UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the fiscal year ended September 30, 2006
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)
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Delaware
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93-1051328
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer
identification
No.)
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20400
Stevens Creek Blvd., Suite 400
Cupertino,
California 95014
(Address
of principal executive offices, including zip code)
(408)
517-6100
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Act:
Common
Stock $.001 Par Value per Share
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Transition Report on Form 10-K
or
any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes ¨ No x
State
the aggregate market value of the voting and non-voting common equity held
by
non-affiliates computed by reference to the price at which the common equity
was
last sold, or the average bid and asked price of such common equity, as of
March
31, 2006, the last business day of the registrant’s most recently completed
second fiscal quarter: $252,691,824.
As
of January 31, 2007, there were 79,842,253 shares of the registrant’s common
stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
Restatements
of Consolidated Financial Statements
Restatement
relating to stock-based compensation
In
this Form 10-K, Chordiant Software, Inc. (“Chordiant”, “the Company” or “we”) is
restating its consolidated balance sheet as of September 30, 2005, and the
related consolidated statements of operations, stockholders’ equity and
comprehensive loss, and cash flows for each of the fiscal periods ended
September 30, 2005 and September 30, 2004, and each of the quarters in fiscal
year 2005 and the first two quarters in fiscal year 2006. We are also restating
the pro forma disclosures for stock-based compensation expense required under
Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based
Compensation,” (SFAS 123) included in Note 13 to our Consolidated Financial
Statements. This Form 10-K also reflects the restatement of Selected
Consolidated Financial Data for the fiscal year ended September 30, 2005,
the
nine month period ended September 30, 2004, and the fiscal years ended December
31, 2003 and December 31, 2002 in Item 6 of this Form 10-K.
Previously
filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected
by
the restatements have not been amended and should not be relied on.
Our
decision to restate our consolidated financial statements was based on facts
obtained by management and the results of an independent review into our
stock
option accounting that was conducted by the Audit Committee of the Board
of
Directors.
In
July 2006, the Company’s Board of Directors initiated a review of the Company’s
historical stock option grant practices and appointed the Audit Committee
to
oversee the investigation. The Audit Committee’s review focused on processes
used to establish the option exercise prices and to obtain required approvals
of
stock option grants and the related measurement dates used for financial
reporting purposes. The Audit Committee and its legal advisors reviewed the
Company’s historical stock option grants and related accounting including an
assessment and review of the Company’s accounting policies, internal records,
supporting documentation and email communications, as well as interviews
with
current and former employees and current and former members of the Company’s
executive management and Board of Directors.
The
Audit Committee determined that, pursuant to the requirements of Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB
25), the correct measurement dates for a number of stock option grants made
by
Chordiant during the period 2000 to 2006 (“Review Period”) differ from the
measurement dates previously used to account for such option grants. The
Audit
Committee identified errors related to the determination of the measurement
dates for grants of options where the price of the Company’s stock on the
selected grant date was lower than the price on the actual grant date which
would permit recipients to exercise these options at a lower exercise price.
Under these circumstances, the Company should have recorded deferred stock
compensation expense, which subsequently should have been amortized as stock
compensation expense over the vesting period of the stock options.
On
November 26, 2006, the Board of Directors, upon the recommendation of the
Audit
Committee and management, after considering the quantitative and qualitative
analysis prepared by management relating to these errors, concluded that
the
Company should restate certain of its historical financial statements. To
correct the accounting errors, our Annual Report on Form 10-K for the year
ended
September 30, 2006 and our Quarterly Report on Form 10-Q for the three months
ended June 30, 2006, includes restated consolidated and condensed consolidated
financial statements and selected consolidated financial data for the years
ended December 31, 2002 and 2003, the nine-month period ended September 30,
2004, the fiscal year ended September 30, 2005, and the quarters ended December
31, 2005 and March 31, 2006.
The
Company also recorded adjustments related to payroll withholding tax for
certain
options formerly classified as incentive stock option (ISO) grants under
Internal Revenue Service regulations. These options were determined to have
been
granted with an exercise price below the fair market value of our stock on
the
actual grant date and therefore do not qualify for ISO treatment. The
disqualification of ISO classification and the resulting conversion to
non-qualified status results in additional payroll withholding tax obligations
on the exercise of these options.
There
was no income tax benefit associated with the increase to the stock-based
compensation expense as the Company has had a full valuation allowance for
the
deferred tax assets for the periods being restated.
To
the extent stock options have been exercised, the Company has pursued and
continues to pursue the recovery of the price difference between the original
and revised measurement dates from certain former officers.
The
Company is recording approximately $8.3 million of additional pre-tax, non-cash
stock-based compensation expense and associated withholding taxes for the
fiscal
periods 2000 through 2006. The impact of recognizing stock-based compensation
expense and associated withholding taxes resulting from the investigation
of
past stock option grants is as follows (dollars in thousands):
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Fiscal
Period
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Additional
Compensation
Expense
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2000
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$
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474
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2001
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2,082
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|
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2002
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2,715
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2003
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1,529
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Adjustment
to accumulated deficit as of December 31, 2003
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6,800
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2004
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928
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2005
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325
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2006
and thereafter
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208
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Total
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$
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8,261
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For
more information regarding the investigation and findings relating to stock
option practices and the restatement, please refer to Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations
-
Restatement of Consolidated Financial Statements,” and Note 3 - “Restatement of
Previously Issued Consolidated Financial Statements” in Item 8. For more
information regarding the investigation and findings relating to stock option
practices and the restatement and our remedial measures, see Item 9A, “Controls
and Procedures.”
Previously
Disclosed Restatement of Financial Statements Reported in our 2005 Form
10-K
In
the course of preparing the 2005 financial results for the year ended
September 30, 2005, the Company and its independent registered public
accounting firm, BDO Seidman, LLP, identified certain errors in the Company’s
2005 interim financial statements for the quarters ended December 31, 2004,
March 31, 2005, and June 30, 2005. On December 6, 2005, management
concluded that the Company should restate the Company’s interim financial
statements for the quarters ended December 31, 2004, March 31, 2005,
and June 30, 2005 due to such errors. On December 6, 2005, senior
management of the Company met with the Audit Committee of the Board of Directors
of the Company to discuss management’s conclusion. The Audit Committee concurred
with management’s conclusion. These errors are more fully described in Note 19
to the Consolidated Financial Statements contained in the Annual Report on
Form 10-K filed with the SEC on December 9, 2005.
Previously
Disclosed Change in Year End and Prior Restatement of Financial Statements
Reported in our 2004 Form 10-K
On
December 29, 2004, the Board of Directors of Chordiant approved a change in
Chordiant’s fiscal year end from December 31st to September 30th. In
the course of preparing the 2004 financial results for the new fiscal year
ended
September 30, 2004, the Company identified certain errors relating to
expense and revenue timing, the valuation of a guarantee, prepaid account
balances, estimates used to compute stock offering costs, warrant valuations
and
stock based compensation in the interim financial statements for the quarters
ended March 31, 2004, June 30, 2004 and September 30, 2004.
Due to the aggregate number of errors identified in the previously issued
interim financial statements and the relative percentages represented by
those
errors in the quarters, management concluded that the interim financial
statements for the quarters ended March 31, 2004, June 30, 2004
and September 30, 2004 should be restated. The Audit Committee of the Board
of Directors concurred with management’s conclusion. As a result, Chordiant
filed a Transition Report on Form 10-K/T for the transition period from
January 1, 2004 to September 30, 2004 to reflect the change in fiscal
year and the related restatement for the quarters ended March 31,
2004, June 30, 2004 and September 30, 2004.
All
financial information contained in this fiscal 2006 Annual Report on Form
10-K
gives effect to these prior restatements.
ANNUAL
REPORT ON FORM 10-K
INDEX
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2
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Item
1
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5
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Item
1A
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14
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Item
1B.
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23
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Item
2.
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23
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Item
3.
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23
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Item
4.
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25
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Item
5.
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26
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Item
6.
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27
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Item
7.
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30
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Item
7A.
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61
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Item
8.
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62
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Item
9.
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111
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Item
9A.
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111
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Item
10.
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117
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Item
11.
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120
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Item
12.
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126
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Item
13.
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129
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Item
14.
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130
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Item
15.
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132
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138
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FORWARD-LOOKING
INFORMATION
Except
for the historical information contained herein, this Annual Report contains
certain information that is forward-looking in nature. This information is
based
on our current expectations, assumptions, estimates and projections about
our
business and our industry, and involves known and unknown risks, uncertainties
and other factors that may cause our or our industry’s results, levels of
activity, performance or achievements 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. In addition,
any
statements that refer to expectations, projections or other characterizations
of
future events or circumstances are forward-looking statements. Our actual
results could differ materially from those anticipated in such forward-looking
statements as a result of several factors more fully described under the
caption
“Risk Factors” and those discussed elsewhere in this document. These and many
other factors could affect the future financial and operating results of
Chordiant. Chordiant undertakes no obligation to update any forward-looking
statement to reflect events after the date of this report.
ITEM 1. BUSINESS
Overview
Chordiant
is an enterprise software company that delivers products that improve the
customer front-office processes for the global banking, insurance, and
telecommunications markets. Chordiant provides companies in these markets
with
innovative solutions that help them more effectively manage their customer
interactions.
In
the market we offer an enterprise system that utilizes predictive decisioning,
analytical modeling, and strategy formulation in real-time for decision
management and execution at the point of sale. This capability enables
organizations to improve the accuracy of marketing offers for retention,
up-selling, cross selling, and modeling risk scenarios such as customer churn
and likelihood of default on payments.
We
believe our solutions add business value and return-on-investment for our
customers by reducing operational costs, and increasing employee productivity.
These improvements are realized by automating key business processes and
supporting organizational decision-making associated with the servicing,
selling, marketing and fulfillment of customer requests across the enterprise.
We offer solutions to our clients that include software applications, business
processes, tools and services that will integrate their customer information
and
corporate systems to produce a real-time view of customers across multiple
business channels. Our solutions offer businesses additional flexibility
to
create and set their policies and processes to control the quality of servicing,
fulfillment and marketing to their customers.
On
December 21, 2004, we acquired KiQ Limited, a privately held United Kingdom
software company (“KiQ”), for an aggregate purchase price of approximately $20
million, which was comprised of $9.7 million in cash, $9.4 million in our
common
stock and approximately $0.9 million in associated transaction costs. Through
this transaction, we acquired a decision management system that advances
the
state of analytics by exploiting the power of predictive data mining, analytical
modeling, and strategy formulation into real-time decision management and
execution. Products and patent-pending technology acquired by us in this
transaction enable organizations to significantly increase the accuracy of
marketing offers for retention, up-selling, cross selling, and to model risk
scenarios such as customer churn and likelihood to default on payments. With
the
addition of KiQ’s products and patent-pending technology we are able to deliver
a range of applications for real-time recommendation, retention, risk management
and recruitment.
As
a result of the transaction, Chordiant added new customers primarily in
financial services and telecommunications industries. A total of 20 KiQ
employees, including two founders and 15 engineering and technical staff,
joined
us as employees in December 2004.
Product
Solutions
Our
products are designed for global enterprises seeking to optimize their customer
experiences through effective decision analysis, marketing, selling and
servicing efforts. We have designed our products to integrate customer
information from different data sources and systems of record, automate business
processes based on a customer’s specific profile and requests, and provide
uniform service and information to customers across multiple communication
channels. Our products are designed to enable companies to deliver appropriate
recommendations (also known as “next best action”), services, offers and
information to a targeted customer at the time of customer need while complying
with relevant business policy and industry regulatory requirements.
Our
solutions are designed to address the enterprise requirements of global consumer
companies serving millions of customers across multiple business channels
integrating multiple lines of business. The solution suite is typically licensed
as an integrated set of software products that include one or more vertical
market applications running on top of a common layer of foundation technology
and supporting tools. Chordiant’s software is based on open systems software
standards that are widely adopted by our industry and capable of deployment
throughout an enterprise’s information technology infrastructure. Chordiant
software is built to be highly scalable and adaptable to a customer’s specific
business requirements or technology infrastructure.
Products
and Solutions
Our
solutions are designed to address a variety of business needs within our
three
target vertical markets of banking, insurance, and
telecommunications:
| · |
Call
Center and Customer Service Desktop (Call Center Advisor - Browser
Edition):
This product is a web browser-based guided desktop for the effective
management of customer contacts, service requests, and customer case
history in the call center channel. The desktop is integrated with
leading
computer telephony integration products, working with our own queue
based
work management to deliver ‘universal queues’ to the enterprise. This
product is used by customer services professionals across all our
target
markets. It is designed to meet the high volume transaction and business
processes common in enterprise contact centers. The desktop also
acts as a
delivery channel for our decision management and marketing products
together with the other business applications that Chordiant
sells.
|
| · |
Marketing
Director:
We provide applications for driving unified, personalized marketing
campaigns and response management across multiple media types and
multiple
channels including email, web, phone, and mobile messaging (MMS/SMS).
These products are used by marketing professionals across all our
target
markets to segment and target prospects and customers and deliver
to them
effective marketing campaigns. The Marketing Director suite of products
integrates with our Decision Management products to provide an integrated
campaign management system.
|
| · |
Recommendation
Advisor:
An application which provides flexible lead collection and routing
in a
common guided selling desktop, integrated with marketing campaigns
and
product fulfillment. Predictive and adaptive analytics guide staff
toward
best offers and “next best action” in the context of inbound or outbound
customer interactions. This product is used by sales and service
professionals across our target markets to manage leads and deliver
highly
effective sales messages.
|
| · |
Credit
Card Disputes, Charge-backs and Fraud:
These modular applications are designed to automate and optimize
customer
and mid-office functions associated with credit card dispute handling
and
fraud investigation and recovery. The products use Chordiant technology
to
implement the dispute and chargeback regulatory requirements of credit
card associations to assist organizations in managing their compliance
of
these complex regulations. This application is used by customer service
professionals in the credit card segment of banking to drive more
cost
effective, compliant handling of disputes and fraud cases.
|
| · |
Teller:
A guided desktop product and supporting financial transaction components
for retail bank tellers/cashiers or other cash-based desktop applications.
This product is used in the banking and lending sectors by customer-facing
staff in bank branches or stores to effectively process cash and
related
financial transactions on behalf of the customer. The solution utilizes
the Chordiant Enterprise Platform (described below) in providing
company-wide case management, customer history, and work management
between front office and back office operations.
|
| · |
Wholesale
Lending Point of Sale (POS):
A product which offers loan quoting and origination for indirect
lending
channels. This product is used in the lending and banking sectors
by third
party and captive brokers to effectively sell, process, and fulfill
various lending products. It utilizes the Chordiant Enterprise Platform
to
provide the necessary scale, and it is designed to integrate with
existing
banking systems.
|
| · |
Lending:
Products which provide a common process-driven lending infrastructure
and
services across an organization to increase efficiency of loan
originations, quoting, account opening and loan risk assessment and
management such as required by Basel II. Our lending products are
used in
banking and lending by a variety of users and desktop
applications.
|
| · |
Insurance:
Products which provide a common process-driven insurance infrastructure
and services across an organization to increase efficiency of case
management, claims processing, quoting, and risk management. Our
insurance
products are used in the insurance sector by a variety of users and
desktop applications.
|
| · |
Collections:
This product is currently in development. This product is designed
to
deliver automation and operational efficiency to debt recovery and
collections professionals. The first generally available release,
consisting of core collections functions, is expected in the third
fiscal
quarter of 2007. The product is designed to make extensive use of
the
Chordiant decision management technology to deliver real time decisioning.
|
Technology
Chordiant
applications share a common technology platform and set of development and
configuration tools. Chordiant technology is built to scale to tens of thousands
of users and integrate seamlessly into our customer’s IT infrastructure.
Chordiant technology is generally built based on standards as defined in
Java 2
Enterprise Edition (J2EE). Chordiant technology works alongside third party
J2EE
Application Servers, such as those from International Business Machines
Corporation (IBM) and BEA Systems Inc.
Chordiant
technology is based on a service oriented architecture (SOA). This architecture
provides a framework for large or growing businesses to provide multi-channel
interaction and process orchestration across multiple lines of business.
The
framework (also known as Chordiant Enterprise Platform) provides a
pre-integrated environment that supports the business applications required
by
these large scale organizations. With predictive decisioning built-in,
organizations can utilize Chordiant technology to obtain customer behavioral
insight and use this to drive the most appropriate business processes, guiding
staff through the best tasks to increase responsiveness, reduce errors, shorten
cycle times, and present the most relevant offers to customers in each
interaction.
| · |
Enterprise
Platform: Foundation Server, Café, and Tools Platform:
Consisting of a family of services with enterprise-wide process
orchestration and case management at its core, the Chordiant Enterprise
Platform product family provides a common, highly scalable base platform
for all Chordiant solutions. The product family incorporates industry
standards such as J2EE, model driven development, AJAX high performance
thin client desktops, Java Server Faces (JSF), and enterprise open
source
technologies including Hibernate, and Apache Trinidad. The products
are
supported by process development and administration tools that use
the
Eclipse integrated development environment.
|
The
Enterprise Platform incorporates module ‘servers’ to deliver additional
functionality as needed including business rules, decision management, telephony
integration, connectivity to systems of record and interaction channel
management. These allow organizations to implement only those functions that
are
required for their particular business requirement without interfering with
future project requirements.
| · |
Decisioning:
Consisting of flexible services and tools for adaptive decisioning,
predictive decisioning, and rules, our Decisioning product family
allows
organizations to effectively drive application behavior based on
industry
or organizational models and logic. This capability allows business
users
advanced control over business priorities, and enables the business
to
refine offer and service management in real-time. Decision management
is a
suite of products and comprises:
|
• Chordiant
Data Preparation Director—Chordiant Data Preparation Director allows non-IT
users to combine, manipulate and aggregate customer data using an easy to
use
visual interface.
• Chordiant
Predictive Analytics Director—Chordiant Predictive Analytics Director provides
marketing professionals functionality which enables in-depth analysis of
significant amounts of customer information using data-mining and predictive
analytical capabilities.
• Chordiant
Strategy Director—Chordiant Strategy Director allows users to design customer
interaction strategies and marketing offers based on decisions and rules
that
reflect customer behavior, preferences, legislation, corporate policies and
desired business outcomes. The resulting decision logic is executed in our
campaign management solution for outbound communication or executed in real-time
in multiple channels of communication.
• Chordiant
Decision Monitor—Chordiant Decision Monitor provides management with insight
into business results, measures data analysis effectiveness, and allows an
organization to learn from current and future data models. It is a software
module in which decisions are automatically logged and stored in a monitoring
database together with the relevant data as well as subsequent customer
information and behavior. This module can be integrated and analyzed by third
party business intelligence tools.
• Chordiant
Deployment Manager—Chordiant Deployment Manager provides the administrative
function to prepare available data in the operational environment and implement
the decision logic into production campaigns, business processes and
applications.
• Chordiant
Real-Time Decisioning Services—Chordiant Real-Time Decisioning Server generates
a decisioning service that can be hosted in industry-standard application
servers.
• Chordiant
Database Decisioning Services—The Chordiant Database Decisioning Server provides
an application for datamining, analysis, and modeling to create the optimal
decision logic and the appropriate decisions outcomes.
Chordiant
Mesh Collaboration
Announced
in fiscal year 2006, Chordiant Mesh is a collaborative development network
where
customers, partners, and Chordiant staff can work together on solutions to
respond to customer initiatives. Chordiant Mesh is a development infrastructure
layer that allows the organizations to collaborate on a wide variety of
solutions, components, and tools. By applying principles from open source
projects to a member-driven high-end ecosystem, Chordiant Mesh facilitates
far
greater collaboration, agility, speed to market, transparency, and quality
than
customers are accustomed to receiving from high-end enterprise software
providers.
Key
benefits of Chordiant Mesh are:
| · |
A
fabric for the maintenance of infrastructure level code and reduction
of
customization and cost of ownership.
|
| · |
A
set of tools and methodologies for building applications collaboratively
with Chordiant and its partners.
|
| · |
Enables
and enhances the IT systems “grid” to better support high value SOA −
based applications;
|
| · |
Enhancement
of the ability of IT departments to provide support, control and
flexibility.
|
| · |
By
leveraging open-source development models, Chordiant can take
code revisions submitted by community members − customers, partners and
Chordiant itself − and allow these to be incorporated into its
products when appropriate.
|
The
collaborative development approach enables Chordiant to be in closer
collaboration with its enterprise customers.
Strategic
Direction
The
Company is focused on solving problems for our global accounts through helping
them improve the quality of the customer experience they deliver in the banking,
insurance, and telecommunications industries. Chordiant anticipates that
it will
increasingly deliver business-focused applications based on an open and
adaptable core information technology (“IT”) infrastructure that provides high
levels of business agility and fast return on investment for enterprises
by
allowing rapid changes to their IT systems. Within the markets above, Chordiant
will continue to develop domain-level solutions for these markets, focusing
on
the most mission-critical business processes facing our customers.
Customers
We
target global brand leaders in our core markets. Our customers include: ING,
Canada, Inc., HSBC Technology and Services (USA), Inc., Capital One Services,
Inc., O2 (UK) Limited, Time Warner Cable, Inc., Covad Communication Company,
21st Century Insurance, T-Mobile, Lloyds TSB Bank plc, Bank of Ireland Group,
The Royal Bank of Scotland plc, Metropolitan Life Insurance Company, Signal
Iduna, Deutsche Bank AG, Canadian Tire Financial Services, Canadian Imperial
Bank of Commerce, Halifax plc, British Telecommunications plc, Connecticut
General Life Insurance Company, Citibank Credit Services Inc. (USA), and
Sky
Subscribers Services Limited. As we deploy new applications, we anticipate
that
a certain percentage of these and new customers will adopt these new
applications and expand their investment in Chordiant products. For the year
ended September 30, 2006, Citicorp Credit Services Inc. (USA) accounted for
12%
of our total revenues.
Technology
Chordiant’s
solutions and core technology are implemented using industry standard software
that includes J2EE, XML, and Web Services. This industry standard set of
development specifications leverages the strengths of the Java programming
language to enable software applications that are easier to develop, configure
and integrate with legacy and third-party information technology systems.
Chordiant’s
architecture leverages J2EE and Web Services extensively to provide a services
oriented architecture for use by Chordiant applications and other systems.
The
business services and related business components use a data persistence
foundation with built-in support for Oracle and DB2 databases as well as
IBM
WebSphere MQ messaging. Generally, our software is easily integrated with
other
data sources, including those built on the Java Connector Architecture (JCA).
Chordiant’s
web browser technology delivers consistent self-service and agent-driven
customer interaction processes using a rich web-based application platform
that
provides desktop interface behavior in a browser-based technology with high
performance, low maintenance costs, and flexibility to meet the differing
demands of a diverse user population.
Certain
of our products use technology modules from third-party technology providers
including IBM, BEA Systems, Sun Microsystems, Ingenieria de Software Bancario,
S.L. (ISBAN) and certain other non-public entities. Our enterprise platform
solutions support industry standard J2EE application servers including IBM
WebSphere and BEA WebLogic. Our server software runs on UNIX server platforms
from Sun Microsystems, IBM and Linux.
Sales
and Marketing
We
license our solutions and sell services primarily through a direct sales
organization that is complemented by selling and support efforts through
business alliance partners such as IBM, Tata Consulting, and Accenture, systems
integrators and technology vendors. Our market focus is the business-to-consumer
segment of the economy with a targeted effort on leading consumer focused
industries and companies using multiple channels as the means of conducting
business and serving customers.
The
sales process generally ranges from six to twenty four months depending on
the
level of knowledge that prospective customers need about the use and benefits
of
our solutions and the involvement of systems integrators. During the sales
process, we typically approach the senior management teams of the business
and
information technology departments of a prospective customer’s organization. We
utilize sales teams consisting of sales and technical professionals who work
with our systems integration partners to create company specific proposals,
presentations and proof of concept demonstrations that address the needs
of the
business and its technology requirements.
Our
corporate offices are located in Cupertino, California, and we maintain an
applications development center in Bedford, New Hampshire. In Europe, we
have
offices in the greater metropolitan areas of London, Madrid, Amsterdam,
Frankfurt, and Munich. We have sales and support personnel in various additional
locations in North America and Europe.
Our
Services
We
offer a comprehensive set of customer services including professional consulting
services and product support and training services. We believe that providing
high quality customer service is critical to achieving rapid product
implementation and customer success.
Professional
Services
We
provide implementation consulting and customer support services to licensed
customers through our worldwide professional services organization. Our
professional services consulting teams often assist customers and systems
integrator partners in the design and implementation of our software solutions.
Our
professional services organization deploys consultants as part of the project
team alongside systems integration partners and members of the customer’s
internal team to provide subject matter expertise, technical knowledge, business
engineering, project guidance and quality assessments during the entire solution
lifecycle. In the design stage, we provide a variety of professional services
that help determine a customer’s business processes and the technical
requirements of the solutions implementation. In the implementation stage,
we
use a delivery methodology to assist customers and integration partners in
planning and managing the implementation. Typically, systems integrators,
supported by our consultants, provide overall program management and coordinate
the implementation of our products with a customer’s existing communications,
applications, databases and transaction systems. In the final phases of an
implementation, the systems integrators provide deployment services to enable
a
customer’s internal team to implement the system, train internal users and
provide first-level end-user support.
Although
our primary strategy is to leverage our strategic systems integration partners
for implementations, our internal professional services organization is often
integral in implementing our enterprise platform software solutions for our
customers. We believe that our consulting services enhance the use and
administration of our software solutions, facilitate the implementation of
our
solutions and result in sharing best business practices with client and systems
integrator project teams. In addition to implementing our software, our
professional services organization works closely with our internal research
and
development organization to enhance existing software solutions.
In
addition to our internal professional services organization, in calendar
2006,
we renewed for one year our agreement with Ness Technologies Inc., Ness Global
Services, Inc. and Ness Technologies India, Ltd. (collectively, “Ness”), that we
originally entered into in 2003. Ness provides our customers with technical
product support, a sustaining engineering function, product testing services,
and product development services through their global technical resources
and
operations center in Bangalore, India. Ness is an independent contracting
company with global technical resources. The agreement with Ness may be extended
for additional one year terms at our discretion. Our agreement with Ness
enables
them, at our direction, to attract, train, assimilate and retain sufficient
highly qualified personnel to perform technical support and certain sustaining
engineering functions.
Educational
Services
We
provide educational services to train and enable our systems integrators
and
customers to use our products and technologies. We offer a comprehensive
series
of training modules to provide the knowledge and skills to successfully deploy,
use and maintain our products. These training courses focus on the technical
aspects of our products as well as business issues and processes. Training
courses can be provided on-site for a custom session for a fee and through
classroom and lab instruction. In addition, we provide certification programs
for our partners and customers.
Customer
Support
We
provide our customers with unspecified support and maintenance services
including telephone support, web-based support and updates to our products
and
documentation. We believe that providing a high level of technical support
is
critical to customer satisfaction. We also offer training programs to our
customers and other companies with which we have relationships to accelerate
the
implementation and adoption of our solutions by the users within a company.
Fees
for our training services are typically charged separately from our software
license, maintenance and consulting fees.
Our
customers have a choice of support and maintenance options depending on the
level of service desired. Our technical support services are available to
clients by telephone, over the web, by e-mail and on-site. Additionally,
we
provide unspecified product enhancement releases to all customers as part
of our
support and maintenance contracts. We use a customer service automation system
to track each customer inquiry until it is resolved. We also make use of
our
website and a secured customer forum to provide product information and
technical support information worldwide 24 hours a day, seven days a week.
Strategic
Partnerships
Establishing
partnerships and alliances with third parties that provide additional services
and resources for implementing our solutions to enhance our sales and service
organizations’ productivity is an important element of our strategy. These
relationships and alliances fall into the following categories:
Consulting
and System Integration Relationships. To
enhance the productivity of our sales and service organizations, we have
established relationships with systems integrators, complementary technology
providers and alternative service providers. We have established relationships
and trained professionals at a number of systems integrators including:
Accenture, IBM Global Services, Ness Technologies, Tata Consultancy Services
and
Business Services, and InfoGain. We plan to expand these relationships to
increase our capacity to license and implement our products. We believe that
expanding our relationships with systems integrators and independent consulting
firms will enable us to gain a greater share of our target markets.
Technology
Partnerships. We
make extensive use of industry platforms and embrace a number of core
technologies in our solution offerings. We have formed partnerships with
vendors
of software and hardware technology platforms. We currently maintain technology
relationships with vendors such as Avaya/Lucent, Alcatel/Genesys, BEA Systems,
Cisco Systems, IBM, Oracle, ISBAN and Sun Microsystems. Many of these companies
voluntarily provide us with early releases of new technology platforms,
education related to those platforms and limited access to their technical
resources to facilitate adoption of their technology.
Product
Development
We
have made substantial investments in research and development through internal
development, acquisitions and technology licensing. Our product development
efforts are focused on extending our enterprise software solutions, application
components, industry specific processes and business process functionality,
and
continued integration of industry-specific transaction systems and services.
Our
product development organization is responsible for new software products,
product architecture, core technologies, product testing, quality assurance
and
enabling the compatibility of our products with third-party hardware and
software platforms.
Our
product development resources are organized into a number of development
teams
including:
| · |
Foundational
Server, Tools, Mesh, Fulfillment, and Release Management;
|
| · |
Decision
Management Products;
|
| · |
Card
and Banking Applications;
|
| · |
Collections
Applications;
|
| · |
Marketing
Applications;
|
| · |
Product
Design, Architecture, and Documentation; and
|
| · |
Product
Test and Quality.
|
Our
product development teams have experience in enterprise and distributed
computing, J2EE and object oriented development, data management, process
and
workflow engineering, transaction system interfaces, Internet and Web-Services
technologies. Our research and development expenditures were $25.9 million
and
$20.3 million for the years ended September 30, 2006 and September 30,
2005, respectively.
Competition
The
market for our products is competitive, rapidly evolving, and can be affected
by
new product introductions and other market activities of industry participants.
The competitive landscape is quickly evolving to address the need for
enterprise-wide integration of IT assets and the convergence of customer
interaction applications, back-office systems and business processes. The
most
significant competition we face is from customers’ internal development efforts,
custom system integration, as well as other software providers that offer
integration and development platforms.
Internal
Development
Many
of our customers and potential customers have in the past attempted to develop
customer service, call center, customer relationship management and new
front-office systems in-house or with the help of systems integrators. Internal
information technology departments have staffed projects to build their own
systems utilizing a variety of tools. In some cases, such internal development
projects have been successful in satisfying the needs of an organization.
The
cost of internal development and total cost-of-ownership has risen to become
a
primary concern of the business and management. We expect that internal
development will continue to be a significant source of competition.
Custom
System Integration Projects
Another
source of competition results from systems integrators engaged to build a
custom
development application. The introduction of a systems integrator typically
increases the likelihood of success for the customer. The competitive factors
in
this area require that we demonstrate to the customer the cost savings and
advantages of configurable, upgradeable and commercially supported software
products developed by a dedicated professional software organization.
We
frequently rely on system consulting and systems integration firms for
implementation and other global services, as well as recommendations of our
products during the evaluation stage of the purchase process. Many of these
third parties have similar and often more established relationships with
our
competitors. We cannot assure that these third parties, many of whom have
significantly greater resources than us, will not market software products
in
competition with us.
Application
Software Competitors
As
discussed, our primary competition is from internal development at our customers
and potential customers. However, other competitors include providers of
traditional, first-generation customer relationship management, enterprise
resources planning, call center, marketing automation software and sales
force
automation software. These vendors include, among others, companies such
as:
Oracle Software, Pegasystems, Inc., Unica, SSA Global Technologies, Fidelity
Systems, S1 Corporation, and Amdocs.
Some
of these companies have longer operating histories, greater financial, marketing
and other resources, greater name recognition in other markets and a larger
base
of customers than we do. In addition, some companies have well-established
relationships with our current and potential customers. As a result, these
competitors may be able to devote greater resources to the development,
promotion and sale of their products than we can.
We
believe that we compete favorably in the industries we serve based on the
following competitive advantages: process-driven solutions for servicing
and
selling; real-time and transactional processes; real-time decision management
and vertical processes implemented in a multi-channel architecture. The
technology advantages include: Chordiant architecture providing an open services
oriented architecture providing for integration with multiple legacy systems,
third-party applications and communication channels and advanced browser
based
application environment for high volume call center, mid-office and branch
operations.
There
is no one competitor, nor are there a small number of competitors that are
dominant in our market. There are many factors that may increase competition
in
the enterprise customer relationship management market, including (i) entry
of new competitors, (ii) mergers and alliances among existing competitors,
(iii) consolidation in the software industry and (iv) technological
changes or changes in the use of the Internet. Increased competition may
result
in price reductions, reduced gross margins and loss of market share, any
of
which could materially and adversely affect our business, operating results
and
financial condition. Recent continuing
consolidation in the software industry during 2006 may indicate that we
will face new competitors in the future. Within the year
Oracle completed an acquisition of i-flex Solutions Ltd., a banking
software maker headquartered in Mumbai, India. In 2005 Oracle had purchased
a 43% stake in the company. Also in 2006, International Business Machines
(IBM)
acquired Webify, a provider of middleware to companies primarily in
the insurance industry. In addition, in September 2005, IBM had acquired
DWL, a
provider of middleware to companies in the banking, insurance, retail and
telecommunications industries. In January 2006, Oracle acquired Siebel Systems,
Inc., a maker of customer relationship management software products. While
we do
not believe that either i-flex Solutions, DWL, or Webify have been
significant competitors of Chordiant in the past, the acquisition of these
companies by Oracle and IBM may indicate that we will face increased competition
from significantly larger and more established entities in the
future.
We
cannot assure that we will be able to compete successfully against current
and
future competitors or that the competitive pressure faced by us will not
materially and adversely affect our business, operating results and financial
condition.
Intellectual
Property and Proprietary Rights
Our
success is in part dependent upon our ability to develop and protect proprietary
technology and intellectual proprietary rights. We rely primarily on a
combination of contractual provisions, confidentiality procedures, patents
pending, trade secrets, and copyright and trademark laws to protect our
intellectual property and proprietary rights.
We
license our products through non-exclusive license agreements that impose
restrictions on customers’ ability to utilize the software. In addition, we seek
to avoid disclosure of our trade secrets, including requiring employees,
customers and others with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code.
We
also seek to protect our rights in our products, documentation and other
written
materials under trade secret and copyright laws. Due to rapid technological
change, we believe factors such as the technological and creative skills
of our
personnel, new product developments and enhancements to our existing products
are more important than the various legal protections of our technology to
establishing and maintaining a technology leadership position.
We
integrate third party software into our products. Costs associated with
integrated technology provided by third parties historically accounts for
approximately 2% to 5% of total license revenues. The third party software
may
not continue to be available on commercially reasonable terms or at all.
If we
cannot maintain licenses to key third party software, shipments of our products
could be delayed until equivalent software is developed or licensed and
integrated into our products. Moreover, although we are generally indemnified
against claims if technology licensed from third parties infringes the
intellectual property and proprietary rights of others, this indemnification
is
not always available for all types of intellectual property and proprietary
rights and in some cases the scope of this indemnification is limited. There
can
be no assurance that infringement or invalidity claims arising from the
incorporation of third-party technology or claims for indemnification from
our
customers resulting from these claims will not be asserted or prosecuted
against
us. These claims, even if not meritorious, could result in the expenditure
of
significant financial and managerial resources, in addition to potential
product
redevelopment costs and delays.
Despite
our efforts to protect our proprietary rights, existing laws afford only
limited
protection. Attempts may be made to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary.
There
can be no assurance that we will be able to protect our proprietary rights
against unauthorized third party copying or use. Use by others of our
proprietary rights could materially harm our business. Furthermore, policing
the
unauthorized use of our products is difficult and expensive litigation may
be
necessary in the future to enforce our intellectual property rights.
Third
parties may claim, and have claimed, that we have infringed, or currently
infringe, their current or future products. We expect that software developers
will increasingly be subject to infringement claims as the number of products
in
different industry segments overlap. Any claims, with or without merit, are
time-consuming, result in costly litigation, prevent product shipment, cause
delays, or require us to enter into royalty or licensing agreements, any
of
which could harm our business. Patent litigation in particular has complex
technical issues and inherent uncertainties. If an infringement claim against
us
was successful and we could not obtain a license on acceptable terms, license
a
substitute technology or redesign to avoid infringement, our business would
be
harmed.
The
Company does not currently hold any patents but has certain patents
pending.
Employees
As
of September 30, 2006, we employed 325 full time employees. Of that total,
87 were primarily engaged in product development, engineering or systems
engineering, 93 were engaged in sales and marketing, 83 were engaged in
professional services and 62 were engaged in operational, financial and
administrative functions.
None
of our employees are represented by a labor union and we have never experienced
a work stoppage. We believe that our relations with our employees are good.
We
believe our future success will depend in part on our continued ability to
recruit and retain highly skilled technical, finance, management and marketing
personnel.
Financial
Information About Geographic Areas
For
a detailed description of our sales by geographic region, we incorporate
by
reference the information in Note 15 to our consolidated financial statements
contained in Item 8 of this Form 10-K. Although the Company’s revenues are
not considered seasonal, our international operations do experience a slow
down
in the summer months. For information relating to the risks attendant to
our
foreign operations, we incorporate by reference the information under the
headings “—Risk Factors—If we fail to adequately address the difficulties of
managing our international operations, our revenues and operating expenses
will
be adversely affected” and “—Risk Factors—Fluctuations 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.”
Backlog
For
a detailed discussion of backlog, we incorporate by reference the information
in
Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” under the heading Financial Trends, Backlog.
Available
Information
We
were incorporated in California in March 1991 and were reincorporated in
Delaware in October 1997.
We
maintain a site on the world-wide web at www.chordiant.com; however, information
found on our website is not incorporated by reference into this Annual Report
on
Form 10-K. We make available free of charge on or through our website our
filings with the Securities and Exchange Commission, including our Annual
Report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act, as soon as reasonably practicable after
we
electronically file such material with, or furnish it to, the Securities
and
Exchange Commission.
The
matters relating to the Audit Committee of the Board’s review of our historical
stock option granting practices and the restatement of our consolidated
financial statements have required us to incur substantial expenses, have
resulted in litigation, and may result in additional litigation and future
government enforcement actions.
On
July 24, 2006, the Company announced that the Audit Committee of the Company’s
Board of Directors, with the assistance of independent legal counsel, was
conducting a review of our stock option practices covering the time from
the
Company’s initial public offering in 2000 through June 2006. As described in the
Explanatory Note immediately preceding Part I, Item 1, and in Note 3
“Restatement of Previously Issued Consolidated Financial Statements” in Notes to
Consolidated Financial Statements in the Form 10-K, the Audit Committee reached
a conclusion that incorrect measurement dates were used for financial accounting
purposes for stock option grants in certain prior periods. As a result, the
Company has recorded additional non-cash stock-based compensation expense,
and
related tax effects, related to certain stock option grants, and the Company
has
restated certain previously filed financial statements included in the Form
10-K.
This
review of our historical stock option granting practices has required us
to
incur substantial expenses for legal, accounting, tax and other professional
services, has diverted our management’s attention from our business, and could
in the future adversely affect our business, financial condition, results
of
operations and cash flows.
Our
historical stock option granting practices and the restatement of our prior
financial statements have exposed us to greater risks associated with litigation
and regulatory proceedings. Several derivative complaints have been filed
pertaining to allegations relating to stock option grants. We cannot assure
you
that these or future similar complaints or any future litigation or regulatory
action will result in the same conclusions reached by the Audit Committee.
The
conduct and resolution of these matters will be time consuming, expensive
and
distracting from the conduct of our business.
We
contacted the SEC regarding the Audit Committee’s review and, in July 2006, the
SEC commenced an investigation into our historical stock option grant practices.
In November 2006, a representative of the Audit Committee and its advisors
met
with the enforcement staff of the SEC and provided them with a report of
the
Audit Committee’s investigation and findings. In January 2007, the enforcement
staff of the SEC notified the Company that its investigation had been terminated
and no enforcement action had been recommended to the Commission.
The
finding of the Audit Committee’s review are more fully described in Note 3
to
the Consolidated Financial Statements and
in Item 9A of this Annual
Report on Report
on Form 10-K for the year ended September 30, 2006.
We
may be subject to further investigation by the SEC or litigation by private
parties in connection with the restatement of our interim financial statements
for the fiscal quarters ended March 31, 2004, June 30,
2004, September 30, 2004, December 31, 2004, March 31, 2005,
June 30, 2005, December 31, 2005, and March 31, 2006 and the fiscal years
ended 2001, 2002, 2003, 2005 and nine months ended September 30, 2004.
In
March 2005, we concluded that our interim financial statements for the fiscal
quarters ended March 31, June 30, and September 30, 2004 should no
longer be relied upon because of various errors in such financial statements.
We
restated those financial statements, which were reported in our 2004 Transition
Report on Form 10-K/T filed with the SEC on March 29, 2005.
Additionally, in the course of preparing our 2005 financial results for the
year
ended September 30, 2005, the Company and its independent registered public
accounting firm, BDO Seidman, LLP, identified certain errors in the Company’s
2005 interim financial statements for the quarters ended December 31,
2004, March 31, 2005, and June 30, 2005 and management concluded that
as a result of these errors, the Company should restate the Company’s interim
financial statements for these quarters. These errors are more fully described
in Note 19 to the Consolidated Financial Statements contained in our Annual
Report on Form 10-K filed with the SEC on December 9, 2005.
On
November 26, 2006, the Board of Directors, upon the recommendation of the
Audit
Committee and management concluded that Chordiant would restate its historical
financial statements for the years ended December 31, 2001, 2002 and 2003,
the
nine-month period ended September 30, 2004, the fiscal year ended September
30,
2005, and the quarters ended December 31, 2005 and March 31, 2006. These
errors are more fully described in Note 3 to the Consolidated Financial
Statements contained in this Annual Report.
Section 408
of the Sarbanes-Oxley Act of 2002 (SOX) requires that the SEC review a public
company’s filings no less frequently than once every 3 years. The SEC’s staff in
the Division of Corporation Finance in Washington D.C. has reviewed the
Company’s annual report on Form 10-K for the fiscal year ended
September 30, 2005 and has commented on the annual report to which the
Company has provided written responses. The SEC may begin an investigation
or we
may be subject to private litigation, which could require significant management
and financial resources which could otherwise be devoted to the operation
of our
business. If we are subject to an SEC investigation or civil litigation,
we
could be required to pay penalties or damages or have other remedies imposed
upon us. In addition, we could become the target of expensive securities
litigation related to other matters in the future. Any SEC investigation
or
litigation could adversely affect our business, results of operations, financial
position or cash flows.
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 $16.0 million and $19.9 million for the years ended September
30, 2006 and 2005, respectively. As of September 30, 2006, we had an accumulated
deficit of $232.9 million. We may continue to incur losses and cannot be
certain
that we can 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
could
further adversely affect our operating results.
Because
a small number of customers account for a substantial portion of our revenues,
the loss of a significant customer could cause a substantial decline in our
revenues.
We
derive a significant portion of our license and service revenues from a limited
number of customers. The loss of a major customer could cause a decrease
in
revenues and net income. For the year ended September 30, 2006, Citicorp
Credit
Services accounted for 12% of our total revenue. While our customer
concentration has fluctuated, we expect that a limited number of customers
will
continue to account for a substantial portion of our revenues. 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 year ended September 30, 2006, international revenues were $37.5 million
or
approximately 38% of our total revenues. While North American revenues have
increased recently 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;
• Economic
downturns and political uncertainty in international economies; and
• Expectations
of European economic growth that is lower than for the US.
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. Additionally we closed our only French
office
in the first fiscal quarter of 2007. The absence of a business office in
France
may harm our ability to attract and retain customers in that
country.
Our
known backlog of business may not result in revenue.
An
increasingly material portion of our revenues has been derived from large
orders, as major customers deployed our products. We define backlog as
contractual commitments by our customers through purchase orders or contracts.
Backlog is comprised of software license orders which have not been accepted
by
customers or have not otherwise met all of the required criteria for revenue
recognition, deferred revenue from customer support contracts, and deferred
consulting and education orders for services not yet completed or delivered.
Backlog is not necessarily indicative of revenues to be recognized in a
specified future period. There are many factors that would impact the Company’s
filling of backlog, such as the Company’s progress in completing projects for
its customers and Chordiant’s customers’ meeting anticipated schedules for
customer-dependent deliverables. The Company provides no assurances that
any
portion of its backlog will be filled during any fiscal year or at all or
that
its backlog will be recognized as revenues in any given period. In addition,
it
is possible that customers from whom we expect to derive revenue from backlog
will default and as a result we may not be able to recognize expected revenue
from backlog.
Fluctuations
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 the Canadian
Dollar. Our international sales comprised 38% of our total sales for the
year
ended September 30, 2006. Our international sales comprised 50% of our total
sales for the year ended September 30, 2005. Our future operating results
will
continue to be subject to fluctuations in foreign currency rates, especially
if
international sales grow as a percentage of our total sales, and we may be
negatively impacted by fluctuations in foreign currency rates in the future.
For
the year ended September 30, 2006, we had an unrealized foreign currency
translation gain of approximately $1.2 million.
Geopolitical
concerns could make the closing of license transactions with new and existing
customers difficult.
Our
revenues will decrease in fiscal year 2007 or beyond 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. 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.
Competition
in our markets is intense and could reduce our sales and prevent us from
achieving profitability.
Increased
competition in our markets could result in price reductions for our products
and
services, reduced gross margins and loss of market share, any one of which
could
reduce our future revenues. The market for our products is intensely
competitive, evolving and subject to rapid technological change. Historically,
our primary competition has been from internal development, custom systems
integration projects and application software competitors. 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.
• Custom
systems integration projects:
we compete with large systems integrators who may develop custom solutions
for
specific companies which may reduce the likelihood that they would purchase
our
products and services.
• 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.
In
addition, recent continuing consolidation in the software
industry during 2006 may indicate that we will face new competitors in the
future. Within the year Oracle completed an acquisition of
i-flex Solutions Ltd., a banking software maker headquartered in Mumbai,
India. In 2005 Oracle had purchased a 43% stake in the company. Also in
2006, IBM acquired Webify, a provider of middleware to
companies primarily in the insurance industry. In addition, in September
2005, IBM had acquired DWL, a provider of middleware to companies in the
banking, insurance, retail and telecommunications industries. In January
2006,
Oracle acquired Siebel Systems, Inc., a maker of customer relationship
management software products. Siebel Systems, Inc. was a competitor of ours.
While we do not believe that either i-flex Solutions, DWL or Webify have
been significant competitors of Chordiant in the past, the acquisition of
these
companies by Oracle and IBM may indicate that we will face increased competition
from significantly larger and more established entities in the
future.
Many
of our competitors have greater resources and broader customer relationships
than we do. In addition, many of these competitors have extensive knowledge
of
our industry. Current and potential competitors have established, or may
establish, cooperative relationships among themselves or with third parties
to
offer a single solution and to increase the ability of their products to
address
customer needs.
We
may experience a shortfall in revenue, earnings, cash flow or otherwise fail
to
meet public market expectations, which could materially and adversely affect
our
business and the market price of our common stock.
Our
revenues and operating results may fluctuate significantly because of a number
of factors, many of which are outside of our control. Some of these factors
include:
• Size
and timing of individual license transactions;
• Delay
or deferral of customer implementations of our products and subsequent impact
on
revenues;
• Lengthening
of our sales cycle;
• Potential
additional 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.
If
our stockholders approve our proposed reverse stock split, our stock price
may
be adversely affected.
On
February 15, 2007, our stockholders will consider at a special meeting whether
to approve a reverse split of our outstanding shares of common stock by a
ratio
of two and one-half (2.5) to 1 (the “Reverse Split”). If approved and our Board
of Directors proceed to effect the Reverse Split, our stock price may decline
back to pre-Reverse Stock split levels. If the Reverse Split is effected
and the
per share price of our common stock declines, the percentage decline as an
absolute number and as a percentage of our overall market capitalization
may be
greater than would occur in the absence of the Reverse Split.
Our
operating results and cash flows fluctuate significantly and delays in delivery
or implementation of our products or changes in the payment terms with customers
may cause unanticipated declines in revenues or cash flow, which could
disappoint investors and result in a decline in our stock price.
Our
quarterly revenues depend primarily upon product implementation by our
customers. We have historically recognized a significant portion of our license
and services revenue through the percentage-of-completion method, using labor
hours incurred as the measure of progress towards completion of implementation
of our products and we expect this practice to continue. The percentage of
completion accounting method requires ongoing estimates of progress of
complicated and frequently changing technology projects. Documenting the
measure
of progress towards completion of implementation is subject to potential
errors
and changes in estimates. As a result, even minor errors or minor changes
in
estimates may lead to significant changes in accounting results which may
be
revised in later quarters due to subsequent information and events. Thus,
delays
or changes in customer business goals or direction when implementing our
software may negatively impact our quarterly revenue. Additionally, we may
increasingly enter into term, subscription or transaction based licensing
transactions that would cause us to recognize license revenue for such
transactions over a longer period of time than we have historically experienced
for our perpetual licenses. In addition, a significant portion of new customer
orders have been booked in the third month of each calendar quarter, with
many
of these bookings occurring in the last two weeks of the third month. We
expect
this trend to continue and, therefore, any failure or delay in bookings would
decrease our quarterly revenue and cash flows. The terms and conditions of
individual license agreements with customers vary from transaction to
transaction. Historically, the Company has been able to obtain prepayments
for
product in some cases. Other transactions link payment to the delivery or
acceptance of products. In particular, we have deferred the recognition of
all
revenue from the license order from Citicorp
Credit Services, Inc.
that we received in December of 2006 pending our completion and delivery
of a
collections application that was one of the required elements under that
license
order. We currently anticipate that we will deliver the collections application
in the third fiscal quarter of 2007 but any delay in our development or delivery
of that application could result in a significant delay in our ability to
recognize revenue from that license and may cause an unanticipated shortfall
in
our revenue. If we are unable to negotiate prepayments of fees our cash flows
and financial ratios with respect to accounts receivable would be negatively
impacted. If our revenues, operating margins or cash flows are below the
expectations of the investment community, our stock price is likely to decline.
If
we fail to maintain and expand our relationships with systems integrators
and
other business partners, our ability to develop, market, sell, and support
our
products may be adversely affected.
Our
development, marketing and distribution strategies rely on our ability to
form
and maintain long-term strategic relationships with systems integrators,
in
particular, 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 systems integrators
may be more likely to recommend competitors’ products and services. In addition,
in September 2005, IBM had acquired DWL, a provider of middleware to companies
in the banking, insurance, retail and telecommunications industries. In 2006,
IBM acquired Webify, a provider of middleware to companies primarily
in the insurance industry. While we do not believe that either DWL or Webify
had
been a direct competitor of Chordiant in the past, IBM’s acquisition of DWL and
Webify may indicate that IBM will become a competitor of ours in the future.
While the Company currently has good relationship with IBM, this relationship
and the Company’s strategic relationship agreement with IBM may be harmed if the
Company increasingly finds itself competing with IBM. Our relationships with
systems integrators and their willingness to recommend our products to their
customers could be harmed if the Company were to be subject to a take over
attempt from a competitor of such systems integrators.
If
systems integrators fail to properly implement our software, our business,
reputation and financial results may be harmed.
We
are increasingly relying on systems integrators to implement our products,
and
this trend may continue. As a result, we have less quality control over the
implementation of our software with respect to these transactions and are
more
reliant on the ability of our systems integrators to correctly implement
our
software. If these systems integrators fail to properly implement our software,
our business, reputation and financial results may be harmed.
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
from
three to twenty-four months. Thus, revenue and cash receipts could vary
significantly from quarter to quarter. Any delays in the implementation of
our
products could cause reductions in our revenues. The licensing of our products
is often an enterprise-wide decision that generally requires us to provide
a
significant level of education to prospective customers about the use and
benefits of our products. The implementation of our products involves
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. If we underestimate
the
resources required to meet the expectations we have set with a customer when
we
set prices, then we may lose money on that customer engagement. If this happens
with a large customer engagement, then this could have a material adverse
effect
on our financial results. Customers generally consider a wide range of issues
before committing to purchase our products, including product benefits, ability
to operate with existing and future computer systems, vendor financial stability
and longevity, ability to accommodate increased transaction volume and product
reliability.
If
we do not improve our internal control over financial reporting, investors
could
lose confidence in our financial reporting and customers may delay purchasing
decisions, which would harm our business and the market price of our common
stock.
Effective
internal controls are necessary for us to provide reliable financial reports.
If
we cannot provide reliable financial reports, our business could be harmed.
We
are a complex company with complex accounting issues and thus subject to
related
risks of errors in financial reporting which may cause problems in corporate
governance, the costs of which may outweigh the costs of the underlying errors
themselves. For example, the
Audit Committee of the Company’s Board of Directors, with the assistance of
outside legal counsel, conducted a review of our stock option practices covering
the time from the Company’s initial public offering in 2000 through September
2006. The Audit Committee reached a conclusion that incorrect measurement
dates
were used for financial accounting purposes for stock option grants in certain
prior periods. As a result, the Company has recorded additional non-cash
stock-based compensation expense, and related tax effects, related to stock
option grants and concluded that a material weakness surrounding the control
activities relating to the stock option grants existed at September 30,
2006. To
correct these accounting errors, we restated the consolidated financial
statements contained in our Annual Report on Form 10-K for the year ended
September 30, 2006 and our Quarterly Report on Form 10-Q for the three months
ended June 30, 2006. As a result of this need to restate financial statements,
management and the Audit Committee determined that material weaknesses in
our
internal control over financial reporting existed. These material weaknesses
have contributed to increased expenses and efforts required for our financial
reporting.
If
we are not successful in implementing effective internal controls over financial
reporting, customers may delay purchasing decisions or we may lose customers,
create investor uncertainty, face litigation and the market price of our
common
stock may decline. For more information, please refer to the discussion under
the heading “Item 9A. Controls and Procedures” in this Annual Report on Form
10-K.
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 Ness Technologies Inc.,
Ness
Global Services, Inc. and Ness Technologies India, Ltd. (collectively, “Ness”),
an independent contracting company with global technical resources and an
operations center in Bangalore, India and operations in other locations.
The
agreement provides for Ness, at our direction, to attract, train, assimilate
and
retain sufficient highly qualified personnel to perform staffing for consulting
projects, technical support, product test and certain sustaining engineering
functions. As of September 30, 2006, we use the services of approximately
126
consultants through Ness. In addition, as a result of the reduction in our
workforce that took place in July 2005, and the reduction in our workforce
that
took place in October 2006, by approximately 10% in each instance, we are
now
more dependent on Ness. The expansion of this agreement is an important
component of our strategy to address the business needs of our customers
and
manage our expenses. The success of this operation will depend on our ability
and Ness’s ability to attract, train, assimilate and retain highly qualified
personnel in the required periods. A disruption of our relationship with
Ness
could adversely affect our operations. Failure to effectively manage the
organization and operations will harm our business and financial results.
We
have incurred and may continue to 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.
On
October 1, 2005, we adopted SFAS 123(R), which requires the measurement and
recognition of compensation expense for all share-based payment awards made
to
the Company’s employees and directors including employee stock options,
restricted stock awards and employee stock purchases related to the ESPP
based
on estimated fair values. For the year ended September 30, 2006, we recorded
$4.7 million of compensation expense associated with these awards. Although
the
effect from the adoption of SFAS 123(R) is expected to continue to have a
material impact on the Company’s results of operations, future changes to
various assumptions used to determine the fair value of awards issued, or
the
amount and type of equity awards granted create uncertainty as to the amount
of
future stock-based compensation expense.
If
our products do not operate effectively in a company-wide environment, we
may
lose sales and suffer decreased revenues.
If
existing customers have difficulty deploying our products or choose not to
fully
deploy our products, it could damage our reputation and reduce revenues.
Our
success requires that our products be highly scalable, and able to accommodate
substantial increases in the number of users. Our products are expected to
be
deployed on a variety of computer software and hardware platforms and to
be used
in connection with a number of third-party software applications by personnel
who may not have previously used application software systems or our products.
These deployments present very significant technical challenges, which are
difficult or impossible to predict. If these deployments do not succeed,
we may
lose future sales opportunities and suffer decreased revenues. If we
underestimate the resources required to meet the expectations we have set
with a
customer when we set prices, then we may lose money on that customer engagement.
If this happens with a large customer engagement then this could have a material
adverse effect on our financial results.
Defects
in our products could diminish demand for our products and result in decreased
revenues, decreased market acceptance and injury to our reputation.
Errors
may be found from time-to-time in our new, acquired or enhanced products.
Any
significant software errors in our products may result in decreased revenues,
decreased sales, and injury to our reputation and/or increased warranty and
repair costs. Although we conduct extensive product testing during product
development, we have in the past discovered 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.
Because
competition for qualified personnel is intense, we may not be able to retain
or
recruit personnel, which could impact the development and sales of our products.
If
we are unable to hire or retain qualified personnel, or if newly hired personnel
fail to develop the necessary skills or fail to reach expected levels of
productivity, our ability to develop and market our products will be weakened.
Our success depends largely on the continued contributions of our key
management, finance, engineering, sales and marketing and professional services
personnel. In particular, we have recently had significant turnover of our
executives as well as in our in our sales,
marketing
and finance organizations and many key positions are held by people who are
new
to the Company or to their roles. If these people are unable to quickly become
familiar with the issues they face in their roles or are not well suited
to
their new roles, then this could result in the Company having problems in
executing its strategy or in reporting its financial results. Because of
the
dependency on a small number of large deals, we are uniquely dependent upon
the
talents and relationships of a few executives and have no guarantee of their
retention. Changes in key sales management could affect our ability to maintain
existing customer relationships or to close pending transactions. We have
been
targeted by recruitment agencies seeking to hire our key management, finance,
engineering, sales and marketing and professional services personnel. In
addition, in July 2005 and again in October of 2006, we reduced the size
of our
workforce by approximately 10% in each instance, which may have a negative
effect on our ability to attract and retain qualified personnel.
To
date, our sales have been concentrated in the financial services,
telecommunications and retail markets, and if we are unable to continue sales
in
these markets or successfully penetrate new markets, our revenues may decline.
Sales
of our products and services in three large markets—financial services,
telecommunications and retail markets accounted for approximately 89 % and
87 % of our total revenues for the year ended September 30, 2006 and 2005,
respectively. We expect that revenues from these three markets will continue
to
account for a substantial portion of our total revenues for the foreseeable
future. 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 58% and 62% of our total revenues for the year
ended
September 30, 2006 and 2005, respectively. Gross margin on service revenues
was
46% and 42% for the year ended September 30, 2006 and 2005, respectively.
License revenues comprised 42% and 38% of our total revenues for the years
ended
September 30, 2006 and 2005, respectively. Gross margins on license revenues
were 96% and 97% for the years ended September 30, 2006 and 2005, respectively.
As
a result, an increase in the percentage of total revenues represented by
services revenues, or an unexpected decrease in license revenues, could have
a
detrimental impact on our overall gross margins. To increase services revenues,
we would expand our services organization, successfully recruit and train
a
sufficient number of qualified services personnel, enter into new implementation
projects and obtain renewals of current maintenance contracts by our customers.
This expansion could further reduce gross margins in our services revenues.
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
July 2005 and again in October of 2006, we reduced the size of our workforce
by
approximately 10% in each instance. In the event that demand for our products
increases, we may need to rebuild our workforce or increase outsourced functions
to companies based in foreign jurisdictions and we may be unable to hire,
train
or retain qualified personnel in a timely manner, which may weaken our ability
to market our products in a timely manner, negatively impacting our operations.
Our success depends largely on ensuring that we have adequate personnel to
support our platform of products as well as the continued contributions of
our
key management, finance, engineering, sales and marketing and professional
services personnel.
If
we fail to introduce new versions and releases of functional and scalable
products in a timely manner, customers may license competing products and
our
revenues may decline.
If
we are unable to ship or implement enhancements to our products when planned,
or
fail to achieve timely market acceptance of these enhancements, we may suffer
lost sales and could fail to achieve anticipated revenues. We have in the
past,
and expect in the future, to derive a significant portion of our total revenues
from the license of our primary product suite. Our future operating results
will
depend on the demand for the product suite by future customers, including
new
and enhanced releases that are subsequently introduced. If our competitors
release new products that are superior to our products in performance or
price,
or if we fail to enhance our products or introduce new features and
functionality in a timely manner, demand for our products may decline. We
have
in the past experienced delays in the planned release dates of new versions
of
our software products and upgrades. New versions of our products may not
be
released on schedule or may contain defects when released.
We
depend on technology licensed to us by third parties, and the loss or inability
to maintain these licenses could prevent or delay sales of our products.
We
license from several software providers technologies that are incorporated
into
our products. We anticipate that we will continue to license technology from
third parties in the future. This software may not continue to be available
on
commercially
reasonable terms, if at all. While currently we are not materially dependent
on
any single third party for such licenses, the loss of the technology licenses
could result in delays in the license of our products until equivalent
technology is developed or identified, licensed and integrated into our
products. Even if substitute technologies are available, there can be no
guarantee that we will be able to license these technologies on commercially
reasonable terms, if at all.
Defects
in third party products associated with our products could impair our products’
functionality and injure our reputation.
The
effective implementation of our products depends upon the successful operation
of third-party products in conjunction with our products. Any undetected
defects
in these third-party products could prevent the implementation or impair
the
functionality of our products, delay new product introductions or injure
our
reputation. In the past, while our business has not been materially harmed,
product releases have been delayed as a result of errors in third-party software
and we have incurred significant expenses fixing and investigating the cause
of
these errors.
Our
customers and systems integration partners may have the ability to alter
our
source code and resulting inappropriate alterations could adversely affect
the
performance of our products, cause injury to our reputation and increase
operating expenses.
Customers
and systems integration partners may have access to the computer source code
for
certain elements of our products and may alter the source code. Alteration
of
our source code may lead to implementation, operation, technical support
and
upgrade problems for our customers. This could adversely affect the market
acceptance of our products, and 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; and,
|
| |
•
|
Our
ability to anticipate and support new standards, especially Internet
and
enterprise Java standards.
|
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 and 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, including
patent
infringement claims, these claims could be costly and time-consuming to defend,
divert management’s attention, cause product delays and have an adverse effect
on our revenues and net income.
We
expect that software product developers and providers of software in markets
similar to our target markets will increasingly be subject to infringement
claims as the number of products and competitors in our industry grows and
the
functionality
of products overlap. 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.
In
particular, if we were sued for patent infringement by a patent holding company,
one which has acquired large numbers of patents solely for the purpose of
bringing suit against alleged infringers rather than practicing the patents,
it
may be costly to defend such suit. We have received a letter from one such
patent holding company alleging that our products may infringe their one
or more
of their patents. If any of our products were found to infringe such patent,
the
patent holder could seek an injunction to enjoin our use of the infringing
product. If we were not able to remove or replace the infringing portions
of
software with non-infringing software, and were no longer able to license
some
or all of our software products, such an injunction would have an extremely
detrimental effect on our business. If we were required to settle such claim,
it
could be extremely costly. A patent infringement claim could have a material
adverse effect on our business, operating results and financial condition.
The
application of percentage of completion and completed contract accounting
to our
business is complex and may result in delays in the reporting of our financial
results and revenue not being recognized as we expect.
Although
we attempt to use standardized license agreements designed to meet current
revenue recognition criteria under generally accepted accounting principles,
we
must often negotiate and revise terms and conditions of these standardized
agreements, particularly in multi-product transactions. At the time of entering
into a transaction, we assess whether any services included within the
arrangement require us to perform significant implementation or customization
essential to the functionality of our products. For contracts involving
significant implementation or customization essential to the functionality
of
our products, we recognize the license and professional consulting services
revenues using the percentage-of-completion method using labor hours incurred
as
the measure of progress towards completion. The application of the percentage
of
completion method of accounting is complex and involves judgments and estimates,
which may change significantly based on customer requirements. This complexity
combined with changing customer requirements could result in delays in the
proper determination of our percentage of completion estimates and revenue
not
being recognized as we expect.
We
have also entered into co-development projects with our customers to jointly
develop new vertical applications, often over the course of a year or longer.
In
such cases we may only be able to recognize revenue upon delivery of the
new
application. The accounting treatment for these co-development projects could
result in delays in the recognition of revenue. The failure to successfully
complete these projects to the satisfaction of the customer could have a
material adverse effect on our business, operating results and financial
condition.
Changes
in our revenue recognition model could result in short term declines to revenue.
Historically,
a high percentage of license revenues have been accounted for on the percentage
of completion method of accounting or recognized as revenue upon the delivery
of
product. If we were to modify future contracts with customers, or to enter
into
new types of transactions accounted for on a subscription or term basis,
revenues might be recognized over a longer period of time. The impact of
this
change would make revenue recognition more predictable over the long term,
but
it might also result in a short term reduction of revenue as the new
transactions took effect.
We
may continue to encounter unexpected delays in implementing the requirements
relating to internal control over financial reporting and we expect to incur
additional expenses and diversion of management’s time as a result of performing
future system and process evaluation, testing and remediation required to
comply
with future management assessment and auditor attestation requirements.
In
connection with the Company’s compliance with Section 404 under SOX for the
fiscal years ended September 30, 2006 and 2005, we identified certain
material weaknesses. In future periods, we will continue to document our
internal controls to allow management to report on, and our independent
registered public accounting firm to attest to, our internal control, over
financial reporting as required by Section 404 of SOX, within the time
frame required by Section 404. We may encounter unexpected delays in
implementing those requirements, therefore, we cannot be certain about the
timing of the completion of our evaluation, testing and remediation actions
or
the impact that these activities will have on our operations. We also expect
to
incur additional expenses and diversion of management’s time as a result of
performing the system and process evaluation, testing and remediation required
to comply with management’s assessment and auditor attestation requirements. If
we are not able to timely comply with the requirements set forth in
Section 404 in future periods, we might be subject to sanctions or
investigation by the regulatory authorities. Any such action could adversely
affect our business or financial results.
On
August 8, 2006, we received a comment letter from the staff of the Division
of
Corporation Finance of the SEC. Additional questions were received in comment
letter dated October 27, 2006 and January 25, 2007. The comments from the
staff
were issued with respect to its review of our Form 10-K for the year ended
September 30, 2005, our Forms 10-Q for the quarterly periods ended December
31,
2005 and March 31, 2006 and Forms 8-K filed on February 9 and May 4, 2006.
The
staff’s letters included comments relating the application of, and disclosures
relating to, the percentage of completion method of accounting; the accounting
for post-contract customer support; the accounting for arrangements that
include
a subscription element; and the presentation of non-GAAP operating results
appearing in press releases.
On
August 17, 2006 and November 13, 2006, we responded to the staff’s comments and
included supplemental analyses and information requested by the staff. On
January 27, 2007, we received a third comment letter from the Division of
Corporation Finance of the SEC. In this most recent set of comments, the
staff
is requesting additional clarifications of our November 13, 2006 responses.
As
of the date of the filing of this Form 10-K, we are in the process of responding
to this latest set of comments.
Our
headquarters are located in offices that are approximately 25,000 square
feet in
Cupertino, California pursuant to an office lease expiring in December 2008.
We
also lease office space in Mahwah New Jersey and Bedford, New Hampshire.
Outside
of the United States, we have offices in the greater metropolitan areas of
London, Madrid, Amsterdam, Frankfurt and Munich. Subsequent to September
30,
2006, we relocated our London office, closed our French office, and believe
our
existing facilities meet our current needs and that we will be able to obtain
additional commercial space as needed.
Beginning
in July 2001, we and certain of our officers and directors (“Individuals”) were
named as defendants in a series of class action stockholder complaints filed
in
the United States District Court for the Southern District of New York, now
consolidated under the caption, “In re Chordiant Software, Inc. Initial Public
Offering Securities Litigation, Case No. 01-CV-6222”. In the amended
complaint, filed in April 2002, the plaintiffs allege that we, the Individuals,
and the underwriters of our initial public offering (“IPO”) violated section 11
of the Securities Act of 1933 and section 10(b) of the Exchange Act of 1934
based on allegations that the our registration statement and prospectus failed
to disclose material facts regarding the compensation to be received by,
and the
stock allocation practices of, our IPO underwriters. The complaint also contains
claims against the Individuals for control person liability under Securities
Act
section 15 and Exchange Act section 20. The plaintiffs seek unspecified monetary
damages and other relief. Similar complaints were filed in the same court
against hundreds of other public companies (“Issuers”) that conducted IPO’s of
their common stock in the late 1990s or in the year 2000 (collectively, the
“IPO
Lawsuits”).
In
August 2001, all of the IPO Lawsuits were consolidated for pretrial purposes
before United States Judge Shira Scheindlin of the Southern District of New
York. In July 2002, we joined in a global motion to dismiss the IPO Lawsuits
filed by all of the Issuers (among others). In October 2002, the Court entered
an order dismissing the Individuals from the IPO Cases without prejudice,
pursuant to an agreement tolling the statute of limitations with respect
to the
Individuals. 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 Individuals 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. In September 2003, in connection with the possible
settlement, those Individuals 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, Chordiant and
almost all of the other Issuers entered into a formal settlement agreement
with
the plaintiffs. On February 15, 2005, the Court issued a decision
certifying a class action for settlement purposes, and granting preliminary
approval of the settlement subject to modification of certain bar orders
contemplated by the settlement. On August 31, 2005, the Court reaffirmed
class certification and preliminary approval of the modified settlement in
a
comprehensive Order, and directed that Notice of the settlement be published
and
mailed to class members beginning November 15, 2005. On February 24,
2006, the Court dismissed litigation filed against certain underwriters in
connection with the claims to be assigned to the plaintiffs under the
settlement. On April 24, 2006, the Court held a Final Fairness Hearing to
determine whether to grant final approval of the settlement. On
December 5, 2006, the Second Circuit Court of Appeals vacated the
lower Court's earlier
decision certifying as class actions the six IPO Lawsuits designated
as "focus cases." The Court has ordered a stay of all proceedings in all
of the
IPO Lawsuits pending the outcome of Plaintiffs' rehearing petition to the
Second
Circuit. Accordingly, the
Court's decision on final approval of the settlement remains pending.
If
this settlement is not finalized as proposed, then this action may divert
the
efforts and attention of our management and, if determined adversely to us,
could have a material impact on our business, results of operations, financial
condition or cash flows.
On
August 1, 2006, a stockholder derivative complaint was filed in the United
States District Court for the Northern District of California by Jesse Brown
under the caption Brown v. Kelly, et al. Case No. C06-04671 JW (N.D.
Cal.). On September 13, 2006, a second stockholder derivative complaint
was filed in the United States District Court for the Northern District of
California by Louis Suba under the caption Suba v. Kelly et al., Case No.
C06-05603 JW (N.D. Cal.). Both complaints were brought purportedly on
behalf of the Company against certain current and former officers and
directors. On November 27, 2006, the court entered an
order consolidating these actions and requiring the plaintiffs to file
a consolidated complaint. The consolidated complaint was filed on January
11, 2007. The consolidated complaint alleges, among other things,
that the named officers and directors: (a) breached their fiduciary duties
as
they colluded with each other to backdate stock options, (b) violated section
10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder through their alleged actions, and (c) were
unjustly enriched by their receipt and retention of such stock options.
The Company's response to the complaint is due on February 28, 2007.
In
September 2006, the Company received a letter from Acacia Technologies Group,
a
patent holding company, suggesting that the Company may be infringing on
two
patents, designated by United States Patent Numbers 5,537,590 and 5,701,400,
which are held by one of their patent licensing and enforcement subsidiaries.
The Company is currently reviewing the validity of these patents and whether
the
Company’s products may infringe upon them. The Company has not formed a view of
whether the Company may have liability for infringement of these patents.
Any
related claims, whether or not they have 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 such patents, the patent
holder could seek an injunction to enjoin our use of the infringing product.
If
we were required to settle such a claim, it could have a material impact
on our
business, results of operations, financial condition or cash flows.
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. However,
litigation is subject to inherent uncertainties.
On
August 1, 2006, our Annual Meeting of Stockholders was held in Cupertino,
California. Of the 79,616,230 shares outstanding and entitled to vote as
of the
record date of June 15, 2006, 70,010,495 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 two Class III directors to hold office until
the 2009 Annual Meeting of Stockholders or until such time as their respective
successors are elected and qualified and the election to re-designate one
Class
III director to Class II to hold office for the remaining Class II term until
the 2008 Annual Meeting of Stockholders and (ii) the ratification of the
selection of BDO Seidman, LLP as our independent registered public accounting
firm for our fiscal year ending September 30, 2006.
The
following nominees were elected as class III directors, each to hold office
until the 2009 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
|
|
|
|
Samual
T. Spadafora (1)
|
|
66,311,843
|
|
3,698,652
|
|
0
|
|
|
|
William
J. Raduchel
|
|
67,926,871
|
|
2,083,624
|
|
0
|
|
| |
|
|
|
|
|
|
|
|
| |
(1)
On November 30, 2006 Mr. Spadafora resigned from the Board of
Directors
|
The
following nominee was re-designated from a class III director to a class
II to
hold office for the remaining class II term until the 2008 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
|
|
|
|
David
A. Weymouth
|
|
67,833,889
|
|
2,176,606
|
|
0
|
|
In
addition to the directors elected above, David R. Springett, Steven R.
Springsteel, Charles E. Hoffman and Richard G. Stevens continued to serve
as
directors after the annual meeting.
The
selection of BDO Seidman, LLP as our independent registered public accounting
firm for our fiscal year ended September 30, 2006 was ratified by the vote
set forth below:
|
|
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
|
|
69,859,087
|
|
133,075
|
|
18,333
|
|
0
|
|
The
Company has changed the date of the 2007 annual meeting of stockholders which
was previously scheduled to be held on or about March 1, 2007. The Company
expects to hold the 2007 annual meeting of stockholders on April 24,
2007.
Our
common stock is traded on the Nasdaq National Market under the symbol “CHRD.”
The following table shows, for the periods indicated, the high and low per
share
sales prices of our common stock, as reported by the NASDAQ National Market.
The
prices appearing in the tables below reflect over-the-counter market quotations,
which reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual
transactions.
|
|
|
High
|
|
Low
|
|
|
|
Year
Ended September 30, 2006
|
|
|
|
|
|
|
|
|
First
Quarter (October 1 - December 31)
|
$
|
3.00
|
|
$
|
2.49
|
|
|
|
Second
Quarter (January 1 - March 31)
|
$
|
3.53
|
|
$
|
2.56
|
|
|
|
Third
Quarter (April 1 - June 30)
|
$
|
3.60
|
|
$
|
2.86
|
|
|
|
Fourth
Quarter (July 1 - September 30)
|
$
|
3.20
|
|
$
|
2.29
|
|
|
|
Year
Ended September 30, 2005
|
|
|
|
|
|
|
|
|
First
Quarter (October 1 - December 31)
|
$
|
3.50
|
|
$
|
1.78
|
|
|
|
Second
Quarter (January 1 - March 31)
|
$
|
2.35
|
|
$
|
1.64
|
|
|
|
Third
Quarter (April 1 - June 30)
|
$
|
2.16
|
|
$
|
1.38
|
|
|
|
Fourth
Quarter (July 1 - September 30)
|
$
|
3.00
|
|
$
|
2.15
|
|
As
of January 31, 2007, there were approximately 246 holders of record of our
common stock who together held approximately 3,804,797 shares of our common
stock. The remainder of our shares outstanding is held by brokers and other
institutions on behalf of stockholders. We have never paid or declared any
cash
dividends. We currently expect to retain working capital for use in the
operation and expansion of our business and therefore do not anticipate paying
any cash dividends.
In
response to the SEC’s adoption of Rule 10b5-1 under the Securities Exchange Act
of 1934, we approved amendments to our insider trading policy on July 20,
2001 to permit our directors, executive officers and certain key employees
to
enter into trading plans or arrangements for systematic trading in our
securities. We have been advised that certain of our directors, officers
and key
employees have entered into trading plans for selling shares in our securities.
As of September 30, 2006, the directors and executive officers who have
entered into trading plans include Samuel T. Spadafora who has since retired
as
an executive officer and resigned as a member of the Board and James D. St.
Jean. We anticipate that, as permitted by Rule 10b5-1 and our insider trading
policy, some or all of our directors, executive officers and employees may
establish trading plans at some date in the future.
Securities
Authorized for Issuance Under Equity Compensation Plans
For
information relating to securities authorized for issuance under our equity
compensation plans, please refer to the information under the heading, “Employee
Benefit Plans” in Item 8, Footnote 13 of this Form 10-K.
Recent
Sales of Unregistered Securities
On
August 12, 2002, we entered into an agreement with IBM to market our
products and services to customers. We issued a fully vested and exercisable
warrant to purchase up to 0.2 million shares of common stock. The exercise
price was set at $2.25 per share. The warrant was valued at $0.1 million
based
on the Black-Scholes model using the following assumptions: volatility: 105%,
risk-free interest rate: 3.22% and fair market value of our common stock
at the
grant date: $0.84. The value of the warrant was recorded as a prepaid expense
and was offset against revenue during 2003 upon the completion of an IBM
revenue
generating transaction. On September 20, 2006, IBM exercised the warrants
in a
cashless transaction resulting in 48,075 of Chordiant shares being issued
to
IBM.
The
shares were issued under the exemption from registration under the Securities
Act of 1933 (the”Act”) set forth in Section 4(2) of the Act
The
consolidated balance sheet as of September 30, 2005 and the consolidated
statements of operations for the fiscal year ended September 30, 2005 and
the
nine months ended September 30, 2004 have been restated as set forth in this
2006 Form 10-K. We derived the selected data for the nine months ended September
30, 2004 and years ended September 30, 2005 and 2006 from our audited restated
consolidated financial statements and notes thereto appearing in this Form
10-K.
The consolidated statements of operations data for the years ended December
31,
2002 and 2003 and the consolidated balance sheet date as of September 30,
2004,
December 31, 2003 and 2002 have been restated to conform to the restated
consolidated financial statements included in this Form 10-K and are presented
herein on an unaudited basis. The data for the consolidated financial statements
for the nine months ended September 30, 2004 and years ended December 31,
2003
and 2002 have been restated to reflect the impact of stock-based compensation
adjustments described below, but such restated data have not been audited
and
are derived from the books and records of the Company.
The diluted net loss per share computation excludes potentially dilutive
shares
of common stock (restricted stock, options and warrants to purchase common
stock), since their effect would be anti-dilutive. See the notes to our
Consolidated Financial Statements for a detailed explanation of the
determination of the shares used to compute basic and diluted net loss per
share. The
information set forth below is not necessarily indicative of results of future
operations, and should be read in conjunction with Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the Consolidated Financial Statements and related notes thereto included
in Item
8 of this Form 10-K to fully understand factors that may affect the
comparability of the information presented below. The information presented
in
the following tables has been adjusted to reflect the restatement of the
Company’s financial results, which is more fully described in the “Explanatory
Note” preceding Part 1, Item 1 and in Note 3 “Restatement of Previously Issued
Consolidated Financial Statements” to our Consolidated Financial Statements in
this Form 10-K.
The
Company has not amended its previously-filed Annual Reports on Form 10-K or
Quarterly Reports on Form 10-Q for the periods affected by this
restatement. The financial information that has been previously filed or
otherwise reported for these periods is superseded by the information in
this
Annual Report on Form 10-K, and the financial statements and related
financial information contained in such previously-filed reports should no
longer be relied upon.
| |
Years
Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
Years
Ended December 31,
|
| |
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
|
2002
|
|
| |
|
|
|
|
|
Restated(1)
|
|
|
|
Restated(1)
|
|
|
|
Restated(1)(2)
|
|
|
|
Restated(1)(2)
|
|
| |
(amounts
in thousands, except per share data)
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
97,536
|
|
|
$
|
83,725
|
|
|
$
|
61,023
|
|
|
$
|
68,266
|
|
|
$
|
73,851
|
|
|
Net
loss
|
|
(16,001
|
)
|
|
|
(19,865
|
)
|
|
|
(1,371
|
)
|
|
|
(17,932
|
)
|
|
|
(35,036
|
)
|
|
Net
loss per share—basic and diluted
|
$
|
(0.21
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.64
|
)
|
|
Weighted
average shares used in computing basic and diluted net loss per
share
|
|
77,682
|
|
|
|
74,449
|
|
|
|
69,761
|
|
|
|
59,353
|
|
|
|
55,055
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Years
Ended September 30,
|
|
Years
Ended December 31,
|
| |
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
|
2002
|
|
| |
|
|
|
|
|
Restated(1)
|
|
|
|
Restated(1)
|
|
|
|
Restated(1)(2)
|
|
|
|
Restated(1)(2)
|
|
| |
(amounts
in thousands, except per share data)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
45,278
|
|
|
$
|
38,546
|
|
|
$
|
55,748
|
|
|
$
|
36,218
|
|
|
$
|
30,731
|
|
|
Working
capital
|
|
22,323
|
|
|
|
23,733
|
|
|
|
46,296
|
|
|
|
19,480
|
|
|
|
20,569
|
|
|
Total
assets
|
|
111,503
|
|
|
|
107,250
|
|
|
|
115,340
|
|
|
|
83,811
|
|
|
|
90,759
|
|
|
Current
and long term portion of capital lease obligations
|
|
95
|
|
|
|
309
|
|
|
|
508
|
|
|
|
—
|
|
|
|
—
|
|
|
Short-term
and long-term borrowings
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,250
|
|
|
Short-term
and long-term deferred revenue
|
|
29,505
|
|
|
|
26,197
|
|
|
|
20,581
|
|
|
|
18,396
|
|
|
|
18,594
|
|
|
Stockholders’
equity
|
$
|
57,225
|
|
|
$
|
65,157
|
|
|
$
|
75,912
|
|
|
$
|
48,350
|
|
|
$
|
50,811
|
|
(1)
See Note 3 - “Restatement of Previously Issued Consolidated Financial
Statements” to our Consolidated Financial Statements for a discussion of these
adjustments
| |
Years
Ended September 30,
|
|
Nine
Months Ended September 30
|
| |
2005
(1)
|
|
2004
(1)
|
| |
|
As
previously
reported
|
|
|
|
Adjustment
|
|
|
|
Restated
|
|
|
|
As
previously
reported
|
|
|
|
Adjustment
|
|
|
|
Restated
|
|
| |
(amounts
in thousands, except per share data)
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
83,725
|
|
|
$
|
—
|
|
|
$
|
83,725
|
|
|
$
|
61,023
|
|
|
$
|
—
|
|
|
$
|
61,023
|
|
|
Net
loss
|
|
(19,540
|
)
|
|
|
(325
|
)
|
|
|
(19,865
|
)
|
|
|
(443
|
)
|
|
|
(928
|
)
|
|
|
(1,371
|
)
|
|
Net
loss per share—basic and diluted
|
$
|
(0.26
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
Weighted
average shares used in computing basic and diluted net loss per
share
|
|
74,449
|
|
|
|
—
|
|
|
|
74,449
|
|
|
|
69,761
|
|
|
|
—
|
|
|
|
69,761
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
September
30,
|
| |
2005
(1)
|
|
2004
(1)
|
| |
|
As
previously
reported
|
|
|
|
Adjustment
|
|
|
|
Restated
|
|
|
|
As
previously
reported
|
|
|
|
Adjustment
|
|
|
|
Restated
|
|
| |
(amounts
in thousands, except per share data)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
38,546
|
|
|
$
|
—
|
|
|
$
|
38,546
|
|
|
$
|
55,748
|
|
|
$
|
—
|
|
|
$
|
55,748
|
|
|
Working
capital
|
|
24,133
|
|
|
|
(400
|
)
|
|
|
23,733
|
|
|
|
46,560
|
|
|
|
(264
|
)
|
|
|
46,296
|
|
|
Total
assets
|
|
107,250
|
|
|
|
—
|
|
|
|
107,250
|
|
|
|
115,340
|
|
|
|
—
|
|
|
|
115,340
|
|
|
Current
and long term portion of capital lease obligations
|
|
309
|
|
|
|
—
|
|
|
|
309
|
|
|
|
508
|
|
|
|
—
|
|
|
|
508
|
|
|
Short-term
and long-term borrowings
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Short-term
and long-term deferred revenue
|
|
26,197
|
|
|
|
—
|
|
|
|
26,197
|
|
|
|
20,581
|
|
|
|
—
|
|
|
|
20,581
|
|
|
Stockholders’
equity
|
$
|
65,557
|
|
|
$
|
(400
|
)
|
|
$
|
65,157
|
|
|
$
|
76,176
|
|
|
$
|
(264
|
)
|
|
$
|
75,912
|
|
(1)
See Note 3 - “Restatement of Previously Issued Consolidated Financial
Statements” to our Consolidated Financial Statements for a discussion of these
adjustments.
| |
|
Years
ended December 31,
|
| |
|
2003
(1) (2)
|
|
2002
(1) (2)
|
| |
|
|
As
previously
reported
|
|
|
|
Adjustment
|
|
|
|
Restated
|
|
|
|
As
previously
reported
|
|
|
|
Adjustment
|
|
|
|
Restated
|
|
| |
|
(amounts
in thousands, except per share data)
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
68,266
|
|
|
$
|
—
|
|
|
$
|
68,266
|
|
|
$
|
73,851
|
|
|
$
|
—
|
|
|
$
|
73,851
|
|
|
Net
loss
|
|
|
(16,403
|
)
|
|
|
(1,529
|
)
|
|
|
(17,932
|
)
|
|
|
(32,321
|
)
|
|
|
(2,715
|
)
|
|
|
(35,036
|
)
|
|
Net
loss per share—basic and diluted
|
|
$
|
(0.28
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.64
|
)
|
|
Weighted
average shares used in computing basic and diluted net loss per
share
|
|
|
59,353
|
|
|
|
—
|
|
|
|
59,353
|
|
|
|
55,055
|
|
|
|
—
|
|
|
|
55,055
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2003
(1) (2)
|
|
2002
(1) (2)
|
| |
|
|
As
previously
reported
|
|
|
|
Adjustment
|
|
|
|
Restated
|
|
|
|
As
previously
reported
|
|
|
|
Adjustment
|
|
|
|
Restated
|
|
| |
|
(amounts
in thousands, except per share data)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
36,218
|
|
|
$
|
—
|
|
|
$
|
36,218
|
|
|
$
|
30,731
|
|
|
$
|
—
|
|
|
$
|
30,731
|
|
|
Working
capital
|
|
|
19,576
|
|
|
|
(96
|
)
|
|
|
19,480
|
|
|
|
20,569
|
|
|
|
—
|
|
|
|
20,569
|
|
|
Total
assets
|
|
|
83,811
|
|
|
|
—
|
|
|
|
83,811
|
|
|
|
90,759
|
|
|
|
—
|
|
|
|
90,759
|
|
|
Short-term
and long-term borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,250
|
|
|
|
—
|
|
|
|
1,250
|
|
|
Short-term
and long-term deferred revenue
|
|
|
18,396
|
|
|
|
—
|
|
|
|
18,396
|
|
|
|
18,594
|
|
|
|
—
|
|
|
|
18,594
|
|
|
Stockholders’
equity
|
|
$
|
48,446
|
|
|
$
|
(96
|
)
|
|
$
|
48,350
|
|
|
$
|
50,811
|
|
|
$
|
—
|
|
|
$
|
50,811
|
|
| (1) |
See
Note 3 - “Restatement of Previously Issued Consolidated Financial
Statements” to our Consolidated Financial Statements for a discussion of
these adjustments.
|
| (2) |
The
unaudited consolidated statements of operations data for the fiscal
years
ended December 31, 2003 and 2002, and the unaudited consolidated
balance
sheet data as of September 30, 2004, December 31, 2003 and 2002 have
been
revised to reflect adjustments related to the restatement described
below
under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Restatement of Consolidated Financial Statements”
and Note 3 of the Notes to the Consolidated Financial Statements.
The
cumulative after tax impact of all restatement adjustments related
to
years prior to 2002 totaled $2.6 million and these amounts are reflected
in the restated stockholders’ equity at December 31, 2001. The impact on
previously reported net loss of these adjustments was a decrease
of $2.1
million and $0.5 million or 4.9% and 1.3% for the fiscal years 2001
and
2000, respectively. The impact on previously reported basic and diluted
loss per share of these adjustments was an increase in loss per share
of
($0.04) and ($0.01) for fiscal years 2001 and 2000,
respectively
|
No
dividends have been paid or declared since our inception. Effective
January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 142 (“SFAS 142”), “Goodwill and
Other Intangible Assets,” and ceased amortizing goodwill balances. Effective
October 1, 2005, the Company adopted SFAS No. 123R as more fully described
in
Note 1 to the Consolidated Financial Statements contained in this Annual
Report.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe
Harbor
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
in
Item 1 of this Form 10-K under the caption “Risk Factors” and those
discussed elsewhere in this Annual Report and in our other filings with the
Securities and Exchange Commission. Chordiant undertakes no obligation to
update
any forward-looking statement to reflect events after the date of this report.
Restatement
of Consolidated Financial Statements and Related
Proceedings
The
following information has been adjusted to reflect the restatement of the
Company’s financial results, which is more fully described in the “Explanatory
Note” immediately preceding Part I, Item 1 and in Note 3, “Restatement of
Consolidated Financial Statements” in Notes to Consolidated Financial Statements
of this Form 10-K. The impact of the restatements on the Company’s results of
operations resulted in an increase in stock-based compensation expenses and
associated payroll tax expense of $2.1 million, $2.7 million, $1.5 million
for
the twelve months ended December 31, 2001, 2002, 2003, respectively, $0.9
million for the nine months ended September 30, 2004, $0.3 million for the
twelve months ended 2005, and $0.2 million for the twelve months ended 2006.
Executive
Overview
As
an enterprise software vendor, we generate substantially all of our revenues
from the financial services, telecommunications, and retail 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 several 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 declined 19% in fiscal 2003.
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 our fiscal year 2006 and appears to have had a favorable
impact, specifically in information technology spending. For the year ended
September 30, 2006 and 2005 and the nine months ended September 30, 2004,
we
were able to grow total revenues on a year over year basis.
Software
Industry Consolidation and Possible Increased Competition
The
software industry in general is continuing to undergo a period of consolidation,
and there has been recent consolidation in sectors of the software industry
in
which we operate. During 2006, Oracle completed the acquisition of i-flex
Solutions Ltd., a banking software maker headquartered in Mumbai, India,
acquired Siebel Systems, Inc., a maker of customer relationship management
software products and acquired Portal Software, a provider of billing and
revenue management solutions for the communications and media industry. Also,
during 2006, IBM acquired Webify, a provider of middleware to companies
primarily in the insurance industry.
In
September 2005, IBM acquired DWL, a provider of middleware to companies in
the
banking, insurance, retail and telecommunications industries. In September
2005,
SSA Global Technologies acquired Epiphany, Inc., a maker of customer
relationship management software products. While we do not believe that these
acquired companies are direct competitors of Chordiant, the acquisition activity
of these large corporations of software providers to the industries we target
may indicate that we will face increased competition from significantly larger
and more established entities in the future.
Stock-based
Compensation Expense
On
October 1, 2005, we adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to our employees and directors related to
employee stock options (“employee stock purchases”) based on estimated fair
values. Stock-based compensation expense recognized under SFAS 123(R) for
the
year ended September 30, 2006 was $4.7 million which consisted of stock-based
compensation expense related to employee stock options of $2.7 million and
stock-based compensation expense related to restricted stock awards of $2.0
million.
Upon
adoption of SFAS 123(R), we began estimating the value of employee stock
options
on the date of grant using the Black-Scholes model. Prior to the adoption
of
SFAS 123(R), the value of each employee stock option was estimated on the
date
of grant using the Black-Scholes model for the purpose of the pro forma
financial information in accordance with SFAS 123. The determination of fair
value of share-based payment awards on the date of grant using an option-pricing
model is affected by our stock price as well as assumptions regarding a number
of highly complex and subjective variables. These variables include, but
are not
limited to the expected stock price volatility over the term of the awards,
and
actual and projected employee stock option exercise behaviors. The use of
a
Black-Scholes model requires the use of extensive actual employee exercise
behavior data and the use of a number of complex assumptions including expected
volatility, risk-free interest rates, expected lives and expected dividend
yields. The weighted-average estimated value of employee stock options granted
during the twelve months ended September 30, 2006 was $1.99 per share using
the
Black-Scholes model with the following weighted-average assumptions:
| |
|
For
the twelve months ended September 30,
|
|
For
the nine
months
ended September 30,
|
|
| |
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
| |
Expected
lives in years
|
|
3.9
|
|
|
|
2.6
|
|
|
|
2.6
|
|
|
| |
Risk
free interest rates
|
|
4.8
|
%
|
|
|
3.3
|
%
|
|
|
2.8
|
%
|
|
| |
Volatility
|
|
88
|
%
|
|
|
98
|
%
|
|
|
85
|
%
|
|
| |
Dividend
yield
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
The
fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model with the weighted average assumptions
for
volatility, expected term and risk-free rate. With the adoption of
SFAS 123(R) on October 1, 2005, we used the trinomial lattice
valuation technique to determine the assumptions used in the Black-Scholes
model. The trinomial lattice valuation technique was used to provide a better
estimate of fair values and meet the fair value objectives of SFAS 123( R).
The expected term of options granted is derived from historical data on employee
exercises and post-vesting employment termination behavior. The risk-free
interest rate is based on the U.S. Treasury rates in effect during the
corresponding period of grant. The expected volatility rate is based on the
historical volatility of our stock price.
As
stock-based compensation expense recognized in the consolidated statement
of
operations for fiscal year 2006 is based on awards ultimately expected to
vest,
it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience.
If
factors change and we employ different assumptions in the application of
SFAS
123(R) in future periods, the compensation expense that we record under SFAS
123(R) may differ significantly from what we have recorded in the current
period. The estimated value of a stock option is most sensitive to the
volatility assumption. Based on the September 30, 2006 variables, it is
estimated that a change of 10% in either the volatility, expected life or
interest rate assumption would result in a corresponding 7%, 4% or 1% change
in
the estimated value of the option being valued using the Black-Scholes
model.
Financial
Trends
Backlog.
An increasingly material portion of our revenues has been derived from large
orders, as major customers deployed our products. As of September 30, 2006
and 2005, we had approximately $36 million and $33 million, respectively,
in
backlog, which we define as contractual commitments by our customers through
purchase orders or contracts. Backlog is comprised of:
• software
license orders which have not been accepted by customers or have not otherwise
met all of the required criteria for revenue recognition. This component
includes both unbilled amounts plus billed amounts classified as deferred
revenue;
• deferred
revenue from customer support contracts;
• consulting
service orders representing the unbilled remaining balances of consulting
contracts not yet completed or delivered, plus deferred consulting revenue;
and
• education
orders for services not yet completed or delivered.
Backlog
is not necessarily indicative of revenues to be recognized in a specified
future
period and except for items included in non-current deferred revenue, backlog
is
generally recognizable as revenue within a twelve-month period. There are
many
factors that would impact Chordiant’s conversion of backlog as recognizable
revenue, such as Chordiant’s progress in completing projects for its customers,
Chordiant’s customers meeting anticipated schedules for customer-dependent
deliverables and customers increasing the scope or duration of a contract
causing license revenue to be deferred for a longer period of time.
Chordiant
provides no assurances that any portion of its backlog will be recognized
as
revenue during any fiscal year or at all or that its backlog will be recognized
as revenues in any given period. In addition, it is possible that customers
from
whom we expect to derive revenue from backlog will default and as a result
we
may not be able to recognize expected revenue from backlog.
Product
Development. Chordiant
has entered into several product co-development arrangements with its customers.
These projects relate to software products that were in various stages of
development prior to the consummation of the individual arrangements. Upon
the
completion of the software, the Company intends to license these products
to
other customers. License revenue relating to these arrangements will be deferred
until the delivery of the final products, provided all other requirements
of SOP
97-2 are met. Expenses associated with these co-development arrangements
are
expensed as incurred as they are considered to be research and development
costs
that do not qualify for capitalization or deferral. The accounting for these
transactions differs from the percentage of completion method or completed
contract method, as expenses are recognized in the period incurred and no
revenue is recognized until the final product is delivered. As of September
30,
2006, license fees aggregating approximately $2.6 million associated with
these
arrangements had been deferred. We expect that research and development costs
will increase as the volume of co-development activities increase.
Gross
margins.
Management focuses on license and service gross margin in evaluating our
financial condition and operating performance. Gross margins on license revenues
were 96%, 97%, and 94% for twelve months ended September 30, 2006, 2005,
and
2004, respectively. The changes in gross margins are primarily related to
the
amortization expense associated with capitalized software development costs
pertaining to a banking product. We expect license gross margin on current
products to range from 95% to 97% in the foreseeable future. The margin will
fluctuate with the mix of products sold. Historically, the enterprise solution
products have higher associated third party royalty expense than the marketing
solution products and decision management products. The banking product that
was
completed during the year ended September 30, 2005 also has higher
royalties than other products.
Gross
margins on service revenues were 46%, 42%, and 40% for the twelve months
ended
September 30, 2006, 2005, and 2004, respectively. The increase in gross margins
from 2005 and 2004 is primarily due to improved service utilization rates
in the
U.S. In addition, margins increased as a result of the company switching
to
lower cost third party service providers and an increase in higher margin
post-contract customer support revenues.
Service
revenues. Service
revenues as a percentage of total revenues were 58%, 62%, and 59% for the
twelve
months ended September 30, 2006, 2005, and 2004, respectively. We expect
that
service revenues will represent between 50% and 60% of our total revenues
in the
foreseeable future.
Revenues
from international customers versus North America revenues.
For all periods presented, revenues were principally derived from customer
accounts in North America and Europe. For the twelve months ended September
30,
2006, 2005, and 2004, international revenues were $37.5 million, $42.0 million,
and $45.3 million or approximately 38%, 50%, and 56% of our total revenues,
respectively. We believe international revenues will continue to represent
a
significant portion of our total revenues in future periods. International
revenues were negatively impacted for the fiscal year ended September 30,
2006,
as compared to fiscal year ended September 30, 2005, as both the British
Pound
and the Euro decreased in average value by less than 1% and approximately
3%,
respectively, as compared to the U.S. Dollar.
For
the twelve months ended September 30, 2006, 2005, and 2004, North America
revenues were $60.0 million, $41.7 million, and $30.2 million or approximately
62%, 50%, and 44%% of our total revenues, respectively. As the U.S. economy
has
strengthened, we have seen an increase in North America revenues. Large
customers have become more willing to invest in new enterprise infrastructure
projects. We believe North America revenues will continue to represent an
increasing portion of our total revenues in the future.
Acquisition
of KiQ Limited.
On December 21, 2004, we acquired KiQ Limited, a privately-held United
Kingdom software company with branch offices in the Netherlands (“KiQ”),
specializing in the development and sales of decision management systems.
The
year ended September 30, 2005 includes the revenue and expense of KiQ from
the acquisition date, December 21, 2004, through the end of the fiscal year,
September 20, 2005. The year ended September 30, 2006 includes the revenues
and
expenses of KiQ for the entire fiscal year. The acquisition resulted in an
increase to our headcount of approximately 20 employees as of the acquisition
date. The majority of these individuals are in the Cost of Service and Research
and Development areas, accordingly personnel costs are now higher in these
categories for the years ended September 30, 2005 and 2006. KiQ operations
have been integrated into the financial operations and the decision management
products are actively being marketed to customers across all regions.
Costs
related to compliance with the Sarbanes-Oxley Act of 2002. Significant
professional services are included in general and administrative costs relating
with efforts to comply with the Sarbanes-Oxley Act of 2002. For the year
ended
September 30, 2006 and 2005, these costs were $1.8 million, and $4.5 million,
respectively. We expect these costs to continue for the year ended
September 30, 2007. While these costs are expected to decline as compared
to the costs incurred for the year ended September 30, 2006, the level and
timing of the decline is uncertain.
Costs
related to stock option investigation. Significant
professional services are included in general and administrative costs
associated with the Company’s stock option investigation which is more fully
described in the “Explanatory
Note” immediately preceding Part I, Item 1 and in Note 3, “Restatement of
Previously Issued Consolidated Financial Statements” in Notes to Consolidated
Financial Statements of this Form 10-K. For
the year ended September 30, 2006, these costs were $1.2 million. We expect
these costs to continue through the first half of fiscal year 2007. In the
first
quarter of fiscal 2007, we incurred aggregate costs of $1.0
million.
Reduction
in workforce. In
October 2006, the Company initiated a restructuring plan intended to align
its
resources and cost structure with expected future revenues. The restructuring
plan included a balancing of services resources worldwide, an elimination
of
duplicative functions internationally, and a shift in the U.S. field
organization toward a focus on domain-based sales and pre-sales
teams.
The
restructuring plan included an immediate reduction in positions of slightly
more
than ten percent of the Company's workforce, consolidation of European
facilities, and the closure of our French office. A majority of the positions
eliminated were in Europe. The plan was committed to on October 24, 2006,
and
employees were begun to be notified on October 25, 2006.
The
Company estimates that it will record pre-tax cash restructuring charges,
in the
first quarter of fiscal year 2007 of approximately $1.9 to $2.1 million for
severance costs, between $4.0 million to $4.8 million for exiting excess
facilities, and $0.1 million for other charges. The facilities are subject
to
operating leases expiring thru 2010. The Company anticipates that between
$5.2
million to $6.2 million of the charge will result in cash expenditures of
which
the majority will be severance paid in cash during the first quarter of fiscal
year 2007.
In
July 2005, we undertook an approximate 10% reduction in our workforce. In
connection with this action, we incurred a one-time cash charge of approximately
$1.0 million in the fourth quarter ended September 30, 2005 for severance
benefits.
Past
results may not be indicative of future performance. We
believe that period-to-period comparisons of our operating results should
not be
relied upon as indicative of future performance. Our prospects must be
considered given the risks, expenses and difficulties frequently encountered
by
companies in 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.
Critical
Accounting Estimates
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 the estimates, including those related to
our
allowance for doubtful accounts, valuation of stock-based compensation,
valuation of goodwill and intangible assets, valuation of deferred tax assets,
restructuring costs, contingencies, vendor specific objective evidence (“VSOE”)
of fair value in multiple element arrangements and the estimates associated
with
the percentage-of-completion method of accounting for certain of our revenue
contracts. We base our estimates on historical experience and on various
other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or
conditions.
We
believe the following critical accounting judgments and estimates are used
in
the preparation of our consolidated financial statements:
• Revenue
recognition, including estimating the total estimated time required to complete
sales arrangements involving significant implementation or customization
essential to the functionality of our products;
• Estimating
valuation allowances and accrued liabilities, specifically the allowance
for
doubtful accounts, and assessment of the probability of the outcome of our
current litigation;
• Stock-based
compensation expense;
• Accounting
for income taxes;
• Valuation
of long-lived and intangible assets and goodwill;
• Restructuring
costs; and
• Determining
functional currencies for the purposes of consolidating our international
operations.
Revenue
recognition. We
derive revenues from licenses of our software and related services, which
include assistance in implementation, customization and integration,
post-contract customer support, training and consulting. 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 increased operating losses. The
accounting rules related to revenue recognition are complex and are affected
by
interpretation of the rules and an understanding of industry practices, both
of
which are subject to change. Consequently, the revenue recognition accounting
rules require management to make significant estimates based on judgments.
Software
license revenue is recognized in accordance with Statement of Position
No. 97-2 “Software Revenue Recognition,” as amended by Statement of
Position No. 98-9 “Software Revenue Recognition with Respect to Certain
Arrangements” (collectively “SOP 97-2”).
For
arrangements with multiple elements, we recognize revenue for services and
post-contract customer support based upon 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.
The VSOE of fair value for annual post-contract customer support is generally
established with the contractual future renewal rates included in the contracts
when the renewal rate is substantive and consistent with the fees when support
services are sold separately. When contracts contain multiple elements and
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 97-2. In multiple element transactions where VSOE is not
established for an undelivered element, we recognize revenue upon the
establishment of VSOE for that element or when the element is delivered.
At
the time we enter into a transaction, we assess whether any services included
within the arrangement require us to perform significant implementation or
customization essential to the functionality of our products.
For
contracts for products that do not involve significant implementation or
customization essential to the product functionality, we recognize license
revenues when there is persuasive evidence of an arrangement, the fee is
fixed
or determinable, collection of the fee is probable and delivery has occurred
as
prescribed by SOP No. 97-2.
For
contracts that involve significant implementation or customization essential
to
the functionality of our products, we recognize the license and professional
consulting services revenue using either the percentage-of-completion method
or
the completed contract method as prescribed by Statement of Position
No. 81-1, “Accounting for Performance of Construction-Type and Certain
Product-Type Contracts” (“SOP 81-1”).
The
percentage-of-completion method is applied when we have the ability to make
reasonable dependable estimates of the total effort required for completion
using labor hours incurred as the measure of progress towards completion.
The
progress toward completion is measured based on the “go-live” date. We define
the “go-live” date as the date the essential product functionality has been
delivered or the application enters into a production environment or the
point
at which no significant additional Chordiant supplied professional service
resources are required. Estimates are subject to revisions as the contract
progresses to completion. We account for the changes as changes in accounting
estimates when the information becomes known. Information impacting estimates
obtained after the balance sheet date but before the issuance of the financial
statements is used to update the estimates. Provisions for estimated contract
losses, if any, are recognized in the period in which the loss becomes
probable
and can be reasonably estimated. When we sell additional licenses related
to the
original licensing agreement, revenue is recognized upon delivery if the
project
has reached the go-live date, or if the project has not reached the go-live
date, revenue is recognized under the percentage-of-completion method. We
classify revenues from these arrangements as license and service revenues
based
upon the estimated fair value of each element using the residual
method.
The
completed contract method is applied when we are unable to obtain reasonable
dependable estimates of the total effort required for completion. Under the
completed contract method, all revenue and related costs of revenue are deferred
and recognized upon completion.
For
product co-development arrangements relating to software products in development
prior to the consummation of the individual arrangements, where the Company
retains the intellectual property being developed, and intends to sell the
resulting products to other customers, license revenue is deferred until
the
delivery of the final product, provided all other requirements of SOP 97-2
are met. Expenses associated with these co-development arrangements are
accounted for under SFAS 86 and are normally expensed as incurred as they
are
considered to be research and development costs that do not qualify for
capitalization or deferral.
Revenue
from subscription or term license agreements, which include software, rights
to
unspecified future products and maintenance, is recognized ratably over the
term
of the subscription period. Revenue from subscription or term license
agreements, which include software, but exclude rights to unspecified future
products or maintenance, is recognized upon delivery of the software if all
conditions of recognizing revenue have been met including that the related
agreement is non-cancelable, non-refundable and provided on an unsupported
basis.
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 subscription period.
Revenues
generated from fees charged to customers for providing transaction processing
are recognized as revenue in the same period as the related transactions
occur.
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 on an hourly or daily basis for time and material contracts. For
consulting services arrangements with a fixed fee, we recognize revenue on
the
proportional performance method.
For
all sales we use either a signed license agreement or a binding purchase
order
where we have a master license agreement as evidence of an arrangement. Sales
through our third party systems integrators are evidenced by a master agreement
governing the relationship together with binding purchase orders or order
forms
on a transaction-by-transaction basis. Revenues from reseller arrangements
are
recognized on the “sell-through” method, when the reseller reports to us the
sale of our software products to end-users. Our agreements with customers
and
resellers do not contain product return rights.
We
assess collectibility based on a number of factors, including past transaction
history with the customer and the credit-worthiness of the customer. We
generally do not request collateral from our customers. If we determine that
the
collection of a fee is not probable, we defer the fee and recognize revenue
at
the time collection becomes probable, which is generally upon the receipt
of
cash. If a transaction includes extended payment terms, we recognized revenue
as
the payments become due and payable.
Allowance
for doubtful accounts. We
must make estimates of the uncollectability of our accounts receivables.
We
specifically analyze accounts receivable and analyze historical bad debts,
customer concentrations, customer credit-worthiness and current economic
trends
when evaluating the adequacy of the allowance for doubtful accounts. Generally,
we require no collateral from our customers. Our gross accounts receivable
balance was $19.1 million with an allowance for doubtful accounts of $0.1
million as of September 30, 2006. Our gross accounts receivable balance was
$19.2 million with an allowance for doubtful accounts of $0.2 million as
of
September 30, 2005. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required. To date bad debts have not been
material and have been within management’s expectations.
Stock-based
Compensation Expense. Upon
adoption of SFAS 123(R) on October 1, 2005, we began estimating the value
of employee stock options on the date of grant using the Black-Scholes model.
Prior to the adoption of SFAS 123(R), the value of each employee stock option
was estimated on the date of grant using the Black-Scholes model for the
purpose
of the pro forma financial disclosure in accordance with SFAS 123. The
determination of fair value of share-based payment awards on the date of
grant
using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of highly complex
and
subjective variables. These variables include, but are not limited to the
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. The expected term of
options
granted is derived from historical data on employee exercises and post-vesting
employment termination behavior. The expected volatility is based on the
historical volatility of our stock.
With
the adoption of SFAS 123(R) on October 1, 2005, we used the trinomial
lattice valuation technique to determine the assumptions used in the
Black-Scholes model. The trinomial lattice valuation technique was used to
provide better estimates of fair values and meet the fair value objectives
of
SFAS 123(R).
In
connection with the Company’s restatement of its consolidated financial
statements, the Company has applied judgment in choosing whether to revise
measurement dates for prior options grants. Information regarding the
restatement, including ranges of possible additional stock-based compensation
expense if other measurement dates had been selected for certain grants,
is set
forth in Note 3-“Restatement of Previously Issued Consolidated Financial
Statements” in the Notes to Consolidated Financial Statements of this Form
10-K.
Accounting
for income taxes.
As part of the process of preparing our consolidated financial statements
we are
required to estimate our income taxes in each of the jurisdictions in which
we
operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then assess the likelihood
that
our deferred tax assets will be recovered from future taxable income and
to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision
in
the statement of operations.
We
have recorded a valuation allowance equal to 100% of the deferred tax assets
as
of September 30, 2006, due to uncertainties related to our ability to utilize
our net deferred tax assets, primarily consisting of certain net operating
losses carried forward and research and development tax credits. Deferred
tax
assets have been fully reserved for in all periods presented.
Valuation
of long-lived and intangible assets and goodwill.
We assess the impairment of identifiable intangibles and long-lived assets
whenever events or changes in circumstances indicate that the carrying value
may
not be recoverable. Furthermore, we assess the impairment of goodwill annually.
Factors we consider important which could trigger an impairment review include
the following:
• Significant
underperformance relative to expected historical or projected future operating
results;
• Significant
changes in the manner of our use of the acquired assets or the strategy for
our
overall business;
• Significant
negative industry or economic trends;
• Significant
decline in our stock price for a sustained period;
• Market
capitalization declines relative to net book value; and
• A
current expectation that, more likely than not, a long-lived asset will be
sold
or otherwise disposed of significantly before the end of its previously
estimated useful life.
When
one or more of the above indicators of impairment occurs we estimate the
value
of long-lived assets and intangible assets to determine whether there is
impairment. We measure any impairment based on the projected discounted cash
flow method, which requires us to make several estimates including the estimated
cash flows associated with the asset, the period over which these cash flows
will be generated and a discount rate commensurate with the risk inherent
in our
current business model. These estimates are subjective and if we made different
estimates, it could materially impact the estimated fair value of these assets
and the conclusions we reached regarding an impairment. To date, we have
not
identified any triggering events which would require us to perform this
analysis.
We
are required to perform an impairment review of our goodwill balance on at
least
an annual basis. This impairment review involves a two-step process as follows:
Step
1—We compare the fair value of our reporting units to the carrying value,
including goodwill, of each of those units. For each reporting unit where
the
carrying value, including goodwill, exceeds the unit’s fair value, we proceed on
to Step 2. If a unit’s fair value exceeds the carrying value, no further work is
performed and no impairment charge is necessary.
Step
2—We perform an allocation of the fair value of the reporting unit to our
identifiable tangible and non-goodwill intangible assets and liabilities.
This
derives an implied fair value for the reporting unit’s goodwill. We then compare
the implied fair value of the reporting unit’s goodwill with the carrying amount
of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s
goodwill is greater than the implied fair value of its goodwill, an impairment
charge would be recognized for the excess.
We
determined that we have one reporting unit. We completed a goodwill impairment
review for the period including September 30, 2006 and 2005 and performed
Step 1 of the goodwill impairment analysis required by Statement of Financial
Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets,” and concluded that goodwill was not impaired as of September 30,
2006 and 2005 using the methodology described above. Accordingly, Step 2
was not
performed. We will continue to test for impairment on an annual basis and
on an
interim basis if an event occurs or circumstances change that would more
likely
than not reduce the fair value of our reporting units below their carrying
amount.
Restructuring
costs.
During fiscal years 2005, 2003, and the nine months ended September 30, 2004,
we
implemented cost-reduction plans as part of our continued effort to streamline
our operations to reduce ongoing operating expenses. In October 2006, we
implemented a restructuring plan intended to align our resources and cost
structure. These plans resulted in restructuring charges related to, among
others, the consolidation of excess facilities. These charges relate to
facilities and portions of facilities we no longer utilize and either seek
to
terminate early or sublease. Lease termination costs and brokerage fees for
the
abandoned facilities were estimated for the remaining lease obligations and
were
offset by estimated sublease income. Estimates related to sublease costs
and
income are based on assumptions regarding the period required to locate and
contract with suitable sub-lessees and sublease rates which can be achieved
using market trend information analyses provided by a commercial real estate
brokerage retained by us. Each reporting period we review these estimates
and to
the extent that these assumptions change due to new agreements with landlords,
new subleases with tenants, or changes in the market, the ultimate restructuring
expenses for these abandoned facilities could vary by material amounts.
Determining
functional currencies for the purpose of consolidation. We
have several foreign subsidiaries that together account for a significant
portion of our revenues, expenses, assets and liabilities.
In
preparing our consolidated financial statements, we are required to translate
the financial statements of the foreign subsidiaries from the currency in
which
they keep their accounting records, generally the local currency, into United
States dollars. This process results in exchange gains and losses which,
under
the relevant accounting guidance are either included within the statement
of
operations or as a separate part of our net equity under the caption
“accumulated other comprehensive income (loss).” Under the relevant accounting
guidance, the treatment of these translation gains or losses is dependent
upon
management’s determination of the functional currency of each subsidiary. The
functional currency is determined based on management’s judgment and involves
consideration of all relevant economic facts and circumstances affecting
the
subsidiary. Generally, the currency in which the subsidiary conducts a majority
of its transactions, including billings, financing, payroll and other
expenditures would be considered the functional currency but any dependency
upon
the parent and the nature of the subsidiary’s operations must also be
considered.
If
any subsidiary’s functional currency were deemed to be the local currency, then
any gain or loss associated with the translation of that subsidiary’s financial
statements would be included in cumulative translation adjustments. However,
if
the functional currency were deemed to be the United States dollar then any
gain
or loss associated with the translation of these financial statements would
be
included within our statement of operations. If we dispose of any of our
subsidiaries, any cumulative translation gains or losses would be recognized
in
our statement of operations. If we determine that there has been a change
in the
functional currency of a subsidiary to the United States dollar, any translation
gains or losses arising after the date of change would be included within
our
statement of operations.
Based
on our assessment of the factors discussed above, we consider the relevant
subsidiary’s local currency to be the functional currency for each of our
international subsidiaries. Accordingly, foreign currency translation gains
and
loses are included as part of accumulated other comprehensive income within
our
balance sheet for all periods presented.
The
magnitude of these gains or losses is dependent upon movements in the exchange
rates of the foreign currencies in which we transact business against the
United
States dollar. These currencies include the United Kingdom Pound Sterling,
the Euro and the Canadian Dollar. Any future translation gains or losses
could
be significantly higher than those reported in previous periods. At September
30, 2006, approximately $14.6 million of our cash and cash equivalents were
held
by our subsidiaries outside of the United States.
Prior
to June 30, 2005, the settlement of accumulated intercompany loans and
advances was not planned or anticipated. Loans and advances made subsequent
to
this date are anticipated as cash balances may need to be transferred between
entities. Exchange gains or losses on these intercompany balances are reflected
in the statement of operations.
Recent
Accounting Pronouncements
In
December 2006, the Financial Accounting Standards Board (FASB) issued Staff
Position (FSP) EITF 00-19-2, “Accounting for Registration Payment Arrangements.”
This FSP specifies that the contingent obligation to make future payments
or
otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured
in
accordance with FASB Statement No. 5, “Accounting for Contingencies.” The
guidance is effective for fiscal years beginning December 15, 2006. The Company
has evaluated the new pronouncement and has determined that it will not have
a
significant impact on the determination or reporting of our financial
results.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements” (SAB 108). SAB 108 provides guidance on how
the effects of the carryover or reversal of prior year misstatements should
be
considered in quantifying a current year misstatement. The guidance is
applicable for fiscal years ending after November 15, 2006. The Company has
evaluated the new statement and has determined that it will not have a
significant impact on the determination or reporting of our financial
results.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, (“SFAS 157”) “Fair Value Measurement.” SFAS 157 defines fair
value, establishes a framework for measuring fair value, and also expands
disclosures about fair value measurements. The SFAS 157 is effective for
periods
beginning after November 15, 2007. The Company is currently evaluating the
effects of implementing this new standard.
In
September 2006, the FASB issued SFAS No. 158, (“SFAS 158”) “Employer’s
Accounting for Defined Benefit Pension and Other Postretirement Plans-an
amendment of FASB Statements No. 87, 88, 106 and 132R.” SFAS
158 requires an entity to recognize in its statement of financial position
an
asset for a defined benefit postretirement plan’s overfunded status or a
liability for a plan’s under funded status. The requirement to recognize the
funded status of a defined postretirement plan and the disclosure requirements
are effective for fiscal years ending after December 31, 2006. The
Company has evaluated the new statement and has determined that it will not
have
a significant impact on the determination or reporting of our financial results.
In
July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (FIN
48), which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognize in its financial statements
the impact of a tax position based on the technical merits of the position.
This
interpretation is effective for fiscal years beginning after December 15,
2006,
with the cumulative effect of the change in accounting principle recorded
as an
adjustment to opening retained earnings; accordingly, the Company expects
to
adopt this standard in its fiscal year commencing October 1, 2007. The Company
is currently evaluating the effects of implementing this new
standard.
In
March 2006, the FASB Emerging Issues Task Force issued Issue 06-3 (EITF 06-3),
“How Sales Taxes Collected From Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement.” A tentative consensus
was reached that a company should disclose its accounting policy (i.e., gross
or
net presentation) regarding presentation of taxes within the scope of EITF
06-3.
If taxes are significant, a company should disclose the amount of such taxes
for
each period for which an income statement is presented. The guidance is
effective for periods beginning after December 15, 2006. The Company presents
sales net of sales taxes in its consolidated statement of operations and
does
not anticipate changing its policy as a result of EITF 06-3.
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140”, which is
effective for fiscal years beginning after September 15, 2006. This
statement was issued to simplify the accounting for servicing rights and
to
reduce the volatility that results from using different measurement attributes.
The Company has evaluated the new statement and has determined that it will
not
have a significant impact on the determination or reporting of our financial
results.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140”,
which is effective for fiscal years beginning after September 15, 2006. The
statement was issued to clarify the application of FASB Statement No. 133
to beneficial interests in securitized financial assets and to improve the
consistency of accounting for similar financial instruments, regardless of
the
form of the instruments. The Company has evaluated the new statement and
has
determined that it will not have a significant impact on the determination
or
reporting of our financial results.
In
November 2005, the FASB issued Staff Position (“FSP”) FAS123(R)-3, “Transition
Election to Accounting for the Tax Effects of Share-Based Payment Awards.” This
FSP requires an entity to follow either the transition guidance for the
additional-paid-in-capital pool as prescribed in SFAS No. 123(R), or the
alternative transition method as described in the FSP. An entity
that
adopts
SFAS No. 123(R) using the modified prospective application may make a
one-time election to adopt the transition method described in this FSP. An
entity may take up to one year from the later of its initial adoption of
SFAS
No. 123(R) or the effective date of this FSP to evaluate its available
transition alternatives and make its one-time election. This FSP became
effective in November 2005. The Company has elected the alternative transition
method as described in the FSP.
In
November 2005, the FASB issued FSP FAS115-1/124-1, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,”
which addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the measurement
of an impairment loss. This FSP also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized
as
other-than-temporary impairments. The guidance in this FSP amends FASB
Statements No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” and No. 124, “Accounting for Certain Investments Held by
Not-for-Profit Organizations,” and APB Opinion No. 18, “The Equity Method
of Accounting for Investments in Common Stock.” The Company has evaluated the
new statement and has determined that it will not have a significant impact
on
the determination or reporting of our financial results.
In
June 2005, the FASB issued SFAS No. 154 (“SFAS 154”), “Accounting Changes
and Error Corrections, a replacement of APB Opinion No. 20, Accounting
Changes, and Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements.” SFAS 154 changes the requirements for the accounting for,
and reporting of, a change in accounting principle. Previously, most voluntary
changes in accounting principles were required to be recognized by way of
a
cumulative effect adjustment within net income during the period of the change.
SFAS 154 requires retrospective application to prior periods’ financial
statements, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 is effective for
accounting changes made in fiscal years beginning after December 15, 2005;
however, the Statement does not change the transition provisions of any existing
accounting pronouncements. The Company does not believe adoption of SFAS
154
will have a material effect on our consolidated financial position, results
of
operations or cash flows.
In
March 2005, the FASB issued Financial Interpretation No. 47 (“FIN 47”),
“Accounting for Conditional Asset Retirement Obligations—an interpretation of
FASB Statement No. 143.” FIN 47 requires asset retirement obligations to be
recorded when a legal obligation exists even though the timing and/or method
of
the settlement of such obligations is conditional on a future event. FIN
47 is
effective for fiscal years beginning after December 15, 2005. The Company
has evaluated the new statement and has determined that it will not have
a
significant impact on the determination or reporting of our financial results.
In
December 2004, the FASB issued FSP No. FSP 109-2 (“FSP 109-2”), “Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the
American Jobs Creations Act of 2004.” FSP 109-2 provides guidance under FASB
Statement No. 109 (“SFAS 109”), “Accounting for Income Taxes,” with respect
to recording the potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense
and deferred tax liability. The Jobs Act was enacted on October 22, 2004.
FSP 109-2 states that an enterprise is allowed
time
beyond the financial reporting period of enactment to evaluate the effect
of the
Jobs Act on its plan for reinvestment or repatriation of foreign earnings
for
purposes of applying SFAS 109. FSP 109-2 is effective for fiscal years after
December 15, 2005. The Company has evaluated the impact of the repatriation
provisions and has determined that it will not have a material impact on
its
consolidated financial statements.
Results
of Operations
On
December 29, 2004, Chordiant’s Board of Directors approved a change in the
Company’s fiscal year end from December 31 to September 30. The
nine-month results reported by the Company relate to the transitional period
ended September 30, 2004. The financial information for the twelve months
ended September 30, 2004 is unaudited and is presented for comparative
purposes.
The
following table sets forth, in dollars (in thousands) and as a percentage
of
total revenues, consolidated statements of operations data for the periods
indicated. This information, except for the year ended September 30, 2004,
has been derived from the consolidated financial statements included elsewhere
in this Annual Report.
| |
|
Years
Ended September 30,
|
|
Nine
Months Ended
September
30, 2004
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
(Restated)
(1)
|
|
(Restated)
(1)
|
|
(Restated)
(1)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
40,514
|
|
|
42
|
%
|
|
$
|
31,678
|
|
|
38
|
%
|
|
$
|
32,909
|
|
|
41
|
%
|
|
$
|
23,661
|
|
|
39
|
%
|
|
Service
|
|
|
57,022
|
|
|
58
|
|
|
|
52,047
|
|
|
62
|
|
|
|
47,714
|
|
|
59
|
|
|
|
37,362
|
|
|
61
|
|
|
Total
revenues
|
|
|
97,536
|
|
|
100
|
|
|
|
83,725
|
|
|
100
|
|
|
|
80,623
|
|
|
100
|
|
|
|
61,023
|
|
|
100
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
1,690
|
|
|
2
|
|
|
|
1,079
|
|
|
1
|
|
|
|
1,836
|
|
|
2
|
|
|
|
1,262
|
|
|
2
|
|
|
Service
|
|
|
30,566
|
|
|
31
|
|
|
|
30,155
|
|
|
36
|
|
|
|
28,617
|
|
|
36
|
|
|
|
21,630
|
|
|
35
|
|
|
Amortization
of intangible assets
|
|
|
1,211
|
|
|
1
|
|
|
|
1,068
|
|
|
2
|
|
|
|
1,838
|
|
|
2
|
|
|
|
1,044
|
|
|
2
|
|
|
Total
cost of revenues
|
|
|
33,467
|
|
|
34
|
|
|
|
32,302
|
|
|
39
|
|
|
|
32,291
|
|
|
40
|
|
|
|
23,936
|
|
|
39
|
|
|
Gross
profit
|
|
|
64,069
|
|
|
66
|
|
|
|
51,423
|
|
|
61
|
|
|
|
48,332
|
|
|
60
|
|
|
|
37,087
|
|
|
61
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
33,616
|
|
|
34
|
|
|
|
29,561
|
|
|
36
|
|
|
|
24,395
|
|
|
30
|
|
|
|
17,825
|
|
|
29
|
|
|
Research
and development
|
|
|
25,858
|
|
|
27
|
|
|
|
20,272
|
|
|
24
|
|
|
|
18,569
|
|
|
23
|
|
|
|
13,160
|
|
|
22
|
|
|
General
and administrative
|
|
|
20,445
|
|
|
21
|
|
|
|
18,549
|
|
|
22
|
|
|
|
9,293
|
|
|
12
|
|
|
|
7,099
|
|
|
12
|
|
|
Amortization
of intangible assets
|
|
|
—
|
|
|
—
|
|
|
|
117
|
|
|
—
|
|
|
|
222
|
|
|
—
|
|
|
|
126
|
|
|
—
|
|
|
Restructuring
expense
|
|
|
—
|
|
|
—
|
|
|
|
1,052
|
|
|
1
|
|
|
|
1,200
|
|
|
2
|
|
|
|
172
|
|
|
—
|
|
|
Purchased
in-process research and development
|
|
|
—
|
|
|
—
|
|
|
|
1,940
|
|
|
2
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
Total
operating expenses
|
|
|
79,919
|
|
|
82
|
|
|
|
71,491
|
|
|
85
|
|
|
|
53,679
|
|
|
67
|
|
|
|
38,382
|
|
|
63
|
|
|
Loss
from operations
|
|
|
(15,850
|
)
|
|
(16
|
)
|
|
|
(20,068
|
)
|
|
(24
|
)
|
|
|
(5,347
|
)
|
|
(7
|
)
|
|
|
(1,295
|
)
|
|
(2
|
)
|
|
Interest
income, net
|
|
|
1,120
|
|
|
1
|
|
|
|
755
|
|
|
1
|
|
|
|
515
|
|
|
1
|
|
|
|
498
|
|
|
1
|
|
|
Other
expense, net
|
|
|
(627
|
)
|
|
—
|
|
|
|
(103
|
)
|
|
—
|
|
|
|
9
|
|
|
—
|
|
|
|
(132
|
)
|
|
—
|
|
|
Loss
before income taxes
|
|
|
(15,357
|
)
|
|
(15
|
)
|
|
|
(19,416
|
)
|
|
(23
|
)
|
|
|
(4,823
|
)
|
|
(6
|
)
|
|
|
(929
|
)
|
|
(1
|
)
|
|
Provision
for income taxes
|
|
|
644
|
|
|
1
|
|
|
|
449
|
|
|
1
|
|
|
|
899
|
|
|
1
|
|
|
|
442
|
|
|
1
|
|
|
Net
loss
|
|
$
|
(16,001
|
)
|
|
(16
|
)%
|
|
$
|
(19,865
|
)
|
|
(24
|
)%
|
|
$
|
(5,722
|
)
|
|
(7
|
)%
|
|
$
|
(1,371
|
)
|
|
(2
|
)%
|
(1)
- See Note 3 - “Restatement of Previously Issued Consolidated Financial
Statements” to our Consolidated Financial Statements for a discussion of these
adjustments.
Comparison
of the Year Ended September 30, 2006 to the Year Ended September 30,
2005
Revenues
License
Revenue. Total
license revenue increased $8.8 million, or 28%, to $40.5 million for the
year
ended September 30, 2006 compared to $31.7 million for the year ended
September 30, 2005. License revenues for enterprise solutions increased
$5.8 million, or 23%, to $30.4 million for the year ended September 30,
2006 compared to $24.6 million for the year ended September 30, 2005. This
increase was primarily due to an increase in value of the average customer
transaction. License
revenues
for marketing solutions increased $3.9 million, or 161%, to $6.4 million
for the
year ended September 30, 2006 compared to $2.5 million for the year ended
September 30, 2005. License revenues for decision management solutions
relate to the products acquired in the KiQ transaction. License revenues
for
decision manager decreased $0.8 million, or 19% to 3.8 million for the year
ended September 30, 2006 compared to $4.6 million for year ended
September 30, 2005.
Service
Revenue.
Total service revenue, which include reimbursement of out-of-pocket expenses,
increased $5.0 million, or 10%, to $57.0 million for the year ended
September 30, 2006 compared to $52.0 million for the year ended
September 30, 2005. This increase is primarily related to a $2.3 million
increase in support and maintenance revenue, a $2.1 million increase in training
revenue and a $0.5 million increase in consulting revenue. Service revenue
associated with enterprise solution products decreased less than
$0.5 million, or 1%, to $39.9 million for the year ended September 30,
2006 compared to $40.4 million for the year ended September 30, 2005.
Service revenues associated with marketing solution products increased $3.3
million, or 34%, to $13.0 million for the year ended September 30, 2006
compared to $9.7 million for the year ended September 30, 2005. Service
revenues associated with decision management solution products relate to
the
products acquired in the KiQ transaction. Service revenues associated with
decision management increased $2.2 million or 114% to $4.1 million for the
year
ended September 30, 2006 compared to $1.9 million for the year ended
September 30, 2005.
Reimbursement
of out-of-pocket expenses (which are included in total service revenues)
decreased $0.2 million, or 4%, to $3.3 million for the year ended
September 30, 2006 compared to $3.5 million for the year ended
September 30, 2005.
Cost
of revenues
License.
Cost of license revenues includes third-party software royalties and
amortization of capitalized software development costs. Royalty expenses
can
vary depending upon the mix of products sold within the period. The capitalized
software development costs pertain to a banking product that was completed
and
available for general release in August 2005. Annual amortization expense
associated with this product is $0.9 million. Amortization of these costs
is
expected through 2008.
Cost
of license revenues increased $0.6 million, or 57%, to $1.7 million for the
year
ended September 30, 2006 compared to $1.1 million for the year ended
September 30, 2005. This increase is primarily related to the fiscal year
2006 including a full year of amortization related to the banking product
versus
the prior year which included only 1.5 months of amortization. These costs
resulted in license gross margins of approximately 96% and 97% for the years
ended September 30, 2006 and 2005, respectively.
Service.
Cost
of service revenues consists primarily of personnel, third-party consulting,
facility and travel costs incurred to provide consulting implementation and
integration, consulting customization, training, post-contract customer support
services. Cost of service revenues increased $0.4 million, or 1%, to $30.6
million for the year ended September 30, 2006 compared to $30.2 million for
the year ended September 30, 2005. This increase in costs is primarily due
to increases in personnel related costs of $0.7 million related to an increase
in headcount, facility and information technology costs of $0.6 million,
third
party support and maintenance costs of $0.3 million offset by a decrease
in
third party consulting costs of $1.5 million. These costs resulted in service
gross margins of approximately 46% and 42% for the years ended
September 30, 2006 and 2005, respectively.
Amortization
of intangible assets (included in cost of revenues). Amortization
of intangible assets cost consists primarily of the amortization of amounts
paid
for developed technologies, customer lists and trade-names resulting from
business acquisitions. Amortization
of intangible assets was $1.2 million for the year ended September 30,
2006 compared to $1.1 million for the year ended September 30, 2005. The
amortization expense in the year ended September 30, 2006 is solely related
to $6.1 million of intangible assets associated with the acquisition of KiQ
in
December 2004. We expect to continue to amortize these assets through December
2009.
Operating
Expenses
Sales
and marketing. Sales
and marketing expenses is composed primarily of costs associated with selling,
promoting and advertising our products, product demonstrations and customer
sales calls. These costs consist primarily of employee salaries, commissions
and
bonuses, benefits, facilities, travel expenses and promotional and advertising
expenses. Sales and marketing expenses increased $4.0 million, or 14%, to
$33.6
million for the year ended September 30, 2006 compared to $29.6 million for
the year ended September 30, 2005. The $4.0 million increase in these
expenses was mainly attributable to an increase of $2.7 million in personnel
related expenses, $1.0 million in sales events, and $0.3 million increase
in
legal contract and personnel costs.
Research
and development. Research
and development expenses is composed primarily of costs associated with the
development of new products, enhancements of existing products and quality
assurance activities. These costs consist primarily of employee salaries
and
benefits, facilities, the cost of software and development tools and equipment
and consulting costs, including costs for offshore consultants. Research
and
development expenses increased $5.6 million, or 27%, to $25.9 million for
the
year ended September 30, 2006 compared to $20.3 million for the year ended
September 30, 2005. This increase was driven by two large co-development
projects; one in North America and one in the United Kingdom. The United
Kingdom
project was completed in September 2006 and the North America project is
expected to be completed in the second half of 2007. This $5.6
million
increase in costs was primarily composed of $6.6 million in consulting expenses
related to our outsourcing of technical support and certain sustaining
engineering functions and $0.4 million in travel costs which were offset
by
decreases of $1.1 million in personnel costs and $0.3 million in information
technology costs.
General
and administrative. General
and administrative expenses is composed primarily of costs associated with
our
executive and administrative personnel (e.g. the CEO, legal and finance
personnel). These costs consist primarily of employee salaries, bonuses,
stock
compensation expense, benefits, facilities, consulting costs, including costs
for Sarbanes-Oxley Act of 2002 (SOX) consultants and stock option investigation
professional services.
General
and administrative expenses increased $1.9 million, or 10%, to $20.4 million
for
the year ended September 30, 2006 compared to $18.5 million for the year
ended September 30, 2005. The increase in costs is primarily due to
increases of $3.4 million for personnel costs, $0.7 million for severance
costs
associated with two senior executives, offset by a reduction of $2.3 million
in
professional services as consultants. The increase in personnel costs and
decrease in professional services was driven by the replacement of accounting
consultants with permanent employees. The decrease in professional services
was
also due to a decrease in SOX consulting fees of $2.7 million which was offset
by stock option investigation professional fees of $1.2 million during the
year.
We do not expect to experience the same level of decrease in SOX costs in
2007
that we did in 2006. We expect the costs associated with the stock option
investigation to continue in the first half of 2007.
Amortization
of intangible assets (included in operating expenses). There
was no amortization of intangible assets included in operating costs for
2006.
All intangible assets attributable to operating expenses were fully amortized
in
2005. Amortization of intangible assets included in operating expenses was
$0.1
million for the year ended September 30, 2005. These intangible assets are
the result of the Prime Response acquisition in March 2001.
Purchased
in-process research and development. In-process
research and development expense represents acquired technology that, on
the
date of acquisition, had not achieved technological feasibility and did not
have
an alternative future use, based on the state of development. Because the
product under development may not achieve commercial viability, the amount
of
acquired in-process research and development was immediately expensed. The
nature of the efforts required to develop the purchased in-process research
and
development into a commercially viable product principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced
to
meet its designed specifications, including functions, features and technical
performance requirements. There was no purchased in-process research and
development expense for the year ended September 30, 2006. For the year
ended September 30, 2005, we recorded an expense of $1.9 million related to
acquired in-process technology attributable to the acquisition of KiQ.
Restructuring
expenses. In
July 2005, we announced a reduction in workforce and incurred a one-time
cash
charge of approximately $1.1 million in the year ended September 30, 2005.
During the year ended September 30, 2004, we announced plans to reallocate
staff between our North American and European operations to better support
our
growth in North America, and an associated restructuring expense was recorded.
Please refer to Note 7 to the Consolidated Financial Statements,
“Restructuring.”
Stock-based
compensation (included in individual operating expense and cost of revenue
categories). The
following table sets forth our stock-based compensation expense in terms
of
absolute dollars and functional breakdown for the years ended September 30,
2006
and 2005 (in thousands):
| |
|
Years
Ended September 30,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
(Restated)
(1)
|
|
| |
Stock-based
compensation expense:
|
|
|
|
|
|
|
| |
Cost
of revenues
|
$
|
248
|
|
$
|
690
|
|
| |
Sales
and marketing
|
|
2,327
|
|
|
986
|
|
| |
Research
and development
|
|
332
|
|
|
843
|
|
| |
General
and administrative
|
|
1,788
|
|
|
512
|
|
| |
Total
stock-based compensation expense
|
$
|
4,695
|
|
$
|
3,031
|
|
| (1) |
-
See Note 3 - “Restatement of Previously Issued Consolidated Financial
Statements” to our Consolidated Financial Statements for a discussion of
these adjustments.
|
For
the year ended September 30, 2006, the aggregate stock-based compensation
cost
included in cost of revenues and in operating expenses was $4.7 million which
is
a combination of $2.7 million related to stock options and $2.0 million
associated with restricted stock awards. Included in the restricted stock
award
compensation expense of $2.0 million is $1.2 million associated with the
amortization of restricted stock awards attributable to the KiQ acquisition
in
December 2004. Amortization of deferred stock-based compensation attributable
to
the acquisition of KiQ will be expensed through June 2007.
For
the year ended September 30, 2005, the aggregate stock-based compensation
cost
included in cost of revenues and in operating expenses was $3.0 million which
was a combination of a $0.4 million benefit related to stock options and
$3.4
million expense associated with restricted stock awards. Included in the
restricted stock award compensation expense of $3.4 million is $2.7 million
associated with the amortization of restricted stock awards attributable
to the
KIQ acquisition.
Interest
income, net. Interest
income, net, consists primarily of interest income generated from our cash
and
cash equivalents, offset by interest expense incurred in connection with
our
capital leases and letters of credit. Interest income, net, increased to
approximately $1.1 million for the year ended September 30, 2006 from $0.8
million for the year ended September 30, 2005. This increase is primarily
due to improved interest rates related to interest-bearing cash and cash
equivalents accounts and a higher average cash balance during 2006 versus
2005.
Other
expense, net. These
gains and losses are primarily associated with foreign currency transaction
gains or losses and re-measurement of our short-term intercompany balances
between the U.S. and our foreign denominated subsidiaries. Other expense
resulted in a net loss of $0.6 million for the year ended September 30,
2006 as compared to a net loss of $0.1 million for the same period in the
prior
year. The change is primarily attributable to currency exchange gains and
losses
recognized during the years ended September 30, 2006 and 2005. These gains
and losses are primarily associated with our U.S. dollar account balances
held
in Europe and the U.S. dollar’s fluctuations in value against the Euro and U.K.
Pound Sterling.
Provision
for income taxes. Our
provisions for income taxes were $0.6 million and $0.4 million for the years
ended September 30, 2006 and 2005, 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.
Comparison
of the Year Ended September 30, 2005 to the Year Ended September 30,
2004
Revenues
License
Revenue.
Total license revenue decreased $1.2 million, or 4%, to $31.7 million for
the
year ended September 30, 2005 compared to $32.9 million for the year ended
September 30, 2004. License revenues for enterprise solutions decreased
$2.2 million, or 8%, to $24.6 million for the year ended September 30, 2005
compared to $26.8 million for the year ended September 30, 2004. This
decrease was primarily due to the timing of revenues recognized under the
percentage-of-completion method of accounting.
The timing and amount of revenue recognized is influenced by the progress
of
work performed relative to the project length of customer contracts and the
dollar value of such contracts. License revenues for marketing solutions
decreased $3.6 million, or 60%, to $2.5 million for the year ended
September 30, 2005 compared to $6.1 million for the year ended
September 30, 2004. License revenues for decision management solutions
relate to the products acquired in the KiQ transaction and were $4.6 million
for
year ended September 30, 2005.
Service
Revenue.
Total service revenues, which include reimbursement of out-of-pocket expenses,
increased $4.3 million, or 9%, to $52.0 million for the year ended
September 30, 2005 compared to $47.7 million for the year ended
September 30, 2004. Service revenues associated with enterprise solution
products increased $4.0 million, or 12%, to $40.2 million for the year
ended September 30, 2005 compared to $36.2 million for the year ended
September 30, 2004. 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 associated with marketing solution products decreased $1.9
million, or 16%, to $9.7 million for the year ended September 30, 2005
compared to $11.6 million for the year ended September 30, 2004. Service
revenues associated with decision management solution products relate to
the
products acquired in the KiQ transaction and were $1.9 million for the year
ended September 30, 2005.
Reimbursement
of out-of-pocket expenses (which are included in total service revenues)
increased $0.6 million, or 22%, to $3.5 million for the year ended
September 30, 2005 compared to $2.8 million for the year ended
September 30, 2004. This increase is primarily due to the higher number of
third party consultants and employees working on projects.
Cost
of revenues
License.
Cost of license revenues decreased $0.7 million, or 41%, to $1.1 million
for the
year ended September 30, 2005 compared to $1.8 million for the year ended
September 30, 2004. These costs resulted in license gross margins of
approximately 97% and 94% for the year ended September 30, 2005 and 2004,
respectively. The license gross margin for the year ended September 30,
2005 is higher than in the recent past due to lower royalties payable associated
with the mix of products sold. The number of product components subject to
the
payment of royalties in the past declined during the year ended
September 30, 2005.
Revenues
derived from the sale of KiQ products are also not subject to significant
royalties.
Service.
Cost
of service revenues increased $1.4 million, or 5%, to $30.2 million for the
year
ended September 30, 2005 compared to $28.6 million for the year ended
September 30, 2004. These costs resulted in service gross margins of
approximately 42% and 40% for the years ended September 30, 2005 and 2004,
respectively.
Amortization
of intangible assets (included in cost of revenues). Amortization
of intangible assets was $1.1 million for the year ended September 30,
2005 compared to $1.8 million for the year ended September 30, 2004. The
amortization expense in the year ended September 30, 2004 primarily related
to intangibles associated with the acquisition of OnDemand in April 2002.
Intangibles associated with the acquisitions of certain assets from ActionPoint
and ASP Outfitter in May 2001 became fully amortized during calendar 2004.
On
December 21, 2004, we recorded, and began to amortize, aggregate additions
of $6.1 million of intangible assets related to the acquisition of KiQ.
Amortization of intangible assets attributable to the acquisition of KiQ
will be
expensed through December 2009. In addition, beginning in the quarter ended
September 30, 2005, quarterly amortization expense increased $0.2 million
relating to an internally developed banking product that was completed and
available for general release. These costs are being amortized over a three-year
period.
Operating
Expenses
Sales
and marketing. Sales
and marketing expenses increased $5.2 million, or 21%, to $29.6 million for
the
year ended September 30, 2005 compared to $24.4 million for the year ended
September 30, 2004. The $5.2 million increase in these expenses was
mainly attributable to an increase of $3.9 million in personnel related expenses
and an $0.8 million increase in travel costs due to a higher number of sales
representatives. Recruiting fees also increased $0.3 million over the prior
period.
Research
and development. Research
and development expenses increased $1.7 million, or 9%, to $20.3 million
for the
year ended September 30, 2005 compared to $18.6 million for the year ended
September 30, 2004. This $1.7 million increase was mainly attributable to
an increase of approximately $1.9 million in research and development consulting
expenses related to our outsourcing of technical support and certain sustaining
engineering functions. Personnel costs also increased $0.6 million, in part
due
to the addition of KiQ employees. Offsetting these increases was an increase
to
the capitalization of internal salary and fringe benefit costs of approximately
$0.8 million associated with the development of a banking product. The
development of this product was completed in July 2005 and no additional
costs
are expected to be capitalized.
General
and administrative. General
and administrative expenses increased $9.2 million, or 100%, to $18.5 million
for the year ended September 30, 2005 compared to $9.3 million for the year
ended September 30, 2004. The increase in these expenses was mainly
attributable to an increase of $5.1 million in consulting related expenses
associated with efforts to comply with SOX and fill vacant accounting positions.
Professional service fees also increased $1.9 million primarily due to the
accounting and legal fees associated with SOX, additional procedures required
in
conjunction with the material weaknesses identified at June 30, 2004 and
September 30, 2004 and additional fees related to the restatement of our
prior year results. Higher costs associated with efforts to comply with SOX
continued for the first quarter of fiscal year 2006. In conjunction with
new
hires in the accounting and finance areas, personnel related costs and
recruiting fees increased $1.0 million and $0.5 million, respectively. Due
to the higher general and administrative headcounts, the allocation of common
costs and facilities costs to the department also increased by $0.6 million.
Amortization
of intangible assets (included in operating expenses). Amortization
of intangible assets included in operating expenses was $0.1 million for
the
year ended September 30, 2005 compared to $0.2 million for the year ended
September 30, 2004. Amortization expense classified in operating expenses
for these periods is mainly attributable to the acquisition of Prime Response
in
March 2001. These intangibles were fully amortized as of September 30,
2005.
Purchased
in-process research and development. In-process
research and development expense represents acquired technology that, on
the
date of acquisition, had not achieved technological feasibility and did not
have
an alternative future use, based on the state of development. Because the
product under development may not achieve commercial viability, the amount
of
acquired in-process research and development was immediately expensed. The
nature of the efforts required to develop the purchased in-process research
and
development into a commercially viable product principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced
to
meet its designed specifications, including functions, features and technical
performance requirements. For the year ended September 30, 2005, we
recorded an expense of $1.9 million related to acquired in-process technology
attributable to the acquisition of KiQ. There was no purchased in-process
research and development expense for the year ended September 30, 2004.
Restructuring
expenses.
In July 2005, we announced a reduction in workforce and incurred a one-time
cash
charge of approximately $1.1 million in the year ended September 30, 2005.
During the year ended September 30, 2004, we announced plans to reallocate
staff between our North American and European operations to better support
our
growth in North America, and an associated restructuring expense was recorded.
Please refer to Note 7 to the Consolidated Financial Statements,
“Restructuring.”
Stock-based
compensation (included in individual operating expense and cost of revenue
categories). The
following table sets fourth our stock-based compensation expense in terms
of
absolute dollars and functional breakdown for the twelve months ended September
30, 2005 and 2004 (in thousands):
The
related functional breakdown of total stock-based compensation is outlined
below
(in thousands):
| |
|
Year
Ended
September 30,
2005
|
|
Year
Ended
September 30,
2004
|
|
| |
|
(Restated)
(1)
|
|
(Restated)
(1)
|
|
| |
Stock-based
compensation expense:
|
|
|
|
|
|
|
| |
Cost
of revenues
|
$
|
690
|
|
$
|
825
|
|
| |
Sales
and marketing
|
|
986
|
|
|
887
|
|
| |
Research
and development
|
|
843
|
|
|
1,175
|
|
| |
General
and administrative
|
|
512
|
|
|
1,218
|
|
| |
Total
stock-based compensation expense
|
$
|
3,031
|
|
$
|
4,105
|
|
(1)
- See Note 3 - “Restatement of Previously Issued Consolidated Financial
Statements” to our Consolidated Financial Statements for a discussion of these
adjustments.
For
the year ended September 30, 2005, the aggregate stock-based compensation
cost
included in cost of revenues and in operating expenses was $3.0 million which
was a combination of a $0.4 million benefit related to stock options and
$3.4
million expense associated with restricted stock awards. Included in the
restricted stock award compensation expense of $3.4 million is $2.7 million
associated with the amortization of restricted stock awards attributable
to the
KiQ acquisition which occurred in December 2004. The $0.4 million benefit
is
partially due to the decrease in our stock price during the period which
affects
the variable accounting calculation to which some restricted stock and
outstanding stock options are subject. Also included in these costs for the
year
ended September 30, 2005 were charges associated with the issuance of 450,000
shares of restricted stock to certain officers of the Company. Amortization
of
deferred stock-based compensation attributable to the acquisition of KiQ
will be
expensed through June 2007.
Interest
income, net. Interest
income, net, consists primarily of interest income generated from our cash,
cash
equivalents and short-term investments, offset by interest expense incurred
in
connection with outstanding borrowings and letters of credit. Interest income,
net, increased to approximately $0.8 million for the year ended
September 30, 2005 from $0.5 million for the year ended September 30,
2004. This increase is primarily due to improved interest rates related to
interest-bearing cash, cash equivalents and short-term investment accounts.
Other
expense, net.
Realized foreign currency gains and losses and other non-operating income
and
expenses resulted in a net loss of $0.1 million for the year ended
September 30, 2005 as compared to net income of less than $0.1 million for
the same period in the prior year. The change is primarily attributable to
currency exchange gains and losses recognized during the years ended
September 30, 2005 and 2004. These gains and losses are primarily
associated with our U.S. dollar account balances held in Europe and the U.S.
dollar’s fluctuations in value against the Euro and U.K. Pound Sterling.
Provision
for income taxes. Our
provisions for income taxes were $0.4 million and $0.9 million for the years
ended September 30, 2005 and 2004, 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.
Quarterly
Financial Information
The
following table presents the Company’s condensed consolidated balance sheets
(unaudited, in thousands):
|
|
|
September
30, 2006
|
|
|
|
June
30, 2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
45,278
|
|
|
$
|
42,664
|
|
|
Restricted
cash
|
|
185
|
|
|
|
175
|
|
|
Accounts
receivable
|
|
19,025
|
|
|
|
22,233
|
|
|
Prepaid
expenses and other current assets
|
|
5,210
|
|
|
|
4,864
|
|
|
Total
current assets
|
|
69,698
|
|
|
|
69,936
|
|
|
Restricted
cash
|
|
334
|
|
|
|
341
|
|
|
Property
and equipment, net
|
|
2,630
|
|
|
|
2,607
|
|
|
Goodwill
|
|
32,044
|
|
|
|
32,044
|
|
|
Intangible
assets, net
|
|
3,937
|
|
|
|
4,239
|
|
|
Other
assets
|
|
2,860
|
|
|
|
2,789
|
|
|
Total
assets
|
$
|
111,503
|
|
|
$
|
111,956
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
$
|
7,665
|
|
|
$
|
7,787
|
|
|
Accrued
expenses
|
|
15,706
|
|
|
|
13,781
|
|
|
Deferred
revenue
|
|
23,909
|
|
|
|
21,060
|
|
|
Current
portion of capital lease obligations
|
|
95
|
|
|
|
150
|
|
|
Total
current liabilities
|
|
47,375
|
|
|
|
42,778
|
|
|
Deferred
revenue—long-term
|
|
5,596
|
|
|
|
3,976
|
|
|
Restructuring
costs, net of current portion
|
|
1,239
|
|
|
|
1,331
|
|
|
Other
long-term liabilities
|
|
68
|
|
|
|
75
|
|
|
Total
liabilities
|
|
54,278
|
|
|
|
48,160
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Pr |