d10q.htm


 
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 December 31, 2007
 
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  x    No  ¨
 
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, 2008, there were 33,212,666 shares of the registrant’s common stock outstanding.
 

CHORDIANT SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
Page No.
 
 
  
Item 1.
3
 
 
  
 
3
 
 
  
 
4
 
 
  
 
5
 
 
  
 
6
 
 
  
Item 2.
26
 
 
  
Item 3.
41
 
 
  
Item 4.
42
 
    
PART II. OTHER INFORMATION
  
 
 
  
Item 1.
43
 
 
  
Item 1A.
43
 
 
  
Item 6.
52
 
 
  
 
52
     


PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited).
 
CHORDIANT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
 
 
 
 
December 31,
2007
      
September 30,
2007
 
 
 
 
 
    
 
  
 
ASSETS
 
 
      
 
  
 
Current assets:
 
 
      
 
    
Cash and cash equivalents
 
$
76,212
    
$
77,987
 
Marketable securities
    
10,885
      
12,159
  
Restricted cash
 
 
48
    
 
46
 
Accounts receivable, net
 
 
21,091
    
 
27,381
 
Prepaid expenses and other current assets
 
 
7,347
    
 
5,306
 
Total current assets
 
 
115,583
    
 
122,879
 
Restricted cash—long-term
 
 
267
    
 
265
 
Property and equipment, net
 
 
3,957
    
 
3,638
 
Goodwill
 
 
32,044
    
 
32,044
 
Intangible assets, net
 
 
2,423
    
 
2,725
 
Other assets
 
 
2,078
    
 
3,264
 
Total assets
 
$
156,352
    
$
164,815
 
 
 
 
      
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
      
 
  
 
Current liabilities:
 
 
      
 
  
 
Accounts payable
 
$
8,469
    
$
8,080
 
Accrued expenses
 
  
13,703
    
 
13,804
 
Deferred revenue, including related party balances of $52and $116at December31, 2007and September 30, 2007, respectively
 
 
38,002
    
 
44,548
 
Total current liabilities
 
 
60,174
    
 
66,432
 
Deferred revenue—long-term
 
 
19,109
    
 
23,434
 
Restructuring costs, net of current portion
 
 
837
    
 
942
 
Other long-term liabilities
 
 
870
    
 
646
 
Total liabilities
 
 
80,990
    
 
91,454
 
                 
Commitments and contingencies (Notes 8, 9 and 10)
 
 
      
 
 
 
 
 
 
      
 
  
 
Stockholders’ equity:
 
 
      
 
 
 
Preferred stock, $0.001 par value; 51,000 shares authorized; none issued and outstanding at December 31, 2007and September 30, 2007
 
 
—
    
 
—
 
Common stock, $0.001 par value; 120,000 shares authorized; 33,309 and 33,221shares issued and outstanding at December 31, 2007and September 30, 2007, respectively
 
 
33
    
 
33
 
Additional paid-in capital
 
 
297,412
    
 
295,650
 
Accumulated deficit
 
 
(226,710
)
  
 
(226,915
)
Accumulated other comprehensive income
 
 
4,627
    
 
4,593
 
Total stockholders’ equity
 
 
75,362
      
73,361
 
Total liabilities and stockholders’ equity
 
$
156,352
    
$
164,815
 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


CHORDIANT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended December 31,
 
 
 
2007
    
 
2006
  
 
 
 
            
Revenues:
 
 
      
 
    
License
 
$
8,807
    
$
7,162
  
Service, including related party items aggregating $64 and $63 for the three months ended December 31, 2007and 2006, respectively.
 
 
20,327
    
 
15,777
  
Total revenue
 
 
29,134
    
 
22,939
  
Cost of revenues:
 
 
      
 
    
License
 
 
334
    
 
454
  
Service, including related party items aggregating $177 for the three months ended December 31, 2006
 
 
8,478
    
 
7,466
  
Amortization of intangible assets
 
 
303
    
 
303
  
Total cost of revenue
 
 
9,115
    
 
8,223
  
Gross profit
 
 
20,019
    
 
14,716
  
Operating expenses:
 
 
      
 
    
Sales and marketing
 
 
8,903
    
 
7,264
  
Research and development
 
 
6,725
    
 
6,296
  
General and administrative
    
5,003
      
5,611
  
Restructuring expense
 
 
—
    
 
6,472
  
Total operating expense
 
 
20,631
    
 
25,643
  
Loss from operations
 
 
(612
)
  
 
(10,927
)
Interest income, net
 
 
835
    
 
304
  
Other income (expense), net
 
 
134
    
 
(15
)
Income (loss)before income taxes
 
 
357
    
 
(10,638
)
Provision for income taxes
 
 
152
    
 
111
  
Net income (loss)
 
$
205
    
$
(10,749
)
                 
Net income (loss)per share:
                
Basic
  
$
0.01
    
$
(0.34
)
Diluted
  
$
0.01
    
$
(0.34
)
                 
Weighted average shares used in computing net income (loss) per share:
                
Basic
    
33,292
      
31,725
  
Diluted
    
33,864
      
31,725
  

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)
 
   
Three Months Ended December31,
 
 
 
2007
    
 
2006
 
 
 
 
      
 
    
Cash flows from operating activities:
 
 
      
 
    
Net income (loss)
 
$
205
    
$
(10,749
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
      
 
    
Depreciation and amortization
 
 
397
    
 
350
  
Amortization of intangibles and capitalized software
 
 
570
    
 
528
  
Non-cash stock-based compensation expense
 
 
1,175
    
 
976
  
Provision for doubtful accounts and sales returns
 
 
38
    
 
111
  
Loss on disposal of assets
 
 
—
    
 
489
  
Accretion of discounts on marketable securities
    
(32
)
    
—
  
Other non-cash charges
 
 
—
    
 
445
  
Changes in assets and liabilities:
 
 
      
 
    
Accounts receivable
 
 
6,255
    
 
(22,698
)
Prepaid expenses and other current assets
 
 
(2,013
)
  
 
(3,497
)
Other assets
 
 
999
    
 
(263
)
Accounts payable
 
 
396
    
 
(2,298
)
Accrued expenses, other long-term liabilities and restructuring
 
 
23
    
 
7,273
  
Deferred revenue
 
 
(10,664
)
  
 
31,727
  
Net cash provided by (used for) operating activities
 
 
(2,651
)
  
 
2,394
  
Cash flows from investing activities:
 
 
      
 
    
Property and equipment purchases
 
 
(723
)
  
 
(1,058
)
Capitalized product development costs
    
(66
)
    
—
  
Increase inrestricted cash
 
 
(2
)
  
 
(81
)
Purchases of marketable securities and short-term investments
    
(4,340
)
    
—
  
Proceeds from maturities of marketable securities and short-term investments
 
 
5,647
    
 
—
  
Net cash provided by (used for) investing activities
 
 
516
    
 
(1,139
)
Cash flows from financing activities:
 
 
      
 
    
Proceeds from exercise of stock options
 
 
569
    
 
221
  
Payment on capital leases
 
 
—
    
 
(56
)
Excess tax benefits from stock-based compensation
    
17
      
—
  
Net cash provided by financing activities
 
 
586
    
 
165
  
Effect of exchange rate changes
 
 
(226
)
  
 
688
  
Net increase (decrease) in cash and cash equivalents
 
 
(1,775
)
  
 
2,108
  
Cash and cash equivalents at beginning of period
 
 
77,987
    
 
45,278
  
Cash and cash equivalents at end of period
 
$
76,212
    
$
47,386
  

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. or the Company, or Chordiant 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. The Company concentrates on serving global customers in banking, insurance, healthcare, communications, retail 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, orSEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to such rules and regulations. The September 30, 2007 Condensed Consolidated Balance Sheetswas derived from 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 the Company’sAnnual Report on Form 10-K for the year ended September 30, 2007, or 2007 Form 10-K, filed with the SEC.

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.

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 the accountsof the Companyand itswholly-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 the Company 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, the Company evaluates the estimates, including those related to the allowance for doubtful accounts, valuation of stock-based compensation, valuation of goodwill and intangible assets, valuation of deferred tax assets, restructuring expenses, contingencies, Vendor Specific Objective Evidence, or VSOE, of fair value in multiple element arrangements and the estimates associated with the percentage-of-completion method of accounting for certain of our revenue contracts. The Company bases these estimates on historical experience and on various other assumptions that are believed to be reasonable. Actual results may differ from these estimates under different assumptions or conditions.

Revenue recognition
 
The Company derives revenue from licensing software and related services, which include assistance in implementation, customization and integration, post-contract customer support, or PCS, 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 revenue is difficult to predict and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from period to period and could result in operating losses. The accounting rules related to revenue recognition are complex and are affected by the 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.



CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Software license revenue is recognized in accordance with AICPA’s 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, the Company recognizes revenue for services and post-contract customer support based upon the fair value VSOE of the respective elements. The fair value VSOE of the services element is based upon the standard hourly rates charged for the services when such services are sold separately. The fair value VSOE 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 fair value VSOE exists for all undelivered elements, the Company accounts 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, revenue is recognized upon the establishment of VSOE for that element or when the element is delivered.

At the time a transaction is entered into, the Company assesses whether any services included within the arrangement relate to significant implementation or customization essential to the functionality of our products. For contracts for products that do not involve significant implementation or customization essential to the product functionality, the Company recognizes license revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection of the fee is probable and delivery has occurred as prescribed by SOP 97-2. For contracts that involve significant implementation or customization services essential to the functionality of our products, the license and professional consulting services revenue is recognized 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”, or SOP 81-1.

The percentage-of-completion method is applied when the Company has the ability to make reasonably 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. The “go-live” date is defined 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 and these changes are accounted for as changes in accounting estimates when the information becomes known. Information impacting estimates obtained after the balance sheet date but before the issuance of the financial statements is used to update the estimates. Provisions for estimated contract losses, if any, are recognized in the period in which the loss becomes probable and can be reasonably estimated. When additional licenses are sold related to the original licensing agreement, revenue is recognized upon delivery if the project has reached the go-live date, or if the project has not reached the go-live date, revenue is recognized under the percentage-of-completion method. Revenue from these arrangements is classified as license and service revenue based upon the estimated fair value of each element using the residual method.

The completed contract method is applied when the Company is unable to obtain reasonably 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 No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” 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 and rights to unspecified future products or 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 and 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.

For transactions involving extended payment terms, the Company deems these fees not to be fixed or determinable for revenue recognition purposes and revenue is recognized.

For arrangements with multiple elements accounted for under SOP 97-2 where the Company determines it can account for the elements separately and the fees are not fixed or determinable due to extended payment terms, revenue is recognized in the following manner. If the undelivered element is PCS, or other services, an amount equal to the estimated value of the services to be rendered prior to the next payment becoming due is allocated to the undelivered services. The residual of the payment is allocated to the delivered elements of the arrangement.


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

For arrangements with multiple elements accounted for under SOP 81-1 where the Company determines it can account for the elements separately and the fees are not fixed or determinable due to extended payment terms, revenue is recognized in the following manner. Amounts are first allocated to the undelivered elements included in the arrangement, as payments become due or are received, the residual is allocated to the delivered elements.

Revenue for PCSis recognized ratably over the support period which ranges from one to five years.

Training and consulting services revenue is 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, revenue is recognized on a percentage-of-completion basis.

For all sales, either a signed license agreement or a binding purchase order with an underlying master license agreement is used as evidence of an arrangement. Sales through third party systems integrators are evidenced by a master agreement governing the relationship together with binding purchase orders or order forms on a transaction-by-transaction basis. Revenues from reseller arrangements are recognized on the “sell-through” method, when the reseller reports to the Company the sale of software products to end-users. The Company’s agreements with customers and resellers do not contain product return rights.

Collectibility is assessed based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. Collateral is generally not requested from customers. If it is determined that the collection of a fee is not probable, the revenue is recognized at the time the collection becomes probable, which is generally upon the receipt of cash.

Restricted cash

At December 31, 2007 and September 30, 2007, restricted cash included interest-bearing certificates of deposit. These restricted cash balances serve as collateral for letters of credit securing certain lease obligations and PCS obligations.

Concentrations of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, restricted cash, marketable securities and accounts receivable. To date, the Company has invested excess funds in money market accounts, commercial paper, corporate bonds, certificates-of-deposit, and marketable securities with maturities of less than one year. The Company hasdepositedcash and cash equivalents and marketable securities with various high quality institutions domestically and internationally. The Company’s marketable securities are composed of investment instruments that are highly rated.

The Company’s accounts receivable are derived from sales to customers located in North America, Europe, and elsewhere in the world. The Company performs ongoing credit evaluations of customers’ financial condition and, generally, requires no collateral from customers. The Company maintains an allowance for doubtful accounts when deemed necessary. The Company estimates its allowance for doubtful accounts by analyzing accounts receivable for specific risk accounts as well as providing for a general allowance amount based on historical bad debt and billing dispute percentages. The estimate considers historical bad debts, customer concentrations, customer credit-worthiness and current economic trends. To date, bad debts have not been material and have been within management expectations.

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

     
Three Months Ended December 31,
  
     
2007
  
2006
  
 
Citicorp Credit Services, Inc.
  
 
22
%
  
 
13
%
  
 
International Business Machines (“IBM”)
  
 
11
%
  
 
11
%
  
 
Wellpoint, Inc.
    
11
%
    
*
    
 
Lloyds TSB Bank plc.
  
 
*
    
 
10
%
  
                     
*        Represents less than 10% of total revenues.

As previously announced, the Company has agreed to license certain of its software to IBM’s customers.



CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

At December 31,2007, Wellpoint, Inc. and Citicorp Credit Services, Inc. accounted for 27% and 13%,of our accounts receivable, respectively. At September 30, 2007, Wellpoint,Inc., IBM and Citicorp Credit Services, Inc. accounted for approximately 28%,17% and 15% of our accounts receivable, respectively.

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 new product is generally short and software development costs qualifying for capitalization have historically been insignificant.

During the quarter ended September 30, 2006, technological feasibility to port an existing product to a new platform was established through the completion of a detailed program design. Costs aggregating$0.5 million associated with this producthave been capitalized and included in Other Assets as of September 30, 2007. This product was completed and became available for general release in July 2007,accordingly,the capitalized costsare being amortizedusing the straight-line method over the remaining estimated economic life of the product which is 36 months. For the three months ended December 31, 2007, amortization expense, included in cost of revenue for licenses, related to this product was less than $0.1 million. As of December 31, 2007, the unamortized expense was $0.4 million.

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 included in 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 36 months. For the three months ended December 31, 2007 and 2006, amortization expense, included in cost of revenue for licenses, related to this product was $0.2 millionfor each of the quarter.As of December 31, 2007, the unamortized expense was $0.5 million.

Income Taxes
  
Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current period and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

Effective October 1, 2007, the Company adopted Financial Accounting Standards Interpretation, No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” or FIN 48. FIN 48 prescribes a recognition threshold and measurement guidance for the financial statement reporting of uncertain tax positions taken or expected to be taken in a company’s income tax return. The application of FIN 48 is explained in Note 11 to the Condensed Consolidated Financial Statements.

Net income (loss) per share
 
    The Company computes net income (loss) per share in accordance with Statement of Financial Accounting Standard, or SFAS,  No. 128, “Earnings per Share”, or SFAS 128. Under the provisions of SFAS 128, basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares, which consist of incremental shares issuable upon the exercise of stock options and unvested restricted stock (using the treasury stock method), are included in the calculation of diluted net income per share, in periods in which net income is reported, to the extent such shares are dilutive. In accordance with SFAS 123(R), unvested performance based restricted stock units are not included in the computation of earnings per share as they are considered contingently issuable shares. The calculation of diluted net loss per share excludes potential common shares as their effect is anti-dilutive for the three months ended December 31, 2006.


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table sets forth the computation of basic and diluted netincome (loss)per share for the periods indicated (in thousands, except for per share data):

   
Three Months Ended December31,
  
     
2007
      
2006
 
  
   
 
  
 
  
 
  
 
  
 
Net income (loss) available to common stockholders
$
205
    
$
(10,749
)
  
 
Denominator:
                
 
Weighted average common stock outstanding
 
33,292
    
 
31,882
    
 
Common stock subject to repurchase
 
—
 
  
 
(157
) 
  
 
Denominator for basic calculations
 
33,292
    
 
31,725
    
                   
 
Effect of dilutive potential common shares
  
572
      
—
  
(*)
 
Denominator for diluted calculations
  
33,864
      
31,725
    
                   
 
Net income (loss)per share—basic
$
0.01
    
$
(0.34
)
  
 
Net income (loss) per share—diluted
$
0.01
    
$
(0.34
)
  
 
        (*) – Dilutive potential common shares are excluded from the calculation of diluted net loss per share.

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):

     
December 31,
2006
            
                   
 
Employee stock options
 
3,544
            
 
Restricted stock
 
157
            
     
3,701
            

Recent Accounting Pronouncements

In November 2007, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin, orSAB, No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings”. SAB 109 provides guidance on written loan commitments that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The guidance is applicable for fiscal years beginning after December 15, 2007. The Company has evaluated the new standard and has determined that it will not have a significant impact on the determination or reporting of our financial results.

In December 2007, the SEC issued SAB No. 110, “Share-Based Payment”. SAB 110 allows for the continued use of the “simplified method” allowed under SAB 107 in developing an estimate of expected term “plain vanilla” share options in accordance with SFAS 123(R). The guidance is applicable after December 31, 2007. The Company has evaluated the new standard and has determined that it will not have a significant impact on the determination or reporting of our financial results.

In December 2007, the Financial Accounting Standards Board, or FASB, issued  SFAS No.141(R), “Business Combinations”, or SFAS 141(R). SFAS 141(R) replaces SFAS No. 141. SFAS 141(R)establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R)is effective for fiscal years beginningafter December 15, 2008. The Company is currently evaluatingthe effects of implementing this new standard.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51”, or SFAS 160. SFAS 160 establishes accounting and reporting standards for


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginningafter December 15, 2008. The Company is currently evaluatingthe effects of implementing this new standard.

NOTE 3—MARKETABLE SECURITIES

The Company has the following marketable securities (in thousands):

   
December  31, 2007
  
     
Amortized
cost
      
Gross
Unrealized
Gain
      
Gross
Unrealized
Loss
      
Fair
Value
    
 
Marketable securities:
                                
 
Commercial paper
$
1,636
    
$
—
    
$
—
    
$
1,636
    
 
Corporate bonds
  
9,246
      
5
      
(2
)
    
9,249
    
 
Total
$
10,882
    
$
5
    
$
(2
)
  
$
10,885
    
       
   
September 30, 2007
  
     
Amortized
cost
      
Gross
Unrealized
Gain
      
Gross
Unrealized
Loss
      
Fair
Value
    
 
Marketable securities:
                                
 
Commercial paper
$
3,008
    
$
—
    
$
(1
)
  
$
3,007
    
 
Corporate bonds
  
9,153
      
3
      
(4
)
    
9,152
    
 
Total
$
12,161
    
$
3
    
$
(5
)
  
$
12,159
    

As of December 31, 2007 and September 30, 2007, all marketable securities have maturity dates less than one year. For the three months ended December 31, 2007 and September 30, 2007, no gains or losses were realized on the sale of marketable securities.

NOTE 4—BALANCE SHEET COMPONENTS
 
Accounts receivable, net
 
Accounts receivable, net,consists of the following (in thousands):

     
December 31,
2007
      
September 30,
2007
 
  
 
Accounts receivable, net:
 
  
 
  
 
  
 
  
 
Accounts receivable
$
21,194
    
$
27,546
 
  
 
Less: allowance for doubtful accounts
 
(103
)
  
 
(165
)
  
 
  
$
21,091
    
$
27,381
 
  

Prepaid expenses and other current assets

Prepaid expense and other current assets consist of the following (in thousands):

     
December 31,
2007
      
September 30,
2007
 
  
 
Prepaid expense and other current assets:
 
  
 
  
 
  
 
  
 
Prepaid commissions and royalties
$
4,363
 
  
$
3,104
 
  
 
Other prepaid expenses and current assets
 
2,984
    
 
2,202
    
 
  
$
7,347
 
  
$
5,306
 
  



CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Property and equipment, net

Property and equipment, net,consists of the following (in thousands):

     
December 31,
2007
      
September 30,
2007
 
  
 
Property and equipment, net:
 
  
 
  
 
  
 
  
 
Computer hardware (useful lives of 3 years)
$
4,478
 
  
$
4,167
 
  
 
Purchased internal-use software (useful lives of 3 years)
 
3,017
 
  
 
2,685
    
 
Furniture and equipment (useful lives of 3 to 7 years)
 
745
 
  
 
739
    
 
Leasehold improvements (shorter of 7 years or the term of the lease)
 
2,903
 
  
 
2,883
    
     
11,143
 
  
 
10,474
 
  
 
Accumulated depreciation and amortization
  
(7,186
)
  
 
(6,836
)
  
 
  
$
3,957
 
  
$
3,638
 
  

Intangible assets, net

Intangible assets, net,consist of the following (in thousands):

   
December 31, 2007
  
September 30, 2007
 
    
Gross
Carrying
Amount
 
  
 
Accumulated
Amortization
      
Net
Carrying
Amount
      
Gross
Carrying
Amount
      
Accumulated
Amortization
      
Net
Carrying
Amount
 
Intangible assets:
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
Developed technologies
 
$
6,904
 
  
$
(5,092
)
  
$
1,812
 
  
$
6,904
 
  
$
(4,869
)
  
$
2,035
 
Customer list and trade-names
    
2,731
      
(2,120
)
    
611
      
2,731
      
(2,041
)
    
690
  
 
 
$
9,635
 
  
$
(7,212
)
  
$
2,423
 
  
$
9,635
 
  
$
(6,910
)
  
$
2,725
 

All of the Company’sacquired intangible assets are subject to amortization and are carried at cost less accumulated amortization. Amortization is computed on a straight line basis over the estimated useful lives which are as follows:  Developed technologies—one and one half to five years; trade-names—three to five years; customer list—three to five years. Aggregate amortization expense for intangible assets totaled $0.3 million for each of the three monthsended December 31, 2007 and 2006, respectively. The Company expects amortization expense on acquired intangible assets to be $0.9 million for the remainder of fiscal year 2008, $1.2 million in fiscal year 2009 and $0.3 million in fiscal year 2010.

Other assets

Other assets consist of the following (in thousands):

     
December 31,
2007
      
September 30,
2007
 
  
 
Other assets:
 
  
 
  
 
  
 
  
 
Long-term accounts receivable
$
—
 
  
$
984
 
  
 
Other assets
 
2,078
    
 
2,280
    
 
  
$
2,078
 
  
$
3,264
 
  

The long-term accounts receivable balance represents a receivable from a single customer related to a sale transaction that occurred during the quarter ended December 31, 2006. This amount represents the third and final payment which is due in the quarter ending December 2008. All revenue associated with this receivable hasbeen deferred and will not be recognized until the payment becomes due. As of December 31, 2007, the receivable has been recorded as a current accounts receivable.


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Accrued expenses

Accrued expenses consist of the following (in thousands):  

     
December 31,
2007
      
September 30,
2007
 
  
 
Accrued expenses:
 
  
 
  
 
  
 
  
 
Accrued payroll, payroll taxes and related expenses
$
7,842
 
  
$
6,781
    
 
Accrued restructuring expenses, current portion (Note 5)
 
1,721
    
 
3,044
    
 
Accrued third party consulting fees
 
724
    
 
1,264
    
 
Accrued income, sales and other taxes
 
1,920
    
 
1,143
    
 
Other accrued liabilities
  
1,496
    
 
1,572
    
 
  
$
13,703
    
$
13,804
    

NOTE 5—RESTRUCTURING

Restructuring Costs

Through December 31, 2007,the Company implementedcertain restructuring plans to, among other things, reduce its workforce and consolidate facilities. Restructuring and asset impairment expenses have been recorded to align the Company’s cost structure with changing market conditions and to create a more efficient organization. The Company’s restructuring expenses have been comprised primarily of: (i) severance and termination benefit costs related to the reduction of our workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities. The Company accounted for each of these costs in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” or previous guidance under Emerging Issues Task Force 94-3 “Liabilities Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”, or EITF 94-3.
 
Retroactive application of SFAS 146 to periods prior to January 1, 2003, was prohibited; accordingly, the accrual relating to facilities vacated prior to the effective date of SFAS 146 continues to be accounted for in accordance with the guidance of EITF 94-3. Accruals for facilities that were restructured prior to 2003 do not reflect any adjustments relating to the estimated net present value of cash flows associated with the facilities.
 
For each ofthe periods presented herein, restructuring expenses 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 office space under leases, the disposal of property and equipment including facility leasehold improvements, and net of estimated sublease income.

As of December 31, 2007, the total restructuring accrual consisted of the following (in thousands):
 
 
 
Current
  
Non-Current
  
Total
 
 
Severance and termination benefits
$
97
 
$
—
 
$
97
 
 
Excess facilities
 
1,624
 
 
837
 
 
2,461
 
 
Total
$
1,721
 
$
837
 
$
2,558
 
 
As of December 31, 2007, and September 30, 2007, $1.7 million and $3.0 million related to the restructuring reserve are included in the Accrued Expenses line item on the Condensed Consolidated Balance Sheets, respectively. The allocation between current portion and long-term portion is based on the current lease agreements.

The Company expects the remaining severance and termination benefit accrual to be paid by September 30, 2008.



CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The excess facilities reserve relates to two facilities: one located in the United Kingdomand one in Boston, Massachusetts. The Company expects to pay the excess facilities amounts related to the restructured or vacated leased office space as follows (in thousands):

 
Fiscal Year Ended September 30, 
          
Total Future
Minimum Lease
Payments
            
 
2008 (remaining nine months)
        
$
1,519
            
 
2009
        
 
412
            
 
2010
        
 
405
            
 
2011
          
125
            
 
Total
        
$
2,461
            

Included in the future minimum lease payments schedule above is an offset of $0.8million of contractually committed sublease rental income for the Bostonfacility. In November 2007, the Company negotiated a break clause in the United Kingdomlease allowing for an early termination of the respective facility which will release the Company of any future rent liabilities subsequent to January 2008. The scheduled lease payments shown in the table above reflect apayment of $1.2million in the second quarter of fiscal year 2008 associated with the early termination of the United Kingdomlease. Subsequent to December 31, 2007 and as of the date of the filing of this Form 10-Q, the Company has paid its final lease payment for the United Kingdomlease and has been released from any future rent liabilities.

Fiscal Year 2007 Restructuring

In October 2006, the Company initiated a restructuring plan intended to align its resources and cost structure with expected future revenues. The restructuring plan included a balancing of service resources worldwide, elimination of duplicative functions internationally, and a shift in the U.S.field organization toward a focus on domain–based sales and pre-sales teams. As a result of the restructuring plan, management undertook a reduction of 33 positions or approximately 10% of the Company’s workforce and consolidation of the European headquarters in the United Kingdomand the closure of the Franceoffice, or 2007 Restructuring. As part of the 2007 Restructuring, the Company initially incurred a one-time restructuring expenseof $6.5million for severance and termination benefits, and excess facilities expensed to Restructuring Expense in the Condensed Consolidated Statements of Operations. The Company accrued lease costs pertaining to the consolidation of excess facilities relating to lease terminations and non-cancelable lease costs. The Company was able to terminate the Francefacility lease during the year-ended September 30, 2007. In the quarter ended December 31, 2007, the Company negotiated an early termination option for the United Kingdomlease which terminatedthe lease inJanuary 2008. Managementbelieves the current restructure reserve amount is sufficient to meet all payments required as a result of the anticipated early termination.

The following table summarizes the activity related to the 2007 Restructuring(in thousands):

 
 
 
Excess Facilities
 
  
 
Reserve balance as of September 30, 2007
$
2,526
 
  
 
Non-cash
 
(62
)
  
 
Cash paid
  
(1,282
)
  
 
Reserve balance as of December 31, 2007
$
1,182
 
  

Fiscal Year 2005 Restructuring

In May 2005, the Company appointed a task force to improve profitability and control expenses. The goal of the task force was to create a 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 adjust as the organization model to flatten management levels, to review the Company’s product line, and to enhance the Company’s business model for profitability and operating leverage. This work resulted in an approximate 10% reduction in the Company’s workforce, or 2005 Restructuring,and in July 2005 affected employees were notified. As part of the 2005 Restructuring, 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.


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table summarizes the activity related to the 2005 Restructuring (in thousands):

 
 
 
Severance
and Termination
Benefits
 
  
 
Reserve balance as of September 30, 2007
$
100
    
 
Non-cash
 
(3
)
  
 
Cash paid
 
—
    
 
Reserve balance as of December 31, 2007
$
97
    

Prior Restructurings

During fiscal year 2002, based upon the Company’scontinued evaluation of economic conditions in the information technology industry and our expectations regarding revenue levels, the Company restructured several areas so as to reduce expenses and improve revenue per employee, or 2002 Restructuring. As part of 2002 Restructuring, the Companyrecorded a total workforce reduction expense relating to severance and termination benefits of approximately $2.0 million and $3.8 million for years ended December 31, 2003 and 2002, respectively. In addition to these costs, the Companyaccrued lease costs related to excess facilities of $0.2 million and $2.8 million during the years ended December 31, 2003 and 2002, respectively, pertaining to the consolidation of excess facilities relating to lease terminations and non-cancelable lease costs. This expense is net of estimated sublease income based on current comparable rates for leases in the respective markets.

During theyear ended September 30, 2007, the Company entered into a new sublease for the last remaining facility lease associated with the 2002 Restructuring. As a result of this sublease rental income being lower than previously estimated as part of the restructure facility reserve, the Company recorded an additional $0.4million of restructuring expense during the year ended September 30, 2007. The sublease term is through the entire remaining term of theCompany’s lease obligation for the facility.

The following table summarizes the activity related to the 2002 Restructuring (in thousands):
 
 
 
 
Excess Facilities
 
  
 
Reserve balance as of September 30, 2007
$
1,360
 
  
 
Non-cash
 
—
    
 
Cash paid
  
(81
)
  
 
Reserve balance as of December 31, 2007
$
1,279
 
  

NOTE 6—COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) are as follows (in thousands):

   
Three Months Ended December 31,
  
     
2007
      
2006
 
  
                   
 
Net income (loss)
$
205
    
$
(10,749
)
  
                   
 
Other comprehensive income (loss):
                
 
Change in foreign currency translation
  
29
      
452
    
 
Net change in unrealized gain from investments
  
5
      
—
    
 
Comprehensive income (loss)
$
239
    
$
(10,297
)
  



CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 7—RELATED PARTY TRANSACTIONS

In August 2005, the Company entered into a service provider agreement with Infogain Corporation, or Infogain. Samuel T. Spadafora, aformer director and executive officer of the Company, is a director of Infogain. Mr. Spadafora terminated his relationship with the Company in November 2006.

Charles E. Hoffman, a director of the Company, is the President and Chief Executive Officer of Covad Communications Group, Inc., or Covad, a customer of ours.

The following presents the related party transaction balances (in thousands):
 
   
Revenue
  
Cost of Revenues
  
Payments
  
   
Three Months Ended December 31,
     
2007
    
2006
    
2007
    
2006
    
2007
    
2006
  
 
Infogain
$
—
  
$
—
  
$
—
  
$
177
  
$
—
  
$
117
  
 
Covad
  
64
    
63
    
—
    
—
    
—
    
—
  
   
$
64
  
$
63
  
$
—
  
$
177
  
$
—
  
$
117
  
                                       
   
Deferred Revenue
          
     
As of
December 31,
2007
    
As of
September 30,
2007
                          
 
Infogain
$
—
  
$
—
                          
 
Covad
  
52
    
116
                          
   
$
52
  
$
116
                          

NOTE 8—BORROWINGS

Revolving line of credit

The Company’s revolving line of credit with Comerica Bank was amended and restated on March 8, 2006 and was extended to March 7, 2008. The terms of the agreement include a $5.0 million line of credit, available on a non-formula basis, and require the Company to maintain (i) at least a $5.0 million cash balance in Comerica Bank accounts, (ii) a minimum quick ratio of 2 to 1, (iii) a liquidity ratio of at least 1 to 1 at all times, and (iv) subordinate any debt issuances subsequent to the effective date of the agreement, and certain other covenants. All assets of the Company have been pledged as collateral on the credit facility.

The revolving line of credit contains a provision for a sub-limit of up to $5.0 million for issuances of standby commercial letters of credit. As of December 31, 2007, the Company had utilized $0.3 million of the standby commercial letters of credit limit of which $0.3 million serves as collateral for computer equipment leases for Ness (see Note 9). The revolving line of credit also contains a provision for a sub-limit of up to $3.0 million for issuances of foreign exchange forward contracts. As of December 31, 2007, the Company had not entered into any foreign exchange forward contracts. Pursuant to the amendment in March 2006, the Company is required to secure the standby commercial letters of credit and foreign exchange forward contracts through March 7, 2008. If these have not been secured to Comerica Bank’s satisfaction, the Company’s cash and cash equivalent balances held by Comerica Bank automatically secure such obligations to the extent of the then continuing or outstanding and undrawn letters of credit or foreign exchange contracts.

Borrowings under the revolving line of credit bear interest at the lending bank’s prime rate. Except for the standby commercial letters of credit, as of December 31, 2007, there were no outstanding balances on the revolving line of credit.


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 9—COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases its facilities and certain equipment under non-cancelable operating leases that expire on various dates through 2013. Rent expense is recognized on a straight line basis over the lease term.

Future minimum lease payments as of December 31, 2007 are as follows (in thousands):

     
Operating
Leases
      
Operating
Sublease
Income
      
Net
Operating
Leases
 
  
 
Fiscal year ended September 30:
                        
 
2008 (remaining nine months)
$
3,619
 
  
$
(185
) 
  
$
3,434
    
 
2009
  
2,503
      
(283
)
    
2,220
    
 
2010
  
2,276
      
(293
)
    
1,983
    
 
2011
  
1,671
      
(86
)
    
1,585
    
 
2012
  
802
      
—
      
802
    
 
Thereafter
  
557
    
 
—
    
 
557
    
 
Total minimum payments
$
11,428
    
$
(847
) 
  
$
10,581
    

Operating lease payments in the table above include approximately $3.4 millionfor two facility operating lease commitments that are included in Restructuring Expense. One of the leases is located in Boston, Massachusettsand the other is located in the United Kingdom. As of December 31, 2007, the Company has $0.8 million insublease income contractually committed for future periods relating to the Boston, Massachusetts facility classified as an operating lease. See Note 5for further discussion. The scheduled lease payments shown in the table above includes$1.2 million that was paid in the second quarter of fiscal year 2008 associated with the early termination of the United Kingdomlease. Subsequent to December 31, 2007 and as of the date of the filing of this Form 10-Q, the Company haspaid its final lease payment for the United Kingdom lease and hasbeen released from any future rent liabilities.

Asset Retirement Obligations

As required by SFAS No.143 “Accounting for Asset Retirement Obligations”, or SFAS 143,and Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143”, orFIN 47, the Company recorded an Asset Retirement Obligation (ARO) of approximately $0.3 million and a corresponding increase in leasehold improvementsin the fiscal year 2007. SFAS 143 and FIN 47 requires the recognition of a liability for the fair value of a legally required conditional asset retirement obligation when incurred, if the liability’s fair value can be reasonability estimated. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is amortized over the life of the asset.

The Company’s asset retirement obligations are associated with commitments to return property subject to operating leases to original condition upon lease termination. As of December 31, 2007, the Company estimated that gross expected cash flows of approximately $0.4 million will be required to fulfill these obligations.

Asset retirement obligation payments as of December 31, 2007 are estimated as follows (in thousands):

             
Payments
            
 
Fiscal year ended September 30:
                        
 
2008 (remaining nine months)
        
$
—
            
 
2009
          
—
            
 
2010
          
—
            
 
2011
          
149
            
 
2012
          
201
            
 
Total
        
$
350
 
          



CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Other Obligations

The Company entered into an agreement with Ness Technologies Inc.,Ness USA, Inc. (formerlyNess Global Services, Inc.)and Ness Technologies India, Ltd. (collectively, “Ness”), effective December 15, 2003, pursuant to which Ness provides the Company’scustomers with technical product support through a worldwide help desk facility, a sustaining engineering function that serves as the interface between technical product support and internal engineering organization, product testing services and product development services (collectively, the “Services”). The agreement had an initial term of three years and was extended for twoadditional year terms. Under the terms of the agreement, the Company pays for services rendered on a monthly fee basis, including the requirement to reimburse Nessfor approved out-of-pocket expenses. The agreement may be terminated for convenience by the Company, subject to the payment of a termination fee. In 2004, 2005, 2006 and 2007 the Company further expanded its agreement with Ness whereby Nessis providing certain additional technical and consulting services. The additional agreements can be cancelled at the option of the Company without the payment of a termination fee. The remaining minimum purchase commitment under these agreements, if Chordiant was to cancel the contracts, was approximately $0.7 million at December 31, 2007. In addition to service agreements, the Company has also guaranteed certain equipment lease obligations of Ness(see Note 8). Nessmay procure equipment to be used in performance of the Services, either through leasing arrangements or direct cash purchases, for which the Company is obligated under the agreement to reimburse them. In connection with the procurement of equipment, Ness has entered into a 36 month equipment lease agreement with IBM India and, in connection with the lease agreement the Company has an outstandingstandby letter of credit in the amount of $0.3 million in guarantee of Ness’ financial commitments under the lease. Over the term of the lease, the Company’sobligation to reimburse Ness is approximately equal to the amount of the guarantee.

Indemnification

As permitted under Delawarelaw, the Company has agreements whereby the Company has indemnifiedour officers, directors and certain employees for certain events or occurrences while the employee, officer or director is, or was serving, at the Company’srequest in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Companycould be required to make under these indemnification agreements is unlimited; however, the Companyhasa Director and Officer insurance policy that limits the Company’sexposure and may enable the Company to recover a portion of any future amounts paid. Future payments may be required to defend current and former directors in the derivative class action lawsuits described in Note 10.As a result of insurance policy coverage, the Companybelievesthe estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2007.

The Company entersinto standard indemnification agreements in our ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify, defend, hold harmless, and to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’sbusiness partners or customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’sproducts. The term of these indemnification agreements is generally perpetual after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements. The Company believes the estimated fair value of these agreements is minimal.  Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2007.

The Company enters into arrangements with our business partners, whereby the business partners agree to provide services as subcontractors for the Company’simplementations. The Company may, at itsdiscretion and in the ordinary course of business, subcontract the performance of any of theseservices. Accordingly, the Company enters into standard indemnification agreements with itscustomers, whereby the Company indemnifies them for other acts, such as personal property damage by itssubcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general and umbrella insurance policies that may enable the Company to recover a portion of any amounts paid. The Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2007.

When, as part of an acquisition, the Company acquires all of the stock or all of the assets and liabilities of a company, the Company may assume the liability for certain events or occurrences that took place prior to the date of acquisition. The maximum potential amount of future payments, if any, the Company could be required to make for such obligations is undeterminable at this time. Accordingly, the Company has no amounts recorded for these contingent liabilities as of December 31, 2007.


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company warrants that software products will perform in all material respects in accordance with standard published specifications and documentation in effect at the time of delivery of the licensed products to the customer for a specified period of time. Additionally, the Company warrants that maintenance and consulting services will be performed consistent with generally accepted industry standards. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history, however, the Company has not incurred significant expense under product or services warranties to date. As a result, the Company believes the estimated fair value on these warranties is minimal. Accordingly, the Company has no amounts recorded for these contingent liabilities as of December 31, 2007.

NOTE 10—LITIGATION

IPO Laddering

Beginning in July 2001, the Company and certain of its officers and directors, or individuals, were named as defendants in a series of class action stockholder complaints filed in the United States District Court for the Southern District of New York, now consolidated under the caption, “In re ChordiantSoftware, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-6222”. In the amended complaint, filed in April 2002, the plaintiffs allege that the Company, the individuals, and the underwriters of the Company’s initial public offering, or IPO, violated section 11 of the Securities Act of 1933 and section 10(b) of the Exchange Act of 1934 based on allegations that the Company’s registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the Company’s IPO underwriters. The complaint also contains claims against the Individuals for control person liability under Securities Act section 15 and Exchange Act section 20. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed in the same court against hundreds of other public companies, or Issuers, that conducted IPO’s of their common stock in the late 1990’s or in the year 2000 (collectively, the “IPO Lawsuits”).

In August 2001, all of the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. In July 2002, the Company joined in a global motion to dismiss the IPO Lawsuits filed by all of the Issuers (among others). In October 2002, the Court entered an order dismissing the individuals from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations with respect to the individuals. In February 2003, the court issued a decision denying the motion to dismiss against Chordiant and many of the other Issuers.

In June 2003, Issuers and plaintiffs reached a tentative settlement agreement that would, among other things, result in the dismissal with prejudice of all claims against the Issuers and individuals in the IPO Lawsuits, and the assignment to plaintiffs of certain potential claims that the Issuers may have against the underwriters. The tentative settlement also provides that, in the event that plaintiffs ultimately recover less than a guaranteed sum of $1 billion from the IPO underwriters, plaintiffs would be entitled to payment by each participating Issuer’s insurer of a pro rata share of any shortfall in the plaintiffs’ guaranteed recovery. In September 2003, in connection with the possible settlement, those individuals who had entered tolling agreements with plaintiffs (described above) agreed to extend those agreements so that they would not expire prior to any settlement being finalized. In June 2004, Chordiant and almost all of the other Issuers entered into a formal settlement agreement with the plaintiffs. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes, and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the modified settlement in a comprehensive Order, and directed that Notice of the settlement be published and mailed to class members beginning November 15, 2005. On February 24, 2006, the Court dismissed litigation filed against certain underwriters in connection with the claims to be assigned to the plaintiffs under the settlement. On April 24, 2006, the Court held a Final Fairness Hearing to determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the lower Court's earlier decision certifying as class actions the six IPO Lawsuits designated as "focus cases." Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of plaintiffs’ petition to the Second Circuit for rehearing en banc. On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the district court. Accordingly, the settlement will not be finally approved. Plaintiffs filed amended complaints in six “focus cases” on or about August 14, 2007. The Company is not a focus case. In September 2007, the Company's named officers and directors again extended the tolling agreement with plaintiffs. On or about September 27, 2007, plaintiffs moved to certify the classes alleged in the focus cases and to appoint class representatives and class counsel in those cases.  The focus case issuers filed motions to dismiss the claims against them on or about November 9, 2007 and an opposition to plaintiffs' motion for class certification on December 21, 2007.   This action may divert the efforts and attention of our management and, if determined adversely to us, could have a material impact on our business, results of operations, financial condition or cash flows.


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Derivative Class Action

On August 1, 2006, a stockholder derivative complaint was filed in the United States District Court for the Northern District of California by Jesse Brown under the caption Brown v. Kelly, et al. Case No. C06-04671 JW (N.D. Cal.). On September 13, 2006, a second stockholder derivative complaint was filed in the United States District Court for the Northern District of California by Louis Suba under the caption Suba v. Kelly et al., Case No. C06-05603 JW (N.D. Cal.). Both complaints were brought purportedly on behalf of the Company against certain current and former officers and directors. On November 27, 2006, the court entered an order consolidating these actions and requiring the plaintiffs to file a consolidated complaint. The consolidated complaint was filed on January 11, 2007. The consolidated complaint alleges, among other things, that the named officers and directors: (a) breached their fiduciary duties as they colluded with each other to backdate stock options, (b) violated section 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder through their alleged actions, and (c) were unjustly enriched by their receipt and retention of such stock options. On May 21, 2007, the Company filed a motion to dismiss the entire action on the grounds that the plaintiffs failed to take the steps necessary to bring a derivative action. Instead of opposing the motion to dismiss on November 14, 2007, the plaintiffs filed an Amended Complaint adding new allegations against five more current and former officer and directors. The substantive allegations in the Amended Complaint are similar to those in the previous complaint. On December 14, 2007, the Company again filed a motion to dismiss the entire action on the grounds that the plaintiffs failed to take the steps necessary to bring a derivative action. The individual defendants also filed a motion to dismiss. On January 22, 2008, the parties reached an agreement in principal on the settlement of this lawsuit. The parties are working to finalize and memorialize the terms of that settlement and will then seek court approval of the settlement.

Patent Claim

In September 2006, the Company received a letter from Acacia Technologies Group, a patent holding company, suggesting that the Company may be infringing on two patents, designated by United States Patent Numbers 5,537,590 and 5,701,400, which are held by one of their patent licensing and enforcement subsidiaries.  The Company is currently reviewing the validity of these patents and whether the Company’s products may infringe upon them.  The Company has not formed a view of whether the Company may have liability for infringement of these patents. Any related claims, whether or not they have merit, could be costly and time-consuming to defend, divert management’s attention or cause product delays. If any of the Company’s products were found to infringe such patents, the patent holder could seek an injunction to enjoin use of the infringing product. If the Company was required to settle such a claim, it could have a material impact on our business, results of operations, financial condition or cash flows.

Yue vs Chordiant Software, Inc.

On January 2, 2008, the Company and certain of our officers and one other employee were named in a complaint filed in the United States District Court for the Northern District of California by Dongxiao Yue under the caption Dongxiao Yue v. Chordiant Software, Inc. et al. Case No. CV 08-0019 BZ (N.D. Cal.). The complaint alleges that the Company’s Marketing Director software product infringed copyrights in certain software referred to as the “PowerRPC software,” copyrights in which had been owned by Netbula LLC and assigned to Dr. Yue, the sole employee and owner of Netbula. The alleged infringement includes (a) distributing more copies of the PowerRPC software than had originally been authorized in a run time license Netbula granted to Chordiant Software, Intl., (b) infringement of a software developer kit (“SDK”) by making copies of the SDK in excess of those that had been licensed by Netbula, (c) making unauthorized derivative works of the SDK, (d) unauthorized distribution of PowerRPC for products operating on the Windows Vista platform, (e) unauthorized distribution of PowerRPC for server based products.Plaintiff also claims that the license Netbula granted to Chordiant Software, Int’l Ltd. should not be construed to authorize uses by its parent company, Chordiant Software, Inc. The plaintiff seeks monetary damages, disgorgement of profits, and injunctive relief according to proof.  The Company and its officers and employee will serve their response to the complaint on or after February 13, 2008.

The Company, from time to time, is also subject to various other claims and legal actions arising in the ordinary course of business. The ultimate disposition of these various other claims and legal actions is not expected to have a material effect on our business, financial condition, results of operations or cash flows. However, litigation is subject to inherent uncertainties.

NOTE 11—INCOME TAXES

Effective October 1, 2007, the Company adopted FIN No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”. FIN 48 prescribes a recognition threshold and measurement guidance for the financial statement reporting of uncertain tax positions taken or expected to be taken in a company’s income tax return. FIN 48 also provides guidance related to recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition matters related to uncertain tax positions. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS 109. Step one, recognition, requires a company to determine if the weight of available


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

evidence indicates that a tax position is more likely than not to be sustained upon audit, including the resolution of related appeals or litigation processes, if any. Step two, measurement, is based on the largest amount of benefit which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN 48, if any, is recorded as an adjustment to the opening balance of retained earnings as of the adoption date.

The net income tax assets recognized under FIN 48 did not materially differ from the net assets recognized before adoption, and, therefore, the Company did not record an adjustment to retained earnings related to the adoption of FIN 48.  At the adoption date of October 1, 2007, the Company had $0.8 million of unrecognized tax benefits related to tax positions taken in prior periods, $0.2 million of which would affect the Company’s effective tax rate if recognized.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the Provision for Income Taxes. The Company had less than $0.1 million accrued for interest and penalties as of December 31, 2007.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, all U.S. federal, state and United Kingdom tax years between 1995 and 2007 remain open to examination due to net operating loss carryforwards and credit carryforwards. Tax years 2003 and later remain open to examination in Canada and years 2004 and later remain open to examination in Germany.

Tax audits of the 2005 tax year are currently in process in the Netherlands and Canada. The Company does not expect resolution of these audits to have a material impact on our financial statements and the Company does not expect a significant increase or decrease in unrecognized tax benefits over the next 12 months.

The Company provides 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 profitsprior to 2007 and the fact that the market in which we compete is intensely competitive and characterized by rapidly changing technology, the Company believes that there is sufficient uncertainty regarding the realization of deferred tax assets such that a full valuation allowance has been provided. At December 31, 2007, the Companyhad approximately $127.6 million and $18.9 million of net operating loss carryforwards for federal and state purposes, respectively, and net operating loss carryforwards of approximately $34.6 million in the United Kingdom. As a result of an IRC Section 382 study completed during fiscal 2008, it was determined that $19.6 million of net operating loss carryforwards resulting from the acquisition of Prime Response will expire unutilized. The $127.6 million in total federal net operating loss carryforwards is presented net of these Section 382 limitations. Upon being realized, the remaining $13.8 million of the Prime Response federal net operating loss carryforwards will reduce goodwill and intangibles recorded at the date of acquisition before reducing the tax provision. Approximately $3.5 million of additional net operating loss carryforwards are related to stock option deductions which, if utilized, will be accounted for as an addition to equity rather than as a reduction of the provision for income taxes. The net operating loss carryforwards are available to offset future federal and state taxable income and expire in years from 2008 through 2026. At December 31, 2007, there are approximately $3.5 million of federal research and development credits and alternative minimum tax credits that expire in years 2011 through 2027. At December 31, 2007, there were also California state credits of approximately $3.5 million that do not expire.

NOTE 12—EMPLOYEE BENEFIT PLANS

2005 Equity Incentive Plan

As of December 31, 2007, there were approximately 1.9 million shares available for future grant and approximately 3.4million options that areoutstanding under the 2005 Equity Incentive Plan or 2005 Plan. In December 2007, the Board amended the 2005 plan to increase the number of shares reserved for future issuance by 0.7 million shares. This amendment was approved by the stockholders at the2008 Annual Meeting of Stockholders’ held on February 1, 2008.

In October 2007,the Company granted 0.2 million performance-based restricted stock units or RSUs to selected executivesof the Companypursuant to the 2005 Plan. The performance-based restricted stock units cliff vest at the end of a two year requisite service period, constituting the Company’s fiscal years 2008 and 2009,upon achievement of specified performance criteria established by the Compensation Committee of our Board of Directors. The award agreements for RSUs generally provide that vesting will be accelerated in certain events related to changes in control of the Company. Total compensation cost for these awards isbased on the fair market value of the shares at the date of grant. The portion of the total compensation cost related to the performance-based awards is subject to adjustment each quarter based on management’s assessment of the likelihood of achieving the two year performance criteria.

2000 Nonstatutory Equity Incentive Plan

As of December 31, 2007, there were approximately 0.4 million options that areoutstanding under the 2000 Nonstatutory Equity Incentive Plan.


CHORDIANT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1999 Non-Employee Directors’ Option Plan

As of December 31, 2007, there were approximately 0.3million shares of common stock are available for future grant and 0.2millionoptions that are outstanding under the 1999 Non-Employee Directors’ Option Planor Directors’ Plan. In December 2007, the Board amended the Directors’ Plan to incorporate the following changes:

1.  
expand the type of awards that may be granted under the Directors’ Plan to allow restricted stock awards and restricted stock unit awards; and
2.  
for fiscal year 2008 and thereafter, directors will be awarded restricted stock awards instead of stock options for their annual and initial automatic Board service award.

This amendment was approved by the stockholders at the2008 Annual Meeting of Stockholders’ held on February 1, 2008.

Stock Option Activity
 
The following table summarizes stock option, restricted stock unitsand restricted stockawardsactivity under our stock option plans (in thousands, except per share data):

   
Shares
Available
for Grant
      
Shares
      
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual
Life (Years)
    
Aggregate
Intrinsic
Value
Closing
Price at
12/31/2007
of $8.55
  
Balance at September 30, 2007
 
3,058
 
  
 
3,178
 
  
$
7.96
 
          
Authorized
 
—
 
  
 
—
 
  
 
—
 
          
Options and awards granted
 
(919
)
  
 
919
 
    
9.70
 
          
Options exercised
 
—
 
  
 
(88
)
    
6.46
 
          
Cancellation of unvested restricted stock
 
—
 
  
 
—
 
  
 
—
 
          
Options and awards cancelled/forfeited
 
39
 
  
 
(39
)
  
 
11.30
 
          
Authorized reduction in shares from existing plans
  
(4
)
    
—
      
—
            
Balance at December 31, 2007
 
2,174
 
  
 
3,970
 
  
$
8.36
 
8.22
  
$
3,847
  
Vested and expected to vest at December 31, 2007
          
3,029
    
$
8.20
  
7.97
  
$
3,449
  
Exercisable at December 31, 2007
          
1,592
    
$
7.41
  
6.87
  
$
2,946
  

The following table summarizes information about stock options outstanding and exercisable at December 31, 2007 (in thousands, except exercise prices and contractual life data):

   
Options Outstanding
  
Options Exercisable
  
Range of
Exercise Prices
  
Number
Outstanding
  
Weighted
Average
Remaining
Contractual
Life (Years)
  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
Closing
Price at
12/31/2007
of $8.55
  
Number
Exercisable
  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
Closing
Price at
12/31/2007
of $8.55
  
$0.35 – 6.45
 
 
570
 
 
5.82
 
$
4.02
 
$
2,584
 
 
484
 
$
3.82
 
$
2,290
 
6.48 – 7.80
 
 
543
 
 
7.70
 
  
7.18
 
  
745
 
 
321
 
  
7.08
    
472
 
7.88 – 8.15
    
439
 
 
7.93
 
  
7.98
 
  
250
 
 
209
 
  
7.99
    
118
  
8.25 – 8.25
    
817
 
 
9.10
 
  
8.25
    
245
 
 
193
 
  
8.25
    
58
  
8.28 – 9.23
    
179
 
 
7.73
 
  
8.53
    
23
 
 
80
 
  
8.61
    
8
  
9.25 – 9.25
    
814
 
 
9.88
 
  
9.25
    
—
 
 
30
 
  
9.25
    
—
  
9.26 – 45.00
 
 
608