UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 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)
 
 
 
Delaware
93-1051328
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
 
20400 Stevens Creek Boulevard, Suite 400
Cupertino, CA 95014
(Address of Principal Executive Offices including Zip Code)
 
(408) 517-6100
(Registrant’s Telephone Number, Including Area Code)
 
 
(Former name, former address and former fiscal year if changed since last report)
 
 
 
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  ¨    No  x 
 
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.
 
Large accelerated filer  ¨
Accelerated filer  x
Non-accelerated filer  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x 
 
As of January 31, 2007, there were 79,842,253 shares of the registrant’s common stock outstanding.


Explanatory Note

Restatement of Consolidated Financial Statements

Restatement relating to stock-based compensation 

In this Form 10-Q, Chordiant Software, Inc. (“the Company”, “Chordiant” or “we”) is restating its condensed consolidated balance sheet as of September 30, 2005, the related condensed consolidated statements of operations and comprehensive loss for the three and nine months ended June 30, 2005, and the related condensed consolidated statement of cash flows for the nine months ended June 30, 2005. In the Company’s Form 10-K for the year ended September 30, 2006 filed with the Securities and Exchange Commission (the “2006 Form 10-K”), the Company 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 years ended September 30, 2005 and September 30, 2004, and each of the quarters in fiscal year 2005 and the first two quarters of fiscal 2006.

The Company’s 2006 Form 10-K also reflects the restatement of “Selected Consolidated Financial Data” in Item 6 for the fiscal years ended September 2005, 2004, 2003, and 2002, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for the fiscal years ended September 30, 2005 and 2004.

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 exercise strike 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 also taken certain financial remediation measures to recover 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):

 
Fiscal Period
    
Additional Compensation
Expense
  
 
2000
  
$
474
  
 
2001
    
2,082
  
 
2002
    
2,715
  
 
2003
    
1,529
  
 
Adjustment to accumulated deficit as of December 31, 2003
    
6,800
  
           
 
2004
    
928
  
 
2005
    
325
  
 
2006 and thereafter
    
208
  
 
Total
  
$
8,261
  

For more information regarding the investigation and findings relating to stock option practices and the restatement, please refer to Note 3 - “Restatement of Previously Issued Condensed Consolidated Financial Statements” in our Condensed Consolidated Financial Statements. For more information regarding the investigation and findings relating to stock option practices and the restatement and our remedial measures, see Item 4, “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 Form 10-Q gives effect to these prior restatements.



 CHORDIANT SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2006
TABLE OF CONTENTS
 
 
Page No.
2
PART I. FINANCIAL INFORMATION
 
 
 
  
Item 1.
5
 
 
  
 
5
 
 
  
 
6
 
 
  
 
7
 
 
  
 
8
 
 
  
Item 2.
35
 
 
  
Item 3.
54
 
 
  
Item 4.
55
 
    
PART II. OTHER INFORMATION
 
 
 
  
Item 1.
58
 
 
  
Item 1A.
59
 
 
  
Item 6.
68
 
 
  
 
68
 


PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
CHORDIANT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
 
 
 
 
June 30,
2006
      
September 30,
2005
 
 
 
 
 
      
(restated)(1)
 
ASSETS
 
 
      
 
  
 
Current assets:
 
 
      
 
  
 
Cash and cash equivalents
 
$
42,664
    
$
38,546
 
Restricted cash
 
 
175
    
 
1,982
 
Accounts receivable, net, including $152 and $263 due from related parties at June 30, 2006 and September 30, 2005, respectively
 
 
22,233
    
 
18,979
 
Prepaid expenses and other current assets
 
 
4,864
    
 
4,345
 
Total current assets
 
 
69,936
    
 
63,852
 
Restricted cash
 
 
341
    
 
365
 
Property and equipment, net
 
 
2,607
    
 
2,479
 
Goodwill
 
 
32,044
    
 
31,907
 
Intangible assets, net
 
 
4,239
    
 
5,148
 
Other assets
 
 
2,789
    
 
3,499
 
Total assets
 
$
111,956
    
$
107,250
 
 
 
 
 
    
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
      
 
  
 
Current liabilities:
 
 
      
 
  
 
Accounts payable, including $132 and nil due to related parties at June 30, 2006 and 2005, respectively`
 
$
7,787
    
$
4,554
 
Accrued expenses
 
 
13,781
    
 
9,302
 
Deferred revenue, including related party balances of $174 and $370 at June 30, 2006 and September 30, 2005, respectively
 
 
21,060
    
 
26,050
 
Current portion of capital lease obligations
 
 
150
    
 
213
 
Total current liabilities
 
 
42,778
    
 
40,119
 
Deferred revenue—long-term
 
 
3,976
    
 
147
 
Restructuring costs, net of current portion
 
 
1,331
    
 
1,731
 
Other long-term liabilities
 
 
75
    
 
96
 
Total liabilities
 
 
48,160
    
 
42,093
 
Commitments and contingencies (Notes 6, 8, 9, 10 and 13)
 
 
      
 
  
 
 
 
 
 
    
 
 
 
Stockholders’ equity:
 
 
      
 
  
 
Preferred stock, $0.001 par value; 51,000 shares authorized; none issued and outstanding at June 30, 2006 and September 30, 2005
 
 
—
   
 
—
 
Common stock, $0.001 par value; 300,000 shares authorized; 79,648 and 78,488 shares issued and outstanding at June 30, 2006 and September 30, 2005, respectively
 
 
79
    
 
78
 
Additional paid-in capital and deferred compensation
 
 
284,908
    
 
279,537
 
Accumulated deficit
 
 
(224,579
)
  
 
(216,942
)
Accumulated other comprehensive income
 
 
3,388
    
 
2,484
 
Total stockholders’ equity
 
 
63,796
    
 
65,157
 
Total liabilities and stockholders’ equity
 
$
111,956
    
$
107,250
 

(1) - See Note 3 - “Restatement of Previously Issued Condensed Consolidated Financial Statements” to our Condensed Consolidated Financial Statements for a discussion of these adjustments

The accompanying notes are an integral part of these condensed consolidated financial statements.


CHORDIANT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended June 30,
  
Nine Months Ended June 30,
 
 
 
2006
    
 
2005
    
 
2006
    
 
2005
 
 
 
 
        
(restated)(1)
              
(restated)(1)
 
Revenues:
 
 
      
 
      
 
      
 
  
 
License, including related party items aggregating $305 for the three months ended June 30, 2005, and $5,612 for the nine months ended June 30, 2005, respectively.
 
$
10,257
    
$
9,228
    
$
32,588
    
$
25,029
 
Service, including related party items aggregating $296 and $678 for the three months ended June 30, 2006 and 2005, respectively, and $527 and $2,009 for the nine months ended June 30, 2006 and 2005, respectively
 
 
16,769
    
 
12,393
    
 
43,268
    
 
37,440
 
Total revenues
 
 
27,026
    
 
21,621
    
 
75,856
    
 
62,469
 
Cost of revenues:
 
 
      
 
      
 
      
 
  
 
License
 
 
398
    
 
337
    
 
1,360
    
 
702
 
Service, including related party items aggregating $468 and nil for the three months ended June 30, 2006 and 2005, respectively, and $542 and nil for the nine months ended June 30, 2006 and 2005 respectively
 
 
8,965
    
 
7,311
    
 
23,217
    
 
22,456
 
Amortization of intangible assets
 
 
303
    
 
303
    
 
908
    
 
765
 
Total cost of revenues
 
 
9,666
    
 
7,951
    
 
25,485
    
 
23,923
 
Gross profit
 
 
17,360
    
 
13,670
    
 
50,371
    
 
38,546
 
Operating expenses:
 
 
      
 
      
 
      
 
  
 
Sales and marketing
 
 
7,976
    
 
7,275
    
 
24,876
    
 
21,678
 
Research and development
 
 
7,780
    
 
5,421
    
 
18,159
    
 
15,600
 
General and administrative
 
 
4,842
    
 
4,679
    
 
14,806
    
 
13,812
 
Amortization of intangible assets
 
 
—
   
 
—
   
 
—
   
 
118
 
Purchased in-process research and development
 
 
—
   
 
—
   
 
—
   
 
1,940
 
Restructuring reversal
 
 
—
   
 
—
   
 
—
   
 
(96
)
Total operating expenses
 
 
20,598
    
 
17,375
    
 
57,841
    
 
53,052
 
Loss from operations
 
 
(3,238
)
  
 
(3,705
)
  
 
(7,470
)
  
 
(14,506
)
Interest income, net
 
 
329
    
 
147
    
 
809
    
 
539
 
Other income (expense), net
 
 
(623
)
  
 
186
    
 
(536
)
  
 
(43
)
Net loss before income taxes
 
 
(3,532
)
  
 
(3,372
)
  
 
(7,197
)
  
 
(14,010
)
Provision for income taxes
 
 
150
    
 
138
    
 
441
    
 
293
 
Net loss
 
$
(3,682
)
  
$
(3,510
)
  
$
(7,638
)
  
$
(14,303
)
Other comprehensive loss:
 
 
      
 
(
    
 
      
 
  
 
Foreign currency translation gain (loss)
 
 
971
    
 
(588
)
  
 
904
    
 
(476
)
Comprehensive loss
 
$
(2,711
)
  
$
(4,098
)
  
$
(6,734
)
  
$
(14,779
)
                                 
Net loss per share— basic and diluted
 
$
(0.05
)
  
$
(0.05
)
  
$
(0.10
)
  
$
(0.19
)
Weighted average shares used in computing basic and diluted loss per share
 
 
78,035
    
 
75,080
    
 
77,358
    
 
73,966
 

(1) - See Note 3 - “Restatement of Previously Issued Condensed Consolidated Financial Statements” to our Condensed Consolidated Financial Statements for a discussion of these adjustments
  
The accompanying notes are an integral part of these condensed consolidated financial statements.


CHORDIANT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Nine Months Ended June 30,
 
 
 
2006
    
 
2005
 
 
 
 
      
 
(restated)(1)
 
Cash flows from operating activities:
 
 
      
 
  
 
Net loss
 
$
(7,638
)
  
$
(14,303
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
      
 
  
 
Depreciation and amortization
 
 
892
    
 
1,063
 
Purchased in-process research and development
 
 
—
   
 
1,940
 
Amortization of intangibles and capitalized software
 
 
1,583
    
 
883
 
Non-cash stock-based compensation expense
 
 
3,694
    
 
1,851
 
Provision for doubtful accounts and sales returns
 
 
51
    
 
86
 
Warrants issued to customers
 
 
—
   
 
(42
)
Loss (gain) on disposal of assets
 
 
39
    
 
(46
)
Other non-cash charges
 
 
105
   
 
127
 
Changes in assets and liabilities:
 
 
      
 
  
 
Accounts receivable
 
 
(3,122
)
  
 
(3,430
)
Prepaid expenses and other current assets
 
 
(628
)
  
 
(1,470
)
Other assets
 
 
(60
)
  
 
173
 
Accounts payable
 
 
3,171
    
 
(3,481
)
Accrued expenses
 
 
4,055
    
 
1,545
 
Deferred revenue
 
 
(1,489
)
  
 
4,677
 
Net cash provided by (used in) operating activities
 
 
653
    
 
(10,427
)
Cash flows from investing activities:
 
 
      
 
  
 
Property and equipment purchases
 
 
(1,043
)
  
 
(630
)
Capitalized product development costs
 
 
—
   
 
(2,089
)
Cash used for acquisitions, net
 
 
—
   
 
(9,783
)
Cash proceeds from disposal of property and equipment
 
 
11
   
 
—
 
Purchase of marketable securities available for sale
 
 
—
   
 
(100
)
Proceeds from release of (increase in) restricted cash
 
 
1,875
    
 
(8
)
Net cash provided by (used for) investing activities
 
 
843
    
 
(12,610
)
Cash flows from financing activities:
 
 
      
 
  
 
Proceeds from exercise of stock options
 
 
1,682
    
 
329
 
Payment on capital leases
 
 
(158
)
  
 
(149
)
Net cash provided by financing activities
 
 
1,524
    
 
180
 
Effect of exchange rate changes
 
 
1,098
    
 
(152
)
Net increase (decrease) in cash and cash equivalents
 
 
4,118
    
 
(23,009
)
Cash and cash equivalents at beginning of period
 
 
38,546
    
 
55,748
 
Cash and cash equivalents at end of period
 
$
42,664
    
$
32,739
 

(1) - See Note 3 - “Restatement of Previously Issued Condensed Consolidated Financial Statements” to our Condensed Consolidated Financial Statements for a discussion of these adjustments

The accompanying notes are an integral part of these condensed consolidated financial statements.


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1—THE COMPANY
 
Chordiant Software, Inc. (“the Company”, “Chordiant” or “we”) is an enterprise software vendor that offers software solutions for global business-to-consumer companies that seek to improve the quality of their customer interactions and to reduce costs through increased employee productivity and process efficiencies. We concentrate on serving global customers in the retail, financial services, communications and other consumer direct industries.
 
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation
 
The accompanying condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The September 30, 2005 condensed consolidated balance sheet was derived from restated audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2006 filed with the Securities and Exchange Commission (“SEC”),(the “2006 Form 10-K”).

As disclosed in our 8-K filed on November 30, 2006, the previous financial statements should not be relied upon 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 because additional non-cash stock-based compensation expense was not recorded correctly. See Note 3 - “Restatement of Previously Issued Condensed Consolidated Financial Statements” to our Condensed Consolidated Financial Statements for a discussion of these adjustments.
 
All adjustments, consisting of only normal recurring adjustments, which in the opinion of management, are necessary to state fairly the financial position, results of operations and cash flows for the interim periods presented have been made. The results of operations for interim periods are not necessarily indicative of the results expected for the full fiscal year or for any future period.
 
Restatements

Restatement relating to stock-based compensation 

On November 30, 2006, we filed a Form 8-K announcing that the Company was restating its financial statements. As previously disclosed 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 has focused on processes used to establish the option exercise price and obtain required approvals of stock option grants and the related measurement dates used for financial reporting purposes.

During the course of the review, the Audit Committee has reached the conclusion 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 certain stock option grants made by the Company during the period 2000 to 2006 differ from the measurement dates previously used to account for such option grants. Based on that conclusion of the Audit Committee, management and the Audit Committee of the Company’s Board of Directors determined that non-cash stock-based compensation expense should have been recorded with respect to those stock option grants and recognized over the vesting period of the options, and that the amount of such additional non-cash expense and associated withholding taxes for the period 2001 through 2006 is approximately $8.3 million. The majority of the errors having significant financial statement impact relate to options that were granted from late 2000 to mid 2003 and generally vested over periods ranging from one to four years if not canceled or forfeited by the recipient. 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 issues, concluded that the Company should 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 because the differences were deemed to be material.

The financial information as of, and for the three and nine months ended June 30, 2005 is labeled restated as it has been


revised from the amounts previously filed in our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2005. See Note 3 - “Restatement of Previously Issued Condensed Consolidated Financial Statements” to our Condensed Consolidated Financial Statements for a discussion of these adjustments. The restatement is further discussed in Note 3 of the consolidated financial statements in our 2006 Annual Report on Form 10-K filed with the SEC.

Previously Disclosed Restatement of Financial Statements Reported in 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.

Reclassifications
 
Certain reclassifications have been made to prior period balances to conform to the current period’s presentation.
 
Principles of consolidation
 
The accompanying unaudited condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
 
Use of estimates
 
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
 
On an on-going basis, we evaluate the estimates, including those related to our allowance for doubtful accounts, valuation of goodwill and intangible assets, valuation of deferred tax assets, certain variables associated with the valuation of stock-based compensation, restructuring costs, contingencies, vendor specific evidence 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.

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. All revenue amounts are presented net of sales taxes in the Company’s condensed consolidated statements of operations. 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 period to period and could result in additional 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 judgment.
 
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 vendor specific objective evidence (“VSOE”) of fair value of the respective elements. VSOE of fair value for the services element is based upon the standard hourly rates we charge for the services when such services are sold separately. 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 product contracts 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 97-2.
 
For product contracts that involve significant implementation or customization essential to the functionality of our products, we recognize the license and professional consulting services revenues 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 in 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 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 status, or if the project has not reached the go-live date status, 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 determine 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 periods which have historically ranged 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 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 receipt of cash. If a transaction includes extended payment terms, we recognize revenue as the payments become due and payable

Restricted cash
 
At June 30, 2006 and September 30, 2005, interest bearing certificates of deposit were classified as restricted cash. These deposits serve as collateral for letters of credit securing certain lease obligations and post-contract customer support obligations. During the quarter ended December 31, 2005, $1.5 million of restricted cash that served as a security deposit on a post-contract customer support transaction was released as the underlying contract requirement expired. During the quarter ended June 30, 2006, $0.3 million of restricted cash for letters of credit related to lease obligations was released in accordance with the requirements of the lease agreements.

Stock-Based Compensation Expense 
 
On October 1, 2005, we adopted Statement of Financial Accounting Standards (“SFAS”) 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 employees and directors including employee stock options, restricted stock awards and employee stock purchases related to the Employee Stock Purchase Plan (“ESPP”) based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provided supplemental implementation guidance for SFAS 123(R). We have applied the provisions of SAB 107 in the adoption of SFAS 123(R).
 
We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of October 1, 2005, the first day of the Company’s fiscal year 2006. The condensed consolidated financial statements as of and for the three and nine months ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the condensed consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the condensed consolidated statement of operations. Prior to the adoption of SFAS 123(R), we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, when the exercise price of the Company’s fixed stock options granted to employees and directors was equal to the fair market value of the underlying stock at the date of grant, no stock-based compensation was required to be recognized under APB 25.

Stock-based compensation expense recognized during the period under SFAS 123(R) is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s condensed consolidated statement of operations for the three and nine months ended June 30, 2006 includes: (i) compensation expense for share-based payment awards granted prior to, but not yet vested as of September 30, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123, and (ii) compensation expense for the share-based payment awards granted subsequent to September 30, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), we changed our method of expense attribution from the vested graded to the straight-line method. Compensation expense for all share-based payment awards granted on or prior to September 30, 2005 will continue to be recognized using the vested graded method of expense attribution while compensation expense for all share-based payment awards granted subsequent to September 30, 2005 will be recognized using the straight-line method of expense attribution. As stock-based compensation expense recognized in the condensed consolidated statement of operations for the third quarter and first nine months of fiscal 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. In the pro forma disclosures required under SFAS 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred. See Note 11.
 
Upon adoption of SFAS 123(R), the Company continued to utilize the Black-Scholes option-pricing model (“Black-Scholes model”) which was previously used for the Company’s pro forma disclosures required under SFAS 123. For additional information, see Note 11. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS 123(R) and SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.


Stock-based compensation expense recognized under SFAS 123(R) for the three and nine months ended June 30, 2006 was $1.5 million and $3.7 million, which consisted of stock-based compensation expense of $1.1 million and $2.0 million related to employee stock options and $0.4 million and $1.7 million related to restricted stock awards, respectively.  

The effect of the adoption of FAS 123(R) on October 1, 2005, resulted in an increase of $0.5 million and $1.3 million in the loss from operations, loss before income taxes and net loss, an increase of $0.01 and $0.02 net loss per share, for the three and nine months ended June 30, 2006, respectively, compared to the continued application of APB 25 as used in the comparable prior year period. Our reported basic and diluted net loss per share was $0.05 and $0.19 for the three and nine months ended June 30, 2006, respectively. We have not recognized, and do not expect to recognize in the near future, any tax benefit related to employee stock-based compensation expense due to the full valuation allowance of our net deferred tax assets and our operating loss carryforwards. In addition, the adoption of FAS 123(R) did not affect our cash flow from operations or cash flow from financing activities. No stock-based compensation expense has been capitalized as part of the cost of an asset as of June 30, 2006.
 
Under APB 25, stock-based compensation expense of $0.7 million and $1.9 million for the three and nine months ended June 30, 2005, respectively, was recorded as stock-based compensation expense in the condensed consolidated statement of operations related to variable options, options granted with exercise prices below fair market value, and restricted stock awards. Previously, the compensation expense under APB 25 on variable options was re-measured at the end of each operating period until the options were exercised, forfeited or expired. Under SFAS 123(R), these options are now expensed based on the fair value approach for unvested shares as of September 30, 2005. The restricted stock awards continue to be expensed under FAS 123(R) using a vested graded expense attribution consistent with the prior period.
 
There was no stock-based compensation expense related to the ESPP recognized during the three and nine months ended June 30, 2006 and 2005. See Note 11 for additional information.

Concentrations of credit risk
 
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, restricted cash and accounts receivable. To date, we have invested excess funds in money market accounts. We have cash and cash equivalents with various high quality institutions domestically and internationally.

Our accounts receivable are derived from sales to customers located in North America, Europe, and elsewhere in the world. We perform ongoing credit evaluations of our customers’ financial condition and, generally, require no collateral from our customers. We maintain an allowance for doubtful accounts when deemed necessary. To date, bad debts have not been material and have been within management expectations.

The following table summarizes the revenues from customers that accounted for 10% or more of total revenues:

   
Three Months Ended June 30,
  
Nine Months Ended June 30
    
 
 
2006
  
2005
  
2006
    
2005
  
 
 
Citicorp Credit Services, Inc.
 
16
%
  
 
*
 
  
 
13
%
  
 
*
 
    
 
Sky Subscribers Service
 
13
%
  
 
*
 
  
 
*
 
  
 
*
 
    
 
Capital One Services, Inc.
 
*
 
  
 
16
%
  
 
10
%
  
 
22
%
    
 
ING Canada, Inc.
 
*
 
  
 
14
%
  
 
*
 
  
 
*
 
    
 
Barclays Bank plc
 
*
 
  
 
*
 
  
 
*
 
  
 
10
%
    
                                     
*  Represents less than 10% of total revenues.
 
At June 30, 2006, Citicorp Credit Services, Sky Subscribers Service and Cash America International accounted for 16% and 15% and 13%, respectively, of our accounts receivable, net. At September 30, 2005, Capital One Services, Wachovia and HSBC Technology & Services accounted for 18%, 17% and 10% respectively of our accounts receivable, net.
 
Research and Development
 
Costs incurred in the research and development of new products and enhancements to existing products are charged to expense as incurred until the technological feasibility of the product or enhancement has been established. Technological feasibility of the product is determined after the completion of a detailed program design and a determination has been made that any uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detail program design, technological feasibility is determined only after completion of a working model. After establishing technological feasibility, additional development costs incurred through the date the product is available for general release to customers is capitalized and amortized over the estimated product life.



When technological feasibility is established through the completion of a working model, the period of time between achieving technological feasibility and the general release of the new product is generally short and software development costs qualifying for capitalization are normally insignificant. During the quarter ended September 30, 2004, technological feasibility for an acquired banking product was established through the completion of a detailed program design. Costs aggregating $2.7 million associated with this product have been capitalized and are characterized as Other Assets as of September 30, 2005. During the quarter ended September 30, 2005, the product became available for general release and, accordingly, the costs capitalized commenced to be amortized. The capitalized costs are being amortized using the straight-line method over the remaining estimated economic life of the product which is estimated to be 36 months. For the three and nine months ended June 30, 2006, amortization expense related to this product was $0.2 million and $0.7 million, respectively, and is included in the cost of revenues for licenses.
 
Income Taxes
 
We provide a valuation allowance for deferred tax assets when it is more likely than not that the net deferred tax assets will not be realized. Based on a number of factors, including the lack of a history of profits, the uncertainty of future taxable income and the fact that the market in which we compete is competitive and characterized by rapidly changing technology, we believe that there is sufficient uncertainty regarding the realization of deferred tax assets such that a full valuation allowance has been provided. At September 30, 2005, we had approximately $150.7 million and $10.6 million of net operating loss carryforwards for federal and state purposes, respectively, and net operating loss carryforwards of approximately $34.4 million in the United Kingdom.  

Under U.S. tax rules, Section 382 of the Internal Revenue Code (IRC), as amended, certain limitations are imposed on the use of net operating losses following certain defined changes in ownership. During the three months ended March 31, 2006 the Company performed an analysis of its historical ownership changes and concluded that four such changes have occurred since inception. As a result of the IRC Section 382 study, approximately $2.7 million of the $150.7 million of net operating loss carryforwards at September 30, 2005 will expire unutilized.
 
Subsequent ownership changes, as defined in Section 382, could further limit the amount of net operating loss carryforwards and research and development credits that can be utilized annually to offset future taxable income, if any.

Net loss per share
 
Basic and diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period excluding common stock subject to repurchase. The calculation of diluted net loss per share excludes potential common shares as their effect is anti-dilutive. Potential common shares consist of common shares issuable upon the exercise of stock options, warrants (using the treasury stock method) and common shares subject to repurchase by us.
 
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except for per share data):

 
   
Three Months Ended June 30,
  
Nine Months Ended June 30,
 
 
  
2006
      
2005
      
2006
      
2005
 
 
 
          
(restated)(1)
              
(restated)(1)
  
 
Net loss available to common stockholders
$
(3,682
)
  
$
(3,510
)
  
$
(7,638
)
  
$
(14,303
)
 
Weighted average common stock outstanding
 
79,275
 
  
 
77,103
 
  
 
78,598
 
  
 
75,686
 
 
Common stock subject to repurchase
 
(1,240
)
  
 
(2,023
)
  
 
(1,240
)
  
 
(1,720
)
 
Denominator for basic and diluted calculation
 
78,035
 
  
 
75,080
 
  
 
77,358
 
  
 
73,966
 
 
Net loss per share - basic and diluted
$
(0.05
)
  
$
(0.05
)
  
$
(0.10
)
  
$
(0.19
)

(1) - See Note 3 - “Restatement of Previously Issued Condensed Consolidated Financial Statements” to our Condensed Consolidated Financial Statements for a discussion of these adjustments




The following table sets forth the potential total common shares that are excluded from the calculation of diluted net loss per share as their effect is anti-dilutive as of the dates indicated (in thousands):
 
 
 
 
June 30,
2006
 
  
 
June 30,
2005
 
 
Warrants outstanding
 
1,662
 
  
 
1,662
 
 
Employee stock options
 
9,801
 
  
 
9,748
 
 
Restricted stock
 
1,240
 
  
 
2,023
 
 
 
 
12,703
 
  
 
13,433
 
 
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, “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 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, “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 underfunded 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 Statement of 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 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. 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.



NOTE 3— RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In this Form 10-Q, the Company is restating its condensed consolidated balance sheet as of September 30, 2005, the related consolidated statements of operations and comprehensive loss for the three and nine months ended June 30, 2005, and the related consolidated statement of cash flows for the nine months ended June 30, 2005. In the Company’s Form 10-K for the year ended September 30, 2006 filed with the Securities and Exchange Commission (the “2006 Form 10-K”), the Company 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 the fiscal year ended September 30, 2005 and nine month ended September 30, 2004, and each of the quarters in fiscal year 2005 and the quarters ended December 31 2005 and March 31, 2006.

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.

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 APB 25, the correct measurement dates for a number of stock option grants made by Chordiant during the period 2000 to 2006 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 recorded selected 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.

The Audit Committee found:

·  
There was a lack of oversight in the issuance and administration of the Company’s stock options.
·  
There was poor record keeping in connection with the authorization and issuance of stock options.
·  
Stock options were granted for which the Company can not provide evidence of authorization consistent with the terms of the applicable option plan and Board of Directors resolutions.
·  
In some cases, the Company issued stock options having exercise prices that were not consistent with the requirements of the applicable option plan.
·  
There is evidence to suggest that in some cases the dates used to establish the exercise prices for certain options were intentionally and selectively chosen based on dates on which the closing prices of the Company’s stock were lower than on the dates on which the options may have been actually granted.
·  
There is inconclusive evidence that on one occasion in 2002, a former employee changed the date on documentation relating to the exercise of a stock option by means of a promissory note to reflect an earlier exercise date. There is also inconclusive evidence that certain other option exercises in 2001 by means of promissory notes may have been memorialized with dates preceding the actual exercise dates.
·  
With respect to certain individuals, there was insufficient evidence to support a definitive conclusion that they appreciated the accounting or disclosure issues associated with the Company’s stock option practices, or knowingly participated in actions intended to mislead or deceive the Company’s auditors.

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.

To the extent stock options have been exercised, the Company has also taken certain financial remediation measures to recover the price difference between the original and revised measurement dates.



The Company is recording approximately $8.3 million of additional pre-tax, non-cash stock-based compensation expense and associated withholding taxes in the restatement for the fiscal periods 2000 through 2006.

In addition, as a result of the errors in determining measurement dates, certain options were determined to have been granted at an exercise price below the fair market value of our stock on the actual grant date. These discounted options vesting subsequent to December 2004 result in nonqualified deferred compensation for purposes of Section 409A of the Internal Revenue Code, and holders are subject to an excise tax on the value of the options in the period in which they vest. We have yet to determine whether we will either implement a plan to assist the affected employees for the amount of this tax, adjust the terms of the original option grant, or adjust the terms of the original option grant and pay the affected employees an amount to compensate such employees for this lost benefit. As such, no expense has been recorded in the Condensed Consolidated Financial Statements in the adjustments discussed above in connection with this matter.

From the date of the Company’s initial public offering in February 2000 through September 30, 2006 stock options were granted on approximately 327 individual dates. Based upon the test work performed, errors were noted on approximately 68 of these days impacting more than 1,300 stock option issuances.

Approximately 65% of the errors noted during the review (aggregating approximately $6.2 million before considering the impact of employee terminations and forfeitures) relate to four annual stock option grants to employees recorded in the years 2000, 2001, 2003 and 2004. On these dates grants were made to the majority of the Company’s employees as a part of the annual “refresh” or “evergreen” stock option granting process. In each case, it was found that the Company had treated option grants to multiple employees as effective prior to the date upon which it had determined the exact number of options that would be granted to each individual employee. Because changes were made to the listing of employees receiving grants, the measurement date for the awards should have been delayed until the listing of awards was determined and approved with finality. To determine the corrected measurement date the Company used the date of the final internal email approval that reconciled to the actual option grants recorded, or if such emails did not reconcile, or if additional changes were made to the allocation of options to recipients, the Company used the date our third party stock option service provider entered the data into the stock option database. As such, judgment was necessary to determine the date the listing was determined with finality. It is estimated that the range between the high and low of such accounting estimates is approximately $0.5 million (unaudited) for these items.

Approximately 10% of the errors (aggregating approximately $0.9 million before considering the impact of employee terminations and forfeitures) relate to activity on 20 different dates. In these instances, the dates on the written documentation supporting the option grants was inconsistent with the measurement dates initially recorded by the Company. During fiscal periods 2000 through 2006, the Board of Directors had delegated the authority to approve certain stock option grants to non-executive officers to the CEO of the Company. The method of documenting such activity routinely resulted in documents being signed or approved via email after the indicated dates of the grants. Because the terms of these stock options either were not known or were subject to change by those empowered to approve the grants, the correct measurement date for the awards was the date the written or electronic documentation was completed. To determine the corrected measurement dates, the Company used the dates of Board meetings, the dates that unanimous written consents were returned or approved, or the date that the appropriate email approvals were obtained from the CEO. Because these dates are not subject to judgment, no significant estimates were necessary for these items.

Approximately 7% of the errors (aggregating approximately $0.6 million before considering the impact of employee terminations and forfeitures) relate to activity on 23 different dates. In these cases the underlying differences relate to the definition of fair market value as defined under the stock option plans of the Company. For example, the 1999 Equity Incentive Plan defined fair market value as the closing price of Chordiant’s stock on the day prior to the date of grant. These errors relate to the inconsistent use of the “day of” price versus the “day prior” price used to determine the exercise price of the options as stipulated by the plan documents. To determine the corrected measurement dates, the Company applied the appropriate definitions as stipulated in the underlying plan documents. As such, no accounting estimates were required for these items.

Approximately 7% of the errors (aggregating approximately $0.6 million before considering the impact of employee terminations and forfeitures) relate to three grants awarded to members of senior management. In two of these instances, the underlying compensation plans were in the process of being negotiated over periods spanning several weeks. The measurement date initially recorded by the Company was a date at, or near, the beginning of the negotiation process. Because the stock options were a part of the respective compensation package, the measurement date for the awards should have been delayed until the respective compensation agreements were determined and approved with finality. In the third instance, the grant was not ratified by the Board of Directors until a later date than the date initially recorded as the measurement date. To determine the corrected measurement dates the Company used documents that evidenced the appropriate level of review, or if not available, the date our third party stock option service provider entered the data into the stock option database. As such, judgment was necessary to determine the date these grants were approved with finality. It is estimated that the range between the high and low of such accounting estimates is less than $0.1 million (unaudited) for these items.

The remainder of the errors (aggregating approximately $1.1 million before considering the impact of employee terminations and forfeitures) included the inconsistent treatment of option dating for newly hired employees, the finalization and documentation of discretionary awards, options granted to non-employee consultants not being expensed, and new hires being


placed on a leave of absence at the hire date. The types of estimates necessary to arrive at the corrected measurement dates were similar to those noted above.

As a result of the above errors and adjustments, we have restated our 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.

The expenses arising from the investigation, the restatement and related activities are recorded in the periods incurred. The aggregate cost of external legal, accounting and auditing costs incurred through September 30, 2006 was approximately $1.2 million and at December 31, 2006 the cumulative costs were approximately $2.2 million.

The impact of the restatement on the consolidated statements of operations is $0.2 million for 2006 and thereafter. For other periods the impact is as follows (in thousands):

   
Total
effect at
September 30,
2005
      
Year ended
September 30,
2005
      
Nine
months
ended
September 30,
2004
      
Total effect at
December 31,
2003
  
Net loss, as previously reported
        
$
(19,540
)
  
$
(443
)
        
Additional compensation expense resulting from improper measurement dates for stock option grants
$
(7,652
)
    
(187
)
    
(761
)
    
(6,704
)
Payroll tax related effects
  
(401
)
    
(138
)
    
(167
)
    
(96
)
Total increase to net loss
$
(8,053
)
    
(325
)
    
(928
)
  
$
(6,800
)
Net loss, as restated
        
$
(19,865
)
  
$
(1,371
)
        
                               
                               
   
Year ended
December 31, 2003
      
Year ended
December 31,
2002
      
Year ended
December 31,
2001
      
Year ended
December 31,
2000
  
Additional compensation expense resulting from improper measurement dates for stock option grants
$
(1,433
)
  
$
(2,715
)
  
$
(2,082
)
  
$
(474
)
Payroll tax related effects
  
(96
)
    
—
      
—
      
—
  
Total increase to net loss
$
(1,529
)
  
$
(2,715
)
  
$
(2,082
)
  
$
(474
)
                               
                               


The following table presents the effect of the restatement adjustments made to the Company’s previously reported unaudited condensed consolidated balance sheet (in thousands, except per share data):

 
September 30, 2005
  
 
  
As
Previously
Reported
      
Adjustments
      
Restated
    
ASSETS
    
Current assets:
        
 
      
 
      
Cash and cash equivalents
$
38,546
    
$
—
    
$
38,546
    
Restricted cash
 
1,982
      
—
      
1,982
    
Accounts receivable
 
18,979
    
 
—
    
 
18,979
    
Prepaid expenses and other current assets
 
4,345
    
 
—
    
 
4,345
    
Total current assets
 
63,852
    
 
—
    
 
63,852
    
Restricted cash
 
365
    
 
—
    
 
365
    
Property and equipment, net
 
2,479
    
 
—
    
 
2,479
    
Goodwill
 
31,907
    
 
—
    
 
31,907
    
Intangible assets, net
 
5,148
    
 
—
    
 
5,148
    
Other assets
 
3,499
    
 
—
    
 
3,499
    
Total assets
$
107,250
    
$
—
    
$
107,250
    
 
 
 
              
 
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
      
 
      
 
      
Current liabilities:
 
      
 
      
 
      
Accounts payable
$
4,554
    
$ 
—
    
$
4,554
    
Accrued expenses
 
8,902
      
400
      
9,302
    
Deferred revenue
 
26,050
    
 
—
    
 
26,050
    
Current portion of capital lease obligations
 
213
    
 
—
    
 
213
    
Total current liabilities
 
39,719
    
 
400
    
 
40,119
    
Deferred revenue—long-term
 
147
    
 
—
    
 
147
    
Restructuring costs, net of current portion
 
1,731
    
 
—
    
 
1,731
    
Other long-term liabilities
 
96
    
 
—
    
 
96
    
Total liabilities
 
41,693
    
 
400
    
 
42,093
    
 
 
 
    
 
      
 
 
    
Stockholders’ equity:
 
      
 
      
 
      
Preferred stock, $0.001 par value; 51,000 shares authorized; none issued and outstanding at September 30, 2005
 
—
   
 
—
    
 
—
   
Common stock, $0.001 par value; 300,000 shares authorized; 78,488 shares issued and outstanding at September 30, 2005
 
78
    
 
—
    
 
78
    
Additional paid-in capital
  
273,824
    
 
7,653
    
 
281,477
    
Deferred stock-based compensation
  
(1,940
)
    
—
      
(1,940
)
  
Accumulated deficit
  
(208,889
)
    
(8,053
)
    
(216,942
)
  
Accumulated other comprehensive income
  
2,484
      
—
      
2,484
    
Total stockholders’ equity
  
65,557
      
(400
)
    
65,157
    
Total liabilities and stockholders’ equity
$
107,250
    
$
—
    
$
107,250
    


The following table presents the effect of the restatement adjustments made to the Company’s previously reported unaudited condensed consolidated statement of operations and comprehensive loss (in thousands, except per share data):

 
Three Months Ended June 30, 2005
  
Nine Months Ended June 30, 2005
   
As
Previously Reported
    
 
Adjustments
    
 
Restated
      
As
Previously Reported
    
 
Adjustments
    
 
Restated
  
 
                                
 
            
Revenues:
                                
 
      
 
    
License
$
9,228
      
—
    
$
9,228
    
$
25,029
      
—
    
$
25,029
  
Service
 
12,393
      
—
      
12,393
      
37,440
      
—
      
37,440
  
Total revenues
 
21,621
      
—
      
21,621
      
62,469
      
—
      
62,469
  
Cost of revenues:
 
                                            
License
 
337
      
—
      
337
      
702
      
—
      
702
  
Service
 
7,300
      
11
      
7,311
      
22,393
      
63
      
22,456
  
Amortization of intangible assets
 
303
      
—
      
303
      
765
      
—
      
765
  
Total cost of revenues
 
7,940
      
11
      
7,951
      
23,860
      
63
      
23,923
  
Gross profit
 
13,681
      
(11
)
    
13,670
      
38,609
      
(63
)
    
38,546
  
Operating expenses:
 
                                            
Sales and marketing
 
7,262
      
13
      
7,275
      
21,624
      
54
      
21,678
  
Research and development
 
5,408
      
13
      
5,421
      
15,556
      
44
      
15,600
  
General and administrative
 
4,672
      
7
      
4,679
      
13,758
      
54
      
13,812
  
Amortization of intangible assets
 
—
     
—
      
—
     
118
      
—
      
118
  
Purchased in-process research and development
 
—
     
—
      
—
     
1,940
      
—
      
1,940
  
Restructuring reversal
 
—
     
—
      
—
     
(96
)
    
—
      
(96
)
Total operating expenses
 
17,342
      
33
      
17,375
      
52,900
      
152
      
53,052
  
Loss from operations
 
(3,661
)
    
(44
)
    
(3,705
)
    
(14,291
)
    
(215
)
    
(14,506
)
Interest income, net
 
147
      
—
      
147
      
539
      
—
      
539
  
Other income (expense), net
 
186
      
—
      
186
      
(43
)
    
—
      
(43
)
Net loss before income taxes
 
(3,328
)
    
(44
)
    
(3,372
)
    
(13,795
)
    
(215
)
    
(14,010
)
Provision for income taxes
 
138
              
138
      
293
              
293
  
Net loss
$
(3,466
)
  
$
(44
)
  
$
(3,510
)
  
$
(14,088
)
  
$
(215
)
  
$
(14,303
)
Other comprehensive loss:
  
(
              
(
                          
Foreign currency translation loss
  
(588
)
    
—
      
(588
)
    
(476
)
    
—
      
(476
)
Comprehensive loss
$
(4,054
)
  
$
—
    
$
(4,098
)
  
$
(14,565
)
  
$
—
    
$
(14,779
)
                                               
Net loss per share— basic and diluted
$
(0.05
)
  
$
—
    
$
(0.05
)
  
$
(0.19
)
  
$
—
    
$
(0.19
)
Weighted average shares used in computing basic and diluted loss per share
  
75,080
      
—
      
75,080
      
73,966
      
—
      
73,966
  


The following table presents the effect of the restatement adjustments made to the Company’s previously reported unaudited condensed consolidated statement of cash flows (in thousands):

 
Nine Months Ended June 30, 2005
  
 
  
As
Previously
Reported
    
 
Adjustments
    
 
Restated
    
Cash flows from operating activities
                        
Net loss
$
(14,088
)
  
$
(215
)
  
$
(14,303
)
  
Adjustments to reconcile net loss to net cash used in operating activities:
 
  
 
    
—
    
 
  
 
  
Depreciation and amortization
 
1,063
 
    
—
    
 
1,063
 
  
Purchased in-process research and development
 
1,940
 
    
—
    
 
1,940
 
  
Amortization of intangibles and capitalized software
 
883
 
    
—
    
 
883
 
  
Non-cash stock-based compensation expense
 
1,647
 
    
204
    
 
1,851
 
  
Provision for doubtful accounts
 
86
 
    
—
    
 
86
 
  
Warrants issued to customers
 
(42
)
    
—
    
 
(42
)
  
Loss on disposal of assets
 
(46
)
    
—
    
 
(46
)
  
Other non-cash charges
 
127
 
    
—
    
 
127
 
  
Changes in assets and liabilities:
 
  
 
          
 
  
 
  
Accounts receivable
 
(3,430
)
    
—
    
 
(3,430
)
  
Prepaid expenses and other current assets
 
(1,470
)
    
—
    
 
(1,470
)
  
Other assets
 
173
 
    
—
    
 
173
 
  
Accounts payable
 
(3,481
)
    
—
    
 
(3,481
)
  
Accrued expenses
 
1,534
 
    
11
    
 
1,545
 
  
Deferred revenue
 
4,677
 
    
—
    
 
4,677
 
  
Net cash used in operating activities
 
(10,427
)
    
—
    
 
(10,427
)
  
Cash flows from investing activities:
 
  
 
          
 
  
 
  
Property and equipment purchases
 
(630
)
    
—
    
 
(630
)
  
Capitalized product development costs
 
(2,089
)
    
—
    
 
(2,089
)
  
Cash used for acquisitions, net
 
(9,783
)
    
—
    
 
(9,783
)
  
Purchases of marketable securities available for sale
 
(100
)
    
—
    
 
(100
)
  
Increase in restricted cash
 
(8
)
    
—
    
 
(8
)
  
Net cash used for investing activities
 
(12,610
)
    
—
    
 
(12,610
)
  
Cash flows from financing activities:
 
  
 
    
—
    
 
  
 
  
Proceeds from exercise of stock options
 
329
 
    
—
    
 
329
 
  
Payment on capital leases
 
(149
)
    
—
    
 
(149
)
  
Net cash provided by financing activities
 
180
 
    
—
    
 
180
 
  
Effect of exchange rate changes
 
(152
)
    
—
    
 
(152
)
  
Net decrease in cash and cash equivalents
 
(23,009
)
    
—
    
 
(23,009
)
  
Cash and cash equivalents at beginning of period
 
55,748
 
    
—
    
 
55,748
 
  
Cash and cash equivalents at end of period
$
32,739
 
  
$
—
    
$
32,739
 
  


NOTE 4—BALANCE SHEET COMPONENTS

Accounts receivable
 
Accounts receivable, net consists of the following (in thousands):
     
June 30,
2006
      
September 30,
2005
 
 
Accounts receivable, net:
 
  
 
  
 
  
 
 
Accounts receivable
$
22,375
 
  
$
19,193
 
 
Less: allowance for doubtful accounts
 
(142
)
  
 
(214
)
 
 
$
22,233
 
  
$
18,979
 
 
Property and equipment, net consists of the following (in thousands):

 
 
June 30,
2006
  
September 30,
2005
 
Property and equipment, net:
 
    
 
Computer hardware (useful lives of 3 years)
$
3,421
 
  
$
9,216
  
 
Purchased internal-use software (useful lives of 3 years)
 
2,127
 
  
 
2,336
 
 
Furniture and equipment (useful lives of 3 to 7 years)
 
840
 
  
 
1,508
 
 
Computer equipment and software under capital leases (useful lives of 3 years)
 
549
 
  
 
549
 
 
Leasehold improvements (shorter of 7 years or the term of the lease)
 
2,693
 
  
 
2,855
 
 
 
 
9,630
 
  
 
16,464
 
 
Accumulated depreciation and amortization
 
(7,023
)
  
 
(13,985
)
 
 
$
2,607
 
  
$
2,479
 

Intangible assets
 
The components of intangible assets are as follows (in thousands):
 
   
June 30, 2006
  
September 30, 2005
 
    
Gross
Carrying
Amount
 
  
 
Accumulated
Amortization
      
Net
Carrying
Amount
      
Gross
Carrying
Amount
      
Accumulated
Amortization
      
Net
Carrying
Amount
 
Intangible assets:
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
Developed technologies
 
$
6,904
 
  
$
(3,748
)
  
$
3,156
 
  
$
6,904
 
  
$
(3,075
)
  
$
3,829
 
Customer list and trade names
 
 
2,732
 
  
 
(1,649
)
  
 
1,083
 
  
 
2,732
 
  
 
(1,413
)
  
 
1,319
 
 
 
$
9,636
 
  
$
(5,397
)
  
$
4,239
 
  
$
9,636
 
  
$
(4,488
)
  
$
5,148
 
 
All of our acquired intangible assets are subject to amortization and are carried at cost less accumulated amortization. Amortization is computed on a straight line basis over their estimated useful lives of five years. Aggregate amortization expense for intangible assets totaled $0.3 million for the three months ended June 30, 2006 and 2005, respectively, and, $0.9 million for the nine months ended June 30, 2006 and 2005. We expect amortization expense on acquired intangible assets to be $0.3 million for the remainder of fiscal 2006, $1.2 million in fiscal 2007, $1.2 million in fiscal 2008, $1.2 million in fiscal 2009 and $0.3 million in fiscal 2010.

Accrued expenses
 
Accrued expenses consist of the following (in thousands):



   
 
June 30,
2006 
 
September 30,
2005
  
   
 
 
  
 
As
Previously
Reported
 
  
Adjustment
    
Restated(1)
  
 
Accrued expenses:
                          
 
Accrued payroll, payroll taxes and related expenses
  
$
6,716
 
$
4,094
 
$
400
  
$
4,494
  
 
Accrued restructuring expenses, current portion (Note 6)
 
 
950
 
 
1,235
 
 
—
  
 
1,235
  
 
Accrued third party consulting fees
    
1,785
    
521
    
—
    
521
  
 
Accrued income, sales and other taxes
    
2,857
    
1,156
    
—
    
1,156
  
 
Other accrued liabilities
 
 
1,473
 
 
1,896
 
 
—
  
 
1,896
  
   
 
$
13,781
 
$
8,902
 
$
400
  
$
9,302
  

(1) - See Note 3 - “Restatement of Previously Issued Consolidated Financial Statements” to our Consolidated Financial Statements for a discussion of these adjustments

NOTE 5—ACQUISITIONS
 
The operating results of KiQ Limited (“KiQ”) have been included in the condensed consolidated financial statements since the acquisition date of December 21, 2004. The following unaudited pro forma condensed consolidated financial information reflects the results of operations for the nine months ended June 30, 2005 as if the acquisition of KiQ had occurred on October 1, 2004, after giving effect to purchase accounting adjustments. The purchased in-process research and development expense of $1.9 million has not been included in the pro forma results of operations for the nine months ended June 30, 2005 because it is considered a non-recurring charge. These pro forma results have been prepared for comparative purposes only, do not purport to be indicative of what operating results would have been had the acquisition actually taken place at the beginning of the period, and may not be indicative of future operating results (in thousands, except per share data):

 
 
  
Nine Months
Ended
June 30, 2005
 
  
   
 
(restated)
 
  
 
Pro forma adjusted total revenue
$
63,363
 
  
 
Pro forma adjusted net loss
$
(12,829
)
  
 
Pro forma adjusted net loss per share—basic and diluted
$
(0.17
)
  
 
Pro forma weighted average shares—basic and diluted
 
75,956
 
  
 
NOTE 6—RESTRUCTURING
 
Restructuring Costs
 Through September 30, 2005, the Company has approved certain restructuring plans to, among other things, reduce its workforce and consolidate facilities. Restructuring and asset impairment charges have been taken to align our cost structure with changing market conditions and to create a more efficient organization. Our restructuring charges have been comprised primarily of: (i) severance and benefit termination costs related to the reductions in workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities. We account for each of these costs in accordance with SFAS No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” or previous guidance under EITF 94-3.
 
Retroactive application of SFAS 146 to periods prior to January 1, 2003 was prohibited and, accordingly, the accrual relating to facilities approved under a plan prior to the effective date of SFAS 146 continues to be accounted for in accordance with the guidance of EITF 94-3. The accrual for such facilities does not reflect any adjustments relating to the estimated net present value of cash flows associated with the facilities.
 .
 
For each of the periods presented herein, restructuring charges consist solely of:
 
• Severance and Termination Benefits—These costs represent severance and payroll taxes related to restructuring plans.
 
• Excess Facilities—These costs represent future minimum lease payments related to excess and abandoned space under lease, net of estimated sublease income and planned company occupancy.

As of June 30, 2006, the total restructuring accrual of $2.3 million consisted of the following (in thousands):
 



 
 
Current
  
Non-Current
  
Total
 
 
Severance and termination
$
31
 
$
—
 
$
31
 
 
Excess facilities
 
919
 
 
1,331
 
 
2,250
 
 
Total
$
950
 
$
1,331
 
$
2,281
 
 
The Company expects the remaining severance and termination benefit accrual will be substantially paid by September 30, 2006.

Included in the facilities reserve is a note payable associated with the buyout of an office lease located in New York City. The amount of the note payable is $0.2 million and is payable in quarterly installments through June 2011. We expect to pay the excess facilities amounts related to restructured or abandoned leased space as follows (in thousands):

 
Fiscal Year Ended September 30, 
  
Total Future
Minimum
Payments
 
    
 
 
2006 (remaining three months)
$
114
 
    
 
 
2007
 
891
 
    
 
 
2008
 
351
 
    
 
 
2009
 
357
 
    
 
 
2010
 
364
 
    
 
 
Thereafter
 
173
 
    
 
 
Total
$
2,250
 
    
 

Year Ended September 30, 2005 Restructuring
 
In May 2005, the Company announced that it had appointed a task force to improve profitability and control expenses (the “Profitability Task Force”). The goal of the Profitability Task Force was to create better alignment of functions within the Company, to make full utilization of the Company’s India development center, to develop a closer relationship between the Company’s field operations and customers, to review the sales and implementation models, as well as the organization model to flatten management levels, to review the Company’s product lines, and to enhance the Company’s business model for profitability and operating leverage. As a result of the work of the Profitability Task Force, management undertook an approximate 10% reduction in the Company’s workforce, and in July 2005 affected employees were notified. In connection with this action, the Company incurred a one-time restructuring charge of $1.1 million in the fourth quarter ended September 30, 2005 for severance and termination benefits.
 
The following table summarizes the activity related to the fiscal year 2005 restructuring (in thousands):
 
 
 
 
Severance
and Benefits
 
  
 
Reserve balance at September 30, 2005
$
469