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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March
31, 2004 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 May 6, 2004 was
71,677,158. CHORDIANT SOFTWARE, INC. PART I -- FINANCIAL INFORMATION
CHORDIANT SOFTWARE,
INC. 2,998 The accompanying notes are an integral part of
these condensed consolidated financial statements. 3 CHORDIANT SOFTWARE,
INC. Three Months Ended March 31, 2004 March 31, 2003 Revenues: License $ $ Service Total revenues Cost of revenues: License Service Stock-based compensation Amortization of intangible assets Total cost of revenues Gross profit 12,638 6,372 Operating expenses: Sales and marketing Research and development General and administrative Stock-based compensation Total operating expenses Loss from operations (189 Interest income, net Foreign exchange and other expenses, net Net loss before income taxes Provision for income taxes Net loss $ (304 $ (6,946 Other comprehensive income (loss): Foreign currency translation gain (loss) (23 220 Comprehensive loss Net loss per share: Basic and diluted $ (0.00 $ (0.12 Weighted average shares used in computing net
loss per share - basic and diluted 67,655 57,210 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 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/A for the fiscal year ended December 31, 2003. We believe that the effects of our strategic actions implemented to improve
revenue as well as control costs will be adequate to generate sufficient cash
resources to fund our operations. Failure to generate sufficient revenues
or control spending could adversely affect our ability to achieve our business
objectives. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Reclassifications Certain reclassifications have been made to prior year
balances to conform to current year presentation. Principles of consolidation The accompanying condensed consolidated financial statements include our accounts and
those of our wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Use of estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods.
On an on-going basis, we evaluate the
estimates, including those related to our 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 the essential product
functionality has been delivered or the application enters into a production
environment or the point at which no significant additional Chordiant supplied
professional 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 was 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 revenues when there is persuasive evidence
of an arrangement, the fee is fixed or determinable, collection of the fee is
probable and delivery has occurred as prescribed by SOP 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 generally 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 the services when such services are sold separately.
VSOE of fair value for annual post-contract customer support is established with
the optional substantive 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 which ranges from one to three
years. Our training and consulting services revenues are recognized as such
services are performed. Restricted cash At March 31, 2004 and
December 31, 2003, we had a balance of $1.5 million in the form of short-term
investments that meet the qualification to be considered cash equivalents, which
were restricted from withdrawal. This balance serves as a security deposit in a
long-term, post-contract customer support revenue transaction. At March 31, 2004 and
December 31, 2003, 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 account for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and to nonemployees
using the fair value method in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." In addition, we apply applicable provisions of
Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 44, "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB No. 25. No
employee stock-based compensation cost is reflected in our net loss related to
options granted under those plans for which the exercise price was equal to the
market value of the underlying common stock on the date of grant.
7
The following table illustrates the effect
on our net loss and net loss per share as if we had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation for the three
months ended March 31, 2004 and 2003, respectively (in thousands, except per
share amounts): March 31, 2004
March 31, 2003 ) ) )
The related functional breakdown of total stock-based
compensation is outlined below (in thousands):
March 31, 2004 March
31, 2003 )
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 have cash equivalents and investments with various high quality
institutions and limit the amount of credit exposure to any one institution. Our
accounts receivable are derived from revenues earned from customers located in
North America, Europe, and elsewhere in the world. We perform ongoing credit
evaluations of our customers' financial condition and, generally, require no
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
that accounted for 10% or more of total revenues: * Represents less than 10% of total revenues. At March 31, 2004, Canadian Imperial
Bank of Commerce, Covad
Communications and Sky Services, Ltd. accounted for approximately 17%, 14% and
12% of accounts
receivable, respectively. At December 31, 2003, Canadian
Imperial Bank of Commerce and Sky Services, Ltd. accounted for approximately 14%
and 10% of our accounts receivable, respectively. NOTE 3 -- BALANCE SHEET COMPONENTS (UNAUDITED): The main components of accounts receivable, net
are as follows (in thousands): The main components of accrued expenses are as
follows (in thousands): 9 The components of intangible assets, excluding
goodwill, are as follows (in thousands): March 31,
2004 December 31, 2003 Gross
Carrying Amount Accumulated Amortization Net
Carrying Amount Gross
Carrying Amount Accumulated Amortization
Net
Carrying Amount Intangible assets:
Developed technologies
$ 2,374 $ (1,950 ) $
424 $ 2,374 $ (1,843 ) $
531 Purchased technologies
7,162 (7,015 )
147 7,162 (6,436 )
726 Customer list 190 (127 )
63 190 (111 )
79 Tradenames 982 (982 )
-- 982 (904 )
78 $ 10,708 $ (10,074 ) $
634 $ 10,708 $ (9,294 ) $
1,414 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 $0.8 million and $0.9 million for the three months ended March
31, 2004 and 2003, respectively. We expect amortization expense on purchased
intangible assets to be $0.5 million for the remaining nine months in fiscal
2004 and $0.1 million in fiscal 2005, at which time
existing purchased intangible assets will be fully amortized. NOTE 4 -- RESTRUCTURING: Restructuring Costs
During fiscal years 2003 and 2002, based
upon our continued evaluation of economic conditions in the information
technology industry and our expectations regarding revenue levels, we
restructured several areas of the Company to reduce expenses and improve our
revenue per employee. This restructuring program included a worldwide workforce
reduction and consolidation of excess facilities and certain business functions.
We believe that these reductions and realignments have resulted and will
continue to result in a more responsive management structure.
As part of the fiscal year 2003
restructuring, we entered into an agreement with an independent contracting
company with global technical resources and an operations center in Bangalore,
India. The agreement provides for the independent contractor, at our direction,
to attract, train, assimilate and retain sufficient highly qualified personnel
to perform technical support and certain sustaining engineering functions. We
expect to benefit from outsourcing these functions by being able to offer
increased levels of technical support services to our customers, maintain a
larger number of customer technology platforms within sustaining engineering and
perform more extensive quality assurance testing, all without material increases
in cost. In the event our relationship with this independent contracting
company was terminated, we would either find an alternate contracting company to
perform these services or we would provide these services which will increase
our costs. In
fiscal year 2004, we plan to significantly increase the size of this
organization and expand its scope as employee reductions occur throughout the
year. Severance costs associated with the fourth quarter of fiscal year 2003
employee reductions were accounted for in accordance with SFAS No. 112,
"Employers' Accounting for Post-Employment Benefits." Other one-time benefit
arrangements are accounted for in accordance with SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities."
Workforce reduction
The restructuring program resulted in the
reduction of 74 regular employees and 108 regular employees during the years
ended December 31, 2003 and 2002, respectively. All areas of the Company were
affected by this restructuring. We recorded a total workforce reduction expense
relating to severance and benefits of approximately $2.0 million and $3.8
million for the years ended December 31, 2003 and 2002, respectively.
10
Consolidation of excess facilities
We accrued for lease costs of $0.2 million
and $2.8 million during the years ended December 31, 2003 and 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 actual loss could exceed the original estimate is approximately $1.3
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 March 31,
2004, $3.8 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.
During the three months ended March 31, 2004, there was a charge of less than
$0.1 million relating to earned portions of severed employee retention bonus
packages included in the cost of services line item in the consolidated
statement of operations. NOTE 5 -- BORROWINGS:
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. The terms of the line of credit 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
issuances subsequent to the effective date of the 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 $5.0
million. The accounts receivable line of credit
contains a provision for a sub-limit of up to $2.0 million for issuances of
standby commercial letters of credit. As of March 31, 2004, we had utilized
$1.1 million of the $2.0 million standby commercial letter
of credit limit. The accounts receivable line of credit also contains a
provision for a sub-limit of up to $2.0 million for issuance of foreign exchange
forward contracts. As of March 31, 2004, we had
not entered into any foreign exchange forward contracts.
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 $2.0 million (non-formula
portion); however, if advances exceed $2.0 million, then subsequent advances
cannot exceed 80% of eligible accounts receivable balances, and the bank would
hold a security interest in those accounts receivable.
Borrowings under the $2.5 million
equipment line bear interest at the lending bank's prime rate plus 1.0%, and the
bank would hold a security interest in the equipment. In March 2003, we borrowed
$2.5 million against the equipment line of credit. We paid off the outstanding
line of credit balance in December 2003. As of March 31, 2004, we were in
compliance with the respective debt covenants and there was no outstanding
balance on our equipment line of credit. 11 NOTE 6 -- LITIGATION:
Beginning in July 2001, we and certain of
our officers and directors 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, now consolidated under the caption, 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 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. Similar
complaints were filed in the same court against hundreds of other public
companies ("Issuers") that conducted IPOs of their common stock in the late
1990s (collectively, the "IPO Lawsuits").
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 IPO Lawsuits 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 Issuers and
denying the motion to dismiss the Section 10(b) claims against Chordiant and
many of the Issuers. In June 2003, Issuers and plaintiffs reached a tentative
settlement agreement that would, among other things, result in the dismissal
with prejudice of all claims against the Issuers and their officers and
directors in the IPO Lawsuits, and the assignment to plaintiffs of certain
potential claims that the Issuers may have against the underwriters. The
tentative settlement also provides that, in the event that plaintiffs ultimately
recover less than a guaranteed sum of $1 billion from the IPO underwriters,
plaintiffs would be entitled to payment by each participating Issuer's insurer
of a pro rata share of any shortfall in the plaintiffs' guaranteed recovery.
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, results
of operations or cash flows. NOTE 7 -- COMMITMENTS AND CONTINGENCIES: Future payments due under debt and lease obligations as of March 31, 2004 are
as follows (in thousands): 12 NOTE 8 -- 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 shares of common stock unless
their effect is anti-dilutive.
Potential shares of common stock consists 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 months ended March 31, 2004 and 2003
(in thousands, except per share data): March 31,
2004 March
31, 2003 ) ) 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 anti-dilutive (in thousands):
NOTE 9 -- SEGMENT INFORMATION: Our chief operating decision maker
reviews financial information presented on a consolidated basis, accompanied by
desegregated information about revenues by geographic regions for purposes of
making operating decisions and assessing financial performance. Accordingly, we
have concluded that we have one reportable segment. License revenues for enterprise solutions amounted to $9.0
million and $2.1 million for the three months ended March 31, 2004 and 2003,
respectively. License revenues for marketing solutions were
approximately $0.3 million and $2.0 million for the three months ended March 31,
2004 and 2003, respectively. 13
Services 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 $7.9 million and $7.2 million for the three months ended March 31,
2004 and 2003, respectively. Service
revenues for marketing solutions were approximately $3.0 million and $2.5
million for the three months ended March 31, 2004 and 2003, 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): March 31, 2004 March
31, 2003 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 10 -- COMMON STOCK PLACEMENT:
In January 2004, we sold 4,854,368 shares
of our common stock to Acqua Wellington Opportunity I Limited for an aggregate
purchase price of approximately $25.0 million which will be used for working
capital and other general corporate purposes. 14 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
2003 audited financial statements and notes thereto included in our Annual
Report on Form 10-K/A for the year ended December 31, 2003 filed with the
Securities and Exchange Commission ("SEC") on April 28,
2004. Operating results are
not necessarily indicative of results that may occur in future periods.
The following discussion and analysis contains forward-looking
statements. These statements are based on our current expectations, assumptions,
estimates and projections about our business and our industry, and involve known
and unknown risks, uncertainties and other factors that may cause our or our
industry's results, levels of activity, performance or achievement to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied in or contemplated by the forward-looking
statements. Words such as "believe," "anticipate," "expect," "intend," "plan," "will,"
"may," "should," "estimate," "predict," "guidance," "potential," "continue" or the negative of such terms or other similar expressions, identify
forward-looking statements. Our actual results and the timing of events may
differ significantly from those discussed in the forward-looking statements as a
result of various factors, including but not limited to, those discussed under
the subheading "Risk Factors" and those discussed elsewhere in this report, in
our other SEC filings and under the headings "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K/A . Chordiant
undertakes no obligation to update any forward-looking statement to reflect
events after the date of this report. Overview
As an enterprise software vendor, we
(Chordiant Software, Inc.) generate substantially all of our revenues from the
financial services and telecommunications industries. Our customers typically
fund purchases of our software and services out of their lines of business and
information technology budgets. As a result, our revenues are heavily influenced
by our customers' long-term business outlook and willingness to invest in new
enterprise information systems and business applications. Beginning in late calendar 2000, the
financial services and telecommunications industries entered into a steep and
long economic downturn, with industry sales dropping from late 2000 through the
first part of 2003. Over the past three years, our customers have focused on
controlling costs and reducing risk, including constraining information
technology and lines of business expenditures and requiring more favorable
pricing terms from their suppliers and pursuing consolidation within their own
industries. As a result of this downturn, our license fee revenues have declined
18%-19% in each of the last two fiscal years. Beginning in the latter part of 2003,
economic conditions began to show signs of improvements which were reflected in
increases in various economic indicators such as productivity, labor statistics
and consumer confidence. This trend has continued into the first quarter
of 2004 and appears to have a favorable impact, specifically in information
technology spending. In a recent survey of 75 United States and 25
European Chief Information Officers published by Merrill Lynch, information
technology budgets have increased this year and during this quarter these
companies spent more than in prior years. The quarter ended March 31, 2004
was the second consecutive
quarter that we were able to grow license fee revenues and total revenues on a year
over year basis since the economic downturn started. Financial Trends
Management focuses on license and service
gross margin in evaluating our financial condition and operating performance.
Gross margin on license revenues was 96% and 94% for the three months ended
March 31, 2004 and 2003, respectively. We expect license gross margin to range
from 94% to 96% in the foreseeable future. Gross margin on service revenues was
42% and 39% for the three
months ended March 31, 2004 and 2003, respectively.
Service revenues as a percentage of total revenues were
54% and 70% for the
three months ended March 31, 2004 and 2003, respectively. We expect that
service revenues will continue to represent over 50% of our total
revenues in the foreseeable future.
For the three months ended March 31, 2004 and 2003, revenues were principally
derived from customer accounts in the North America and Europe. For the three months ended March 31, 2004 and 2003,
international revenues were $17.0 million and $11.7 million, or approximately
84% and 85% of our total revenues, respectively. We believe international revenues will
continue to represent a significant portion of our total revenues in future
periods. Our international revenue growth rate has continued to outpace our
United States revenue growth rate. We believe this has occurred because the U.S.
economy has been weak compared to areas where we have an international presence
and our leadership and market presence have been very strong internationally,
particularly in the United Kingdom.
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. 15 Results of Operations The following table sets forth, as a percentage of total revenues,
consolidated statements of operations data for the periods indicated: Three Months Ended March 31, 2004 March 31, 2003 Revenues: License 30 Service Total revenues Cost of revenues: License Service Stock-based compensation Amortization of intangible assets Gross profit 63 Operating expenses: Sales and marketing Research and development General and administrative Stock-based compensation Loss from operations (48 Interest income, net
Foreign exchange and other expenses, net Net loss before income taxes (1 (49 Provision for income taxes Net loss )% 16 Comparison of the Three Months Ended March 31, 2004 and 2003 Revenues
Service. Total service revenues,
which include reimbursement of
out-of-pocket expenses, increased to $10.9 million for the three months ended March
31, 2004 from $9.7 million, or approximately 13%, for the three months ended March
31, 2003. Service revenues for enterprise solutions increased to $7.9 million
for the three months ended March 31, 2004 from $7.2 million, or approximately 11%,
for the three months ended March 31, 2003. This increase was due to a
continuation in large customer implementations as well as maintenance, support
and consulting revenues associated with license agreements entered into in prior
periods. Service
revenues for marketing solutions increased to $3.0 million for the three months ended March 31, 2004 from $2.5
million, or approximately 20%, for the three months ended March 31, 2003.
This increase was due to the continuation of maintenance and support revenues
associated with marketing solutions license agreements which were entered into
in prior periods along with new marketing solutions agreements entered into
during fiscal year 2003. Reimbursement of out-of-pocket expenses
(which is included in total service revenues) remained flat at $0.5 million for
both the three months ended March 31, 2004 and 2003. Cost of revenues License. Cost of license revenues
increased to $0.4 million for the
three months ended March 31, 2004 from $0.3 million, or approximately 50%, for the
three months ended March 31, 2003. These costs resulted in license gross margins of
approximately 96% and 94% for the three months ended March 31, 2004 and 2003,
respectively. The aggregate cost of license revenues is in line with the
increase of our 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
increased to $6.3 million for the
three months ended March 31, 2004 from $5.9 million, or approximately 6%, for the
three months ended March 31, 2003. These costs resulted in service gross margins of
42% and 39% for the three months ended March 31, 2004 and 2003, respectively.
Service gross margins improved mainly as the result of combined effects of
restructuring actions implemented, increased efficiencies, reduced spending
relative to service revenues and lower stock-based
compensation and amortization of intangible assets expenses. Stock-based compensation.
Stock-based compensation decreased to $0.2 million
for the three months ended March 31, 2004 from $0.5 million, or approximately
55%, for the three months ended March 31, 2003. The decrease in stock-based
compensation is mainly due to the decrease in the Company's stock price during
first three months of fiscal year 2004 which affects the variable accounting
calculation to which restricted stock and some outstanding stock options are
subject. Amortization of intangibles.
Amortization of intangible
assets
was $0.7 million for the three months ended March 31, 2004 compared to $0.8 million
for the three months ended March 31, 2003. The amortization expense
in the three months ended March 31, 2004 included $0.1 million attributable to
the acquisition of OnDemand in April 2002, $0.4 million attributable to the
acquisition of Prime Response in March 2001 and $0.2 million attributable to the
acquisitions certain assets from ActionPoint and ASP Outfitter in May 2001.
We expect
amortization expense on purchased intangible assets to be $0.5 million for the
remaining nine months in fiscal 2004 and $0.1 million in fiscal 2005, at which
time existing purchased intangible assets will be fully amortized. Operating Expenses
Sales and marketing. Sales and
marketing expenses decreased to $5.9 million for the three months ended March 31,
2004 from $6.0 million, or approximately
1%, for the three months ended March 31, 2003. The decrease in these expenses was
mainly attributable to a decrease
of $0.1 million in marketing programs and trade shows and a decrease of
approximately $0.6 million in communication, facilities, depreciation and other
allocated expenses. These decrease were partially offset by an increase of
$0.5 million in increased commission expenses and bonus expenses due to higher
license revenues. 17 Research and development.
Research and development expenses
increased to $4.4 million for the three months ended March 31, 2004 from $4.1
million, or approximately 9%, for the three months ended March 31, 2003. The
increase in these expenses was mainly attributable to an increase of $0.4 million in personnel
related expenses and $0.1 million in travel and equipment rental expenses
related to our outsourcing of
technical support and certain
sustaining engineering functions. These increases were partially offset by a decrease of $0.2 million
in depreciation related expenses. General and administrative. General and administrative expenses increased to $1.9 million for the three
months
ended March 31, 2004 from $1.4 million, or approximately 34%, for the three
months
ended March 31, 2003. The increase in these expenses was mainly
attributable to an increase of $0.4 million in personnel related expenses due to
increased salary and bonus expenses and an increase of $0.4 million in allocated
expenses due to lower headcounts in other operating functions of the Company as
a result of restructuring actions implemented. These increases were
partially offset by a decrease of $0.3 million in office, facilities and
depreciation related expenses due to restructuring actions implemented and a
renegotiated lease agreement. Stock-based compensation. We recorded amortization of stock-based compensation expense of $0.1 million
for the three months ended March 31, 2004 compared to $0.2 million for the
three months ended March 31, 2003
relating 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 March 31, 2004, approximately $0.1 million of
unearned 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 ("Replacement Options") at
the closing market price on that date. The Program, as amended, also provided
our 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. There were 11,668,875 options
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 the 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. In
November 2003, our then acting Chief Financial Officer left our employ and, as a
result, the Company is no longer subject to stock-based compensation expense
related to the vesting of his restricted stock. In connection with the
termination, we accelerated the vesting of 154,723 shares of restricted stock
resulting in a compensation expense of $0.6 million during the fourth quarter of
fiscal year 2003.
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. The remaining unearned stock-based
compensation expense amounted to approximately $0.6
million at March 31, 2004. For the three months ended March 31, 2004, $0.6 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 the change 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. 18
The related functional
breakdown of total stock-based
compensation is outlined below (in
thousands):
March 31, 2004 March
31, 2003 )
In September 2001, we issued warrants
to Accenture plc to purchase up to 600,000 shares of our common stock subject to
performance-based vesting. No warrants have vested through March 31, 2004.
Amortization of intangibles. Amortization of intangible
assets
was $0.1 million for both the three months ended March 31, 2004 and 2003,
respectively.
The $0.1 million amortization expense for
both the three months ended March 31, 2004 and 2003 is mainly attributable to the
acquisition of Prime Response in March 2001.
We expect
amortization expense on purchased intangible assets included in operating
expenses to less than $0.1 million for the
remaining nine months in fiscal year 2004 and less than $0.1 million in fiscal
year 2005, at which
time existing purchased intangible assets will be fully amortized. Interest
Income, net Interest income, net consist primarily
of interest income generated from our cash, cash equivalents and short-term
investments and interest expense incurred in connection with outstanding
borrowings. Interest income, net increased to $0.2 million for the three
months ended March 31, 2004 from $0.1 million for the three months ended March
31, 2003. This increase is due to interest being earned on a larger cash
and cash equivalent balances during the quarter and no interest expense
offsetting the interest income due to no outstanding borrowings during the
quarter. Foreign exchange and other
expenses, net Realized foreign currency gains and losses and other
non-operating income and expenses were $0.2 million and $0.3 million for the
three months ended March 31, 2004 and 2003, respectively.
The $0.2 million expense for the three months ended March 31, 2004 is mainly due
to realized net foreign currency exchange losses. The $0.3 million expense for
the three months ended March 31, 2003 is mainly due to the write-off of a long
outstanding acquisition-related balance. Provision for Income Taxes
Our provisions for income taxes were $0.2
million and $0.3 million for the three months ended March 31, 2004 and 2003,
respectively. The provisions were attributable to taxes on earnings from our
foreign subsidiaries and certain state income taxes.
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, and
short-term investments and restricted cash and long-term restricted cash consist
principally of money market funds, a certificate of deposit and marketable
equity securities and totaled $35.5 million, $38.3 million and $65.9 million at
March 31, 2003, December 31, 2003 and March 31, 2004, respectively.
Cash and cash equivalents increased
during the three months ended March 31, 2004 compared to prior periods as a
result of our sale of 4,854,368 shares of our common stock for an aggregate purchase price of approximately $25.0
million during the three months ended March 31, 2004. All of our
short-term investments are classified as available-for-sale under the provisions
of SFAS 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 income. 19
Cash provided by operating activities was $0.2 million during the three months ended March
31, 2004. Cash provided by operating activities during the three months
ended March 31, 2004 consisted primarily of our net loss of $0.3 million
adjusted for non-cash items (primarily depreciation, amortization, non-cash
stock-based compensation expense and other non-cash charges) of approximately $1.9
million and the net cash outflow effect from changes in assets and
liabilities of approximately $1.4 million.
During
the three months ended March 31, 2004, the following occurred which contributed
to the net cash outflow effect from changes in assets and liabilities: (i) deferred
revenues decreased as long-term support and maintenance revenues were recognized
for which cash was received in prior years; (ii) prepaid royalty and commission
expenses increased due to the signing of two large percentage-of-completion
method customer contracts in the last month of the quarter; and (iii) accounts
receivable decreased due to increased customer collections during the quarter as
evidenced by our days sales outstanding decreasing from 55 days to 49 days for
the three months ended December 31, 2003 and March 31, 2004, respectively.
Cash used in operating activities was
$10.2 million during the three months ended March 31, 2003. Cash used in
operating activities during the three months ended March 31, 2003 consisted
primarily of our net loss of $6.9 million adjusted for non-cash items (primarily
depreciation, amortization, and non-cash stock-based compensation expense) of
approximately $3.5 million and the net cash outflow effect from changes in
assets and liabilities of approximately $6.8 million. During the three months
ended March 31, 2003, the following occurred which contributed to the net cash
outflow effect from changes in assets and liabilities: (i) accounts receivable
increased due to revenue recognition beginning on a large
percentage-of-completion method customer contract during the quarter for which
payment was not received until the second quarter of 2003; (ii) accounts payable
decreased as a result of timing differences when trade payables were paid; (iii)
accrued expenses decreased as a result of payments for restructuring-related
accruals, commissions and bonuses which were only partially offset by current
quarter accruals; and (iv) deferred revenue increased due to revenue recognition
on a large percentage-of-completion method customer contract carrying into the
second quarter of 2003 and partially offset by long-term support and maintenance
revenues being recognized for which cash was received in prior years.
We entered into several multi-year support
and maintenance agreements in 2000 and, to a lesser extent, in 2001 and 2002.
Because we recognize support and maintenance revenue over the life of these
agreements, our cash flows from operations are negatively impacted in the years
after we enter into these agreements. Since we expect to continue our
recent focus on annual (instead of multi-year) agreements, we expect that this
negative impact on our cash flow from operations to decrease significantly after
fiscal year 2004.
Cash used in investing activities during
the three months ended March 31, 2004 was $0.2 million and related to capital
expenditures made during the quarter. Cash provided by investing activities was
$5.5 million during the three months ended March 31, 2003 and related mainly to
the maturities of short-term investments, net of additional purchases, which
were reinvested into cash and cash equivalent investments to be available to
fund operating activities.
Cash provided by financing activities was
$27.6 million and $4.0 million during the three months ended March 31, 2004 and
2003, respectively. During the three months ended March 31, 2004, the
following occurred: (i) obtained net proceeds of $24.8 million from the sale of
4,854,368 shares of our common stock to Acqua Wellington Opportunity I Limited;
(ii) received proceeds of $1.1 million from the issuance of common stock as part
of the employee stock purchase plan; and (iii) received proceeds of
approximately $1.7 million from the exercise of employee stock options. During
the three months ended March 31, 2003, the following occurred: (i) received
proceeds of $0.7 million from the issuance of common stock as part of the
employee stock purchase plan; (ii) received proceeds of $2.8 million from
additional borrowings entered into during the quarter net of $0.7 million of
borrowings repayments; and (iii) received proceeds of $0.5 million from the
collection of notes receivables. At March 31, 2004 and
December 31, 2003, we had a balance of $1.5 million in the form of short-term
investments that meet the qualification to be considered cash equivalents, which
were restricted from withdrawal. This balance serves as a security deposit in a
long-term, post-contract customer support revenue transaction. At March 31, 2004 and
December 31, 2003, 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.
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. The terms of the line of credit 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
issuances subsequent to the effective date of the 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 $5.0
million. The accounts receivable line of credit
contains a provision for a sub-limit of up to $2.0 million for issuances of
standby commercial letters of credit. As of March 31, 2004, we had utilized
$1.1 million of the $2.0 million standby commercial letter
of credit limit. The accounts receivable line of credit also contains a
provision for a sub-limit of up to $2.0 million for issuance of foreign exchange
forward contracts. As of March 31, 2004, we had
not entered into any foreign exchange forward contracts.
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 $2.0 million (non-formula
portion); however, if advances exceed $2.0 million, then subsequent advances
cannot exceed 80% of eligible accounts receivable balances, and the bank would
hold a security interest in those accounts receivable. 20
Borrowings under the $2.5 million
equipment line bear interest at the lending bank's prime rate plus 1.0%, and the
bank would hold a security interest in the equipment. In March 2003, we borrowed
$2.5 million against the equipment line of credit. We paid off the outstanding
line of credit balance in December 2003. As of March 31, 2004, we were in
compliance with the respective debt covenants and there was no outstanding
balance on our equipment line of credit. Future Commitments Future payments due under debt and lease obligations as of March 31, 2004 are
as follows (in thousands): Critical Accounting Policies Our discussion and analysis of our
financial condition and results of operations are 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, valuation
allowances, intangible assets, income taxes, 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 consolidated financial statements:
We have reviewed our critical accounting
policies, critical accounting estimates, and the related disclosures with our
Disclosure and Audit Committees. Additional information about our critical
accounting policies may by found in the Company's Annual Report on Form 10-K/A
for the year ended December 31, 2003 filed on April 28, 2004, in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations," under the heading "Application of Critical Accounting Policies and
Use of Estimates." We have not changed those policies since such date.
Investors should therefore read this Item 2 in conjunction with such
description. 21
RISK FACTORS
Weakness in technology spending in our
target markets combined with geopolitical concerns could make the closing of
license transactions to new and existing customers difficult.
Our revenues fell in fiscal year 2003
compared to revenues in fiscal year 2002. Our revenues will continue to decrease
in 2004 if we are unable to enter into new large-scale license transactions with
new and existing customers. The current state of world affairs and geopolitical
concerns have left many customers reluctant to enter into new large value
license transactions without some assurance that the economy both in the
customer's home country and worldwide will have some economic and political
stability. Continued or further weakness in technology spending and geopolitical
instability will continue to make closing large license transactions difficult.
In addition, we cannot predict what effect the U.S. military presence overseas
or potential or actual political or military conflict have had or are continuing
to have on our existing and prospective customers' decision-making process with
respect to licensing or implementing enterprise-level products such as ours. Our
ability to enter into new large license transactions also directly affects our
ability to create additional consulting services and maintenance revenues, on
which we also depend.
Historically, we have not been
profitable and we may continue to incur losses, which may raise vendor viability
concerns thereby making it more difficult to close license transactions with new
and existing customers.
We incurred losses of $0.3 million and
$6.9 million for the three months ended March 31, 2004 and 2003, respectively,
and a loss of $16.4 million for the year ended December 31, 2003.
As of March 31, 2004, we had an accumulated deficit of $189.2 million. We may
continue to incur losses and cannot be certain that we can achieve or generate
sufficient revenues to achieve profitability. Continued losses may leave many
customers reluctant to enter into new large value license transactions without
some assurance that we will operate profitably. If we fail to enter into new
large value license transactions due to lack of vendor profitability and or
viability concerns, our revenues will decline, which would further adversely
affect our operating results.
Because a small number of customers
account for a substantial portion of our revenues, the loss of a significant
customer could cause a substantial decline in our revenues.
We derive a significant portion of our
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
revenues and net income. For the three months ended March 31, 2004, Barclays,
the Royal Bank of Scotland and Canadian Imperial Bank of Commerce accounted for
29%, 16% and 12% of our total revenues, respectively. For the three months
ended March 31, 2003, Barclays accounted for 22% of our total revenues.
While our customer concentration has fluctuated, we expect that a limited number
of customers will continue to account for a substantial portion of our revenues.
As a result, if we lose a major customer, or if a contract is delayed or
cancelled or we do not contract with new major customers, our revenues and net
loss would be adversely affected. In addition, customers that have accounted for
significant revenues in the past may not generate revenues in any future period,
causing our failure to obtain new significant customers or additional orders
from existing customers to materially affect our operating results.
If we fail to adequately address the
difficulties of managing our international operations, our revenues and
operating expenses will be adversely affected.
For the three months ended March 31, 2004,
international revenues were $17.0 million or approximately 84% of our total
revenues. For the three months ended March 31, 2003, international revenues were
$11.7 million or approximately 85% of our total revenues. While we expect North
American revenues to increase as a percentage of our overall revenues,
international revenues will continue to represent a significant portion of our
total revenues in future periods. We have faced, and will continue to face,
difficulties in managing international operations which include:
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.
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.
A significant portion of our sales and
operating expenses result from transactions outside of the United States, often
in foreign currencies. Our international sales comprised 84% and 85% of our
total sales for the three months ended March 31, 2004 and 2003, respectively. In
fiscal year 2003, our operating results were positively affected by changes in
foreign currency rates. Our future operating results will continue to be subject
to fluctuations in foreign currency rates, especially if international sales
continue to grow as a percentage of our total sales, and we may be negatively
impacted by fluctuations in foreign currency rates in the future. 22
Competition in our markets is intense
and could reduce our sales and prevent us from achieving profitability.
Increased competition in our markets could
result in price reductions for our products and services, reduced gross margins
and loss of market share, any one of which could reduce our future revenues. The
market for our products is intensely competitive, evolving and subject to rapid
technological change. 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.
We may experience a shortfall in
revenue, earnings, cash flow or otherwise fail to meet public market
expectations, which could materially and adversely affect our business and the
market price of our common stock.
Our revenues and operating results may
fluctuate significantly because of a number of factors, many of which are
outside of our control. Some of these factors include:
One or more of the foregoing factors may
cause our operating expenses to be disproportionately high during any given
period or may cause our revenues and operating results to fluctuate
significantly. Based upon the preceding factors, we may experience a shortfall
in revenues and earnings or otherwise fail to meet public market expectations,
which could materially and adversely affect our business, financial condition,
results of operations and the market price of our common stock.
Our operating results fluctuate
significantly and delays in implementation of our products may cause
unanticipated declines in revenues or cash flow, which could 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 revenue. If our revenues or operating
margins are below the expectations of the investment community, our stock price
is likely to decline. 23
If we fail to maintain and expand our
relationships with systems integrators and other business partners, our ability
to develop, market, sell, and support our products may be adversely affected.
Our development, marketing and
distribution strategies increasingly rely on our ability to form and maintain
long-term strategic relationships with system integrators, in particular, our
existing business alliance partners, IBM and Accenture. These business
relationships often consist of joint marketing programs, technology partnerships
and resale and distribution arrangements. Although most aspects of these
relationships are contractual in nature, many important aspects of these
relationships depend on the continued cooperation between the parties.
Divergence in strategy, change in focus, competitive product offerings or
potential contract defaults may interfere with our ability to develop, market,
sell, or support our products, which in turn could harm our business. If either
IBM or Accenture were to terminate their agreements with us or our relationship
were to deteriorate, it could have a material adverse effect on our business,
financial condition and results of operations. In many cases, these parties have
extensive relationships with our existing and potential customers and influence
the decisions of these customers. A number of our competitors have stronger
relationships with IBM and Accenture and, as a result, these parties 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 could prevent or delay 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
and cash receipt 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.
If we are not able to successfully
manage our partner operations in India, our operations and financial results may
be adversely affected.
In fiscal year 2003 we entered into an
agreement with an independent contracting company with global technical
resources and an operations center in Bangalore, India. The agreement provides
for the independent contractor, at our direction, to attract, train, assimilate
and retain sufficient highly qualified personnel to perform technical support
and certain sustaining engineering functions. In the
event our relationship with this independent contracting company was terminated,
we would either find an alternate contracting company to perform these services
or we would provide these services which will increase our costs. In fiscal year
2004 we plan to significantly increase the size of this organization and
expand its scope. The expansion of this organization is an important component
of our strategy to address the business needs of our customers and manage our
expenses. The success of this operation will depend on our ability and our
independent contractor's ability to attract, train, assimilate and retain highly
qualified personnel in the required periods. A disruption of our relationship
with the independent contractor could adversely affect our operations and
financial results. Failure to effectively manage the organization and operations
will harm our business and financial results.
Our stock price is subject to
significant fluctuations, which may adversely affect the value of your
investment in our common stock.
Since our initial public offering in
February 2000, the price of our common stock has fluctuated widely. During the
twelve-month period ended March 31, 2004, the closing price of our common stock
on the NASDAQ National Market ranged from a low of $0.81 to a high of $5.85 per
share. 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. 24
We may incur in future periods
significant stock-based compensation charges related to certain stock options
and stock awards, which may adversely affect our reported financial results.
Based on accounting standards involving
stock compensation, we may incur variable accounting costs related to the
issuance of restricted stock and certain stock options, including those
associated with our stock option cancellation/re-grant program. Accounting
standards require us to re-measure 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 stock-based compensation costs in future periods.
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 under the caption, 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 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. Similar
complaints were filed in the same court against hundreds of other public
companies that conducted IPOs of their common stock in the late 1990s. Although
Chordiant and almost all of the other issuers have approved in principle a
tentative settlement with the plaintiffs, it 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.
If our products do not operate
effectively in a company-wide environment, we may lose sales and suffer
decreased revenues.
If existing customers have difficulty
deploying our products or choose not to fully deploy our products, it could
damage our reputation and reduce revenues. Our success requires that our
products be highly scalable, and able to accommodate substantial increases in
the number of users. Our products are expected to be deployed on a variety of
computer 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 December 2003.
To date, our sales have been
concentrated in the financial services 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 two
large markets-financial services and telecommunications-accounted for
approximately 82% and 80% of our total revenues for the three months ended March
31, 2004 and 2003, respectively. We expect that revenues from these two
markets will continue to account for a substantial portion of our total revenues
in 2004. 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.
Low gross margin in services revenues
could adversely impact our overall gross margin and income.
Our services revenues have had lower gross
margins than our license revenues. Service revenues comprised 54% and 70% of our
total revenues for the three months ended March 31, 2004 and 2003, respectively.
Gross margin on services revenues was 42% and 39% for the three months ended
March 31, 2004 and 2003, respectively. Gross margin on license revenues
was 96% and 94% for the three months ended March 31, 2004 and 2003,
respectively. As a result, an increase in the percentage of total revenues
represented by services revenues, or an unexpected decrease in license revenues,
could have a detrimental impact on our overall gross margins. To increase
services revenues, we 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. 25
Because we have reduced the size of our
workforce, we may not have the workforce necessary to support our platform of
products if demand for our products substantially increased, and, if we need to
rebuild our workforce in the future, we may not be able to recruit personnel in
a timely manner, which could negatively impact the development and sales of our
products.
In 2002 and 2003, we reduced the size of
our workforce and may carry out further reductions in the future. Our recent
reductions were intended to align our operating expenses with our revenue
expectations. 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 increase
outsourced functions to companies based in foreign jurisdictions and we may be
unable to hire, train or retain qualified personnel in a timely manner, which
may weaken our ability to market our products in a timely manner, negatively
impacting our operations. Our success depends largely on ensuring that we have
adequate personnel to support our platform of products as well as the continued
contributions of our key management, engineering, sales and marketing and
professional services personnel.
If we fail to introduce new versions
and releases of functional and scalable products in a timely manner, customers
may license competing products and our revenues may decline.
If we are unable to ship or implement
enhancements to our products when planned, or fail to achieve timely market
acceptance of these enhancements, we may suffer lost sales and could fail to
achieve anticipated revenues. We have in the past, and expect in the future, to
derive a significant portion of our total revenues from the license of our
primary product suite. Our future operating results will depend on the demand
for the product suite by future customers, including new and enhanced releases
that are subsequently introduced. If our competitors release new products that
are superior to our products in performance or price, or if we fail to enhance
our products or introduce new features and functionality in a timely manner,
demand for our products may decline. We have in the past experienced delays in
the planned release dates of new versions of our software products and upgrades.
New versions of our products may not be released on schedule or may contain
defects when released.
We depend on technology licensed to us
by third parties, and the loss or inability to maintain these licenses could
prevent or delay sales of our products.
We license from several software providers
technologies that are incorporated into our products. We anticipate that we will
continue to license technology from third parties in the future. This software
may not continue to be available on commercially reasonable terms, if at all.
While currently we are not materially dependent on any single third party for
such licenses, the loss of the technology licenses could result in delays in the license of our
products until equivalent technology is developed or identified, licensed and
integrated into our products. Even if substitute technologies are available,
there can be no guarantee that we will be able to license these technologies on
commercially reasonable terms, if at all.
Defects in third party products
associated with our products could impair our products' functionality and injure
our reputation.
The effective implementation of our
products depends upon the successful operation of third-party products in
conjunction with our products. Any undetected 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.
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: * * * 26
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. 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. 27 Item 3. Quantitative and Qualitative
Disclosures about Market Risk. 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. International revenues from our foreign subsidiaries accounted for
approximately 84% and 85% of total revenues for the three months ended March 31,
2004 and 2003, respectively. International sales are made
mostly from our foreign sales subsidiaries in their respective countries and are
typically denominated in the local currency of each country. These subsidiaries
also incur most of their expenses in the local currency. Accordingly, all
foreign subsidiaries use the local currency as their functional currency.
Additionally, one of our foreign
subsidiaries holds cash equivalent investments in currencies other than its
respective local currency. Such holdings increase our exposure to foreign
exchange rate fluctuations. As exchange rates vary, the holdings may magnify
foreign currency exchange rate fluctuations or upon translation or adversely
impact overall expected profitability through foreign currency losses incurred
upon the sale or maturity of the investments. Foreign currency losses, net for
the three months ended March 31, 2004 were $0.2 million. Foreign
currency gains, net for
the three months ended March 31, 2003 were $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. 28
Item 4. Controls and
Procedures. (a) Evaluation of disclosure controls
and procedures We carried out an evaluation, as of
March 31, 2004, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) under the Exchange Act).
Based upon that evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures are effective to
ensure that material information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission rules and forms. (b) Changes in internal controls
Such evaluation did not identify any
significant changes in our internal controls over financial reporting that
occurred during the quarter ended March 31, 2004 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting. (c) Limitations on the Effectiveness of
Controls. The Company's management, including
the Chief Executive Officer and Chief Financial Officer, does not expect that
our disclosure controls and procedures or our internal control over financial
reporting will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error, mistake or circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. We believe, however, our disclosure controls
and procedures are designed to provide a reasonable level of assurance of
achieving our disclosure control objectives and that our disclosure controls and
procedures are effective in achieving that level of reasonable assurance.
Information with respect to this Item may be found in Note 6
of Notes to Condensed Consolidated Financial Statements in this Form 10-Q,
which information is incorporated into this Item 1 by reference. 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 January 29, 2004, the
Company furnished a Current Report on Form 8-K which announced
the Company's financial results for the
quarter and year ended December 31, 2003 and certain other information. On January 26, 2004, the
Company filed a Current Report on Form 8-K which announced
the Company's $25 million private
placement transaction.
On
January 20, 2004, the Company filed a Current Report on Form 8-K
announcing the appointment of Steven R. Springsteel as a Class II Director and
the resignation of George Reyes as a Class II Director effective after the
Company files its Annual Report on Form 10-K. 29 Chordiant Software, Inc. Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 10, 2004
Chordiant Software, Inc.
30 EXHIBIT INDEX 31 CHORDIANT SOFTWARE, INC. 1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Adopted by the Board of Directors November 30, 1999
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 MARCH 31, 2004
TABLE OF CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, 2004
December 31, 2003
ASSETS
Current
assets:
Cash and cash
equivalents
$
63,784
$
36,218
Short-term
investments and restricted cash
581
581
Accounts receivable,
net
11,101
11,974
Prepaid expenses and other current
assets
3,031
2,675
Total current
assets
78,497
51,448
Restricted cash
1,500
1,500
Property and
equipment, net
2,884
3,071
Goodwill
24,874
24,874
Intangible assets,
net
634
1,414
Other
assets
1,398
1,504
Total assets
$
109,787
$
83,811
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
liabilities:
Accounts payable
$
4,141
$
3,931
Accrued expenses
13,041
13,038
Deferred revenue
13,321
14,548
Total current
liabilities
30,503
31,517
Deferred revenue,
long-term
3,848
Total liabilities
33,501
35,365
Stockholders' equity:
Common
stock
72
65
Additional paid-in
capital
263,064
235,911
Deferred stock-based
compensation
(658
)
(1,665
)
Accumulated deficit
(189,210
)
(188,906
)
Accumulated other
comprehensive income
3,018
3,041
Total stockholders'
equity
76,286
48,446
Total liabilities and
stockholders' equity
$
109,787
$
83,811
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except
per share data)
(Unaudited)
9,286
4,138
10,932
9,677
20,218
13,815
392
261
6,293
5,926
209
464
686
792
7,580
7,443
5,940
6,016
4,442
4,070
1,851
1,378
500
1,375
Amortization of intangible assets
94
98
12,827
12,937
)
(6,565
)
210
135
(174
)
(334
)
(153
)
(6,764
)
151
182
)
)
)
$
(327
)
$
(6,726
)
)
)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three
Months Ended
March
31, 2004
March
31, 2003
Cash flows from
operating activities:
Net loss
$
(304
)
$
(6,946
)
Adjustments to
reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and
amortization
414
778
Amortization of
intangibles
780
890
Non-cash stock-based compensation expense
508
1,839
Warrants issued to customers
26
--
Loss on
disposal of assets
--
2
Other non-cash charges
157
--
Changes in assets and
liabilities:
Accounts receivable
941
(3,129
)
Prepaid expenses
and other current assets
(328
)
(404
)
Other
assets
105
405
Accounts payable
152
(933
)
Accrued expenses
38
(3,082
)
Deferred
revenue
(2,327
)
331
Net cash provided by (used in)
operating activities
162
(10,249
)
Cash flows from
investing activities:
Property and equipment
purchases
(194
)
(20
)
Proceeds from
disposal of property and equipment
--
15
Purchases of
short-term investments
--
(576
)
Proceeds from maturities of short-term
investments
--
6,082
Net cash provided by (used
in) investing
activities
(194
)
5,501
Cash flows from
financing activities:
Proceeds
from issuance of common stock, net
24,844
--
Proceeds
from exercise of stock options
1,640
36
Proceeds from
issuance of common stock for Employee Stock Purchase Plan
1,072
674
Proceeds from
borrowings
--
3,491
Repayment of notes
receivable
--
496
Repayment of borrowings
--
(668
)
Net cash provided by
financing activities
27,556
4,029
Effect of
exchange rate fluctuations on cash and cash equivalents
42
220
Net increase
(decrease) in cash and cash equivalents
27,566
(499
)
Cash and cash equivalents at
beginning of period
36,218
30,731
Cash and cash
equivalents at end of period
$
63,784
$
30,232
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended
Net loss -- as reported
$
(304
)
$
(6,946
)
Add:
Stock-based compensation expense included in reported net loss
134
279
Less:
Stock-based compensation expense determined under fair value method
(1,128
(1,039
)
Net loss -- proforma
$
(1,298
$
(7,706
Basic and diluted net loss per share
-- as reported
$
(0.00
)
$
(0.12
)
Basic and diluted net loss per
share -- proforma
$
(0.02
)
$
(0.13
)
Three Months Ended
Stock-based compensation expense:
Cost of
service revenues
$
209
$
464
Sales and
marketing
271
414
Research and
development
338
495
General and
administrative
(109
466
Total
stock-based compensation expense
$
709
$
1,839
Three Months Ended
March 31, 2004
March 31, 2003
Barclays
29%
22%
The
Royal Bank of Scotland
16%
*
Canadian Imperial Bank of Commerce
12%
*
March 31, 2004
December 31, 2003
Accounts receivable, net:
Accounts receivable
$
11,216
$
12,107
Less: allowance for doubtful accounts
(115
)
(133
)
$
11,101
$
11,974
March 31,
2004
December 31, 2003
Accrued
expenses:
Accrued payroll and related
expenses
$
6,295
$
6,656
Accrued restructuring expenses
3,811
4,265
Other accrued liabilities
2,935
2,117
$
13,041
$
13,038
Facilities
Severance and Benefits
Total
Reserve
balance at December 31, 2003
$
3,099
$
1,166
$
4,265
Total charge
--
30
30
Non-cash
(2)
(59)
(61)
Cash paid
(119)
(304)
(423)
Reserve
balance at March 31,
2004
$
2,978
$
833
$
3,811
Operating Leases
Sublease Income
Total
Remaining portion of Fiscal 2004
$
2,398
$
(295
)
$
2,103
Fiscal 2005
3,266
(143
)
3,123
Fiscal 2006
3,490
--
3,490
Fiscal 2007
3,430
--
3,430
Fiscal 2008
2,893
--
2,893
Thereafter
3,065
--
3,065
Total
$
18,542
$
(438
)
$
18,104
Three Months Ended
Net loss available to common
stockholders
$
(304
)
$
(6,946
)
Weighted
average common stock outstanding
69,488
62,670
Common stock subject to repurchase
(1,833
(5,460
Denominator for basic and diluted calculation
67,655
57,210
Net loss per share -- basic and diluted
$
(0.00
)
$
(0.12
)
Three Months Ended
March 31, 2004
March 31, 2003
Warrants outstanding
1,662
1,850
Employee stock options
8,171
2,687
Common stock subject to repurchase
1,833
5,460
11,666
9,997
Three Months Ended
North America
$
3,255
$
2,071
Europe
16,908
11,695
Rest of World
55
49
$
20,218
$
13,815
March 31, 2004
December 31, 2003
North America
$
1,403
$
1,475
Europe
1,481
1,596
$
2,884
$
3,071
46
%
%
54
70
100
100
2
2
31
43
1
3
3
6
Total cost of revenues
37
54
46
29
44
22
29
9
10
3
10
Amortization of intangible assets
1
1
Total operating expenses
64
94
(1
)
)
1
1
(1
)
(2
)
)
)
1
1
(2
)%
(50
Three Months Ended
Stock-based compensation expense:
Cost of
service revenues
$
209
$
464
Sales and
marketing
271
414
Research and
development
338
495
General and
administrative
(109
466
Total
stock-based compensation expense
$
709
$
1,839
Operating Leases
Sublease Income
Total
Remaining portion of Fiscal 2004
$
2,398
$
(295
)
$
2,103
Fiscal 2005
3,266
(143
)
3,123
Fiscal 2006
3,490
--
3,490
Fiscal 2007
3,430
--
3,430
Fiscal 2008
2,893
--
2,893
Thereafter
3,065
--
3,065
Total
$
18,542
$
(438
)
$
18,104
*
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 of the allowance
for doubtful accounts;
*
Restructuring costs; and
*
Determining functional currencies for
the purposes of consolidating our international operations.
*
Difficulties in hiring qualified local
personnel;
*
Seasonal fluctuations in customer
orders;
*
Longer accounts receivable collection
cycles;
*
Expenses associated with licensing
products and servicing customers in foreign markets; and
*
Economic downturns and political
uncertainty 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.
2004
Fair Value
Short-term
investments and restricted cash
$
$
Average interest
rates
1.60
%
SIGNATURES
(Registrant)
/s/ Michael J. Shannahan
Michael J. Shannahan
Senior Vice President of Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
Exhibit
Number
2.1
Stock Purchase
Agreement, dated July 19, 2000, between Chordiant Software, Inc., White
Spider Software, Inc. and the Sellers of capital stock of White Spider
Software, Inc. (filed as Exhibit 99.1 with Chordiant's Current Report on
Form 8-K (No. 000-29357) filed on August 3, 2000 and incorporated herein
by reference).
2.2
Agreement and Plan
of Merger and Reorganization, dated as of January 8, 2001, by and among
Chordiant Software, Inc., Puccini Acquisition Corp. and Prime Response,
Inc. (included as Annex A to the joint proxy statement/prospectus filed
with Amendment No. 1 to Chordiant's Registration Statement on Form S-4
(No. 333-54856) filed on February 26, 2001 and incorporated herein by
reference).
2.3
Agreement and Plan
of Merger and Reorganization, dated as of March 28, 2002, by and among
Chordiant Software, Inc., OnDemand Acquisition Corp. and OnDemand, Inc.
(filed as Exhibit 2.1 to Chordiant's Current Report on Form 8-K filed on
April 12, 2002 and incorporated herein by reference).
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).
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
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).
4.3
Registration Rights
Agreement, dated January 22, 2004, by and between Chordiant Software,
Inc., and Acqua Wellington Opportunity I Limited (filed as Exhibit 4.5 to
Chordiant's Current Report on Form 8-K filed on January 26, 2004 and
incorporated herein by reference)
4.4
Warrant, dated
February 28, 1999, issued to GAP Coinvestment Partners II, L.P. (filed as
Exhibit 10.19 with Prime Response's Registration Statement on Form S-1
(No. 333-92461) filed on December 10, 1999 and incorporated herein by
reference).
4.5
Warrant, dated
December 9, 1999, issued to General Atlantic Partners 52, L.P. (filed as
Exhibit 10.20 with Prime Response's Registration Statement on Form S-1
(No. 333-92461) filed on December 10, 1999 and incorporated herein by
reference).
4.6
Warrant, dated
December 9, 1999, issued to Accenture (Formerly known as Andersen
Consulting), L.P. (filed as Exhibit 10.25 with Prime Response's
Registration Statement on Form S-1 (No. 333-92461) filed on December 10,
1999 and incorporated herein by reference).
4.7
Warrant, dated
December 9, 1999, issued to Accenture (Formerly known as Andersen
Consulting), L.P. (filed as Exhibit 10.26 with Prime Response's
Registration Statement on Form S-1 (No. 333-92461) filed on December 10,
1999 and incorporated herein by reference).
4.8
Warrant, dated
December 9, 1999, issued to Accenture (Formerly known as Andersen
Consulting), L.P. (filed as Exhibit 10.27 with Prime Response's
Registration Statement on Form S-1 (No. 333-92461) filed on December 10,
1999 and incorporated herein by reference).
10.3
1999
Non-Employee Directors' Plan as amended and restated.
10.25
Purchase
Agreement by and between Chordiant and Acqua Wellington Opportunity I
Limited, dated January 22, 2004 (filed as exhibit 99.1 to Amendment No. 1 to
Chordiant's Registration Statement on Form S-3 (File No. 333-112698) filed
on March 30, 2004).
23.1
Consent of
Independent Accountants.
24.1
Power of Attorney
(filed as Exhibit 24.1 to Chordiant's Annual Report on Form 10-K filed on
March 8, 2004 and incorporated herein by reference).
31.1
Certification
required by Rule 13a-14(a) or Rule15d-14(a).
31.2
Certification
required by Rule 13a-14(a) or Rule15d-14(a).
32.1
Certification
required by Rule 13a-14(a) or Rule15d-14(a) and Section 1350 of Chapter 63
of Title 18 of the United States Code (18 U.S.C. 1350).
Approved By Stockholders December 31, 1999
Amended by the Board of Directors January 19, 2001
Stockholder Approval Not Required
Amended by the Board of Directors April 18, 2002
Approved by Stockholders May 29, 2002
Effective Date: Upon Initial Public Offering
Termination Date: None
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation of the
Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "Annual Grant" means an Option granted annually to all Non-Employee
Directors who meet the specified criteria pursuant to subsection 6(b) of the
Plan.
(c) "Annual Meeting" means the annual meeting of the stockholders of the
Company.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee Grant" means an Option granted to a member of a committee of the
Board pursuant to subsection 6(c) of the Plan.
(g) "Common Stock" means the common stock of the Company.
(h) "Company" means Chordiant Software, Inc., a Delaware corporation.
(i) "Consultant" means any person, including an advisor, (i) engaged by the
Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (ii) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors of the Company who are not compensated by the Company for their
services as Directors or Directors of the Company who are merely paid a
director's fee by the Company for their services as Directors.
(j) "Continuous Service" means that the Optionholder's service with the Company
or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Optionholder's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Optionholder renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Optionholder
renders such service, provided that there is no interruption or termination of
the Optionholder's Continuous Service. For example, a change in status from a
Non-Employee Director of the Company to a Consultant of an Affiliate or an
Employee of the Company will not constitute an interruption of Continuous
Service. The Board or the chief executive officer of the Company, in that
party's sole discretion, may determine whether Continuous Service shall be
considered interrupted in the case of any leave of absence approved by that
party, including sick leave, military leave or any other personal leave.
(k) "Director" means a member of the Board of Directors of the Company.
(l) "Disability" means the inability of a person, in the opinion of a qualified
physician acceptable to the Company, to perform the major duties of that
person's position with the Company or an Affiliate of the Company because of the
sickness or injury of the person.
(m) "Employee" means any person employed by the Company or an Affiliate. Mere
service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(o) "Fair Market Value" means, as of any date, the value of the Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange or traded on
the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value
of a share of Common Stock shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such exchange or market
(or the exchange or market with the greatest volume of trading in the Common
Stock) on the last market trading day prior to the day of determination, as
reported in The Wall Street Journal or such other source as the Board deems
reliable.
(ii) In the absence of such markets for the Common Stock, the Fair Market Value
shall be determined in good faith by the Board.
(p) "Initial Grant" means an Option granted to a Non-Employee Director who meets
the specified criteria pursuant to subsection 6(a) of the Plan.
(q) "IPO Date" means the effective date of the initial public offering of the
Common Stock.
(r) "Non-Employee Director" means a Director who is not an Employee.
(s) "Nonstatutory Stock Option" means an Option not intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(t) "Officer" means a person who is an officer of the Company within the meaning
of Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder.
(u) "Option" means a Nonstatutory Stock Option granted pursuant to the Plan.
(v) "Option Agreement" means a written agreement between the Company and an
Optionholder evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(w) "Optionholder" means a person to whom an Option is granted pursuant to the
Plan or, if applicable, such other person who holds an outstanding Option.
(x) "Plan" means this Chordiant Software, Inc. 1999 Non-Employee Directors'
Stock Option Plan.
(y) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any
successor to Rule 16b-3, as in effect from time to time.
(z) "Securities Act" means the Securities Act of 1933, as amended.
3. ADMINISTRATION.
(a) Administration by Board. The Board shall administer the Plan. The Board may
not delegate administration of the Plan to a committee.
(b) Powers of Board. The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine the provisions of each Option to the extent not specified in
the Plan.
(ii) To construe and interpret the Plan and Options granted under it, and to
establish, amend and revoke rules and regulations for its administration. The
Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Option Agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective.
(iii) To amend the Plan or an Option as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts as the Board
deems necessary or expedient to promote the best interests of the Company that
are not in conflict with the provisions of the Plan.
(c) Effect of Board's Decision. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.
4. SHARES SUBJECT TO THE PLAN.
(a) Share Reserve. Subject to the provisions of Section 11 relating to
adjustments upon changes in the Common Stock and to the provisions of subsection
4(b) relating to automatic increases in the share reserve, the Common Stock that
may be issued pursuant to Options shall not exceed in the aggregate Seven
Hundred Thousand (700,000) shares of Common Stock.
(b) Automatic Increase to the Share Reserve. The aggregate number of shares of
Common Stock that may be issued pursuant to Options granted under the Plan as
specified in subsection 4(a) hereof automatically shall be increased as follows:
(i) For a period of ten (10) years, on October 1 of each year (the "Calculation
Date"), commencing in 2000, the aggregate number of shares of Common Stock
specified in subsection 4(a) hereof shall be increased by the greater of (1)
that number of shares of Common Stock equal to one-half of one percent (0.5%) of
the Diluted Shares Outstanding or (2) that number of shares of Common Stock that
have been made subject to Options granted under the Plan in the prior 12-month
period; provided, however, that each year the Board, in its discretion, may
provide for a smaller increase in the share reserve.
(ii) For purposes of subsection 4(b)(i) hereof, "Diluted Shares Outstanding"
shall mean, as of any date, (1) the number of outstanding shares of Common Stock
on such Calculation Date, plus (2) the number of shares of Common Stock issuable
upon such Calculation Date assuming the conversion of all outstanding Preferred
Stock and convertible notes, plus (3) the additional number of dilutive Common
Stock equivalent shares outstanding as the result of any options or warrants
outstanding during the fiscal year, calculated using the treasury stock method.
(c) Reversion of Shares to the Share Reserve. If any Option shall for any reason
expire or otherwise terminate, in whole or in part, without having been
exercised in full, the shares of Common Stock not acquired under such Option
shall revert to and again become available for issuance under the Plan. If the
Company repurchases any unvested shares of Common Stock issued under an Option,
such repurchased shares of Common Stock shall revert to and again become
available for issuance under the Plan.
(d) Source of Shares. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
The Options as set forth in section 6 automatically shall be granted under the
Plan to all Non-Employee Directors.
6. NON-DISCRETIONARY GRANTS.
Without any further action of the Board, each Non-Employee Director shall be
granted the following Options:
(a) Initial Grants.
(i) On the IPO Date, each person who is then a Non-Employee Director
automatically shall be granted an Initial Grant to purchase Twenty-five Thousand
(25,000) shares of Common Stock on the terms and conditions set forth herein.
(ii) After the IPO Date, each person who is elected or appointed for the first
time to be a Non-Employee Director automatically shall, upon the date of his or
her initial election or appointment to be a Non-Employee Director by the Board
or stockholders of the Company, be granted an Initial Grant to purchase
Twenty-five Thousand (25,000) shares of Common Stock on the terms and conditions
set forth herein.
(b) Annual Grants.
(i) On the day following each Annual Meeting after the IPO Date, each person who
is then a Non-Employee Director automatically shall be granted an Annual Grant
to purchase Seven Thousand Five Hundred (7,500) shares of Common Stock on the
terms and conditions set forth herein.
(ii) If a person is first elected or appointed as a Non-Employee Director during
the 12-month period following the time specified in subsection 6(b)(i) but
before the next Annual Meeting, then such person automatically shall be granted
an Annual Grant that is pro rated as to the number of shares and the vesting
schedule. The pro rated number of shares shall be determined by reducing Seven
Thousand Five Hundred (7,500) shares of Common Stock by Six Hundred Twenty-five
(625) shares of Common Stock for each full month that has elapsed between the
date of the prior Annual Meeting and the date of such election or appointment.
The pro rated shares shall vest monthly after the date of grant at the rate of
Six Hundred Twenty-five (625) shares of Common Stock per month.
(c) Committee Grants.
(i) On the day following each Annual Meeting after the IPO Date, each
Non-Employee Director who is then a member of a committee of the Board
automatically shall be granted, for each such committee, an Option to purchase
Five Thousand (5,000) shares of Common Stock.
(ii) If a person is first appointed to a committee of the Board during the
12-month period following the time specified in subsection 6(c)(i) but before
the next Annual Meeting, then such person automatically shall be granted a
Committee Grant that is pro rated as to the number of shares and the vesting
schedule. The pro rated number of shares shall be determined by reducing Five
Thousand (5,000) shares of Common Stock by Four Hundred Sixteen and 7/10th
(416.7) shares of Common Stock for each full month that has elapsed between the
date of the prior Annual Meeting and the date of such appointment (rounded down
to the nearest whole share). The pro rated shares shall vest monthly after the
date of grant at the rate of Four Hundred Seventeen (417) shares of Common Stock
per month.
7. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and conditions as
required by the Plan. Each Option shall contain such additional terms and
conditions, not inconsistent with the Plan, as the Board shall deem appropriate.
Each Option shall include (through incorporation of provisions hereof by
reference in the Option or otherwise) the substance of each of the following
provisions:
(a) Term. No Option shall be exercisable after the expiration of ten (10) years
from the date it was granted.
(b) Exercise. Each Option shall be exercisable immediately.
(c) Exercise Price. The exercise price of each Option shall be one hundred
percent (100%) of the Fair Market Value of the stock subject to the Option on
the date the Option is granted. Notwithstanding the foregoing, the exercise
price for an Initial Grant made on the IPO Date shall be the price at which the
Common Stock is first sold to the public in the initial public offering as
specified in the final prospectus. Notwithstanding the foregoing, an Option may
be granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.
(d) Consideration. The purchase price of stock acquired pursuant to an Option
may be paid, to the extent permitted by applicable statutes and regulations, in
any combination of (i) cash or check, (ii) delivery to the Company of other
Common Stock, (ii) deferred payment or (iv) any other form of legal
consideration that may be acceptable to the Board. The purchase price of Common
Stock acquired pursuant to an Option that is paid by delivery to the Company of
other Common Stock acquired, directly or indirectly from the Company, shall be
paid only by shares of the Common Stock of the Company that have been held for
more than six (6) months (or such longer or shorter period of time required to
avoid a charge to earnings for financial accounting purposes). At any time that
the Company is incorporated in Delaware, payment of the Common Stock's "par
value," as defined in the Delaware General Corporation Law, shall not be made by
deferred payment.
In the case of any deferred payment arrangement, interest shall be compounded at
least annually and shall be charged at the minimum rate of interest necessary to
avoid the treatment as interest, under any applicable provisions of the Code, of
any amounts other than amounts stated to be interest under the deferred payment
arrangement.
(e) Transferability. An Option shall not be transferable except (i) by will or
by the laws of descent and distribution and (ii) to the further extent permitted
under the rules for a Form S-8 registration statement under the Securities Act.
The Option shall be exercisable during the lifetime of the Optionholder only by
the Optionholder or a permitted transferee. Notwithstanding the foregoing, the
Optionholder may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.
(f) Vesting Generally. Options shall vest and become exercisable as follows:
(i) Initial Grants shall provide for vesting of 1/3rd of the shares one year
after the date of the grant and 1/36th of the shares each month thereafter.
(ii) Annual Grants shall provide for vesting of 1/12th of the shares each month
for 12 months after the date of the grant.
(iii) Committee Grants shall provide for vesting of 1/12th of the shares each
month for 12 months after the date of the grant.
(g) Termination of Continuous Service. In the event an Optionholder's Continuous
Service terminates (other than upon the Optionholder's death or Disability), the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination) but only within such
period of time ending on the earlier of (i) the date three (3) months following
the termination of the Optionholder's Continuous Service, or (ii) the expiration
of the term of the Option as set forth in the Option Agreement. If, after
termination, the Optionholder does not exercise his or her Option within the
time specified in the Option Agreement, the Option shall terminate.
(h) Extension of Termination Date. If the exercise of the Option following the
termination of the Optionholder's Continuous Service (other than upon the
Optionholder's death or Disability) would be prohibited at any time solely
because the issuance of shares would violate the registration requirements under
the Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in subsection 7(a) or (ii) the
expiration of a period of three (3) months after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.
(i) Disability of Optionholder. In the event an Optionholder's Continuous
Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination or (ii) the expiration of the term of the Option as
set forth in the Option Agreement. If, after termination, the Optionholder does
not exercise his or her Option within the time specified herein, the Option
shall terminate.
(j) Death of Optionholder. In the event (i) an Optionholder's Continuous Service
terminates as a result of the Optionholder's death or (ii) the Optionholder dies
within the three-month period after the termination of the Optionholder's
Continuous Service for a reason other than death, then the Option may be
exercised (to the extent the Optionholder was entitled to exercise the Option as
of the date of death) by the Optionholder's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the Option upon the Optionholder's death, but only within the period
ending on the earlier of (1) the date eighteen (18) months following the date of
death or (2) the expiration of the term of such Option as set forth in the
Option Agreement. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate.
8. COVENANTS OF THE COMPANY.
(a) Availability of Shares. During the terms of the Options, the Company shall
keep available at all times the number of shares of Common Stock required to
satisfy such Options.
(b) Securities Law Compliance. The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to grant Options and to issue and sell shares of Common Stock
upon exercise of the Options; provided, however, that this undertaking shall not
require the Company to register under the Securities Act the Plan, any Option or
any stock issued or issuable pursuant to any such Option. If, after reasonable
efforts, the Company is unable to obtain from any such regulatory commission or
agency the authority which counsel for the Company deems necessary for the
lawful issuance and sale of stock under the Plan, the Company shall be relieved
from any liability for failure to issue and sell stock upon exercise of such
Options unless and until such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute general
funds of the Company.
10. MISCELLANEOUS.
(a) Stockholder Rights. No Optionholder shall be deemed to be the holder of, or
to have any of the rights of a holder with respect to, any shares subject to
such Option unless and until such Optionholder has satisfied all requirements
for exercise of the Option pursuant to its terms.
(b) No Service Rights. Nothing in the Plan or any instrument executed or Option
granted pursuant thereto shall confer upon any Optionholder any right to
continue to serve the Company as a Non-Employee Director or shall affect the
right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.
(c) Investment Assurances. The Company may require an Optionholder, as a
condition of exercising or acquiring stock under any Option, (i) to give written
assurances satisfactory to the Company as to the Optionholder's knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Option; and (ii) to give written assurances satisfactory
to the Company stating that the Optionholder is acquiring the stock subject to
the Option for the Optionholder's own account and not with any present intention
of selling or otherwise distributing the stock. The foregoing requirements, and
any assurances given pursuant to such requirements, shall be inoperative if
(iii) the issuance of the shares upon the exercise or acquisition of stock under
the Option has been registered under a then currently effective registration
statement under the Securities Act or (iv) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the stock.
(d) Withholding Obligations. The Optionholder may satisfy any federal, state or
local tax withholding obligation relating to the exercise or acquisition of
stock under an Option by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Optionholder by
the Company) or by a combination of such means: (i) tendering a cash payment;
(ii) authorizing the Company to withhold shares from the shares of the Common
Stock otherwise issuable to the Optionholder as a result of the exercise or
acquisition of stock under the Option, provided, however, that no shares of
Common Stock are withheld with a value exceeding the minimum amount of tax
required to be withheld by law; or (iii) delivering to the Company owned and
unencumbered shares of the Common Stock.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) Capitalization Adjustments. If any change is made in the shares of Common
Stock subject to the Plan, or subject to any Option (through merger,
consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of securities subject both to the Plan pursuant to subsection 4(a) and to
the nondiscretionary Options specified in Section 5, and the outstanding Options
will be appropriately adjusted in the class(es) and number of securities and
price per share of Common Stock subject to such outstanding Options. The Board
shall make such adjustments, and its determination shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a transaction "without receipt of consideration" by the
Company.)
(b) Change in Control. In the event of a: (1) a dissolution, liquidation or sale
of all or substantially all of the assets of the Company; (2) a merger or
consolidation in which the Company is not the surviving corporation; (3) a
reverse merger in which the Company is the surviving corporation but the shares
of the Common Stock outstanding immediately preceding the merger are converted
by virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (4) the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable
successor provisions (excluding any employee benefit plan, or related trust,
sponsored or maintained by the Company or any Affiliate of the Company) of the
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then: (i) any surviving corporation or
acquiring corporation shall assume any Options outstanding under the Plan or
shall substitute similar options (including an option to acquire the same
consideration paid to the stockholders in the transaction described in this
subsection 11(b)) for those outstanding under the Plan, or (ii) in the event any
surviving corporation or acquiring corporation refuses to assume such Options or
to substitute similar options for those outstanding under the Plan, (A) with
respect to Options held by persons then performing services as Employees,
Directors or Consultants, the vesting of such Options (and, if applicable, the
time during which such Options may be exercised) shall be accelerated prior to
such event and the Options terminated if not exercised after such acceleration
and at or prior to such event, and (B) with respect to any other Options
outstanding under the Plan, such Options shall be terminated if not exercised
(if applicable) prior to such event.
(c) Acceleration of Vesting. In the event of any transaction described in
subsection 11(b) (other than a merger or consolidation for the purpose of a
change in domicile) and subject to any limitation set forth in an Option, with
respect to Options held by persons then performing services as an Employee,
Director or Consultant of the Company, the vesting of such Options shall be
automatically accelerated immediately prior to such transaction such that each
such Option shall be exercisable for such number of vested shares that would
have been vested as of the date one year following the date of the transaction.
In the event the terms of an Option provide for acceleration of vesting due to a
transaction described in subsection 11(b) or a similar transaction, the
acceleration provisions of this subsection 11(c) shall not be applicable to such
Option.
12. AMENDMENT OF THE PLAN AND OPTIONS.
(a) Amendment of Plan. The Board at any time, and from time to time, may amend
the Plan. However, except as provided in Section 11 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company to the extent stockholder approval is necessary to
satisfy the requirements of Rule 16b-3 or any Nasdaq or securities exchange
listing requirements.
(b) Stockholder Approval. The Board may, in its sole discretion, submit any
other amendment to the Plan for stockholder approval.
(c) No Impairment of Rights. Rights under any Option granted before amendment of
the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the Optionholder and (ii) the Optionholder
consents in writing.
(d) Amendment of Options. The Board at any time, and from time to time, may
amend the terms of any one or more Options; provided, however, that the rights
under any Option shall not be impaired by any such amendment unless (i) the
Company requests the consent of the Optionholder and (ii) the Optionholder
consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) Plan Term. The Board may suspend or terminate the Plan at any time. No
Options may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) No Impairment of Rights. Suspension or termination of the Plan shall not
impair rights and obligations under any Option granted while the Plan is in
effect except with the written consent of the Optionholder.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the IPO Date, but no Option shall be
exercised unless and until the Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before or after the
date the Plan is adopted by the Board.
15. CHOICE OF LAW.
All questions concerning the construction, validity and interpretation of this
Plan shall be governed by the law of the State of Delaware, without regard to
such state's conflict of laws rules.
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 evaluation; 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 the 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 control 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: May 10, 2004 /s/ Stephen Kelly
Stephen Kelly
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Michael J. Shannahan, 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 evaluation; 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 the 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 control 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: May 10, 2004 /s/ Michael J. Shannahan
Michael J. Shannahan
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 Michael J. Shannahan, 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 March 31, 2004, 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 10th day of May, 2004.
/s/ Stephen Kelly |
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Stephen Kelly |
/s/ Michael J. Shannahan |
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Michael J. Shannahan |