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UNITED STATES FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended
June 30, 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 93-1051328 (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 [ ]
Indicate by check mark whether the registrant
is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
The number of shares of the Registrant's common stock outstanding as of August 4, 2004 was
72,103,696.
CHORDIANT SOFTWARE, INC.
PART I -- FINANCIAL INFORMATION
CHORDIANT SOFTWARE, INC. 3,043 The accompanying notes are an integral part of
these condensed consolidated financial statements. 3
CHORDIANT SOFTWARE, INC. Three Months Ended Six Months Ended June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 Revenues: License $ $ 6,486 $ $ 10,624 Service 10,599 20,276 16,830 17,085 37,048 30,900 Cost of revenues: License 319 580 Service 6,024 11,950 Stock-based compensation 314 778 793
1,585 Total cost of revenues Gross profit 9,818 9,635 16,007 Operating expenses: Sales and marketing 5,783 4,717 11,723 10,733 Research and development 3,895 7,965 General and administrative 1,783 1,675 3,634 3,053 (79 1,159 421 2,534 Amortization of intangible assets 98 196 1,161 1,161 11,721 12,705 24,548 25,642 Loss from operations (1,903 (3,070 (9,635 Interest income, net 75 210 Foreign exchange and other expenses, net (121 (455 Net loss before income taxes $ (1,637 $ (3,116 $ $ (9,880 Provision for income taxes 100 275 457 Net loss $ (1,737 $ (3,391 $ (2,041 $ (10,337 Other comprehensive income (loss): (201 727 (224 947 Comprehensive loss $ (1,938 $ (2,664 $ (2,265 $ (9,390 Net loss per share: Basic and diluted $ (0.02 $ (0.06 $ (0.03 $ (0.18 Weighted average shares used in computing net
loss per share - basic and diluted 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
adjustments, 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.
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 unaudited condensed consolidated financial statements include our accounts and
the accounts of our wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Use of estimates
The preparation of 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.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Cupertino, CA 95014
(Address of Principal Executive Offices including Zip Code)
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed
since last report)
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2004
TABLE OF CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands)
(Unaudited)
June 30, 2004
December 31, 2003
ASSETS
Current
assets:
Cash and cash
equivalents
$
62,943
$
36,218
Short-term
investments and restricted cash
588
581
Accounts receivable,
net
17,993
11,974
Prepaid expenses and other current
assets
3,963
2,675
Total current
assets
85,487
51,448
Restricted cash
1,500
1,500
Property and
equipment, net
2,685
3,071
Goodwill
24,874
24,874
Intangible assets,
net
366
1,414
Other
assets
1,357
1,504
Total assets
$
116,269
$
83,811
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
liabilities:
Accounts payable
$
4,862
$
3,931
Accrued expenses
11,911
13,038
Deferred revenue
21,622
14,548
Total current
liabilities
38,395
31,517
Deferred revenue,
long-term
3,848
Total liabilities
41,438
35,365
Stockholders' equity:
Common
stock
72
65
Additional paid-in
capital
263,488
235,911
Deferred stock-based
compensation
(599
)
(1,665
)
Accumulated deficit
(190,947
)
(188,906
)
Accumulated other
comprehensive income
2,817
3,041
Total stockholders'
equity
74,831
48,446
Total liabilities and
stockholders' equity
$
116,269
$
83,811
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In
thousands, except per share data)
(Unaudited)
5,395
14,681
11,435
22,367
Total revenues
301
693
6,501
12,794
(42
)
167
Amortization of intangible assets
252
938
7,012
7,450
14,592
14,893
22,456
4,218
8,660
Stock-based compensation
)
16
110
Restructuring expense
--
--
Total operating expenses
)
)
(2,092
)
)
146
356
120
)
(54
)
)
)
)
(1,790
)
)
251
)
)
)
)
Foreign currency translation gain (loss)
)
)
)
)
)
)
)
)
)
)
70,345
58,567
69,005
57,894
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
Six
Months Ended
June
30, 2004
June 30, 2003
Cash flows from operating activities:
Net loss
$
(2,041
)
$
(10,337
)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization
800
1,492
Amortization of
intangibles
1,048
1,781
Non-cash stock-based compensation expense
267
3,312
Provision for
doubtful accounts
22
21
Warrants issued to customers
39
21
Loss on disposal
of assets
--
49
Other non-cash
charges
(42
)
--
Changes in assets
and liabilities:
Accounts
receivable
(6,100
)
(3,389
)
Prepaid
expenses and other current assets
(1,271
)
(1,101
)
Other assets
142
438
Accounts
payable
907
(2,549
)
Accrued expenses
(894
)
(3,774
)
Deferred revenue
6,200
2,352
Net cash used in operating
activities
(923
)
(11,684
)
Cash flows from investing activities:
Property and equipment purchases
(398
)
(218
)
Proceeds from
disposal of property and equipment
--
18
Purchases of short-term investments
(588
)
(576
)
Proceeds from maturities of short-term investments
581
8,724
Net cash provided by
(used in) investing
activities
(405
)
7,948
Cash flows from financing activities:
Proceeds from
issuance of common stock, net
24,761
--
Proceeds from exercise of stock options
2,300
58
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
--
(1,943
)
Net cash provided by financing
activities
28,133
2,776
Effect of exchange
rate fluctuations on cash and cash equivalents
(80
)
947
Net increase (decrease) in cash and cash
equivalents
26,725
(13
)
Cash and cash equivalents at beginning of
period
36,218
30,731
Cash and cash equivalents at end of
period
$
62,943
$
30,718
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 2004 and December 31, 2003, we had an interest bearing certificate of deposit in the amount of $0.6 million classified as short-term investments of which $0.4 million serves as collateral for a letter of credit security deposit for a leased facility and is restricted from withdrawal. At June 30, 2004 and December 31, 2003, we also had a balance of $1.5 million in the form of cash equivalents which is restricted from withdrawal. This balance serves as a security deposit in a long-term, post-contract customer support revenue transaction.
7
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.
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 employee compensation for the three and six months ended June 30, 2004 and 2003, respectively (in thousands, except per share amounts):
Three Months Ended |
Six Months Ended |
|||||||||||
|
|
|||||||||||
June 30, 2004 |
June 30, 2003 |
June 30, 2004 |
June 30, 2003 |
|
||||||||
|
|
|
|
|||||||||
Net loss -- as reported |
$ |
(1,737 |
) |
$ |
(3,391 |
) |
$ |
(2,041 |
) | $ |
(10,337 |
) |
Add: Stock-based employee compensation expense included in reported net loss | (241 | ) | 1,473 | 267 | 3,312 | |||||||
Less: Stock-based employee compensation expense determined under fair value method |
(514 |
) |
(2,135 |
) |
(1,580 |
) |
(5,013 |
) | ||||
|
|
|
|
|
||||||||
Net loss -- proforma |
(2,492 |
) |
(4,053 |
) |
(3,354 |
) |
(12,038 |
) | ||||
|
|
|
|
|||||||||
Basic and diluted net loss per share -- as reported |
$ |
(0.02 |
) |
$ |
(0.06 |
) |
$ |
(0.03 |
) |
$ |
(0.18 |
) |
|
|
|
|
|||||||||
Basic and diluted net loss per share -- proforma |
$ |
(0.04 |
) |
$ |
(0.07 |
) |
$ |
(0.05 |
) |
$ |
(0.21 |
) |
|
|
|
|
The related functional breakdown of total stock-based compensation is outlined below (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||
June 30, 2004 |
June 30, 2003 |
June 30, 2004 |
June 30 , 2003 |
||||||||||
|
|
|
|
||||||||||
Stock-based compensation expense: | |||||||||||||
Cost of service revenues | $ | (42 |
) |
$ | 314 | $ | 167 | $ | 778 | ||||
Sales and marketing | (43 |
) |
277 | 228 | 691 | ||||||||
Research and development | (43 |
) |
370 |
|
295 |
|
865 |
|
|||||
General and administrative | 7 |
|
512 | (102 |
) |
978 | |||||||
|
|
|
|
||||||||||
Total stock-based compensation expense | $ | (121 |
) |
$ | 1,473 | $ | 588 | $ | 3,312 | ||||
|
|
|
|
8
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"). 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 employed by us 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, we are no longer subject to stock-based compensation expense related to the vesting of his restricted stock. In connection with his departure, 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 June 30, 2004. Due to the decline in our stock price, for the three months ended June 30, 2004, a credit of ($0.2) 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.
We also recorded amortization of stock-based compensation expense of $0.1 million for the three months ended June 30, 2004 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 June 30, 2004, all unearned stock-based compensation relating to options granted prior to our initial public offering had been fully amortized.
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 June 30, 2004.
Concentrations of credit risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and 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 allowances for potential credit losses on customer accounts when deemed necessary.
9
The following table summarizes the revenues from customers that accounted for 10% or more of total revenues:
Three Months Ended | Six Months Ended | ||||||
|
|
||||||
June 30, 2004 | June 30, 2003 | June 30, 2004 | June 30, 2003 | ||||
|
|
|
|
||||
Barclays | * | 11% | 18% | 16% | |||
The Royal Bank of Scotland | * | 28% | * | 17% | |||
Canadian Imperial Bank of Commerce | 13% | * | 13% | * | |||
Covad Communications | 13% | * | * | * |
At June 30, 2004, Capital One and Canadian Imperial Bank of Commerce accounted for approximately 46% and 10% 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:
The main components of accounts receivable, net are as follows (in thousands):
June 30, 2004 | December 31, 2003 | |||||||
Accounts receivable, net: | ||||||||
Accounts receivable | $ | 18,104 | $ | 12,107 | ||||
Less: allowance for doubtful accounts | (111 | ) | (133 | ) | ||||
|
|
|||||||
$ | 17,993 | $ | 11,974 | |||||
|
|
The main components of accrued expenses are as follows (in thousands):
|
June 30, 2004 | December 31, 2003 | ||||||
|
| |||||||
Accrued expenses: | ||||||||
Accrued payroll and related expenses | $ | 5,677 | $ | 6,656 | ||||
Accrued restructuring expenses | 3,362 | 4,265 | ||||||
Other accrued liabilities | 2,872 |
|
2,117 |
| ||||
|
|
|||||||
$ | 11,911 | $ | 13,038 | |||||
|
|
10
The components of intangible assets, excluding goodwill, are as follows (in thousands):
June 30, 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 |
$ |
(2,055 |
) |
$ |
319 |
$ |
2,374 |
$ |
(1,843 |
) |
$ |
531 | ||||||
Purchased technologies |
|
7,162 |
|
(7,162 |
) |
-- |
|
7,162 |
|
(6,436 |
) |
726 | ||||||||
Customer list |
|
190 |
|
(143 |
) |
47 |
|
190 |
|
(111 |
) |
79 | ||||||||
Tradenames |
|
982 |
|
(982 |
) |
-- |
|
982 |
|
(904 |
) |
78 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
$ |
10,708 |
$ |
(10,342 |
) |
$ |
366 |
$ |
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 $1.0 million and $1.8 million for the six months ended June 30, 2004 and 2003, respectively. We expect amortization expense on purchased intangible assets to be $0.3 million for the remaining six 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.
11
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 $1.4 million.
A summary of the restructuring expense and other special charges is outlined as follows (in thousands):
Facilities | Severance and Benefits | Total | ||||
|
|
| ||||
Reserve balance at December 31, 2003 | $ | 3,099 | $ | 1,166 | $ | 4,265 |
Total charge | -- | -- | -- | |||
Non-cash | (2) | (61) | (63) | |||
Cash paid | (255) | (585) | (840) | |||
|
|
|
||||
Reserve balance at June 30, 2004 | $ | 2,842 | $ | 520 | $ | 3,362 |
|
|
|
Amounts related to net lease expenses due to the consolidation of facilities will be paid over the lease terms through fiscal 2011. As of June 30, 2004, $3.4 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 both the three and six months ended June 30, 2004, there were charges 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 unaudited condensed 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 June 30, 2004, we had utilized $1.3 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 June 30, 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 June 30, 2004, we were in compliance with the respective debt covenants and there was no outstanding balance on our equipment line of credit.
12
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.
In June 2004, we executed a formal settlement agreement with the plaintiffs consistent with the terms described above. The settlement is subject to a number of conditions, including action by the Court certifying a class action for settlement purposes and formally approving the settlement. The underwriters have opposed both certification of the class and judicial approval of the settlement. No accrual has been made in our financial statements relating to this litigation, as the amount of loss that may occur as a result of this litigation, if any, cannot be reasonably estimated.
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 June 30, 2004 are as follows (in thousands):
Operating Leases | Sublease Income | Total | |||||
|
|
| |||||
Remaining portion of Fiscal 2004 | $ | 1,599 | $ | (171 | ) | $ | 1,428 |
Fiscal 2005 | 3,346 | (143 | ) | 3,203 | |||
Fiscal 2006 | 3,573 | -- | 3,573 | ||||
Fiscal 2007 | 3,465 | -- | 3,465 | ||||
Fiscal 2008 | 2,895 | -- | 2,895 | ||||
Thereafter | 3,077 | -- | 3,077 | ||||
|
|
| |||||
Total | $ | 17,955 | $ | (314 | ) | $ | 17,641 |
|
|
|
As of June 30 2004, we had approximately $1.3 million in standby letters of credit which serve as collateral for operating leases of computer equipment. Of this $1.3 million, $0.8 million of the letters of credit serve as collateral for computer equipment leases for our outsourcing partner in India. Please refer to Note 5 "Borrowings."
As of June 30, 2004, we also had a $0.3 million commitment for ongoing engineering support for technology licensed to us from a third party.
13
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 and six months ended June 30, 2004 and 2003 (in thousands, except per share data):
Three Months Ended |
Six Months Ended |
|||||||||||
|
|
|||||||||||
June 30, 2004 |
June 30, 2003 |
June 30, 2004 |
June 30, 2003 | |||||||||
|
|
|
|
|||||||||
Net loss available to common stockholders |
$ |
(1,737 |
) |
$ |
(3,391 |
) |
$ |
(2,041 |
) | $ |
(10,337 |
) |
|
|
|
|
|||||||||
Weighted average common stock outstanding |
71,668 |
62,903 |
70,328 |
62,230 |
||||||||
Common stock subject to repurchase |
(1,323 |
) |
(4,336 |
) |
(1,323 |
) |
(4,336 |
) | ||||
|
|
|
|
|||||||||
Denominator for basic and diluted calculation |
70,345 |
58,567 |
69,005 |
57,894 |
||||||||
|
|
|
|
|||||||||
Net loss per share - basic and diluted |
$ |
(0.02 |
) |
$ |
(0.06 |
) |
$ |
(0.03 |
) | $ |
(0.18 |
) |
|
|
|
|
The following table sets forth the potential common shares that are excluded from the calculation of diluted net loss per share as their effect is antidilutive (in thousands):
Three Months Ended | Six Months Ended | ||||||
|
|
||||||
June 30, 2004 |
June 30, 2003 | June 30, 2004 | June 30, 2003 | ||||
|
|
|
|
||||
Warrants outstanding | 1,662 | 1,850 | 1,662 | 1,850 | |||
Employee stock options | 9,743 | 10,259 | 9,743 | 10,259 | |||
Common stock subject to repurchase | 1,323 | 4,336 | 1,323 | 4,336 | |||
|
|
|
|
||||
12,728 | 16,445 | 12,728 | 16,445 | ||||
|
|
|
|
14
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 $4.2 million and $5.8 million for the three months ended June 30, 2004 and 2003, respectively. License revenues for enterprise solutions amounted to $13.2 million and $7.9 million for the six months ended June 30, 2004 and 2003, respectively. License revenues for marketing solutions were approximately $1.2 million and $0.7 million for the three months ended June 30, 2004 and 2003, respectively. License revenues for marketing solutions were approximately $1.5 million and $2.7 million for the six months ended June 30, 2004 and 2003, respectively.
Service revenues consist of consulting assistance and implementation, customization and integration and post-contract customer support, training and certain reimbursable out-of-pocket expenses. Service revenues for enterprise solutions were approximately $8.9 million and $8.1 million for the three months ended June 30, 2004 and 2003, respectively. Service revenues for enterprise solutions were approximately $16.8 million and $15.3 million for the six months ended June 30, 2004 and 2003, respectively. Service revenues for marketing solutions were approximately $2.5 million for both the three months ended June 30, 2004 and 2003. Service revenues for marketing solutions were approximately $5.6 million and $5.0 million for the six months ended June 30, 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):
Three Months Ended |
Six Months Ended |
|||||||
|
|
|||||||
June 30, 2004 |
June 30, 2003 |
June 30, 2004 |
June 30, 2003 |
|||||
|
|
|
|
|||||
North America |
$ |
8,816 |
$ |
3,549 |
$ |
12,921 |
$ |
6,037 |
Europe | 7,998 |
13,495 |
24,056 | 24,773 | ||||
Rest of World |
16 |
41 |
71 | 90 | ||||
|
|
|
|
|||||
|
$ |
16,830 |
$ |
17,085 |
$ |
37,048 |
$ |
30,900 |
|
|
|
|
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):
June 30, 2004 | December 31, 2003 | ||||||
|
|
||||||
North America | $ | 1,392 | $ | 1,475 | |||
Europe | 1,293 | 1,596 | |||||
|
|
||||||
$ | 2,685 | $ | 3,071 | ||||
|
|
15
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 improvement, which were reflected in increases in various economic indicators such as productivity, labor statistics and consumer confidence. This trend has continued through the first half of 2004 and appears to have a favorable impact, specifically in information technology spending. For the six months ended June 30, 2004, we were able to grow license fee revenue and total revenues on a year over year basis.
Financial Trends
Management focuses on license and service gross margin in evaluating our financial condition and operating performance. Gross margin on license revenues was 94% and 95% for the three months ended June 30, 2004 and 2003, respectively. Gross margins on license revenues were 95% for both the six months ended June 30, 2004 and 2003. We expect license gross margin to range from 94% to 96% in the foreseeable future. Gross margin on service revenues was 43% for both the three months ended June 30, 2004 and 2003. Gross margin on service revenues was 43% and 41% for the six months ended June 30, 2004 and 2003, respectively.
Service revenues as a percentage of total revenues were 68% and 62% for the three months ended June 30, 2004 and 2003, respectively. Service revenues as a percentage of total revenues were 60% and 66% for the six months ended June 30, 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 and six months ended June 30, 2004 and 2003, revenues were principally derived from customer accounts in the North America and Europe. For the three months ended June 30, 2004 and 2003, international revenues were $8.0 million and $13.5 million, or approximately 48% and 79% of our total revenues, respectively. For the six months ended June 30, 2004 and 2003, international revenues were $24.1 million and $24.9 million, or approximately 65% and 80% of our total revenues, respectively. We believe international revenues will continue to represent a significant portion of our total revenues in future periods.
For the three months ended June 30, 2004 and 2003, North America revenues were $8.8 million and $3.5 million, or approximately 52% and 21% of our total revenues, respectively. For the six months ended June 30, 2004 and 2003, domestic revenues were $12.9 million and $6.0 million, or approximately 35% and 20% of our total revenues, respectively. As the U.S. economy has strengthened, we have seen an increase in North America revenues. We believe domestic revenues will continue to represent an increasing portion of our total revenues in future periods.
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.
16
Results of Operations
The following table sets forth, as a percentage of total revenues, unaudited condensed consolidated statements of operations data for the periods indicated:
Three Months Ended |
Six Months Ended |
|||||||||||||
|
|
|||||||||||||
June 30, 2004 |
June 30, 2003 |
June 30, 2004 |
June 30, 2003 |
|||||||||||
Revenues: |
|
|
|
|
||||||||||
License |
|
32 |
% |
|
38 |
% |
|
40 |
% |
|
34 |
% | ||
Service |
68 |
62 |
60 |
66 |
||||||||||
|
|
|
|
|||||||||||
Total revenues |
100 |
100 |
100 |
100 |
||||||||||
Cost of revenues: |
||||||||||||||
License |
2 |
2 |
2 |
2 |
||||||||||
Service |
39 |
35 |
35 |
39 |
||||||||||
Stock-based compensation |
-- |
2 |
-- |
2 |
||||||||||
Amortization of intangible assets |
1 |
5 |
2 |
5 |
||||||||||
|
|
|
|
|||||||||||
Total cost of revenues |
42 |
44 |
39 |
48 |
||||||||||
|
|
|
|
|||||||||||
Gross profit |
58 |
56 |
61 |
52 |
||||||||||
|
|
|
|
|||||||||||
Operating expenses: |
||||||||||||||
Sales and marketing |
34 | 27 | 32 | 35 | ||||||||||
Research and development |
25 | 23 | 24 | 26 | ||||||||||
General and administrative |
11 |
10 |
10 |
10 |
||||||||||
Stock-based compensation |
-- | 7 | 1 | 8 | ||||||||||
Amortization of intangible assets |
-- |
-- |
-- |
-- |
||||||||||
Restructuring expense |
-- |
7 |
-- |
4 |
||||||||||
|
|
|
|
|||||||||||
Total operating expenses |
70 |
74 |
67 |
83 |
||||||||||
|
|
|
|
|||||||||||
Loss from operations |
(12) |
(18) |
(6) |
(31) |
||||||||||
Interest income, net |
1 |
-- |
1 |
-- |
||||||||||
Foreign exchange and other expenses, net |
1 |
-- |
-- |
(1 |
) | |||||||||
|
|
|
|
|||||||||||
Net loss before income taxes |
|
(10) |
|
(18) |
|
(5) |
|
(32) |
||||||
Provision for income taxes |
-- |
2 |
1 |
1 |
||||||||||
|
|
|
|
|||||||||||
Net loss |
(10) |
% |
(20) |
% |
(6) |
% |
(33) |
% | ||||||
|
|
|
|
17
Comparison of the Three Months Ended June 30, 2004 and 2003
Revenues
License. Total license revenues decreased to $5.4 million for the three months ended June 30, 2004 from $6.5 million, or approximately 17%, for the three months ended June 30, 2003. License revenues for enterprise solutions decreased to $4.2 million for the three months ended June 30, 2004 from $5.8 million, or approximately 27%, for the three months ended June 30, 2003. This decrease was due to one transaction in the quarter ended June 30, 2003 that exceeded our historical license fee range of $1.0 million to $3.0 million. There were no transactions of that amount for the same period in 2004. License revenues for marketing solutions increased to $1.2 million for the three months ended June 30, 2004 from $0.7 million, or approximately 64%, for the three months ended June 30, 2003. The increase was due to one additional customer and a modest increase in the average license fee in the three months ended June 30, 2004 compared to the prior year.
Service. Total service revenues, which include reimbursement of out-of-pocket expenses, increased to $11.4 million for the three months ended June 30, 2004 from $10.6 million, or approximately 8%, for the three months ended June 30, 2003. Service revenues for enterprise solutions increased to $8.9 million for the three months ended June 30, 2004 from $8.1 million, or approximately 10%, for the three months ended June 30, 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 current and prior periods. Service revenues for marketing solutions remained constant at $2.5 million for both the three months ended June 30, 2004 and 2003.
Reimbursement of out-of-pocket expenses (which is included in total service revenues) increased to $0.8 million for the three months ended June 30, 2004 from $0.6 million, or approximately 27%, for the three months ended June 30, 2003.
Cost of revenues
License. Cost of license revenues remained flat at $0.3 million for both the three months ended June 30, 2004 and 2003. These costs resulted in license gross margins of approximately 94% and 95% for the three months ended June 30, 2004 and 2003, respectively. 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 $6.5 million for the three months ended June 30, 2004 from $6.0 million, or approximately 8%, for the three months ended June 30, 2003. These costs resulted in service gross margins of 43% for both the three months ended June 30, 2004 and 2003. We expect cost of service revenues to remain at or above 40% of service revenues.
Stock-based compensation. Stock-based compensation decreased to a credit of less than $0.1 million for the three months ended June 30, 2004 from a charge of $0.3 million for the three months ended June 30, 2003. The decrease in stock-based compensation is mainly due to the decrease in our stock price since March 31, 2004, which affects the variable accounting calculation to which restricted stock and some outstanding stock options are subject. Please refer to Note 2, "Summary of Significant Accounting Policies", under the heading "Stock-based compensation."
Amortization of intangibles. Amortization of intangible assets was $0.3 million for the three months ended June 30, 2004 compared to $0.8 million for the three months ended June 30, 2003. The amortization expense in the three months ended June 30, 2004 included $0.1 million attributable to the acquisition of OnDemand in April 2002 and approximately $0.2 million attributable to the acquisitions of certain assets from ActionPoint and ASP Outfitter in May 2001. We expect amortization expense on purchased intangible assets to be $0.2 million for the remaining six 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 increased to $5.8 million for the three months ended June 30, 2004 from $4.7 million, or approximately 23%, for the three months ended June 30, 2003. The increase in these expenses was mainly attributable to an increase of $1.0 million in personnel related expenses due to a higher number of sales representatives in 2004 and $0.2 million increase in marketing programs expenses.
18
Research and development. Research and development expenses increased to $4.2 million for the three months ended June 30, 2004 from $3.9 million, or approximately 8%, for the three months ended June 30, 2003. The increase in these expenses was mainly attributable to an increase of approximately $0.4 million in personnel related expenses and $0.1 million in 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 $1.8 million for the three months ended June 30, 2004 from $1.7 million, or approximately 6%, for the three months ended June 30, 2003. The increase in these expenses was mainly attributable to an increase of $0.1 million in allocated expenses due to lower headcounts in our other operating functions as a result of restructuring actions implemented and a $0.2 million increase in professional services expenses due to the reversal of a legal accrual upon the tentative settlement of the class action shareholder complaint during 2003. These increases were partially offset by a decrease of $0.2 million in insurance and depreciation related expenses.
Stock-based compensation. Stock-based compensation decreased to a credit of less than $0.1 million for the three months ended June 30, 2004 from a charge of $1.2 million for the three months ended June 30, 2003. The decrease in stock-based compensation is mainly due to the decrease in our stock price since March 31, 2004, which affects the variable accounting calculation to which restricted stock and some outstanding stock options are subject. Please refer to Note 2, "Summary of Significant Accounting Policies", under the heading "Stock-based compensation."
Amortization of intangibles. Amortization of intangible assets was less than $0.1 million for the three months ended June 30, 2004 compared to $0.1 million for the three months ended June 30, 2003. The $0.1 million amortization expense for the three months ended June 30, 2004 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 be less than $0.1 million for the remaining six 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.
Restructuring expenses. During the three months ended June 30, 2003, several areas of the Company were restructured to reduce expenses and improve operating efficiency. The restructuring program resulted in the reduction of 30 employees which cost approximately $1.0 million for severance and benefits. We also vacated excess facilities and provided $0.2 million for lease costs. We did not have restructuring expenses during the three months ended June 30, 2004. During the three months ended June 30, 2004, there were charges 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 unaudited condensed consolidated statement of operations. Please refer to Note 4, "Restructuring."
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 approximately $0.2 million for the three months ended June 30, 2004 from $0.1 million for the three months ended June 30, 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 a net gain of $0.1 million for the three months ended June 30, 2004 and a net expense of $0.1 million for the three months ended June 30, 2003. The $0.1 million gain for the three months ended June 30, 2004 is mainly due to realized net foreign currency exchange gains. The $0.1 million expense for the three months ended June 30, 2003 is mainly due to an asset write-off of disposed property and equipment.
Provision for Income Taxes
Our provisions for income taxes were $0.1 million and $0.3 million for the three months ended June 30, 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.
19
Comparison of the Six Months Ended June 30, 2004 and 2003
Revenues
License. Total license revenues increased to $14.7 million for the six months ended June 30, 2004 from $10.6 million, or approximately 38%, for the six months ended June 30, 2003. License revenues for enterprise solutions increased to $13.2 million for the six months ended June 30, 2004 from $7.9 million, or approximately 68%, for the six months ended June 30, 2003. The increase was due to revenue recognized on five significant enterprise license contracts during the six months ended June 30, 2004 compared to three contracts in the same period of 2003. License revenues for marketing solutions decreased to $1.5 million for the six months ended June 30, 2004 from $2.7 million, or approximately 46%, for the six months ended June 30, 2003. The decrease was due to a decline in the number of marketing solution transactions over $0.1 million from nine to five during the six months ended June 30, 2003 compared to the same period of 2004.
Service. Total service revenues, which include reimbursement of out-of-pocket expenses, increased to $22.4 million for the six months ended June 30, 2004 from $20.3 million, or approximately 10%, for the six months ended June 30, 2003. Service revenues for enterprise solutions increased to $16.8 million for the six months ended June 30, 2004 from $15.3 million, or approximately 10%, for the six months ended June 30, 2003. This increase was due to a continuation in large customer implementations as well as maintenance, support and consulting revenues associated with enterprise solutions license agreements entered into in current and prior periods. Service revenues for marketing solutions increased to $5.6 million for the six months ended June 30, 2004 from $5.0 million, or approximately 10%, for the six months ended June 30, 2003. This increase was due to the continuation of maintenance and support revenues associated with marketing solutions license agreements entered into in current and prior periods.
Reimbursement of out-of-pocket expenses (which is included in total service revenues) increased to $1.3 million for the six months ended June 30, 2004 from $1.1 million, or approximately 16%, for the six months ended June 30, 2003.
Cost of revenues
License. Cost of license revenues increased to $0.7 million for the six months ended June 30, 2004 from $0.6 million, or approximately 19%, for the six months ended June 30, 2003. These costs resulted in license gross margins of approximately 95% for both the six months ended June 30, 2004 and 2003. The aggregate cost of license revenues is in line with the increase in aggregate license revenues. We expect cost of license revenues to remain in the four to six percent range of license revenues.
Service. Cost of service revenues increased to $12.8 million for the six months ended June 30, 2004 from $12.0 million, or approximately 7%, for the six months ended June 30, 2003. These costs resulted in service gross margins of 43% and 41% for the six months ended June 30, 2004 and 2003, respectively. We expect cost of service revenues to remain at or above 40% of service revenues.
Stock-based compensation. Stock-based compensation decreased to $0.2 million for the six months ended June 30, 2004 from $0.8 million for the six months ended June 30, 2003. The decrease in stock-based compensation is mainly due to the decrease in our stock price since December 31, 2003, which affects the variable accounting calculation to which restricted stock and some outstanding stock options are subject. Please refer to Note 2, "Summary of Significant Accounting Policies", under the heading "Stock-based compensation."
Amortization of intangibles. Amortization of intangible assets was $0.9 million for the six months ended June 30, 2004 compared to $1.6 million for the six months ended June 30, 2003. The amortization expense in the six months ended June 30, 2004 included $0.2 million attributable to the acquisition of OnDemand in April 2002, approximately $0.3 million attributable to the acquisition of Prime Response in March 2001 and $0.4 million attributable to the acquisitions of certain assets from ActionPoint and ASP Outfitter in May 2001. We expect amortization expense on purchased intangible assets to be $0.2 million for the remaining six months in fiscal 2004 and $0.1 million in fiscal 2005, at which time existing purchased intangible assets will be fully amortized.
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Operating Expenses
Sales and marketing. Sales and marketing expenses increased to $11.7 million for the six months ended June 30, 2004 from $10.7 million, or approximately 9%, for the six months ended June 30, 2003. The increase in these expenses was mainly attributable to an increase of $1.5 million in personnel related expenses due to a higher number of sales representatives and higher license revenues in the six months ended June 30, 2004 and $0.1 million increase in marketing program expenses. These increases were partially offset by a decrease of approximately $0.6 million in communication, facilities, depreciation and other allocated expenses.
Research and development. Research and development expenses increased to $8.7 million for the six months ended June 30, 2004 from $8.0 million, or approximately 9%, for the six months ended June 30, 2003. The increase in these expenses was mainly attributable to an increase of approximately $0.8 million in personnel related expenses and $0.2 million in equipment rental expenses related to our outsourcing of technical support and certain sustaining engineering functions. These increases were partially offset by a decrease of approximately $0.3 million in depreciation related expenses.
General and administrative. General and administrative expenses increased to $3.6 million for the six months ended June 30, 2004 from $3.1 million, or approximately 19%, for the six months ended June 30, 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 travel expenses, an increase of $0.5 million in allocated expenses due to lower headcounts in other operating functions of the Company as a result of restructuring actions implemented and a $0.2 million increase in professional services expenses due to the reversal of a legal accrual upon the tentative settlement of the class action shareholder complaint during 2003. These increases were partially offset by a decrease of $0.5 million in insurance, facilities and depreciation related expenses.
Stock-based compensation. Stock-based compensation decreased to $0.4 million for the six months ended June 30, 2004 from $2.5 million for the six months ended June 30, 2003. The decrease in stock-based compensation is mainly due to the decrease in our stock price since December 31, 2003, which affects the variable accounting calculation to which restricted stock and some outstanding stock options are subject. Please refer to Note 2, "Summary of Significant Accounting Policies", under the heading "Stock-based compensation."
Amortization of intangibles. Amortization of intangible assets was $0.1 million for the six months ended June 30, 2004 compared to $0.2 million for the six months ended June 30, 2003. The $0.1 million amortization expense for the six months ended June 30, 2004 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 six 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.
Restructuring expenses. During the six months ended June 30, 2003, several areas of the Company were restructured to reduce expenses and improve operating efficiency. The restructuring program resulted in the reduction of 30 employees which cost approximately $1.0 million for severance and benefits. We also vacated excess facilities and provided $0.2 million for lease costs. We did not have restructuring expenses during the six months ended June 30, 2004. During the six months ended June 30, 2004, there were charges 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 unaudited condensed consolidated statement of operations.
Please refer to Note 4, "Restructuring."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 approximately $0.4 million for the six months ended June 30, 2004 from $0.2 million for the six months ended June 30, 2003. This increase is due to interest being earned on a larger cash and cash equivalent balances during the first half of 2004 and no interest expense offsetting the interest income due to no outstanding borrowings during the six months ended June 30, 2004.
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Foreign exchange and other expenses, net
Realized foreign currency gains and losses and other non-operating income and expenses were a net expense of $0.1 million for the six months ended June 30, 2004 and $0.5 million for the six months ended June 30, 2003. The $0.1 million expense for the six months ended June 30, 2004 is mainly due to banking fees. The $0.5 million expense for the six months ended June 30, 2003 is mainly due to the write-off of a long outstanding acquisition-related balance and an asset write-off of disposed property and equipment.
Provision for Income Taxes
Our provisions for income taxes were $0.3 million and $0.5 million for the six months ended June 30, 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 $33.3 million, $38.3 million and $65.0 million at June 30, 2003, December 31, 2003 and June 30, 2004, respectively. Cash and cash equivalents increased during the six months ended June 30, 2004 compared to prior periods as a result of our sale of 4,854,368 shares of our common stock at a purchase price of $5.15 per share resulting in net proceeds of approximately $24.8 million, net of issuance costs of approximately $0.2 million, during the six months ended June 30, 2004. The common stock was purchased at an 8.5% discount compared to the closing price of the closing price of our common stock on January 22, 2004, the date of the purchase agreement. 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.
Cash used in operating activities was $0.9 million during the six months ended June 30, 2004, which consisted primarily of our net loss of $2.0 million adjusted for non-cash items (primarily depreciation, amortization, non-cash stock-based compensation expense and other non-cash charges) of approximately $2.1 million and the net cash outflow effect from changes in assets and liabilities of approximately $1.0 million. During the six months ended June 30, 2004, the following occurred which contributed to the net cash outflow effect from changes in assets and liabilities: (i) deferred revenue increased due to revenue recognition on two large percentage-of-completion method customer contracts carrying into the third quarter of 2004 and partially offset by long-term support and maintenance revenues being recognized for which cash was received in prior years; (ii) accounts receivable increased due to revenue recognition beginning on a large percentage-of-completion method customer contract signed at the end of the period; (iii) prepaid royalty and commission expenses increased due to the revenue deferred on two large percentage-of-completion method customer contracts; (iv) accrued expenses decreased as a result of payments for restructuring-related accruals, commissions and bonuses which were only partially offset by current accruals at the end of the period; and (v) accounts payable increased as a result of timing differences when trade payables were paid.
Cash used in operating activities was $11.7 million during the six months ended June 30, 2003, which consisted primarily of our net loss of $10.3 million adjusted for non-cash items (primarily depreciation, amortization and non-cash stock-based compensation expense) of approximately $6.7 million and the net cash outflow effect from changes in assets and liabilities of approximately $8.0 million. During the six months ended June 30, 2003, the following occurred which contributed to the net cash outflow effect from changes in assets and liabilities: (i) deferred revenue increased due to revenue recognition on one large percentage-of-completion method customer contracts carrying into the last half of 2003 and partially offset by long-term support and maintenance revenues being recognized for which cash was received in prior years; (ii) accounts receivable increased due to revenue recognition beginning on a large percentage-of-completion method customer contract signed at the end of the period; (iii) prepaid royalty and commission expenses increased due to the revenue deferred on one large percentage-of-completion method customer contract; (iv) accrued expenses decreased as a result of payments for restructuring-related accruals, payroll taxes and bonuses, which were only partially offset by current accruals at the end of the period; and (v) accounts payable increased as a result of timing differences when trade payables were paid.
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Cash used in investing activities during the six months ended June 30, 2004 was $0.4 million and related to capital expenditures made during the first half of fiscal year 2004. Cash provided by investing activities was $7.9 million during the six months ended June 30, 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 $28.1 million and $2.8 million during the six months ended June 30, 2004 and 2003, respectively. During the six months ended June 30, 2004, the following occurred: (i) obtained net proceeds of approximately $24.8 million, net of issuance costs of approximately $0.2 million, from the sale of 4,854,368 shares of our common stock at $5.15 per share; (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 $2.3 million from the exercise of employee stock options. During the six months ended June 30, 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 $3.5 million from additional borrowings entered into during the first half of fiscal year 2003 and made payments of $1.9 million against outstanding borrowings; and (iii) received proceeds of $0.5 million from the collection of notes receivables.
At June 30, 2004 and December 31, 2003, we had an interest bearing certificate of deposit in the amount of $0.6 million classified as short-term investments of which $0.4 million serves as collateral for a letter of credit security deposit for a leased facility and is restricted from withdrawal. At June 30, 2004 and December 31, 2003, we also had a balance of $1.5 million in the form of cash equivalents which is restricted from withdrawal. This balance serves as a security deposit in a long-term, post-contract customer support revenue transaction.
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 June 30, 2004, we had utilized $1.3 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 June 30, 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 June 30, 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 June 30, 2004 are as follows (in thousands):
Operating Leases | Sublease Income | Total | |||||
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Remaining portion of Fiscal 2004 | $ | 1,599 | $ | (171 | ) | $ | 1,428 |
Fiscal 2005 | 3,346 | (143 | ) | 3,203 | |||
Fiscal 2006 | 3,573 | -- | 3,573 | ||||
Fiscal 2007 | 3,465 | -- | 3,465 | ||||
Fiscal 2008 | 2,895 | -- | 2,895 | ||||
Thereafter | 3,077 | -- | 3,077 | ||||
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Total | $ | 17,955 | $ | (314 | ) | $ | 17,641 |
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As of June 30 2004, we had approximately $1.3 million in standby letters of credit securing operating leases relating to computer equipment. Of this $1.3 million, $0.8 million of the letters of credit secure computer equipment leases for our outsourcing partner in India. As of June 30, 2004, we also had a $0.3 million commitment for ongoing engineering support for technology licensed to us from a third party.
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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:
* | 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. |
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.
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 $2.0 million and $10.3 million for the six months ended June 30, 2004 and 2003, respectively, and a loss of $16.4 million for the year ended December 31, 2003. As of June 30, 2004, we had an accumulated deficit of $190.9 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.
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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 June 30, 2004, Canadian Imperial Bank of Commerce and Covad Communications accounted for 13% and 13% of our total revenues, respectively. For the three months ended June 30, 2003, Barclays and the Royal Bank of Scotland accounted for 11% and 28% of our total revenues, respectively. For the six months ended June 30, 2004, Barclays and Canadian Imperial Bank of Commerce accounted for 18% and 13% of our total revenues, respectively. For the six months ended June 30, 2003, Barclays and the Royal Bank of Scotland accounted for 16% and 17% of our total revenues, respectively. 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 June 30, 2004, international revenues were $8.0 million or approximately 48% of our total revenues. For the three months ended June 30, 2003, international revenues were $13.5 million or approximately 79% of our total revenues. For the six months ended June 30, 2004, international revenues were $24.1 million or approximately 65% of our total revenues. For the six months ended June 30, 2003, international revenues were $24.9 million or approximately 80% 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:
* | 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. |
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. These currencies include the United Kingdom Pound Sterling, the Euro and Canadian Dollars. Our international sales comprised 65% and 80% of our total sales for the six months ended June 30, 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.
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:
* | Internal information technology departments: in-house information technology departments of potential customers have developed or may develop systems that provide some or all of the functionality of our products. We expect that internally developed application integration and process automation efforts will continue to be a significant source of competition. |
* | Point application vendors: we compete with providers of stand-alone point solutions for web-based customer relationship management and traditional client/server-based, call-center service customer and sales-force automation solution providers. |
Many of our competitors have greater resources and broader customer relationships than we do. In addition, many of these competitors have extensive knowledge of our industry. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to offer a single solution and to increase the ability of their products to address customer needs.
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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:
* | Size and timing of individual license transactions; |
* | Delay or deferral of customer implementations of our products; |
* | Lengthening of our sales cycle; |
* | Further deterioration and changes in domestic and foreign markets and economies; |
* | Success in expanding our global services organization, direct sales force and indirect distribution channels; |
* | Timing of new product introductions and product enhancements; |
* | Appropriate mix of products licensed and services sold; | ||
* | Levels of international transactions; | ||
* | Activities of and acquisitions by competitors; | ||
* | Product and price competition; and | ||
* | Our ability to develop and market new products and control costs. |
One or more of the foregoing factors may cause our operating expenses to be disproportionately high during any given period or may cause our revenues and operating results to fluctuate significantly. Based upon the preceding factors, we may experience a shortfall in revenues 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.
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.
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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 June 30, 2004, the closing price of our common stock on the NASDAQ National Market ranged from a low of $1.82 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.
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.
Because competition for qualified personnel could again become intense, we may not be able to retain or recruit personnel, which could impact the development and sales of our products.
If we are unable to hire or retain qualified personnel, or if newly hired personnel fail to develop the necessary skills or fail to reach expected levels of productivity, our ability to develop and market our products will be weakened. Our success depends largely on the continued contributions of our key management, engineering, sales and marketing and professional services personnel.
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.
27
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 79% and 84% of our total revenues for the three months ended June 30, 2004 and 2003, respectively. Sales of our products and services in two large markets-financial services and telecommunications-accounted for approximately 81% and 83% of our total revenues for the six months ended June 30, 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 68% and 62% of our total revenues for the three months ended June 30, 2004 and 2003, respectively. Gross margin on service revenues was 43% for both the three months ended June 30, 2004 and 2003. Gross margin on license revenues was 94% and 95% for the three months ended June 30, 2004 and 2003, respectively. Service revenues comprised 60% and 66% of our total revenues for the six months ended June 30, 2004 and 2003, respectively. Gross margin on services revenues was 43% and 41% for the six months ended June 30, 2004 and 2003, respectively. Gross margins on license revenues were 95% for both the six months ended June 30, 2004 and 2003. 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.
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.
28
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:
* | 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. |
29
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.
The application of percentage of completion accounting to our business is complex and may result in delays in the reporting of our financial results and revenue not being recognized as we expect.
Although we attempt use standardized license agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in multi-product transactions. At the time of entering into a transaction, we assess whether any services included within the arrangement require us to perform significant implementation or customization essential to the functionality of our products. For contracts involving significant implementation or customization essential to the functionality of our products, we recognize the license and professional consulting services revenues using the percentage-of-completion method using labor hours incurred as the measure of progress towards completion. The application of the percentage of completion method of accounting is complex and involves judgments and estimates, which may change based on customer requirements. This complexity combined with changing customer requirements could result in delays in the proper determination of our percentage of completion estimates and revenue not being recognized as we expect.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes, foreign currency fluctuations and change in the market values of our investments. The following table presents the amounts of short-term investments and restricted cash that are subject to interest rate risk by year of expected maturity and average interest rates as of June 30, 2004 (in thousands):
|
2005
|
Fair Value
|
|||||
---|---|---|---|---|---|---|---|
Short-term investments and restricted cash | $ |
588 |
$ |
588 |
|||
Average interest rates | 1.25 | % |
|
|
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.
30
Foreign Currency Risk. A significant portion of our sales and operating expenses result from transactions outside of the United States, often in foreign currencies. These currencies include the United Kingdom Pound Sterling, the Euro and Canadian Dollars. International revenues from our foreign subsidiaries accounted for approximately 48% and 79% of total revenues for the three months ended June 30, 2004 and 2003, respectively. International revenues from our foreign subsidiaries accounted for approximately 65% and 80% of total revenues for the six months ended June 30, 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, two of our foreign subsidiaries holds cash equivalent investments in currencies other than its respective local currency. Such holdings increase our exposure to foreign exchange rate fluctuations. As exchange rates vary, the holdings may magnify foreign currency exchange rate fluctuations or upon translation or adversely impact overall expected profitability through foreign currency losses incurred upon the sale or maturity of the investments. Foreign currency gains, net for the three months ended June 30, 2004 were $0.2 million. Foreign currency losses, net for the three months ended June 30, 2003 were less than $0.1 million. Foreign currency gains, net for the six months ended June 30, 2004 were less than $0.1 million. Foreign currency gains, net for the six months ended June 30, 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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
We carried out an evaluation, as of June 30, 2004, under the supervision and with the participation of our management, including our Chief Executive Officer and our Interim 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 Interim 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
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, in July 2004, PricewaterhouseCoopers LLP informed our Audit Committee of possible revenue recognition problems for the quarter ended June 30, 2004 arising out of two contracts involving the sale of our enterprise solutions software. The issue with one of the contracts related to the timing of the execution of the contract and the issue with the other contract involved the percentage of completion accounting. Our Audit Committee initiated an investigation and also engaged outside legal counsel to assist in the investigation. The investigation was conducted to (i) identify whether any revenue recognition issues existed at Chordiant generally, and (ii) review the business practices of our employees as they relate to procedures and controls applicable to the execution of our contracts. Through this investigation, our Audit Committee determined that a material weakness in our internal control over financial reporting exists relating to our revenue recognition controls. The Audit Committee has approved a number of changes to our internal controls over financial reporting which management is in the process of implementing. We have also made a number of personnel decisions. Effective August 16, 2004, Michael Shannahan resigned as the Chief Financial Officer and will be leaving Chordiant to pursue other opportunities. The Board of Directors announced the temporary appointment of Don Morrison, our President, as the Interim Chief Financial Officer. We are commencing a search for a permanent chief financial officer. In addition, our Vice President of Finance and Controller is assuming different responsibilities within the finance organization. Our Accounting Manager has been appointed our interim principal accounting officer and controller. We have commenced a search for an additional two employees, one whose primary responsibility will be revenue recognition, and one who will serve as our contracts manager. The Audit Committee is continuing to evaluate what further steps and appropriate measures should be taken. We will provide additional disclosure regarding the material changes made to our internal control over financial reporting during the third quarter in our Form 10-Q for the quarter ended September 30, 2004.
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(c) Limitations on the Effectiveness of Controls.
The Company's management, including the Chief Executive Officer and Interim 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 our 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 the unaudited Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated into this Item 1 by reference.
Item 4. Submission of Matters to a Vote of Security Holders
On June 15, 2004, our Annual Meeting of Stockholders was held in Cupertino, California. Of the 71,834,985 shares outstanding and entitled to vote as of the record date of May 14, 2004, 60,467,741 shares were present or represented by proxy at the meeting. At the meeting, stockholders were asked to vote with respect to (i) the election of 2 directors to hold office until the 2007 Annual Meeting of Stockholders or until such time as their respective successors are elected and qualified; (ii) the ratification of the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2004 and (iii) the approval of an increase of 3,475,000 shares to the number of shares reserved for issuance pursuant to our 1999 Equity Incentive Plan.
The following nominees were elected as class II directors, each to hold office until the 2007 Annual Meeting of Stockholders or until such time as their respective successors are elected and qualified, by the vote set forth below:
Nominee |
Votes For | Withheld | Broker Non-votes |
R. Andrew Eckert | 56,240,575 | 4,227,166 | 0 |
David R. Springett, Ph.D | 59,282,119 | 1,185,622 | 0 |
The selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2004 was ratified by the vote set forth below:
Votes For | Votes Against | Abstentions | Broker Non-votes |
59,912,369 |
486,149 | 69,223 | 0 |
The approval of an increase of 3,475,000 shares to the number of shares reserved for issuance pursuant to Chordiant's 1999 Equity Incentive Plan:
Votes For | Votes Against | Abstentions | Broker Non-votes |
14,725,049 |
25,569,040 | 128,746 | 20,044,906 |
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
On April 22, 2004, the Company furnished a Current Report on Form 8-K which announced the Company's financial results for the quarter ended March 31, 2004 and certain other information.
33
Chordiant Software, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 16, 2004
Chordiant Software, Inc. |
(Registrant) | |
/s/ Stephen Kelly | |
Stephen Kelly | |
Chief Executive Officer | |
34
EXHIBIT INDEX
Exhibit Number |
||
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. | |
10.3 | 1999 Non-Employee Directors' Plan as amended and restated. | |
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). | |
35
AMENDED AND RESTATED BYLAWS
OF
CHORDIANT SOFTWARE, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle.
Section 2. Other Offices. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
Section 3. Corporate Seal. The Board of Directors may adopt a corporate seal. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
Section 4. Place Of Meetings. Meetings of the stockholders of the corporation may be held at such place, either within or without the State of Delaware, as may be determined from time to time by the Board of Directors. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as provided under the Delaware General Corporation Law ("DGCL").
Section 5. Annual Meetings.
(a) The annual meeting of the stockholders of
the corporation, for the purpose of election of directors and for such other
business as may lawfully come before it, shall be held on such date and at such
time as may be designated from time to time by the Board of Directors.
Nominations of persons for election to the Board of Directors of the corporation
and the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders: (i) pursuant to the corporation's notice of
meeting of stockholders; (ii) by or at the direction of the Board of Directors;
or (iii) by any stockholder of the corporation who was a stockholder of record
at the time of giving the stockholder's notice provided for in the following
paragraph, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in Section 5.
(b) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of Section 5(a) of
these Bylaws, (i) the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation, (ii) such other business must be a
proper matter for stockholder action under DGCL, (iii) if the stockholder, or
the beneficial owner on whose behalf any such proposal or nomination is made,
has provided the corporation with a Solicitation Notice (as defined in clause
(iii) of the last sentence of this Section 5(b)), such stockholder or beneficial
owner must, in the case of a proposal, have delivered a proxy statement and form
of proxy to holders of at least the percentage of the corporation's voting
shares required under applicable law to carry any such proposal, or, in the case
of a nomination or nominations, have delivered a proxy statement and form of
proxy to holders of a percentage of the corporation's voting shares reasonably
believed by such stockholder or beneficial owner to be sufficient to elect the
nominee or nominees proposed to be nominated by such stockholder, and must, in
either case, have included in such materials the Solicitation Notice, and (iv)
if no Solicitation Notice relating thereto has been timely provided pursuant to
this section, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this Section 5. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the one hundred twentieth (120th) day nor earlier than the close of
business on the one hundred eightieth (180th) day prior to the first anniversary
of the preceding year's annual meeting; provided, however, that in the event
that the date of the annual meeting is advanced more than thirty (30) days prior
to or delayed by more than thirty (30) days after the anniversary of the
preceding year's annual meeting, notice by the stockholder to be timely must be
so delivered not earlier than the close of business on the one hundred eightieth
(180th) day prior to such annual meeting and not later than the close of
business on the later of the one hundred twentieth (120th) day prior to such
annual meeting or the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made. In no event shall the
public announcement of an adjournment of an annual meeting commence a new time
period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth: (A) as to each person whom the stockholder
proposed to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "1934 Act") and Rule 14a-4(d) thereunder (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); (B) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (C) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the corporation's books, and of
such beneficial owner, (ii) the class and number of shares of the corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner, and (iii) whether either such stockholder or beneficial owner
intends to deliver a proxy statement and form of proxy to holders of, in the
case of the proposal, at least the percentage of the corporation's voting shares
required under applicable law to carry the proposal or, in the case of a
nomination or nominations, a sufficient number of holders of the corporation's
voting shares to elect such nominee or nominees (an affirmative statement of
such intent, a "Solicitation Notice").
(c) Notwithstanding anything in the third sentence of Section
5(b) of these Bylaws to the contrary, in the event that the number of directors
to be elected to the Board of Directors of the Corporation is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the corporation
at least one hundred (100) days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this Section 5 shall
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the corporation.
(d) Except as set forth in Section 18 of these Bylaws, only
such persons who are nominated in accordance with the procedures set forth in
this Section 5 shall be eligible to serve as directors and only such business
shall be conducted at a meeting of stockholders as shall have been brought
before the meeting in accordance with the procedures set forth in this Section
5. Except as otherwise provided by law, the Chairman of the meeting shall have
the power and duty to determine whether a nomination or any business proposed to
be brought before the meeting was made, or proposed, as the case may be, in
accordance with the procedures set forth in these Bylaws and, if any proposed
nomination or business is not in compliance with these Bylaws, to declare that
such defective proposal or nomination shall not be presented for stockholder
action at the meeting and shall be disregarded.
(e) Notwithstanding the foregoing provisions of this Section
5, to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholders' meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Nothing in these Bylaws shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the corporation proxy statement pursuant to
Rule 14a-8 under the 1934 Act.
(f) For purposes of this Section 5, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the 1934 Act.
Section 6. Special Meetings.
(a) Special meetings of the stockholders of
the corporation may be called, for any purpose or purposes, by (i) the Chairman
of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board of Directors for adoption).
(b) If a special meeting is properly called by any person or
persons other than the Chairman of the Board of Directors, the Chief Executive
Officer, or the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors, the request shall be in
writing, specifying the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by certified or registered
mail, return receipt requested, to the Secretary of the corporation. No business
may be transacted at such special meeting otherwise than specified in such
notice. The Board of Directors shall determine the time and place of such
special meeting, which shall be held not less than thirty-five (35) nor more
than one hundred twenty (120) days after the date of the receipt of the request.
Upon determination of the time and place of the meeting, the officer receiving
the request shall cause notice to be given to the stockholders entitled to vote,
in accordance with the provisions of Section 7 of these Bylaws. Nothing
contained in this paragraph (b) shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by action of the Board
of Directors may be held.
(c) Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which directors
are to be elected pursuant to the corporation's notice of meeting (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
corporation who is a stockholder of record at the time of giving notice provided
for in these Bylaws who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 6(c). In the event
the corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the corporation's notice of meeting, if the
stockholder's notice required by Section 5(b) of these Bylaws shall be delivered
to the Secretary at the principal executive offices of the corporation not
earlier than the close of business on the one hundred twentieth (120th) day
prior to such special meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
Section 7. Notice Of Meetings. Except as otherwise provided by law, notice, given in writing or by electronic transmission, of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, if any, date and hour, in the case of special meetings, the purpose or purposes of the meeting, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at any such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the corporation. Notice of the time, place, if any, and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, or by electronic transmission by such person, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person, by remote communication, if applicable, or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given.
Section 8. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person, by remote communication, if applicable, or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by statute or by applicable stock exchange or Nasdaq rules, or by the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of the majority of shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and entitled to vote generally on the subject matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, directors shall be elected by a plurality of the votes of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and entitled to vote generally on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person, by remote communication, if applicable, or represented by proxy duly authorized, shall constitute a quorum entitled to take action with respect to that vote on that matter. Except where otherwise provided by statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of shares of such class or classes or series present in person, by remote communication, if applicable, or represented by proxy at the meeting shall be the act of such class or classes or series.
Section 9. Adjournment And Notice Of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting. When a meeting is adjourned to another time or place, if any, notice need not be given of the adjourned meeting if the time and place, if any, thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Section 10. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person, by remote communication, if applicable, or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period.
Section 11. Joint Owners Of Stock. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the DGCL, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest.
Section 12. List Of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, at the option of the corporation either (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the corporation. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. The list shall be open to examination of any stockholder during the time of the meeting as provided by law.
Section 13. Action Without Meeting.
(a) No action shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance with these Bylaws, and no action shall be taken by the stockholders by written consent or by electronic transmission.
Section 14. Organization.
(a) At every meeting of
stockholders, the Chairman of the Board of Directors, or, if a Chairman has not
been appointed or is absent, the President, or, if the President is absent, a
chairman of the meeting chosen by a majority in interest of the stockholders
entitled to vote, present in person or by proxy, shall act as chairman. The
Secretary, or, in his absence, an Assistant Secretary directed to do so by the
President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be
entitled to make such rules or regulations for the conduct of meetings of
stockholders as it shall deem necessary, appropriate or convenient. Subject to
such rules and regulations of the Board of Directors, if any, the chairman of
the meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are necessary, appropriate or convenient for the proper conduct of the
meeting, including, without limitation, establishing an agenda or order of
business for the meeting, rules and procedures for maintaining order at the
meeting and the safety of those present, limitations on participation in such
meeting to stockholders of record of the corporation and their duly authorized
and constituted proxies and such other persons as the chairman shall permit,
restrictions on entry to the meeting after the time fixed for the commencement
thereof, limitations on the time allotted to questions or comments by
participants and regulation of the opening and closing of the polls for
balloting on matters which are to be voted on by ballot. The date and time of
the opening and closing of the polls for each matter upon which the stockholders
will vote at the meeting shall be announced at the meeting. Unless and to the
extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
Section 15. Number And Term Of Office. The authorized number of directors of the corporation shall be fixed by the Board of Directors from time to time. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws.
Section 16. Powers. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation.
Section 17. Classes of Directors. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. At the first annual meeting of stockholders following the initial classification of the Board of Directors, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following such initial classification, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following such initial classification, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his earlier death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.
Section 18. Vacancies.
(a) Unless otherwise provided in the Certificate of
Incorporation and subject to the rights of the holders of any series of
Preferred Stock or as otherwise provided by applicable law, any vacancies on the
Board of Directors resulting from death, resignation, disqualification, removal
or other causes and any newly created directorships resulting from any increase
in the number of directors shall, unless the Board of Directors determines by
resolution that any such vacancies or newly created directorships shall be
filled by stockholders, be filled only by the affirmative vote of a majority of
the directors then in office, even though less than a quorum of the Board of
Directors. Except (i) as otherwise provided by applicable law, or (ii) as may be
otherwise determined by resolution of the Board of Directors, and (iii) subject
to the rights of holders of any series of Preferred Stock, any director elected
in accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A vacancy
in the Board of Directors shall be deemed to exist under this Section 18 in the
case of the death, removal or resignation of any director.
Section 19. Resignation. Any director may resign at any time by delivering his or her notice in writing or by electronic transmission to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified.
Section 20. Removal.
(a) Subject to the rights of any series of Preferred
Stock to elect additional directors under specified circumstances, neither the
Board of Directors nor any individual director may be removed without cause.
(b) Subject to any limitation imposed by law, any
individual director or directors may be removed with cause by the affirmative
vote of the holders of a majority of the voting power of all then outstanding
shares of capital stock of the corporation entitled to vote generally at an
election of directors.
Section 21. Meetings.
(a) Regular Meetings. Unless otherwise
restricted by the Certificate of Incorporation, regular meetings of the Board of
Directors may be held at any time or date and at any place within or without the
State of Delaware which has been designated by the Board of Directors and
publicized among all directors, either orally or in writing, by telephone,
including a voice-messaging system or other system designed to record and
communicate messages, facsimile, telegraph or telex, or by electronic mail or
other electronic means. No further notice shall be required for regular meetings
of the Board of Directors.
(b) Special Meetings. Unless otherwise
restricted by the Certificate of Incorporation, special meetings of the Board of
Directors may be held at any time and place within or without the State of
Delaware whenever called by the Chairman of the Board, the Chief Executive
Officer, or any two (2) directors.
(c) Meetings by Electronic Communications Equipment.
Any member of the Board of Directors, or of any committee thereof, may
participate in a meeting by means of conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting by such means shall
constitute presence in person at such meeting.
(d) Notice of Special Meetings. Notice of the
time and place of all special meetings of the Board of Directors shall be orally
or in writing, by telephone, including a voice messaging system or other system
or technology designed to record and communicate messages, facsimile, telegraph
or telex, or by electronic mail or other electronic means, during normal
business hours, at least twenty-four (24) hours before the date and time of the
meeting. If notice is sent by US mail, it shall be sent by first class mail,
charges prepaid, at least three (3) days before the date of the meeting. Notice
of any meeting may be waived in writing, or by electronic transmission, at any
time before or after the meeting and will be waived by any director by
attendance thereat, except when the director attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
(e) Waiver of Notice. The transaction of all
business at any meeting of the Board of Directors, or any committee thereof,
however called or noticed, or wherever held, shall be as valid as though had at
a meeting duly held after regular call and notice, if a quorum be present and
if, either before or after the meeting, each of the directors not present who
did not receive notice shall sign a written waiver of notice or shall waive
notice by electronic transmission. All such waivers shall be filed with the
corporate records or made a part of the minutes of the meeting.
Section 22. Quorum And Voting.
(a) Unless the Certificate of Incorporation requires a
greater number and except with respect to questions relating to indemnification
arising under Section 44 for which a quorum shall be one-third of the exact
number of directors fixed from time to time, a quorum of the Board of Directors
shall consist of a majority of the exact number of directors fixed from time to
time by the Board of Directors in accordance with the Certificate of
Incorporation; provided, however, at any meeting whether a quorum be present or
otherwise, a majority of the directors present may adjourn from time to time
until the time fixed for the next regular meeting of the Board of Directors,
without notice other than by announcement at the meeting.
(b) At each meeting of the Board of Directors at which
a quorum is present, all questions and business shall be determined by the
affirmative vote of a majority of the directors present, unless a different vote
be required by law, the Certificate of Incorporation or these Bylaws.
Section 23. Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and such writing or writings or transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
Section 24. Fees And Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor.
Section 25. Committees.
(a) Executive Committee. The Board of Directors may
appoint an Executive Committee to consist of one (1) or more members of the
Board of Directors. The Executive Committee, to the extent permitted by law and
provided in the resolution of the Board of Directors shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to (i) approving or
adopting, or recommending to the stockholders, any action or matter expressly
required by the DGCL to be submitted to stockholders for approval, or (ii)
adopting, amending or repealing any bylaw of the corporation.
(b) Other Committees. The Board of Directors may, from
time to time, appoint such other committees as may be permitted by law. Such
other committees appointed by the Board of Directors shall consist of one (1) or
more members of the Board of Directors and shall have such powers and perform
such duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall any such committee have the powers denied to
the Executive Committee in these Bylaws.
(c) Term. The Board of Directors, subject to any
requirements of any outstanding series of Preferred Stock and the provisions of
subsections (a) or (b) of this Bylaw, may at any time increase or decrease the
number of members of a committee or terminate the existence of a committee. The
membership of a committee member shall terminate on the date of his death or
voluntary resignation from the committee or from the Board of Directors. The
Board of Directors may at any time for any reason remove any individual
committee member and the Board of Directors may fill any committee vacancy
created by death, resignation, removal or increase in the number of members of
the committee. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee, and, in addition, in the absence or
disqualification of any member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
(d) Meetings. Unless the Board of Directors shall
otherwise provide, regular meetings of the Executive Committee or any other
committee appointed pursuant to this Section 25 shall be held at such times and
places as are determined by the Board of Directors, or by any such committee,
and when notice thereof has been given to each member of such committee, no
further notice of such regular meetings need be given thereafter. Special
meetings of any such committee may be held at any place which has been
determined from time to time by such committee, and may be called by any
Director who is a member of such committee, upon notice to the members of such
committee of the time and place of such special meeting given in the manner
provided for the giving of notice to members of the Board of Directors of the
time and place of special meetings of the Board of Directors. Notice of any
special meeting of any committee may be waived in writing at any time before or
after the meeting and will be waived by any director by attendance thereat,
except when the director attends such special meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Unless otherwise
provided by the Board of Directors in the resolutions authorizing the creation
of the committee, a majority of the authorized number of members of any such
committee shall constitute a quorum for the transaction of business, and the act
of a majority of those present at any meeting at which a quorum is present shall
be the act of such committee.
Section 26. Lead Independent Director. The Chairman of the Board of Directors, or if the Chairman is not an independent director, one of the independent directors, may be designated by the Board of Directors as lead independent director to serve until replaced by the Board of Directors ("Lead Independent Director"). The Lead Independent Director will, with the Chairman of the Board of Directors, establish the agenda for regular Board meetings and serve as chairman of Board of Directors meetings in the absence of the Chairman of the Board of Directors; establish the agenda for meetings of the independent directors; coordinate with the committee chairs regarding meeting agendas and informational requirements; preside over meetings of the independent directors; preside over any portions of meetings of the Board of Directors at which the evaluation or compensation of the Chief Executive Officer is presented or discussed; preside over any portions of meetings of the Board of Directors at which the performance of the Board of Directors is presented or discussed; and coordinate the activities of the other independent directors and perform such other duties as may be established or delegated by the Chairman of the Board of Directors.
Section 27. Organization. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the Lead Independent Director, or if the Lead Independent Directors is absent, the Chief Executive Officer, or if the Chief Executive Officer is absent, the President (if a director), or if the President is absent, the most senior Vice President (if a director), or, in the absence of any such person, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, any Assistant Secretary or other officer or director directed to do so by the Chairman, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
Section 28. Officers Designated. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer and the Treasurer. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors.
Section 29. Tenure And Duties Of Officers.
(a) General. All officers shall hold office at the
pleasure of the Board of Directors and until their successors shall have been
duly elected and qualified, unless sooner removed. Any officer elected or
appointed by the Board of Directors may be removed at any time by the Board of
Directors. If the office of any officer becomes vacant for any reason, the
vacancy may be filled by the Board of Directors.
(b) Duties of Chairman of the Board of Directors. The
Chairman of the Board of Directors, when present, shall preside at all meetings
of the stockholders and the Board of Directors. The Chairman of the Board of
Directors shall perform other duties commonly incident to the office and shall
also perform such other duties and have such other powers, as the Board of
Directors shall designate from time to time.
(c) Duties of Chief Executive Officer. The Chief
Executive Officer shall preside at all meetings of the stockholders and at all
meetings of the Board of Directors, unless the Chairman of the Board of
Directors has been appointed and is present or a Lead Independent Director has
been appointed and is present. Unless some other officer has been appointed
Chief Executive Officer of the corporation, the President shall be the chief
executive officer of the corporation and shall, subject to the control of the
Board of Directors, have general supervision, direction and control of the
business and officers of the corporation. To the extent that a Chief Executive
Officer has been appointed, all references in these Bylaws to the President
shall be deemed references to the Chief Executive Officer. The Chief Executive
Officer shall perform other duties commonly incident to the office and shall
also perform such other duties and have such other powers, as the Board of
Directors shall designate from time to time.
(d) Duties of President. The President shall preside
at all meetings of the stockholders and at all meetings of the Board of
Directors, unless the Chairman of the Board of Directors, the Lead Independent
Director, or the Chief Executive Officer has been appointed and is present.
Unless some other officer has been appointed Chief Executive Officer of the
corporation, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. The President shall perform other duties commonly incident to the
office and shall also perform such other duties and have such other powers, as
the Board of Directors shall designate from time to time.
(e) Duties of Vice Presidents. The Vice Presidents may
assume and perform the duties of the President in the absence or disability of
the President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
(f) Duties of Secretary. The Secretary shall attend
all meetings of the stockholders and of the Board of Directors and shall record
all acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these Bylaws of all meetings of
the stockholders and of all meetings of the Board of Directors and any committee
thereof requiring notice. The Secretary shall perform all other duties provided
for in these Bylaws and other duties commonly incident to the office and shall
also perform such other duties and have such other powers, as the Board of
Directors shall designate from time to time. The Chairman of the Board, or in
his or her absence, the Lead Director, or in his or her absence, the Chief
Executive Officer, may direct any Assistant Secretary or other officer to assume
and perform the duties of the Secretary in the absence or disability of the
Secretary, and each Assistant Secretary shall perform other duties commonly
incident to the office and shall also perform such other duties and have such
other powers as the Board of Directors or the Chief Executive Officer shall
designate from time to time.
(g) Duties of Chief Financial Officer. The Chief
Financial Officer shall keep or cause to be kept the books of account of the
corporation in a thorough and proper manner and shall render statements of the
financial affairs of the corporation in such form and as often as required by
the Board of Directors or the President. The Chief Financial Officer, subject to
the order of the Board of Directors, shall have the custody of all funds and
securities of the corporation. The Chief Financial Officer shall perform other
duties commonly incident to the office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time. The President may direct the Vice President of
Finance, Treasurer or any Assistant Treasurer, or the Controller or any
Assistant Controller to assume and perform the duties of the Chief Financial
Officer in the absence or disability of the Chief Financial Officer, and each
Vice President of Finance, Treasurer and Assistant Treasurer and each Controller
and Assistant Controller shall perform other duties commonly incident to the
office and shall also perform such other duties and have such other powers as
the Board of Directors or the President shall designate from time to time.
Section 30. Delegation Of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.
Section 31. Resignations. Any officer may resign at any time by giving notice in writing or by electronic transmission to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer.
Section 32. Removal. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or by the Chief Executive Officer or by other superior officers upon whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE
CORPORATION
Section 33. Execution Of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do.
Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
Section 34. Voting Of Securities Owned By The Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
Section 35. Form And Execution Of Certificates. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
Section 36. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or the owner's legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.
Section 37. Transfers.
(a) Transfers of record of shares of stock of the
corporation shall be made only upon its books by the holders thereof, in person
or by attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and
perform any agreement with any number of stockholders of any one or more classes
of stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the DGCL.
Section 38. Fixing Record Dates.
(a) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall, subject to applicable law, not be more than sixty (60) nor less than
ten (10) days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
(b) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted, and which record date shall be not more than
sixty (60) days prior to such action. If no record date is fixed, the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
Section 39. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
Section 40. Execution Of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
Section 41. Declaration Of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law.
Section 42. Dividend Reserve.
Before payment of any dividend, there may be set aside out of any funds of the
corporation available for dividends such sum or sums as the Board of Directors
from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
Board of Directors shall think conducive to the interests of the corporation,
and the Board of Directors may modify or abolish any such reserve in the manner
in which it was created.
ARTICLE X
FISCAL YEAR
Section 43. Fiscal Year.
The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
Section 44. Indemnification Of Directors,
Executive Officers, Other Officers, Employees And Other Agents.
(a) Directors and Officers. The corporation shall
indemnify its directors and officers to the fullest extent not prohibited by the
DGCL or any other applicable law; provided, however, that the corporation
may modify the extent of such indemnification by individual contracts with its
directors and officers; and, provided, further, that the corporation
shall not be required to indemnify any director or officer in connection with
any proceeding (or part thereof) initiated by such person unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board of Directors of the corporation, (iii) such
indemnification is provided by the corporation, in its sole discretion, pursuant
to the powers vested in the corporation under the DGCL or any other applicable
law or (iv) such indemnification is required to be made under subsection (d).
(b) Employees and Other
Agents. The corporation shall have power to indemnify
its employees and other agents as set forth in the DGCL or any other applicable
law. The Board of Directors shall have the power to delegate the determination
of whether indemnification shall be given to any such person except executive
officers to such officers or other persons as the Board of Directors shall
determine.
(c) Expenses. The corporation shall advance and pay to
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director or officer, of the corporation, or is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or officer in connection with such proceeding.
Notwithstanding the foregoing, if the DGCL requires, an advancement of expenses
incurred by a director or officer in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section 44 or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph
(e) of this Section 44, no advance shall be made by the corporation to an
officer of the corporation (except by reason of the fact that such officer is or
was a director of the corporation in which event this paragraph shall not apply)
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative, if a determination is reasonably and promptly made (i) by a
majority vote of directors who were not parties to the proceeding, even if not a
quorum, or (ii) by a committee of such directors designated by a majority vote
of such directors, even though less than a quorum, or (iii) if there are no such
directors, or such directors so direct, by independent legal counsel in a
written opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation.
(d) Enforcement. Without the necessity of entering
into an express contract, all rights to indemnification and advances to
directors and officers under this Bylaw shall be deemed to be contractual rights
and be effective to the same extent and as if provided for in a contract between
the corporation and the director or officer. Any right to indemnification or
advances granted by this Section 44 to a director or officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting the claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
DGCL or any other applicable law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an officer of the
corporation (except in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such officer is or
was a director of the corporation) for advances, the corporation shall be
entitled to raise a defense as to any such action clear and convincing evidence
that such person acted in bad faith or in a manner that such person did not
believe to be in or not opposed to the best interests of the corporation, or
with respect to any criminal action or proceeding that such person acted without
reasonable cause to believe that his conduct was lawful. Neither the failure of
the corporation (including its Board of Directors, independent legal counsel or
its stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the DGCL or
any other applicable law, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct. In any suit brought by a director or
officer to enforce a right to indemnification or to an advancement of expenses
hereunder, the burden of proving that the director or officer is not entitled to
be indemnified, or to such advancement of expenses, under this Section 44 or
otherwise shall be on the corporation.
(e) Non-Exclusivity of Rights. The rights conferred on
any person by this Bylaw shall not be exclusive of any other right which such
person may have or hereafter acquire under any applicable statute, provision of
the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the DGCL, or by any other
applicable law.
(f) Survival of Rights. The rights conferred on any
person by this Bylaw shall continue as to a person who has ceased to be a
director officer, employee or other agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(g) Insurance. To the fullest extent permitted by the
DGCL or any other applicable law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Section 44.
(h) Amendments. Any repeal or modification of this
Section 44 shall only be prospective and shall not affect the rights under this
Bylaw in effect at the time of the alleged occurrence of any action or omission
to act that is the cause of any proceeding against any agent of the corporation.
(i) Saving Clause. If this Bylaw or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each director and officer to the
full extent not prohibited by any applicable portion of this Section 44 that
shall not have been invalidated, or by any other applicable law. If this Section
44 shall be invalid due to the application of the indemnification provisions of
another jurisdiction, then the corporation shall indemnify each director and
officer to the full extent under any other applicable law.
(j) Certain Definitions. For the purposes of this
Bylaw, the following definitions shall apply:
(1) The term "proceeding"
shall be broadly construed and shall include, without limitation, the
investigation, preparation, prosecution, defense, settlement, arbitration and
appeal of, and the giving of testimony in, any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative.
(2) The term "expenses"
shall be broadly construed and shall include, without limitation, court costs,
attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and
any other costs and expenses of any nature or kind incurred in connection with
any proceeding.
(3) The term the "corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Section 44 with
respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existence had continued.
(4) References to a "director,"
"executive officer," "officer," "employee,"
or "agent" of the corporation shall include, without limitation,
situations where such person is serving at the request of the corporation as,
respectively, a director, executive officer, officer, employee, trustee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
(5) References to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the corporation"
shall include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this Section 44.
ARTICLE XII
NOTICES
Section 45. Notices.
(a) Notice To Stockholders. Written
notice to stockholders of stockholder meetings shall be given as provided in
Section 7 herein. Without limiting the manner by which notice may otherwise be
given effectively to stockholders under any agreement or contract with such
stockholder, and except as otherwise required by law, written notice to
stockholders for purposes other than stockholder meetings may be sent by US mail
or nationally recognized overnight courier, or by facsimile, telegraph or telex
or by electronic mail or other electronic means.
(b) Notice To Directors. Any notice required to be
given to any director may be given by the method stated in subsection (a), as
otherwise provided in these Bylaws, or by overnight delivery service, facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such director.
(c) Affidavit Of Mailing. An affidavit of mailing,
executed by a duly authorized and competent employee of the corporation or its
transfer agent appointed with respect to the class of stock affected, or other
agent, specifying the name and address or the names and addresses of the
stockholder or stockholders, or director or directors, to whom any such notice
or notices was or were given, and the time and method of giving the same, shall
in the absence of fraud, be prima facie evidence of the facts therein contained.
(d) Methods of Notice. It shall not be necessary that
the same method of giving notice be employed in respect of all recipients of
notice, but one permissible method may be employed in respect of any one or
more, and any other permissible method or methods may be employed in respect of
any other or others.
(e) Notice To Person With Whom Communication Is Unlawful.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the DGCL, the certificate shall state, if such is the fact and if
notice is required, that notice was given to all persons entitled to receive
notice except such persons with whom communication is unlawful.
(f) Notice to Stockholders Sharing an Address. Except
as otherwise prohibited under DGCL, any notice given under the provisions of
DGCL, the Certificate of Incorporation or the Bylaws shall be effective if given
by a single written notice to stockholders who share an address if consented to
by the stockholders at that address to whom such notice is given. Such consent
shall have been deemed to have been given if such stockholder fails to object in
writing to the corporation within 60 days of having been given notice by the
corporation of its intention to send the single notice. Any consent shall be
revocable by the stockholder by written notice to the corporation.
ARTICLE XIII
AMENDMENTS
Section 46. Amendments. Subject to the limitation set forth in Section 44(h) of these Bylaws or the provisions of the Certificate of Incorporation the Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the corporation. The stockholders also shall have power to adopt, amend or repeal the Bylaws of the corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the corporation required by law or by the Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the Bylaws of the corporation.
Exhibit 31.1
CERTIFICATION
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 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) [intentionally omitted]
c) 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
d) 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 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: August 16, 2004
/s/ Stephen Kelly
Stephen Kelly
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Donald Morrison, 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 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) [intentionally omitted]
c) 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
d) 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 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: August 16, 2004
/s/ Donald Morrison
Donald Morrison
Interim Chief Financial Officer
Exhibit 32.1
CERTIFICATION*
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") and Section 1350 of
Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350), Stephen
Kelly, Chief Executive Officer of Chordiant Software, Inc. (the "Company"), and
Donald Morrison, Interim Chief Financial Officer of the Company, each hereby certifies
that, to the best of his knowledge:
1. The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 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 Exchange Act; and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
In Witness Whereof, the undersigned have set their hands hereto as of the 16th day of August 2004.
/s/ Stephen Kelly |
/s/ Donald Morrison |
|
Stephen Kelly |
Donald Morrison |
* This certification accompanies the Form 10-Q to which it
relates, is not deemed filed with the Securities and Exchange Commission and is
not to be incorporated by reference into any filing of Chordiant Software, Inc.
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended (whether made before or after the date of the Form 10-Q),
irrespective of any general incorporation language contained in such filing.