements. 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): September 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 $ (1,647 ) $ 727 $ 2,374 $ (1,059 ) $ 1,315 Purchased technologies
7,162 (5,839 )
1,323 7,162 (4,050 ) 3,112 Customer list 190 (96 )
94 190 (48 ) 142 Tradenames 982 (822 ) 160 982 (576 ) 406 $ 10,708 $ (8,404 ) $ 2,304 $ 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 $2.7 million for both the nine months ended September 30,
2003 and 2002, respectively. We expect amortization expense on purchased
intangible assets to be $0.9 million for the remaining three 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 nine months ended September 30, 2003 and fiscal year
2002, several areas of the Company were restructured to reduce expenses and
improve efficiency 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 nine months ended September 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 $1.0 million and $3.8 million for
the nine months ended September 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 nine months ended September 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
September 30, 2003, $3.5 million related to the restructuring reserve remains
outstanding and is included in the accrued expenses line item on the balance
sheet. 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 15.00%. The notes are due at various times through
2004. As of September 30, 2003, the total outstanding notes payable balance for
equipment leases was approximately $0.2 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 September 30, 2003, there was no outstanding note payable
balance related to the D&O insurance policy.
Revolving line of credit
Our two-year line of credit with Comerica Bank, effective
from March 28, 2003, is comprised of an accounts receivable line and an
equipment line. 12
Under the 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 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 $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 September 30,
2003, the outstanding line of credit balance was $1.9 million. At
September 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. In September 2003, in connection with the possible settlement,
those officers and directors who had entered tolling agreements with Plaintiffs
(described above) agreed to extend those agreements so that they would not
expire prior to any settlement being finalized. 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
September
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 non-exclusive 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. As part of the original
agreement, we were required to pay Merit certain minimum revenue amounts and
were subject to an early termination fee.
In September 2003, we amended the agreement by extending its effective date
through March 2006 and we are no longer required to make
minimum revenue payments to Merit or an early termination fee. As part of the amendment, Merit has
agreed to share a portion of Merit-Chordiant monthly consulting revenues with us
as follows: 0% revenue share of Merit-Chordiant monthly consulting
revenues of (British Pounds) 0 to 157,000; 10% revenue share of Merit-Chordiant
monthly consulting revenues exceeding (British Pounds) 157,001 and up to
300,000; and 15% revenue share of Merit-Chordiant monthly consulting revenues
exceeding (British Pounds) 300,001.
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 September 30, 2003. 14
We enter into
arrangements with our business partners, whereby a 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 September 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 September 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 September 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 nine months ended September 30, 2003 and
2002 (in thousands, except per share data): Three Months Ended Nine Months Ended September 30, 2003 September 30, 2002 September 30, 2003 Net loss available to common stockholders $ (2,129 ) $ (4,968 $ (12,466 (23,725 ) Weighted average common stock outstanding 63,661 55,552 60,951 54,731 Common stock subject to repurchase (3,624 (5 (3,624 (5 Denominator for basic and diluted calculation 60,037 55,547 57,327 54,726 Net loss per share - basic and diluted $ (0.04 ) $ (0.09 $ (0.22 (0.43 ) 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): September 30, 2003 NOTE 11--COMPREHENSIVE LOSS: The components of comprehensive loss, net of tax, are as follows
(in thousands): For the three and nine months ended September 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 nine months
ended September 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
$5.6
million and $8.0 million for the three months ended September 30, 2003 and 2002,
respectively. License revenues for enterprise solutions amounted to
$13.5
million and $21.8 million for the nine months ended September 30, 2003 and 2002,
respectively. License revenues for application products were approximately $1.0 million and $0.6 million for the three months ended
September 30, 2003 and 2002,
respectively. License revenues for application products were approximately
$3.8 million and $3.9 million for the
nine months ended September 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
$8.6 million and $6.8
million for the three months ended September 30, 2003 and 2002, respectively.
Service revenues for enterprise solutions were approximately
$23.9 million and $22.3 million for
the nine months ended September 30, 2003 and 2002, respectively. Service
revenues for application products were approximately $2.5
million and $3.5
million for the three months ended September 30, 2003 and 2002, respectively.
Service revenues for application products were approximately
$7.5 million and
$8.7 million for the nine months ended September 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 Nine Months Ended September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002 Americas $ 5,085 $ $ $ 12,643 Other 38 $ 17,766 $ 18,901 $ 48,666 $ 56,785 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):
NOTE 13--SUBSEQUENT EVENT:
On October
21, 2003, Steve Vogel announced he was leaving the company after serving
approximately two and a half years as Chief Financial Officer and Senior Vice
President of Finance effective immediately after the filing of the Company's
quarterly report on Form 10-Q for the three and nine months ended September 30,
2003. Concurrent with this announcement, the company
announced the appointment of Michael Shannahan as Senior Vice President of
Finance commencing October 27, 2003. Mr. Shannahan will assume the
position of Chief Financial Officer upon Mr. Vogel's departure. 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 transactional customer software
solutions 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 multiple 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 completed acquisitions in
previous years. As a
result of these acquisitions, comparison of prior period revenues and expenses
may not be meaningful. One of our business strategies includes pursuing
opportunities to grow our business, both through internal growth and through
acquisitions of companies, technology and other assets and could include
strategic combinations of the Company and other similarly sized or larger
companies. To implement this strategy, we may be involved in one or more
of these types of transactions in the future. Service revenues as a percentage of total revenues were
63% and 54% for the three months ended September 30, 2003 and 2002,
respectively. Service revenues as a percentage of total revenues were 65%
and 55% for the nine months ended September 30, 2003 and 2002, respectively. 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 nine months ended September 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 September 30,
2003 and 2002, international revenues were
$12.7 million and $9.0 million, or
approximately 71% and 48% of our total revenues, respectively. For the
nine
months ended September 30, 2003 and 2002, international revenues were $38.5 million
and $39.7 million, or approximately
79% and
70% 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 has continued to outpace
our United States revenue. 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 adjusted our forecasting model accordingly. 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
282 at September 30, 2003, representing a decrease of approximately
14%. In April 2003, we implemented a
workforce reduction intended to align our cost base with our expected operating
performance. The restructuring charge for the nine months ended September 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 or outsourcing to companies located in foreign jurisdictions. 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; 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 Nine Months Ended September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002 Revenues: License 37 46 35 45 Service 63 54 65 55 Total revenues 100 100 100 100 Cost of revenues: License 2 1 2 2 Service 36 37 38 41 Non-cash compensation expense 2 -- 2 -- Total cost of revenues 40 38 42 43 Gross profit 60 62 58 57 Operating expenses: Sales and marketing: Non-cash compensation expense 2 1 2 1 Other sales and marketing expense 28 40 32 44 Research and development: Non-cash compensation expense 2 1 3 1 Other research and development expense 23 28 25 27 Purchased in-process research and development -- -- -- 2 General and administrative: Non-cash compensation expense 4 -- 3 -- Other general and administrative expense 8 13 10 11 Amortization of intangible assets 5 5 6 5 -- 1 2 8 Total operating expenses 72 89 83 99 Loss from operations (12) (27) (25) (42) Interest expense -- -- -- -- Other income (expense), net -- 1 (1 1 Net loss (12) (26) (26) (41) 20 Comparison of the Three Months Ended September 30, 2003 and
2002 Revenues License. Total license revenues
decreased to $6.6 million for the quarter ended
September 30, 2003 from $8.6 million,
or approximately 23%, for the quarter ended
September 30, 2002. License revenues for
enterprise solutions decreased to $5.6 million for the quarter ended
September 30,
2003 from $8.0 million, or approximately
29%, for the quarter ended September 30,
2002. License revenues for application products
increased to $1.0 million for
the quarter ended September 30, 2003 from $0.6 million, or approximately
45%, for the
quarter ended September 30, 2002. The overall license revenue
decrease was primarily
due to smaller 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 $11.1 million
for the quarter ended September 30, 2003 from $10.3 million, or approximately
8%, for
the quarter ended September 30, 2002. Service revenues for enterprise solutions
increased to $8.6 million for the quarter ended September 30, 2003 from $6.8 million,
or approximately 28%, for the quarter ended September 30, 2002. Service revenues for
application products decreased to $2.5 million for the quarter ended September 30,
2003 from $3.5 million, or approximately
29%, for the quarter ended September 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
increased to $0.3 million for the quarter ended September 30, 2003 from $0.2 million,
or approximately 64%, for the quarter ended September 30, 2002. These costs resulted
in license gross margins of approximately
96% and 98% for the quarters ended
September 30, 2003 and 2002, respectively.
The cost of license revenues reflects a higher royalty mix in the quarter ended September 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 $6.7 million for the quarter ended September 30, 2003 from $7.1 million,
or approximately 5%, for the quarter ended September 30, 2002. These costs resulted
in service gross margins of 39% and
31% for the quarters ended September 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. Operating Expenses
Sales and marketing. Sales and
marketing expenses decreased to $5.3 million for the quarter ended September 30, 2003
from $7.7 million, or approximately 31%, for the quarter ended September 30, 2002. The decrease in these expenses was mainly attributable to a decrease of $1.8
million in personnel related expenses due to a decrease in headcount and
commission expenses, a decrease of $0.3 million in marketing programs and trade
shows and a decrease of approximately $0.5 million in office, facilities, depreciation
and other 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. 21 Research and development. Research
and development expenses decreased to $4.5 million for the quarter ended
September
30, 2003 from $5.5 million, or approximately
18%, for the quarter ended
September 30,
2002. The decrease in these expenses was mainly attributable to a decrease of
$0.8 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
were partially offset by an increase of $0.2 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 both the quarters ended September 30, 2003
and 2002, there
were no expenses related to purchased in-process research and development.
General and administrative. General
and administrative expenses decreased to $2.1 million for the quarter ended
September
30, 2003 from $2.4 million, or approximately
12%, for the quarter ended
September 30,
2002. The decrease in these expenses
was mainly attributable to a decrease of $0.7 million in personnel related
expenses due to a decrease in headcount, a decrease of $0.1 million in office,
facilities and depreciation related expenses due to restructuring actions
implemented and a decrease of $0.1 million in professional services and other
expenses. These decreases were partially offset by 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
September
30, 2003 compared to $1.0 million for the quarter ended September 30, 2002.
Restructuring expenses. Restructuring expenses were none and
$0.2 million for the three months ended September
30, 2003 and 2002, respectively. All areas of the Company were affected by
the restructuring in the three months ended September 30, 2002 which resulted in
the reduction of 19 regular employees. The restructuring was part of the
Company's continued efforts to reduce expenses and improve efficiency
to achieve cash flow and profitability breakeven in the near future. Non-cash compensation expense. We recorded amortization of stock-based compensation expense
of $0.2
million for the quarter ended September 30, 2003 compared to $0.4 million for the
quarter ended September 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 September 30, 2003,
approximately $0.4 million of stock-based compensation remained to be
amortized. 22 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 September 30, 2003, $1.5 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 September 30, 2003
September 30,
2002 Cost of revenues
$
343 $
62 Sales and marketing
304
77 Research and development
414
212 General and administrative
675
61 Total $
1,736 $ 412 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 September 30, 2003
from $0.2 million for the quarter ended September 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 Nine Months Ended September 30, 2003 and
2002 Revenues License. Total license revenues decreased to $17.3 million for the
nine months ended September 30, 2003 from $25.7
million, or approximately 33%, for
the nine months ended September 30, 2002. License
revenues for enterprise solutions decreased to $13.5 million for the nine months
ended September 30, 2003 from $21.8 million, or approximately
38%, for the nine months
ended September 30, 2002. License revenues for application products decreased to $3.8
million for the nine months ended September 30, 2003 from $3.9 million, or
approximately 5%, for the nine months ended September 30, 2002.
The overall license revenue decrease was
primarily due to the lack of growth in the number of product implementations and
smaller aggregate dollar sales by new and existing customers as they reduced or
delayed spending. Service. Total service revenues,
including reimbursement of out-of-pocket expenses,
increased to $31.4 million
for the nine months ended September 30, 2003 from $31.0 million, or approximately
1%,
for the nine months ended September 30, 2002. Service revenues for enterprise
solutions increased to $23.9 million for
the nine months ended
September 30,
2003 from $22.3 million, or approximately
7%, for the nine months ended September 30, 2002. Service revenues for application products
decreased to $7.5
million for the nine months ended September 30, 2003 from $8.7 million, or
approximately 13%, for the nine months ended September 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 $0.8 million for the nine months ended September 30, 2003 from $1.2
million, or approximately 30%, for the nine months ended September 30, 2002. These
costs resulted in license gross margins of approximately 95% for both the
nine
months ended September 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 $19.5 million for the nine months ended September 30, 2003 from $23.4
million, or approximately 17%, for the nine months ended September 30, 2002. These
costs resulted in service gross margins of 38% and 25% for the nine months ended
September 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.
24 Operating Expenses
Sales and marketing. Sales and
marketing expenses decreased to $16.7 million for the nine months ended
September 30,
2003 from $25.4 million, or approximately
34%, for the nine months ended
September 30,
2002. The decrease in these expenses was mainly
attributable to a decrease of $6.1 million in personnel related expenses due to
a decrease in headcount and commission expenses, a decrease of $2.2 million in
marketing programs, trade shows and professional services and a decrease of
approximately $1.1 million in office, facilities, depreciation and other related
expenses due to restructuring actions implemented. These decreases are
partially offset by an increase of $0.7 million of non-cash compensation
expense. Research and development. Research
and development expenses decreased to $13.4 million for the nine months ended
September
30, 2003 from $16.0 million, or approximately
16%, for the nine months ended
September
30, 2002. The decrease in these expenses was mainly attributable to a decrease
of $2.3 million in personnel related expenses due to a decrease in headcount and
bonus expenses and a decrease of approximately $1.1 million in overhead
allocations, office, facilities and depreciation related expenses due to
restructuring actions implemented. These decreases are partially offset by
an increase of $0.7 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 nine months ended September 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 nine months
ended September 30, 2002 is related to the OnDemand, Inc. acquisition that was
completed on April 1, 2002. General and administrative. General
and administrative expenses decreased to $6.6 million for the nine months ended
September 30, 2003 from $6.7 million, or approximately
1%, for the nine months ended
September 30, 2002. The decrease in these expenses
was mainly attributable to a decrease of $1.2 million in personnel related
expenses due to a decrease in headcount, a decrease of $0.1 million in office,
facilities and depreciation related expenses due to restructuring actions
implemented and a decrease of $0.4 million in professional services and other
expenses. These decreases were partially offset by an increase of $1.4 million of non-cash compensation
expense primarily related to vesting of restricted stock and an increase of $0.2
million in state tax related expenses. Amortization of intangibles. Amortization of intangibles was $2.7 million for both the nine months
ended September 30, 2003 and 2002, respectively. Restructuring expenses. During the nine months ended
September
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 nine months ended September 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 $1.0 million and $3.8 million for
the nine months ended September 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 nine months ended September 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 September 30, 2003,
$3.5 million related to the restructuring reserve remains
outstanding and is included in the accrued expenses line item on the balance
sheet. 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
$0.6 million for
the nine months ended September 30, 2003 compared to $1.4 million for the nine months
ended September 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 September 30, 2003,
approximately $0.4 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 nine months ended September 30, 2003, $4.4 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): Nine Months Ended September 30, 2003
September 30,
2002 Cost of revenues
$
1,121 $
233 Sales and marketing
995
313 Research and development
1,279
602 General and administrative
1,653
222 Total $
5,048 $
1,370 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 $(0.1) million for the nine months ended
September
30, 2003 from $0.7 million for the nine months ended September 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, the write-off of a long outstanding acquisition-related
balance 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. 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
$34.2 million at September 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 nine months
ended September 30, 2003 was $11.2 million and consisted primarily of our net
loss of $12.5 million adjusted for non-cash items of approximately $10.0 million
and the effect of changes in assets and liabilities of approximately $8.7
million. The effect of changes in assets and liabilities resulted primarily from
an increase other assets of $0.5 million, a decrease in accounts payable of $3.1 million,
a decrease in accrued expenses of $2.5 million and
a decrease in deferred revenue of $2.6 million.
Cash used in operating activities for
the nine months ended September 30, 2002 was $8.7 million and consisted primarily of
our net loss of $23.7 million adjusted for non-cash items of approximately $8.5 million and
the effect of changes in assets and liabilities of $6.5 million. The effect of
changes in assets and liabilities resulted primarily from a decrease in accounts
receivable of $6.8 million, a decrease in prepaid expenses and other assets of
$2.3 million, an increase in accrued expenses of $2.1 million and
partially offset by a decrease in other liabilities of $0.8
million and a decrease in deferred revenue of $3.9 million.
27 Cash provided by investing activities for the nine
months ended September 30, 2003 was $8.2 million and consisted primarily of $8.6
million of proceeds from sales and maturities of short-term investments (net of
purchases of short-term investments) and partially offset by approximately $0.4 million of
property and equipment purchases. Cash provided by investing activities
for the nine months ended September 30, 2002 was $6.4 million and consisted primarily
of approximately $12.2 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 $1.0 million of property and equipment purchases (net of proceeds
from disposal of property and equipment). Cash provided by financing activities for the nine
months ended September 30, 2003 was $3.0 million and consisted primarily of proceeds
from borrowings of $0.9 million (net of repayment of borrowings), $1.3 million
of proceeds from the issuance of common stock for the employee stock purchase
plan, $0.5 million from the repayment of notes receivable and approximately $0.3
million of proceeds from the exercise of stock options by employees. Cash
provided by financing activities for the nine months ended September 30, 2002 was $5.4
million and consisted of proceeds from the exercise of stock options of
$1.5 million, proceeds from the issuance of common stock for the
employee stock purchase plan of approximately $1.6 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 $0.7 million (net of proceeds from borrowings). At September 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 September 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. Interest rates
range from 12.86% to 15.00%. The notes are due at various times through
2004. As of September 30, 2003, the total outstanding notes payable balance for
equipment leases was approximately $0.2 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 September 30, 2003, there was no outstanding note payable balance related to
the D&O insurance policy .
Revolving line of credit
Our two-year line of credit
with Comerica Bank, effective from March 28, 2003, is comprised of an accounts receivable
line and an equipment line.
Under the 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 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 $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 September 30, 2003, the
outstanding line of credit balance was $1.9 million. At September 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
September
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 non-exclusive 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. As part of the original
agreement, we were required to pay Merit certain minimum revenue amounts and
were subject to an early termination fee.
In September 2003, we amended the agreement by extending its effective date
through March 2006 and we are no longer required to make minimum revenue
payments to Merit or an early termination fee. As part of the amendment, Merit has
agreed to share a portion of Merit-Chordiant monthly consulting revenues with us
as follows: 0% revenue share of Merit-Chordiant monthly consulting
revenues of (British Pounds) 0 to 157,000; 10% revenue share of Merit-Chordiant
monthly consulting revenues exceeding (British Pounds) 157,001 and up to
300,000; and 15% revenue share of Merit-Chordiant monthly consulting revenues
exceeding (British Pounds) 300,001. Subsequent Event
On October
21, 2003, Steve Vogel announced he was leaving the company after serving
approximately two and a half years as Chief Financial Officer and Senior Vice
President of Finance effective immediately after the filing of the Company's
quarterly report on Form 10-Q for the three and nine months ended September 30,
2003. Concurrent with this announcement, the company
announced the appointment of Michael Shannahan as Senior Vice President of
Finance commencing October 27, 2003. Mr. Shannahan will assume the
position of Chief Financial Officer after Mr. Vogel's departure. 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 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 products.
For contracts involving significant implementation or customization essential to
the functionality of our products, we recognize the license and professional
consulting services revenues using the percentage-of-completion method using
labor hours incurred as the measure of progress towards completion 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 product 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 for products not involving significant implementation or
customization essential to the product functionality, 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 $15.2
million, net of allowance for doubtful accounts of $0.2 million and long-term
accounts receivable included in Other assets of $0.8 million as of September 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 79% of our revenues,
48% of our assets and 65% of
our total liabilities as of and for the nine months ended September 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 $1.3 million
which were included as part of
accumulated other comprehensive income within our balance sheet at September 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.
Effective January 1,
2003, we adopted SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format. Additionally, SFAS No. 148 amends APB Opinion
No. 28, "Interim Financial Reporting," and requires disclosure of the pro forma
effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure requirements of SFAS No. 148 are effective for
interim periods beginning after December 15, 2002 and have been implemented in
our financial statements. 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 September 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 September 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 September 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 September 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 large license transactions to new and existing
customers difficult. Our revenues fell in the nine months ended September 30, 2003
compared to revenues for the nine months ended September 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 large license transactions difficult. Our ability to enter
into new large license transactions also directly affects our ability to create
additional consulting services and maintenance revenues, on which we also
depend. 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 $2.1 million and $12.5 million for
the three and nine months ended September 30, 2003, respectively. As of
September 30, 2003,
we had an accumulated deficit of $185.0 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 September 30, 2003 and December 31, 2002 was
$34.2 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 September 30, 2003, Royal Bank of Scotland
and Canadian Imperial Bank of Commerce accounted for approximately 22% and 11% of our total revenues,
respectively. For the three months ended September 30, 2002, USAA
accounted for 43% of our total revenues, respectively.
For the
nine
months ended September 30, 2003, Barclays and Royal Bank of Scotland accounted for
10% and 14% of our total revenues, respectively. For the nine months ended
September
30, 2002, USAA, Hutchinson 3 G and Lloyds TBS accounted for 21%, 15%
and 12% 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 of license revenues 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 revenues flowed
through deferred revenue. For the three months ended September 30, 2003 and 2002,
67% and 19%, respectively, of license revenues were derived from deferred revenue. For
the nine months ended September 30, 2003 and 2002,
47% and 59%, respectively, of
license revenues were 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 September 30, 2003, international
revenues were $12.7 million or approximately
71% of our total revenues. For the
three months ended September 30, 2002, international revenues were $9.0 million or
approximately 48% of our total revenues. For the nine months ended September 30, 2003,
international revenues were $38.5 million
or approximately 79% of our total
revenues. For the nine months ended September 30, 2002, international revenues were
$39.7 million or approximately 70% 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: 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: 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: 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.
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
79% and 85% of our total revenues
for the three months ended September 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 81% of our total revenues for
both the nine months ended September 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 50% 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.
38 Because we have 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 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 or outsource certain functions to companies based in
foreign jurisdictions and we may be unable to hire, train or retain qualified
personnel in a timely manner, which may weaken our ability to market our
products in a timely manner, negatively impacting our operations. Our success
depends largely on ensuring that we have adequate personnel to support our
platform 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 failure to successfully integrate with future acquired
or merged companies and technologies could prevent us
from operating efficiently. Our business strategy includes pursuing opportunities to
grow our business, both through internal growth and through merger, acquisition and
technology and other asset transactions. To implement this strategy, we may be
involved in merger and acquisition activity, additional technology and asset purchase transactions. Merger and
acquisition transactions are motivated by many factors, including, among others,
our desire to grow our business, acquire skilled personnel, obtain new technologies and expand and
enhance our product offerings. Growth through mergers and acquisitions has
several identifiable risks, including difficulties associated with successfully
integrating distinct businesses into new organizations, the
substantial management time devoted to integrating personnel, technology and
entire companies, the possibility that we might not be successful in retaining
the employees, undisclosed liabilities, the failure to
realize anticipated benefits (such as cost savings and synergies) and issues
related to integrating acquired technology, merged/acquired companies or content into our products (such as
unanticipated expenses). Realization of any of these risks in connection with
any technology transaction or asset purchase we have entered into, or may enter
into, could have a material adverse effect on our business, operating results
and financial condition. If we become subject to intellectual property infringement
claims, 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 September 30, 2003 (in thousands):
-- -- 581 581 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.
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 SEPTEMBER 30, 2003
TABLE OF CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30,
2003
December 31, 2002
ASSETS
Current
assets:
Cash and cash
equivalents
$
32,094
$
30,731
Short-term
investments and restricted cash
581
9,245
Accounts receivable,
net
15,226
15,343
Prepaid expenses and
other current assets
3,096
3,162
Total current
assets
50,997
58,481
Restricted cash
1,500
1,500
Property and
equipment, net
3,313
5,069
Goodwill,
net
24,874
24,874
Intangible assets,
net
2,304
4,975
Other
assets
2,308
1,788
Total assets
$
85,296
$
96,687
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current
liabilities:
Borrowings
$
1,191
$
1,114
Accounts
payable
2,797
5,936
Accrued expenses
11,327
14,007
Deferred revenue
16,722
15,990
Total current
liabilities
32,037
37,047
Deferred revenue,
long-term
Borrowings, long-term
Other
liabilities
Total
liabilities
38,308
45,876
Stockholders'
equity:
Common
stock
55
55
Treasury
stock
(332
)
(332
)
Additional paid-in
capital
233,774
230,192
Notes receivable from
stockholders
--
(496
)
Deferred stock-based
compensation
(3,446
)
(6,750
)
Accumulated deficit
(184,969
)
(172,503
)
Accumulated other
comprehensive income
1,906
645
Total stockholders'
equity
46,988
50,811
Total liabilities and stockholders'
equity
$
85,296
$
96,687
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except
per share data)
(Unaudited)
Restructuring expense
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Basic and
diluted
60,037
55,547
57,327
54,726
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine
Months Ended
September 30,
2003
September 30, 2002
Cash flows from
operating activities:
Net loss
$
(12,466
)
$
(23,725
)
Adjustments to
reconcile net loss to net cash used in operating activities:
Depreciation and
amortization
2,088
2,915
Amortization of
intangibles
2,671
2,732
Non-cash compensation expense
5,048
1,369
Provision for doubtful accounts
21
554
Warrants issued to customers
55
--
(Gain) loss on disposal of
assets
88
(7
)
Purchased in-process
research and development
--
997
Changes
in assets and liabilities:
Accounts receivable
96
6,790
Prepaid expenses
and other current assets
66
2,263
Other
assets
(520
)
(273
)
Accounts
payable
(3,139
)
296
Accrued expenses
(2,537
)
2,084
Deferred revenue
(2,559
)
(3,880
)
Other
liabilities
(71
)
(800
)
Net cash used in
operating activities
(11,159
)
(8,685
)
Cash flows from
investing activities:
Property and equipment
purchases
(438
)
(1,100
)
Proceeds from disposal of property and equipment
18
88
Cash used for
acquisition, net of cash acquired
--
(4,768
)
Restricted
cash
44
--
Purchases of short-term
investments
(576
)
(9,044
)
Proceeds from sales
and maturities of short-term investments
9,196
21,182
Net cash provided by
investing activities
8,244
6,358
Cash flows from
financing activities:
Exercise of stock options
359
1,490
Proceeds from issuance of common stock
--
3,029
Proceeds from issuance of common stock for employee stock purchase
plan
1,281
1,542
Proceeds from
borrowings
3,491
444
Repayment of notes receivable
496
--
Repayment of borrowings
(2,610
)
(1,128
)
Net cash provided by
financing activities
3,017
5,377
Effect of exchange rate changes on cash
and cash equivalents
1,261
714
Net increase
in cash and cash equivalents
1,363
3,764
Cash and cash
equivalents at beginning of period
30,731
27,068
Cash and cash
equivalents at end of period
$
32,094
$
30,832
Supplemental noncash
activities:
Common
stock issued for stockholder notes
$
--
$
496
Issuance of warrants
$
--
$
112
Compensation expense relating to change in status of employee
$
--
$
58
Compensation expense relating to issuance of common stock to employees
$
130
$
--
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2002
)
)
)
$
)
Add: Non-cash
compensation expense included in reported net loss
489
245
903
939
Less: Non-cash
compensation expense determined under fair value method
)
)
)
)
$
)
)
)
$
)
)
)
)
)
)
)
)
)
Three Months Ended
Nine Months Ended
September 30, 2003
September 30, 2002
September 30, 2003
September 30, 2002
Barclays
--
--
10%
--
H3G
--
--
--
15%
Lloyds TSB
--
--
--
12%
EDS
--
--
--
--
Royal
Bank of Scotland
22%
--
14%
--
USAA
--
43%
--
21%
Canadian Imperial Bank of Commerce
11%
--
--
--
September 30, 2003
December 31, 2002
Accounts receivable, net:
Accounts receivable
$
11,591
$
8,783
Unbilled receivables
4,582
6,741
Allowance for doubtful accounts
(156
(181
Accounts receivable included in
Other assets, long-term
(791
--
$
15,226
$
15,343
September 30, 2003
Property and equipment, net:
$
11,702
$
11,312
2,586
2,497
1,669
1,634
2,782
2,840
18,739
18,283
Accumulated depreciation and
amortization
(15,426
(13,214
$
3,313
$
5,069
September 30, 2003
December 31, 2002
Accrued
expenses:
Accrued payroll and related
expenses
$
6,021
$
8,570
Accrued restructuring expenses
3,537
4,557
Other accrued liabilities
1,769
880
$
11,327
$
14,007
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
(280)
(1,778)
(2,058)
Reserve
balance at September 30, 2003
$
3,295
$
242
$
3,537
Borrowings
Operating Leases
Sublease Income
Total
Remaining portion of Fiscal 2003
$
258
$
688
$
(143
)
$
803
Fiscal
2004
1,123
2,946
(438
)
3,631
Fiscal
2005
750
2,104
(143
)
2,711
Fiscal 2006
--
2,258
--
2,258
Fiscal
2007
--
2,224
--
2,224
Thereafter
--
4,664
--
4,664
Total
$
2,131
$
14,884
$
(724
)
$
16,291
September 30, 2002
)
)
$
)
)
)
)
)
)
$
Three Months Ended
Nine Months Ended
September 30, 2002
September 30, 2003
September 30, 2002
Warrants outstanding
1,850
1,850
1,850
1,850
Employee stock options
9,711
9,237
9,711
9,237
Common stock subject to repurchase
3,624
5
3,624
5
15,185
11,092
15,185
11,092
Three Months
Ended
Nine Months
Ended
September 30,
2003
September 30,
2002
September 30,
2003
September 30, 2002
Net loss
$
(2,129
)
$
(4,968
)
$
(12,466
)
$
(23,725
)
Other comprehensive income:
Foreign currency
translation gain (loss)
314
(187
)
1,261
695
Comprehensive loss
$
(1,815
)
$
(5,155
)
$
(11,205
)
$
(23,030
)
9,902
10,181
17,099
Europe
(principally United Kingdom)
8,847
38,357
39,158
152
128
528
September 30,
2003
December 31,
2002
Americas
$
1,680
$
2,867
Europe (principally United
Kingdom)
1,633
2,198
Other
--
4
$
3,313
$
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
(280)
(1,778)
(2,058)
Reserve
balance at September 30, 2003
$
3,295
$
242
$
3,537
Borrowings
Operating Leases
Sublease Income
Total
Remaining portion of Fiscal 2003
$
258
$
688
$
(143
)
$
803
Fiscal
2004
1,123
2,946
(438
)
3,631
Fiscal
2005
750
2,104
(143
)
2,711
Fiscal 2006
--
2,258
--
2,258
Fiscal
2007
--
2,224
--
2,224
Thereafter
--
4,664
--
4,664
Total
$
2,131
$
14,884
$
(724
)
$
16,291
*
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.
*
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.
*
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.
*
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.
*
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.
2003
Fair Value
2004
Fair Value
Short-term
investments and restricted cash
$
$
$
$
Average interest
rates
--
%
1.60
%
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 losses, net for the three months ended September 30, 2003 and 2002 were $0.1 million and zero, respectively. Foreign currency net gains and losses for both the nine months ended September 30, 2003 and 2002, respectively, were less than $0.1 million.
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 September 30, 2003, 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. In September 2003, in connection with the possible settlement, those officers and directors who had entered tolling agreements with Plaintiffs (described above) agreed to extend those agreements so that they would not expire prior to any settlement being finalized.
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
None.
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 July 22, 2003, the Company furnished a Current Report on Form 8-K which announced the Company's financial results for the quarter ended June 30, 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.
On September 10, 2003, the Company filed a Current Report on Form 8-K announcing the appointment of R. Andrew Eckert as a Class II Director and the resignation of Bill Ford as a Class II Director. A copy of the Company's press release announcing Mr. Eckert's appointment to the Board and Mr. Ford's resignation from the Board 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: November 3, 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
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: November 3, 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: November 3, 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 September 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 3rd day of November, 2003.
/s/ Stephen Kelly |
|
Stephen Kelly |
/s/ Steve G. Vogel |
|
Steve G. Vogel |